ARCHIVESHISTORIQUES
DELACOMMISSION
COLLECTION RELIEEDES
DOCUMENTS "COM"
COM(81)95
Vol.1981/0027

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COMMISSION OFTHEEUROPEAN COMMUNITIES
COM(81)95 final
Brussels/6thMarch1981
;
THEECONOMIC ANDSOCIALSITUATION INTHECOMMUNITY
(Communication fromtheCommission totheCouncilinaccordance
withArticle2oftheConvergence Decisionof18thFebruary1974)•
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COMC81)95final

Ccfv/vt4i-evvi
1.Recenteconomicperformance inthe.Community– laaWwwCTMBB–MaBawM
Theslow-downineconomicactivityin1980,with.GDPgrowing1,3%
intheECasawhole,wasapproximately asforeseenbytheCouncilin
inDecemberoflastyear.Output .peakedinthe.firstquarterof1980,
butdeclinedthereafter ."HoWevter,private
consumption wasprobablybeginningto-growagaininrealtermsbytheend.
oftheyear,whiletheECbusinesssurveysshowedfirstsignsthatthesharp
deterioration inbusinesssentiment mayhavebeenarrested.
Therewashardlyanyincreaseinemployment in1980,whilethelabour
forcecontinuedtoexpandratherrapidly.Theresultwasasharprisein
unemployment :theaverageratefortheyearwas6,0%,andbythebeginning
of1981hadpassed7,0%.Overthelasttwelve ;monthstheunemployment rate
increased mostinDenmarkandtheNetherlands (upbyaboutonehalf)andthe
UnitedKingdomCupbytwo-thirds).Theadditional costtothenationalexchequers
oftherise"inunemployment amountsforthe^Community asawholetosome0,15%
ofGDPfor1980comparedto1979.
Thedeterioration ininflationperformance whichhadbegunin1979«
wasaccentuated in1980;theincreaseinconsumerpricesintheCommunity
onaveragereached ,12,1%in1980,comparedtothelow:pointof7,3%in1978.
Divergence betweenconsumerpricerisesofMemberStatesalsowidenedtotwicethe
•>nIaveragefortheseventies asawhole(thestandarddeviation roseto
5,6%).However,asomewhatbetterperformance wasevidentinthesecond
halfoftheyear,especiallyintheUnitedKingdomwheretheannualrate
hadfallentobelowdoublefigures. ;
TheCommunity !scurrentaccountdeficitin1980,expressedasa
percentageofGDP,wasthelargesteverrecorded.Incontrastwith1979,
therewassomeimprovement in1980inexportinrelationtoimportvolume.
However,thiswasmorethanoffsetbyaterrrisoftrade ,deterioration (2,8%)
considerably largerthanthat-in1979(althoughthiswasstillverymuch
smallerthanthatsufferedin1974afterthefirstoil-price shock).
Exchange-rates developments inthetMSin1980werelimitedto
\
movementspermitted byunchangedcentralrates.However,theUKpoundappreciated
15%*against theECUinthecourseoftheyear,andtheYen24%.Theu'Sdollar
wasonadecliningtrendagainsttheECUuntilmid-year,buthassince
recoveredsubstantially :.

/2.-
2. Outlook for 1981
Thepresent cycle isnowseen asbeing sharper and deeper than
anticipated .The starting point ,the high level ofactivity inearly 1980
hasbeen again revised upwards ,with the steeper fall later in1980 then
carrying aheavier recessionary momentum over into 1981 .Domestic private
demand (consumption ,stockbui Iding and investment )wholly accounts for the
more pronounced cyclical profile .Foreign demand hasstayed ontheexpected
path ,while government consumption .involume terms isstill expected togrow
slightly .in1981 .Thus therevised forecasts prepared bythe
Commission 'sservices inFebruary suggest that theupturn inactivity may
bedelayed until thethird quarter of1981 ,twoquarters later than earlier
expected .GDPgrowth atanannual rate ofabout 2%isnowexpected inthe
second half of1981 and into 1982 .The year onyear growth ofGDP for 1981
fortheCommunity asawhole isrevised down from +0,6% intheAnnual Economic
Report to-0,6% .
Employment could fall bynearly 1%,andbytheendoftheyear the
unemployment rate could beabove 71/2%^andstill rising .
Asignificant slowdown inconsumer prices canbeexpected during the
course of1981 ,asthe effect ofmore moderate wage settlements inthe first
half ofthe yeaf 1isreinforced bysome rebound ofproductivity inthesecond
half .Although consumer prices for 1981 asawhole could beup .byaround
101/2%on ,1980 (Table 1),theannual fate inthesecond half oftheyear
could ,at8,2% ,be41/2points lower than inthesecond half of1980 .
Divergence ofinflation raters should also lessen somewhat ,with thestandard
deviation ofconsumer prices increases falling back to4,6% .
I
The Community 'sbalance ofpayments current account islikely tochange
little during thecourse of1981 andfortheyear asawhole could beslightly
worse than thehigh deficit recorded in1980 .Afurther worsening oftheterms
oftrade in1981 will slightly more than offset animprovement involume
movements .
3. PoLicy issues
•• •'w '• •
-TheCouncil isrequired (according tothe1974 Convergence Decision )
todeliberate inMarch asregards possible adjustments totheeconomic 7
(1)Seasonally adjusted figure .•- ' '../..
' ■n • •

policyguidelinesadoptedintheAnnualReportinDecember.;
-AtthetimetheCouncilconcludedthatthepolicymixshouldgive
prioritytothereductionininflation,savingsinoilimports,andthe
pursuitoftheothernecessarystructuralchangesintheComm-unityeconomy,1
andbeonlymoderatelysupportiveintermsofcyclicaldemandmanagement .
Theweakereconomicoutlookcannotimplyaneasierwayoutoftheconstraints .
Whiletheevolvingsituationcallsfortec,hhicaI'adjustments tosomefinancial
policies,thefundamentallineofpolicy-toreduceinflationandpush
aheadwithstructuraI.adaptation-hastobepursuedwithevengreater ,urgency.
Controlofdomesticmonetaryaggregates andexchangerateswithin
theEuropeanMo'netarySystemhasonthewholebeensatisfactory .However,
monetarypolicyinEuropehasbeenandis.stillconfrontedwiththeneedfora
concertedreaction'totheveryhighandvolatileinterestratesprevailingin..
theUnitedStates,andto±heappreciation 'oftheexchangeratesofthedollarandyen.
Theappreciation oftheYenappearstobejustifiedfnthelight
ofJapan'stradingperformance .WithrespecttotheUnitedStates'monetary
policy,Europeismuchaffectedbybothinterestandexchangeratemovements.;
.IfEuropeaninterestratesnowmovedfurtheruponaveragetowardsUnited
Stateslevels,itisquitelikelythatasaresulttherewouldbenocyclical
recoveryinEuropethisyear.Ontheotherhand,afurthersubstantial
depreciation ofEuropeancurrenciesagainstthedollarcouldriskcausing
anewacceleration ofinflationintheCommunity,throughtheincreasein•
importpricesinEuropean .currencies.Moreover,erraticswingsineither •
exchangeratesorinterest'ratesarecostlytotheeconomythroughthe
uncertaintythattheyintroduce.' ,
Inviewofitslargecurrentaccountdeficitonthebalance,ofpayments,
theCommunityshouldbfepreparedtoaccept''higherdollarexchangerates
thanprevailedin1980onaverage.Theinevitability ofthisdeficitin
theshort-runmeansthatitsfinancingshouldbecarefullyprepared.
Thisinitselfshouldposenoinsuperableproblems;theCommunityhas"for
itspartinFebruaryrenewedandexpandedsownrecyclingfacility.Experience
confirmshowquicklyconditions maychangeasbet-weenEMScurrenciesandthe
mainfloatingexchangerates,andEuropeshouldnot.makefundamental changes
initsdomesticmonetarypoliciesinresponsetovolatileexchangeratemove­
ments.TheUnitedStatesauthorities fortheirpartcouldcontributetothe
international interestbymanagingtheirbudgetary-monetary policymix
andthetechniquesofmonetarypolicywitha

4.-
viewtoreducingtheLevelofinterestratesconsistent withastable
evolutionofmoneysupply.
WithintheCommunity,MemberStatesmustmatchthedifficulties ,
oftransatlantic monetaryconditions withintensified cooperation as
regardsinterestrateadjustments,intervention policyandofficialcapital
movements.InadditiontofulluseofthemechanismsoftheEuropeanMonetary
System,therewouldseemnowtobeopportunities foradjustments ofUnited
Kingdommonetarypolicyasregardsinterestratesandcriteriaofexchange
ratemanagement .
Apartfromtheincreaseinunemployment aconsequence oftheweaker
levelofactivityin1981issomeincreaseinbudgetdeficitsoverwhathad
beenforecastintheAnnualReport.However,thestructural weaknesses in
r/
partsoftheEuropeaneconomyaresuchthatafullplayofthe'automatic
stabilisers' cannotberiskedinallcountries.Inparticular,countries
withthehighestdeficits(Belgium,Ireland,Italy)shouldacttoprevent
increases.Furtherincreasesinthesecountries'deficitscannotprovideany
sustainable increaseineconomicactivity;onthecontrary,increaseddefi­
cits-whetherspontaneous or,discretionary-arelikelytocauseswiftand
significant interestrateincreases .Amongthesecountries,Italyhasmade
progressin1980inreducingtheborrowingofgeneralgovernmenttowell
under10%ofGDP,andthisshouldbeconservedin1981.InthecaseofIreland
theprojectionofareduceddeficitisalsosignificant,particularly inview
oftheincreasedspendingonpublicinvestment .Inothercountries,some
increaseinbudgetdeficitsshouldbepermittedtosupportactivity;indeed
the'automaticstabilisers' shouldbeallowedtooperatefullyincountries •
withtheleasthighdeficits.However,eveninthesecases,prioritymustbe
giventorestructuring expenditure toimproveproductivepotential.
Extensivestructural problemshavetobeovercometoachievehigher
trendrates'ofgrowthandemployment .Policymustintensifyeffortstoimprove
productivepotentialbyredirecting budgetaryresourcesfromsubsidiesthat
aresupporting uneconomic ornon-priority activities,intoaidingpublicor
privateinvestment .Theinvestmentratiohasdeclinedfrom23%ofGDPin
1970to21%in1979intheCommunity asawhole.Meanwhile,overthesame
perioditseemsthat(subjecttodifficulties of'statisticalmeasurement )
investmentgrantsremainedstaticat1%ofGDP,whereassubsidies
' ..
- */
> mm•/m•m

(notablyoperatingsubsidies,excludingtaxexpenditures )rosefrom1,8/Sof
GDPto2,6%,withparticularly largeincreasesrecordedintheBenelux
countries,IrelandandItaly.Justifications forhigherormorerapidfiscal
depreciation a1lowances .existintheaccelerated obsolescence ofexisting
capitalstockduetothehigherenergyprices,andintheneedtoachieve
fundamental improvement inindustrial compet.itivityvis-a-visthirdcountries.
TheCommissionforitspartisfollowingtheseprinciples inareasof.-
Communityresponsibility ,havingrecentlyproposed areductionofstateaids
(1).•. ...."*tosteel,anincreaseinproducers "financialco-responsibility forsurplus
' (?)agricultural production,andastrengthening inCommunityloaninstruments
" . .(3)forfinancing investment . *,
P.
,Progressisbeing-made-inreducingtheCommunity'sdependence on
importedoil.Theshareofimportedoilingrossinlandconsumption of
primaryenergyfellfrom47,6%in1979to44,2%in1980,andisexpected
tofallfurtherto42,1%in1981.Thevolumeofnetoilimportsdropped10,7%-
in1980andshouldfurtherfall5%ormorein1981. ~■
However,muchmoreprogressmustbeachievedbeforetheCommunity .
couldconsideritsmacroeconomic policytobenolongerconstrained by
energymarketfactors.Energyproduction andsavingsmustbeboostedby
everypossiblemeans.Obstacles suchasdelaysininvesting ,innuclearpower,
orfailuretomaketimelyadjustments toenergyconsumption taxessoasto
sustainthe'pricemessage',willultimately exactanextremelyhighprice ..
inlivingstandards .Severalcountriesarerelatively wellendowed-in
hydrocarbon resources (Netherlands,UnitedKingdom)orhavereasonable
chancesofbecomingmuchmoreself-sufficient (Ireland,Denmark);France
ismakingparticularly rapidprogresswithotherenergyforms.Belgium,Germany
andItaly-whilemakingefforts .incertainareasofenergyproduction or
saving-needurgentlytostrengthen majorfeaturesoftheirnationalenergy
programmes,ortheirimplementation .Examplesofbelow-average taxation
ofenergyconsumption includeheatingoilingeneral-asbetweenformsofhydro­
carbonconsumption,and,asbetweenMemberStatesinrelationtotheCommunity
average,heatingoilin.Germany,BelgiumandtheUnitedKingdom,petrolin
GermanyandLuxembourg anddieseloilinItalyandLuxembourg .
(1)COM(81)71final
(2)COM(81)50final
(3)C0M(80)670finai

6.-
Thefurtherdeterioration intheLabourmarketsituationshouldbe
appraisedasafunctionofitsdifferentformsandcauses.
Theexpectedreductionofemploymentin1981couldbecorrectedpro­
gressivelywiththerecoveryinthesecondhalfof1981.Thespeedofthis
recoverydependsontheresponseofsocialpartnerstotheneedforhigher
investment andstructural change.Particularconsideration shouldinthis
contextbegiventotheneedtotakefullaccountofthedeterioration of
employmentprospectsandtogeneratenewjobs.Defensivemeasuresandsubsidies ,
wouldimpedetheprocessofreallocation asmuchasaggressivewagepolicies.
Withlittleproductivity growthandfurtherlossesin1981onthetermsof
trade,thereisalmostnoscopeforsignificantrealincomeqainsinthe
Communityandeventheneedtoacceptarealincomelossinsomecountries.
Insomecountriesstrongeffortsarecurrentlybeingmadetomoderatethe
growthofnominalincomes,andtheBeneluxcountriesinparticularareimproving
theircompetitive positionsasaresultofcombining alowinflationrate
withstableexchangerateswithintheEMS.Inothercountriesitisurgent
thatmoreeffortsbemadetoreducethetrendofgrowthinnominalincomes,
notablyinIrelandandItaly.Moreover,thesubstantia Iincreaseinstructural
unemployment emphasizestheneedforwagecontractstoallowforthequicker
adjusmentsofincomesbetweencountries,sectorsandfirmswherecompetitivity
andprofitshavebeenreduced.
Partofthetrendincreaseinunemployment reflectsthelongerperiods
ofsearchbetweenjobs,facilitated byunemployment andsocialsecuritybenefits.
However,theweakgrowthperformance since1973increasedthenumberofunemployed
Amongtheunemployedcertaingroupsareinaparticularly vulnerableposition:
youngpeoplewithoutsufficienttraining,womenlookingforpart-timejobsand
olderpeopleapproachingtheirpension-age .Toaidthesegroupsandtoalleviate
unemployment ingeneralitisvitalthatMemberStatesassuresufficientresources
forexpandedvocationaltrainingandretraining,undertakesupplementary efforts
tohelptherecordsupplyofyoungpeopleintotheirfirstemployment,improve
programmesofapprenticeships (asofferedinGermany)andpromotepre-pension -j
schemes -andthecreationofpart-timejobs. I
V • |
Anoldphenomenonhasattractednewinterest:thegrowingsizeof
unrecordedandunobservedemployment^hichseemstohavebeenspreading
\ '■
rapidlyinmanyindustrialised countries.

7.τ
Themultipleandcontinuedeffortstoremedytheunemployment situation
inCommunitycountries haveshownsomeresults.Morehastobedone,but
nogeneralandquickpanaceaisavailable:Theresponsibility foremploy­
mentcreationliesasmuchwiththose;whodecidetheconditionsofemploy­
mentattheenterprise levelaswithgovernments intheirmacroeconomi cand
*/structuralpoliciesatthenationalandCommunitylevel.
' ■ '1
4.Conclusions
TheEuropeanandothernon-oiI-producingcountriesarenowundergoing
thenewreadjustment processduetothesecondoilpriceshock-whoseimpact
ongrowth,pricesandthebalanceofpaymentsissimilar ,tothatofthe
firstshockin1973-74.Thedifficulttaskofgovernments,tradeunions,employ­
ersandhouseholds liesintheneedtoavoidthepolicyerrorsand
mistakehreactionsthatfollowedin1974and1975.Theconsequences ofthe
secondheavytransferofresourcesinfavourofOPEChavetobeaccepted.
Thisimpliesprioritiesforreducingthegrowthof.nominallabourcosts
andforrestructuring theproductivepotentialofoureconomiesthrough
accelerated investment andenergysubstitution andsavings.Thescopefor
globalpolicyactionsintheCommunityisverylimitedmainlybecause
thehighbudgetarydeficits .afterthefirstoilshockcouldnotbe
reducedduringthemodestrecoveryperiod1976-79,andbecausepresent
inflationratesandinflationary expectations inmostcountriesarestill
excessive .Thelimitedpolicycontributions ofgovernments couldbewidened
ifprogressincounteringinflation becomes'moreevidentandifthe
structuralpolicyeffortsmakerapidprogress.Onlyinthiswayisitpossible
forMemberStatestohelpeachotherthroughhavingacoherent,collectivepro­
grammeforeconomicrecoveryandimprovement intheemploymentsituation.
Thisprogrammeofpolicycoordination impliesfortheCommunity :
i-
-maintenanceofthegenerallyconvergent monetaryandbudgetarypolicy
orientations approvedinDecember1980an^'progressinstrengthening the
EuropeanMonetarySystem;
-strongercooperation betweentheCommunity andtheUnitedStatesinmonetary
andexchangeratepolicies; _
-limitedscopefordemandstimulatory actionsthroughaqualifiedacceptanceof
automaticbudgetstabilisers,butmoresupportforinvestment,aquickerre­
structuring andenergysubstitution policy,andimprovedlabourretraining
andmobilityschemes. ■•

Table1;MainEconomieAggregatesi 1979-818.-
1979 1980 1981<1979 1980 1981
GDPvolume,%change Privateconsumptiondeflator,Ζchange
DK 3,5-0,9-0,1 9,5 11,0 9,0
D 4,6 2,0-0,7 3,9 .5,4 4,5
GR 3,8 1,4 2,4 17,7 24,5 21,5:.
F 3,2 1,8 0,5 10,5 13,5 11,8
IRL 1,9 0,8 1,8 12,2 18,2 16,0
I 5,0 3,8-0,8 14,9 21,2 18,7
NL 2,2-0,2-0,6 4,6 6,5 6,3
Β 2,4 1,2-0,7 3,5 6,3 6,2
L 3,6 0,4-1,0 5,8 6,3 6,3
UK 1,3-2,0-2,0 12,2 16,1 11,0
EC· 3,5 1,3-0,6 :8,9 12,1.10,4
Unemployment rate,Ζof
civilianlabourforce•'4'Currentaccountofbalanceofpayments
··ΖGDP
DK 5'36,2 7,6 -4,6-4,1-3,7
■D 3,4 3,4i4,4 -0,7-1,7-1,6
GR(1) (2,2)C2,1>(2,3)--2,9"2,6-2,9
F 6,1 6,5 '7,5+0,1-1,3-1,8
IRL 7,9 8,9 10,9
♦-10,1"8,3-11,4
i 7,6 8,0 8,2 +1,6-2,6-1,4
NL 4'25,0 6,8 -1,4-1,5-0,9
.Β 8,6 9,310,7 -2,9-5,6-6,6
L· 0,7 0,7.0,8+28,7 +20,8 +18,0
UK 5,4 6,9 9,8 -0,9 +1,0 +0,3
EC..... 5,5 6'17,4„· -0,5-1,5-1,6
Generalgovernment
(+)orborrowing (-netlending
■),%GDP■Ìfl,,Moneysupply,Xchange
OK -3,1.-4,6-5,7:€M2>9,9 10,9 8,7
D ■■-3,0-3,5-3,8 (PO)6,0 6,2 4,5.
GR
F -0,8*-0,6-1,8 (M2)14,4 10,5 10,0
,ÍRL -11,9-13,5-11,7 (M3)12,0 18,9 12,0
I "9,4-7,8-8,4 (M2)20,3 12,3 13,1
NL -2,0-2,8(-3,2 (W2)7,6 5,8 6,5
Β -7,2-9,4-9,7 (M2H)6,0 3,0 5,0
L +0,1-0,9 : : :
UK "3/3-2,3'"2,2'(ÍM3)12,7 19,5 10,2
EC. -3,6-3,6··-4,0 11,2 10,1 8,2
(1)Notcomparablewithothercountries.
Source:Commissionservices,basedoninformation availableto24February1981 m

3
ΓΛ
ADDENDUM
totheCommunication fromtheCommissiontotheCouncil;
Doc.C0M(81)95final
When,on15December1980,theCounciladoptedtheAnnualReport
ontheeconomicsituationintheCommunity (Decision80/1265/EEC),itwasagreed
tofixthefirsteconomicpolicyguidelinesforGreeceatthefirst
examination oftheeconomicsituationbytheCouncilin1981.
Accordingly,theCommissionproposesthattheCouncilapprove
theeconomicpolicyguidelinesforGreececontainedintheannex.

/Jû
InGreece,theimprovement inthecurrentaccountbalancewas
achievedin1980atthecostofamoderatedeclineindomestic demand
andacontrolled dropintheexchangerate;asaresult,amoreflexible
economicpolicywaspossiblefor1981.Thepolicyhastwoaims:first,to
containtheupturninconsumption ofwhichthereweresignstowardtheend
of1980,whilestimulating therecoveryofinvestment whichisessentialif
production structures aretoadjusttothenewexternalcontext;andsecond,
toslowdownprices-risingatanannualrateof26%attheendof1980-
inordertopreservethecompetitiveness oftheeconomywhichislikely,
soonerorlater,tobeaffectedifthepresentrateofpricerisespersists.
\
Theseobjectives aretobeachievedbyapackageofmeasuresconcerning
incomes,thebudgetandcredit.Asacomplementtotheadjustments"madetothe
incometaxratesandallowancestocounteractfiscaldrag,incomespolicyhas
laiddown,fortheyear,rulesfortheadaptationofwagesdesignedsimply
tomaintainpurchasing power:thisshouldhelpachievethenecessary slowdown
innominalpayrisesandthemoderation ofprivateconsumption .Asforbudgetary
policy,ithasprovidedforasubstantial increaseinpublicsectorinvestment
andanappreciably greaterefforttoassistcertaincategories ofprivate
investment .Lastly,monetarypolicyhasconsiderably loosenedtheconstraints
onfirms:for1981,theincreaseinlendingtotheprivatesectoristargeted
tomoveroughlyinparallelwiththeforecastincreaseinthevalueofgross
Ψ
domesticproduct;however,noimmediate moveshavebeenmadetolowerinterest
rates.
Thispackageseemstoachievethebestcompromise possiblebetween
short-term constraints andmedium-term necessities .Onlyduringthefirst
half-yearwillitbepossibletoassesswhethertheresultsachievedfully
correspondtotheobjectives setas-regards,inparticular,slowingdown
pricerisesandlimitingtheincreaseintheexternaldeficit.Iftheydo
not,certainelementsofthecurrentpolicywouldhavetobetightened up.