ARCHIVESHISTORIQUES
DELACOMMISSION
COLLECTION RELIEEDES
DOCUMENTS "COM"
COM(81)457
Vol.1981/0140

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COMMISSION OFTHEEUROPEAN COMMUNITIES
COM(81)457 final
Brussels ,23rd July 1981
COMMISSION COMMUNICATION TOTHE COUNCIL
ONTHE PRINCIPLES OFINDEXATION INTHE COMMUNITY
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C0M(81 )457 final

f..VIi
Commission commumcationonthe
principlesofindexationintheCommunity
A.
1.InitsAnnualReportontheeconomicsituation,theCommission
proposedtotheCouncilthatmechanismsforindexingnominalincomesshould
be"usedwithsufficientflexibility orlimitationstoavoidpassingon,
intowages,unavoidable termsoftradelosses,andtoallowothernecessary ,
adjustments inincomedistribution ortaxstructurewithoutcausingex'tra
inflation."
TheCounciladoptedthistextinitsDecisionof15December1980. -
TheEuropeanCouncildiscussedthequestionduringitsmeeting
acMaastricht on23and24March1981.ThePresidencyconcludedasfollows:
"Highanddivergentinflationratesareathreatbothtotheprospectsof
growthandtotheeconomicandmonetarycohesionoftheCommunity.Inthis
contexttheEuropeanCouncilalsodiscussedtheeffectscausedbyrigid
systemsofindexationofincomesandexpressedth&opinionthatanadjustment
j
ofsuchmechanisms shouldbeconsidered .
3.Beginningfromthesediscussions andguidelines,theCommission
presentsbelowvariousetementsandconclusions aimedat,preparingthediscussions.
4-Firstly,theanalysisshouldbeconsideredinthelightof"twogeneral
remarks:
thefirstconcernsthe^wayinwhichexistingindexationmechanismsin
variousMemberStatescontributetothesettlementofpayissues.This
suggeststhatanychangesinthesesystems'shouldbemadeonlywithcaution
andwithafullunderstanding ofitsimplications .Thustheessentialobjective
o-iouldbetoadjustedexistingmechanismssoastoremedytheirmaindis­
advantages . -
-tnesecondconcernsthefactthatinpractice,theconsequences ofan
ι
■ndexationsystemgreatlydependonhowthemechanisminquestionoperates:
nowgeneralitis,thedefinition andcontentofthepriceindexused,the
degreeandfrequencyofcompensation,whatcategoriesofpricesandincomes
areindexed.3.
presents
/

-2-
5. Anautomaticorsemi-automatic linkbetweenthecostofLiving
andwagesorotherpricesorincomes-whichexistsatpresentinanumber
ofMemberStates-mayformaseriousobstacletoeffortstocorrectan
underlyingbalanceofpaymentsdisequiLibrium,to.improvetheproduction
structureofaneconomyortomeasuresdesignedlastinglytoreduce
inflation.Inparticular :
-wheretheeconomyinquestionsuffersaninflationary shockwhich
hasnothingtodowiththerelptivesharesofwagesandprofits-suchasa
riseinthepriceofoiI-automaticindexationextendstheinflationary
processandblocksadjustmentsrequiredbychangesinrelativeprices;
-wheretheexchangerateismodifiedtocorrectanexternalim­
balance,anautomaticlinkgravelyhamperstheadjustmentprocessandthus
tendstokeeptheeconomyinitspositionofimbalance;
-where,"forbudgetpolicyreasons,theauthorities wishto
increasetaxesorsocialsecuritycontributions (withashort-termeffect
onprices)automaticindexationpushesupwagecosts,atthesametimefuelling
domesticinflationanddamagingcompetitiveness .
Thus,bymakingadaptations incostandpricestructures moredifficult,
anautomaticlinkbetweenpricesandwagescanendangertheviabilityof
existingjobsaswellasincreaseobstaclestothecreationofnewjobs.
6.Furthermore,indexationmechanismsrepresentaconsiderable
dangerthatdivergences withintheEuropeanMonetarySystemwillbeprolonged
sincesuchmechanisms mayhelptopreserveinflationdifferentials anddistort
relativecosts.Inacountryseeking-bytheuseofbudgetaryandmonetary
policymeasures-tokeeptheexchangeratewithinmarginsoffluctuation,
unlimitedindexationalsoresultsinpurchasing power
compensation ,thusweakeningtheabilityofeconomicpolicytotacklethe
necessaryadjustments .
7.Atpresent,Belgium,LuxembourgandItalyaretheonlyMember
Slatestohaveaverydevelopedandrapidsystemoflinkingaconsumerprice
;exontheonehandtohourlywages(andotherprices)onthe"other.
InDenmark,indexationissemi-annual onthebasisofaspecialindexwhicn
excludestheeffectsofrisesinindirecttaxesandthepriceofenergy

products.IntheNetherlands indexationisalsosemi-annual onthebasis
ofaspecialindexwhichexcludesindirecttaxincreasesandgivesa,
reducedweighttomedicalservices.IntheotherMemberStates, --
totheextentthatitexistsat,all;automatic
indexationislimited.InFrance,-automaticindexationappliesonlytothe
statutoryminimumwage(SMIC),butthisisprincipally alowincome
protectionmeasure;inGermany,indexationisillegal.Howe'ver,in-Greece/
.i
andIrelandthelastcollective wageagreementsprovideforcompensation .
shouldtheriseinconsumerpricesgoaboveacertainthreshold (20%and10%-
respectively ). \ ; „
8..InviewoftheneedtoimproveemploymentprospectsintheCommunity
bystrengthening competitiveness ,makingaflexibleadjustment --to'"
theneweconomicsituation,substantial lyslowingdowninflationandreducing
theextenttowhichprices'andcostsdiverge,andinviewalsooftheneed
toreducebudgetdeficitsandbalanceofpaymentsdisequilibria ,theCommission
suggeststhattheCounciladoptarecommendation relatingtoindexation :
practices: '
(i)intheMemberStatesinwhichtheprincipleofwageindexationis
_accepted,the.basisforindexationshouldbeaprice-indexadapted
insuchawayastopreventpriceincreasefactorsoutsidecorporatecontrol
fromworkingthroughto'wagecosts;theregulationindexoughtthustoexclude
theimpactofanychanges -inindirecttaxesandcertainpublicservice ■
pricessuchaspubLictransportandmedicalservicecharges;where •
■the-rise*inpricesisattributable toadeterioration inthetermsof
tradedue^forexample,teariseinimportantrawmaterialpricesor■
toadepreciation ofthecurrency,theimpactofthesefactorsoughtto
beexcludedfromindexation;
^ii)inordertopreventtemporaryfluctuations inconsumerpricesfrom
beingpermanently incorporated intowagecosts,givingafurther
boosttothepricesandincomesspiral,wageadjustments shouldbeimple­
mentedwithadelayandshouldnumbernomorethantwoayear;
tiii)wheretheinflationrateisappreciably abovetheCommunityaverage
andtheindexationprinciplewidelyapplied,theaimshouldbetolimit
thedegreeofindexationtoan'agreedrate,,forexampletheCommunity
averageinflationrate,sothattheupwardmovementofpridesandcosts
isgraduallysloweddownandexchangeratesbecomemorestable.

–L-
(iv)asimpleandtemporarytechniqueforadaptingtoaninflationary shock
couldbetoforegoentirely acertainnumberofindexation adjustments
9.'•Theseprinciples shouldalsoapplytoothertypesofincome
suchasthefeesoftheliberalprofessions andrents,wheretheyare
indexedtoconsumerprices.
10.Therecommendation oughttobeadressedtothesocialpartnersin
theMemberStatesconcerned sothattheycanundertakenegotiations with
aviewtomakingrapidchangesintheexistingindexation mechanisms .
11.Lookingaheadtotheinstitutional phaseoftheEuropeanMonetary
System,theCommission considersitvitalfortheCommunitytoclarifythe
monetaryprinciplesoftheEuropeaneconomy..Inthisregard,theEuro-
peoneconomymustmovetowardsasystemwhichadoptsasitsbasicobjective
thedefenceofthenominalvalueofmoneyforitsuseincontracts and
transactions andforthedenomination ofmonetary andfinancial assets.
12.Inthelightofthediscussions whichwilltakeplaceonthebasis
ofthiscommunication ,theCommissionwillpresentadraftrecommendation
implementing theprinciples setoutinparagraphs 8and9.typesofincome
wheretheyare