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Vol.1982/0037

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COMMISSION OFTHE EUROPEAN COMMUNITIES
COM(82)100 final
Brussels ,5th March 1982
,·»··■ ·0/-ν
y*' .-J\
- - .-i
•.
■ -J
Ί
THE ECONOMIC SITUATION INTHE COMMUNITY
(Communication from the Commission tothe Council inaccor­
dance with Article 2ofthe Convergence Decision of18th
February 1974 )
C0M(82 )100final

C9MC82 ),0.
The Economic Situation inthe Community
(Communication tothe ECGFIN Council of15March 1982 ^
inaccordance with Article 2ofthe »
Convergence Decision ©f18February 1974)

The -Economic Situation <ntheCommunity
The first twosections ofthis communication give anaccount of
recent developments intheEuropean economy together with revised fore -,
casts for1982 .The tatter suggest aslow recovery ineconomic activity
during this year .Theassociated policy recommendations are setout in
section three .These forecasts andrecommendations rely upon relatively
hopeful assumptions forworld economic conditions (forexample anend to
the USrecession inmid-year andnonewupuard movement ofinterest rates ).
However ,there is&serious possibility of«frankly worse turn of
events ,forexample ofworld monetary conditions that could abort the
cyclical recovery process inEurope *Acloser examination ofaction which
could beundertaken would then become necessary .This isconsidered in
section four . #
1«Economic trends andprospects .
Theeconomic situation attheendof1981 and inearly 1982 has
been evolving somewhat more than onemight deduce from the flat trend of
industrial production andthesteep rise inunemployment .Processes of
cyclical andbalance ofpayments adjustment are inmotion inmost countries .
Business prospects have been gradually improving according totheEuro­
pean Community opinion surveys ofindustrialists ^ .
However ,thefragility oftherecovery phase isillustrated bythe
newCommission forecasts which suggest only 1.6%GOP .growth in1982 as
I i
awhole .This implies aquarterly profile oflowgrowth from theendof
1981 tomid-1982 .Byend-1982 growth isprojected toreach a21/2Xannual
rate .
Underlying thecyclical profile forboth 1981 and1982 isarelatively
buoyant export volume growth ,which hasbeen stimulated asanecessary
adjustment tothesecond oil shock and was further boosted bythestrong
depreciation ofEuropean currencies last year ,for1982 theoutlook is
for aslight growth ofprivate consumption involume tenss ,aless strongly
negative evolution ofInvestment <than in1981 ),and apositive turn tothe
stock-building cycle .

Themost striking change in1981 wasthe16,4 Xreduction inthe
volume ofpetroleum imports ,following thesignificant reduction already
achieved in1980 »With rising production intheCommunity ofoiland
nuclear electricity ,theCommunity 'sdependence onimported oil for it#
total energy requirements made ssharp step down from 45Xin1980 to
39 1/2Xin1981 .
Thebalance ofpayments current account oftheCommunity overall
turned outbetter in1981 than expected last autumn .Thedeficit isnow
estimated tohave declined from 1.3 %ofGDP in1980 to0,8 ,*in .1981 ,
andtofurther decline to .0,4% in1982 .Germany ismoving rapidly back
towards equilibrium ,theUKandtheNetherlands are insurplus ,but
France and most ofsmaller Member States remain insubstantial deficit .
Little progress wasmade inreducing inflation in1981 ,with anFC
average consumer price rise of11.4 X.With therecent weakening of
commodity prices ,andsome deceleration inthegrowth ofnominal incomes ,
theachievements in1982 should bemore substantial inthis respect ,and
theobjective should betolower inflation below the10.6 Xnowforeseen
bytheCommission .Divergences between countries seem likely toremain
worringly wide ,with consumer price increases ofover 20Xinthe last
twelve months inGreece andIreland ,andonly alittle less inItaly .
Total employment in1981 isestimated tohave fallen bynearly
11/2X,andwith thesubstantial growth ofthelabour force ,theunemploy­
ment rate rose bynearly one-third .The rate ofgrowth ofunemployment
haduptotheendof1981 shown nosign ofslowing down ,with anaverage
monthly increase of180.000 persons .Iftheexpected business upturn
materialises ,this rate ofgrowth ofunemployment will slow ,with the
absolute level possibly stabilising insome countries towards theendof
1982 ,with theaidalso ofspecial labour market measures .

2.Policy developments
Monetary policy intheCommunity inrecent months hasbeen over­
shadowed byfinancial developments intheUnited States .Short-tern Interest
rates fell sharply there with onset ofrecession towards theendof1981 ,
but inthenewyear USrates hardened again .
IntheCommunity themonetary authorities have been seeking toobtain
amore gradual butsteady lowering ofinterest rates <>Bymid-February
average short-term rates haddeclined toalittle over 14X,which maintains
areal interest rate margin ofabout 3X;with theexpected decline inthe
inflation rate in1982 ,these rates remain very high for alow-point inthe
business cycle .TheECU/USdollar exchange rate hasbeen sensitive tothese
changing interest rate differentials .Thus thedollar wasweaker inthe
last months of1981 ,buthasstrengthened again sharply inearly 1982 ,not­
withstanding substantial European central bank intervention selling dollars .
Money supply intheCommunity asawhole haskept toarather steady
rate ofabout 101/2X.Slower monetary growth wasachieved inseveral
Member States in1981 (including Germany andtheUK),butsomewhat faster
growth than expected wasseen inFrance ,Italy andespecially Greece .
Budgetary policy ended upin1981 less tight than originally planned .
Theaggregate netborrowing ofgovernment asawhole thus rose quite signi­
ficantly from 3,6XofGDP in1980 to5,0%in1981 (with allthereserve
with which such aweighted mean should beinterpreted ).Theonly country to
have reduced itspub Ii<f"government borrowing asashare of6DPwastheUK,
Thelevels ofgovernment borrowing -.were highest inBelgium ,Denmark ,Greece ,
Ireland andItaly .
budget polic'y adjustments have been inpreparation inseveral
countries inearly 1982 ,inBelgium andIreland aswell asItaly inarestrictive
direction ,inGermany with measures tostimulate investment andaid
employment ;intheUKthe1982™83 budget will bepublished inMarch
against -abackground ofapproximate achievement ofbudget policy
objectives forthepast year .
Onpresent plans andforecasts itistapected that government
borrowing will bereduced slightly in1982 t© %ofGBP (from 5.0%
in1981 )fortheCommunity as«whole ,with increases sxpeeted though in
france ,Greece and Denmark .

Thegrowthofnominalwageincomespercapitadecelerated onaverage
In1981to11.7%,comparedto13.4%in1980.Takingintoaccountprice
rises,thisgavein1981ayeryslightgaininpurchasingpower.A
furtherdeceleration isforecastfor1982ir»nominalwageincomesper
capita<10.1%),approximately inlinewithdeceleration ofprices.
Negotiations havebeenunderwayinseveralcountriesinlinewiththe
Commission"scommunication (ofJuly1981)ontheprinciplesfor
indexationintheCommunity.InItalythesehavenotyetresultedinan
adjustmentoftheprevailingsystem;inBelgiumthegovernmenthasjust
decidedtolimitpayincreasesin1982throughatemporary .limitation
ofindexation.TheNetherlands madesomesuchadjustments in1981®In
FranceavoluntaryIncome?polieyisundernegotiation.
Inthefaceofthedramaticincreaseinunemployment inthecourseof
1980and1981,MemberStateshavebeentakingmeasuresaimedatreducing
thedisequilibrium inthelabourmarket.Severalcountrieshavebeen
adaptingtheirpoliciesforschool-leavers alongthelinesenvisagedby
theCommission^*,theUK,DenmarkandxFranceinparticularenvisaging
trainingoremploymentopportunities forall16«"18yearelds(2>;Gersany's
veryextensiveapprenticeship schemesarecoveringastillincreasing
proportionofyoungpeople.
Anintensification ofworksharingschemesthroughearlyretirement
(whichisalreadyanimportantfeatureinBelgiumandDenmarkandwhich
playsacertainroleintheUK)isnowenvisagedinFranceandistobe
examinedinGermany.InFranceareductionoftheweeklyworkingtimeis
alsognderway,togetherwithanexpansionofpublicsectoremploymentand
othermeasures.TheDutchgovernmentenvisagesanemploymentcreationpro-
grammacostingabout1XofGDPbutdetailsar#stillbeingdebated.
(1)ForewardtotheFifthMediua-T«ns Programme(para7,2,2)
(2)16-25yearolds1ftDenmark

-5-
i
3.Policy forreinforcing arecovery ineconomic activity
Theprerequisite ofaneffective European economic policy isthat a
sufficient internal coherence between Member States isachieved *This does
notmean identical performance orpolicies ,asthecontrolled adaptability
ofexchange rate parities intheEMShasshown ,,However ,itdoes mean ,for
example inthepresent situation ,that countries which have moved into
financially vulnerable situations actdecisively toremedy this ;anc |that
countries with strong balance ofpayments positions donotpursue so
prudent financial policies astoimpede therecovery ofhigh deficit
countries ,Divergences ofthis kind risk undermining thecyclical recovery
process .
Several Member States ,especially Belgium ,have been preparing stabili­
sation policies ,and inthese cases bold action intheareas ofpublic finance
andcosts provides thebest prospects for arenewal ofemployment creating
growth.Belgium has inparticular announced measures tolimit payindexation ,a
measure allthemore urgently needed ,following tiledevaluation ofthe
Belgian franc (and toalesser degree theDanish krone )on21st February ,
The EJelgian devaluation corresponded toaneed foranexceptionally deep
adjustment ,andmust befollowed through with thedomestic budget and
income measures .Ingeneral theessential Community interest isthat Member
States concentrate onthorough domestic publis finance and cost stabilisation
measures ingood time ,rather than wait until thefailure tolimit internal
disequilibrium hastoberatified byexchange rate changes .TheCommunity
mu$j guard inanyease against adrift towards apattern ofcompetitive deva­
luation ,Action toturn thetrend inextremely high inflation rates (Ireland ,
Greece andItaly )and/orextremely high public deficits (Denmark ,Greece ,Ireland ^
Italy )isnowurgently required .
Some countries have been able tocreate acertain room formanoeuvre :
thus Germany hasrecently taken measures aimed atstimulating
investment andemployment over themedium-run ,,Meanwhile domestic demand
remains intheshort-run stagnant inthis country ,andseems likely
toremain soin1982 ,asalso intheUK,Thepolicy strategy inthese
countries aiming indirectly atreducing interest rates must beencouraged ,
notably inGermany .Forthetime being ,these countries should avoid any
restrictive budget policy action in1982 =Moreover monetary policy should ..
typically aim atthehigher endoftarget ranges formonetary expansion .

Asamore general proposition intheCommunity ,budgetary measures
maypartially compensate fortheeffects ofhigh interest rates either
through increased investment aids asinGermany and Prance ,orthrough
such measures asareduction ofthe value added t#»onconstruction
activity asinBelgium .
There isalso now astrong case atatime ofdeclining petroleum
prices foradjusting energy consumption taxes upwards ,soastomaintain
theright energy price message toconsumers andinvestors *Theoil impor­
ting countries must notrepeat themistake ofthemid-nineteen seventies ,
when acceptance ofashort-term energy price weakness ledeventually to
thegreat costs ofthesecond oil shock .Extra consumption taxrevenues
caneasily beoffset inuseful public finance adjustments ofother kinds ,
beitforemployment orinvestment expenditures ortaxreductions .
•Employment measures will continue towarrant arising share ofpublic
expenditure .Specific measures aimed atimproving thesituation onlabour
markets have been described inother Commission communications .From an
economic point ofview ,care should betaken toavoid introducing anynew
labour market rigidities impedeing theredeployment oflabour when astronger
demand arises .Theadjustment ofworking time initsmany forms (working
week ,year ,life time )should also contribute toreducing unemployment ,,
This needs tobenegotiated bythesocial partners inways .which take
account ofthecompetitive position offirms .
Inaddition totheneed forconvergence ofpolicies infundamental
respects ,there aretechnical possibilities forstrengthening theEuropean
Monetary System which arecurrently being examined intheappropriate
Community fora .Decisions inthis field are,ex.oected tobetaken soon .

4.Risksandcontingencies
Againstabackgroundofuncertaincyclicalrecovery,themostclear-
cutriskfor1932isthatnegativeimpulsesmaybecommunicated across
totheEuropeaneconomyfromtheUnitedStatesasaresultoftheparti­
cularstanceofpoliciesthere.forexampleitispossiblethatacyclical
upturnintheUScombineswitharisingfederalbudgetdeficit
tocauseupwardpressureoninterestratesbeyondpresentlevels®
ThefactthatinterestratesinEuropein1981,atthetroughofth«
recession,wereevenhigherthanin1979and1980,isprobablythemost
importantexplanation ofthefailureofcyclicalrecoverytogetunder
waylastyear.Inthetypicalcycleofthepastdecade,short-term
interestratesfell5-6Xfrompeaktotrough,Arenewedriseininte­
restratescouldwelltipthebalanceofinfluencesagainstanupturn.
«
I <
Itisalsopossiblethatworldtradegrowtheouldweakenagainin/
1982,reflectingdifficulties inotherregionsoftheworld,including
EasternEuropeandpartsofthedevelopingworld.
Thusforanumberofreasons1t1spossiblethattheeconomicrecovery
inEuropein1932mightabort.Actiontoforestallthiscontingencyis
thereforeimperative.
first,thedepressiveinfluencesofhighinterestratesmaybe
combiningwithaweakeningpropensitytoinvestthatreflectedindustria­
lists'perceptions ofincreasingworld-widetraderestrictions ;thesetwo
factorsmaybedampening,ifnotstultifyingthemotorforcesthatnor­
mallydrivethebusinessupswing.
»
Secondly,onthepolicyside,themajorindustrialised economiesnay
bemakingsomemiscalculationsoverthecostsofinsufficient policy
coordination,bothasbetweenthebranchesofgovernmentresponsible
forbudgetary,monetaryandtradepolicies,andasbetweenthemajor
regionalcentresofpolicy-making inNorthAmerica,JapanandEurope.
AsregardstheUnitedStatestheproblemsofreconcilingtheobjec­
tivesofmonetaryandbudgetarypolicy ForbothEurope

8
andJapantheresultantpressuresonthedollar'sexchangerate,unabated
byan/policypositionintheUS*havecausedproblems*InEuropethoinfla­
tionaryinfluencesofdevaluation haverequiredcontinuedtightfinancial
policies.,InJapanareluctancetofollowUSinterestrates
hascontributedtoaweakerexchangerateandafasterbalanceofpay­
mentsadjustmentthanmightotherwisehaveoccurredorbeendesired.
Theprospectnowofafurtherroundofmonetarytensions,originating
intheUSbudget/monetarypolicymixishavingaprofoundlyunsettling
impact„Whetherornotapprehensions turnouttobefounded,theimpact
oftheuncertaintyisadverseorsbusinessexpectations andonattempts
ofpolicy-makers toset,adheretoandexplainpubliclytheirstrategies®
InEuropeathirdconsecutiveyearoffast-rising unemployment should
notbemetjustbyresolvetowaitforthepresentorientations orpolicyto
deliverdesirableresults.Twobroadpolicy'responsesshouldbeconsidered.
I
(i)Themostconstructive approachwouldbeforthemajorindustrialised .
countriesandregionstoworktogether,onatime-scaleadaptedtothe
mid-yearJunesummit,toproduceaninternational cooperativesolution.
Thiscouldmeanachievingamoregeneralised concerninmonetarypolicy
forinterestrateandexchangeratemovements,amorebalancedsetof
domesticpolicymixes,andarelaxationoftradepolicytensionsthateould
beconfirmedbyanagreementremovingpresentdisputes*OntheUSside
thiscouldmeanreducingthebudgetdeficitandintroducinginternational
\
considerations intothemanagementofmonetarypolicy.InJapanthiscould
meanconverselyalessrestrictivestanceorevenabudgetarystimulusinan
evolvingpolicymixwhichassuredasoundinternal-externaIbalanceinthe
economy.ForEuropepolicycouldaimataneasingofinterestratesandat
strengthening economicactivitywithouttradetensions.
•ii)-Ifanagreementwithitsprincipalpartnersprovesimpossibletoachieve,
theCommunityshouldexaminewhichpolicieswouldpermit,ittoprotectits
owninterests.Thesepoliciesshouldbedeterminedattheappropriatetimeand
couldforexampleaimataconcertedreductionofEuropeaninterestrates,
togetherwiththe-introduction ofthenecessarymeasurestocontainthe
secondaryeffectsofsuchaction. ■»

S. Conclusions
Theeconomic upswing inEurope isstill uncertain and isprobably
being hampered bythehigh interest rates ;unemployment isstill rising
fast .However thebalance ofpayments isimproving onthewhole quite fast .
(b)iWithin theEuropean Community ,there arepolicy' adjustments that can,
andneed tobemade tostrengthen asustainable upswing .Stabilisation pro­
grammes remain still tobeimplemented asamatter ofurgency insome coun­
tries andthese areindispensable forimproving employment .But inother
countries whose financial condition isbecoming sounder ,budgetary
policies should abstain from anyrestrictive impulses Monetary policy should
atpresent beaiming typically atthehigher endoftarget ranges incoun­
tries with relatively lowinflation .Budgets should notably support employ "
ment-related measures andaidinvestment ,inpart through "measures anticipating
general interest rate decline ;andmaintain theright energy price message
through fiscal adjustments .
Improvements to .theEuropean Monetary System ,inparticular amore
extensive role fortheECU inprivate andpublic uses ,arewarranted asa
contribution torebuilding amore balanced andsafe international monetary
environment .
(d)Theprospects for1982 arestill darkened byserious problems ofiabalar.ee
budgetary -monetary -trade policy mixemerging intheindustrialised
,9^
countries ,andnotably theUS.Aset-back totherecovery inEurope in1982 ,
implying athird successive year offast rising unemployment would have
far-reaching impl ications .Policies would have tobereconsidered in
fundamental ways ,asregards themanagement ofmonetary policy inEurope in
relation totheUS,as'regards thedomestic mixofpolicies within Europe ,
andasregards thegeneral balance ofmonetary ,budgetary andtrade policies
inthe industrialised world® . '

Table 11-MaiηEconomic Aqq»· ente' ,. 1780-32
IViO 1vai 1982 1980 1981 m ?
GDPvolume· ,Xchange Private consumption deflator ,Xchange
OK -0,2 -1/2 2,5 . 12,3 11,5 10,1
0 1/9 0,0 ..1/4I5/4 6,0 4,5
GR 1,6 -0/2 1/2 22,2 •23,5 24,0
F 1/3 0/1 2/7 13/2 13,1 13,0
IRL 1/9 I'7 '-1/6•18,2 20/0 19,5
I 4/0 -0,8 '1/5 20,3 19/2 16,5
NL 0,6 -1/1 0,8 6/9 6/7 5,0
θ 2/4 -1/4 *0,« 6,4 .7,6 10,0
L 0/4 -3,0 0/1 7,7 8,1 12/0
UK -1/4 -1/4 1/1 15,9 11,6 10,3
CE 1/4 -0,5 1/6 11,8 11,4 10,6
Unemployment rate,%of Current account :ofbalance ofpayments
.civilian labour force %GDP
OK 6/2 8/3 8/9 -3,4 -3/1 -2/9
D 3/4- 4/8 6,6 -1/8 -1/2 0,2
GR < (2,8) (3,1) (3,4) -0;9 -4/0 -3,0
F 6,5 7,8 .8,5 -1/3 -1/4 -1,4
IRL 8,3 10,4 12,0 -8,4 -12/9 -9/3
I 8,0 8,9 · 9,7 -2/5 -2/1 -1/2
NL 4,9 7/5 9,7 -1/4 2,0 3/9
8 9,3 11/5 13,3 -5/2 -6/6 -3,9
L 0,7 1,0 1/3 22/2 19/7 (20)
UK 6,9 10,5 11,8 1/4 2/2 0,7
CE 6,1 7,9 9,1 -1/3 -0,8 -0,4 ■
General yovernment net lending Money supply .Xchange
(+) orborrowinq (-), V,GDP (1) end ofyear (1)(2)
OK<3> -5,9 -10,7 -12,1 <M2)10/9 10/1 13,0
0 -3,5 -4,5 "3,6 (M3) 6/2 5,0 4,9
GR (-3,3) (-6,3) (-8,2) (M3)24,7 34,7 27,8
F +0,4 -2/1 -3/1 <M2) 9,7 12/3 (13,0 )
IRL -12,8 -14,4 <4> -12,3 (M3)16,9 13,6 13,6
I -7,8 -10,6 . -10,3 (M5) 16/9 17/0 17,0
NL -3/4 -4,1 -3,7 (M2) 3,6 6/3 8,8
θ -9/4 -13,3 -12,0 (M2) 2,7 5/1 (9,5)
L -1,8 -3,3 -3,0••••••
UK "3,9 -2,3 -0,8 (ÍM3)18,4 10,5 9,0
-3,6 -5,0 -4,7 11,3 10,9 (9,9)
U)Thefigures relate tocalendar years except forthe UK(financial years ).
(2)end-year onend–ye.=>r .
(3)Excluding losses onbonds issued below par:-2,9,-6,9and-8,5% respectively .
(4)Excluding private sector participation ininvestments counting to112mill .I°L.
Source :Commission services ,based oninformation available upto2March 1932;the
the .figures take provisionally into account theeffects oftherealignment ofSMSpanties on21feor.yary 1.582 =........