22. 7. 91 Official Journal of the European Communities No C 190/19 
Proposal for a Council Decision adopting the annual economic report 1990/91 on the economic 
situation in the Community and determining the economic policy orientation for the Community in 
1991 — Revision 
(91/C 190/02) 
COM(91) 185 final 
(Submitted by the Commission on 24 May 1991) 
THE COUNCIL OF THE EUROPEAN COMMUNITY, 
Having regard to the Treaty establishing the European Economic Community, 
Having regard to Council Decision 90/141 /EEC of 12 March 1990 on the attainment of progressive 
convergence of economic policies and performance during stage one of economic and monetary 
union, and in particular Article 4 thereof (*), 
Having regard to the proposal of the Commission, 
Having regard to the opinion of the European Parliament, 
Having regard to the opinion of the Economic and Social Committee, 
HAS ADOPTED THIS DECISION: 
Article 1 
The Annual Economic Report 1990/91, annexed to the present Decision is adopted, and the 
economic policy orientations for the Community put forward in the report are adopted. 
Article 2 
This Decision is addressed to the Member States. 
H OJ No L 78, 24. 3. 1990, p. 23. 
! 
No C 190/20 Official Journal of the European Communities 22. 7. 91 
ANNUAL ECONOMIC REPORT 1990/91: REVISION 
Section I of the March version of the Annual Economic Report 1990/91 which discussed the 
short-term outlook will be replaced by the first two sections on the economic situation and 
outlook. 
Section II of the previous report, relating to economic policy tasks during Stage I of economic and 
monetary union, remains valid. Its main recommendations as well as eventual adjustments are 
developed in section HI of the present report. 
CONTENTS 
Page 
Introduction 21 
I. THE ECONOMIC SITUATION IN 1990 AND EARLY 1991 21 
A. Growth slowdown in the Community '21 
1. The worsening of the international environment 22 
1.1. The United States 22 
1.2. Central and Eastern Europe 23 
1.3. The fluctuations of the US dollar 23 
2. A cyclical adjustment within the Community 24 
3. The Gulf crisis and the fall in business and consumer confidence 26 
B. Recession in the United Kingdom 26 
C. German unification 27 
D. Inflation and employment 28 
II. THE OUTLOOK FOR 1991 AND 1992 29 
A. The risk factors 29 
B. The policy concerns 30 
1. Profitability, growth and employment . > 30 
2. Inflation 31 
3. Budgetary convergence 32 
4. Inadequacy of saving 33 
III. POLICY CONCLUSIONS 34 
A. Maintain stability and growth climate 34 
B. The development of Community potential 34 
1. Complete the internal market 35 
2. Improve economic and social cohesion 35 
3. Structural adjustment 36 
4. The environmental challenge 37 
C. Policies for improved convergence 37 
1. Price and cost convergence 37 
2. Convergence of budgetary policies 39 
3. Convergence of external positions 42 
22. 7. 91 Official Journal of the European Communities No C 190/21 
THE EUROPEAN COMMUNITY IN THE 1990s: TOWARDS ECONOMIC AND MONETARY 
UNION 
INTRODUCTION 
The economic outlook for the Community in the current year 
is much less favourable than it appeared in autumn last year. 
In the Community, output is expected to increase by less than 
1,5% in 1991, half the rate recorded in 1990. As a result, 
growth in employment is likely to slow down significantly to 
less than 0,25%. This small increase in employment will, 
however, be more than offset by the expected increase in 
the labour force leading to a consequent rise in the 
unemployment rate to 8,7 % in 1991. Despite the slowdown 
in activity, inflation is expected to remain broadly stable at a 
relatively high level (5%). 
The deterioration in the Community's economic 
performance expected in 1991 is only partly explained by 
events in the Gulf region. The increase in oil prices in the 
second half of 1990 and the erosion of business and 
consumer confidence that followed are, without doubt, a 
direct result of the Gulf crisis. Some Community countries 
were, however, already experiencing difficulties well before 
August 1990. External demand was slowing down, with 
negative effects on investment growth, and the necessary 
correction of macroeconomic imbalances was dampening 
internal demand in some countries. These comprise the restoration of profitability during the 
1980s; some progress made in reducing unsustainably large 
budget deficits; the implementation during the past decade of 
structural reforms aimed at a better functioning of markets; 
the achievement of a more sustainable pattern of external 
balances and, last but not least, the European integration 
prospects. 
These factors have contributed to the relatively good 
performance during the 1983 to 1990 period. To further 
improve the basis for sustained non-inflationary growth 
during the period ahead with the aim of entering the final 
stage of EMU, policy makers must seek to consolidate and 
enhance the gains already made through a continued pursuit 
of the strategy that has been at the basis of the improved 
performance during the 1980s. 
With such policies, the recent economic slowdown in the 
Community is expected to be reversed during the course of 
the year. In 1992 the overall situation is expected to improve 
with output growth reaching 2,25 %. Due to lag effects, 
however, employment growth is expected to remain at the 
level of 1991 (0,2 %) entailing a further modest rise in the 
unemployment rate to 9,2 %. 
Despite the current slowdown of activity in the world 
economy, prospects for a resumption of stronger growth are 
good. The Gulf crisis now seems to have had smaller and 
probably more transitory effects on confidence, inflation and 
growth than initially feared. And there are incipient signs 
that the relatively pronounced cyclical downturn in some 
industrial countries, including the United States and the 
United Kingdom, is bottoming out. 
The fundamentally healthy underlying growth conditions 
in the Community should therefore reassert themselves. A climate of stability is an essential prerequisite for the 
development of the Community's potential. Monetary and 
fiscal policies have therefore to maintain a cautious stance. 
Fiscal policy ought to support to a larger extent monetary 
policy. The standstill of budget consolidation is from this 
viewpoint a cause for concern. Particularly since stage one 
of economic and monetary union tightens convergence 
requirements in the fields of prices and costs, budgetary and 
external positions. A considerable adjustment has still to be 
carried out by some member countries. Hence speedy 
implementation of the policy recommendations is essential 
to prepare succesfully the transition to full economic and 
monetary union. 
I. THE ECONOMIC SITUATION IN 1990 AND EARLY 1991 
A. Growth slowdown in the Community 
Over the past year the world economy has had to adjust to a number of events: the dismantling of the 
centrally planned economies of Eastern Europe, German unification, growing uncertainties in the 
Soviet Union and finally the Gulf crisis. The Community has weathered this difficult international 
situation relatively well, not least because of the powerful stimuli emanating in the short-term from the 
German unification process and more durably from the progressive implementation of the Single 
Market Programme. Overall, however, a further slowdown of real GDP growth in the Community 
could not be prevented: real growth is likely to drop to only 1,5 % in 1991, about half the rate 
recorded in 1990, and about two percentage points less than 1989 (Table 1). 
No C 190/22 Official Journal of the European Communities 22. 7. 91 
TABLE 1 
The EC economy at the turn of the decade 
(annual percentage charges) 
Real GDP 
Employment 
Inflation (2) 
Investment 
of which equipment 
Real unit labour costs 1984—1987 
+ 2,6 
+ 0,6 
+ 5,1 
+ 3,3 
+ 6,1 
-1,1 1988 
+ 4,0 
+ 1,6 
+ 3,7 
+ 9,0 
+ 10,4 
-1,1 1989 
+ 3,3 
+ 1,6 
+ 4,9 
+ 6,7 
+ 8,4 
-0,7 1990 
+ 2,7 
+ 1,6 
+ 5,0 
+ 4,3 
+ 4,7 
+ 0,6 1991 {') 
+ 1,4 
+ 0,2 
+ 5,0 
+ 0,8 
+ 0,2 
+ 0,3 1992 (>) 
+ 2,3 
+ 0,2 
+ 4,6 
+ 3,7 
+ 4,4 
-0,7 
(') Forecast. 
(2) Private consumption deflator. 
A number of factors have contributed to this outcome, such as: 
— the deterioration of the international environment, 
— a cyclical adjustment within the Community, 
— the Gulf crisis and the concomitant fall in business and consumer confidence. 
1. The worsening of the international environment 
From early 1990 until the first quarter of 1991 the external environment has deteriorated 
continuously; economic activity slowed down considerably in the United States, Canada and 
Australia and the restructuring in Central and Eastern Europe brought about a contraction of 
activity. Finally the Gulf crisis exacerbated weak trends in most countries and particularly in 
the Middle East and Latin America. Real GDP growth outside the Community slowed down 
from 3,2 % in 1989 to 1,7 % in 1990 and is likely to slow further in 1991 to less than 1 %. As a 
result import demand by the world outside the Community only grew by some 4 % in 1990 and 
is forecasted to grow by 2,75 % in 1991, less than half as much as before (7,4 % in 
1989). 
1.1. The United States 
The long expected and largely cyclical slowdown in the United States started around mid-1989 
and became more pronounced throughout 1990. Sharp declines were registered in consumer 
expenditures, in residential construction and business investment. The unavoidable tightening 
of monetary policy in 1989 in combination with rising private sector indebtedness, which was 
followed in 1990 by credit restrictions resulting from tighter standards for financial 
institutions, have put a brake on domestic demand. 
Demand was further reduced by the oil price in the second half of 1990. As a result real GDP 
growth dropped from 4,6 % in 1988 to 1,0 in 1990 and will again be very weak in 1991, even if 
a recovery gets underway later in the year (Table 2). 
22. 7. 91 Official Journal of the European Communities No C 190/23 
TABLE 2 
United States, main economic indicators 
(in percent or percent of GNP) 
Real GNP 
Domestic demand 
Investment 
Consumer prices 
Fiscal balance (2) 
Current account 1984—1988 
+ 4,4 
+ 4,6 
+ 6,5 
+ 3,5 
-3,9 
-2,9 1989 
+ 2,8 
+ 2,2 
+ 2,7 
+ 4,5 
-2,0 
-1,9 1990 
+ 1,0 
+ 0,5 
-0,1 
+ 5,0 
-2,4 
-1,8 1991 (') 
+ 0,1 
-0,5 
-3,1 
+ 4,5 
-1,8 
-0,3 1992 (>) 
+ 1,6 
+ 1,4 
+ 5,7 
+ 4,9 
-2,4 
-0,9 
(') Forecast. 
(2) General government. 
1.2. Central and Eastern Europe 
To integrate their countries in the world economy, the new democratically elected governments 
in Central and Eastern Europe have initiated comprehensive reform programs. The boldness 
and frontloaded nature of these reforms make the beginning of the reform process a critical 
phase. While curcial market oriented policies are being implemented progressively, the 
behaviour of economic agents is adapting only gradually to the new environment and 
production is severely constrained as much of the obsolescence of the capital stock was brought 
out under exposure to world market prices. In these circumstances it is inevitable that output 
would decline at the initial stage. 
Moreover, the necessary restructuring has to take place in a rather unfavourable environment: 
most countries face large domestic and external imbalances accumulated over years, while at 
the same time the system of mutual trade in the framework of the Council of Mutual Economic 
Assistance has collapsed, entailing a serious terms of trade loss for the Central and Eastern 
European countries. These difficulties were compounded by the oil price rise and the slowdown 
of demand in the Western world. 
1.3. The fluctuations of the US dollar 
Besides the loss in demand following the recession in the US-Community exports to the rest of 
the world suffered in 1990 from a loss of competitiveness resulting from the appreciation of the 
European currencies vis-d-vis the dollar. At the end of February 1991, the dollar value of the 
ECU was about 20% higher than the average for 1989. Since then, the dollar has recovered 
most of this loss. The yen fluctuated over the same period even more sharply, its value in ECU 
being in August 1990 more than 28 % lower than in 1989 on average. The value of the yen 
recovered subsequently more than 10 percentage points of this loss. The loss in competitiveness 
was one of the factors behind the slowing in exports and consequently in investment growth in 
the Communtiy since 1989. This illustrates that despite its internal growth, the Community 
could not avoid a sizable loss of competitiveness to translate into a decline in export growth 
which affected in turn investment. 
Community export growth (EUR-10 without Germany and United Kingdom) declined as a 
result from 7,3 % in 1989 to 5,4 % in 1990 with a further slowing to 4,2 % likely in 1991. The 
slowdown was particularly marked in the case of Italy, France, Belgium and Luxembourg. 
Exports to markets outside the Community slowed down even more sharply and were only 
partially compensated by increased exports to Germany. 
Despite these large exchange rate fluctuations and the liberalisation of capital movements, the 
EMS has not experienced major tensions, although positions of the different currencies within 
the ERM changed over time and interest rate differentials were gradually reduced. 
No C 190/24 Official Journal of the European Communities 22. 7. 91 
A cyclical adjustment within the Community 
To some extent the slowdown of demand was also a cyclical phenomenon after the strong 
recovery in the second half of the 1980s. Investment in particular expanded markedly during 
the period 1987 to 1990, by a yearly average of more than 7%. Hence some downward 
adjustment was inevitable when external demand weakened, spare capacity increased (Graph 
1) and monetary policy was tightened. 
Graph 1 
Capacity utilization in manufacturing (in %) 
Even if the cyclical downswing in the Communtiy has not fundamentally affected its growth 
potential, the oudook for profitability of investment has nonetheless deteriorated since 1990: 
the continuous decline in real unit labour costs going on since 1981 (the best proxy for company 
profitability) has come to an end. Profitability has no longer been recovering since 1989. The 
deterioration has been particularly marked in the United Kingdom from 1989 to 1991, and is 
likely in Germany in 1991. But also in Italy, Ireland, the Netherlands, Belgium and 
Luxembourg the profit improvement of the previous years has been halted or reversed. The 
increase is mainly due to high nominal increases in compensation per head, above 7% per 
annum in 1990 and 1991 in the Community on average (Table 3). 
TABLE 3 
Nominal wages, real wages and real unit labour costs 
(% change) 
EUR-10 (2) 
Germany 
United Kingdom 
EUR-12 1986—1988 
+ 6,2 
+ 3,3 
+ 7,9 
+ 6,0 1989 
Nominal co 
+ 6,6 
+ 2,8 
+ 8,9 
+ 6,2 1990 1991 (») 
mpensation per employee 
+ 7,7 
+ 4,1 
+ 10,9 
+ 7,6 + 6,9 
+ 6,4 
+ 8,5 
+ 7,1 1992 (») 
+ 6,3 
+ 5,5 
+ 6,8 
+ 6,2 
22. 7. 91 Official Journal of the European Communities No C 190/25 
EUR-10 (2) 
Germany 
United Kingdom 
EUR-12 
EUR-10 (2) 
Germany 
United Kindom 
EUR-12 1986—1988 
+ 1,9 
+ 2,5 
+ 3,2 
+ 2,2 
-1,2 
-0,7 
+ 0 
-0,9 1989 1990 1991 (>) 
Real compensation per employee 
+ 1,2 
-0,2 
+ 2,8 
+ 1,2 + 2,4 
+ 1,5 
+ 3,4 
+ 2,4 + 1,6 
+ 2,8 
+ 1,9 
+ 1,9 
Real unit labour costs 
-1,3 
-1,6 
+ 2,6 
-0,7 + 0,5 
- 1,2 
+ 3,0 
+ 0,6 -0,2 
+ 1,0 
+ 1,3 
+ 0,3 1992 (>) 
+ 1,5 
+ 1,2 
+ 1,6 
+ 1,5 
-0,5 
+ 0,1 
-2,3 
-0,7 
(') Forecast. 
(2) EUR-10 = EUR-12 minus Germany and United Kingdom. 
Policies over recent years have, to some extent, contributed to this development. The liquidity 
ratio (M2/3 over nominal GDP) for the Community, although also influenced by financial 
innovation and other structural adjustments on money and capital markets, increased 
relatively sharply in 1987 and again in 1989 (Graph 2). It is therefore at least questionable 
whether despite rising short term interest rates, monetary policy was sufficiently consistent 
with potential growth over the period till 1989, as excess liquidity was allowed to build up, 
thereby underpinning the basis for large wage claims. In 1990 there was a much smaller 
increase in the liquidity ratio, reflecting the tightening of monetary policy in an attempt to 
prevent the oil price rise from feeding into a wage-price spiral. 
Graph 2 
Growth money supply (M2/3) and GDP — Eur-12 
(annual % change) 
1 1 1 1 1 1 T 1 1 1 1— 
1M1 IMS «M 1M7 MM W»1 
* Forecast 
** Deflated by GDP price deflator 
\\\ Change in liquidity ratio 
No C 190/26 Official Journal of the European Communities 22. 7. 91 
3. The Gulf crisis and the fall in confidence 
In addition to the abovementioned factors, the sharp, but short-lived rise in oil prices resulting 
from the Gulf crisis led to a deterioration in the terms of trade in the Community and a decline 
in real disposable income that affected consumption and investment. In the event that oil prices 
had remained high, this would have affected member states quite differently. Indeed, while 
overall energy intensity of production has been reduced sizably since 1973 in nine Community 
countries, it has increased in Spain and particularly Greece and Portugal owing to the transition 
in those countries to a production structure with a greater industrial content. 
The subsequent drop in oil prices to pre-conflict levels reversed most of the unfavourable direct 
income and price effects of the higher oil price. The oil price in mid April 1991 was at about 
$ 19 per barrel (spot market price for Brent oil) compared to around $ 32 per barrel, in the 
fourth quarter of 1990. 
However, the Gulf crisis led to a sharp rise in uncertainty in the second half of 1990 and the 
early part of 1991. Confidence was severely eroded among consumers, in industry and in 
construction (see Graph 3)„with adverse repercussions on consumption and investment plans. 
While the main factor responsible for the sharp business deterioration, the Gulf conflict, has 
disappeared, there are few signs yet of a reestablishment of a more favourable sentiment: 
according to the first business survey after the end of the conflict, only consumers and the 
construction sector seemed to have regained some confidence; in industry on the contrary the 
deterioration in sentiment has stopped, but there is as yet no clear sign of a revival. A return of 
confidence in industry is, however, crucial for a recovery of investment. 
Graph 3 
Confidence indicators — Eur-12 (business surveys) 
8-
10-
16-
20 
M-r';\ 
l/ 
r J i t i i i i i t i i i Eur-12 
\/"Y 
•;'\ /" 
consumers 
TT ll'IIM II i construction 
'•'A 
y 1A V industry 
li V. 
u/w 
*'' 7 
i i ii ii i i i rrrr 
jan apr Jul oct jan apr Jul oct 
1988 1960 jan apr jul oct jan apr 
1990 1991 
B. Recession in the United Kingdom 
At its peak in 1988 the rate of expansion of domestic demand in the United Kingdom reached about 
8 %, far in excess of the growth in capacity. Induced by this strong expansion, inflationary pressures, 
accommodated initially by a lax monetary policy, became apparent on the price and wage front and in 
22. 7. 91 Official Journal of the European Communities No C 190/27 
the external account. Monetary policy then changed towards an increasingly restrictive stance with a 
progressive increase of short-term interest rates through the latter part of 1988 and 1989. However, 
the monetary squeeze implemented was slow to produce the intended results. Inflation has been 
persistent, influencing in turn wage settlements. The highly restrictive monetary policy resulted in a 
steep drop in activity from the second half of 1990 on. GDP growth slowed to 0,6 % in 1990 and a 
sharp decline in output of some 2 % is expected in 1991, mainly as a result of a sharp fall of investment 
(- 10,75% in 1991) and a decline in private consumption (-1,75% in 1991). Despite this 
slowdown in activity, nominal wage trends have remained strong, rising by 10,5 % in 1990 and likely 
to slow only to 8,5% in 1991. In 1992, output is expected to pick up again. 
The current account deficit reached a peak in 1989 at 4,8% of GDP and improved markedly to a 
deficit of 2,3 % in 1990 and a forecast of about 1 % in 1991 as imports weaken in line with falling 
domestic demand. 
C. German unification 
In contrast to the rest of the Community, economic activity accelerated further in Germany as a result 
of the tax reform, unification and the ensuing expansionary impulse of fiscal policy. Real GDP growth 
accelerated from 3,3 % in 1989 to 4,7% in 1990 (for data on Germany, see box). Particulary private 
consumption, was stimulated while also investment witnessed a strong expansion. 
STATISTICAL PROBLEMS FOR GERMANY 
All the data on Germany in this year's Annual Economic Report relate to West Germany. Due 
to major statistical problems it is not yet possible to present reliable data for the whole of 
Germany. Of course, the data on the budget deficit reflect the transfers from West to East 
Germany, while also the current account data incorporate these transfers. 
The high level of activity led to a strong increase in employment in 1990 and 1991 and a resulting 
sharp drop in the unemployment rate from 6,1 % in 1988 to 4,5 % in 1991 (harmonized definition of 
the Statistical Office of the Community). The tightening of the labour market has, however, also 
resulted in increased wage demands that put an end to the continuous decline in real unit labour costs. 
The expansion of domestic demand and deliveries to the Eastern part of Germany could not be met by 
domestic supply, resulting in sharply increased imports. 
The abrupt integration of the centrally planned East German economy into a market system as a result 
of unification, implied a fast and steep adjustment of the East German economy entailing a substantial 
cost to bridge the transition period. The cost of unification would swell the fiscal deficit from a small 
surplus in 1989 to a deficit of around 2,2% of GDP in 1990 and around 4,7% in 1991 despite sizable 
increases in taxes. 
The massive transfers to East Germany also resulted in a swing in the current account from a large 
surplus in 1989 into presumably a small deficit in 1991. 
t 
The developments in the West contrast sharply with those in East Germany which undergoes a 
dramatic adjustment process: a fall of 50% in industrial production and underemployment 
amounting to some 35 % of the labour force (including short-time workers) is expected by the end of 
1991. Output is generally acknowledged to be falling by two-digit figures both in 1990 and 1991 as 
new investment and the creation of working places is not yet sufficient to offset the loss of output and 
employment in the old industries. A slight recovery is expected in 1992 with the help of growth in 
investment as well in equipment as in construction. 
No C 190/28 Official Journal of the European Communities 22. 7. 91 
D. Inflation and employment 
Inflation has been relatively well contained since the start of the Gulf crisis. Although higher oil prices 
did push up rates of consumer price increases between August and October 1990, there are few signs 
that they have become embedded in the ongoing wage and inflation process. So far monetary policy 
seems to have succeeded in preventing the creation of a wage-price spiral. Indeed consumer price 
inflation is even subsiding: the average rate of consumer price inflation in the Community, which 
peaked in October 1990 at 6,3% was down to 5,3% in March 1991. 
Still at 5 % for the year 1991, the excepted average rate of inflation in the Community is worryingly 
high for a period of slowing growth. With lower oil prices such a level could indicate underlying cost 
push pressures (Graph 4). Also worrying from the point of view of EMU is that between 1988 and 
1990 price developments diverged within the Community (Graph 5). 
Graph 4 
Prices, costs and money supply growth (Eur-12, in %) 
M2/3 per unit of output 
nominal unit labour costs 
0-| , , , , , , , , , 1 | 
1M1 «M 1«M 1M7 1tM 1M1 
Forecasts 
Graph 5 
Inflation convergence (consumption price deflator) (annual % change) 
26 
* Forecast 
Hi Eur-7 • Eur-3 Hi Eur-2 
Eur-7:B,Dk,D,F,Irl,L,Nl. Eur-3: Sp.I.UK. Eur-2: Gr,P. 
22. 7. 91 Official Journal of the European Communities No C 190/29 
Employment growth has lagged the slowdown in activity resulting in a cyclical slowing of productivity 
(see Graph 6). Employment continued to grow in 1990 at the same rate as in 1989 (1,6%). The 
growth was particularly strong in Germany, reflecting partly an increased availability of skilled labour 
from East Germany and Eastern Europe. But also in the other Community countries, with the 
exception of Greece, the United Kingdom and Denmark, employment growth was robust. In 1991, 
employment growth in the Community is excepted to slow down to 0,2%. This small increase in 
employment will however be largely offset by the expected increase in the labour force. The continued 
fall in the unemployment rate since 1986 is expected to be reverse and increase from 8,2 % in 1990 to 
8,7% in 1991. 
Graph 6 
The productivity cycle 
4 
3 
2 
1 
0 1980 1086 1890 1992 
R^N Difference between GDP and employment growth 
II. THE OUTLOOK FOR 1991 AND 1992 
At the end of the first quarter of 1991 the main factors that underlie the present downswing have either 
disappeared or turned around: the Gulf crisis has been resolved, oil prices have returned to their 
pre-conflict levels, economic activity in the United States in excepted to recover in the second half of 
the year, the dollar has reversed its downward trend and confidence is gradually being restored. 
The fundamentally healthy underlying growth conditions in the Community should therefore reassert 
themselves. The decline in real growth is expected to bottom out during the course of the year so that 
activity would gradually recover in the second half of the year: real GDP growth would increase from 
1,25 % in 1991 to 2,25 % in 1992 mainly under the influence of a pick-up in consumer demand and 
investment. 
A. The risk factors 
These relatively favourable expectations hinge crucially on a recovery of the consumer and business 
climate. Any delay in recouping the erosion of confidence could weaken the economic performance of 
the Community. With consumer optimism restored and real incomes basically unaffected and even 
slightly increasing, consumer demand should gradually pick up. 
No C 190/30 Official Journal of the European Communities 22. 7. 91 
The recovery of investment in 1992 partly relies on the assumption that the deterioration in the wage 
situation was only temporary and that per capita real wage increases will come down again from 
2,25% on average between 1986 to 1991 to 1,5% in 1992. If such a development were not to 
materialize, profitability would not improve for the third consecutive year for the Community as a 
whole, which would depress expectations for investment. A further weakening of economic activity in 
combination with a continued fall in profits might further deteriorate the situation. 
Another risk factor is the instability of the US dollar. The dollar's behaviour has been very volatile over 
recent years. Although a further decline now seems less likely, it can still not be excluded if the 
expected US recovery does not establish itself in 1991. But also a strong upward shift in the value of the 
dollar would not be without adverse consequences for the Community: although this would improve 
competitiveness, it would also considerably strengthen inflationary impulses through higher import 
prices from outside the Community. 
B. The policy concerns 
The still ongoing cooling-off does not require any significant change of policies. Against the 
background of continuing positive growth fundamentals, forces are gradually taking shape that 
should lead to an early recovery of activity: the increase in household income, the downward tendency 
of long term interest rates, lean inventories during the course of 1991 are all factors pointing to an 
imminent reacceleration of growth. There are a few areas though where developments are less 
satisfactory and further progress would be warranted. 
1. Profitability, growth and employment 
The improvement in growth fundamentals during the 1980s was not brought about 
spontaneously but was a result of a consistent set of policies aiming at revigourating the 
European growth performance aided by a relatively favourable international environment. 
Besides sustained demand expectations, wage developments will play a critical role to bring 
about the economic recovery. Continued wage moderation is an important condition to 
strengthen employment-creating investment and is needed to make new inroads in the still high 
unemployment rate. 
The relatively unfavourable recent wage developments have not yet seriously affected the 
medium-term outlook for profits in the Community. Profitability had improved considerably 
during the 1980s and the recent deterioration has not changed that picture fundamentally. The 
net return on the capital stock had, however, not yet recovered its average level of the period 
1961 to 1973, because more capital is now employed per unit of output (see Graph 7). A 
•further increase in the investment ratio would be welcome in view of the still high level of 
unemployment. This would require the re-establishment of unambiguous expectations on a 
further improvement of the level of profitability. 
22. 7. 91 Official Journal of the European Communities No C 190/31 
Graph 7 
Profitability indicators, Eur-12, indexes 1961—1973 = 100 
120 
110-
100 nat operating surplus 
per unit of GDP 
net return on net capital stock 
60 I i i i i i i i i i i i i i i i r i i i i i i i i i i i i i i 
1M1 tttft ItTO 1«T« 1M0 «M WM' 
Forecast 
Wage moderation is an essential prerequisite to stimulate employment-creating investment. 
Increases in real wages must remain below increases in total factor productivity so as to avoid 
switches to more capital intensive forms of production and further improve the employment 
content of growth. Indeed, the unemployment rate, at 8,2 % in 1990, remains unacceptably 
high and will increase again in 1991 and 1992. It needs to be further lowered. The 
intensification of wage pressures in the presence of such high levels of unemployment seem to 
suggest rigidities in the functioning of the labour market. 
While the outlook for 1991 is not yet a matter of concern, the large wage increases granted in 
Germany constitute a potential threat. They risk undermining price stability in the country that 
had the best price performance of EMS countries in the past and whose currency therefore 
served as an anchor. Moreover, if these increases were to spread to neighbouring countries the 
situation could become really disturbing and create a cost push inflation. The situation is the 
more worrying as there could be a tendency for such higher increases in wages to be more 
readily accepted in these countries since they would not erode external competitiveness. They 
could erode, however, profitability and could thereby undermine the growth, investment and 
employment potential of the economy. 
The wage situation in the United Kingdom, is also still not satisfactory although some 
improvement is expected in 1991 and 1992. Membership of the ERM is providing the 
framework for a more rational setting of wages. 
Also in Portugal, Greece, Italy and Spain expected wage developments, while not threatening 
profitability, are nonetheless not yet conducive to a better nominal convergence. In the other 
Community countries, there seems to be less reason for concern in as far as the assumed wage 
behaviour will be validated. 
2. Inflation 
Moderate wage developments are not only important to improve the employment situation, 
but also for better nominal convergence within the Community. Together with wage 
developments, the inflation performance has to be carefully monitored. While an improved 
No C 190/32 Official Journal of the European Communities 22. 7. 91 
convergence of consumer price levels is expected, regrettably this is at a higher level of inflation 
mainly as a result of the deterioration in the price performance in Germany. From the point of 
view of the required nominal convergence in EMU, the situation is not satisfactory. 
3. Budgetary convergence 
Not only in the field of prices is there a lack of improved convergence, also in the budgetary 
area, there has been no further progress since 1989. The process of budgetary consolidation 
that began in most countries around 1983 has come to a standstill. In fact much of the 
improvement registered over the last years seems to be mainly due to the favourable cyclical 
situation and may even imply a structural deterioration of budget balances (see Graph 8). For 
the Community as a whole, net borrowing is estimated to increase from 3 % of GDP in 1989 to 
4 % in 1990 and 4,5 % in 1991. Hence there is a clear need to strengthen the budgetary 
consolidation efforts in most countries. 
Graph 8 
Structural and cyclical changes in budget balances (in % of GDP) 
bdkdgrefirlilnlpuk 
bdkdgrefirlilnlpuk 
1990 l^-l cyclical balance 
Jd total balance 
structural balance 
bdkdgrefirlilnlpuk 
22. 7. 91 Official Journal of the European Communities ^oCB^n^ 
decent budgetary trendsmthe community are not only dis^uieung in light of the desired 
convergencetowardseconomicandmonetaryunion,butalsomacontextofgrowingscarc^ 
of capitalmmeworldeconomy,which has been exacerbated through theopemngofEastern 
European countries. Over and abovethat,themajormdustrial countries have increased the 
drawing on net savings from the rest of the world in recent years, mainly asaresult of the 
reducuonoftheexcesssavingsupplyfrom]apanandparticularlyGermany^Graph^^.Private 
saving remained fairly stable during the r^^s,medeclinein household savingbeing 
compensated by an mcrease in corporate savmg.Ta^esmglemostimportantfactorbehmd the 
declme in mdustrial country savings is the excessive government budget deficits in the major 
countries.Afailure to redress their situation would not only reduce the domestic growth 
potential of these countries,but also jeopardize efforts to reverse the unsustainable and 
undesirablenetresourcetlowfromdevelopingto industrial countriesthathaspersisted during 
thei^Os 
Graph 9 
Saving and investment in the major industrial countries (in % of GDP) 
EC — USA — Japan 
M 
M 
t* 
ftt 
to 
•M UN Wl Wit 1MB WW MM 
EC 
M —- --------
M 
•4 
It 
to 
mm m wn ma im m» 
A global shortfall of savings could translate in a continued and significant tightening of global 
capital markets, with very high long-term interest rates. In this context it should not be 
forgotten that the reduction in investment demand in 1990 and 1991 has allowed the public 
sector to absorb a langer share of savings so far without undue further pressure on real interest 
rates. In these conditions real long-term interest rates may remain high, and could even rise 
again if investment demand were to recover strongly. 1 • • • • • •''•••' I I I I I I I 1—1 • I I • • L 
national saving 
• • i i i i i • i • • • i 
No C 190/34 Official Journal of the European Communities 22. 7. 91 
III. POLICY CONCLUSIONS 
To sustain economic growth and employment, the Community will have to rely more on its own 
potential. A climate of stability is an essential prerequisite for its development. Therefore the 
Community will have to maintain prudent and balanced monetary and fiscal policies. These policies 
will at the same time help to preserve the favourable growth fundamentals. The completion of the 
internal market, the continued implementation of structural policies and further improvements in 
economic and social cohesion and in the environment will in turn strengthen the Community's 
potential. 
The deterioration in short-term growth prospects in the Community does not alter the fundamental 
positive assessment of the underlying potential of the Community economy. Provided appropriate 
policies are followed, confidence should pick up again and investment activity could resume its strong 
growth leading to renewed significant job creation. 
To meet the challenges it is all the more important that policy coordination is strengthened in 
accordance with the decision on multilateral surveillance for Stage One. Multilateral surveillance is 
covering a wide range of macroeconomic and structural policies to ensure convergence of economic 
policies and performances in the Member States with the aim of maintaining or improving the 
conditions for a sustainable, employment creating growth. 
A. Maintain stability and growth climate 
Monetary policy will have to remain vigilant to quell inflationary pressures. The divergent cyclical 
positions of the member countries and the steadying of exchange rate expectations have provided 
some scope for reducing interest rate differentials without undermining the exchange rate 
commitment. In the absence of a common monetary policy during the transition to the final stage of 
economic and monetary union, however, monetary policy will have to be gearded as well to the 
domestic price situation as to exchange rate considerations. Unless inflationary pressures subside 
clearly and in the absence of greater support from fiscal policy ther is no room for a relaxation of 
monetary policy in the Community. 
Fiscal policy needs further tightening not only with a view to better convergence in Stage One of 
economic and monetary union, but also as a contribution to increasing global savings and relieving the 
pressure on monetary policy. With budgetary revenues less forthcoming and outlays on 
unemployment increasing, some deterioration of budget balance seems inevitable in 1991 as a result of 
automatic stabilizers. To further the process of consolidation, however, it would seem appropriate 
that the cyclical deterioration of the budget position would only partly be reflected in the total budget 
balance so that structural improvement would be resumed. The rules aimed at limiting public sector 
deficits and indebtedness, which the Community is in the process of defining in the framework of the 
Intergovernmental Conference, could be an important contribution for sound medium-term budget 
balances. As a matter of fact already now, during the transition period, these rules should serve as an 
informal guideline to assess budget balances to ensure that sufficient progress would be achieved in 
Stage One. 
Rising wage pressure in a context of a still high level of unemployment points to the need for more 
fundamental structural reform in labour markets to strengthen employment creating investment. 
There seems to be a good case for encouraging a more active labour market policy with greater 
emphasis on retraining than on provision of unemployment support. Further obstacles to employment 
creation should be removed and wage setting procedures should allow a fuller reflection of differences 
in productivity so as to improve adjustment of demand and supply of labour. 
B. The development of Community potential 
The general policies which must be implemented to curb the re-emergence of inflationary pressures 
and inflation divergences are also those needed to create the conditions for the realization of the great 
Community projects: economic and monetary union, completion of the internal market, economic 
and social cohesion. At the same time, these projects complement the policies being implemented at 
the national level. 
^ Be^l Official journal of the European Communities ^ocr^og^ 
t. Co^^^^^^^^^^r^ 
Tosecure its economic future,Europe has embarked onaprogramme for creatmgamarket of 
continental dimensions. One of the main constraints the Community still faces on the 
competitive world stage is the fragmented nature of its markets, which makes it difficult to 
produce at optimum levels,holds back technological progress and impedes development ofthe 
services sector, where growth is particularly strong. The opening of the Community frontiers 
will enhance competition. Increased specialisation and efficiency of production will greatly 
improve consumer choice 
The internal market programme is the decisive driving force in adding to Community growth 
prospects and prosperity. Economic operators are increasingly anticipating the highly 
competitive environment which will prevail and the new operating conditions and 
opportunities which will e^ist by 1^^. An increasing number of firms ha^e begun to operate 
on greatly enlarged market horizons and are actively changing their strategies. In addition to 
the positive growth effects stemming from the abolition of internal border controls, and the 
removal of techmcalbarrierstothefreemo^ementof goods andser^ices, particularly as 
regards the latter in the financial services sector, growth will also be attributable to the positive 
effects arising ftomthe necessary testructunng in mdustnaland^er^ices sectors and from 
positive changes in marketing strategies. 
In the single market,an effecti^eCommunity competition policy isessential since measures and 
practices aimed at reducing or avoiding competition nuchas increased subsidies or market 
sharing agreements^ would reduce these positive effects. Tocrowntheachie^ementof the 
internal marketwithasmgle currency in the near future would — as recent business surveys 
show — further bolster the positive mood of management. 
The high expectations that ha^e been created mustnotbedisappomted.Therefore the deadline 
ofl]anuaryl^^ for completing the internal market must be respected.Idence,it is essential 
thatthe remaining decisions inrespectoftheproposalscontainedinthel^^^hitel^apermust 
be taken as soon as possible, significant progress has already been achieved and decisions ha^e 
been taken in all areasof economicactnaty. TheCommission has already tabledall the 
proposals contained in the whitepaper, ando^er twoDthirds ha^e been approved by the 
Council. The Commission is turning its attention to the problems of implementation ^some 
^^ofthe so farre^uirednationalimplementingmeasuresha^e been taken^and to the proper 
functioning of the single market. Uecisionsha^e still to be taken in important fields relating to 
the complete removal ofinternal border controls.TheCouncil must gi^e priority to these areas 
^which include the approximation of indirect taxation rates^ and monitor the situation ona 
regular basis to ensure that decisionsaretaken such thatprogresstowardsremo^mg completely 
the internal borders becomes irreversible,as is the case for the rest ofthe programme.member 
states ought to accelerate the rateofimplementation of decisions aud to eliminate all delays by 
theendoft^t 
The impro^ementofeconomic and socialcohesionwill also strengthengrowthprospects. 
Abo^ea^eragegrowth in the less favoured countries would contnbutetoe^pandingthe growth 
potential of the Community economy as whole. 
The strengthening of economic and social cohesion and the ob^ecti^e of a harmonious 
development across European regions ha^e been reaffirmed in Article 1^0 of the single Act. 
Abo^ea^erage growth in those countries and regions,as has been the case in recent years in 
^pain,Portugal and Ireland,but notmC^reece,has started to reduce the income gap ^Table^ 
and has expanded the growth potential in the Community asawhole.The gap remains sizable 
though,and will re^uirealong^term effort of catching^up. 
No C 190/36 Official Journal of the European Communities 22. 7. 91 
TABLE 4 
The catching-up process in the Comunity. GDP (*) at current market prices and purchasing parities per 
head of population (Eur-12 = 100) 
1986 
1987 
1988 
1989 
1990 
1991 
1991—1986 Greece 
55,9 
54,1 
54,2 
54,0 
52,9 
52,6 
-3,3 Spain 
72,8 
74,7 
75,7 
76,9 
77,8 
79,2 
+ 6,4 Ireland 
63,4 
64,4 
64,7 
\67^, 
68,6 
68,7 
+ 5,3 Portugal 
52,5 
53,7 
53,7 
54,9 
55,6 
57,1 
+ 4,6 
(l) Reference to GDP may overstate progress to the extent that income transfers to abroad may have outpaced nominal 
GDP growth. 
The economically stronger countries could contribute to this process by the maintenance of a 
dynamic growth pattern and the opening of markets to trade. The doubling of the Structural 
Funds and the simultaneous strengthening of the financial instruments will make available to 
Greece, Portugal and Ireland resources equivalent to between 3 and 5 % of GDP in 1993. They 
support the considerable improvement in structural policies achieved so far. Economic and 
social policies on the national and Community level have to provide the basis for a continuous 
relative growth of real GDP, without inflationary pressure and unsustainable internal and 
external imbalances. The catching-up countries will, however, remain primarily resonspible 
for their own development through the pursuit of appropriate policies. 
3. Structural adjustment 
Structural policies improve the capacity of Member States' economies to adjust. They enhance 
flexibility in goods and factor markets and should lead to an improvement in the extent and 
speed of response of prices in those markets to changes in market conditions. Structural policies 
thereby reduce the potential size and duration of adjustment costs associated with 
disturbances. 
Beyond the internal market programme, Member States have engaged in a number of structural 
improvements to be able to cope with increased competition on the unified market. So far the 
major initiatives fell within the liberalization of financial markets and the restructuring of 
personal and corporate taxation. 
Governments and the Community have taken initiatives to improve the capacity of labour 
markets to cope with change and policies for education and vocational training are being given 
high priority in many Member States. They are an important instrument for the absorption of 
the long-term unemployed. Structural policy initiatives for labour market flexibility will need 
further emphasis. 
Also in the public sector, structural reform has to be carried further so as to improve the 
efficiency of the public sector and to ensure transparent and fair competition between private 
and public enterprises. 
Higher economic efficiency and improved resource allocation should not only be sought within 
the Community, but also in the world. The Uruguay Round is a cooperative effort to promote 
trade and economic growth. As the world's largest trading block, the Community has a natural 
interest in a successful conclusion of the Round. It is at the same time an instrument to provide a 
better platform for its weaker trading partners, in particular the Central and Eastern European 
and the developing countries. 
22. 7. 91 Official Journal of the European Communities No C 190/37 
The environmental challenge 
Just as the previous oil shocks helped to break the parallelism that was perceived in the fifties 
and sixties between economic growth and energy use, there is presently a growing awareness, 
that was given added impetus through the Gulf crisis, that the link between economic growth 
and pollution needs to be broken. Experience in Eastern European countries, which have a 
much higher level of pollution than the richer Community countries, shows, however, that the 
link is not straightforward. The Community's better performance is no reason for complacency 
and needs to be substantially improved. There does exist, though, a clearer link between the 
price mechanism and pollution. Often market prices do not reflect the full environmental cost 
to society of their production or use. Moreover, private economic agents are not inclined to 
take into account the environmental effect of their activities, when taking consumption or 
investment decisions. 
At the centre of any comprehensive policy to address the pollution problem (beyond the 
inevitable need for regulatory instruments), is therefore the need to internalize these external 
environmental effects in order to give the right signals to market participants. 
The aim is to transform the patterns of economic growth in such a way as to reach a sustainable 
development path. A reinforced policy of environmental protection would not necessarily 
represent a constraint on private business, but could offer significant market opportunities for 
those pioneering environmentally friendly products and production processes. 
There is now a broad consensus that more use of economic and fiscal instruments should be 
made in environmental policy, but that the optimal policy would still consist of a balanced mix 
of market-based and traditional regulatory instruments. The main examples of economic and 
fiscal instruments have been identified as taxes, charges or fiscal incentives, deposit refund 
systems, tradable emission permits and financial aid or subsidies. In the case of taxes and 
charges, the impact on the competitive position of the Community and the priorities of the 
internal market ought to be given due consideration. 
In view of the importance of the international dimension of pollution close international 
coordination is called for. Within the Community there is ,a need for a minimum of 
harmonization in order to avoid policy instruments being in potential conflict with other 
Community objectives and to ensure compatibility of instruments among Member States when 
the issue is transnational. 
C. Policies for improved convergence 
While the Community has significantly improved its econbmic convergence performance since the 
beginning of the decade, some worrying divergence has emerged between 1988 and 1990. Serious 
problems remain in some countries and in some areas. Convergence requirements will furthermore be 
tightened as a result of the multilateral surveillance. The significant progress already realised is 
testimony to the prositive effects of the discipline imposed by the exchange rate mechanism of the 
EMS. In fact, the present convergence positions of Member States are closely correlated with their 
degree of exposure to this descipline. 
1. Price and cost convergence 
The degree of price convergence is most marked among those countries which have respected 
the narrow band of fluctuation from the outset. The average rate of inflation (private 
consumption deflator) in this group of countries has been close to, or below, the three per cent 
mark since 1986, although the rate has been rising recently. The dispersion in the individual 
rates of inflation is lower than in the 1960s and the gap between the highest (3,8% in 
Luxembourg) and the lowest (2,5% in Denmark) rates of inflation for 1990 is just over one 
point (Table 5). 
No C 190/38 Official Journal of the European Communities 22. 7. 91 
TABLE 5 
Inflation convergence in the Community in the second half of the 1980s (') 
EUR-12 
EUR-7 
Belgium 
Denmark 
Germany 
France 
Ireland 
Luxemburg 
Netherlands 
EUR-3 
Italy 
Spain 
United Kingdom 
EUR-2 
Portugal 
Greece 1986 
+ 3,8 1989 
+ 4,9 1990 
+ 5,0 1991 (2) 
+ 5,0 1992 (2) 
+ 4,6 
Countries with low and converging inflation (3) 
+ 1,2 
+ 0,5 
+ 2,9 
-0,2 
+ 2,9 
+ 4,3 
+ 1,1 
+ 0,2 
+ 5,7 
+ 5,7 
+ 8,6 
+ 4,4 
+ 18,1 
+ 13,8 
+ 22,1 + 3,3 
+ 3,5 
+ 5,1 
+ 3,1 
+ 3,5 
+ 3,9 
+ 3,4 
+ 2,9 + 2,8 
+ 3,5 
+ 2,6 
+ 2,5 
+ 3,0 
+ 2,6 
+ 3,8 
+ 2,6 + 3,2 
+ 3,2 
+ 2,4 
+ 3,5 
+ 3,1 
+ 3,0 
+ 3,5 
+ 2,8 
Countries with high inflation 
+ 6,0 
+ 5,8 
+ 6,6 
+ 5,9 + 6,7 
+ 6,2 
+ 6,4 
+ 7,2 + 6,3 
+ 6,3 
+ 5,9 
+ 6,5 
Countries with double-digit inflation 
+ 13,8 
+ 12,8 
+ 14,7 + 16,9 
+ 13,6 
+ 20,5 + 14,6 
+ 11,5 
+ 18,0 + 3,6 
+ 3,6 
+ 2,6 
+ 4,2 
+ 3,2 
+ 3,0 
+ 3,5 
+ 2,9 
+ 5,3 
+ 5,6 
+ 5,3 
+ 5,1 
+ 11,3 
+ 9,8 
+ 13,0 
(') Private consumption deflator. 
(2) Forecast. 
(3) Countries which registered low and converging inflation rates in the second half of the 1980s; they are the countries 
which participated from the outset in the narrow band of the EMS. 
The price convergence in these countries up to 1990 already broadly corresponds to what might 
be required for the transition to the final stage of EMU. This convergence in the rate of inflation 
has been accompanied by a clear deceleration in the rates of increase in nominal unit labour 
costs. 
The acceleration of inflation in 1990 and 1991 in these countries and particularly in Germany 
in 1992, cannot be considered satisfactory from the point of view of stability and needs 
therefore to be rolled back as soon as possible. Particularly since the main source of inflation 
seems to be higher wage costs. 
A second group of countries had in 1990 an inflation rate which is still double that of the first 
group. Italy, which belongs to the narrow band, and Spain, which joined the wider band in 
1989, have also made significant progress since the beginning of the 1980s, but they still show a 
much less favourable convergence position. Italy faces strong wage pressures with nominal unit 
labour costs rising by more than 9 % in 1990 against less than 5 % for most of the original 
participants in the narrow-band. These countries should gradually improve their inflation 
performance over the next two to three years to the level of the narrow band countries. This will 
require that the claims on resources of the different sectors of the economy be made more 
compatible with each other. Setting more ambitious but realistic inflation targets and pursuing 
them by stability oriented monetary and fiscal policies may help to create a stability 
environment and may contribute to provide a reference framework for wage 
developments. 
The United Kingdom, which belongs to the wider band of the Exchange Rate Mechanism, is 
experiencing a high rate of inflation (more than 7 % in 1990 for the deflator of private 
22. 7. 91 Official Journal of the European Communities No C 190/39 
consumption adjusted for the impact of local government taxation changes) and a large current 
account deficit (about 2,25% of GDP in 1990). The current recession of the economy will 
bring some improvement on both fronts in 1991 and 1992. The main problem for the United 
Kingdom's economy is the excessive increase in wage costs. What is even more worrying is that 
wage settlements are still running at a high rate and are only showing limited signs of reacting to 
the slowdown in the economy. The composition of the retail price index may also partly 
explain this development. After entry of the pound sterling into the ERM, expectations are 
favourably affected creating a better prospect for the United Kingdom to reduce inflation. 
Portugal still has a very high rate of inflation (over 13 % in 1990). Nominal unit labour costs 
are still growing too rapidly (14,5 %). A persistent effort will be needed to reduce inflation 
progressively to the level in the narrow-band. Such an endeavour remains possible as 
experience in other countries has shown. In 1982 and 1983, when exchange rate policy in the 
EMS became tighter, Ireland had rates of inflation comparable to that now experienced by 
Portugal. The more flexible exchange rate policy implemented since October 1990 and the 
framework for wage moderation recently agreed with the social partners should help to put 
downward pressure on inflation, allowing early participation in the ERM. 
The Greek economy is characterized by serious imbalances in many areas, which call for radical 
measures. The rate of inflation exceeded 20 % in 1990, and the budget deficit has reached 
unprecedented levels in the Community, leading to a rapidly rising public debt to GDP ratio. A 
serious adjustment effort is essential, and should be sustained over the medium-term. The 
Greek Government's medium-term programme proposes significant adjustments which are 
expected to lead to a sizable decline in inflation in 1992. 
2. Convergence of budgetary policies 
Convergence must not only be fostered from the cost and price side, but public authorities also 
have to reduce their claims on resources, so as to avoid unsustainable imbalances, to improve 
the supply side of the economy and to create room for manoeuvre when adverse developments 
have to be addressed. 
In the budgetary area, progress in convergence has been distinctly less marked than for prices 
and costs. In about half the number of Member States the level of the budget deficit gives causes 
for concern. As indicated the process of consolidation has come to a standstill. Further progress 
is essential because unsustainable fiscal positions undermine over the medium and longer term 
the credibility of the commitment to monetary stability and impair the conduct of economic 
policy. 
A new budgetary problem has emerged in Germany. Unification has led to a sizable 
deterioration in its fiscal position. Recent measures adopted in January and February 1991 
increasing social contributions, income taxes and excise duties would provide the State with 
extra revenues amounting to some 1 % of GDP in 1991. This would result in limiting the public 
borrowing requirement to 4,7 % of GDP in 1991 (Table 6). Although the use of national 
savings to solve a temporary domestic problem can hardly be challenged, the size and 
abruptness of the swing in the federal budget position is from the conjunctural point of view not 
without risks. The strong demand from the former GDR, supported by large budgetary 
transfers required to avoid an economic breakdown in the five new Lander, may strain 
production capacity in West Germany, putting pressure on inflation and appreciating the 
exchange rate in real terms. To guard against these dangers and to avoid an overburdening of 
monetary policy, a more ambitious tightening of the fiscal stance would be appropriate. 
Moreover greater emphasis might be put on reducing expenditures and particularly subsidies to 
regions that are no longer peripheral as a result of unification. 
No C 190/40 Official Journal of the European Communities 22. 7. 91 
TABEL6 
General Government net lending (+) or borrowing (-) 
(in percent of GDP) 
EC 
Greece 
Italy 
Belgium 
Ireland 
Netherlands 
Portugal 
Denmark 
Germany 
Spain 
France 
Luxemburg 
United Kingdom 1985 
-4,6 
-13,8 
-12,5 
-8,5 
-11,2 
-4,8 
-10,1 
-2,0 
+ 1,1 
-6,9 
-2,9 
+ 5,3 
-2,8 1987 
-4,2 1989 
-3,0 1990 
-4,1 1991 (•) 
-4,6 
High deficit /high debt countries 
-12,4 
-11,1 -19,2 
-10,1 -18,9 
-10,6 
High debt countries 
-7,0 
-9,1 
-6,6 
-6,8 -6,6 
-3,5 
-5,0 
-3,4 -6,0 
-3,4 
-5,7 
-5,8 
Other countries 
+ 2,4 
-1,9 
-3,2 
-1,9 
+ 1,2 
-1,3 -0,5 
+ 0,2 
-2,7 
-1,4 
+ 3,1 
+ 1,0 -1,5 
-2,2 
-3,7 
-1,6 
+ 4,2 
-0,5 -15,4 
-10,0 
-6,4 
-3,8 
-4,8 
-5,5 
-1,3 
-4,7 
-2,7 
-1,6 
+ 1,7 
-2,2 1992 (') 
-4,4 
-10,7 
-10,0 
-6,1 
-3,5 
-4,9 
-5,0 
-1,1 
-3,9 
-2,0 
-1,5 
+ 1,6 
-3,1 
{') Forecast. 
In Greece and Italy progress has been fairly limited. In Italy, the fiscal position deteriorated 
again slightly in 1990, and shows limited signs of improving despite repeated attempts at 
correction. The necessary reduction in the rate of inflation will have to go in tandem with 
significant reductions in budget deficits that allow first a stabilization, and then a reduction in 
the level of debt as a percentage of GDP that is now exceeding 100 % (Table 7). A disinflation 
process not accompanied by an appropriate budgetary adjustment woud result in an even faster 
rise in the public debt ratio, as was also the case in Belgium in the early and middle eighties. 
Given the unsustainable debt position of Italy, any postponement of corrective action only 
increases the adjustment effort that ultimately will have to be carried out, as the snowballing 
interest charges crowd out other expenditures. 
22. 7. 91 Official Journal of the European Communities No C 190/41 
TABLE 7 
Gross public debt in the Community countries 
(in percent of GDP) 
Belgium 
Italy 
Ireland 
Greece 
Netherlands 
Portugal 
Denmark 
Germany 
Spain 
United Kingdom 
France 
Luxemburg 
EUR-12 1986 
123,7 
88,4 
115,3 
65,1 
71,7 
68,4 
66,9 
42,7 
48,0 
57,7 
34,1 
13,4 
58,3 1989 
128,9 
98,6 
103,8 
82,9 
78,0 
71,2 
62,5 
43,6 
44,6 
45,1 
35,7 
8,5 
58,6 1990 
127,5 
100,7 
99,8 
86,3 
78,5 
67,3 
62,4 
43,0 
45,2 
43,2 
36,4 
6,3 
58,6 1991 (J) 
128,1 
103,3 
97,4 
86,0 
78,8 
63,8 
62,3 
45,4 
44,5 
44,4 
37,3 
4,7 
60,0 1992 (») 
127,8 
105,8 
95,2 
83,3 
79,9 
61,6 
61,7 
47,2 
43,7 
45,6 
37,8 
3,2 
61,0 
(') Forecast. 
In Greece, the budget deficit, at more than 18 % of GDP in 1990, has led to a rapid increase in 
the gross public debt ratio, from less than 30 % of GDP in 1980 to about 86 % in 1990. The 
adjustment efforts undertaken by the Greek Government are expected to result in a sizable 
reduction of the budget deficit this year and next. Sustained efforts over several years will be 
needed, however, before sufficient convergence will be achieved. 
Also in Belgium, the Netherlands and Portugal the level of the budget deficit is worrying for 
economic and monetary union. The public debt ratio is still very high and has not yet fully been 
stabilized. The fiscal deficit should be reduced further so as to bring the public debt ratio on a 
clearly declining trend. In Belgium the public debt ratio is still excessively high (128 % of GDP 
in 1990). The budget deficit is still too large to put the public debt ratio on a downward path, if 
growth slows or interest rates rise. The double government norm aiming at freezing in real 
terms non-interest expenditures and at keeping constant the deficit in nominal terms, should be 
applied to all levels of government. Only its strict and global application will ensure that the 
public debt ratio will be progressively reduced, which is essential to guarantee long-term 
stability. In the Netherlands, the public debt ratio, though not as high as in the case of Belgium 
and Ireland, is still not fully stabilized. Some tightening of fiscal policy would be warranted. 
The budgetary situation in Portugal also needs to be improved in parallel with the disinflation 
process so as to maintain the progress in stabilizing the public debt ratio. 
Ireland has already reduced its budget deficit substantially, so that the public debt ratio is on a 
clearly declining trend. This trend should now be continued. 
In a last group of countries, including Denmark, Spain, France, Luxembourg and the United 
Kingdom, the budgetary position in terms of net lending or borrowing and public debt seems to 
be under control and does not present the Community with a convergence problem. The 
increase in the budget deficit in the United Kingdom, although partly attributable to the 
recession, nevertheless calls for attention. The general assessment does not detract, however, 
from the need, also valid for the other countries, to improve the structural features of their 
No C 190/42 Official Journal of the European Communities 22. 7. 91 
public finance to benefit the supply side of the economy, to prepare for the single market of 
1992 and to increase budgetary flexibility as required by a better policy mix. This will 
particularly involve improving the structure of expenditure and receipts, winding down in 
some cases the share of expenditure in GDP and lessening the tax burden. 
Moreover, a few of these countries continue to suffer from strong inflationary pressures and 
large external deficits, such as the United Kingdom and Spain, or from high foreign debt, such 
as Denmark. Hence, there is a need to maintain a cautious budgetary policy in these 
countries. 
Convergence of external positions 
In an integrating economy with fully liberalized capital movements and increasing exchange 
rate fixity, convergence of current account balances is to be judged in a different context and the 
appropriateness of current account imbalances has to be individually assessed. 
Spain is confronted with a high current account deficit (more than 3,5 % of GDP in 1990). A 
current account deficit per se would not be worrying in the Spanish case as long as it 
corresponds to capital imports financing rapid growth in productive investment. Such capital 
imports, though, exerted strong upward pressure on the exchange rate. What gives cause for 
concern, however, is the rapidity of the deterioration of the current account position which was 
still in equilibrium in 1987. However, the deficit is expected to stabilize in 1991 and 1992. If 
exchange rate stability is to be maintained, the rate of growth of unit labour costs in Spain must 
soon be brought below that of its main trading partners so as to improve its competitive 
position. This would also create the conditions for the continued strong growth needed both to 
reduce the persistently high levels of unemployment and to allow the catching-up process to 
continue. These considerations also apply to Greece where the external position has 
deteriorated sharply in recent years and only modest improvement is expected in 1991 and 
1992. 
In Italy the external position, while not yet giving cause for concern, nevertheless calls for a 
critical look at wage developments to preserve external competitiveness. In the United 
Kingdom some improvement is expected in the external position, largely as a result of the drop 
in domestic demand. Still cost developments will need to be monitored carefully to avoid a 
renewed deterioration of the current account once domestic demand picks up again. 
The current account positions of the initial narrow band countries appear broadly sustainable. 
The German external surplus, which had given cause for concern in the recent past, is being 
eliminated from 1991 on as a consequence of the unification process. Considerable progress 
has been made in Denmark, where in 1990, for the first time since the early sixties, the current 
account has turned into a surplus and is expected to stay so in 1991 and 1992. This has been 
achieved, however, at a considerable cost in terms of growth. A further improvement in the 
competitive position, migth help to consolidate this improvement, at higher levels of activity 
and employment. 
With appropriate monetary, budgetary and structural policies, internal inflationary pressures can be 
absorbed, thus preserving the positive fundamental growth conditions of the Community. At the same 
time, the development of the Community potential will improve the supply side of the economy and 
contribute to resume its medium-term growth trend. Such policy mix fulfils at the same time the 
requirements for a successful move towards economic and monetary union. 
22. 7. 91 Official Journal of the European Communities No C 190/43 
MAIN ECONOMIC INDICATORS 1988 to 1992 
COMMUNITY, USA AND JAPAN 
(a) GDP at constant prices (') 
(annual % change) (b) Domestic demand at constant prices 
(annual % change) 
B 
DK 
D 
GR 
E 
F 
IRL 
I 
L 
NL 
P 
UK 
EC 
USA 
JAP 1988 
4,6 
0,5 
3,7 
4,1 
5,2 
3,6 
3,9 
4,2 
5,5 
2,7 
3,9 
4,6 
4,0 
4,5 
5,7 1989 
3,9 
1,2 
3,3 
2,8 
4,8 
3,6 
5,9 
3,2 
6,1 
4,0 
5,4 
2,2 
3,3 
2,8 
4,9 1990 (*) 
3,7 
1,6 
4,7 
0,1 
3,7 
2,8 
5,2 
2,0 
3,7 
3,3 
4,0 
0,6 
2,7 
1,0 
5,6 1991 (») 
2,25 
1,5 
2,75 
0,75 
3 
1,5 
1,75 
1,75 
3 
2,75 
2,75 
-2,25 
1,25 
0 
3,75 1992 (*) 
2,5 
2,25 
1,75 
1,5 
3,5 
2,5 
2,25 
2,5 
3,25 
1,75 
2,75 
2,25 
2,25 
1,5 
4 B 
DK 
D 
GR 
E 
F 
IRL 
I 
L 
NL 
P 
UK 
EC 
USA 
JAP 1988 
4,1 
-1,7 
3,8 
7,0 
7,1 
3,8 
0,4 
5,0 
3,6 
1,6 
7,4 
8,0 
5,0 
3,3 
7,3 1989 
4,9 
0,3 
2,7 
3,3 
7,8 
3,2 
6,0 
3,6 
7,8 
4,9 
4,0 
3,1 
3,7 
2,2 
5,7 1990 (*) 
3,6 
-0,8 
5,1 
2,5 
4,6 
3,2 
5,5 
1,9 
3,7 
3,8 
5,8 
-0,1 
2,8 
0,5 
5,8 1991 (*) 
2,25 
0,25 
3 
0,75 
3,5 
1,75 
1,5 
2 
4,25 
2,25 
5,25 
-3 
1,5 
-0,5 
4 1992 (*) 
2,25 
1,5 
2,5 
2 
4,25 
2,75 
1,75 
3 
3,75 
1 
4,5 
2,5 
2,75 
1,5 
4,5 
(c) Deflator of private consumption 
(annual % change) (d) Balance on current transactions 
(as a % of GDP) 
B 
DK 
D 
GR 
E 
F 
IRL 
I 
L 
NL 
P 
UK 
EC 
USA 
JAP 1988 
1,6 
4,9 
1,3 
14,2 
5,1 
2,9 
2,5 
5,2 
2,8 
0,4 
10,0 
4,9 
3,7 
4,0 
-0,1 1989 
3,5 
5,1 
3,1 
14,7 
6,6 
3,5 
3,9 
5,8 
3,4 
2,9 
12,8 
5,9 
4,9 
4,5 
1,7 1990 (*) 
3,5 
2,6 
2,5 
20,5 
6,4 
3,0 
2,6 
6,2 
3,8 
2,6 
13,6 
7,2 
5,0 
5,0 
2,4 1991 (*) 
3,25 
2,5 
3,5 
18 
6,75 
3 
3 
6,25 
3,5 
2,75 
11,5 
6,5 
5 
4,5 
2,75 1992 (*) 
3,5 
2,5 
4,25 
13 
5,25 
3,25 
3 
5,5 
3,5 
3 
9,75 
5 
4,75 
5 
2,5 B 
DK 
D 
GR 
E 
F 
IRL 
I 
L 
NL 
P 
UK 
EC 
USA 
JAP 1988 
1,5 
-1,2 
4,2 
-2,0 
-1,1 
-0,3 
1,7 
-0,8 
33,5 
2,5 
-4,4 
-4,6 
0,1 
-2,5 
2,8 1989 
1,1 
-1,2 
4,7 
-4,8 
-3,2 
-0,1 
1,3 
-1,4 
34,4 
3,3 
-2,9 
-4,8 
-0,1 
-1,9 
2,1 1990 (*) 
0,7 
0,8 
3,0 
-5,7 
-3,5 
-1,0 
2,7 
-1,4 
29,3 
4,0 
-0,1 
-2,3 
-0,2 
-1,8 
1,2 1991 (*) 
1 
1,5 
0 
-5 
-3 
-0,75 
2,25 
-1,25 
26,5 
4 
-1,25 
-1 
-T),5 
-0,25 
1 1992 (*) 
1 
2,5 
-0,25 
-4 
-3,25 
-1 
1,75 
-1,5 
24,75 
4 
-2,25 
-1,25 
-0,75 
-1 
1 
(*) Based on the forecasts of May 1991. 
(>) GNP for USA and Japan from 1989 onwards. 
No C 190/44 Official Journal of the European Communities 22. 7. 91 
(e) Number of unemployed 
(as % of the civilian labour force) 
B 
DK 
D 
GR 
E 
F 
IRL 
I 
L 
NL 
P 
UK 
EC 
USA 
JAP 1988 
10,0 
6,5 
6,1 
7,6 
19,3 
9,9 
17,4 
10,8 
2,1 
9,3 
5,6 
8,5 
9,7 
5,5 
2,5 1989 
8,5 
7,7 
5,5 
7,5 
17,1 
9,4 
16,0 
10,7 
1,8 
8,7 
4,8 
7,0 
8,9 
5,3 
2,3 1990 (*) 
8,1 
8,6 
5,1 
7,5 
16,1 
9,0 
15,1 
9,8 
1,7 
8,1 
4,6 
5,7 
8,2 
5,4 
2,1 1991 (*) 
8,5 
9 
4,5 
8,75 
16 
9,25 
16 
9,75 
1,5 
7,75 
4,75 
8,5 
8,75 
6,5 
2,25 1992 (*) 
8,25 
8,75 
4,75 
9,25 
15,5 
9,5 
16,75 
9,5 
1,5 
7,75 
5,25 
10,75 
9,25 
6,5 
2,25 
(g) Total employment 
(annual % change) 
B 
DK 
D 
GR 
E 
F 
IRL 
I 
L 
NL 
P 
UK 
EC 
USA 
JAP 1988 
1,5 
-0,0 
0,8 
1,6 
3,5 
0,7 
0,4 
0,9 
3,1 
1,4 
0,1 
3,3 
1,6 
2,8 
1,6 1989 
1,1 
-0,6 
1,4 
1,5 
3,6 
1,2 
-0,1 
0,2 
4,0 
1,6 
1,0 
2,8 
1,6 
2,3 
1,9 1990 (*) 
1,0 
-0,7 
2,8 
0,4 
2,6 
1,2 
2,1 
1,4 
2,4 
1,9 
2,5 
0,6 
1,6 
0,4 
2,0 1991 (*) 
0 
-0,25 
1,75 
-0,25 
1,5 
0,5 
0,25 
0,5 
1,25 
1 
1 
-2,5 
0,25 
-1 
1,5 1992 (») 
0 
0,25 
0,75 
0 
1,75 
0,5 
0,5 
0,5 
1,5 
0,5 
0,5 
-2 
0,25 
1 
.1,5 
(*) Based on the forecasts of May 1991. 
{') Deflated by the deflator of private consumption. (f) General government lending and borrowing 
(as a % of GDP) 
B 
DK 
D 
GR 
E 
F 
IRL 
I 
L 
NL 
P 
UK 
EC 
USA 
JAP 1988 
-6,6 
0,5 
-2,1 
-15,5 
-3,3 
-1,8 
-5,2 
-10,9 
2,1 
-5,2 
-5,4 
1,1 
-3,7 
-2,0 
2,1 1989 
-6,7 
-0,5 
0,2 
-19,2 
-2,7 
-1,2 
-3,5 
-10,1 
3,3 
-5,0 
-3,4 
1,0 
-2,9 
-1,7 
1,8 1990 (») 
-6,0 
-1,5 
-2,2 
-18,9 
-3,7 
-1,6 
-3,4 
-10,6 
4,2 
-5,7 
-5,8 
-0,5 
-4,1 
-2,4 
2,2 1991 (») 
-0,25 
-0,25 
-4,75 
-15,5 
-2,75 
-1,5 
-3,75 
-10 
1,75 
-4,75 
-5,5 
-2,25 
-4,5 
-1,75 
1,75 1992 (*) 
-6 
-1 
-4 
-10,75 
-2 
-1,5 
-3,5 
-10 
1,5 
-i 
-5 
-3,25 
-4,5 
-2,5 
2 
(h) Real compensation of employees per head 
(annua] % change) (*) 
B 
DK 
D 
GR 
E 
F 
IRL 
I 
L 
NL 
P 
UK 
EC 
USA 
JAP 1988 
0,8 
-0,9 
1,7 
3,7 
1,1 
1,2 
2,9 
4,0 
0,5 
1,1 
3,1 
2,9 
2,1 
1,9 
3,4 1989 
0,6 
-1,6 
-0,2 
4,1 
-0,5 
1,2 
2,2 
3,1 
3,0 
-2,4 
0,8 
2,8 
1,2 
-0,7 
2,2 1990 (•) 
2,3 
1,0 
1,5 
0,6 
1,2 
1,8 
3,0 
3,9 
1,8 
1,6 
3,7 
3,4 
2,4 
-0,1 
1,7 1991 (») 
2,5 
1 
2,75 
-2 
1,25 
1,5 
3,25 
1,75 
2,5 
2 
5,25 
2 
2,5 
0 
1,25 1992 (*) 
2,5 
1 
1,25 
-0,25 
1 
1 
2,5 
2 
2,25 
1,75 
4,75 
1,75 
1,5 
0,5 
1,5 
22. 7. 91 Official Journal of the European Communities No C 190/45 
(i) Investment in construction at constant prices 
(annual % change) 
B 
DK 
D 
GR 
E 
F 
IRL 
I 
L 
NL 
P 
UK 
EC 1988 
15,0 
-3,1 
4,7 
7,6 
12,6 
6,2 
-0,7 
3,7 
9,9 
11,8 
10,1 
6,1 
6,4 1989 
9,6 
-4,6 
5,1 
2,1 
14,9 
6,6 
9,8 
3,9 
8,8 
2,6 
3,5 
-0,5 
5,3 1990 (») 
5,7 
-3,8 
5,2 
0,7 
10,7 
2,3 
8,4 
2,5 
5,9 
2,5 
6,5 
0,1 
3,8 1991 (•) 
-1 
-3 
3,25 
0 
6,5 
1,25 
1,5 
0,75 
5,5 
-0,25 
6,25 
-3,25 
1,5 1992 (•) 
3 
0,25 
2 
4 
7,5 
2,25 
3 
2,5 
4,5 
0,25 
6 
2 
3 
(k) Gross fixed capital formation at constant prices 
(annual % change) 
B 
DK 
D 
GR 
E 
F 
IRL 
I 
L 
NL 
P 
UK 
EC 
USA 
JAP 1988 
13,5 
-6,6 
5,1 
8,8 
14,0 
8,5 
4,6 
6,7 
-5,5 
9,4 
15,0 
14,8 
9,0 
5,0 
12,6 1989 
13,6 
0,2 
7,1 
8,6 
13,7 
5,8 
11,3 
5,1 
13,4 
3,0 
7,5 
4,8 
6,7 
2,7 
11,0 1990 (•) 
7,6 
-1,0 
8,8 
5,2 
6,7 
4,0 
7,5 
3,0 
5,8 
4,1 
7,5 
-1,9 
4,3 
-0,1 
10,8 1991 (•) 
1 
-2,25 
6 
3 
5 
1,25 
2,75 
1 
5,75 
1,25 
5,75 
-10,5 
0,75 
-3 
5 1992 (•) 
3,5 
2,25 
4 
7 
6,75 
2,5 
3,75 
4 
5 
0,25 
5,75 
2,75 
3,75 
5,75 
6,5 (j) Investment in equipment at constant prices 
(annual % change) 
B 
DK 
D 
GR 
E 
F 
IRL 
I 
L 
NL 
P 
UK 
EC 1988 
17,7 
-7,5 
7,7 
10,8 
16,5 
8,9 
5,6 
6,4 
-5,4 
6,8 
23,2 
17,7 
10,4 1989 
19,0 
6,6 
9,8 
17,3 
12,1 
8,1 
14,1 
5,2 
14,9 
5,5 
7,7 
8,4 
8,6 1990 (*) 
9,9 
2,3 
12,9 
10,4 
1,2 
5,3 
6,8 
3,5 
5,6 
6,0 
8,5 
-3,7 
4,7 1991 (*) 
3,5 
-1,25 
8,75 
6 
2,5 
1 
3,75 
1,25 
6,25 
2,75 
5,25 
-17 
0,25 1992 (•) 
4 
4,75 
5,75 
10 
5,75 
2,5 
4,5 
5,25 
5,75 
0,25 
5,5 
3,5 
4,5 
(1) GDP per head 
(EC = 100), at current prices and current PPS 
B 
DK 
D 
GR 
E 
F 
IRL 
I 
L 
NL 
P 
UK 
EC 
USA 
JAP 1960 
95,4 
118,3 
117,9 
38,6 
60,3 
105,8 
60,8 
86,5 
158,5 
118,6 
38,7 
128,6 
100,0 
189,6 
55,8 1973 
101,2 
113,1 
111,1 
56,8 
79,0 
110,4 
58,9 
93,3 
141,9 
113,1 
56,4 
108,5 
100,0 
161,6 
96,3 1986 
100,6 
117,0 
114,0 
55,9 
72,8 
110,1 
63,4 
103,0 
126,2 
106,0 
52,5 
105,4 
100,0 
155,7 
110,7 1991 (») 
104,4 
108,5 
113,8 
52,5 
79,3 
108,9 
68,9 
103,6 
133,0 
103,9 
56,7 
101,3 
100,0 
147,3 
121,7 1992 (») 
105,1 
108,9 
112,3 
52,3 
80,5 
109,1 
69,0 
104,0 
134,9 
103,3 
57,1 
101,3 
100,0 
145,6 
124,0 
(*) Based on the forecasts of May 1991. 
Source: Commission services.