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COMMISSION OF THE EUROPEAN COMMUNITIES
COM(84)351 final
B russels, 9 J u ly  1984.
THE ECONOMIC AND SOCIAL  
SITUATION IN THE COMMUNITY
(Communication from the Commission to  
the European Council of 25-26 June 1984)
COM(84)351 final

THE ECONOMIC AND SOCIAL  
SITUATION IN THE COMMUNITY
(Communication from the
Commission to the European Council of 25-26 June 1984)
CONTENTS
Introduction
I. The economic situation in 1984 and 1985
II. Problems facing the European economies and economic  
policy priorities
III. External uncertainties

INTRODUCTION
The economic situation has changed little since last March when the European  
Council last met. The most recent indicators have confirmed or accentuated  
the three main features of the Community economy in mid-1984:
- the economic recovery is a little stronger than was expected at the end of  
1983; it is accompanied by a reduction in the main disequi l  ibria (inflation,  
budget deficits, external accounts) and by a growing convergence in
Member States' performances;
however, the recovery is not strong enough to bring any general  
improvement in the employment situation in the immediate :  
future;
- continuation of the recovery depends partly on the external environment,
i.e. on developments in a number of areas which affect the growth of the world  
economy: interest rates, exchange rates and international indebtedness.
I. THE ECONOMIC SITUATION IN 1984 AND 1985
A. The growth rate of international trade is expected to accelerate further  
taking 1984 as a whole and to remain strong in 1985. It is forecast to be  
nearly 7% in volume terms in 1984 and more than 4% in 1985, notably under  
the impact of growth in the OECD countries, which is expected to reach  
4.5% in volume terms in 1984 and around 2.5% in 1985. Overall, taking the  
three years 1983, 1984 and 1985, real growth in the OECD countries as a group  
should average around 3% per year as compared with 0.2% in 1982.
World trade could thus expand at a significantly faster rate.
This prospect depends essentially on the growth profile of
the industrialized countries, which in turn depends to a large extent on:

-  2 -
- growth in the American economy being maintained at a satisfactory Level;
- interest rates and exchange rates moving in such a way that they do not  
choke off the recovery, particularly the recovery in investment, and do not  
show sudden changes that would affect the return to a climate of greater  
confidence;
- an improvement in the developing countries' terms of trade.
B. If these conditions are met, the recovery should be able to continue in  
the Community in 1984 and be maintained in 1985, though at a lower rate  
because of the slowdown in the growth of international trade. The Community  
economy is expected to grow at a rate of about 2.2% in 1984 and 2% in 1985  
under the impact of the growth of world trade and the recovery in some Member  
States (Federal Republic of Germany: 3% in 1984 and 2.5% in 1985;
United Kingdom: 2.7% in 1984 and 2.1% in 1985): this trend is Likely to  
spread to a greater or lesser extent to the other Community countries.
However, two comments must be made on this prospect of a continuing recovery  
in the Community:
- firstly, appreciable though it may be following the recession which began
in 1979, growth is likely to remain modest compared with past performance
(from 1969 to 1976, the growth rate of Community GDP averaged 3.6% a year
and, from 1971 to 198G, it was still 2.9%). This slowdown coincides with1a decline in the potential rate of growth :  estimates indicate that while
the Community's potential growth rate was still in the 3.7% to 4% range  
between 1970 and 1974, it fell to around 2.9% in the period 1977-80;
This is the growth rate that is theoretically possible in a given period,  
representing the maximum rate of utilization of factors of production.

- 3 -
- the second comment concerns the self-sustaining nature of the recovery  
and the role of investment. Whereas the recovery in 1983 was largely  
generated by the external sector, productive investment should play a  
greater role in fuelling the growth process in 1984 and 1985. In 1983,  
investment volume had already stopped declining throughout the Community  
and was showing appreciable increases in the United Kingdom (4.7%) and in  
the Federal Republic of Germany (2.9%). In 1984, it should grow by some  
3.4% in the Community as a whole and by 3.8% in 1985.
C. The inflation rate is expected to continue to fall in 1984 and 1985, to 5%  
this year and 4.3% next year, or half the average annual inflation rate in  
the period 1971-80. As in 1984, this trend will probably be accompanied by
a narrowing of differentials between EMS countries, with inflation rates  
ranging between 2.9% and 10% in 1984 and, according to certain hypotheses  
based on the determined continuation of policies aimed at restoring the  
key equilibria, between 2% and 6.5% in 1985.
D. The main adjustments in internal and external disequi libria (incomes,  
public deficits and external accounts) which were initiated in 1983 are expected  
to continue in 1984-85. In these areas, there should also be a reduction in  
divergences within the Community, though to a lesser extent than in the case
of inflation.
E. If the prospective trend for 1984-85 is relatively encouraging with regard  
to inflation and, to a lesser extent, growth, it is very unsatisfactory with  
regard to employment. Despite the recovery, the unemployment rate could  
continue to rise to reach an annual average of 11.4% in 1985, as against  
10.4% in 1983.

- 4 -
This is Linked to the fact that growth in 1984-85 is likely to be lower than  
the average rates observed during longer periods in the past, whi leaven if  
there is little change in the total employed population, the labour force  
will continue to increase.
Thus, despite a less sharp increase and indeed a stabilization of unemployment  
in the Federal Republic of Germany and the United Kingdom in 1984-85, the overall  
trend of unemployment in the Community is very worrying.
*
* *
The outlook for 1984-85 is thus for further consolidation of the recovery  
in the Community. The Community economy is expected to return gradually  
to a more satisfactory growth rate as the stabilization and adjustment  
policies currently being pursued produce results. However, though this  
outlook may be moderately satisfactory, it remains subject to considerable  
internal and external uncertainties.
II.  Problems facing the European economies and economic policy priorities
The uncertainties as to the durability of the economic recovery and as to  
the chances of beginning to reverse the trend of employment are closely  
bound up with the structural weaknesses of the European economies.
Significant progress has no doubt been made in achieving stabilization  
and adjustment in recent years; however, such progress, which would certainly  
be facilitated by a sustained recovery, must be maintained if there is to be  
strong enough growth, over a sufficiently long period, to obtain a more  
favourable trend in employment.
A. Experience and a comparison between the different regions show that there  
is a link between job creation (and, hence, a fall in the unemployment rate)  
and the strength of competitive structures.

- 5 -
A comparison between European and American performances on  
job creation is equally enlightening. The facts revealed  
are well known, and the Commission has already presented  
them to the European Council: from 1973 to 1983, total
employment fell in the Community from 106 million to  
104 million, whereas it increased in the United States from  
85 million to more than 100 million. During the same  
period, the ratio of labour costs to return on capital  
increased by 2.4% a year in the Community but decreased by  
0.4% in the United States, while capital endowment per  
person employed increased by 3% a year in the Community, but  
by only 0.3% in the United States. Admittedly, during this  
period average annual real growth was 1.6% in the Community,  
whereas it was 2% in the United States. However, the  
profitability of companies has begun to improve, in some cases  
very appreciably, in certain Community countries during the last  
two years, reflecting the adjustment process that is  
under way. Even so, the figures cited above (which should be  
interpreted in the light of demographic trends) illustrate just  
how much the capacity to achieve growth that can create lasting  
employment depends on an appropriate trend in production costs,  
particularly the relative costs of labour and capital.
B. The adjustment and stabilization efforts being undertaken must  
therefore be continued and, at the same time, helped by lower  
inflation, the conditions must be created for sustained stronger growth.  
Close consistency must consequently be ensured between short-term  
economic policies and policies to adjust production structures.
This means that economic policies must be geared to two  
objectives: consolidating the slowdown in inflation, or where
appropriate obtaining a sharoer deceleration and increasing the  
flexibility and dynamism of the economies of Membei— States.
1. Short-term economic policies must continue to be aimed at  
restoring the key equilibria and pursuing the fight against  
inflation:

-  6 -
monetary policies must continue to ensure that the trend  
of the monetary aggregates is such as to prevent the  
re-emergence of inflationary expectations, while at the  
same time seeking to establish the conditions for getting  
interest rates down to as low a level as possible;
budgetary policies must pursue a threefold objective:  
reducing the deficits which in several Member States are  
still claiming an excessive proportion of savings and  
are keeping interest rates high; stabilizing, then  
reducing the share of public expenditure; and restructuring  
public budgets in such a way as to restore their role in  
supporting and underpinning growth by modifying taxation  
and by strengthening in particular measures to promote  
investment, research and training. Efforts in this area  
are of overriding importance in cases where the trend of  
deficits is handicapping the fight against inflation and  
threatening the recovery;
- the growth of incomes must be consistent with the need to  
keep the economies competitive and flexible.
2. The second objective of economic policies must be to strengthen
structures and introduce greater flexibility into the economies,
both being necessary if employment is to recover:
- even though investment is picking up again in the Community,  
it must not be forgotten that the Community's economy is  
emerging from a long period - beginning in 1975 - during  
which the investment share in the Community declined steadily;  
this coincided with the premature obsolescence of much of
the capital stock as a result of changes in relative prices  
(oil shocks) and technology. Hence the need for improved  
investment performance over an extended period if ground  
is to be made up in the adaptation and modernization of  
productive structures and if the potential growth rate of  
the European economies is to be gradually raised.

- 7 -
The Member-States must therefore press ahead with the measures taken  
to alter legislation, taxation and regulations so that they favour pro­
ductive activity. This objective will have to be attained through a set  
of measures which in isolation are often unspectacular but whose combined  
effect can make a significant contribution to the restoration of more  
stable and lasting growth. This means essentially changing taxation and  
easing the regulatory framework, promoting competition and securing  
better use of productive structures.
Lastly, the outlook on unemployment confirms the importance of the role  
which must be played by active employment policies. Measures to reduce  
and reorganize working time may help to improve the employment  
situation provided that they respect the constraint of competitiveness,  
that they enable the productive system to be used more flexibly and  
more efficiently, that they assist structural change and that they do not  
create bottlenecks in labour supply. An unequivocal stand by the  
Community could give employers and unions valuable guidance here. The  
Member States must also reinforce their specific measures to increase  
youth employment and alleviate the problem of long-term unemployment.  
Lastly, the return to higher growth is closely linked to labour market  
flexibility, and it is important that changes be made in this area,  
notably in respect of the operation or forward planning of labour  
markets, and that vocational training policies be given a higher priority.
C. The Community can contribute to the success of these policies in  
three ways:
- the effects of internal economic cohesion, monetary stability and  
collective discipline in economic policies represent a valuable  
achievement and have a very direct bearing on the existence of the  
Community as a homogeneous and open entity: in this respect the
role of the EMS is fundamental and its consolidation should be a  
primary objective;

-  8 -
exploitation of the advantages of a large integrated economic entity  
such as the Community can more than ever help the European economies  
to adjust and to achieve a lasting return to competitiveness. In this  
respect, the completion of a single, continental-size market by a range  
of radical measures in fields such as the movement of goods and services,  
technical barriers and standards, taxation and company law, may make a  
direct contribution to the restoration of higher growth;
lastly, the Community countries, largely united in the pursuit of  
the required modernization of productive activities through faster  
technological development, should take more systematic advantage of the  
added effectiveness offered by common measures in the field of technology,  
whether these be closer coordination in the use of government procurement,  
the mutual recognition of standards in high-technology industries,  
pre-competitive research, or training.
III. EXTERNAL UNCERTAINTIES
Several uncertainties originating from outside the Community could affect the  
economic recovery. These include, of course, the implications for Europe  
of a possible reduction in Gulf oil supplies. The two main factors of  
uncertainty, however, are the international monetary situation and the problem  
of developing countries' indebtedness.
A. The international monetary situation is marked by the increase in real  
interest rates and continued existence of exchange rate relationships which do  
not sufficiently reflect economic fundamentals.
From 1981 onwards, real short- and long-term interest rates in the United States  
were hovering around 6%. After easing slightly in 1983, they have risen  
again since early 1984. It is true that in Europe interest rates have not risen

- 9 -
to the same extent, and full use has been made of any scope for  
decoupling them in practice from United States interest rates, to assist  
the recovery in Europe. Yet, in the wider world context, higher  
interest rates could affect the economic recovery in three main ways:  
they increase the developing countries' burden of indebtedness; they  
raise the threshold above which investment becomes profitable, and  
therefore jeopardize its growth; and, pushing up both prices and the  
cost of servicing the public debt, they make it more difficult to  
pursue stabilization policies.
The recovery could also be undermined by the movement of exchange rates,  
coupled with heavy current account deficits in some countries.
These two problems - the movement of exchange rates and the level of  
interest rates - stem partly from the mix of United States monetary  
and fiscal policies. There is no doubt that this policy has brought  
about rapid stabilization, and then a strong recovery, of the  
United States economy, and hence of world trade (in 1983 the volume  
of United States imports increased by 12%). It is also true that  
at 4.4% of GDP in 1983, the United States public sector deficit is much  
smaller than the general government deficit recorded in a group of  
Community countries where efforts to establish a healthier public  
finance situation must be continued as a matter of priority. The  
United States public sector deficit is, however, appreciably larger than  
the deficits in the Federal Republic of Germany, France and the  
United Kingdom. Moreover, it must be set against the structurally  
very low savings ratio in the United States (5.8% of personal disposable  
income in 1983) and against the fact that, combined with high interest  
rates and a heavy current account deficit, it is bound to have something  
of a crowding-out effect in the other economies.
On both questions (interest rates and exchange rates), the Community  
must push forward with the efforts made since the Versailles summit  
to secure, through proper supervisory machinery, greater coherence of  
economic policies and to lay the foundations for organized monetary

-  10  -
cooperation between the principal monetary entities. The work started  
in 1982 is continuing within the Group of Ten. As the Commission has  
advocated, the Community should adopt common positions and should be  
able to make concrete proposals at the appropriate time on the main  
subjects under examination.
B. The second problem is that of international indebtedness. This  
is being dealt with in a variety of forums, and was notably discussed  
at the last economic summit in London. The Community must participate  
in the overall strategy into which the specific solutions most  
appropriate to each particular situation can be fitted.
This strategy covers the following main questions:
- first, an improvement in the financial position of the developing  
countries depends in large measure on a better international  
environment as regards interest rates, exchange rates and the  
opening up of markets; the conclusions reached in work done  
elsewhere on these subjects wi U L  therefore have a direct impact on  
indebtedness problems;
- second, if the most heavily indebted countries are to achieve a  
healthier financial position, economic recovery must continue in  
the industrialized countries and the developing countries' terms  
of trade must be improved;
- third, the Community should - also in the context of the forthcoming  
international meetings and in particular the IMF meeting in
September - join in the various specific initiatives in the international  
financial field which were outlined at the recent London summit and  
which closely correspond to its earlier policy thinking.
*
* *

MAIN ECONOMIC INDICATORS FOR THE EUROPEAN COMMUNITY, UNITED STATES AND JAPAN
ITABLE 1 GROSS DOMESTIC PRODUCT (PERCENT. CHANGE AT CONSTANT 
PRICES ON PRECEDING YEAR, EC, USA, JAPAN, 1971-1985)
3.2
2.3 
2.8
3.1
3.4
1.9
2.9
2.9 
4.8I -|TABLE 2 :  DEFLATOR OF PRIVATE CONSUMPTION (PERCENT. CHANGE ON 
|  PRECEDING YEAR, EC, USA, JAPAN, 1971-1985)
11 013 8 1IB 7.1 7.0 8775776650
4 736252730 II  DK 10.2 9.8 17103675338
0-10 93025 1ID 5.2 5.4 5751302924
6_4 0 21716 1|  GR 13.4 22.1 223211191190180
316 6111< i  1IF 9.413.1 12711937557
T612 52425 11  IRL 13.9 18.6 2011711059065
9 1 3-132429 11  1 14.6 20.3 19216714911387
8-11-14 316 1IL 6.7 7.7 77100647760
9 8-16 82117 1INL 7.7 6.7 6255253020
26-1323352721  i(UK 13.3 16.8 11163545256
510222i  11  EC 9.711.1 10188635145
30-24335926 1|USA 6.910.3 8958395155
494032294736 1
11  JAP 
18.6 6.8 4824141417
ITABLE 3 :  NUMBER OF UNEMPLOYED AS PERCENTAGE OF THE 
|  CIVILIAN LABOUR FORCE (FC, USA, JAPAN, 1971-1985)I...—...-....................
|  
|  - I960 1981 1982 1983 1984 1985
I  I  1980
1.....
IB 5791121
3113.4 137140
i  DK 3667699510.5 103100
ID 263347688.4 8483
ICR- - - 157.8 8592
IF 66478889.11031  10
1  IRL 728310212414.2 162174
|  1 5980861059.71061  12
|L 3 710131.6 1921
INL 3362881  1715.4 165172
|UK 41639310711.7 116116
1
1  EC 4061789510.5 111114
(USA 625876979.7 7569
1  JAP 162122242.7 2626IITABLE 4 :  BALANCE ON CURRENT ACCOUNT (PER CENT OF CDP, 
|  EC, USA, JAPAN, 1971-1985)I ...........................
1
1
11971
19801980 1981 1962 1983 1984 1965
IB .0-4.5 -43-36-16-.6 .  7
1  DK -3.0 -3.7 -31-41-21-2.2 -1.7
ID .7-1.8 -10 6 71.2 1.9
1  GR -2.8 .  3 3-37-43-4.7 -5.3
!  F -.4-1.4 -14-30-16-1.0 -.8
1  IRL -4.9-10.0 -131-63-23-.9 .  T
1  1 -.3-2.4 -23-16 1.2 .  1
!L 22.5 22.6 28240239037.7 35.8
INL .  1-1.5 2226273.5 4.8
1  uk -.8 1.8 2520 7.7 .5
!ec
IUSA 
1  JAP 
1-.2 
.  1  
.  7-1. 3 
.2
-1.16
1
5:5
3
7-1
20
2
0.4
-2.5
2.6.7
-2.8
2.6
ITABLE 5 :  GENERAL GOVERNMENT LENDING OR BORROWING (-) 
j  AS PERCENTAGE OF GDP (EC, 1971-1985)I..........................
1
1
119
71
19801980 1981 1982 1983 1984 1985
1-----IB -
4.9-9.9-12.6 -11.6 -11.7 -10.9 -
|  DK -1 .0 -3.3 -7.1 -9.3 -6.0 -6.5 -
ID -1.7 -3.1 -3.9 -3.4 -2.7 -1.6 -
{GR -4.6 -5.4-10.6 -10.0 -9.7-10,1 -
IF -.5 .3-1.8 -2.6 -3.3 -3.3 -
I  IRL -9.1-11.8 -15.6 -15.6 -12.9 -11.7 -
1  I -8.7 -6.4-11.7 -12.7 -11.8 -12.6 -
1  L 2.0 -.8-2.3 -1.4 -2.2 - .  7 -
INL -1.6 -4.0 -5.2 -7.0 -6.4 -5.8 -
|  UK -3.3 -3.4 -2.7 -2.0 -3.3 -2.9
1  EC -3.2 -3.5 -5.4 -5.6 -5.5 -5.2 -ITABLE 6 :  MONEY SUPPLY M2/M3 (PERCENTAGE CHANCE AT END OF YEAR 
|  ON TWELVE MONTHS EARLIER, EC. USA, JAPAN, 1971-1985)I............................ -..
I  
I  1971
|  |  - 1980 1981 1982 1983 1964 1985
I  I  1980
I  —  —  IB 1032766597176
|  DK 1171099617242100
ID 1006250715352
|  GR 238247343290202219
IF 148971410810970
!  IRL 18416917412956120
I  I 195120160172146129
INL 10836527610790
IUK 1451861469210289
I  EC 138105106 io8 io285
i  USA 959010092 - - -
I  JAP 169728770- - -I_____________________________F,N
L,USA: M2; D, GR, IRL: M3; B, DK: M2H; UK: STERLINC M3 
(FISCAL YEAR); I: M2 (71-79), M3 (80-85); JAP: M2 AND CD.