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DOCUMENTS "COM"
COM(81)368
Vol.1981/0114

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COMMISSION OFTHEEUROPEAN COMMUNITIES
COM(81)368 final
v
Brussels,July11981
THEECONOMIC ANDSOCIALSITUATION
INTHECOMMUNITY
(Communication fro*theCommissiontotheCouncil
inaccordancewithArticle3oftheConvergence
Decisionof18thFebruary1974)
C0M(81)368final

1.-
Short-term developments andprospects
~ .*
Sincethelastexamination oftheeconomicsituation (inMarch)there
havebeensomesignsofimprovementintheEuropeanbusinesscycleandaneasingofworld
oilmarketpressures;butalsoworryingmovementsininterestandexchange
ratesacrosstheAtlanticandmuchtoolimitedprogressinfundamental aspects
f
ofeconomicpolicyandperformance inEurope.
Production intheCommunityprobablyreacheditslow-pointintheearly
monthsofthisyear.Theimmediateoutlookissubjecttoconflicting in­
fluences.Thebusinesscycleisshowingsignsofmovingintotherecovery
stage,withsomestrengthening ofexportandprivateconsumption demand.
Communitybusinesssurveysshowthis.Butthebalanceofthechangingtrend
asbetweenahalttotherecession andabeginningoftheupturnisstilldif-•
ficulttodircern.For1981asawholetheeommissionexpectsafallofabout
1/2%inGDPvolume,withanimproving secondhalfoftheyearleadingto:.
positivegrowthin1982perhapsslightlyinexcessof2%.Thiswouldbe
barelysufficienttostoptheriseinunemployment inthecourse'ofnextyear.
Forthetimebeingunemployment isstillrisingsharplyandhasreached
7.7%ofthelabourforce. .
Anegativeinfluence hasbeenthehigherinterestrates,andthe
generalinternational monetaryinstability .Sincethebeginningofthis,
yearshort-terminterestrateshavebeenforceduponaverageintheCommu­
nitybyover3points(to15%for3monthinter-bank rates),restoringappro­
ximateparitywithUnitedStatesrates.Nevertheless evengreatermovements
havebeenseeninexchangerates,withtheECUnowhavingdepreciated 21%
againstthedollarand24%againsttheYenintwelvemonths.
f / •• •'
'Intimethisdepreciation shouldleadtosubstantial Europeangains
inworldexportmarkets.MoreovertheCommunity'slargebalanceofpayments
9
currentaccountdeficit(nearlyAOtbillionin1981,comparedtoamodest-
surplusintheUnitedStates/andamodestdeficitinJapan)leaves
nodoubtabouttheneedinEuropeforasubstantial adjustment .Some
progressinreducingthisdeficitislikel^in1982,butamulti-year
strategyadjustmentininvestment andworldtradingperformance -isbasically
necessary. . *

Thedepreciation oftheECU-meansthatEuropeiscurrentlyexperien­
cingawaveofimportpriceincreasesassevereasLast/earwhenoilprices
werethemaincause.Thisisseriouslyretardingprogressinreducing
-inflation.Theaverageconsumerpriceriseisnowexpectedtobe111/2%
in1981(up1pointsincetheforecastsbeforetheEuropeanCouncil'smeeting
March,withthedivergencebetweencountriesnowrangingfrom5,8%to24%)
andcouldwellbestillashighas101/2%in1982.Asinthecaseof
theoilpricerise,itisvitaltoensurethatthisunavoidabledeterioration
inthetermsoftradedoesnothaverepercussions whichleadtoan
increaseindomesticinflation.Thisreinforcestheimportanceof
certainMemberStatestoadjustextremelycomprehensive andfast-acting
incomeindexationmechanisms.AsstatedattheEuropeanCouncil'smeetingin
March,thesemechanismsareincontradiction withthemainaimofcreating
azoneofmonetarystabilityinEurope.
Theeffectsoftherecessiononpublicbudgets'isseen,inanupward
revisionoftheexpecteddeficitofthegeneralgovernmentaccountsfor
1981from4.0to4.3%ofGDPfortheCommunityasawhole(comparedto
3.6%in1980).Forsomecountries,astabilisingeffectfromthebudget
shouldbeaccepted,"andindeedwelcomed,forexampleinGermanywherethere
arealreadysignsthatstrongerexportswillsoontakeoverasthemain
supporttoeconomicactivity..InFrance,whichaloneamongCommunitycountries
actuallyexperienced asmallbudgetsurplusin1980,somelimiteddeficit
in1981shouldnotencounterfinancingproblemsifkeptwithinprudent
proportions .Inseveralothercountries,however,measurestorestrict
currentpublicexpenditure "anddeficitsareoverdue.Eachyear'sdelay
increasesthefutureburdenofadjustment.Double-digit deficitsasa
shareofGDParenotstablepropositions,yetthisistheorderof
magnitudeoftheBelgiandeficitandnearlysoinItaly;Denmark'sdeficit
alsoappearstobeincreasingalarmingly,whilethatofIreland,already
15%ofGDP,hasrecentlybeenincreasedbysubstantialsubsidiestohouse-v
holdsforfoodandhousingitems. *

MecHum-term challenges
TheCouncilwillshortlyhavetoconsideramedium-term economicpolicy
programmefortheperidd1981-1985.Preparatory workbyexpertshasbeen
completed (intheEconomicPolicyCommittee ),andonthisbasistheCommission
planstosubmitadraftprogrammetotheCouncilbeforethesummerrecess.
Projections forafive-yearperiodarenotoriouslydifficulttomake,
andthosedonebytheCommissionfor1981-1985onthebasisofpresent
policiesandhistorical economicbehaviour-remainopentosurprisesfor
betterorforworse.Subjecttotheseimportantreserves,andassuminga
moderateeconomicrecoveryfromnowto1982,theprojections suggestanannual
averagerateofgrowthintheCommunityasawholeof21/2%inthefour„years
1982to1985(1.9%forthefiveyears1981-1985),whichcompares -witharound
2.2%fortheyears1974to1980,andatrendof41/2%intheprecedingdecade.
Assuminga5%growthinworldtradethepresentlargebalanceofpayments
currentaccountdeficitcould-wellbereducedverysubstantially by1.985.
evenwithsomerenewed,butgradual/increaseintherealpriceofoil.Progress
inreducingpublicsectordeficitsseemslikelytobemoremodest;therate♦.
ofinflationmightonaveragedeceleratetoabout71/2%comparedtothe
present11%.Themodestrateofrealgrowthmeansthatthereislikelytobe
approximatestabilityinthetotalemploymentlevel.Combinedwiththeexcep-•
tionally,fast.demographic expansionofthelabourforce(nearly1%peryear
forthewhole-quinquennium),,unemployment ,isquite-likely'onthebasisof.
';Sp<^tarie<xis' :tr1erti3*■tocontinuetorisestiltJfromWhepresent'averagetevet..
}of?,73?v."■;''r^,::■ \ ".K/:>
6f'coursethese,trends-arenot:immutIei«Ppticycan,and'irtseveral ..
-respects -should,change.■Economitbehaviaur :cdncHange'yr ,an#must"beencouraged
intherightdirection.Theuncertainties arenot-atInegativerisks.Fo'r
example,:«emaymanagetoachievefasterprogress1r>energy.-adjuStmentthan
expected.,;-andviemay-underratethecapacityoftheecbnomymoregenerally ,
toadjust'forthebetteroncegiventherightsignalssteadilyoveraperiod,
ofyears* ■■*•

But the fundamental message isthat the Community cannot hope that
anew cyclical recovery -itself fragile anduncertain -will lead the
economy back automatically onto asatisfactory trajectory assuring asub­
stantial anddurable improvement inemployment prospects .Itisnot a
question ofwaiting with alittle more patience fortrends toimprove rThe
European economy needs still toembark ondeep and lasting changes inpublic
policy and intheeconomic performance ofthe social partners andhouseholds
before wecanhope for a-much better economic future ;i.e. toassure thedevelop­
ment ofthe competitive capacity ofoureconomies andtheir aptitude torespond
totheopportunities ofgrowing markets .Investment andsavings must beincreased
Consumption ,employment costs and current public expenditure must bemoderated .
Investment andemployment inenergy production and saving inparticular must .
beamassive priority asalso the development -ofindustries based onnew
technologies .Present investment trends inthe .Community are not yet onapar
with that seen inthe United States andJapan .The Community can and should
provide afinancial bobst tothis priority (in7this connection proposals for
arenovation ofthe New Community Instrument for investment financing arebefore ,
the Council awaiting decision ).
While abundantly debated ,these issues are still notbeing sufficiently
acted upon inmany Member States .Ifthis state ofaffairs persists the risks
are for arelapse ofthe Community into serious financial andmonetary instabi -
«
lity' andthence into great losses .Forthe Community ,asawhole this could
mean eroding theachievements even ofthe Common Market aswell asofthe -
European Monetary System ,and for individual Member States there would bethe
prospects ofthe large economic >andsocial costs that always ultimately result
from excessively delayed economic adjustment .Alonger period ofdelayed ad­
justment andslow growth would also endanger the social and spolitical balance
inour countries andundermine thedegree ofsocial consensus sofarachieved .,
Current developments demonstrate thenecessity for astable ,framework
1
forinternational economic relations .The Community should therefore intensify
itspolicy ofcooperation ,with third countries ,especially establishing
increased monetary and financial cooperation between industrialised countries ,
also with aview toaiding theeconomic situation ofdeveloping countries .

Conc lusions
TheCommission suggests thefollowing assessment andpolicy orientations :
(i) Itmaybethat therecession hasnowpassed itslowpoint inEurope ,
andthat thechances foramoderate recovery arefairly good ..However ,
great risks surround this uncertain andfragile improvement..' With the
, short-term easing ofthe oilmarket ,,themain risks atpresent liein
»
themanagement ofeconomic policy within theCommunity andinternationally
The Social Partners also have animportant role .
(ii)Within theCommunity ,particular risks follow from thefailure sofar
ofseveral Member States toprogress with urgently required public
*finance and income stabilisation measures .These failures weaken the
cohesion oftheEuropean Monetary System .TheCommission recommends
tothese countries accelerated programmes ofeconomic adjustment .On
theother hand ,Germany ,where astrong export recovery seems nowassured ,
should notunduly precipitate thedesirable medium-term reduction ofit's
public deficits .Ingeneral ,allMember States'must aimatbalance .in
theuseofmonetary andbudgetary policies ,anddesist from descriminatory
measures ineither domain that threaten thebasic economic principles of
theCommunity ;theprospects forexport –ledrecovery canonly bebased
onkeeping open markets fortrade . .
(iii)Thelarge depreciation oftheECUagainst thedollar andyenover the
pa?t months means that theCommunity have anewopportunity toimprove
.itsshare inworld markets ,andincrease investment andemployment ..
But theinflationary impact ofthedepreciation must becontained ,and
this isafurther reason whyadjustments must urgently bemade inindex­
ation practices insome Member States ,and .expectations forreal income
gains bestill lowered more generally for the'time being .
(iv)Internationally ,moreover ,thevolatility of'interest andexchange rates
isofmajor concern ;indeed itrepresents aserious -threat toEurope 's
incipient economic recovery ,notably because ofthegreat fluctuations
incosts andinthecontinuing uncertainties that theenterprise sector •
hastoface .TheCommunity should pursue these issues indepth indis­
cussions with theother major monetary powers .,TheCommunity ,theUnited
States andJapan basically share thesame monetary policy objectives and
there ismuch tobedone ,including intheCommunity (asmentioned ,with
regard tobudgets andincomes )torelieve thestrain onmonetary policiesThe

6.-
However theUnited States should also bear inmind the significant
international consequences ofdifferent choices that are open toit
intheframing and execution ofitsbudgetary andmonetary policies .
Themain policy stance ofthemajor industrial countries does affect
thefunctioning oftheworld economy andshould ,therefore ,bedis­
cussed inthe forthcoming international meetings .
(v>The medium-term outlook reinforces the need for the accentuation of
adjustment policies inmany Member States ,andpersistance throughout
the Community inefforts topromote investment inenergy saving and
production and innew industrial capacity ,and tomoderate labour costs
(including both incomes and social security levies ).
(vi)Unemployment andinflation areproblems which should betackled
jointly >asgenerally agreed recently bytheJoint Council of
Ministers ofEmployment and Social Affairs and ofFinancial Affairs .
Animprovement intheoverall economic situation ,andhence inemploy­
ment ,implies persistant actions andefforts inawide area ofsocial
andeconomic policies over several years andspecific urgent ^actions
tocombat the high unemployment ofyoung people .Theefficiency of
national policies canbestrengthened byastronger degree ofcoordi­
nation andcooperation between Member States andcould also beassisted
through reinforced actions atCommunity level .

Table1:MainEconomieAggregates,1979-81
1979 1980 1981 1979 1980 1981
GDPvolume,Xchange »Privateconsumption deflator,Xchange
Β 2,4 1/1-0/6 3,5 6,3 7,2
OK 3,5-0/8 0/1 9/511,0 10,0·
0 4,6 1/9-0/6 3/9 5/45,8
GR 3,8 1/7 1/5V17,7 23,7 23,3
F 3/2 -1/80,5 10/513,5 13,0
IRL 1,9 0/9 1/9 12/218,2 17,5-
I .5,0 4,0-0/2 14/920,3 21,0
L 3,6 0,4.-3,1 5/8 6/3 7/5
NL 2,2 0,9-0/6 . 4/6 6/9 7/3
UK 1/3-1,4-2,2 12,2 15/511/2
*
.EC 3/5 1/4-0/4 8/9 11/7 11/5
Unemployment rate,Xof
civilianlabourforceCurrentaccountofbalance
XGDP.ofpayments
Β 8,6 9/3 11/0 -2/9-5/7-7/3
DK 5,3 6/28,2 -4,6-3/8-3,8
D 3,4 -3'4 4/6 -0,7-1/7 •-1,9
GR(1) (2,2)(2/9),(3,2) -2/9-2/4-2,6
F .6,1 6,5 7,7 ♦0,1-1/4-1,6
IRL 7,9 8/29,7 -10,1 -8/6-14/2
I 7,6 8,1 8/4 +1,6-2/5-2,3
L 0,7 :0,7 1/1 ♦28,7.+22,8 ♦20/8
NL 4,2'5,0 7/2 .-1/4-.-1/5 +0/7■
υκ 5'46,9 10,5 -0/9 +1,2 +0,6'
£C 5,5 6,1 7/7 S-0,5-1/4·-1,7
.Generalgovernment netlending ■■.·-
(+)ORborrowing(-)',XGDP •J-'r'·.'■■'■Honeysupply# %cftange
;r,endofyear'
Β: "9,3-11/0 6/J ■2/8,;.3r9..
DK':.-3,i·"■v...,-5/4-8,6(ci?)9,9 10/98,1
D'■ '-3,0 ,-3/5-4,0 '·;.6/0...;· 5'4'•■'v·
GR· -,* ■··..•
•'·"* 5..(M3>.18,4:·'·.2$,222,4 *
'-0,8:0/4-1/6:<M2)■V14,4'■·■■·.9,7.12,5 ·
IRL
χ.·V-11,9•.!-13,2 ;.-15,2 "■,<M5).19,0;16,9,12,2
ι·';-9,4-7,8-8,5;:(«2r­'20,3.-··,;.12,0 11,0
L ,+0/1-1/4-2/5: •*·*'·»
*\::
NL*'-2/0"2/8-3,3'(M2)■·"■7,6-■;3,6 6,2-
UK -3,3i-3/7--2/3(ÍM3)12/718,6 8,5
EC -3,6-3,6-4/3 11,9 10,2 8,8
CDNotcqmparable withothercountries
rnirimissionservices-basedoninformationavailabletoearlyJune1981