COMMISSION OF THE EUROPEAN COMMUNITIES 
Brussels, 31.05.1995 
COM(95) 228 final 
Commission's Recommendation 
for the Broad Guidelines of the Economic 
Policies of the Member States and the 
Community 

- A ~ 
EUROPEAN COMMISSION 
Commission's Recommendation 
for the Broad Guidelines of the Economic 
Policies of the Member States and the 
Community 
drawn up in conformity with article 103 (2) of the 
Treaty establishing the European Community 

-4*r 
Table of contents 
BROAD ECONOMIC POLICY GUIDELINES FOR THE COMMUNITY 
AND THE MEMBER STATES 1L, 
1. Introduction 1 I o 
2. Economic policy guidelines 2 
Price and exchange rate stability 2 
Sound public finances 4 
Competitiveness 6 
Employment and the labour market 7 
II. EXPLANATORY DOCUMENT 10 
1. Introduction 10 
2. The economic situation and outlook 11 
2.1 Growth prospects 11 
2.2 Employment trends 12 
2.3 The outlook for inflation and budgetary convergence 14 
3. The policy objectives and risks 21 
4. The Policies 24 
4.1 Macroeconomic policies 24 
4.2 Policies for greater competitiveness 27 
4.3 Employment and labour market policies 29 

41-
I. Broad Economic Policy Guidelines for the Member 
States and the Community 
1. Introduction 
Since the Summer of 1994, when the previous Broad Guidelines were adopted, 
economic growth in the Community has become firmly established. However, as the 
recent foreign exchange turmoil following the decline of the dollar has highlighted, 
significant risks and important policy issues remain unresolved. In order to ensure 
that the growth prospects are fully taken advantage of to increase employment and 
enhance convergence, economic policies must respond to the challenges and 
opportunities presented by the emerging economic expansion. 
The present set of policy guidelines - prepared and adopted according to article 103(2) 
of the Treaty establishing the European Community - will constitute the reference for 
the conduct of economic policies in the Community and the Member States. It re­
affirms both the objectives proposed in the earlier versions and the conclusions on 
fighting unemployment reached by the European Council, notably those of the Essen 
meeting which recommended five areas where action had to be intensified. Full 
implementation of these guidelines will make possible a strengthening of convergence 
and a realisation of the good growth and employment prospects, thus achieving 
significant reductions in the rate of unemployment. 
Two policy concerns should be given prominence in the present environment. First, 
there is the possibility that the favourable impact of economic growth could give rise 
to "adjustment neglect". This may take the form of a weakening commitment, induced 
by the cyclical improvement of the budget deficit, to resolve in a durable manner the 
structural fiscal imbalances, or, as employment begins to recover, it may be reflected 
in a reluctance to initiate and implement those measures which are necessary to 
remove labour market imperfections. It is essential that either type of "adjustment 
neglect" should be vigorously resisted. 
Secondly, recent exchange rate changes have not only contributed to greater risks of 
inflation dispersion, but they have also contributed to a potential fragmentation of the 
internal market and to threatening the beneficial achievements of economic integration. 
-2-
Exchange rate misalignments will have detrimental effects for all the Member States. 
It is clear that, in order to minimise the occurrence of such episodes, creating the 
conditions for exchange rate stability within the Community must become a key 
priority of economic policies. 
The present guidelines re-affirm the policy objectives set in the December 1993 and 
July 1994 guidelines: it is essential for the Community and the Member States to turn 
the present recovery into a strong, sustainable, non-inflationary medium-term growth 
and employment creation process, so that the rate of unemployment is substantially 
reduced and to make possible the achievement of the necessary degree of convergence 
to facilitate the transition to stage III of EMU. Achievement of these objectives will 
require a stable, investment-enhancing, short- and medium-term macroeconomic 
framework characterised by: 
- a stability-oriented monetary policy whose task is not undermined by 
inappropriate budgetary and wage developments; 
- sustained efforts to consolidate the public finances in most Member States 
consistent with the objectives of their convergence programmes; 
- nominal wage trends incorporating the price stability objective; at the same 
time, real wage developments should take into acount the need to 
strengthen the profitability of employment-creating investment. 
An essential complement of this framework are structural reforms aimed at fostering 
the competitiveness of the economies of the Member States and at improving the 
functioning of their labour markets. The policies necessary for sustaining long-term 
growth, increasing employment, and strengthening convergence are mutually 
consistent. 
2. Economic Policy Guidelines 
Price and Exchange Rate Stability 
Substantial progress in reducing inflation in the Community and in the Member States 
has been made since the beginning of the decade. Nine Member States (B, DK, D, F, 
IRL, L, NL, A, UK) are now expected to see a rate of inflation in the range of 
between 2 and 3 per cent in 1996, consistent with the objective of the 1993 and 1994 
guidelines; Finland and Sweden are forecast to experience rates of inflation just above 
this range next year. Spain, Italy and Portugal, on the other hand, are projected to 
record rates of inflation of about 4 Vi per cent while inflation in Greece is expected to 
decline to about 9 per cent. 
Further progress towards price stability must be made. This means, above all, 
enlarging substantially the group of Member States where inflation performance can be 
considered satisfactory. Those Member States that are currently expected to 
experience rates of inflation between 2 and 3 per cent should maintain a policy aimed 
at preventing any resurgence of inflationary pressures and at progressing towards the 
lower end of this range. Other countries should substantially increase their efforts. 
The recent exchange rate changes have important implications for inflation 
convergence. Thus, in Member States experiencing currency appreciations in nominal 
effective terms, inflation convergence is expected to strengthen and inflation is 
projected to remain below 3 per cent this year and next. In these Member States wage 
trends are expected to develop broadly in line with the objective of price stability too. 
However, it will be necessary to ensure that wage developments do not lead to 
reductions in investment profitability, particularly in the export-oriented sectors. On 
the other hand, in the Member States experiencing currency depreciations, price 
stability is less secure and the risks of an acceleration of inflation dominate the 
outlook. In these countries utmost caution is needed. In particular, in the context of 
strong economic growth, it will be important to prevent increases in import prices 
from generating a vicious circle of price and wage inflation. Otherwise, the achieved 
credibility of moving towards a stability oriented policy framework would be lost 
rapidly. 
The combination of the marked depreciation of the dollar and of uncertain fiscal and 
inflation prospects in some Member States have led to substantial exchange rate 
instability within the Community. The exchange rate changes which have taken place 
exceed what would have been warranted by the differentials in the rates of inflation 
and have resulted in a competitiveness penalty for the countries who have followed 
sound policies and increased inflationary pressures for those whose currencies have 
depreciated. Such exchange rate misalignments are detrimental to all Member States; 
in the ones whose currencies have appreciated short-term growth prospects will 
deteriorate, while in those whose currencies have depreciated inflation prospects will 
worsen and the stability-oriented medium-term policy will be in jeopardy. Moreover, 
the proper functioning of the internal market has been put at risk. Not only is it 
possible that investment decisions may be made with the view to exploit exchange-rate 
induced competitiveness gains, but also it is possible that special interest groups 
supporting devaluation policies will be encouraged. 
Therefore, all Member States must pursue policies supporting stable exchange rates 
within the Community. Exchange rate stability will not only contribute to reaping the 
full benefits of the internal market and to improving resource allocation within the 
Community, but it will also make possible the realisation of improved price stability. 
In this respect a key role will be played by budgetary policy and by the credibility of 
the fiscal consolidation commitments. 
Sound Public Finances 
Despite the consolidation of economic growth, prospects for the resolution of the 
fiscal imbalances remain uncertain and fiscal convergence continues to be elusive. 
According to current estimates, net borrowing as per cent of GDP is expected to 
decline by approximately 1 lA percentage points between 1994 and 1996, about half of 
which is reflecting the contribution of the automatic stabilisers on the budget balance. 
The failure to realise greater progress in budgetary consolidation sustains, in many 
cases, a situation where fiscal policy is severely constrained by a high and rising burden 
of interest payments; it also undermines price and exchange rate stability, increases 
uncertainty about the course of fiscal policy and erodes the credibility of policies, it 
contributes to an unbalanced policy mix, and it undermines the task of monetary 
policy. Over the medium term, persistent fiscal imbalances will have adverse 
implications for economic growth and for employment creation. A sound fiscal 
position is a positive supply factor as it opens up the possibility for tax reductions and 
for increases in productive public investment. Indeed the arguments for budgetary 
consolidation based on growth and employment considerations are at least as 
important as those based on the need to improve the sustainability of debt positions 
and nominal convergence. If budget deficits cannot be reduced in a durable manner 
now, during a period of relatively strong growth, when will they be reduced ? 
The clear task confronting virtually all the Member States is to ensure that advantage 
is taken of all the growth opportunities to promote fiscal consolidation by reducing 
structural deficits. The Member States should aim to bring their budget deficit below 
3 per cent of GDP as soon as possible, as a first step towards the medium term goal, 
particularly important during Stage III, of reducing it to between 0 and 1 per cent of 
5-
GDP as indicated in the 1993 Broad Guidelines. With such a policy it would be 
possible to have the average budget deficit in the Community below 3 per cent of GDP 
by 1997. 
The current estimates suggest that, all the Member States, including those where the 
forecast deficit for this year will be below the 3 per cent mark (Denmark, Germany, 
Ireland, and Luxembourg), ought to exploit any room provided by economic growth 
higher than in budget plans, or by a decline in interest rates, to accelerate the process 
of budget consolidation. In the event that the exchange rate turbulence lowers 
economic growth this year, the efforts to achieve the targets of the convergence 
programmes should not be relaxed. 
The forecast for 1996 indicates that, on the basis of the adjustment measures which 
have been clearly specified so far among those Member States which have set fiscal 
targets in their convergence programmes, the fiscal objectives will not uniformly met. 
Adjustment to achieve the deficit target of the convergence programme is required, 
albeit of different magnitude, in the cases of Belgium, Germany, Greece, Spain, 
France, and Portugal; in all these cases, the projected deficit is larger than that set in 
the convergence programme. On the other hand, Denmark, Ireland, the Netherlands, 
and the UK are expected to meet the deficit objectives by next year. 
In many countries, restraining expenditure increases should be the preferred approach 
since, apart from their impact on employment, there are undoubtedly limits to higher 
taxation and social charges. But the rationalisation of the public expenditure and 
taxation systems can also contribute to economic growth and employment creation. 
In particular, as proposed in the 1994 guidelines, the tax structure should be adjusted 
in a manner consistent with employment support, while public expenditure should be 
re-allocated away from consumption and in favour of productivity-enhancing 
spending; in the latter, strengthening public investment and immaterial investment in 
human capital should be accorded a priority. In this context as well, taxation on the 
use of labour should be reduced, especially at the lower end of the wage and 
productivity scale. It is important, however, that the necessary reduction in budget 
deficits is not endangered, which implies that compensatory additional revenues should 
be found. 
Fiscal difficulties continue to characterise the public finances of several Member 
States. In Greece and Italy, the persistence of the fiscal imbalances continues to have 
-6 
wider implications, undermining price and exchange rate stability, contributing to high 
risk premia on interest rates, and inhibiting progress towards convergence. Decisive 
measures, in a multi-annual framework, are required in order to restore confidence in 
the course of economic policies. In the case of Sweden, which is confronted with 
similar difficulties, a multi-annual adjustment fiscal framework has already been 
announced; it is necessary that the adjustment path is adhered to. In Belgium, the 
high indebtedness necessitates that the fiscal component of the Global plan is fully 
implemented and that further progress in reducing the deficit below the 3 per cent of 
GDP mark is required in order to also achieve a more significant reduction in the debt 
ratio. 
In Spain and Portugal, greater commitment and more ambitious targets are required in 
the area of fiscal consolidation; more ambitious fiscal objectives are also necessary in 
the cases of Austria and France. In Austria and Sweden, further efforts will also be 
necessary to bring the debt ratio on a downward course. Finally, while Finland has 
not yet prepared a convergence programme, the forecasts suggest that its fiscal 
objectives are ambitious; efforts to realise these objectives should be sustained. 
Fiscal developments and prospects in Ireland and Luxembourg suggest that they will 
continue to show no excessive deficit. In the former, the decline in the debt ratio is 
projected to continue at a healthy pace, while the state of the public finances of the 
latter continues to be robust. 
Competitiveness 
Following the proposals of the White Paper on "Growth, Competitiveness, 
Employment", Member States are implementing reforms aimed at strengthening the 
forces contributing to endogenous growth and at enhancing the dynamism and 
competitiveness of the Community economies. 
In order to benefit fully from the opportunities offered by the internal market, the 
transposition of Community directives into national law now stands at 92.4 per cent 
while the dispersion ranges from 86.3 per cent to 98.6 per cent. Progress is required, 
however, in the areas of insurance, intellectual and industrial property, public 
procurement, new technologies and services and freedom of movement. Moreover, 
progress has been slow in the extension of the single market to telecommunication and 
energy, while the internal market in transport remains incomplete. Furthermore, 
additional progress is necessary in reinforcing competition rules, reducing state aids, 
and reducing the role of the public sector. Privatisation, to the extent that Member 
States judge it compatible with their objectives, could further the progress already 
made in this direction. 
State of implementation of the internal market White Paper measures 
(breakdown of situation by Member State, in percent; May 17, 1995) 
DK NL UK B IRL GR 
98.6 95.9 95.4 95.0 92.7 92.2 90.9 90.4 90.0 89.5 89.0 86.3 
EC-12: 92.4 
Source: European Commission 
Several initiatives have been taken at the Community level. Following the 
recommendation of the Essen Council, a Competitiveness Advisory Group has been 
set up and it plans to prepare a report for the Cannes European Council on the state of 
Community competitiveness and related issues; moreover, the Group for Legislative 
and Administrative Simplification has been established. In order to enhance overall 
competitiveness, several issues are being reviewed at the Community level, including 
improving financing for SMEs, enhancing labour market flexibility, and improving the 
quality of vocational training. 
It is essential for the dynamism of the Community economies that material and 
immaterial investment be stepped up. This relates in particular to investment in 
education and training and in the infrastructure of the Community which needs to be 
developed to match the requirements of the 21st century. The Trans-European 
Networks should be realised and the Action plan on the Information Society should be 
carried through. In addition, for the active promotion of research and development 
initiatives, greater co-ordination between Member States activities is essential. 
Parallel, co-ordinated, efforts at the level of the Community and of the Member States 
is an essential building block to realising the potential for job creation and growth. 
Employment and the Labour Market 
The economic recovery, if it progresses as predicted, will absorb the cyclical 
component of unemployment by 1997. Nevertheless, to continue to reduce 
unemployment in a significant and progressive manner, it is necessary to achieve a high 
rate of economic growth over many years and to increase the capacity of that growth 
to generate jobs. An essential component of the efforts to achieve these goals is 
represented by more active and more efficient labour market policies. These must aim 
at a comprehensive, integrated and coherent effort to bring about structural change in 
the fields of the educational systems, labour law, work contracts, contractual 
negotiation systems and the social security system to improve the functioning of the 
labour market as a whole. 
In the context of the White Paper, the Essen European Council identified within the 
wide array of measures working in the directions outlined presently, the following five 
priorities: 
• Improving the employment opportunities for the labour force by promoting 
investment in vocational training, 
• Increasing the employment intesiveness of growth, 
• Reducing non-wage labour costs, 
• Improving the effectiveness of labour market policies, 
• Improving measures to help groups which are particularly hard hit by 
unemployment. 
Member States were invited to implement measures adapted to their own specific 
situation and to prepare multi-annual programmes spelling out their policy intentions. 
Various measures have already been taken, but greater and more determined efforts 
are needed. 
Active and more efficient labour market policies contribute to the goal of increasing 
employment through three main channels: 
i) they improve the employment opportunities for the labour force by promoting 
investment in vocational training, notably in SMEs, and thus raise the quality of 
human capital which improves competitiveness, potential output and the flexibility 
of, and opportunities for, the workforce; 
ii) they increase the employment intensity of growth, without affecting negatively 
the rate of growth itself, by: 
the Social Partners examining at the appropriate levels whether employment 
could be promoted without endangering competitiveness through the 
allocation of productivity gains to contribute to innovative forms of work 
organisation such as reduction and new patterns of working time and new 
combinations of work and leisure; 
increasing the incentives to employment by reducing non-wage labour costs, 
especially at the lower end of the wage and productivity scale, without 
harming other parts of the labour market; from a macroeconomic point of 
view this must be achieved in ways which do not compromise the reduction 
of budgetary deficits nor the competitiveness of enterprises. Reforms 
including, where appropriate, alternative financing sources of social 
protection systems are therefore required; 
encouraging the development of new employment opportunities and 
activities, e.g. those linked to the service society and environmental 
sustainability. 
iii) they promote the employability of people when new jobs become available by: 
improving the effectiveness of labour market policy through enhancing the 
flexibility with respect to professional and geographical mobility (particularly 
for those workers readily employable); 
improving measures to help groups which are particularly hard hit by 
unemployment through special retraining schemes which concentrate on 
target groups hit by exclusion. 
Labour market policies contributing to exploiting these three channels constitute not 
only an indispensable complement to macroeconomic policies and structural policies in 
the area of competitiveness but they also contribute to maintaining and reinforcing 
cohesion and the social consensus inside the Union in the long and difficult process of 
absorbing unemployment. 
In order to enhance the effectiveness of the work which is currently under way and to 
increase the overall consistency of the individual policy actions, the Commission, on 
8 March 1995 presented a Communication to the Council in which it suggests the 
implementation, in the context of Article 103 of the Treaty, of a procedure for the 
surveillance of employment trends and policies. 
It is now important that Member States adopt rapidly their multi-annual programmes 
which will constitute the benchmark in the continuous monitoring of the policies aimed 
for job creation. These programmes should be mutually consistent with the 
macroeconomic framework defined by the Broad Economic Policy Guidelines. 
40-
tt. Explanatory document 
This explanatory document reviews the economic situation and outlook, the progress 
made in implementing the previous Broad Guidelines and the current stance of 
economic policy. In accordance with what was announced in the Communication to 
the Council on the Follow-up to the Essen European Council on Employment1, 
employment trends and policies are given greater prominence. 
On the basis of the analysis outlined in this explanatory document, the Commission is 
recommending a new set of guidelines for the economic policies of the Member States 
and of the Community which are firmly oriented towards achieving economic 
convergence and fostering job creation. These guidelines confirm the thrust of those 
adopted in December 1993 and July 1994, but take into account the fact that the 
economies of the Community are now at a much more advanced stage of the recovery 
and that a number of risks are appearing on the way to transforming the current 
recovery into strong medium-term growth. 
1. Introduction 
The economic outlook for the Community continues to be favourable. The recovery, 
which had just become visible a year ago when the 1994 Broad Guidelines were 
adopted, has gathered strength and its pattern - exports and investment continue to be 
the most dynamic components - remains conducive to sustained medium-term growth. 
Notwithstanding the negative effects of the recent foreign exchange turmoil, growth is 
expected to remain satisfactory also in 1996. The recent episode of exchange rate 
instability has certainly affected business confidence negatively, but the fundamental 
factors determining growth remain favourable. 
Progress has taken place in achieving the degree of nominal convergence necessary for 
the transition to EMU. But more needs to be done and, in certain cases, progress has 
been disappointing relative to what could have been achieved in the current favourable 
economic environment. The recent instability of foreign exchange markets, even if its 
origin lays to a great extent outside the Community, highlights the lack of convergence 
which still characterises the economic performance of several Member States, and 
especially the lack of credibility of their budgetary consolidation plans. 
' "Follow-up to the Essen European Council on Employment" Com (95) 74 final of 8 March 1995 
11 -
Given that employment always responds with a lag to a recovery in economic activity, 
the improvement in the economic situation is not yet contemporaneously reflected in a 
similar upturn in labour market conditions, even though the reduction of 
unemployment in this cycle is expected to be much more pronounced than that seen in 
the early 1980s. Employment, which declined again in 1994, is now projected to 
increase this year and in 1996 by about one per cent a year, with the rate of 
unemployment also starting to decline. 
Under these circumstances, economic policy must be resolutely oriented towards the 
twin objectives achieving economic convergence and fostering job creation. This 
means achieving strong, non-inflationary and more employment-creating rates of 
growth. 
2. The economic situation and outlook 
2.1 Growth prospects 
Economic growth in the Community is projected to average 3.1 per cent in 1995 and 
2.9 per cent in 1996, up from an estimated 2.7 per cent last year. Thus, the recovery 
which commenced towards the second half of 1993, is now being transformed into 
robust economic growth so that, by 1996, real output in the Community will be almost 
10 per cent above the 1991 level. 
The economic expansion has been, and is expected to continue to be, sustained by 
strong exports, investment spending and, to a lesser extent, private consumption 
growth. Buoyant world trade conditions are expected to sustain Community exports 
which should increase, in real terms, by 7.5 and 6.5 per cent, respectively, during this 
year and next. Investment spending, which is estimated to have grown by 2.4 per cent 
in 1994, is projected to increase by 6.3 per cent this year and by just below 6 per cent 
in 1996. Finally, private consumption, is projected to expand by 2.1 per cent this year 
and by 2.5 per cent in 1996. This pattern of growth - with investment growing at a 
brisk pace - corresponds closely to what is necessary to create the conditions for a 
long period of strong growth. 
The recent weakening of the dollar in the foreign exchange markets and the substantial 
depreciations experienced by some European currencies are having a twofold effect on 
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Community growth prospects. On the one 
hand, overall growth is slowed down as 
Community exports become, on average, more 
expensive on world markets and as business 
confidence is negatively affected by the 
uncertainty induced by exchange rate instability. 
On the other hand, the exchange rate 
movements within the Community may result in 
short-term differential effects on the growth 
prospects of countries whose currencies have 
depreciated compared with those which 
appreciated. 
The fundamental factors which shape economic 
growth in the Community, however, remain 
favourable. World trade is expected to 
continue expanding strongly while labour 
productivity and investment profitability trends within the Community are 
encouraging. As a result, most Member States are expected to show satisfactory 
rates of economic growth (see Table 1), with Ireland projected to post remarkably fast 
rates of output and employment growth throughout the period. Table 1 
Economic growth in the Community 
(percentage change in real GDP) 
B 
DK 
D 
GR 
E 
F 
IRL 
I 
L 
NL 
A 
P 
FIN 
S 
UK 
EC 1993 
-1.7 
1.5 
-1.1 
-0.5 
-1.1 
-1.5 
4.0 
-0.7 
2.1 
0.3 
-0.1 
-1.2 
-1.6 
-2.6 
2.0 
-0.5 1994 
2.3 
4.4 
2.9 
1.2 
2.0 
2.7 
6.3 
2.2 
3.0 
2.5 
2.7 
1.1 
3.9 
2.2 
3.8 
2.7 1995 
2.7 
3.3 
3.0 
1.6 
3.1 
3.1 
6.9 
3.3 
3.3 
3.2 
2.7 
3.0 
5.3 
2.8 
3.1 
3.1 1996 
2.6 
2.9 
2.6 
1.8 
3.4 
2.9 
5.5 
3.4 
2.9 
2.8 
2.5 
3.2 
4.2 
3.0 
2.8 
2.9 
Source: Commission Spring 1995 economic forecasts 
2.2 Employment trends 
Following three years of net job losses, employment in the Community is projected to 
expand again in 1995 and 1996. Employment in the Community declined by a 
cumulative 3.9 percentage points over the period 1992-1994: 5.8 million jobs were 
lost. 1995-96 should see an increase in employment of about one per cent a year 
which implies the net creation, over the two years, of about 3 million jobs. Given that 
in 1995-96 the active population will increase by about 1.4 million persons, the 
expected job creation will allow a net reduction of unemployment by approximately 
1.6 million. 
This year and next employment is expected to rise in all the Member States, with 
particularly strong rates of increase in Denmark, Spain, the Netherlands, Sweden, the 
United Kingdom, and especially so in Luxembourg, Finland and Ireland (see table 2). 
-13-
In recent years, labour productivity growth evolved in a way similar to that of all 
previous cyclical episodes: it decelerated substantially during the recession (see 
table 3) and accelerated at the beginning of the recovery (3.2 per cent in 1994). For 
1995 and 1996, however, the forecasts suggest a return to the trend of the last twenty 
years (about 2 per cent). In the present forecast the Community economy is therefore 
expected to show an employment content of growth which is not inferior, but also not 
greater, than that of the last twenty years. 
Table 2 
Employment and Unemployment 
(percentage change and per cent of the labour force) 
B 
DK 
D 
GR 
E 
F 
IRL 
1 
L 
NL 
A 
P 
FIN 
S 
UK 
EC Employment growth 
1994 
-0.7 
-0.1 
-0.9 
1.3 
-0.9 
0.1 
2.6 
-1.6 
2.6 
-0.0 
0.2 
-0.1 
-0.8 
-0.9 
0.3 
-0.5 1995 
0.7 
2.3 
0.7 
1.0 
1.5 
1.1 
2.7 
0.3 
2.8 
1.3 
0.5 
0.4 
3.0 
2.0 
1.2 
1.0 1996 
1.0 
1.1 
0.9 
1.0 
2.0 
1.0 
2.6 
0.8 
2.7 
1.9 
0.4 
0.7 
2.5 
1.8 
1.1 
1.1 Unemployment rates 
1994 
10.0 
10.2 
8.4 
9.6 
24.1 
12.5 
15.1 
11.4 
3.5 
7.7 
4.0 
6.9 
18.5 
7.8 
9.4 
11.2 1995 
9.6 
8.6 
7.8 
9.6 
23.7 
12.1 
14.1 
11.4 
3.6 
7.6 
3.9 
6.7 
16.3 
7.2 
8.3 
10.7 1996 
9.1 
8.0 
7.3 
9.5 
22.8 
11.5 
13.1 
10.9. 
3.4 
7.2 
3.8 
6.3 
14.6 
6.5 
7.8 
10.1 
Source: Commission Spring 1995 economic forecasts 
N.B. At the beginning of 1995 Eurostat has significantly revised its unemployment figures 
Employment in the manufacturing sector, where productivity increases are particularly 
strong, declined by about 2.5 per cent last year, but is now expected to recover to a 
projected growth of 0.5 per cent in 1995 and 1.1 per cent in 1996. The expansion in 
employment in this sector as well suggests that the recovery has given way to a 
sustained growth process. 
The projected increases in employment will produce a decline in the unemployment 
rate from a peak of 11.2 per cent of the labour force in 1994 to 10.1 per cent in 1996. 
Large declines in unemployment in the period 1994-1996 are projected to take place in 
Finland (3.9 percentage points), Denmark (2.2 points) and Ireland (2 points). 
-14 
High unemployment, however, is projected to continue to mark the labour market 
experience of Spain, Ireland, Finland; in Italy and France unemployment is expected 
to remain between 10.5 and 11.5 per cent in 1996; in Belgium and Greece 
unemployment is projected to remain between 9 an 9 XA per cent; finally, with regard 
to the remaining eight Member States, the rate of unemployment is expected to range 
from a low of 3 XA per cent in the case of Luxembourg to a high of 8 per cent in the 
case of Denmark. 
Table 3 
Labour Productivity Growth 
(annual percentage changes) 
B 
DK 
D* 
GR 
E 
F 
IRL 
1 
L 
NL 
A 
P 
FIN 
S 
UK 
EC* 1961-73 
4.3 
3.2 
4.0 
8.1 
6.5 
4.7 
4.3 
5.5 
3.0 
3.9 
5.0 
6.6 
4.5 
3.5 
2.9 
4.4 1974-90 
2.0 
1.4 
1.9 
1.4 
2.7 
2.2 
3.8 
2.0 
1.3 
1.7 
1.5 
3.4 
2.6 
1.1 
1.6 
2.0 '91 
2.1 
2.9 
2.5 
5.6 
1.8 
0.7 
2.9 
0.4 
-1.0 
0.9 
0.9 
1.3 
-2.0 
0.4 
1.1 
1-5 '92 
2.3 
1.2 
3.9 
-0.6 
1.9 
2.2 
4.5 
1.8 
0.0 
0.4 
0.0 
1.7 
3.7 
3.2 
1.6 
2.3 •93 
-0.3 
2.2 
0.7 
-1.5 
3.3 
-0.3 
3.3 
2.2 
0.0 
0.5 
0.4 
0.8 
5.0 
3.2 
3.7 
1.5 '94 
3.1 
4.5 
3.8 
-0.1 
2.9 
2.6 
3.6 
3.8 
0.4 
2.5 
2.5 
1.3 
4.7 
3.1 
3.4 
3.2 '95 
1.9 
1.0 
2.3 
0.6 
1.6 
1.9 
4.1 
3.0 
0.4 
1.9 
2.2 
2.5 
2.3 
0.9 
1.8 
2.1 '96 
1.6 
1.8 
1.8 
0.7 
1.4 
1.8 
2.9 
2.6 
0.1 
0.9 
2.1 
2.5 
1.6 
1.2 
1.7 
1.8 1991-96 
1.8 
2.2 
1.7 
0.8 
2.1 
1.5 
3.6 
2.3 
0 
1.2 
1.4 
2.8 
2.5 
2.0 
2.2 
2.1 
Source: Commission Spring 1995 economic forecasts * For the averages until 1991 Germany = West Germany 
While employment trends and the pace of the reduction of unemployment correspond 
closely to expectations, unemployment continues to be a major policy concern. 
Current and projected trends suggest the need to ensure that the rate of economic 
growth remains strong over many more years so as to make possible the recovery of 
the ground lost during the recession and to set in train reductions in unemployment 
below the level achieved at the peak of the previous cycle. 
2.3 The Outlook for Inflation and Budgetary Convergence 
Of all areas of convergence in the Community, most progress has taken place with 
regard to inflation. Measured by the private consumption deflator, the Community 
average rate of inflation declined to 3.2 per cent in 1994, from a peak of 5.6 per cent 
15 
in 1991, and is expected to remain at its 1994 level during this year and in 1996. The 
guidelines goal of the Community achieving a rate of inflation of between 2 and 3 per 
cent by 1996, as a first step towards price stability, will therefore not be fully met. 
In 1994, ten Member States had inflation at or below 3 per cent while the remaining 
had inflation in excess of 3 per cent. Changes in the country composition of these 
groups are projected to take place in 1995 and in 1996, with Ireland's and Austria's 
inflation falling below 3 per cent this year and easing to 2.7 per cent in 1996 in Ireland 
while stabilising at somewhat below 3 per cent in Austria; Sweden's and Finland's 
inflation accelerating to around 3.3 per cent next year; and the UK's staying flat at 3 
per cent this year and next. 
Price convergence appears secure in the group 
of Member States which are seeing effective 
exchange rate appreciations. Inflation in eight 
Member States (Belgium, Denmark, Germany, 
France, Ireland, Luxembourg, the Netherlands, 
Austria) is expected to be below 3 per cent this 
year and next. 
In Portugal and Finland, which have also seen 
recently effective exchange appreciations, 
inflation prospects are less encouraging. In 
Portugal, after a significant decline from the 
level of 1993 ànd a smaller one from last year, 
inflation is expected to stabilise at 4.5 per cent 
this year and next. In Finland, on the other 
hand, inflation is forecast to accelerate 
markedly next year. Table 4 
Inflation 
(percentage change, 
private consumption deflator) 
B 
DK 
D 
GR 
E 
F 
IRL 
1 
L 
NL 
A 
P 
FIN 
S 
UK 
EC 1993 
2.6 
1.0 
3.8 
13.6 
5.6 
2.2 
1.6 
5.1 
3.6 
2.1 
3.5 
7.9 
3.9 
5.8 
3.4 
4.0 1994 
2.4 
1.7 
2.7 
10.9 
5.1 
1.8 
3.0 
4.7 
2.2 
2.2 
3.3 
5.1 
1.6 
3.0 
2.5 
3.2 1995 
1.9 
2.3 
2.3 
9.6 
4.9 
1.9 
2.9 
5.2 
2.3 
1.8 
2.8 
4.5 
1.7 
3.2 
3.0 
3.2 1996 
2.4 
2.7 
2.5 
8.9 
4.5 
2.1 
2.7 
4.5 
2.5 
2.2 
2.9 
4.5 
3.3 
3.2 
3.0 
3.2 
Source: Commission services Spring 1995 forecasts 
The inflation outlook remains uncertain in the Member States which have experienced 
currency depreciations in recent months (Italy, Greece, Sweden, Spain and the UK). 
While, it may be argued, the inflationary consequences of the depreciation would not 
emerge until actual output rises above potential, uncertainty about the exact level of 
the output gap, and the possibility that potential output may have declined during the 
recession, would suggest that the risk for an acceleration of inflation dominates the 
outlook. 
16-
Greece, Spain, Italy and Portugal are recording and are expected to record, a less 
satisfying, albeit to different degrees, price convergence in the Community, and 
Sweden's inflation is not expected to post any deceleration over the forecast period. 
Inflation in the UK is projected to remain stable at 3 per cent in 1995 and 1996. 
However, there is considerable uncertainty about the inflation outlook in view of the 
fact that, in addition to recent exchange rate developments, the UK will have had four 
years of strong economic growth by 1996 and the level of excess capacity will have 
narrowed substantially. In the UK, but also in Finland and Sweden where monetary 
policy pursues an inflation target, vigilance is an essential ingredient of the policy 
stance. 
Table 5 
Nominal effective exchange rate changes 
(relative to 19 industrial partners) 
Annual percentage changes 
B 
DK 
D 
GR 
E 
F 
IRL 
I 
NL 
A 
P 
FIN 
S 
UK 
EC 1992 
2.3 
2.8 
3.3 
-7.7 
-1.8 
3.6 
2.8 
-2.7 
2.4 
2.6 
3.6 
-12.7 
1.3 
-3.6 
2.2 1993 
0.8 
2.1 
2.7 
-9.6 
-13.1 
1.9 
-5.9 
-16.9 
3.0 
2.4 
-7.6 
-14.8 
-19.3 
-9.0 
-13.1 1994 
1.6 
0.1 
0.1 
-7.1 
-6.7 
0.6 
0.3 
-4.6 
0.4 
0.0 
-4.7 
7.5 
-1.2 
0.2 
-2.2 1995* 
5.3 
5.3 
6.8 
-3.3 
-2.1 
4.0 
-0.4 
-14.3 
5.2 
4.9 
2.8 
9.3 
-4.7 
-4.0 
1.4 Cumulative changes since 1991 
B 
DK 
D 
GR 
E 
F 
IRL 
I 
NL 
A 
P 
FIN 
S 
UK 
EC 1992 
2.3 
2.8 
3.3 
-7.7 
-1.8 
3.6 
2.8 
-2.7 
2.4 
2.6 
3.6 
-12.7 
1.3 
-3.6 
2.2 1993 
3.1 
4.9 
6.1 
-16.6 
-14.7 
5.5 
-3.3 
-19.2 
5.5 
5.1 
-4.3 
-25.7 
-18.2 
-12.3 
-11.2 1994 
4.8 
5.0 
6.3 
-22.5 
-20.4 
6.1 
-3 
-22.9 
6.0 
5.0 
-8.7 
-20.1 
-19.1 
-12.1 
-13.2 1995* 
10.3 
10.5 
13.4 
-25.0 
-22.1 
10.4 
-3.5 
-33.9 
11.4 
10.1 
-6.2 
-12.6 
-22.8 
-15.6 
-12.0 
Source: Commission Services * on the assumption that exchange rates will remain constant at their April 1995 level 
A notable feature of the inflation performance since 1993 is that, despite the severity 
of the recession, the average rate of inflation in the Community has remained at over 3 
per cent. Certainly a large number of countries are currently experiencing a 
satisfactory price performance, but in about a third of the Member States, inflation still 
gives cause for concern. In addition, no further progress in lowering inflation is 
projected for this year and next. 
17 
The apparent stickiness of inflation could reflect the influence of several, reinforcing, 
factors. On the one hand, the amount of spare capacity created during the recession 
may be smaller than currently estimated. This could be the result of measurement 
errors or of an acceleration in the scrapping of obsolete capacities. On the other 
hand, the credibility of announced monetary and, above all, fiscal policies may still be 
too low and unable to affect significantly expectations about future inflation. In 
addition, in some Member States currency depreciations have contributed to sustaining 
inflation. Finally, it is possible that non-competitive conditions continue to prevail in 
several Community countries despite the efforts to implement the internal market. 
An implication of these considerations is that further reductions in inflation will require 
measures which foster the credibility of policies, which improve the adaptability of 
workers in a changing economic environment, and which also foster competition. In 
particular, it is important to strengthen the credibility of the low inflation targets, so 
that they can be incorporated into pay trends, and of the budgetary consolidation 
programmes. 
Budgetary convergence in the Community continues to be elusive. Table 6 shows 
that, for the Community as a whole, the net borrowing of the general government, 
which peaked at 6.3 per cent of GDP in the recession year 1993, is currently estimated 
to decline gradually to 4.5 per cent of GDP in 1995 and to 3.9 per cent by 1996. 
Between 1994 and 1996, the largest reduction in the deficit is projected to take place 
in Finland and Sweden (4.6 and 4.5 percentage points in terms of GDP, respectively), 
followed by the UK (4 points), Denmark (2.8 points), and Greece (2.3 points). In 
addition to these five countries, five more, Belgium, Spain, France, Italy and Portugal, 
are expected to register deficit reductions ranging between one and two percentage 
points of GDP, with Spain and France envisaged to make the greatest degree of 
progress amongst this group. No significant change is expected in relation to the five 
remaining Member States which, with the Netherlands and Austria, includes the three 
countries which were below the reference value of 3 per cent of GDP in 1994, namely 
Germany, Ireland and Luxembourg. On the basis of the present forecasts seven 
Member States will have a general government deficit at or below the reference value 
of 3 per cent of GDP by 1996. 
The forecasts are based on the assumption of unchanged policies; however, not all 
Member States have announced their concrete budgetary intentions for 1996. An 
implication of this assumption for the projected fiscal adjustment is provided by the 
18 
decomposition of the change in net borrowing into a cyclical and a discretionary part. 
Table 7 shows that over a three-year period of strong economic growth (1994-96) 
only small reductions in the structural deficits are expected to take place. The 1.6 
point in terms of GDP cumulative decline in Community net borrowing between 1994 
and 1996 reflects only 0.8 of one per cent of GDP discretionary deficit reduction. 
Table 6 
General government deficit 
(per cent of GDP) 
B 
DK 
D 
GR 
E 
F 
IRL 
1 
L 
NL 
A 
P 
FIN 
S 
UK 
EC 1993 
6.6 
4.5 
3.3 
13.2 
7.5 
6.1 
2.4 
9.6 
-2.1 
3.3 
4.1 
7.0 
7.8 
13.4 
7.8 
6.3 1994 
5.3 
4.0 
2.5 
12.5 
6.6 
6.0 
2.3 
9.0 
-2.3 
3.1 
4.0 
5.8 
5.6 
10.4 
6.9 
5.5 1995 
4.2 
1.9 
2.1 
11.3 
6.0 
4.9 
2.8 
7.9 
-1.4 
3.2 
4.6 
5.6 
5.0 
9.1 
4.8 
4.5 1996 
3.9 
1.2 
2.4 
10.2 
4.8 
3.9 
2.6 
8.1 
-1.5 
2.5 
3.9 
4.7 
1.1 
5.8 
2.9 
3.9 
Source: Commission Spring 1995 economic forecasts; (-) indicates a surplus 
The persistence of fiscal disequilibrium has contributed significantly to the growth in 
the general government indebtedness in the Community. At the beginning of the 
present decade the ratio of general government debt to GDP in the Community was 
55.8 per cent; as can be seen in table 8, it grew to 66.2 per cent in 1993, and it is 
currently expected to grow to 70.4 per cent of GDP by 1996. In 1996, four Member 
States (Germany, France, Luxembourg, and the UK) are projected to have a debt ratio 
below the 60 per cent of GDP mark. Of the remaining Member States, the debt ratio 
is projected to increase in six (Greece, Spain, Austria, Portugal, Finland, Sweden), 
while in another five (Belgium, Denmark, Ireland, Italy, the Netherlands) it is 
projected to decline. Despite the good growth prospects, these trends suggest that 
substantially more ambitious fiscal plans than those currently contemplated are 
necessary in order, in several cases, to stabilise the debt ratio and to place it 
unambiguously on a downward path. 
19 
From a medium-term perspective, covering the period 1993-1996, in four Member 
States (Belgium, Denmark, Ireland, the Netherlands) the debt ratio is projected to 
decline, with the largest decline projected to take place in Ireland (16.2 percentage 
points in terms of GDP), followed by Belgium and Denmark (4.9 points) and by the 
Netherlands (4.3 points). 
Table 7 
Changes in the actual and cyclically adjusted general government deficit 
(per cent of GDP) 
B 
DK 
D 
GR 
E 
F 
IRL 
1 
L* 
NL 
A 
P 
FIN 
S 
UK 
EC Changes in the actual deficit 
1993 
-0.1 
1.6 
0.4 
0.9 
3.3 
2.2 
0.0 
0.1 
-1.3 
-0.6 
2.1 
3.7 
1.9 
5.6 
1.7 
1.2 1994 
-1.3 
-0.5 
-0.8 
-0.7 
-0.9 
-0.1 
-0.1 
-0.6 
-0.2 
-0.2 
-0.1 
-1.2 
-2.2 
-3.0 
-0.9 
-0.8 1995 
-1.1 
-2.1 
-0.4 
-1.2 
-0.6 
-1.1 
0.5 
-1.1 
0.9 
0.1 
0.6 
-0.2 
-0.6 
-1.3 
-2.1 
-1.0 1996 
-0.3 
-0.7 
0.3 
-1.1 
-1.2 
-1.0 
-0.2 
0.2 
-0.1 
-0.7 
-0.7 
-0.9 
-3.9 
-3.3 . 
-1.9 
-0.6 Changes in the cyclically-adjusted deficit 
1993 
-2.4 
1.2 
-1.4 
0.2 
0.9 
0.5 
-0.8 
-1.2 
-2.0 
-2.2 
0.9 
2.1 
0.1 
2.4 
1.4 
-0.4 1994 
-1.0 
0.8 
-0.7 
-0.8 
-1.3 
0.1 
0.5 
-0.4 
-0.4 
-0.2 
0.1 
-1.7 
-0.6 
-2.0 
-0.1 
-0.5 1995 
-0.8 
-1.3 
-0.3 
-1.1 
-0.2 
-0.7 
1.2 
-0.6 
1.1 
0.7 
0.7 
0.1 
1.9 
0.0 
-1.6 
-0.5 1996 
0.1 
-0.4 
0.3 
-0.9 
-0.7 
-0.5 
-0.2 
0.8 
-0.3 
-0.4 
-0.6 
-0.4 
-2.4 
-1.9 
-1.6 
-0.3 B 
DK 
D 
GR 
E 
F 
IRL 
1 
L 
NL 
A 
P 
FIN 
S 
UK 
EC 
Source: Commission Spring 1995 economic forecasts; (-) indicates a reduction, (+) indicates an increase in the respective deficits 
* Luxembourg has a surplus, thus a (-) indicates an increase, (+) a reduction in its surplus. 
In France the debt ratio is projected to increase to 52.8 per cent of GDP by 1996, 
while in the UK it is projected to stabilise at 51.5 per cent of GDP this year and next. 
In Germany, the sharp rise in the debt ratio this year is a reflection of the take-over by 
the general government of off-budget liabilities related to unification. 
In Greece and Italy a rise in the debt ratio by 1 and 5 points, respectively, is projected 
between the period 1993-1996. In Italy the debt ratio is expected to have peaked in 
1994 and relative to this mark a modest adjustment is projected for this year and next. 
In Greece, where the debt ratio is also already very high, debt convergence will be 
worsening this year and next. 
-20 
Finally, worsening convergence on the basis of the debt criterion is also expected to 
take place in Spain and Portugal, where the debt ratio is projected to rise by 5.3 and by 
4.1 points, respectively, between 1993 and 1996 and to reach 65.2 and 70.7 per cent 
of GDP, respectively, in 1996. 
Table 8 
General government gross debt 
(per cent of GDP) 
B 
DK1) 
D 
GR 
E 
F 
IRL 
I 
L 
NL 
A 
P 
FIN 
S 
UK 
EC 1993 
137.2 
80.3 
48.2 
115.2 
59.9 
45.8 
97.0 
119.4 
6.9 
81.4 
62.8 
66.6 
57.1 
76.2 
48.5 
66.2 1994 
136.1 
75.6 
50.1 
114.1 
62.3 
48.5 
89.8 
125.4 
7.2 
78.1 
64.5 
69.2 
60.1 
79.1 
50.1 
68.1 1995 
134.3 
76.1 
58.2 
115.3 
64.6 
51.2 
84.6 
124.9 
7.6 
78.1 
66.2 
70.5 
64.4 
84.6 
51.5 
70.3 1996 
132.3 
75.4 
58.1 
116.2 
65.2 
52.8 
80.8 
124.4 
7.8 
77.1 
67.4 
70.7 
64.6 
85.7 
51.5 
70.4 
Source: Commission Spring 1995 economic forecasts 
1) Government deposits with the central bank, government holdings of non-governmental bonds and public enterprises related debt amounted 
to 23.4% of GDP in 1994 
2) The sharp increase in the German debt ratio in 1995 is mainly caused by the take-over by the government of off-budget unification-related 
liabilities, the most important of which is the debt of the "Treuhandanstalt" 
Worrying trends have also emerged in the debt ratio in the three new Member States. 
While the large increases occurring over the period 1993-1996 reflect to a 
considerable extent the impact of the recession, it is also clear that adjustment plans of 
greater ambition are necessary in order to halt the rise, and to ultimately reverse 
direction, in the path of the debt ratio. In May 1995 Austria presented a convergence 
programme and Sweden is expected to do so in June. 
It is possible that the persistence of fiscal imbalances in the Community countries, and 
the failure to decisively advance fiscal consolidation in periods of strong economic 
growth, reflect also the importance of budget institutions and procedures in the 
determination of fiscal deficits as well as the nature of political discourse. In several 
Community countries the rules according to which budgetary policy is approved and 
-21 -
amendments to budget plans are admissible, play a key role in fiscal outcomes. It is 
also possible that the form the commitment to fiscal consolidation takes may not be 
conducive to fiscal discipline; for example, it may be appropriate to combine improved 
budget procedures with numerical fiscal targets in order to enhance the probability that 
fiscal programmes are actually implemented as planned. 
The importance of these considerations has now become more pronounced, both 
because it is necessary to explore all avenues to strengthen fiscal discipline in the 
Member States and in order to increase the probability that fiscal convergence criteria 
are met by the largest possible group of countries prior to the move to stage III of 
EMU. 
The forecast for 1996 indicates that, on the basis of the adjustment measures which 
have been clearly specified so far among those Member States which have set fiscal 
targets in their convergence programmes, the fiscal objectives will not be uniformly 
respected. Adjustment to achieve the deficit target of the convergence programme is 
required, albeit of different magnitude, in the cases of Belgium, Germany, Greece, 
Spain, France, and Portugal; in all these cases, the projected deficit is larger than that 
set in the convergence programme. On the other hand, Denmark, Ireland, the 
Netherlands, and the UK are expected to meet the deficit objectives by next year. Of 
the new Member States, Austria has recently submitted a convergence programme and 
Sweden is expected to do so in June. In both cases more ambitious targets would be 
required to ensure that fiscal convergence is secure. Finally, in Finland where a 
substantial fiscal consolidation effort is under way, policies should ensure that the 
projected reduction of the deficit in 1996 is in fact realised. 
3. The policy objectives and risks 
The Broad Guidelines of December 1993 and July 1994 have laid out the broad thrust 
of the policies needed to achieve economic convergence and to foster job creation. 
The 1995 Broad Guidelines should confirm these objectives. In addition, the 
recommended policies should take account of the risks and concerns characterising the 
current economic outlook. 
The Community economy is still broadly expanding at the pace forecast a few months 
ago, even if growth prospects have become somewhat less favourable. The 
improvement in the consumer and business confidence indicators stalled at the 
beginning of this year, even before the recent period of exchange rate instability. In 
-22 
addition, a new period of weakness of the US dollar vis-à-vis the European currencies 
would create an atmosphere of greater uncertainty that might jeopardise the projected 
positive growth. On the other hand, it should be stressed that, as already noted, the 
main factors affecting growth prospects - notably world trade and investment 
profitability - remain good and that a rate of growth stronger than the one now 
projected cannot be ruled out. Economic policy must therefore act to prevent 
developments that might jeopardise the continuation of the growth process. 
The first risk to be considered is that of a renewed resurgence of inflation. As regards 
the consequences of the recent currency movements for inflation two different groups 
of countries may be identified: on the one hand the countries whose currencies 
appreciated in effective terms and who are therefore likely to "import" price stability 
and on the other hand the ones whose currencies devalued (especially Italy) and whose 
inflation, all other things held equal, will tend to increase. Overall, this risks making 
inflation performances more divergent than prior to the recent exchange market 
episodes. 
Inflationary pressures may appear due to the fact that the economy's actual rate of 
growth may approach to or exceed the potential rate of growth, especially in 1996, 
which would cause capacity constraints leading to inflationary tensions. This risk will 
be less apparent if business investment in the Community increases significantly over 
the next few years. Furthermore, there may be a danger that wage settlements will be 
higher than currently forecast and put upward pressure on prices and/or lead to 
reduced investment profitability. This danger could also arise from a desire to 
compensate, too rapidly and at the expense of growth and employment, for the low 
increases or, in some cases, actual declines in real wages during the 1993-94 period of 
sluggish economic growth and of rising unemployment. Some countries are already 
expected to record inappropriately high wage increases in 1995-96. 
The second, and more worrying, concern is that budgetary positions in several 
Member States remain unsatisfactory. Increased consolidation efforts are therefore 
necessary and the elimination of structural budgetary deficits must be tackled now, 
during the recovery, when the Member States can also take advantage of the 
functioning of automatic stabilisers. In addition, with the still high levels of public 
debt, several Member States continue to be very vulnerable to interest rate shocks that 
are possibly associated with uncertainties about fiscal, exchange rate and price 
-23-
developments and could in those countries effectively eliminate the budgetary gains 
likely to occur during the recovery. 
Finally, as already put forward in the Commission's 1995 Annual Economic Report, 
the favourable economic conditions created by the recovery may give rise to 
"adjustment neglect". This could take the form of a less determined commitment by 
the public authorities to tackle the structural causes of the high budget deficits as the 
recovery makes a positive cyclical contribution to tax receipts and to the budget 
balance. Furthermore, the efforts aimed at the removal of labour market rigidities 
may seem less urgent in the short term when employment is starting to rise again and 
unemployment is falling. Such a relaxation in consolidation and reform efforts would 
seriously put at risk the successful transformation of the recovery into a sustained and 
job-creating growth process, would contribute to an unbalanced policy mix and would 
increase the risk of a new recession. 
Strengthening convergence and sustaining economic growth will require that the 
opportunities emerging in the present recovery are wisely taken advantage of. It is 
clear that an important contribution to inflation convergence will be made by wage 
developments. 
If nominal wage increases begin to accelerate with the consolidation of economic 
growth, especially before unemployment declines substantially, also giving rise to an 
acceleration of inflation, the Member States may have to undergo another deflationary 
cycle; at current levels of unemployment, such an episode they can ill afford. 
Moderate wage growth will also contribute to fostering investment. The recent 
recovery of private investment is a reflection of the propitious economic prospects and 
of a wage growth inferior to labour productivity increases. The strength of investment 
expenditure, if sustained, will contribute to raising potential output and to fostering job 
creation. 
A wise use of the recovery will require that the Member States, first and foremost, 
consolidate their public finances. Sustainable fiscal positions are a necessary 
condition to support economic growth and durable employment creation. It is evident 
that the policies which are required to sustain long-term economic growth, foster job 
creation and reduce unemployment, and strengthen convergence are mutually 
consistent. 
-24 
Recent developments in the foreign exchanges indicate how important stability of 
exchange rates within the Community is for furthering economic integration and 
completing the single market. Exchange rate changes can lead to resource 
misallocation when investment decisions, made on the expectation of depreciation-
induced competitiveness gains, prove ultimately obsolete when competitiveness is 
eroded either as a result of nominal exchange appreciation or because of higher 
inflation. Furthermore, the possibility of exchange depreciation undermines wage and 
price discipline since losses in competitiveness can be, temporarily at least, recovered 
through exchange devaluations; as a result, reductions in inflation and price stability 
become difficult to achieve. Finally, as devaluations offer a prospect of temporarily 
improving competitiveness, they raise the possibility of practising beggar-thy-neighbor 
policies, which are not compatible with the completion of the internal market. 
4. The Policies 
The principal task of economic policy at this stage of the cycle is to ensure that the on­
going recovery translates into non-inflationary, employment-creating, growth. In view 
of the risks impinging upon the economic outlook, and the progress yet to be 
accomplished in convergence, macroeconomic and structural policies should be 
directed towards securing price stability, fostering fiscal consolidation, and 
strengthening the dynamism and competitiveness of the Community. 
4.1 Macroeconomic policies 
The main task of macro-economic policies will be to maintain a stable framework 
which will prevent the appearance of the tensions which have contributed to the 
recession of 1992-93 and which will foster a continued steady increase in potential 
output. As the previous sections have underlined, key developments give cause for 
concern on both counts. At the same time, with the consolidation of economic 
growth and the approach to stage III of EMU, the challenges confronting the Member 
States have become more pronounced, while the diverging trends which have emerged 
as a result of exchange rate changes have also raised important questions about the 
appropriate economic policies. 
Securing and furthering the progress made on inflation, and sustaining economic 
growth is a crucial challenge for monetary and exchange rate policy in the current 
cycle. A necessary contribution to the task of defending price stability in this context 
will have to be provided by fiscal consolidation policies. While in virtually all Member 
25 
States such policies are required, these are especially urgent in those Member States 
where fiscal deficits and rising debt burdens, and the associated inflation and exchange 
market developments, place the greatest burdens on the conduct of monetary policy 
and where the risks of a substantial acceleration of inflation are greatest. Equally 
necessary will be policies encouraging non-inflationary wage developments and, over a 
longer-term horizon, increased competition in product markets. 
Stability of exchange rates within the Community is essential for the proper 
functioning of the internal market. In Member States where fiscal positions are 
diverging and which have experienced exchange depreciations (Greece, Spain, Italy, 
and Sweden) it is essential that a bold and credible efforts are undertaken to foster 
fiscal consolidation. More generally, credible fiscal consolidation measures will 
contribute to reducing exchange rate instability. This will contribute not only to 
resolving concerns about competitive disruptions of the internal market, but it will also 
create the conditions for reductions in interest rates, and it will ultimately facilitate the 
implementation of the fiscal adjustment programme. 
Budgetary policy directed towards consolidation will play a crucial role in reducing 
the risks of an acceleration of inflation, of exchange rate instability, and of further 
worsening fiscal imbalances. 
Fiscal consolidation is necessary not only in order to foster stable inflationary 
expectations but also to sustain the progress made in reducing inflation. This is 
particularly important in Member States with persistent fiscal imbalances and persistent 
inflation (Greece, Italy, Spain). Failure to make decisive progress in redressing the 
fiscal imbalances, especially in an environment of strong economic growth, will 
increase uncertainty about the intentions of the fiscal authority. This uncertainty has 
been contributing to raising real interest rates and to, in turn, making fiscal 
consolidation more difficult to achieve in several Member States. 
Incomplete credibility of the fiscal consolidation plans may also be reflected in 
exchange rate instability, higher real interest rates and increases in interest rate 
differentials vis-à-vis other countries. Domestic and international investors holding 
government debt require an increase in the rate of return, or a strong exchange rate, to 
compensate for the increased risk, a combination of circumstances which is inimical to 
both economic growth and to fiscal adjustment. The instability characterising 
26 
exchange rates in Greece, Spain, Italy and Sweden is partly a reflection of the 
continuing lack of resolution of the fiscal difficulties. 
Over the medium term, fiscal consolidation will contribute to raising the level of 
national saving and will, through this channel, contribute to increasing the level of 
potential output. 
Respecting the fiscal convergence criteria remains an area where sustained efforts will 
have to be expended. According to the Spring 1995 forecast, seven Member States 
are expected to have deficits below the 3 per cent of GDP mark in 1996 (Denmark, 
Germany, Ireland, the Netherlands, Finland, and the UK; Luxembourg is expected to 
have a surplus). In these Member States the efforts to consolidate the public finances 
must be pursued with determination. In Belgium, France, and Austria, attaining the 
reference value for the deficit in 1996 would be within reach, provided that the 
adjustment effort gains renewed momentum. While no forecasts exist for the outer 
years, it is clear that for the remaining Member States the objective to respect the 
fiscal convergence criteria by 1999 must, even more than today, become a principal 
policy objective. 
The policy mix required in the individual Member States reflects the uneven 
distribution of policy risks. The Member States whose currencies have experienced 
depreciations over the recent months will likely see an increase in the inflationary 
pressures while the interest rate implications of the exchange rate instability will 
undoubtedly make budgetary consolidation more difficult. In general, these countries 
had already unsatisfactory starting positions. The depreciations will lead to higher 
import costs and, through the effects on export growth and economic activity in 
general, will contribute to narrowing the output gap. 
In these Member States the policy mix must be resolutely oriented towards containing 
the inflation risks and towards stepping up the efforts to consolidate budgetary 
positions. In these countries it will be particularly important to prevent, through the 
instruments available in each country, that the increase in imports costs may lead to a 
price and wage inflation spiral. 
In the Member States whose currencies have experienced appreciations, inflationary 
risks will be generally contained. However, given that the success of these countries 
in containing inflation owes much to the external constraint, it will be important to 
27 
make sure that pay trends do not lead to reductions in investment profitability. There 
are indications that this may be happening in Germany. 
Investment profitability must still increase substantially in most countries if investment 
is to expand to the extent necessary to ensure sustained growth in the medium term. 
In some cases, the stability of exchange rates could only be maintained at the cost of 
increases in the interest rate differentials with Germany. This suggests that markets 
still perceive some risks in the budgetary positions of these countries. Determined 
corrective action could bring substantial benefits through the reduction, or the total 
elimination, of these differentials. 
4.2. Policies for greater competitiveness 
Structural measures aimed at promoting the competitiveness, dynamism and overall 
productivity of the Member States' economies are essential to the achievement of the 
Community's twin policy objectives of strong, employment-creating growth and 
enhanced nominal convergence. Such measures are particularly important at the 
present time to strengthen economic growth, but also given the renewed anxiety about 
inflation especially in those Member States which have witnessed substantial 
depreciations of their currencies. 
The 1993 White Paper advocated reforms directed towards increasing the endogenous 
growth forces of the Community's economy as the means to securing the basis for its 
long-term prosperity. A variety of proposals aimed at making the Community 
economies more dynamic were subsequently incorporated in the 1993 and 1994 
Guidelines exercises. Such proposals, which were to be carried out at both the 
Community and individual Member State levels, were essential to the quest to promote 
the productivity and competitiveness necessary to underpin stronger growth and 
employment creation. 
Efforts at enhancing productivity and employment growth can only be successful if 
carried out in the context of a flexibly functioning economy which is capable of 
exploiting the opportunities generated by a rapidly changing technological and social 
environment. In this regard efforts are being undertaken to: 
exploit the opportunities associated with the internal market, an open world 
trading system and to safeguard the Community's competitiveness; 
accelerate the realisation of the Trans-European networks; 
28-
push through rapidly the Action Plan concerning the development of the 
information society; 
exploit the growth and employment potential offered by SMEs; 
and actively promote Community initiatives in Research and Development 
(R & D) and call for a greater .degree of co-ordination of Member States' R&D 
policies. 
In relation to the internal market, strong efforts have been undertaken to transpose the 
relevant directives into Member States' legislation. However, transposition has been 
slow in the key sectors of insurance, company law, intellectual and industrial property, 
public procurement, new technologies and services, financial services, and freedom of 
movement. 
The Essen European Council stressed the intention of the Council to pay particular 
attention in the future to the competitiveness of the European economy. In this 
connection the Commission has established a high-level group to deal with 
competitiveness and to submit appropriate reports on these matters2. This the 
Commission duly followed through on with the formation of the Competitiveness 
Advisory Group at the beginning of 1995. The high-level Legislative Administrative 
Simplification Group ("Deregulation Group") has begun its work. It has stressed the 
need to monitor Community and national law for over-regulation and it requested the 
"Deregulation Group" to submit a report by June 1995. 
Initiatives in the area of the Trans-European networks in the transport, energy and 
environmental spheres have also been receiving a lot of attention. The Group of 
Personal Representatives of Heads of State or Government (the Christophersen group) 
submitted their report to the December 1994 European Council. It confirmed that the 
eleven priority projects decided upon at the Corfu European Council in June 1994 and 
the three new projects concerning the Nordic Member States and Ireland had already 
been started or were in a position to commence shortly. 
In relation to the establishment of the information society, this has been the object of 
an Action Plan adopted by the Commission in July 1994, which encompassed all 
See also "An Industrial Competitiveness Policy for the European Union", Communication from the Commission to 
the Council, COM(94) 319 final, September 14, 1994 and two companion documents: "Report on the 
Implementation of the Council Resolutions and Conclusions on Industrial Policy", SEC(95) 437 final, March 22, 
1995 and "Action Programme and Timetable for Implementation of the Action Announced in the Communication on 
an Industrial Competitiveness Policy for the European Union", COM(95) 87 final, March 30, 1995. 
-29-
aspects addressed in the report of the Bangemann group. In its November 1994 
meeting this Council discussed the Commission's liberalisation timetable. The 
December European Council emphasised that the Commission's Action Plan and the 
conclusions of the Ministers for Industry and Telecommunications had set the agenda 
for the development of an information society. With regard to developments in 1995, 
as a follow-up to the G-7 ministerial meeting of February 1995, the Group of 
Commissioners on the Information Society was established 
Raising the productivity of the Community's economy using these initiatives has the 
potential to contribute to strengthening employment creation. There is no necessary 
contradiction between productivity growth and employment creation. 
However three conditions must be met to ensure that the relative price mechanism 
makes possible a redistribution of productivity gains between sectors, enabling sectors 
with low productivity growth to create new jobs and to maintain similar wages for 
similar work: 
relative prices must continue to change without artificial rigidities, and the 
increased competition and flexibility on all markets should help this; 
sectoral changes need to be socially acceptable, with market mechanisms being 
complemented by forward looking active policies and social dialogue; 
the overall macroeconomic rate of growth must be strong enough to allow for a 
positive balance between job creation and job destruction across sectors. 
4.3 Employment and labour market policies 
The economic recovery, if it progresses as predicted, could absorb by 1997 the cyclical 
component of unemployment. This component is estimated at about 3 million 
unemployed or only 2 percentage points of the present eleven per cent rate of 
unemployment in the Community. To absorb 3 million unemployed is indeed a first 
important step and an essential one towards the achievement of the White Paper 
objectives. Nevertheless, in order to reduce, in a significant and progressive manner, 
the remaining 9 per cent of unemployment, it is necessary not only to achieve a strong 
and sustainable medium-term growth process, brought about by investment in order to 
create the necessary working posts, but it is also necessary to implement more active 
and more efficient labour market policies which may need to bring about significant 
changes in the areas of educational systems, labour law, work contracts, wage 
settlement arrangements and the social security systems. 
30 
To this end, the Essen European Council, identified the following five priorities: 
1) Improving the employment opportunities for the labour force by promoting 
investment in vocational training, 
2) Increasing the employment intesiveness of growth, 
3) Reducing non-wage labour costs, 
4) Improving the effectiveness of labour market policies, 
5) Improving measures to help groups which are particularly hard hit by 
unemployment. 
Active and more efficient labour market policies contribute to the goal of increasing 
employment through three main channels: 
i) reinforce the growth potential itself by an improvement in the quality of human 
capital; 
ii) make growth more employment-creating without, however, negatively affecting 
the growth process itself; and finally 
iii) facilitate, to the extent that the new jobs will become available, the absorption of 
those unemployed who are still easily employable as well as to help the long-term 
unemployed and particular disadvantaged groups who cannot easily occupy the 
available working posts and who risk being affected by social exclusion. 
Labour market policies in the above three areas constitute not only an indispensable 
complement to macroeconomic policies and to structural policies in the area of 
competitiveness but they also contribute to maintaining and reinforcing cohesion and 
social consensus inside the Union in the long and difficult process of absorbing 
unemployment. 
i) As regards the improvement of the quality of human capital, it is a matter of 
strengthening the systems of professional training, in particular that of the young, 
and to promote continuous training of the workforce in order to prepare and 
adapt the latter to social and technological change in a world of free trade and in a 
process of strong structural adjustment. These policies will improve the flexibility 
of the labourforce, individual opportunities, and the comparative advantage of the 
European economy in comparison with other geographical regions of the world 
[Essen priority n° 1 ]. 
31 
These policies will increase the growth potential of the European economy and, 
like the policies for competitiveness, will generate their full benefit from the point 
of view of both their costs and their creation of employment, if simultaneously the 
effective rate of economic growth can develop without encountering the obstacles 
of inflation and of capacity constraints. 
ii) The contribution of the medium-term growth process to the reduction of 
unemployment is indispensable, but it must be complemented by a large effort, 
targeted and concrete, to increase the employment content of growth [Essen 
priority n° 2J. Actions in three areas, which must not hold back the growth 
process itself, are necessary in this regard: 
• the examination, by the social partners, of whether a reorganisation, a 
reduction and/or new patterns of working time could lead to increases in the 
employment content of growth without reducing the competitiveness of firms. 
In particular, the de-coupling of the working time of individuals from that of 
the enterprise may open promising opportunities: the existing capital stock -
equipment, premises, etc. - could be better exploited with significant 
productivity gains which may be used to encourage different working patterns 
among the employees. Development of part-time and other atypical forms of 
employment may also help. Progress in this area might also require a 
revision of existing regulations [Essen priority n° 2]. 
• increasing the incentives to employment by reducing non-wage labour costs, 
especially at the lower end of the wage and productivity scale, without 
harming other parts of the labour market; from a macroeconomic point of 
view this must be achieved in ways which do not compromise the reduction 
of budgetary deficits nor the competitiveness of enterprises. Reforms, 
including where appropriate alternative financing sources for social protection 
systems, are therefore required [Essenpriority n° 3J; 
• easing the development of new employment opportunities and activities, e.g. 
those linked to the service society and environmental sustainability [Essen 
priority n° 2]. 
iii) The task of facilitating the absorption without tensions of the unemployed and the 
new entrants to the labour market, when the economy makes available the new 
working posts, concerns firstly the efficiency of labour and manpower offices and 
the promotion of flexibility in the areas of professional and geographical mobility 
32 
[Essen priority n°4J. An important part of the non-cyclical component of 
unemployment could be progressively integrated into working life by reasonable 
efforts in these areas provided that the recovery can be transformed into the 
medium-term growth and employment creation process described by the White 
Paper and aimed at by the present economic policy guidelines. 
Nevertheless, to significantly reduce the hard core of structural unemployment -
which could represent about half of the 9 per cent of non-cyclical unemployment -
different and much greater efforts will be necessary. It is a matter not only of 
strengthening the link between the granting of social allowances and the 
availability of the unemployed to accept work, but especially of reinforcing active 
labour market policies aimed at improving the "employability" of long-term 
unemployed workers by giving access to specific training and of concentrating the 
latter on particularly disadvantaged groups i.e. women, young people and older 
citizens who risk to being affected by social exclusion [Essenpriority n°5]. 
These relatively expensive policies also only achieve their full benefit if labour, 
which in this way is rendered employable, has the opportunity in practice to find a 
job. Nevertheless, these policies must not only be evaluated in terms of their 
immediate economic benefit; taking into account the inevitable and necessary time 
to significantly reduce the hard core of structural unemployment, these policies 
must also act to safeguard the existing human capital of the unemployed in order 
to prevent social exclusion and to maintain social cohesion. 
In order to better organise the implementation of the priorities identified by the Essen 
European Council, the Commission, on 8 March 1995, presented a Communication to 
the Council in which it suggests the implementation, in the context of Article 103 of 
the Treaty, of a surveillance procedure with regard to employment trends and policies. 
• 
• 
Bearing these considerations in mind, the Commission is proposing the present broad 
economic policy guidelines for the Community and the Member States which confirm 
the medium-term framework of those of June 1994, and assert the policy priority of 
reducing unemployment. 

"33 
ISSN 0254-1475 
COM(95) 228 final 
DOCUMENTS 
EN 10 
Catalogue number : CB-CO-95-270-EN-C 
ISBN 92-77-89585-3 
Office for Official Publications of the European Communities 
L-2985 Luxembourg