COMMISSION OF THE EUROPEAN COMMUNITIES 
Brussels, 23.04.1997 
COM(97) 168 final 
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 

Table of contents 
1. Main objectives: growth, employment and convergence 1 
2. Growth and stability-oriented macroeconomic policy mix 2 
3. Price and exchange rate stability 3 
4. Sound and efficient public finances 4 
5. Structural reforms to promote growth and employment 7 
5.1. Better functioning product and services markets 8 
5.2. Fostering labour market reforms and investment in knowledge 8 
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Broad Guidelines of the Econome Policies 
of the Member States and the Community 
1. Main objectives: growth, employment and convergence 
Since the summer of 1996, when the previous Guidelines were adopted, a moderate recovery in 
economic activity has taken hold in the Community. Supply-side fundamentals continue to 
improve whereas demand prospects are brightening. These developments in combination with 
an increasingly well-balanced macroeconomic policy mix and the emerging improvement in 
confidence should allow for a gradual strengthening in output growth to about its trend rate this 
year and to well-above-trend next year. 
ïn the present environment, two fundamental policy concerns should be given prominence, with 
success on both fronts being mutually reinforcing. Firstly, although employment is expected to 
increase moderately in the short run, there is a need to raise the Community's low employment 
rate and to reduce unemployment significantly. Secondly, despite appreciable strides in recent 
years towards the goals of price stability and sustainable public finances, further progress is 
required in achieving and maintaining a high degree of nominal convergence so that a significant 
number of Member States will be in a position to participate in EMU as from 1 January, 1999. 
In the coming quarters, it is of crucial importance ~ also for growth and employment — to 
avoid any doubt about the fulfilment of the Maastricht criteria and the 1999 launch date for the 
single currency so as to reassure European citizens and businesses that the opportunities brought 
by EMU will indeed be seized. Since the pursuit of sounder budgetary positions will bring 
important growth and employment benefits over the medium term, continuing budgetary 
consolidation efforts are in the interest of all Member States. 
With the Single Market and EMU, the Community is becoming one of the most important 
economic entities in the world. Its medium to longer term potential in terms of technological 
progress, labour and wealth creation is considerable. In order to exploit fully this potential for 
raising the standard of living, the Community must progressively achieve a high employment 
rate. Such a performance would also help to safeguard the sustainability of pension schemes, in 
a reformed manner, which form an integral part of the social protection systems in the Member 
States. 
Restoring a sustained, high rate of non-inflationary growth is the most favourable way, both 
from a political and social point of view, of achieving a long-lasting solution to the 
Community's unemployment problem and of making further headway towards sound public 
finances. Furthermore, since structural deficiencies continue to restrain both growth and the 
degree to which growth can be translated into additional employment, most Member States need 
to implement structural reforms. However, policies to improve competitiveness and the 
functioning of product, services and labour markets will bear full fruit when the economy is 
expanding rapidly and is generating a high number of jobs. 
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An employment-friendly growth must be supported by higher investment, both private and 
public. Due to the relatively weak private investment trends since the early 1990s and the 
squeeze on public investment, the current investment rate in the Community is rather low. The 
current investment ratio, if maintained over the medium term, would sustain a rate of growth of 
only a little over 2 per cent per year. It is essential therefore that the currently favourable 
investment conditions, in terms of high profitability and lower interest rates, are fully exploited. 
In addition, the realisation of the transeuropean transport, energy and communication networks 
should be actively pursued, with the Community financial instruments and the EIB playing a key 
role and with a greater involvement of the private sector. Moreover, investment in human 
resources, knowledge and skills should also be stepped up. 
Against this background, the Member States and the Community institutions are urged, in 
conformity with Article 102(a) of the Treaty, to conduct their economic policies with a view to 
making significant progress towards sustainable, non-inflationary growth and a high level of 
employment, which are among the objectives stipulated in Article 2 of the Treaty. To this end, 
they are also called upon to co-ordinate their policies (Articles 3a, 102a and 103) within the 
context of increased integration of the Member States' economies. 
2. Growth and stability-oriented macroeconomic policy mix 
The present Guidelines reaffirm that the achievement of sustained, investment-supported output 
growth and job creation over the medium term without inflationary tensions continues to require 
a common macroeconomic policy strategy which builds further on the following three elements, 
as formulated in the 1996 Guidelines: 
"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 consistent with the price stability objective; at the same time, real 
wage developments should be below the increase in productivity in order to strengthen the 
profitability of employment-creating investment. 
The more the stability task of monetary policy is facilitated by appropriate budgetary measures 
and wage developments, the more monetary conditions, including exchange rates and long-term 
interest rates, will be favourable to growth and employment." 
With regard to medium-term prospects, it is important that policy-makers, the social partners and 
economic agents take fully into account the fact that EMU will imply a genuine regime change, 
fundamentally affecting the way macroeconomic policies and wage trends are set. 
(i) A common monetary policy under the responsibility of an independent European Central 
Bank will have price stability as its primary objective while, without prejudice to this 
objective, supporting the general economic policies in the Community so as to contribute to 
the achievement of the objectives laid down in Article 2 of the Treaty. 
(ii) The Treaty provisions in the field of budgetary policy (Articles 104 to 104c) and the 
Stability and Growth Pact will work in the direction of sound and disciplined budgetary 
policies. Subject to these legal provisions, responsibility for budgetary policies will reside 
with the sovereign national governments which will have to co-ordinate theiF budgetary 
policies in the framework of the Broad Economic Policy Guidelines. 
(iii) As regards wages, which are determined by autonomous social partners according to 
individual countries' practices, stability-oriented monetary and budgetary policies and the 
impossibility of exchange rate movements within the euro area will reinforce both the 
conditions and the incentives for an adequate evolution. These incentives should also be 
strengthened by an intensified social dialogue, where possible and according to prevailing 
traditions, at the national level. Àt the Community level, the Commission, in conformity 
with Article 118B, will continue to develop the social dialogue, notably en macroeconomic 
policy issues, with a view tc building on the common understanding on the economic policy 
strategy !aid down it: the Guidelines. The European social partners' contribution on the 
macioeconomic framework transmitted to the Dublin European Council constitutes an 
important step in the right direction which should be encouraged. 
If all actors involved live up to the new exigencies, the macroeconomic policy mix will continue to 
favour sustained high and employment-creating growth in the Community. The achievement of 
EMU will thus be conducive to 'locking in' the fundamental change in the macroeconomic policy 
mix which has been progressively established in the Community. 
3. Price and exchange rate stability 
Price stability ~ The Community has made considerable headway towards price stability and 
inflation convergence which is an essential requirement both for achieving sustained medium-
term growth and for adopting a single currency. Inflation in the Community on average is 
expected to fall to VA per cent in 1997, the lowest rate since the Community's inception. In the 
EMU perspective, the Community should aim at bringing down its average inflation rate to 2 per 
cent and to target such a level over the medium term. 
In February 1997, nine Member States (Belgium, Denmark, Germany, France, Luxembourg, the 
Netherlands. Austria, Finland and Sweden) had an inflation rate1 of two per cent or less. Having 
already achieved a satisfactory degree of price stability, these countries will need to sustain this 
performance over the medium term. Against the background of a sustained recovery, Ireland 
and the United Kingdom2 will need to maintain a policy aimed at preventing any resurgence of 
underlying inflationary pressures and, where adequate, progressing towards lower inflation. 
In Spain, Italy and Portugal, the average rate of inflation' has edged down to the 3 to 3.5 per cent 
range in February 1997, but in this month the inflation rate on a year earlier reached about 2.5 
per 
As measured by the arithmetic average of the latest twelve monthly harmonised indices (HICP) 
relative to the arithmetic average of the twelve monthly harmonised indices of the previous period. 
Ireland and the United Kingdom have not yet published HICP data in a manner which allows the 
calculation of the measure referred to in footnote Î. However, the Commission's own estimates, on 
the basis of available information, suggest that the inflation performance (HICP) in these two 
countries is in the 2 to 3 per cent range. 
cent. In these three countries, it is essential to persevere with stability-oriented policies with a 
view to achieving an average rate of inflation of 2.5 per cent or less for the year 1997 and to 
ensure that the disinflation gains are preserved, and even improved upon, as the recovery gathers 
strength. 
In Greece, where progress in reducing inflation has been made over recent years, reinforced 
efforts are needed in order to bring inflation down to the official inflation targets of 4.5 per cent 
by the end of 1997 and to below 3 per cent by the end of 1998. 
Exchange rate stability — In conformity with Article 109m, all Member States must continue to 
treat their exchange-rate policies as a matter of common interest. Sounder and more credible 
economic policies and favourable developments relative to the US dollar have contributed to a 
more appropriate alignment of exchange rates within the Community. Financial market 
optimism on the prospects for a relatively wide participation in EMU from the outset has also 
helped in this regard. Finland and Italy entered the ERM in the autumn of last year and the vast 
majority of ERM currencies are now within or close to the former narrow bands of the 
mechanism. In this context, as well as with a view to participation in EMU, it is imperative that 
Member States maintain ~ and where appropriate intensify ~ their commitments to stability-
oriented macroeconomic policies. For countries which are not currently participating in the 
ERM, these policies would also contribute to creating the conditions for making such 
participation possible. Sound macroeconomic policy management creates the conditions for 
stable exchange rates and low long-term interest rates within the Community and contributes to 
a stable international monetary system. 
4. Sound and efficient public finances 
In the Community as a whole, the actual budget deficit declined from 5 per cent of GDP in 1995 
to 4.3 per cent of GDP in 1996. Slow economic growth in 1996 made efforts at budgetary 
consolidation more difficult and masked the underlying improvement which was achieved. On 
the basis of the budget measures decided upon until mid-April 1997, the net borrowing of 
general government in the Community as a whole is likely to fall to just below 3 per cent of 
GDP in 1997, declining further to 2.5 per cent of GDP in 1998. 
In their budgets for 1997, a large majority of Member States have taken significant measures to 
reduce their budget deficits to 3 per cent of GDP or less. It is of paramount importance that 
Member States rigorously implement these budgets and take immediate corrective action in the 
event of slippage from budgetary targets. As regards the budgets for 1998, an enactment of 
additional deficit-reducing measures is required in most Member States. This would serve to 
provide die needed confidence about the sustainability of the budgetary adjustment, especially in 
those countries where the budget deficit is not expected to be clearly below 3 per cent of GDP in 
1997 or where the 1997 budget contained temporary measures. This resolve is needed not only 
to comply with the Maastricht budgetary criteria but also to make further progress towards the 
attainment, over the medium-term, of the objective of a budgetary position close to balance or in 
surplus in normal circumstances as stipulated in previous Guidelines and the Stability and 
Growth Pact, thereby safeguarding a growth and stability-oriented macroeconomic policy mix. 
It is necessary that budgetary adjustment programmes are credible and socially balanced. To be 
credible, it is important that programmes are transparent and sustainable. Transparency requires 
that commonly agreed accounting rules and economic principles are strictly applied. It also 
requires that, in the presentation of their budgets, Member States clearly characterise the nature 
of the announced deficit-reducing measures, indicating which «measures are one-off. 
Furthermore, annual budgets and medium-term budgetary projections should clearly indicate the 
underlying economic assumptions. To be sustainable, it is essential that deficit-reducing 
measures are of a structural kind. Reliance on one-off measures and actions which have to be 
reversed in subsequent years have in some cases been instrumental in heightening the pace of 
budgetary consolidation. They do not, however, reduce the need for fundamental budgetary 
adjustments and should therefore be complemented by lasting budgetary improvements. 
Realising the economic rewards of budgetary consolidation crucial!}' hinges upon the quality of 
the measures taken. ïn this respect, the present Guidelines reaffirm the general principles which 
have been stipulated in previous Guidelines, Firstly, prominence should be given to restraining 
expenditure as opposed to further increases in the overall tax burden. In this respect, action 
needs to focus on structural measures to better control spending on public consumption, public 
pension provisions, health care, unemployment compensation and subsidies. If tax increases are 
unavoidable, care should be taken to minimise the adverse effects on growth and employment 
and to avoid a revival of inflationary pressures. Secondly, action to permanently reduce the 
share in GDP of public expenditure should be accompanied, to the extent possible and without 
threatening the necessary reduction in budget deficits, by a shift in government spending 
priorities towards productive activities such as investment in infrastructure, human capital and 
active labour market initiatives. Thirdly, the desired reduction in the tax burden in most 
Member States, especially on labour, should be enacted to the extent that tight expenditure 
control makes tax reductions consistent with the achievement and maintenance of sound budget 
balances. The Community policies in the area of taxation should be consistent with these 
guidelines. 
Given the interrelationship between taxation policy on the one hand and the Single Market, 
EMU and the fight against unemployment on the other, Member States stand to gain from 
increased co-operation in tax measures. Harmful competition between the tax regimes of the 
different Member States should be avoided. In this respect, Member States are called upon to 
examine the possibility of establishing a code of conduct. 
As regards individual Member States, five ~ Denmark, Ireland, Luxembourg, the Netherlands 
and Finland ~ already respected the 3 per cent reference value in 1996. In Denmark where the 
budget balance is expected to turn slightly positive this year, it is important to consolidate this 
performance over the business cycle, to keep the public debt-to-GDP ratio on a steady downward 
trajectory and to reduce the growth in public expenditure, including in social transfers. Ireland 
should take advantage of the current strong growth phase to intensify efforts to restrain public 
expenditure, thereby making final progress towards a balanced budgetary position. A 
continuation of the restrained expenditure policy is also essential in the Netherlands and Finland, 
with a particular focus needed on social security transfers, offering the opportunity to lower 
further non-wage labour costs or other employment-impeding taxes. 
In Belgium, the budget deficit is expected to reach 3 per cent of GDP or less in 1997. On the 
basis of current policies, the deficit is likely to fall further in 1998. To put the public finances on 
a sustainable footing, the Belgian government should strictly adhere to its new convergence 
programme. Particular attention should be given to ensuring sound social security accounts, 
with key elements being the introduction of effective mechanisms to better control health care 
spending and the continued pursuit of pension reforms. 
In Germany, the budget deficit is expected to reach 3 per cent of GDP or less in 1997. On the 
basis of current policies, the deficit is likely to fall slightly further in 1998. The German 
government has made a firm commitment to take all the necessary measures to respect the 3 per 
cent reference value in 1997 and should take the necessary action to arrest the upward trend of 
the public debt-to-GDP ratio already in the current year. The pace of budgetary consolidation 
should be maintained in 1998 in line with the new convergence programme. Continued 
budgetary consolidation should focus on a permanent reduction in the share of government 
spending in the economy which would facilitate the introduction of structural reforms in the tax 
and social security systems without threatening a strict adherence to the budgetary objectives of 
the new convergence programme. 
In Spain, the budget deficit is expected to reach 3 per cent of GDP or less in 1997. On the basis 
of current policies, the deficit is likely to fall slightly further in 1998. In their 1998 budget, the 
Spanish authorities, which are fully committed to reaching the deficit target of 3 per cent of GDP 
in 1997, should pursue further budgetary consolidation as envisaged in the new convergence 
programme. It is important to continue the implementation of structural deficit-reducing 
measures, particularly to curb current expenditure and improve the efficiency in budgetary 
management. 
In France, the budget deficit is expected to reach 3 per cent of GDP or less in 1997. On the basis 
of current policies, the deficit might not fall further in 1998, reflecting in part the expiration of 
one-off measures. It is essential that budgetary consolidation is sustained over the medium term 
by implementing its recently agreed convergence programme without fail. In particular, it is 
necessary to contain health spending and to balance the social security accounts and to ensure 
that the envisaged tax reductions, in themselves supportive to growth and employment, will not 
slow down the pace of deficit reduction. 
In Italy, the budget deficit may reach 3 per cent of GDP in 1997, if the measures already taken in 
the 1997 budget and in March of this year have a full effectiveness, and, if necessary, further 
measures are taken by the Italian government. On the basis of current policies, the deficit might 
increase again in 1998, reflecting the expiration of one-off measures. A further reduction should 
be envisaged in the 1998 budget to provide assurance regarding the continuity of adjustment and 
to place public finances on a sound medium-term footing. Measures taken in 1997 which had a 
temporary nature should be replaced by structural measures with a permanent impact on the 
budget. The conditions for a durable consolidation of the Italian budget should be specified in 
the convergence programme which the Italian authorities are invited to present as soon as 
possible. 
In Austrias the budget deficit is expected to reach 3 per cent of GDP or less in 1997. On the 
basis of current policies, the deficit is likely to fall slightly further in 1998. The Austrian 
government is urged to take all the necessary measures to meet its budget deficit target of 3 per 
cent of GDP in 1997 and to secure the sustainability of its budgetary consolidation efforts in 
subsequent years through a programme of ongoing and, where necessary, reinforced structural 
adjustments. 
In Portugal, the budget deficit is expected to reach 3 per cent of GDP or less in 1997. On the 
basis of current policies, the deficit is likely to fall slightly further in 1998. The new strategic 
agreement between the government and the social partners should be strictly complied with in 
order to achieve significant progress in reforming public administration and the social security 
and taxation systems. 
In Sweden, the budget deficit is expected to reach 3 per cent of GDP or less in 1997. On the 
basis of current policies, the deficit is likely to fall considerably further in 1998. Budgetary 
adjustment should concentrate on curbing the growth of expenditure, especially social transfers, 
and on reducing, as far as possible, taxation on households and firms so as to improve incentives 
to economic activity and work. 
In the United Kingdom, the budget deficit is expected to reach 3 per cent of GDP or less in 1997. 
On the basis of current policies, the deficit is likely to fall considerably further in 1998. It is 
recommended to adhere firmly to the path of deficit reduction envisaged in the budget for 
1997/98. 
As regards Greece, where announced measures are expected to lead to a further reduction in the 
government budget deficit in 1997, sustained efforts on a wide range of fronts are required in 
order to meet the targets of the convergence programme, including reinforced efforts to widen 
the tax base, to increase the efficiency of the tax administration and of the tax collection system, 
to curb government spending and to pursue and extend privatisation plans. 
In some of the above Member States, further progress in reducing the government deficit ratio in 
1998 is likely to be limited or indeed absent, in part reflecting the expiration of one-off 
measures. Consequently, in their budgets for next year, these Member States should take this 
fact into account. 
5. Structural reforms to promote growth and employment 
In order to safeguard and promote the EC's competitiveness and employment in a world of free 
trade and constant technological change, it is essential that Member States and the Community, 
in line wkh the Broad Guidelines for Economic Policies, intensify their efforts to modernise 
their markets for goods, services and labour. In order to augment the ability of the Member 
States' economies to adapt to changing conditions and to enhance the growth potential, there is 
also a need to promote innovation, research and development and to improve education and 
training systems. 
To increase the efficiency of environmental policies, they should rely on more market-based 
instruments, including fiscal ones, both at the national level and — if EU-wide action appears 
necessary — at the level of ti^e Community. 
5.1. Better functioning product and services markets 
As part of the strategy to foster growth and employment, while maintaining low inflation, it is 
essential to improve the operation of product and service markets, to stimulate competition and to 
ensure efficient price setting. This was the rationale for the Single Market Programme (SMP), the 
importance of which has clearly been highlighted in the Commission's recent evaluation3. The 
conclusion of that evaluation was that on the one hand Member States' product markets are now 
generally highly integrated; on the other hand, the markets for services are less integrated, although 
the situation has improved significantly since the start of the SMP. Particular problems clearly 
remain. Services, especially construction, insurance and banking, should become the subject of 
more attention, particularly on the need to fully implement Single Market legislation. 
Furthermore, product markets associated with public procurement continue to escape the full force 
of competition; other product markets, notably pharmaceuticals, continue to be excessively 
regulated by the Member States. Consumers face higher prices as a result. State aids continue to 
distort markets and blunt competition without any sign of improvement. Taxation around the 
Community is continuing to segment markets and to increase price differentiation. Product 
standards, especially the concept of "mutual recognition" is another area where progress has been 
too slow. The business environment for SMEs should be improved. 
Competition in, and the efficiency of, product and service markets will be improved by making the 
Single Market work better, with additional Member State commitment to: (i) implement fully and 
ensure proper enforcement of the existing legislative framework, in particularly in the telecom 
sector; (ii) complete the legal framework in areas such as taxation and company law and the 
liberalisation of the energy markets; (iii) reduce the burden of over-regulation and to revise or 
remove national, market fragmenting measures; and (iv) avoid using state aids to postpone 
essential restructuring. The Commission's Action Plan on the Single Market proposes a number 
of concrete actions that should be in place before 1 January 1999 to redynamise the Single Market. 
5.2. Fostering labour market reforms and investment in knowledge 
The positive experience of a number of Member States permits some important policy conclusions 
to be drawn both on the content and on the implementation of reforms. Firstly, structural reforms 
need to be comprehensive in scope, as opposed to limited or occasional measures, so as to address 
in a coherent manner the complex issue of incentives in creating and taking up a job. This 
See Commission Communication on "The impact and effectiveness of the Single Market" 
(COM(96)520, October 1996) and "Economic Evaluation of the Internal Market" (European 
Economy, Reports and Studies, No. 4, 1996). 
8 
approach allows policy complementarities to be exploited, thereby increasing the overall 
effectiveness of reforms and, by enhancing their social and political acceptability, reducing the 
likelihood of policy reversal. Secondly, mechanisms to monitor the impact of reforms on the 
labour market and on employment help assess the effectiveness of the reforms and indicate the 
need for possible changes in priorities or implementation. As a result, the multi-annual 
employment programmes need to focus more on the interplay between the Guidelines and 
specific labour market measures whereas the Joint Employment Reports, which monitor their 
application, need to pay particular attention to the identification of good practices arising from 
the Member States policies. 
A wide array of measures aimed at reinforcing labour market efficiency have been adopted in 
recent years at the national level and important reforms are currently under discussion in a 
number of Member States. This process should continue and, where necessary, be intensified. 
In this context priority should usefully be given to actions aimed at increasing the employment-
intensity of growth through the implementation of pragmatic measures which would reconcile 
the attachment of EU citizens to high social standards and the need to open, to a certain degree, 
the relatively compressed wage cost structure in most Member States. These measures include: 
(i) more differentiation in wage agreements according to qualifications and regions in order to 
reflect adequately differences in productivity levels as well as the introduction of temporary 
entry wages for the young, inexperienced or long-term unemployed. This is an important 
task for the social partners; 
(ii) soundly-financed reductions in non-wage labour costs or lower income taxes at the lower 
end of the wage scale; 
(iii) new patterns of work organisation, including more flexible working-time arrangements, 
tailored to the specific needs of firms and workers; greater use of voluntary part-time work; 
and the promotion of local employment initiatives. 
Moreover, measures to increase the employment-intensity of growth should be linked with the 
necessary re-orientation of government spending in favour of inter alia education, vocational 
training and research and development. 
The shift towards active labour market policies should be closely linked to the reform of taxation 
and social protection systems so as to ensure incentives, as well as possibilities, for job-seekers 
to take up a job or to participate in other employment-enhancing activities. In addition, these 
reforms need to be supported by a stronger employment orientation in other policies. In 
particular, measures undertaken with the assistance of the Community's structural funds should 
also fit into the global employment strategy and the multi-annual employment programmes of 
the Member States. 

ISSN 0254-1475 
COM(97) 168 final 
DOCUMENTS 
EN 10 01 
Catalogue number : CB-CO-97-165-EN-C 
ISBN 92-78-18925-1 
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