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COMMISSION OF THE EUROPEAN COMMUNITIES
C0M(85) 88 fin a l
Brussels, 19 March 1985
T H E  E C O N O M IC  A N D  SO C IAL SITUATION 
IN T H E  C O M M U N IT Y
(Working paper of the Commission to the European Council 
29 and 30 March 1985)
C O M  (85) 88 fin al

fg  f-
Brussels,, 1 9  March 1985
The economic and social situation In the Community 
Working paper presented to the European Council
1. Introduction
At its  Last meeting in Dublin, the European Council underlined the p rio rity  
given to the problem of unemployment. It considered that the guidelines 
embodied 1 n  the most recent Annual Economic Report should be speedily 
implemented and asked the Council to take appropriate action.
The European Council asked the Council and the Commission "to report back to 
its  meeting 1n March on what measures might be appropriate for the Community 
or m ay already have been in itia te d  to assure the objective of a  progressive 
Increase in the actual and potential growth rate for the Community to the 
benefit of employment".
Such 1s the object of this working paper.
2. Trends and prospects
There is at present no evidence that the European or world economic recovery 
1s fa lte rin g .
2.1 In the Community In fla tio n  rates are fa llin g  and becoming more
convergent. The current balance of payments situation has improved. G D P  is
expected to grow by 2.4% in 1984 and 1985. This figure is s lig h tly  higher 
than that assumed 1 n  the last annuaL economic report.
There has been no radical Improvement in the employment situation, WhiLe 1985 
1s like ly to see a  slight increase in employment over the Community as a  
whole, unemployment is s t i l l  at 8  high level and m ay even be somewhat higher 
in 1985 (11.2%) than in 1984 (10,9%). The labour market situation therefore 
remains highly unsatisfactory. With a  continuation of recent trends, and 
without further measures, it 1s unlikely to becom e any more acceptable over 
the next few years.
2.2 At the world level economic recovery 1 s also continuing. The slowdown in
growth in the United States is currently proceeding relatively smoothly (1984; 
6.8%; forecast for 1985: 3.5%), although budget policy corrections have not
yet been m ade and leading indicators do not provide a clear picture. From  the 
viewpoint of the European economy, the erratic movements and upward trend of 
the dollar exchange rate provide cause for concern in the short term, since 
they could lead to an undesirable rise in European interest rates. The 
dangers inherent in the continuing and increasing budget and balance of 
payments d eficits have in no way diminished. The higher the dollar rises and

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the longer the delay before d e fic its  are cut, the greater could be the 
eventual adjustment problems. This provides serious cause for concern as to 
the growth of the world economy and international trade and as to the 
operation of exchange and capital markets.
3. Recent economic policy developments
Since the Community's economic strategy, as adopted by the Council of 
Ministers in the last annual economic report, is essentially a  medium-term 
strategy, it  is not surprising that there have been no major changes in 
economic policy in recent months. Monetary policy, underpinned by the E M S  
exchange-rate mechanism, continues to aim for s ta b ility , although the 
anticipated rise in dollar interest rates has interrupted the downward trend 
in short term rates in Europe. If the dollar continues to appreciate, there 
m ay be undesirable repercussions for domestic economies in the form of higher 
interest rates, as has already happened in the United Kingdom.
Budgetary policy remains one of consolidation, although in som e countries 
budget d e ficits in 1984 turned out to be somewhat larger than hoped for.
The moderate rise in nominal and real wage costs is Likely to continue in most 
Community countries 1 n  1985.
4. Is there any room for an economic policy that would be more beneficial to 
employment?
The Commission did not propose any adjustment in the economic policy 
guidelines to the Council of Ministers. This does not m ean that it is
satisfied with the results achieved.
The task now  is to implement the economic strategy rapidly, to develop it
further and to emphasize certain features. Further progress must be m ade on
the prices and balance of payments fronts 1 n  a  number of countries. For the 
Community as a  whole, however, employment has f ir s t p rio rity . There is
therefore a  continued need to achieve higher growth than the forecast rate of 
just under 2.5% on a  healthy and sustainable basis, and in particular to bring 
about more employment-intensive growth with a  higher rate of job creation for 
each percentage point of growth.
The conditions for this have improved:
-  the smooth functioning of the E M S  exchange-rate mechanism has led to a  very 
d istin ct improvement in the convergence of policies and in the results 
achieved, notably in terms of in fla tio n  and balances of payments;
“ moderate wage settlements have Improved business p ro fits and strengthened 
the propensity to invest in m any Community countries, even though too m any 
firms s t i l l  hesitate to m ake use of the ir capacity for self-financing 
because of the weakness of demand;
-  the two sides of industry, both employers and unions, seem  more open to 
dialogue. This is at any rate the impression the Commission has gained 
from the dialogue which it has sought to revive with and between them;

-  the awareness has grown am ong those responsible for economic policy that no 
Community country can alone solve the problems of employment and 
employment-intensive growth and at the sam e time safeguard s ta b ility . N o  
M em ber State can secure a  sustainable increase in growth simply by stepping 
up its  exports to other M em ber States, It should be remembered that S O X  of 
M em ber States' foreign trade is carried on between them. This underscores 
the degree of interdependence that exists but also the lim its to any plan 
for underpinning growth in one country by boosting demand In the others. 
Each country must therefore focus more closely on bolstering its  o w n  
domestic dem and? This therefore is a Community-wide problem.
U se must be m ade of the economic and p o litic a l room for manoeuvre created in 
this way.
(1) Implementation of the Community's economic strategy w ill be a ll the 
more effective the broader the consensus on which it  is based.
Hence the importance of the industrial dialogue between the two sides 
of industry and of negotiations at a ll levels <e.g. at company Level, 
at industry level, at national level and at Community level). The 
fields in which progress would seem  possible Include the Introduction 
of new  technologies, the functioning of Labour markets as it  affects 
the distrib utio n  of work, and even macroeconomic matters such as 
reconciling m oves to bring costs under control with moves to underpin 
demand;
(ii>  There is broad agreement between M em ber States' governments on the need 
further to improve supply conditions in the economy. Since the 
policies followed are slow in acting, this m ay hamper their social 
acceptance. O n  the other hand, i f  economic a c tiv ity  were more buoyant, 
1t would be easier to improve suppLy conditions. Steps should be taken 
to add a  dynamic element to the necessary policy mix of budgetary 
consolidation, monetary s ta b ility  and wage cost moderation. This could 
be done by aiming for stronger growth in public and private investment. 
The countries 1n which the process of consolidating public budgets has 
already m ade sufficient headway should m ake fu ll use of the existing 
and future room  for budgetary manoeuvre as a  means of fostering 
investment. This would be a  contribution to economic dynamism and 
positive adjustment that would be not only in the interests of each 
individual country but also in the com m on interest. The Community can 
its e lf pLay a  part in the process. For this purpose, consideration 
could be given to a  further development of Its borrowing and lending 
instruments, especially as part of a  programme of investment in 
transport and telecommunications infrastructures commensurate with a  
large economic area in which internal frontiers have been dismantled. 
This would contribute to attainment of the key objective of creating a  
vast internal market.

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5. To sum  up/ the Commission proposes to the European Council that:
-  it should reaffirm the objective of an appreciable reduction in 
unemployment within a  reasonable period, to be achieved with the help of 
higher and, in p articula r, more employment-intensive growth that does not 
jeopardize monetary s ta b ility ;
- implementation of the Community's economic policy strategy should be helped 
by reactivating the Industrial dialogue at a ll levels; as part of the 
dialogue and, where appropriate, with the Commission's support, employers 
and unions should draw up, in time for the European Council meeting in 
December 1985, proposals on how  they can contribute to attainment of the 
jo in t objectives;
- the M em ber States and the Commission should examine how  each country can 
ensure that control of expenditure and budget d e ficits is more closely 
reconciled with economic dynamism; expenditure that helps to underpin 
a c tiv ity  and to prepare for the future should be Iden tified , together with 
the reductions in taxation that would do most to boost Investment and 
create jobs;
■  the European Council should lend its  support to the Commission's intention 
of examining the extent to which the Community could Its e lf, through its 
borrowing and lending operations, assist and foster this overall strategy.