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COM(81)324
Vol.1981/0103

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COMMISSION OFTHEEUROPEAN COMMUNITIES
COM(81)324 final
Brussels,18June1981
THEECONOMIC ANDSOCIALSITUATION
INTHECOMMUNITY
(Commission communication totheEuropeanCouncil/,
Luxembourg -29and30June1981)
1
/**\
K•• .7
V:^'
X /
COM(8l)324final

1.-
Short-term developments andprospects -
SincethelastmeetingoftheEuropeanCounciltherehavebeensome
signsofimprovement intheEuropeanbusinesscycleandaneasingofworld
oilmarketpressures;butalsoworryingmovementsininterestandexchange
ratesacrosstheAtlanticandmuchtoolimitedprogressinfundamental aspects
ofeconomicpolicyandperformance inEurope.
ProductionintheCommunityprobablyreacheditslow-pointintheearly
monthsofthisyear.Theimmediateoutlookissubjecttoconflicting in­
fluences.Thebusiness "cycleisshowingsignsofmovingintotherecovery
stage,withsomastrengthening ofexportandprivateconsumption demand.
Communitybusinesssurveysshowthis.Butthebalanceofthechangingtrend
asbetweenahalttotherecession andabeginningoftheupturnisstilldif­
ficulttodiscern.For1981asawhaletheCommission expectsafallofabout
1/2%inGOPvolume,withanimproving secondhalfoftheyearleadingto
positivegrowthin1982perhapsslightlyinexcessof2%.Thiswouldbe
barelysufficienttostoptheriseinunemployment inthecourseofnextyear.
Forthetimebeingunemployment isstillrisingsharplyandhasreached
7.7%ofthe.labourforce.
Anegativeinfluencehasbeenthehigherinterestrates,andthe
generalinternational monetaryinstability .Sincethebeginningofthis
yearshort-terminterestrateshavebeenforceduponaverageintheCommu­
nitybyover3points(to15%for3monthinter-bank rates),restoringappro­
ximateparitywithUnitedStatesrates.Nevertheless evengreatermovements
havebeenseeninexchangerates,withtheECUnowhavingdepreciated 21%
againstthedollarand24%againsttheYenintwelvemonths.
Intimethisdepreciation shouldleadtosubstantial Europeangains
yinworldexportmarkets.MoreovertheCommunity'slargebalanceofpayments
currentaccbuntdeficit(nearly40S5billionin1981,comparedtoamodest
surplusintheUnitedStates,and.amodestdeficitinJapan)leaves
nodoubtabouttheneedinEuropeforaisubstantial adjustments Some
/
progressin.reducingthisdeficitislikelyin1982,butamulti-year
strategyadjustment ininvestment andworldtradingperformance isbasicall )-
necessary.

2.-
Thedepreciation oftheECUmeansthatEuropeiscurrentlyexperien­
cingawaveofimportpriceincreasesas.severeasLastyearwhenoilprices
werethemaincause.Thisisseriouslyretardingprogressinreducing
inflation.Theaverageconsumerpriceriseisnowexpectedtobe111/2%
in1981(up1pointsincetheforecastsbeforethelastEuropeanCouncil
meeting,withthedivergencebetweencountriesnowrangingfrom5,8%to24%)
andcouldwellbestillashighas101/2%in1982.Asinthecaseof
theoilpricerise,itisvitaltoensurethatthisunavoidabledeterioration
inthetermsoftradedoesnothaverepercussions whichleadtoan
increaseindomesticinflation.Thisreinforcestheimportanceof
certainMemberStatestoadjustextremelycomprehensive andfast-acting
incomeindexationmechanisms.AsstatedattheEuropeanCouncil'slast
meeting,thisisincontradiction withthemainaimofcreatingazoneof
monetarystabilityinEurope.'
Theeffectsoftherecessiononpublicbudgetsisseeninanupward
.revisionoftheexpecteddeficitofthegeneralgovernmentaccountsfor
1981from4.0to4.3%ofGDPfortheCommunityasawhole(comparedto
3.6%in19805.Forsomecountries,astabilisingeffectfromthebudget
shouldbeaccepted,andindeedwelcomed,forexampleinGermanywherethere
arealreadysignsthatstrongerexportswillsoontakeoverasthemain
supporttoeconomicactivity.InFrance,whichaloneamongCommunitycountries
actuallyexperienced asmallbudgetsurplusin1980,somelimiteddeficit
in1981shouldnotencounterfinancingproblemsifkeptwithinprudent
proportions .Inseveralothercountries,however,measurestorestrict
currentpublicexpenditure anddeficitsareoverdue.Eachyear'sdelay
increasesthefutureburdenofadjustment.Double-digit deficitsasa
shareofGDParenotstablepropositions,yetthisistheorderof
magnitudeoftheBelgiandeficitandnearlysoinItaly;Denmark'sdeficit
alsoappearstobeincreasingalarmingly,whilethatofIreland,already
15%ofGDP,hasrecentlybeenincreasedbysubstantialsubsidiestohouse­
holdsforfoodandhousingitems.
■/■β·

Medium-term challenges
TheCouncilwillshortlyhavetoadoptamedium-term economicpolicy
\
programmefortheperiod1981-1985.Preparatory workbyexpertshasbeen
completed (inthe,EconomicPolicyCommittee),andonthisbasistheCommission
plans"tosubmitadraftprogrammetotheCouncilbeforethesummerrecess.
Projections forafive-yearperiodarenotoriouslydifficulttomake,
andthosedonebytheCommissionfor1981-1985onthebasisofpresent
policiesandhistoricaleconomicbehaviour-remainopentosurprisesfor
betterorforworse.'Subjecttotheseimportantreserves,andassuminga
moderateeconomicrecoveryfromnowto1982,theprojections suggestanannual
averagerateofgrowthintheCommunityasawholeof21/2%inthefouryears
1982to1985<1.9%forthefiveyears1981-1985),whichcompareswitharound
2.2%fortheyears1974to1980,andatrendof41/2%intheprecedingdecade
Assuminga5%grdwthinworldtradethepresentlargebalanceofpayments
currentaccountdeficitcouldwellbereducedverysubstantially by1985
//evenwithsomerenewed,butgradual/increaseintherealpriceofoil.Progres
inreducingpublicsector ,deficitsseemslikelytobe*moremodest;therate
ofinflationmightonaveragedeceleratetoabout71/2%comparedtothe~
9present11%.Themodestrateofrealgrowthmeansthatthereislikelytobe
approximatestabilityinthetotalemploymentlevel.Combinedwiththeexcep­
tionallyfastdemographic expansionofthelabourforce<nearly1%peryear
forthewholequinquennium),unemployment isquitelikely-onthebasisof
spontaneoustrends-tocontinuetorisestillfromthepresentaveragelevel
of7.7%.
Ofcoursethesetrendsarenotimmutable.Policycan,andinseveral
respectsshould,change.Economicbehaviourcanchange,andmustbeencouraged
intherightdirection.Theuncertainties arenotallnegativerisks.For
example,wemaymanagetoachievefasterprogressinenergyadjustmentthan
expected,andwemayunderratethecapacityoftheeconomymoregenerally
*toadjustforthebetteroncegiventherightsignalssteadilyoveraperiod
ofyears.

4.
But the fundamental message isthat the Community cannot hope that
anew cyclical recovery -itself fragile anduncertain -will lead the
economy back automat icallyonto asatisfactory trajectory assuring asub­
stantial and durable improvement inemployment prospects .Itisnot a
quest ionofwait ingwith alittle more patience fortrends toimprove .The
European economy needs still toembark ondeep and lasting changes inpublic
policy and inthe economic performance ofthe social partners and households
before wecanhope for amuch better economic future ;i.e. toassure the develop­
ment ofthe competitive capacity ofour economies and their aptitude torespond
totheopportunities ofgrowing markets .Investment and savings must beincreased .
Consumption ,employment costs and current public expenditure must bemoderated .
Investment andemployment inenergy production and saving inparticular must
beamassive priority asalso the development ofindustries based onnew
technologies .Present investment trends inthe Community are not yet onapar
with that seen inthe United States and Japan .The Community can and should
provide afinancial boost tothis priority (inthis connection proposals for
arenovation ofthe New Community Instrument for investment financing are before ;
the Council awaiting decision ). •
While abundantly debated ],these issues are still not being sufficiently
acted upon inmany Member States .Ifthis state' ofaffairs persists the risks
are for arelapse ofthe Community into serious financial andmonetary instabi­
lity andthence into great losses .Forthe Community asawhole this could
mean eroding theachievements even ofthe Common Market aswell asofthe
European Monetary System ,and for individual Member States there would bethe
prospects ofthe large economic and social costs that always ultimately result
from excessively delayed economic adjustment .Alonger period ofdelayed ad­
justment and slow growth would also endanger the social andpolitical ,balance
inour countries andundermine the degree ofsocial consensus sofarachieved .
■Current developments demonstrate thenecessity for astable framework
forinternational economic relations .The Community should therefore intensify
itspolicy ofcooperation with third countries ,especially establishing
increased monetary 3nd financial cooperation between industrialised countries ,
also with aview toending theeconomic situation ofdeveloping countries .
»*/BG»

S1- sr'd.Conclusions
TheCommission suggests totheEuropean Council thefollowing assessment
andpolicy orientations :
(i) Itmaybethat therecession hasnowpassed itslowpoint inEurope ,
andthat thechances foramoderate recovery arefairly good .However ,
great risks surround this uncertain andfragile improvement .With the
short-term easing oftheoilmarket ,themain risks atpresent liein
themanagement ofeconomic policy within theCommunity andinternationally .
TheSocial Partners also have animportant r81e .
(ii)Within theCommunity ,particular risks follow from thefailure sofar
ofseveral Member States toprogress with urgently required public
finance and income stabilisation measures .These failures weaken the
cohesion oftheEuropean Monetary System .TheCommission recommends
tothese countries accelerated programmes ofeconomic adjustment .On
theother hand ,Germany ,where astrong export recovery seems now assured ,
should notunduly precipitate thedesirable medium–term reduction ofits
public deficits ".Ingeneral ,allMember States must aim atbalance in
theuseofmonetary andbudgetary policies ,anddesist from descriminatory
measures ineither domain that threaten thebasic ,economic principles of
theCommunity ;theprospects forexport-led recovery canonly bebased
onkeeping open markets for trade . ■»' . ■ _
(iii)Thelarge depreciation oftheECUagainst thedollar andyenover the
past months means that theCommunity have anewopportunity toimprove
its share inworld markets ,andincrease investment andemployment .
But theinflationary impact ofthedepreciation must becontained ,said
this isafurther reason whyadjustments must urgently bemade inindex­
ation practices insome Member States ,andexpectations forreal income
gains bestill lowered more generally forthetime being .
(iv)Internationally ,moreover ,thevolatility ofinterest andexchange rates
isofmajor concern ;indeed itrepresents aserious threat toEurope Js
incipient economic recovery ,notably because ofthegreat fluctuations
incosts andinthecontinuing ■uncertainties that theenterprise sector
hastoface .TheCommunity should pursue these issues indepth indis­
cussions with theother major monetary powers .TheCommunity ,theUnited
States andJapan basically share thesame monetary policy objectives and
there ismuch tobedone ,including intheCommunity (asmentioned with
regard tobudgets andincomes )torelieve thestrain onmonetary policies .

However theUnited States should also "bear inmind the significant
international consequences ofdifferent choices that areopen toit
intheframing andexecution ofitsbudgetary andmonetary policies .
Themain policy stance ofthemajor industrial countries does affect
thefunctioning oftheworld economy andshould ,therefore ,bedis­
cussed intheforthcoming international meetings .
Themedium–term outlook reinforces theneed for theaccentuation of
adjustment policies inmany Member States ,andpersistance throughout
theCommunity inefforts topromote investment inenergy saving and
production andinnewindustrial capacity ,andtomoderate labour costs
(including both incomes andsocial security levies ). -
The Joint Council ofMinisters ofEmployment andSocial Affairs and of
Financial Affairs ,which washeld on11June 1981 ,discussed theunem­
ployment situation andthetype ofstrategy andactions which needed to
beadopted inorder toensure afundamental improvement .-Itwasgenerally
agreed that unemployment andinflation were problems which should betackled
jointly andthat animprovement intheoverall economic situation ,and
hence inemployment ,could beassisted through reinforced action at
Community level .TheCommission accepted tofollow upcertain policy
issues ,inparticular :thereview ofmethods forcombating inflation
andencouraging economic growth ;-thedevelopment ofinvestment andnew
areas ofemployment growth ;analysis ofpublic expenditure andthe
financing ofBocial security ;thepromotion offlexibility inworking
time ;and .thedevelopment ofanintegrated framework ofeducation ,
training andwork opportunities foryoung people .Itwasforeseen to
follow upthese questions inafurther Joint Council .

Table 1:Main Economie Aqgregates ,1979-81
1979 1980 1981 1979 1980 1981
GDPvolume ,%change ' Private consumption deflator ,Xchange
Β 2,4 1,1 -0,6 3,5 6,3 7,2
DK 3,5 -0,8 0,1 9,5 11,0 10,0
D 4,6 1,9 -0,6 3,9 5,4 5,8
GR 3,8 1,7 1,5 17,7 23,7 23,3
Γ 3,2 1,8 0,5 10,5 13,5 13,0
IRL 1,9 0,9 1,9 12,2 18,2 17,5
I 5,0 4,0 -0,2 14,9 20,3 21,0
L 3,6 0,4 -3,1 5,8 6,3 7,5
NL 2,2 0,9 -0,6 4,6 6,9 7,3
UK 1,3 -1,4 -2,2 12,2 15,5 11,2 -
EC 3,5 1,4 -0,4 8,9 11,7 11,5
Unemployment rate ,%of
civilian labour forceCurrent account ofbalance
XGDPofpayments
Β . 8,6 9,3 '11,0 "2,9 -5,7 -7,3
OK 5,3 6,2 8,2 -4,6 "3,8 -3,8
0 . 3,4 3,4 4,6 -0,7 -1,7 "1,9
GRC1) (2,2 ) (2,9 ) ' (3,2 ) -2,9 "2,4 -2,6
F 6,1 6,5 7,7 +0,1 -1,4 -1,6
IRL 7,9 ^ 8,2 9,7 -10,1 -8,6 -14,2
I 7,6 8,1 8,4 +1,6 -2,5 "2,3
L 0,7– "0,7 1,1 +28,7-+22,8 +20,8
NL 4,2 '5,0 7,2 -1,4 -1,5 +0,7
UK 5,4 6,9 10,5 -0,9 +1,2 +0,6
EC 5,5 6,1 7,7--0,5 -1,4 -1,7
General
(+)orgovernment net
borrowing (-),lending
%GDPMoney supply ,%change
end ofyear
Β -7,2 -9,3 -11,0 (M2H) 6,0 2,8 3,9
DK -3,1 -5,4 -8,6 (M2) 9,9 10,9 8,1
D -3,0 -3,5 -4,0 '(M3) 6,0 ' 6,2 5,4
GR •
••
••
• - (M3) 18,4 25,2 22,4
F -0,8 0,4 -1,6 (M2) 14,4 9,7 12,5
IRL -, -11,9 -13,2 -15,2 (M3) 19,0 16,9 12,2
I -9,4 -7,8 "8,5 (M2) 20,3 12,0 11,0
L +0,1 --1,4 "2,5 :•
••
t
NL--2,0 -2,8 -3,3 .(M2) 7,6 3,6 6,2
UK-3,3 -3,7 -2,3 (l£M3 ) 12,7 18,6 8,5
EC -3,6 -3,6 _ -4,3 11,9 10,2 8,8
(1)Notcomparable with other countries
Source ;Commission services ,based oninformation available toearly June 1981