28. 2. 91 Official Journal of the European Communities No C 53/1 
II 
(Preparatory Acts) 
COMMISSION 
\ 
Proposal for a Council Decision adopting the annual economic report 1990/91 on the economic 
situation in the Community and determining the economic policy orientation for the Community in 
1991 — annual economic report 1990/91 
CC>M(90) 613 final 
(91/C 53/01) 
THE COUNCIL OF THE EUROPEAN COMMUNITY, 
Having regard to the Treaty establishing the European Economic Community, 
Having regard to Council Decision 90/141 /EEC of 12 March 1990 on the attainment of progressive 
convergence of economic policies and performance during stage one of economic and monetary 
union, and in particular Article 4 thereof (*)> 
Having regard to the proposal from the Commission, 
Having regard to the opinion of the European Parliament, 
Having regard to the opinion of the Economic and Social Committee, 
HAS ADOPTED THIS DECISION: 
f Article 1 
The annual economic report 1990/91, annexed to the present Decision, is adopted, and the economic 
policy orientations for the Community put forward in the report are adopted. 
Article 2 
This Decision is addressed to the Member States. 
(') OJ No L 78, 24. 3. 1990, p. 24. 
No C 53/2 Official Journal of the European Communities 28. 2. 91 
ANNUAL ECONOMIC REPORT 1990/91 
THE EUROPEAN COMMUNITY IN THE 1990s: 
TOWARDS ECONOMIC AND MONETARY UNION 
CONTENTS 
Page 
Introduction 3 
I. The short-term outlook clouded 4 
A. Community growth tapers off in 1990 5 
1.- Growth slowing down in most countries 5 
2. But strong German expansion continues 6 
B. An unfavourable international environment 7 
1. Economic consequences of the oil price rise 7 
2. Slow growth in the United States of America and strong but decelerating growth in Japan .. 10 
3. A slow-down in world trade 10 
C. The outlook for 1991 and 1992 - 11 
II. Economic policy tasks during stage one of economic and monetary union 11 
A. Maintain stability and growth climate 12 
1. Avoid an inflation spiral 12 
2. Safeguard the fundamental conditions for sustained and employment-generating growth 14 
B. The development of Community potential 15 
1. Complete the internal market 15 
2. Improve economic and social cohesion 16 
3. Structural adjustment and labour market flexibility 16 
4. The environmental challenge 17 
C. Policies for improved convergence 18 
1. Price and cost convergence 18 
2. Convergence of budgetary policies 20 
3. Convergence of external positions 22 
28. 2. 91 Official Journal of the European Communities No C 53/3 
THE EUROPEAN COMMUNITY IN THE 1990s: 
TOWARDS ECONOMIC AND MONETARY UNION 
INTRODUCTION 
The Community embarked on stage one of economic and 
monetary union on 1 July 1990. The success of stage one will 
be crucial for the creation of EMU. To make stage one a 
success with less favourable short-term prospects for the 
Community economy requires a stronger coordination of 
policies to support sustainable growth and greater nominal 
and real convergence. Given the considerable adjustments 
needed to bring convergence at the best possible level, this 
process must be reinforced already now. 
Facing the 1990s, the Community economy is in an 
ambiguous situation. On the one hand, the world economic 
climate is clearly deteriorating and the United States of 
America and the United Kingdom are even facing a recession. 
The Gulf crisis has added to uncertainties and inflation, and 
growth and investment are decelerating in many countries, 
particularly in those which were not able to control inflation 
sufficiently. World trade is slowing down, and the strongly 
falling dollar reduces the competitivity of European 
Community industry. Although the less favourable growth 
prospects may bring the fall in unemployment temporarily to 
a halt, the Community can, on the other hand, have much 
more confidence in the underlying strength of its economy. In 
spite of the imminent slow-down in growth, the 
medium-term perspectives remain promising. There has been 
significant improvement in fundamental determinants of 
economic growth, and the prospects opened up by the 
expectation of an early completion of the internal market 
have imparted additional dynamism. 
On the competitive world stage, the Community is still 
constrained by the fragmentation of its markets. It is 
precisely in order to secure its economic future that the 
Community has embarked on a programme to create a 
market of continental dimensions. That programme is 
already adding substantially to Community growth 
prospects. Crowning the completed internal market with a 
common currency in the near future will further bolster the 
positive mood of management. Great expectations have been 
created; they must not be frustrated. Member States need to 
speed up the implementation of the proposals contained in 
the White Paper to keep the deadline of 1 January 1993. In 
particular, the narrowing of differentials in indirect taxes 
is important for the successful elimination of border 
controls. 
The second factor adding to medium-term growth prospects 
is the acceleration of the catching-up process in the 
less-favoured countries and regions. Above-average growth 
in those countries and regions, apparent in recent years, 
notably in Spain, Ireland and Portugal, has significantly expanded the growth potential of the Community as a whole. 
In view of the existing gap, the catching-up process must be 
sustained by long term efforts. The countries involved will, 
despite the recent improvement of structural policies, the 
doubling of the Structural Funds and the simultaneous 
strengthening of the financial instruments, remain primarily 
responsible for their own development. To discharge this 
responsibility successfully, they must conduct their economic 
and social policies in a way that will provide the basis for 
strong and sustainable growth of real GDP, without 
inflationary pressure or unsustainable internal and external 
imbalances. 
A vital macroeconomic condition for the success of the 
catching-up process and the internal market programme is 
the consolidation — and subsequent acceleration in a 
non-inflationary manner — of growth performances in the 
more advanced economies. In this respect, a solid consensus 
has emerged in the Community's economic policy: it centres 
on a supply side oriented further revitalization of 
Community growth performance in conditions of price 
stability. This is to be attained by way of stringency in 
monetary conditions, progressive consolidation of public 
finances, increased supply side flexibility, real wage 
moderation and strengthened coordination of policies within 
the context of multilateral surveillance of stage one. 
Finally the recent East-West detente has important 
consequences for the medium-term growth climate. Given 
the intention to reincorporate the State-trading countries into 
the international division of labour, relations with them are 
now at a decisive turning-point. Although in the short run, 
the transformation of the Central and Eastern European 
command economies into market economies will add to the 
disruptive factors implying a short-term deterioration in 
trade prospects, it should not be forgotten that Central and 
Eastern Europe provide in the longer term a potential market 
of more than 400 million consumers, right on the 
Community's doorstep. This increases the Community's 
interest in helping these countries, but it also raises the 
world's need for savings. 
German unification is the most important immediate effect of 
the liberalization of Central and Eastern Europe. It has come 
about very rapidly and is of major direct importance for the 
Community. It will be accompanied by a strengthening of 
Germany's growth performance, shrinking — perhaps even 
eliminating — the current account surplus and transforming 
East Germany into a market economy. This will accentuate 
the scarcity of capital in Europe, requiring a 
Community-wide effort to narrow the Community's savings 
gap. The most straightforward way to achieve this is to 
increase public saving. 
No C 53/4 Official Journal of the European Communities 28. 2. 91 
With the Community economy in better order and the 
fundamentals for growth still in good shape, it is not very 
likely that the underlying growth performance in the 
Community will come to an abrupt stop. Admittedly, there 
are negative factors in the world environment: the 
performance of the US is weak and the latest oil price hike, 
limited though it may be, will further reduce growth in 
activity. The falling US dollar mitigates oil-induced 
inflationary pressures in the Community and provided that 
policies respond to the oil-price hike in a way which prevents 
the initial boost to prices becoming embedded in a wage-price 
spiral, it is also not to be expected that a deceleration 
of world trade going together with a US recession will 
unduly weaken the confidence of the private sector. 
Notwithstanding the slowing-down of the growth 
performance in quite a number of Community countries, the 
underlying health of the Community's economy and the tonic 
provided by German unification probably imply that the 
momentum of the Community growth process will carry 
through in the medium term. The same appears to be the case 
for Japan and the South Pacific Basin, where growth 
prospects remain largely satisfactory. A positive outcome of 
the Uruguay Round is essential for a resumption of world 
trade growth. As the world's largest trading block, the 
Community has a natural interest in its successful 
conclusion. 
At first sight, there might seem to be a fear that the Gulf crisis 
could significantly alter the picture just presented and put 
further progress towards EMU at risk. The two previous oil 
shocks did in fact result in serious damage to convergence 
in the Community. But this time more favourable economic circumstances prevail. In 1973 the price of oil 
quadrupled and in 1979 it trebled. In present conditions, it 
can be hoped, the extent of the price rise will become much 
smaller. Further, oil dependency in the productive sector has 
fallen by around a third since the end of the 1970s, although 
sizeable differences remain among Member countries. The 
increase in the oil bill is particularly important for Portugal, 
Greece and Spain. Furthermore, the general state of our 
economies has greatly improved. Lastly, with stage one, 
procedures for improved policy coordination are in place and 
should be fully used. 
In the somewhat shorter run it will be crucial, in responding 
to the new oil price hike, to avoid the mistakes of the past. 
Then, oil shocks met with very divergent, but in the 
aggregate, insufficiently restrictive policies and attitudes that 
facilitated the efforts to maintain high increases in real wages 
in spite of the oil-induced terms of trade loss. In the last 
instance that resulted in an intensified struggle over the 
distribution of income which was the main reason behind the 
weak Community growth performance and the increasing 
divergence of the 1970s. To avoid a repetition of such 
mistakes, monetary policy will have to maintain and, if 
needed, even reinforce its anti-inflationary stance: no doubt 
must be left as to the authorities' intentions not to 
accommodate inflation. Fiscal policy should remain on a 
path of medium term budget consolidation; there should be 
no attempt to compensate for the unavoidable income loss 
related to the oil shock. Such a policy stance is also important 
for a successful move into stage two of EMU on 1 January 
1994 and, ultimately, for making the attainment of economic 
and monetary union a realistic endeavour. 
I. THE SHORT-TERM OUTLOOK CLOUDED 
After several years of strong expansion with growing levels of investment, rapid employment creation 
and improved convergence, the short-term outlook for the Community economy has become less 
favourable in 1990. This is partly the result of internal factors; their impact, however, has been 
strongly reinforced by external events such as the increase in the price of oil, the depreciation of the 
dollar, and the slow-down in growth in the United States of America and in world trade. 
In 1991 the outlook for the Community is for a further deceleration of growth and employment and an 
acceleration of consumer price inflation. The extent and the duration of the slow-down in growth and 
of the acceleration in inflation will depend very much on the policies pursued. With appropriate 
policies, for which stage one of EMU may provide the necessary disciplinary framework, the 
Community may already in 1992 resume more buoyant growth in a climate of decelerating 
inflation. 
28. 2. 91 Official Journal of the European Communities No C 53/5 
A. Community growth tapers off in 1990 
Already before the Gulf crisis there was some cooling-off in the Community's growth performance. 
Real growth was expected to decline from 3,8 % in 1988 to 3,3 % in 1989 and to 2,9 % in 1990. This 
was notably due to weaker than expected growth in the United Kingdom but also to lower growth in 
France, Italy and Spain. This slow-down was only partly compensated by the stronger German 
expansion resulting from unification and the tax reform (see box on particular treatment of 
Germany), which had a positive spillover effect on the Benelux countries and Denmark. 
TABLE 1 
The EC economy at the turn of the decade 
(annual percentage change) 
1982—1985 1986—1987 1988—1990 1989 1990 1991 (>) 
Real GDP + 1,8 + 2,7 + 3,3 + 3,3 + 2,9 + 2,2 
Employment -0,2 + 1,0 + 1,5 +1,6 + 1,7 + 0,6 
Inflation (2) + 8,1 + 3,6 + 4,6 + 4,9 + 5,1 + 5,3 
Investment: + 0,4 + 4,6 + 6,5 + 6,5 + 4,4 + 2,9 
of which equipment + 3,2 + 5,9 + 8,9 + 8,9 + 5,1 + 3,7 
Real unit labour costs -1,3 -0,6 -0,5 -0,8 + 0,4 -0,2 
(') Forecast. 
(2) Consumption price deflator. 
Overall employment continued to grow at a strong pace, but inflation accelerated throughout the 
Community. This reflected rapidly rising per capita wages, which are expected to rise by 7,5 % in 
nominal terms and more than 2 % in real terms, one of the highest rates of growth since the late 1970s, 
ending the continuous improvement of profitability since 1981. In the second half of the year inflation 
was given a new boost by the oil price rise. 
1. Growth slowing down in most countries 
The slowing down in the larger Community countries (with the exception of Germany) was 
particularly due to exports and gross fixed capital formation, the former reflecting less buoyant 
world trade. At the same time, however, wage costs have been rising relatively quickly in these 
countries over the last two years. Buoyant demand has so far allowed rising costs to be reflected in 
higher prices, which may have undermined export performance and investment. The tightening of 
monetary policy and the resulting higher real interest rates have also had their effect on 
investment, particularly on construction activity. 
No C 53/6 Official Journal of the European Communities 28. 2. 91 
STATISTICAL PROBLEMS FOR GERMANY 
All the data presented in this year's Annual Economic Report relate to the Federal Republic of 
Germany prior to German unification. Due to major statistical problems it is not yet possible 
to present reliable data for the new German State. 
These statistical problems are manifold. Basically they have their origin in the fact that the 
former GDR was a centrally planned economy. The statistical concepts used there, as in other 
centrally planned economies, were very different from the standard European National 
Accounts. The concept of net material product (NMP), unlike the familiar gross domestic 
product (GDP), excludes all 'immaterial' services (health, education, financial services). In 
addition, the values indicated in the old GDR statistics carry little economic significance since 
the whole price structure was distorted. Thus, prices bore little relation to the relative scarcity 
of goods. Attributing proper prices to the physical quantities of goods produced is also 
difficult since most goods would not have met the standards of the western market thus 
making it almost impossible to estimate a realistic price. 
Under the above circumstances it is very difficult and not very meaningful to presently 
estimate the level of GDP in East Germany before unification. New statistics comparable to 
those of the other Community economies are now in the process of being built up, but this will 
take time. In the meantime highly tentative estimates for the most important economic 
aggregates are all that can be used and these must be treated with the necessary caution. 
It is expected that the East German economy would go through a drastic adjustment process. 
A strong reduction of industrial production has taken place, mainly in the second half of 
1990, as the production of uncompetitive goods is halted. Gross domestic product in real 
terms could decline substantially. The fall in activity should bottom out in the first half of 
1991, whereafter a recovery is expected. This recovery will continue into 1992 where GDP 
growth for the whole of Germany could be higher than that for the old Federal Republic. If 
one includes such tentative estimates for East Germany in the forecasts for the Community as 
a whole, Community GDP growth would be slightly lower in 1990 and 1991 and slightly 
higher in 1992. 
Unemployment is expected to reach 1,5 million in 1991 and 1992 in East Germany. The 
figure for short-time work could reach 2 million in 1991 and about 1,5 million in 1992. The 
unemployment rate for the whole of Germany (number of unemployed as a percentage of the 
civilian labour force) could amount to 8,7% in 1991 and 8,9% in 1992, excluding 
'short-term' workers. This compares with 6,3 % in 1991 and 6,5 % in 1992 expected in the 
old Federal Republic. Including East Germany in the Community unemployment figures 
increases the Community unemployment rate by around 1,5 percentage points in both 1991 
and 1992. 
Despite the weakening of activity and the appreciation of their currencies, inflation as measured 
by the private consumption deflator accelerated slightly in 1990. In France, Italy and Spain the rise 
was only modest (less than V4 percentage point), but in Italy and Spain the level of inflation 
was still almost double that of France, and prices rose much more in the United Kingdom 
(by 3/4 percentage point). Nevertheless in all those countries there is a need to further improve 
growth fundamentals, contain inflation and particularly to keep wage developments in check now 
that productivity increases are slowing down. 
2. But strong German expansion continues 
German unification is on the other hand leading to a strengthening of Germany's growth 
performance, accompanied by important changes in the budget position and balance of payments. 
In fact, while an expansionary swing of some 5 % of GNP is expected between 1989 and 1991 in 
the budget for Germany as a whole, the balance-of-payments surplus will nearly disappear over 
the same period. The considerable current and capital transfers from Western Germany to the five 
new Lander have partly been converted into new import demands from the latter which have in 
28. 2. 91 Official Journal of the European Communities No C 53/7 
turn resulted in a strong growth of West German exports. This induced boost to Western 
Germany's final demand has resulted in turn in sharply increased imports from the rest of the 
world. 
At the same time, private consumption was boosted by tax cuts representing some 1 % of GDP, 
large scale immigration from the East and the growth of employment. These positive features in 
domestic demand supported a strong increase in investment, in particular in equipment. Capital 
outflows from Germany to the rest of the world are likely to be reduced as a result of the 
disappearance of the surplus on the current account of the balance of payments. This is 
compensated, however, by strongly increased imports from the partner countries, which 
stimulate demand in these countries. 
Notably the Benelux countries have been benefiting from the expansion in Germany, and continue 
to record favourable growth rates supported by a strong investment performance. But also in these 
countries inflation has accelerated, mainly driven by wage developments. 
B. An unfavourable international environment 
Since the middle of 1990 the Community outlook has been overshadowed by developments outside 
the Community: the Gulf crisis and the slow-down of growth in the United States and in world trade. 
Although these developments will not necessarily have a lasting influence on economic conditions in 
the Community, they harm the short-term stability and growth prospects. 
1. Economic consequences of the oil price rise 
The Gulf crisis resulted in an immediate reduction in world supply of oil by about 7 % that has 
been compensated since by increased supplies from other countries. Uncertainties about future 
supplies led to a sharp increase in oil prices from US $ 21 per barrel at the end of July to around 
US $ 35 per barrel at the end of October. Over that period prices have been very volatile, 
exceeding at one stage US $ 40 per barrel. 
Graph 1 
Oil import prices, Community of Twelve 
50 
US Dollar Ecu 
40-
20-30-
10-
0 -I-1 i rili n rH i i i—rH—i i i i—hi—i—i i I i—r-1—tH-
1960 1965 1970 1975 1980 1985 1990 
No C 53/8 Official Journal of the European Communities 28. 2. 91 
For the oil-importing countries the price increases have so far been less important in relative terms 
than in the previous oil price shocks of 1973 and 1979 (graph 1). If the average price for the period 
September-October is taken, the price increase in dollar terms is about 60 % compared to around 
300% in 1973 and 200% in 1979 to 1980. 
TABLE 2 
Effects of a rise in the world price of oil to US $ 25 per barrel 
(deviations from baseline, in percent) 
1990 1991 
Industrial countries: 
— Real GDP -0,2 -0,5 
— Inflation + 0,3 + 0,5 
Community: 
— Real GDP -0,2 -0,5 
— Inflation + 0,3 + 0,5 
Non-oil less-developed countries' real GDP 
— Exporters of primary products -0,4 -0,9 
— Exporters of manufactures -0,2 ' -0,4 
— Fuel exporters + 2,0 + 4,5 
The increase in oil prices involves a significant transfer of revenue from oil importing to oil 
exporting coutries. Higher oil prices will raise domestic prices and lower domestic demand and 
output. With unchanged monetary policies they would also involve a rise in nominal interest rates. 
Moreover, the volatility in oil prices is injecting considerable uncertainty into the economy, which 
may negatively affect expectations. 
Simulations based on a working assumption of an oil price of US $ 25 per barrel on average in 
1991, suggest the following effects (table 2): the growth rate of real GDP would be 0,5 percentage 
point lower in 1991 in the industrial countries and in the Community than the baseline forecast, 
which assumed an oil price of US $ 17,8 per barrel and a real growth of around 3%. 
Oil importing less developed countries would, however, be harder hit: the growth rate of 
exporters of primary products would be 0,9 percentage point lower than the baseline, while that 
of exporters of manufactures would be about 0,4 percentage point lower. Inflation would be 
higher by 0,5 percentage point in the industrial countries and in the Community. 
If, however, oil prices were to remain at the average level of September and October 1990 (around 
US $ 35 per barrel) throughout the year 1991, the abovementioned impacts could be twice as high. 
The technical assumption in the Community forecast takes an intermediate assumption: the oil 
price would stay at about this level during the first half of 1991, but would drop to about US $ 25 
per barrel on average in the second half of the year. 
The countries of Eastern and Central Europe are subjected to a triple shock. The preferential 
arrangements that existed with the Soviet Union and provided them with petroleum products at 
below market prices will lapse at the end of 1990. The price adjustment in these countries will be 
sizeable as the loss of preferential agreements is compounded by the Gulf crisis. These elements 
and the loss of the former GDR as a trading partner will add to the economic dislocation stemming 
from the unwinding of central planning. 
For the Community, the consequences of the Gulf crisis will be less important than after the first 
and second oil price shock. 
— First, movements in exchange rates between the dollar and the ecu have in fact resulted in a 
spreading of the assumed price increase over a three-year period (table 3). 
28. 2. 91 Official Journal of the European Communities No C 53/9 
TABLE 3 
Oil price 
1988 1989 1990 1991 (») 
Level Level Variation 
(%) Level Variation 
(%) Level Variation 
(%) 
US $ per barrel 
US $/ecu 
Ecu per barrel 14,9 
0,847 
12,6* 17,7 
0,907 
16,0 + 18,8 
+ 7,1 
+ 27,0 23,7 
0,796 
18,9 + 33,9 
-12,2 
+ 18,1 29,0 
0,755 
22,0 + 22,4 
- 5,2(2) 
+ 16,4 
(') Assumptions of the economic forecast. 
(2) The US dollar is supposed to remain at its value of mid-October 1990. 
— Second, the energy dependency of the Community has been greatly reduced since the previous 
oil shocks: in 1989 the volume of energy requirements per unit of GDP was about 25 % lower 
than in 1970, as a result of energy conservation measures (graph 2). The oil intensity of 
production has dropped even more, by 45 %, as a result of diversification to other sources of 
energy. Imports of oil are more than 55 % lower due to increased domestic production in the 
Community. 
Graph 2 
Energy intensity per unit of real GDP, Community of Twelve (1972 = 100) 
120 
100 
Energy 
80-
Oil 
60-
Oil-imports 
40-
20-
1986 1988 1970 1973 1979 1982 1976 
Energy/GDP Oil/GDP Imports/GDP 
The overall pattern described above must, however, be qualified for individual countries. While 
overall energy intensity has been reduced to a similar degree in nine Community countries since 
1973 (by an average of some - 30 %), it increased in Spain ( + 10 %) and particularly in Greece 
( + 23,7%) and Portugal ( + 26%) owing to the transition in those countries to a productive 
structure with a greater industrial content. 
— Third, the economic situation and particularly investment profitability in the Community is 
also much better than at the time of the previous shocks, when the economy was overheating 
and inflation was soaring. 
— Fourth, the Community now has the benefit of hindsight. The previous two oil shocks have 
provided valuable lessons on how to deal with such situations. 
Nevertheless, if the actual oil price increase were to remain within the limits of the above 
assumptions, this will require policy adjustments so as not to accommodate and perpetuate the 
inflationary impulse. If these policies are appropriately carried out, the Gulf crisis should not 
necessarily result in a durable deterioration of the growth and stability fundamentals in the 
Community. 
No C 53/10 Official Journal of the European Communities 28. 2. 91 
2. Slow growth in the United States of America and strong but decelerating growth in Japan 
Already before the outbreak of the Gulf crisis it became evident that the United States was 
experiencing a pronounced slow-down of growth. It is now anticipated that real GNP would grow 
less than 1,0% in 1991 and barely a quarter of a point in 1991 (table 4). In particular private 
consumption and investment will be much weaker than expected. At the same time inflationary 
pressures will be much more persistent, with inflation rising to 6,3% in 1991. 
TABLE 4 
United States, main economic indicators 
(in percent or percent of GDP) 
' 1988 1989 1990 1991 (») 
Real GNP + 4,6 + 3,0 + 1,0 + 0,3 
Investment + 5,4 + 1,6 -0,4 -i,o 
Consumer prices + 4,1 + 4,4 + 5,1 + 6,3 
Fiscal balance -2,0 -2,0 -2,3 -2,3 
Current account -2,4 -1,8 -1,7 -1,8 
(') Forecast. 
Despite much weaker domestic growth, the current account of the balance of payments would 
hardly improve in 1990 and 1991, but the general government deficit, on the other hand, is 
expected to widen slightly. 
Sluggish economic activity has already led over the last year to a significant loosening of monetary, 
policy. The resulting widening of negative short-term interest rate differentials with the Japanese 
yen and the German mark and the weak outlook for the US economy have led to a continuous 
decline of the dollar over the period. The growth of imports is expected to decelerate to about 
2,5% down from almost 6% on average in the period 1980 to 1989. 
Inadequacy of domestic saving, largely as a result of the federal deficit, remains a crucial issue for 
the United States. Further fiscal consolidation is required to limit the absorption of investment 
resources, particularly in view of the huge demand for investment in Central and Eastern Europe. 
More determined action to improve the budget outlook might also contribute to the international 
adjustment process. 
In Japan, real GDP growth is expected to decelerate from 6% in 1990 to about 4% in 1991, 
mainly as a result of monetary tightening. The continuous robust rate of growth and the more 
unfavourable international environment contribute to a further reduction in the surplus on the 
current balance. Inflation is expected to remain modest. 
3. A slow-down in world trade 
The external environment will also be marked by.the necessary transformation from Central and 
Eastern Europe from a planned to a market economy. The integration of Central and Eastern 
Europe in the international division of labour will increase significantly the demand for capital, 
adding to the existing sizeable needs of developing countries. Without increased saving, real 
interest rates will remain at high levels. 
The slow-down of growth in the United States, the increase in the price of oil and its impact on less 
developed countries together with the inevitable transformation in Central and Eastern Europe 
will create a more subdued international environment. In 1991, real GDP outside the Community 
28. 2. 91 Official Journal of the European Communities No C 53/11 
should increase by less than one percentage point. As a result, world trade excluding the 
Community is expected to expand in 1991 by less than 4,5 % in real terms, down from 6,0 % in 
1990 and 7,4% in 1989. Furthermore, Community exports to the rest of the world could be 
negatively affected by a further appreciation of Community currencies. By end-November 1990, 
the dollar value of the ecu was already more than 25 % above its average 1989 level. A successful 
outcome of the Uruguay Round is essential for a resumption of world trade growth. 
C. The outlook for 1991 and 1992 
The rise in oil prices, slower growth in world trade, US recession and the strong appreciation of 
Community currencies against the US dollar, will contribute to dampen growth in 1991 to around 
2 V4%, down from 3,3% in 1989 and 2,9% in 1990. Again the general slow-down is marked by 
significant divergences within the Community: growth would be around 3% in West Germany, 
Luxembourg and Portugal, but at 1 %, or less, in Denmark, Greece and the United Kingdom,. In the 
other countries the growth rate would be close to the average. All components of domestic demand are 
expected to weaken, in particular investment. 
Employment growth would slow down from 1,5 % on average over the period 1987 to 1990 to 0,6 % 
in 1991 so that the steady decline in the unemployment rate, seen in most countries in the last few 
years, would be halted. The budget positions in the Community would slightly deteriorate, mainly as 
a result of the widening of the budget deficit in Germany to close to 5 % of GDP. 
In 1992, with investment profitability basically unaffected, the prospects are for growth to pick up 
again: domestic demand would expand by 3 %, up from 2,3 % in 1991, mainly as a result of a revival 
in investment. 
The outlook for 1991 and 1992 is subject to considerable uncertainties in the international 
environment, mainly related to the evolution of the oil price and of the dollar. The oil price evolution 
will be significantly affected by the outcome of the Gulf conflict. 
The second source of uncertainty relates to developments in the United States. On balance the 
depreciation of the dollar has so far had largely benign effects for the Community, because it has 
mainly offset the inflationary impact of higher oil prices, while the negative impact on the already 
buoyant activity has been less a source of concern. A further, important and abrupt decline of the 
dollar, however, may have along with its beneficial effects on inflation, a more significant impact on 
exports and investment and could test the stability of the EMS. 
II. ECONOMIC POLICY TASKS DURING STAGE ONE OF EMU 
To sustain economic growth and employment in the present unfavourable external environment, the 
Community will have to rely on its own potential. A climate of stability is an essential prerequisite for 
its development. Therefore the Community will have to maintain restrictive monetary and fiscal 
policies. These policies will at the same time help to preserve the favourable growth fundamentals. 
The completion of the internal market and other structural policies, further improvements in 
economic and social cohesion and the environment will in turn strengthen the Community's 
potential. 
Furthermore, stage one of economic and monetary union will tighten convergence requirements in the 
fields of prices and costs, budgetary and external positions. The amount of adjustment is in some cases 
still important. Some Member States should already now present medium-term adjustment 
programmes so as to ensure that all Member States would join the final stage of EMU. 
No C 53/12 Official Journal of the European Communities 28. 2. 91 
The deterioration in short-term growth prospects in the Community does not necessarily alter the 
, fundamental positive assessment of the underlying potential of the Community economy. As a result 
of adverse internal and external factors, a certain deceleration in growth was inevitable. But provided 
appropriate policies are followed, profitability should remain favourable and investment activity 
could resume its strong growth leading to renewed significant job creation. 
To meet the challenges it is all the more important that policy coordination is strengthened in 
accordance with the decision on multilateral surveillance for stage one. 
A. Maintain stability $nd growth climate 
Despite a significant appreciation of the ecu and a slow-down of growth, inflation remains high. The 
most immediate policy concern in the present situation is therefore inflation. The oil price increase 
adds new impetus to an already accelerating cost and price trend. The relaxation of the moderate wage 
behaviour of the 1980s may be understandable after a long period of economic recovery, but it puts 
the medium-term growth prospects at risk: unemployment is still very high and many more years of 
strong investment and robust growth are needed, especially in the less prosperous countries and 
regions, to recover an acceptable employment situation. 
To preserve the continuation of a satisfactory growth climate in the Community, the inflationary 
threat posed by rising wage costs and the latest oil price hike must be immediately addressed, while at 
the same time divergent developments must be avoided. The lessons from the previous oil shocks 
should therefore be adequately drawn. This also includes strengthening of measures of vocational 
training to support the required adjustments. 
1. Avoid an inflation spiral 
Graph 3 
Price variability after the two oil shocks 
1st oil shock 
EUR 12 EUR 7 * 
% u 
Maximum 
Average 
Minimum 
i * * I I n I i t i I I 74 I I 7« I I 7» I I ml I t I « I t * I I 71 I I 74 I I 74 I ! 7i I I 7» I I 
2nd oil shock 
M 
Maximum 
Average 
Minimum 
o 9 4 14*4 7 I I I 71 t I 79 I I 7t I liOl I MS I I 
28. 2. 91 Official Journal of the European Communities No C 53/13 
The previous two oil shocks were characterized by a sharp acceleration of inflation and an 
increase in the divergences between Members' inflation rates. This was especially marked in the 
reactions to the 1973 oil price shock. 
With the benefit of hindsight, the adoption of inappropriately loose and even conflicting policies 
between Member States appears as one of the main reasons behind the very weak convergence of 
the EC during the second half of the 1970s (graph 3). 
The response to the second oil price shock of 1979/80 showed some improvement in policy 
coordination, due notably to the existence of the EMS. But since the effects of the 1973 shock were 
not yet fully absorbed, dispersion remained high. The improvement of Community internal 
cohesion required long and painful efforts throughout the 1980s. 
Since the 1979 oil shock, the consensus on economic policy and the coordination of monetary 
policy improved significantly, making a coordinated approach easier to carry out. 
The experience of the previous oil shocks argues for an economic policy stance that does not try to 
compensate for the loss of real demand and income resulting mechanically from the oil price 
increase, but that remains oriented towards overall price stability. 
In general terms therefore: 
— governments should allow the full and complete pass-through of higher oil import prices to oil 
products on the domestic market; in addition energy conservation policies will need to be 
reinforced to further reduce energy dependency, 
— monetary policy would have to pursue and, if needed, even reinforce its anti-inflationary 
stance. It must above all prevent the development of a wage-price spiral, by leaving no doubt 
as to the intention of the authorities not to accommodate inflationary developments, 
— fiscal policy should remain on the path of medium-term budget consolidation. It should not try 
to compensate for the unavoidable loss of private demand and income that any oil shock 
implies, 
— policy coordination should be strengthened within the context of stage one of EMU. 
So far, monetary policies in the Community have by and large remained on a restrictive course. 
The recent appreciation of EC currencies is helping to offset some of the inflationary pressures, 
confronting the monetary authorities with the difficult task of judging whether this is sufficient to 
stem domestically-induced wage pressures. The steepening of the yield curve as a result of rising 
long-term interest rates raises some concern as it may indicate, besides strong capital needs, rising 
inflationary expectations. Firm policy commitments are therefore needed. 
Policies effectively pursued up to now, however, have been less convergent than is desirable. 
Declining interest rates at a time of rising inflation cloud the policy message of the authorities in 
terms of their determination to fight inflationary expectations. The danger of insufficiently 
addressing the inflationary consequences of the oil price rise and of domestic wage developments, 
right from the beginning, is that policy will have to be tightened anyway at a later stage to quell 
inflationary pressure, but at a greater cost. 
The liberalization of capital movements and the increased exchange rate stability in the EMS have 
as a consequence that restrictive monetary policies, are less effective. The interest rate lever can be 
used less and less without overloading monetary policy. Hence there is a need for stronger 
economic policy coordination. The increasing symmetry of the EMS has to be accompanied by 
substantial coordination efforts by the monetary authorities to ensure overall stability. 
To avoid overloading monetary policy, fiscal policy will have to continue pursuing its medium 
term consolidation objectives, even if the effects of 'automatic stabilizers' and rising interest rates 
lead to a temporary deterioration in public accounts. It is particularly important that the public 
No C 53/14 Official Journal of the European Communities 28. 2. 91 
sector does not use saving to finance current expenditure. The huge investment needs in the 
Community and in Central and Eastern Europe will lead to rising real interest rates and an 
unwelcome crowding out of investment unless savings are substantially increased. Increasing 
public saving is the most straightforward way to increase national saving. In Greece and Italy in 
particular, but also in Belgium, Portugal, the Netherlands and Ireland, public dissaving is .still 
significant. The public sector should improve its contribution to national saving in these 
countries. 
The sharp increases in the German fiscal deficit resulting from unification is also a reason for 
concern because it risks placing an undue burden on monetary policy and on capita!markets, and 
may sustain and reinforce inflationary expectations stemming from the oil price rise. 
2. Safeguard the fundamental conditions for sustained and employment-generating growth 
Graph 4 
Favourable growth factors 
(in % or index) 
Real compensation per employee and Rate of profit of fixed capital 
productivity (3-year moving average) 
Productivity 
Real compensation (1961—1973 = 100) 170-1 
100 -
140-
110-
Gross fixed capital formation (in % of GDP) 
10-1 
two 1970 1908 1960 1960 
During the 1980s the Community has brought about a considerable improvement in its growth 
fundamentals (graph 4). Appropriate monetary and budgetary policies should ensure that the loss 
of income entailed by the oil price rise is appropriately split between wages and profits, in order to 
minimize the negative impact on investment profitability. Economic policy cannot avoid a 
temporary slackening of growth, but by preventing secondary inflationary repercussions it should, 
be possible to maintain the fundamental medium-term conditions for healthy growth. 
As the experience of the previous two oil price shocks has shown the behaviour of wages will be 
crucial in preserving the growth potential of the Community. 
The specific distribution of the burden of the income loss between the state, households and 
enterprises, will depend on the particular situation in each Member State, but it must be kept in 
mind that the less investment profitability is affected, the sooner economic growth will resume its 
upward trend. Divergences in the pattern of burden sharing between countries could also 
endanger the necessary convergence of Member States' economies. The existence in 
28. 2. 91 Official Journal of the European Communities No C 53/15 
some countries of formal or informal wage indexation mechanisms may make wage behaviour 
unnecessarily rigid. The commitment to monetary stability in stage one implies that the effects of 
wage rigidity should no longer be absorbed by an increase in the general price level or by exchange 
rate adjustments. Wage developments need, therefore, to be more flexible in adjusting to 
developments in competing countries. 
A strong commitment to competition and to open markets will provide a consistent and effective 
framework for positive adjustment in reply to market forces, as put forward in the Commission's 
communication on industrial policy in a global environment. 
B. The development of Community potential 
The general policies which must be implemented to curb the reemergence of inflationary pressures and 
inflation divergences are also those needed to create the conditions for the realization of the great 
Community projects: economic and monetary union, completion of the internal market, economic 
and social cohesion. At the same time, these projects complement the policies being implemented at 
the national level. 
1. Complete the internal market 
To secure its economic future, Europe has embarked on a programme for creating a market of 
continental dimensions. One of the main constraints the Community still faces on the competitive 
world stage is the fragmented nature of its markets, which makes it difficult to produce at 
optimum levels, holds back technological progress and impedes development of the services 
sector, where growth is particularly strong. The opening of the Community frontiers will enhance 
competition. Increased specialization and efficiency of production will greatly improve consumer 
choice. 
The internal market programme is the decisive driving force in adding to EC growth prospects and 
prosperity. Economic operators are increasingly anticipating the highly competitive environment 
which will prevail and the new operating conditions and opportunities which will exist by 1992. 
An increasing number of firms have begun to operate on greatly enlarged market horizons and are 
actively changing their strategies. In addition to the positive growth effects stemming from the 
abolition of internal border controls, and the removal of technical barriers to the free movement of 
goods and services, particularly as regards the latter in the financial services sector, growth will 
also be attributable to the positive effects arising from the necessary restructuring in industrial and 
services sectors and from positive changes in marketing strategies. 
In the single market, an effective Community competition policy is essential since measures and 
practices aimed at reducing or avoiding competition (such as increased subsidies or market 
sharing agreements) would reduce these positive effects. To crown the achievement of the internal 
market with a common currency in the near future would — as recent business surveys show — 
further bolster the positive mood of management. 
The high expectations that have been created must not be disappointed. Therefore the deadline of 
1 January 1993 for completing the internal market must be respected. Hence, it is essential that the 
remaining decisions in respect of the proposals contained in the 1985 White Paper must be taken 
as soon as possible. Significant progress has already been achieved and decisions have been taken 
in all areas of economic activity. The Commission has already tabled all the proposals contained 
in the White Paper, and over two thirds have been approved by the Council. The Commission is 
turning its attention to the problems of implementation (some 72 % of the so far required national 
implementing measures have been taken) and to the proper functioning of the single market. 
Decisions have still to be taken in important fields relating to the complete removal of internal 
border controls. The Council must give priority to these areas (which include the approximation 
of indirect taxation rates) and monitor the situation on a regular basis to ensure that decisions are 
taken such that progress towards removing completely the internal borders becomes irreversible, 
as is the case for the rest of the programme. Member States ought to accelerate the rate of 
implementation of decisions and to eliminate all delays by the end of 1991. 
No C 53/16 Official Journal of the European Communities 28. 2. 91 
2. Improve economic and social cohesion 
The improvement of economic and social cohesion will also strengthen growth prospects. Above 
average growth in the less favoured countries would contribute to expanding the growth potential 
of the Community economy as a whole. 
The strengthening of economic and social cohesion and the objective of a harmonious 
development across European regions have been reaffirmed in Article 130 of the Single Act. 
Above-average growth in those countries and regions, as has been the case in recent years in Spain, 
Portugal and Ireland, but not in Greece, has started to reduce the income gap (table 5) and has 
expanded the growth potential in the Community as a whole. The gap remains sizeable though, 
and will require a long-term effort of catching up. 
TABLES 
The catching-up process in the Community GDP (') at current market prices and purchasing parities per head 
of population (EUR 12 = 100) 
Greece Spain Ireland Portugal 
1985 56,8 71,8 65,2 52,1 
1986 55,8 72,2 63,5 52,7 
1987 54,2 73,9 64,9 53,8 
1988 54,3 74,7 65,2 54,0 
1989 54,1 75,9 67,2 55,2 
1990 53,4 76,7 68,8 56,2 
1990 to 1985 -3,4 + 4,9 + 3,6 + 4,1 
(1) Reference to GDP may overstate progress to the extent that income transfers to abroad may have outpaced nominal GDP 
growth. 
The economically stronger countries could contribute to this process by the maintenance of a 
dynamic growth pattern and the opening of markets to trade. The doubling of the Structural 
Funds and the simultaneous strengthening of the financial instruments will make available to 
Greece, Portugal and Ireland resources equivalent to between 3 and 5 % of GDP in 1993. They 
support the considerable improvement in structural policies achieved so far. Economic and social 
policies on the national and Community level have to provide the basis for a continuous relative 
growth of real GDP, without inflationary pressure and unsustainable internal and external 
imbalances. The catching-up countries will, however, remain primarily responsible for their own 
development. 
3. Structural adjustment and labour market flexibility 
Structural policies improve the capacity of Member States' economies to adjust. They enhance 
flexibility in goods and factor markets and should lead to an improvement in the extent and speed 
of response of prices in those markets to changes in market conditions. Structural policies thereby 
reduce the potential size and duration of adjustment costs associated with disturbances. 
Beyond the internal market programme, Member countries have engaged in a number of 
structural improvements to be able to cope with increased competition on the unified market. So 
far the major initiatives fell within the liberalization of financial markets and the restructuring of 
personal and corporate taxation. 
28. 2. 91 Official Journal of the European Communities No C 53/17 
Governments have taken initiatives to improve the capacity of labour markets to cope with 
change, and policies for education and vocational training are being given high priority in many 
Member States. They are an important instrument for the absorption of the long-term 
unemployed. 
Structural policy initiatives for the labour market will need further emphasis. The freeing-up of 
trade in goods and services in the completed market will certainly put additional strains upon 
labour markets and particularly upon systems of wage determination. In order to avoid as much as 
possible negative employment effects, present systems of wage determination within Member 
States should be made sufficiently flexible (for industries, occupations, regions or firms) to enable 
a rapid and efficient adjustment to new market circumstances. 
Also in the public sector, structural reform has to be carried further so as to improve the efficiency 
of the public sector. 
Higher economic efficiency and improved resource allocation should not only be sought within 
the Community, but also in the world. The Uruguay Round is a cooperative effort to promote 
trade and economic growth. As the world's largest trading block, the Community has a natural 
interest in a successful conclusion of the Round, It is at the same time an instrument to provide a 
better platform for its weaker trading partners, in particular the Central and Eastern European 
and the developing countries. 
4. The environmental challenge 
Just as the previous oil shocks helped to break the parallelism that was perceived in the 1950s and 
1960s between economic growth and energy use, there is presently a growing awareness, that was 
given added impetus through the Gulf crisis, that the link between economic growth and pollution 
needs to be broken. Experience in Eastern European countries, which have a much higher level of 
pollution than the richer Community countries, shows, however, that the link is not 
straightforward. The Community's better performance is no reason for complacency and needs to 
be substantially improved. There does exist, though, a clearer link between the price mechanism 
and pollution. Often market prices do not reflect the full environmental cost to society of their 
production or use. Moreover, private economic agents are not inclined to take into account the 
environmental effect of their activities, when taking consumption or investment decisions. 
At the centre of any comprehensive policy to address the pollution problem (beyond the inevitable 
need for regulatory instruments), is therefore the need to internalize these external environmental 
effects in order to give the right signals to market participants. 
The aim is to transform the patterns of economic growth in such a way as to reach a sustainable 
development path. A reinforced policy of environmental protection would not necessarily 
represent a constraint on private business, but could offer significant market opportunities for 
those pioneering environmentally friendly products and production processes. 
There is now a broad consensus that more use of economic and fiscal instruments should be made 
in environmental policy, but that the optimal policy would still consist of a balanced mix of 
market-based and traditional regulatory instruments. The main examples of economic and fiscal 
instruments have been identified as taxes, charges or fiscal incentives, deposit refund systems, 
tradable emission permits and financial aid or subsidies. In the case of taxes and charges, the 
impact on the competitive position of the Community and the priorities of the internal market 
ought to be given due consideration. 
In view of the importance of the international dimension of pollution close international 
coordination is called for. Within the Community there is a need for a minimum of harmonization 
in order to avoid policy instruments being in potential conflict with other Community objectives 
and to ensure compatibility of instruments among Member States when the issue is 
transnational. 
No C 53/18 Official Journal of the European Communities 28. 2. 91 
C. Policies for improved convergence 
While the Community has significantly improved its economic convergence performance since the 
beginning of the decade, serious problems remain in some countries and in some areas. Furthermore 
stage one of EMU will tighten convergence requirements. The significant progress already realized is 
testimony to the positive effects of the discipline imposed by the exchange rate mechanism of the EMS. 
In fact, the present convergence positions of Member States are closely correlated with their degree of 
exposure to this discipline. 
1. Price and cost convergence 
The degree of price convergence is most marked among those countries which have respected the 
narrow band of fluctuation from the outset. The average rate of inflation (private consumption 
deflator) in this group of countries has been close to, or below, the 3 % mark since 1986 (graph 5). 
The dispersion in the individual rates of inflation is lower than in the 1960s and the gap between 
the highest (3,6% in Belgium) and the lowest (2,4% in the Netherlands) rates of inflation for 
1990 is just over one point (table 6). The acceleration of inflation in 1990 and 1991 in these 
countries cannot be considered satisfactory from the point of view of stability and needs therefore 
to be rolled back as soon as possible. 
Graph 5 
Convergence of private consumption deflators 
EUR 12 EUR 7 
(annual percentage change) 80 
Maximum 
EUR 12 
Minimum 
wei 1071 1081 1001 (annual percentage change) 
Maximum 
'EUR t 
Minimum 
1861 1086 1071 1081 1086 1001 
The price convergence in these countries already broadly corresponds to what might be required 
for the transition to the final stage of EMU. This convergence in the rate of inflation has been 
accompanied by a clear deceleration in the rates of increase in nominal and real unit labour costs 
thereby improving investment profitability. Further improvements in profitability could be 
required, however, in those countries where unemployment levels are particularly high or where, 
as in Denmark, economic growth had to be slowed down to fight inflation and reduce the external 
deficit. 
A second group of countries has in 1990 an inflation rate which is still double that of the first 
group. Italy, which has recently joined the narrow band, and Spain, which joined the wider band 
last year, have also made significant progress since the beginning of the 1980s, but they still show a 
much less favourable convergence position. Both countries face strong wage pressures with 
nominal unit labour costs rising by 7% or more in 1990 against less than 4% for the original 
participants in the narrow band. These countries should gradually improve their inflation 
performance over the next two to three years to the level of the narrow band countries. This will 
require that the claims on resources of the different sectors of the economy be made more 
compatible with each other. Setting more ambitious but realistic inflation targets and pursuing 
them by stability-oriented monetary and fiscal policies may help to create a stability environment 
and may contribute to providing a reference framework for wage developments. 
28. 2. 91 Official Journal of the European Communities No C 53/19 
TABLE 6 
Inflation convergence in the Community in the second half of the 1980s (') 
1981 1986 1989 1990 1991 (2) 
C Duntries with 1 ow and conver ging inflation 3) 
Community of 7 9,3 1,2 3,2 3,0 3,8 
Belgium 8,1 0,3 3,4 . 3,6 . 4,5 
Denmark 12,0 3,5 5,0 2,8 3,3 
Germany 6,0 -0,2 3,2 2,8 3,9 
France 13,0 2,9 3,3 3,4 3,6 
Ireland 19,6 4,0 3,9 2,8 3,5 
Luxembourg 8,7 1,2 4,0 3,5 4,0 
Netherlands 6,3 0,2 2,1 2,4 2,8 
Countries with high inflation 
Italy 18,2 5,7 6,0 6,1 6,3 
Spain 14,3 8,7 6,6 6,8 6,6 
United Kingdom 11,2 4,4 6,1 7,0 6,3 
Countries with double-digit inflation 
Portugal 20,2 13,8 12,8 13,2 12,6 
Greece 22,7 22,0 14,4 20,5 18,5 
(') Private consumption deflator. 
(2) Forecast. 
(3) Countries which registered low and converging inflation rates in the second half of the 1980s; they are the countries which 
participated from the outset in the narrow band of the EMS. 
The United Kingdom, which has recently joined the wider band of the exchange rate mechanism, 
is experiencing a high rate of inflation (about 7 % in 1990 for the deflator of private consumption 
adjusted for the impact of local government taxation changes) and a large current account deficit 
(about 3% of GDP in 1990). The current slow-down of the economy will bring some 
improvement on both fronts. The main problem for the United Kingdom's economy is the 
excessive increase in wage costs. What is even more worrying is that wage settlements are still 
running at a high rate and are,not yet showing signs of reacting to the slowdown in the economy. 
The composition of the retail price index may also partly explain this development. After entry of 
the pound sterling into the ERM, expectations may be favourably affected creating a better 
prospect for the United Kingdom to reduce inflation. 
Portugal still has a very high rate of inflation (about 13 % in 1990). Nominal unit labour costs are 
still growing too rapidly. A persistent effort will be needed to reduce inflation progressively to the 
level in the narrow-band. Such an endeavour remains possible as experience in other countries has 
shown. In 1982 and 1983, when exchange rate policy in the EMS became tighter, Ireland had rates 
of inflation comparable to that now experienced by Portugal. Therefore participation in the ERM 
should be sought as soon as possible. 
The Greek economy is characterized by serious imbalances in many areas, which call for radical 
measures. The rate of inflation exceeds 20% in 1990, and the budget deficit has reached 
unprecedented levels in the Community, leading to a rapidly rising public debt to GDP ratio. A 
serious adjustment effort is essential, and should be sustained over the medium-term. The recent 
Greek Government's medium-term programme is a step in the right direction. 
No C 53/20 Official Journal of the European Communities 28. 2. 91 
2. Convergence of budgetary policies 
Convergence must not only be fostered from the cost and price side, but public authorities also 
have to reduce their claims on resources, so as to avoid unsustainable imbalances, to improve the 
supply-side of the economy and to create room for manoeuvre when adverse developments have to 
be addressed. 
In the budgetary area, progress in convergence has been distinctly less marked than for prices and 
costs. Its impact on monetary and exchange rate stability is only felt in an indirect way and after a 
prolonged period of accumulated imbalances. Such progress is nonetheless essential because 
unsustainable fiscal positions undermine over the medium and longer term the credibility of the 
commitment to monetary stability and impair the conduct of economic policy. 
Greece and Italy still have excessive budget deficits. In Greece the budget deficit, at more than 
*18 % of GDP in 1990, has reached levels never experienced in the Community. Gross public debt 
has rapidly increased, from less than 30 % of GDP in 1980 to about 90 % in 1990 (table 7). A wide 
ranging adjustment effort extending over several years is needed, as reflected in the recent 
medium-term adjustment programme. 
TABLE 7 
Gross public debt in the Community countries 
(in percent of GDP) 
1980 1986 1989 1990 1991 (') 
Belgium 76,9 , 123,7 129,9 129,4 t 
129,4 
Italy 59,0 88,5 98,9 100,9 102,9 
Ireland 76,8 115,7 104,7 101,4 99,4 
Greece 28,8 65,3 85,1 • 89,5 94,3 
Netherlands 45,9 71,7 77,6 77,8 78,5 
Portugal 37,1 68,4 71,5 67,8 64,7 
Denmark 39,3 67,2 63,3 62,8 63,3 
Spain 18,1 48,5 45,2 44,7 42,6 
Germany 32,7 42,7 43,6 43,7 45,2 
United Kingdom 54,3 58,1 45,7 43,0 41,8 
France 24,6 34,2 36,0 36,1 36,1 
Luxembourg 13,8 13,8 8,8 7,8 6,8 
Community of 12 41,0 58,5 59,0 58,9 59,2 
(') Forecast. 
Italy also faces a high budget deficit (10 % of GDP in 1990), which leads to a rising level of public 
debt as a percentage of GDP (about 100 % of GDP in 1990 against 66 % in 1982). The necessary 
reduction in the rate of inflation will have to go in tandem with significant reductions in budget 
deficits that allow first a stabilization, and then a reduction in the level of debt as a percentage of 
GDP. A disinflation process not accompanied by an appropriate budgetary adjustment would 
result in an even faster rise in the public debt ratio, as was the case in Belgium in the early and 
middle 1980s. The adjustment efforts required would then have to be even greater. 
Belgium, Portugal, Ireland and, to a lesser extent, the Netherlands are still experiencing budgetary 
problems due to the level of public debt. A decline in the level of debt as a percentage of GDP is 
needed in these countries to reduce debt'servicing costs and vulnerability to interest rate increases. 
28. 2. 91 Official Journal of the European Communities No C 53/21 
In Belgium the public debt ratio is still excessively high (128 % of GDP in 1990). The budget deficit 
is still too large to put the public debt ratio on a downward path, if growth slows or interest rates 
rise. The double government norm aiming at freezing in real terms non-interest expenditures and 
at keeping constant the deficit in nominal terms should be applied to all levels of governments. 
Only its strict and global application will ensure that the public debt ratio will be progressively 
reduced, which is essential to guarantee long-term stability. Ireland has already reduced its budget 
deficit substantially, so that the public debt ratio is on a clearly declining trend. This trend should 
now be continued. In the Netherlands, the public debt ratio, though not as high as in the case of 
Belgium and Ireland, is still not fully stabilized. The budget position therefore warrants close 
scrutiny. The budgetary situation in Portugal also needs to be improved in parallel with the 
disinflation process so as to maintain the progress in stabilizing the public debt ratio. 
TABLE 8 
General Government net lending ( + ) or borrowing ( - ) 
(in percent of GDP) 
1983 1985 1987 1989 1990 1991 (') 
Community -5,3 • "5,2 -4,2 -3,0 -3,9 -4,1 
High deficit countries 
Greece -8,3 -13,8 -12,0 -18,4 -18,6 -17,1 
Italy -11,8 -12,5 -11,2 -10,2 -10,0 -9,4 
High debt countries 
Belgium -11,2 -8,5 -7,1 -6,6 -5,6 -5,9 
Ireland -11,8 -11,3 -9,1 -3,2 -3,3. -3,5 
Netherlands -6,4 -4,8 -6,5 -5,3 -5,4 -4,7 
Portugal -9,0 -10,1 -6,8 -3,8 -6,0 -5,6 
Other countries 
Denmark -7,2 -2,2 + 2,2 -0,8 -1,4 -1,6 
Germany -2,5 -1,1 -1,9 + 0,2 -3,2 -4,8 
Spain -4,8 -7,0 -3,2 -2,7 -3,0 -1,8 
France -3,2 -2,9 -2,0 -1,5 -1,2 -1,1 
Luxembourg + 2,0 + 5,3 + 1,3 + 3,4 + 3,3 + 1,1 
United Kingdom -3,3 -2,7 -1,3 + 0,9 -0,2 -0,7 
(') Forecast. 
In unified Germany, the fiscal stance is also a matter for concern, because of the expansionary 
effect of the budgetary costs of unification. Though a higher public deficit to finance investment 
during the transition is economically justified, the size of the present borrowing exerts undue 
pressure on interest rates. Furthermore, the strong demand from the former GDR may strain 
production capacity in West Germany, putting pressure on inflation and appreciating the 
exchange rate in real terms. To guard against these dangers and to avoid an overburdening of 
monetary policy, a tightening of the fiscal stance would be expedient. To the extent that the strong 
demand is met by increased imports from other Member States, this will diminish the strains on 
German production capacity and stimulate activity in the other countries. 
In a last group of countries — including Denmark, Spain, France, Luxembourg and the United 
Kingdom — the budgetary position in terms of net lending or borrowing and public debt seems to 
be under control and does not present the Community with a convergence problem. The increase 
in budget deficits in Denmark and in the United Kingdom calls nevertheless for attention. The 
general assessment does not detract, however, from the need, also valid for the other countries, to 
improve the structural features of their public finance to benefit the supply side of the economy, to 
No C 53/22 Official Journal of the European Communities 28. 2. 91 
prepare for the single market of 1992 and to increase budgetary flexibility as required by a better 
policy mix. This will particularly involve improving the structure of expenditure and receipts, 
winding down in some cases the share of expenditure in GDP and lessening the tax burden. 
Moreover, a few of these countries continue to suffer from strong inflationary pressures and large 
external deficits, such as the United Kingdom and Spain, or from high foreign debt, such as 
Denmark. Hence, there is a need to maintain a cautious budgetary policy in these countries. 
3. Convergence of external positions 
In an integrating economy with fully liberalized capital movements and increasing exchange rate 
fixity, convergence of current account balances is to be judged in a different context and the 
appropriateness of current account imbalances has to be individually assessed. 
Spaih is confronted with a high and rising current account deficit (more than three and a half 
points of GDP in 1990). A current account deficit per se would not be worrying in the Spanish case 
as long as it corresponded to capital imports financing rapid growth in productive investment. 
What gives cause for concern, however, especially if high oil prices were to persist in the months to 
come, is the rapidity of the deterioration of the current account position which was still in 
equilibrium in 1987. However, the deficit is expected to stabilize in 1991. If exchange rate 
stability is to be maintained, the rate of growth of unit labour costs in Spain must soon be brought 
below that of its main trading partners so as to improve its competitive position. This would also 
create the conditions for the continued strong growth needed both to reduce the persistently high 
levels of unemployment and to allow the catching-up process to continue. These considerations 
also apply to Greece where the external position has deteriorated sharply in recent years. 
In Italy the external position, while not yet giving cause for concern, nevertheless calls for a critical 
look at external competitiveness. In the United Kingdom some improvement is expected in the 
external position, still cost developments will need to be monitored carefully. 
The current account positions of the initial narrow band countries appear broadly sustainable. 
The German surplus, which had given cause for concern in the recent past, is being greatly reduced 
as a consequence of the redirection of trade resulting from the unification process. Considerable 
progress has been made in Denmark, where for the first time since the early 1960s the current 
account would turn into a surplus. This has been achieved, however, at a considerable cost in 
terms of growth. A further improvement in the competitive position might help to consolidate this 
improvement, at higher levels of activity and employment. 
With appropriate monetary, budgetary and structural policies, the impact of the oil price hike and 
internal inflationary pressures can be absorbed, thus preserving the positive fundamental growth 
conditions of the Community. The development of the Community potential will improve the 
supply side of the economy and contribute to resuming its medium-term growth trend. Such policy 
mix fulfills at the same time the requirements for a successful move towards economic and 
monetary union. 
28. 2. 91 Official Journal of the European Communities No C 53/23 
MAIN ECONOMIC INDICATORS 1988 TO 1992 
COMMUNITY, UNITED STATES OF AMERICA AND JAPAN 
(a) GDP at constant prices (b) Domestic demand at constant prices 
(% change on previous year (')) (% change on previous year) 
1988 1989 1990 (») 1991 (•) 1992 (*) 1988 1989 1990 n 1991 n 1992 (*) 
B 4,3 4,0 '3,5 2% 2% B 4,3 5,0 4,0 2% 2% 
DK "0,4 1,3 0,9 1 1V4 DK -2,2 0,8 -0,8 -v4 1 
D 3,7 3,3 . 4,3 3V4 2 D 3,8' 2,7 3,7 3% 2% 
GR 4,0 2,6 1,2 1 iv2 GR . 5,6 4,2 2,1 1 iv2 
E 5,0 4,9 3,5 2V2 3V4 E 7,3 7,7 5,3 3 33/4 
F . 3,3 3,6 2,5 2 V2" 23/4 F 3,5 3,1 2,9 2V4 3 
IRL • 3,7 5,9 4,5 2% . 3% IRL 0,2 6,1 6,4 % 4V4 
I 3,9 3,2 2,6 2% 2% I 4,6 3,3 2,9 2% 3V4 
L 4,3 6,1 3,2 3 3V4 L 2,7 5,3 5,2 4V2 4 
NL 2,7 4,0 3,4 2 2V2 NL 2,0 4,3 3,9 I3/4 2 
P 3,9 5,4 4,2 3% 3% P 7,4 4,1 5,0 3V2 4% 
UK 4,1 2,2 1,5 3U 2 V2 UK 7,3 3,1 0,9 v2 2% 
EC 3,8 • 3,3 2,9 2% 2 V2 EC 4,8 3,6 3,0 2% 3 
USA 4,6 2,5 1,1 v4 1% USA 3,2 1,9 0,6 -% V4 
JAP 5,7 4,9 6,0 4% 4 JAP 7,5 5,9 6,0 4% 4% 
(c) Deflator of private consumption (d) Balance on current transactions 
(% change on previous year) (as a % of GDP (')) 
1988 1989 1990 (*) 1991 n 1992 ("•) 1988 1989 1990 (*) 1991 (») 1992 n 
B 1,8 3,4 3,6 4V2 3V2 B 1,0 1,0 0,3 . - v4 0 
DK 4,9 5,0 2,8 3V4 2 DK -1,8 -1,3 0 v4 1V4 
D 1,3 3,2 2,8 4 3V2 D 4,1 4,7 2,6 3A 
GR 14,0 14,4 20,5 18V2 15 GR -1,7 .-4,8 -5,1 -5 -4V2 
E 5,1 6,6 6,8 63/4 5V2 E -1,1 -2,9 -3,8 -4 -4 
F 3,0 3,3 3,4 3V2 3 F -0,4 -0,2 -0,3 - v2 - % 
IRL 2,5 3,9 2,8 3V2 2 V2 IRL 1,8 1,6 1,2 v2 - v4 
I 4,8 6,0 6,1 6% 5V2 I -0,6 -1,3 -1,3 -l3/4 -1% 
L 2,6 4,0 3,5 4 3V2 L 34,3 31,5 27,3 24 22 V2 
NL 0,7 2,1 2,4 23/4 2V2 NL 2,4 3,6 3,3 3V2 3V2 
P 10,0 12,8 13,2 12V2 11 P -4,4 -1,2 -1,2 -l3/4 -IV4 
UK 5,0 6,1 7,0 6% 4% UK -4,1 -3,7 -2,8 -2 -2 
EC 3,7 4,9 5,1 5V4 4V2 EC 0,2 0,2 -0,3 - % - V4 
USA 4,1 4,4 5,1 6V4 5V2 USA -2,4 -1,9 -1,7 -VU -l'/2 
JAP 0 1,7 2,5 2V4 2% JAP 2,8 2,2 1,6 1V2 l3/4 
(*) Forecast October 1990. 
(') GDP for USA and Japan from 1989 onward. 
No C 53/24 Official Journal of the European Communities 28. 2. 91 
(e) Number of unemployed as % of the civilian labour force- (f) General government lending and borrowing 
(as a % of GDP) 
1988 1989 1990 (*) 1991 (*) 1992 (•) 1988 1989 1990 (*) 1991 (•) 1992 (•) 
B 10,0 8,5 7,8 7% 7V2 B -6,6 — 6,6 -5,8 -6 - 5V2 
DK 6,5 7,7 8,2 83/4 83/4 DK 0,2 -0,7 -1,4 -iv2 -1 
D 6,1 5,5 6,0 6V4 6V2 D -2,1 0,2 -3,2 - 43/4 - 3 V2 
GR 7,7 7,8 8,1 9% 9V2 GR -15,6 -18,4 -18,4 -17 -143/4 
E 19,3 17,0 15,8 15V2 15 E -3,2 -2,7 -3,1 -IV, -1 
F 9,9 9,4 8,9 ' 8% 8V2 F ' -1,7 -1,5 -1,2 -1 -1 
IRL 17,6 17,0 16,5 16V2 16V2 IRL -5,2 -3,4 -3,4 - 3V2 - 3V2 
I .10,8 10,8 10,2 10'/4 10V4 I -10,9 -10,2 -10,1 -9V2 -9V4 
L 2,1 1,8 1,7 v/2 1V2 L 2,1 . 3,2 3,3 1V4 1 
NL 9,3 8,7 7,4 . 7V4 7 NL -5,2 -5,2 -5,4 - 43/4 -4V2 
P 5,6 5,0 4,4 5 • 5 P -5,4 -3,8 -6,0 - 5V2 -4% 
UK 8,5 7,0 6,4 7% 8 UK 1,1 0,9 -0,2 -% -v2 
EC 9,7 8,9 8,5 8% 83/4 EC -3,7 -3,0 -4,0 -4 -3V2 
USA 5,5 5,3 5,4 6 63/4 USA -3,6 -2,0 -2,3 -2% -2 
JAP 2,5 2,3 2,2 ' 2V4 2'/4 JAP 2,1 1,8 2,7 2V2 2% 
(g) Total employment (H) Real compensation of employees per head 
(annual percentage change) (annual % change (')) 
1988 1989 1990 (*) 1991 n 1992 (*) 1988 1989 1990 (*) 1991 (*) 1992 (*) 
B 1,5 1,3 0,9 V4 V4 B -0,1 0,5 2,6 2 V2 2 V2 
DK -0,6 -0,5 -0,2 0 v2 DK -0,4 -1,3 0,4 -'V 1 
D 0,6 1,4 2,4 1V2 1 D 1,9 -0,3 1,9 1% "3/4 
GR 1,6 0,4 0,7 -V2 0 GR 2,8 3,9 -2,1 -iv2 -iv2 
E 2,9 4,1 . 2,7 1V2 1% E 1,3 -0,8 1,3 3A 1 
F 0,6 1,2 1,2 3/4 • 3/4 F 1,0 1,5 2,0 1 1V2 
IRL 0,4 1,1 1,6 3A 3/4 IRL • 1,6 -1,5 1,5 13A 1V4 
I 1,4 0,2 0,9 V4 V2 I 3,8 3,0 2,6 • 2V2 2V4 
L 3,1 3,7 2,4 i3/4 L'/2 L 0,5 -0,2 2,6 IV4' 2V4 
NL 1,3 1,6 1,7 3U 1 NL 0,7 -1,5 2,2 1V2 l'/2 
P 0,1 1,8 0,7 v4 V4 P 3,1 0,2 3,3 23/4 2V2 
UK 3,2 2,8 2,0 -V2 0 UK 2,1 2,5 3,2 2V4 1% 
EC 1,5 1,6 1,7 V2 3A EC 1,8 1,1 2,2 IV2 iv2 
USA 2,9 2,0 0,9 3/4 3U USA 0,9 -0,7 0 ~ v4 3U 
JAP 1,6 1,9 1,6 1V4 1 JAP 3,7 2,2 3,0 3 2% 
(*) Forecast October 1990. 
(') Deflated by the deflator of private consumption. 
28. 2. 91 Official Journal of the European Communities No C 53/25 
(i) Investment in construction at constant prices 
(% change on previous year) (j) Investment in equipment at constant prices 
(% change on previous year) • 
1988 1989 1990 (») 1991 N 1992 (*) 1988 1989 1990 (*) 1991 (*) 1992 (*) 
B 15,0 9,6 4,7 -v4 3% B 17,7 19,0 10,0 8 ' 8% 
DK -3,1 -4,2 -6,1 -2% -v4 DK -7,5 5,5 1,8 2 V2 3V2 
D 4,7 5,1 5,2 2 2% D 7,7 9,7 11,4 7 6 
GR 7,6 2,0 2,0 2 3V2 GR 10,8 17,3 4 4 6 
E 12,6 13,3 11,5 6 7 E 16,5 14,1 5,4 4 5V4 
F 6,2 4,5 3,0 2 3V2 F 8,9 6,9 4,5 4 5% 
IRL -0,7 9,8 . 10,6 63/4 - 63/4 IRL 5,6 14,1 9,8 6V4 6V2 
I 3,7 3,6 2,5 2 V2 2V2 I 6,4 6,3 3,4 4 5V4 
L 9,9 8,8 8,2 5 4 V2 L -5,4 14,9 12,0 6V4 5% 
NL 11,8 2,6 0,8 .-iv2 2 V2 NL 6,8 5,5 5,5 3V2 2% 
P 10,1 7,5 7,0 4V£- 5 V2 P 23,2 9,0 11,0 8 8V2 
UK 6,1 -0,4 -2,2 ~*U I3/4 UK 17,7 10,0 -0,3 -2% ' 3V4 
EC 6,4 4,7 3,6 2 3V« EC 10,4 . 9,1 5,3 33/4 5V4 
(k) Total investment at constant prices 
(% change on previous year) (1) GDP per head 
(EC = 100) at current prices and current PPS 
1988 1989 1990 (*) 1991 (*) 1992 (*) 1960 1973 1986 1991 H 1992 (* 
B 16,0 13,6 7,0 3V2 5V2 B 95,4 101,3 101,0 103,3 ^ 104,0 
DK -6,5 -0,1 -2,6 0 IV2 DK 118,4 113,2 116,7 104,2 103,9 
D 5,9 7,1 8,0 4V2 4 D 118,0 111,3 114,3 112,5 110,9 
GR 9,0 8,6 2,9 3 4% GR 38,7 56,9 55,8 52,8 52,4 
E 14,0. 13,6 8,9 5% 6V4 E 59,6 78,1 72,2 77,1 77,8 
F 7,5 5,9 3,8 3V4 4V2 F 105,9 110,6 110,1 108,9 109,3 
IRL 0,3 12,1 -10,2 6V2 6%' IRL 60,8 59,0 63,5 69,2 70,4 
I 4,9 "5,1 3,0 3% 4 I 86,6 93,4 103,2 104,4 104,9 
L 3,2 11,5 10,0 5iU 5V4 L 158,4 142,3 124,2 125,4 127,4 
NL 9,8 3,9 2,9 3/4 2V2 * NL 118,7 113,2 106,3 103,6 103,6 
P 15,0 8,3 9,1 6V4 7 P 38,8 56,4 52,7 56,9 57,7 
UK 13,1 4,8 -1,2 -IV2 2V2 UK 128,7 108,5 105,1 104,0 104,1 
EC 8,4 6,8 4,4 3 4V4 EC 100,0 100,0 100,0 100,0 100,0 
USA 5,4 1,8 0,6 -lU 3 USA 190,0 162,0 155,8 147,4 144,9 
JAP 13,4 10,9 9,9 5 6 JAP 55,9 96,4 111,0 122,5 125,4 
(*) Forecast October 1990. 
Source: Commission services.