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DOCUMENTS "COM"
COM(80)100
Vol.1980/9005

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COMMISSION OFTHEEUROPEAN COMMUNITIES
COM(80 )100 final
Brussels .5March 1980
THEECONOMIC SITUATION INTHECOMMUNITY
Communication fromtheCommission totheCouncil
(EconomicandFinancialAffairs)foritsmeetingon
Monday17thMarch1980;firstquarterlyexamination
inaccordance withArticle 2oftheCouncil's
Convergence Decisionof18thFebruary1974
C0M(80 )100 final

2.
1. Results for 1979 .Inspite ofthe new oil shock ,theperformance ,
ofthe Community economy in1979 was inseveral respects favourable .Gross
domestic product (GDP )isnowestimated tohave grown 3/3%inthe
Community asawhole ,which isclose totheoriginal 31/2%objective
envisaged intheautumn of1978 intheAnnual Report ofthat year ,and thus
somewhat higher than the3,1% growth inthe Annual Report adopted at
the end oflast year .
2. The cyclical upswing which begun in1978 ,inpart asaresult ofthe
concerted budget policy stimulus decided inJuly ofthat year ,continued
throughout 1979 ,and ledtoastronger growth ofprivate investment than in
any year since 1973 .Capacity utilisation inindustry increased significantly
Employment grew by0,9% ,again themost positive result since 1973 .
Unemployment declined very slightly inthe course oftheyear ,with a
more pronounced decline inmale unemployment nearly offset bythe in­
creasing unemployment ofwomen .
3. Money supply growth decelerated notably ,from 12,7% in1978 to10,6%
in1979 ,with alarge degree offulfillment ofnational quantitative
objectives .Some progress wasalso made inefforts toreduce public sector
deficits .Theaggregate deficit ofall levels ofgovernment reduced only
slightly from 4,0% ofGDP in1978 to3,9% in1979 ,butthis latter figure
issubstantially lower than the4,5% ofGDP expected inthe Annual Report
oflate 1978 .Thus thefiscal stimulus "imparted bypolicy exante inthe
course of1978 helped strengthen economic activity in1979 ,and expost
thefaster growth saw these increased deficits inpart paid back within a
period ofayear -and-a-half .
4. Intra -Community exchange-rate relations were more stable than inany
year since 1972 .Theaverage change intheexchange-rates ofMember States
vis-a-vis the ECU ihtheyear 1979 asawhole was 1,9% ,compared to5,2%
intheaverage ofthe sixpreceding years .Thus itmayapproximately
besaid that the first year ofOperation oftheEuropean Monetary System
(EMS )sawintra-European exchange-rate instability cutbynearly two-thirds
compared torecent historical experience .
\

5. Asregards external exchange-rate relations ,theECUappreciated in
1979 against both theUSdollar and .theYen .However ,thedepreciation of
thedollar againt theECUwasfairly small ;andthedollar 'sowneffective
exchange-rate remained nearly stable .This inturn reflects themuch
greater depreciation oftheYen,whose value against theECUdeclined 30/£
inthecourse of1979 ,which ismatter forpreoccupation from thepoint of
view ofinternational monetary instability ingeneral ,andofthelow,
excessively competitive value oftheYennowattained .
6. Theoilprice rise^in 1979 (ofnearly 50%indollar terms ,yearly
average )wasinpart responsible forthedeterioration inprice performance .
After thelowest rise in1978 inseven years (6,9% ),consumer prices rose
onaverage intheCommunity in1979 by9%,with a12,4% rise inthesecond
half oftheyear (atanannual rate).Allmajor components oftheconsul ,
price index accelerated (food,services ,rent,manufactured goods and
indirect taxes ),albeit generally atrates farbelow that forenergy .
7. Theacceleration ofinflation wa*'not coined tothecommon impact of
_.Qrhpre was arenewed tendency for inflation rates tothe oil price rise .tne(e
"ththegapbetween theleast andmost inflationary Member Stat <?
^ncreasing from10%inthefourth quarter of1978to17%inthefourth
rtpr -of1979 (consumer price data atannual rates );similarly theQUd rt,6 '**•
standard deviation ofconsumer price rises nearly doubled overthesame
period .Thegreater exchange-rate stability wasnot,therefore ,underpinned ___
byabetter convergence ofinflation .
g- Theoilprice escalation has coordinated steps toslowdo
Idoildemand .For1979thecommUnitypledged to -.Uconsumption
W°r .tons ,5% !-«sstha ."-theoriginal forecast and2t-Less
t0500mo7Routturn .However ,this^ wasnotachieved ,duein -
thanthe1 weatherinearly 197Vanotoorecautiona rystock-buUdmg
parttotheSe^sumpt .on 1979isestimated tohe.-,reached 523million
GPO k6%above thetarget ,tons ,^r0''
Outlook for1980 .Thebeginning ofthenevyearsawfurther major
9" ,~Tcpswhich maymeananaverage increase for1980ofsome60/4
IIηΓίΰβ
on y.tarterms).Thishasbeentaken intoaccount inrevised economic

4.-
forecastspreparedbytheCommission services,whichnowsuggest1,2%growth
fortheyearasawhole.Whilethe1980growthrateanticipated intherecent
AnnualReportwas2%,itisalsotobeborneinmindthatthelevelof
activityattheendof1979wassomewhat
higherthanexpected.Asaresultthedownwardrevisionofthelevelof
activityfor1980isonly-0,4%.
10.Thesefiguressuggestthattheeconomymaybemoreresilienttothe
newoilshockthanhadbeenfeared.Whiletheoilpricerisesareamajor
set-back,especiallyforpriceinflation andthebalanceofpayments,the
impactonthebusinesscycleisfarfromclear.'Thelatestrecordedoutput
figuresstillshowafirmlyrisingtrend.Leadingindicators (notably
businesssurveys)suggestaturning-point fortheCommunity asawhole,but
therangebetweenMemberStatesiswide(betweenFranceforwhichlittle
changeinbusinesssentimentisyetapparent,andtheUnitedKingdom
wheretheoutlookhasclearlydeteriorated substantially ).Iftheeconomy
istoremainrelatively buoyant,thiswouldbeduetoapreparedness of
householdstocontinuetoreducetheirsavings,andforthecompanysector
nottoreducestocksandtomaintaintheirinvestment plans.Thiswould
inturndependonacombination offinancial andconfidencefactors,where
theconditionoftheEuropeaneconomyiscertainly nowbetterplaced
thanafterthe1973oilshock. .•
11.However,theprospectsforemployment haveworsenedwithunemploy­
mentexpectedtoincreasefromanaverage5,6%in1979to6,4%in
1980fortheCommunityasawhole,andwiththeincreasesconcentrated
inDenmark,France,Italy^andtheUnitedKingdom.
12.TheoutlookforinflationisworsethanwasenvisagedintheAnnual
Report.Theforecastfor1980hasbeenrevisedupwards2pointsto-11,3%
fortheCommunityasawholeandafurtherdivergenceofperformance between
MemberStatesisexpected,withthehighestratesofinflation,between
15and20%,in.Ireland,Italy,andtheUnitedKingdom.
13.Thebalanceofpaymentscurrentaccountshavealsoclearlysuffered
fromtheoilpricerise,withtheCommunity'stotaldeficitfor1980now
revisedupwardsfrom4to14billionECU.Thefinancingofthesedeficits
shouldnotposemajorproblemsforthefourlargerMemberStates:Germany
inparticularisexpectedtoaccountforhalfoftheCommunitytotal.However,
someofthesmallerMemberStatesarenowfacingoverridingbalanceof
paymentsconstraints ,notablyDenmarkandIreland.
••/i•

5.-
14. Policy fortheperiod ahead .TheAnnual Report argued that priority
had tobegiven in1980 toalleviating theinflation andenergy constraints ,
and toproceeding with other more widespread improvements ineconomic
structures inmany Member States .This implied continuing with policies to
control money supply growth strictly ,tostabilise orcutpublic deficits
(according toMember State)' ,toimprove resource allocation inpublic
andprivate sectors and toprevent theoilprice rises from leading tofurther
inflation through resisting compensatory rises innominal .incomes .Amore
' * •r . ' ' - ' ''
active cyclical policy could only beenvisaged for alater stage ifpositive
results asregards inflation were assured and ifeconomic activity were
clearly found tobeweakening significantly .
*- . ' •
15. Theeconomic situation has indeed evolved since last autumn (as
outlined above ).But thechanges amount ,ontheother hand ,tohigher
inflation ,astill more acute energy constraint ,andworse balance ofpayments
situations ;and,ontheother hand ,stronger recent trends irvreal output
andgreater uncertainty inthis respect for1980 andthetrends that may
lead into 1981 .
16. Inthis situation theCommission judges that itisnotappropriate
tochange thebasic stance ofmacroeconomic policy in .theCommunity
(andtherefore does notpropose achange intheguidelines adopted bythe
Council inDecember 1979 ).Certain objectives ofpolicy have tobeimplemented
with even greater urgency andforce .This concerns notably :
17. Energy Policy (inallMember States andattheCommunity level )*
Efforts toproduce alternative supplies andeconomise inconsumption more ~
have tobeincreased .
1 Budgetary policy .Inmany Member States severe public finance policies
have tobepursued asanunconditional necessity ,soastoreduce thestrain
ofdeficits onthenon-inflationary financing oftheeconomy ,andtoimprove
resource allocation infavour ofproductive investment (this applies notably
toDenmark ,Ireland ,Italy ,theNetherlands ,Belgium andtheUnited Kingdom ).
Inthese cases there islittle ornoroom ,forthetime being ,forcounter -
cyclical flexibility inbudget policy .Without abasically sound economic
structure and abackground ofreasonably stable price -expectations ,a'flexible
budgetary policy risks aggravating inflation without improving employment
prospects .

6.
19. Monetary policy .Themaintenance orreassertion offirm control
over themonetary aggregates inthe recent conditions ofrising inflation has
naturally leatohigher nominal interest rates .However ,fortheCommunity
asawhole this hasonly just enabled real short-term interest rates tobecome
positive again attheendof1979 ,while long-term rates remain onaverage
slightly negative .Where real rates ofinterest arehighest (Denmark ,Belgium ,
Netherlands )there arerecognized policy needs toreduce public sector andbalance
ofpayments deficits .Ingeneral ,aneasing ofinterest rates canonly be
expected when inflation trends areseen tobeimproving ,which ishot ,yet
thecase .However ,,thetrend ininterest rates should becarefully controlled
soastoavoid anunduly severe impact oneconomic activity .
2Q. Incomes .Theoilprice levy onhousehold incomes hasbeen further ,
inescapably increased .While governments may alleviate the impact onthe
poorest andhardest-hit parts ofthepopulation ,there canbenoalternative
forthepopulation asawhole toaccepting the loss ofreal income to -oil'
producers solong asoilconsumption habits arenotchanged .Special efforts -
have been evident inseveral Member States tolimit the rise ofnominal
incomes asaresult ofthe oilprice rise ,although inseveral instances
theoutcome ofthese efforts isnot yetclear .Insome countries ,however ,
theacceleration ofnominal income increases isparticularly preoccupying
(Ireland ,Italy ,United Kingdom ).
2-). Balance ofpayments .Member States inbasically sound economic
situations (forexample Germany )should accept forthetime being deficits
oncurrent account .Some Member States inthemost exposed situations (for
example Denmark andIreland )need totake urgent action toreduce their
deficits ,especially through budget policy andincome adjustments .The
Community itself hasavailable ample credit facilities tomeet enyfore­
seeable financing problems asregards itsMember States .
22.Itismore likely that financing problems could arise fornon-oil
producing developing countries .TheCommunity should beprepared tosupport
international efforts toassure sound andadequate financial recycling
acilities .

7.-
Table :TheCommunity economy 1978-80
1978 1979 1980 1978 1979 1980
GDPvolume ,Xchange pnvate consumption deflator,X change
OK 0,9 3,1 -0,3 9,4 9,5 12,5
0 3,2 .4,4 2,1 •2,6 4,1 5,0
F 3,3 3,4 2,1 8,8 10,5 12,1
IRL 6,1 3,2 1,4 7,9 13,2 15,5
I 2,6 4,9 2,0 12,7 15,0 17,1
NL 2,4 2,3 1,0 4,4 4,7 6,8
Β 2,6 3,0 1,9 4,5 4,5 6,9
L 4,5 2,7 1,8 3,5 4,5 6,5
UK 3,3 0,2 "2'5 8,4 13,2 18,9
EC 3,0 3,3 1,2 6,9 9,0 11,3
unemployment rate , balance ofpayments
Xcivilian working population current account -billion ECU
OK
D
F
IRL
I
NL
θ
L
UK6.6
3,9
5,3
8.7
7.1
4.2
8.3
0,7
5,75.3
3.4
6,1
7,9
7.6
4,3
8.7
0,1
5,37,0
3,5
6,9
7,8
8,5
4,5
9,2
0,9
6,8■-1,2
7,4
2,9
-0,3
4,9
-0,7
-1,2
0,4
1,0-2,1
-2,7
1,7
-1,1
4,6
-0,7
-1,6
0,4
-3,8-2,3
-6,9
-0,1
-1,3
1,2
-0,9
-2,2
0,4
-2,3
EC 5,5 5,6 6,4 13,4 -5,1 -14,2
public finance
deficit ,:general
XofGDPgovernmentmoney supply ,Xchange
DK -0,9 -1,3 -1,2 (M2i 6,7 9,9 9,0
0 -2,8 -3,0 -2,6 (M3) 11,0 6,0 6,0
F -2,3 -1,4 -1,8 (M2> 12,2 13,5 12,0
IRL -10,5 -13,2 -11,2 (M3) 28,7 19,0 13,0
I -10,6 -10,5 -11,5 <M2) 22,8 20,0 20,0
NL -2,2 -3,0 -2,7 (M2) 4,2 6,0 8,0
β -6,0 -6,8 - -7,5 (M2M ) 9,5 6,5 6,5
L 3,3 2,7 1,2 :
UK -4,2 -3,5 -3,4 fils 13,3 11> 11*5
EC -4,0 -3,9 -4,0 12,7 10,7 10,4
Source :Commission services ,based oninformation available upto27th February 1980 . '
Data forIreland donottake intoaccount thebudget announced on28th February .