COMMISSION OF THE EUROPEAN COMMUNITIES 
Brussels, 15.05.1996 
COM(96)211 final 
Commission's Recommendation 
for the Broad Guidelines of the Economic Policies 
of the Member States and the Community 
drawn up in conformity with article 103 (2) of the 
Treaty establishing the European Community 

EUROPEAN COMMISSION 
Commission's Recommendation 
for the Broad Guidelines of the Economic Policies 
of the Member States and the Community 
drawn up in conformity with article 103 (2) of the 
Treaty establishing the European Community 
I. BROAD ECONOMIC POLICY GUIDELINES FOR THE COMMUNITY 
AND THE MEMBER STATES 
II. EXPLANATORY MEMORANDUM 
11.1. PROGRESS REPORT ON THE 1995 BROAD ECONOMIC POLICY GUIDELINES 
11.2. ECONOMIC OUTLOOK 
A&-
- Il -
Table of contents 
I. BROAD ECONOMIC POLICY GUIDELINES FOR THE COMMUNITY 
AND THE MEMBER STATES 1 
1.1. Main objectives and general guidelines 1 
1.2. Macroeconomic policy mix conducive to growth, employment and convergence 2 
1.3. Price and exchange rate stability 3 
1.4. Sound public finances 5 
1.5. Better functioning of product and service markets 7 
1.6. Fostering employment and labour market reforms 8 
II. EXPLANATORY MEMORANDUM 10 
11.1 Progress report on the implementation 
of the 1995 Broad Economic Policy Guidelines 10 
11.1.1. Introduction 10 
11.1.2. Price and exchange rate stability 13 
11.1.3. Sound public finances 16 
11.1.4. Competitiveness 21 
11.1.5. Employment and the labour market 23 
11.2. Economic outlook 26 
11.2.1. Growth prospects 26 
tl.2.2. Employment trends 28 
H.2.3. Convergence 29 
4i> 
I. Broad Economic Policy Guidelines for the 
Community and the Member States 
1.1. Main objectives and general guidelines 
Contrary to expectations prevailing at the time of the adoption of the 1995 Broad 
Economic Policy Guidelines, the Community's economy experienced a marked slowdown 
in economic activity over the last twelve months and a renewed rise in unemployment. 
Whereas inflation declined broadly as anticipated and price convergence strengthened, 
progress towards sounder public finances proceeded at an insufficient pace and was made 
more difficult by the economic downturn. 
As a result, the Community did not succeed in making significant progress towards 
realising important economic objectives such as those stipulated in Article 2 of the Treaty, 
namely the promotion of sustainable, non-inflationary growth and a high level of 
employment. This failure to reduce the gap between aspirations for and the realisation of 
economic and social well-being is the major cause of the present less confident mood in the 
Community. 
Nonetheless, the Community enjoys quite favourable economic fundamentals. Inflation is 
historically low and contained, interest rates are falling, exchange rates are progressively 
being brought into line with underlying conditions, world trade is expanding at a healthy 
pace and investment profitability has been improving and, in overall terms, is noticeably 
higher than in the second half of the 1980s. However, rising long-term interest rates in 
1994, the currency turmoil in the spring of 1995, persistent structural weaknesses and 
deteriorating confidence have prevented these fundamentals from asserting themselves 
during 1995 and early 1996. With the impact of the first two factors progressively fading 
out, allied with an end to destocking, expectations centre on a rebound in economic activity 
in the second half of this year. The pace of the expected recovery will mainly be 
determined by the extent to which the policy mix becomes more conducive to growth and 
succeeds in restoring confidence. The opportunities offered by the expected recovery 
should be fully seized upon to accomplish the necessary degree of convergence in order to 
ensure a successful transition to Economic and Monetary Union on 1 January 1999. 
Meeting these challenges will primarily require a macroeconomic policy strategy geared 
towards growth and stability. Appropriate structural initiatives in both the goods and 
A L 
services markets and in the area of labour market reform should accompany and reinforce a 
durable rebalancing of the macroeconomic policy-mix. 
In essence, therefore, the present Guidelines corroborate and augment the policy 
recommendations outlined in previous exercises. If this strategy does not yet seem to 
deliver satisfactory results in the Community at large, this is because it has been 
implemented with insufficient vigour and credibility. All actors are therefore encouraged 
to conduct their economic policies with a view to contributing to the achievement of the 
objectives of the Community (Article 102a of the Treaty), to demonstrate with action what 
has been promised since more than two years and to co-ordinate better their economic 
policies. The latter is not only a Treaty obligation (Article la) but also a practical 
obligation made all the more critical by the increased integration of the economies of the 
Member States. 
It should be underlined that the present guidelines constitute not only the logical 
dénouement of the analyses undertaken in the context of the Commission's 1996 Annual 
Economic Report but also take into account the opinions prepared by the European 
Parliament and the Economic and Social Committee on the latter report. 
1.2. Macroeconomic policy mix conducive to growth, employment and 
convergence 
Achieving the Community objectives in terms of growth, employment and convergence 
will continue to require the establishment of a stable, investment-enhancing, short and 
medium-term macroeconomic policy mix, characterised by: 
(i) a stability-oriented monetary policy; 
(ii) sustained efforts to consolidate the public finances in most Member States consistent 
with the timetable and the objectives of the Treaty; and 
(iii) nominal wage trends consistent with the price stability objective as well as real wage 
developments consistent with the conditions for strengthening employment-creating 
investment. 
To relaunch the recovery process and to strengthen medium-term growth and job-creation, 
a durable détente of the macroeconomic policy mix is essential. The more the stability task 
of monetary policy is facilitated by appropriate budgetary measures and wage 
developments, the more monetary conditions, including exchange rates and long-term 
interest rates, will be favourable to growth and employment. In such a context, monetary 
policy can contribute substantially, in accordance with the spirit of Article 105(1) of the 
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Treaty, to the achievement of the Community's objectives as laid down in Article 2 of the 
Treaty. 
High and sustained economic growth over the medium term, driven by capacity-expanding 
investment is essential: 
(i) to reduce significantly and durably the Community's unacceptably high level of 
unemployment and to combat the spread of social exclusion; 
(ii) to make the necessary improvement in the competitiveness, and in particular the 
productivity, of the Community economy compatible with the safeguarding, in the 
context of an open market economy, of the basic social values which characterise the 
Union; and 
(iii) to ensure the lasting success of Economic and Monetary Union in which stability, 
competitiveness and employment must be assured concurrently. 
Responsibility for bringing about the desired détente of the macroeconomic policy mix is 
assumed by three different groups of actors (central banks, national governments and the 
social partners). Efficient co-ordination between actors and between countries is essential 
in order to ensure policy consistency. The Commission will intensify its dialogue with the 
social partners on macroeconomic issues and invite the EMI to participate in these 
meetings. The social dialogue itself should also be intensified, where possible and 
according to prevailing traditions, at the national level. 
To reinforce both the credibility of the macro-economic policy framework and the 
efficiency of the co-ordination process within the Community, Member States should 
present updated and politically strengthened convergence programmes. These programmes 
should clearly demonstrate that the planned policy measures to improve convergence go 
hand in hand with the promotion of growth and employment in the medium term. The 
Commission and the Council will assess their consistency at the Community level with a 
view to a tightening-up of the surveillance of economic policies under Article 103(3) of the 
Treaty. 
1.3. Price and exchange-rate stability 
The achievement and maintenance of a stable macroeconomic environment is a 
precondition for achieving sustained medium-term growth. For this purpose, and given 
that inflation in the Community on average is expected to fall to 2XA per cent this year, the 
Community should aim to keep it at this low level and to make further progress towards 
reaching 2 per cent. 
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At present, ten of the Member States already respect the objective established in previous 
guidelines exercises of a rate of inflation1 of no more than 2 to 3 percent as a step towards 
price stability and in the United Kingdom inflation is close to 3 per cent. In the seven 
countries (Belgium, Germany, France, Luxembourg, the Netherlands, Austria and Finland) 
where inflation is below 2 per cent and in Denmark and Ireland, where it is just above 2 per 
cent, the anti-inflation credibility of the monetary policy framework is generally firmly 
established and the task is to consolidate this performance over the medium term. In 
Sweden, where inflation has recently come down significantly, and the United Kingdom, 
policies should aim at maintaining and, where appropriate, reinforcing anti-inflationary 
policies. 
Those countries where inflation is expected to be between 3 and 5 per cent in 1996 (Spain, 
Portugal and Italy), should endeavour to reduce inflation further to below 3 per cent by 
1997. Spain and Portugal should persevere with their existing policies with a view to 
achieving the desired inflation range in the near future. In Italy, the conduct of fiscal 
policy will in essence dictate the pace of progress with regard to the establishment of 
exchange rate credibility and in anchoring low inflation expectations. 
Despite visible progress in Greece over recent years, it is evident that efforts must be 
continued and enhanced. In this regard, emphasis should be placed in particular on the 
maintenance of the corrective fiscal policy stance operated over the last two years as well 
as continuing with the prudent monetary and exchange rate policies evident since the early 
1990s. 
As stressed in the previous Guidelines, all Member States must continue to treat their 
exchange-rate policies as a matter of common interest within the framework of the 
European Monetary System and, where appropriate, its exchange rate mechanism. The 
exchange rate movements in early 1995 pointed to the need for several Member States to 
put their overall policy framework on a more credible footing. Policies credibly and 
resolutely geared towards a rebalancing of the policy mix and achieving price stability, as 
recommended in the present Guidelines, will not only be conducive to an appropriate 
alignment of exchange rates within the Community but also at the world level. For 
countries which are not currently participating in the exchange rate mechanism, these 
policies would also contribute to creating the conditions, where appropriate, for such 
participation. 
As measured by the 12 month average of the annual change in the interim indices of consumer prices 
1.4. Sound public finances 
Some, but only limited, progress towards fiscal consolidation was made last year in the 
Community. Slippages relative to announced budgetary targets only partially reflected the 
adverse impact of the growth slowdown. Insufficient credibility of budgetary policies 
contributed importantly to the currency turbulence in the spring of 1995, sapped economic 
confidence and led to doubts in financial markets regarding the likelihood of a successful 
realisation of the Community's single currency goal. 
Meanwhile, a large number of countries have taken significant steps to consolidate their 
public finances in 1996 and, in many cases, also in 1997. Nevertheless, the still 
unsatisfactory state of the public finances in the Community should lead Member States to 
review and, where necessary, to strengthen their fiscal consolidation plans. Credible, pre-
announced and socially balanced efforts to reduce high budgetary imbalances will allow for 
a revival in confidence, for the transformation of the expected recovery into a durable, job-
creating, medium-term, growth process and for a sound transition to EMU on 1 January 
1999. 
While the economic conditions are presently less favourable than anticipated at the time of 
the adoption of the 1995 Guidelines, a further delay in the inevitable consolidation process 
is not a justifiable option. Any postponement risks provoking an adverse financial market 
reaction and would aggravate the consolidation task in future years. In the present 
circumstances, a policy of allowing the automatic stabilisers to work is therefore largely 
inappropriate in the vast majority of Member States. Progress made in reducing structural 
budget deficits this year will of course persist and reinforce consolidation when cyclical 
conditions improve. Moreover, the adverse near-term growth impact of credible reductions 
in budget deficits is likely to be limited provided that the appropriate Hanking conditions, 
in both the monetary and structural area, are set in place. 
On the basis of the adjustment measures decided up until early-May 1996, the net 
borrowing of general government in the Community as a whole is likely to fall to just 
below VA per cent of GDP in 1997, which compares with a deficit of 5 per cent in 1995. 
Virtually all Member States should aim at lowering the budget deficit to, at most, 3 per 
cent of GDP in 1997, as a step towards the objective of close to balance in the medium 
term. In this respect, it is encouraging that several countries have recently announced and 
are implementing substantial measures to redress budgetary imbalances. 
As regards the individual Member States, 12 of the 14 Member States with convergence 
programmes (the exception being Luxembourg) are committed to reducing their deficits to 
3 per cent of GDP or below by 1996 or 1997 at the latest. Two of these countries 
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(Denmark and Ireland) already respect the 3 per cent budget deficit reference value and 
they should consequently move towards the achievement of more ambitious medium-term 
targets. 
As regards the remaining ten countries, the additional effort needed to respect the 3 per 
cent reference value is undoubtedly feasible and should be pursued vigorously. Within this 
group, several countries (Germany, France, Austria, Finland, Sweden) have this year 
announced substantial measures or reinforcements with a view to achieving a reduction in 
their budget deficits to 3 per cent of GDP or less in 1997. These countries, as with the 
Netherlands, should resolutely implement their programmes of fiscal consolidation and, if 
necessary, strengthen them in order to ensure that their objectives are fully met. 
In Belgium both the impact of weaker-than-anticipated output growth on tax revenues and 
social transfers and the non-recurrent nature of some of the measures previously taken 
require supplementary efforts to respect the 3 per cent reference value in 1997. The 
Belgian government is firmly committed to specifying the necessary measures during the 
preparation of its 1997 budget in June-July of 1996. In the United Kingdom, substantial 
reductions in the budget deficit are expected to continue over the next two years mainly as 
a result of planned expenditure restraint. But to respect the convergence programme 
targets, further action is needed both to compensate for the fiscal slippage in 1995 and an 
expected less rapid budgetary improvement in the short run which is partly due to lower 
growth than previously predicted. Finally, in Spain and Portugal, a determined 
implementation of the budgetary component of the convergence programmes is required, 
with special attention to be given in Spain to a re-evaluation of the social security system. 
With regard to the two remaining Member States, Italy needs to introduce significant 
measures to achieve and improve upon the planned budgetary consolidation which remains 
the central policy priority in terms of restoring market confidence. Action should primarily 
focus on the fight against tax evasion, on greater budgetary discipline of local authorities 
and on improved efficiency of the public administration. As regards Greece, sustained 
efforts on a wide range of fronts, most notably a continuation of the existing privatisation 
initiatives, an expansion of the tax base and current expenditure reductions, are all required. 
Although the extent, timing and design of consolidation measures need to be tailored to 
country-specific conditions, some general principles have been identified in previous 
Guidelines exercises. These include: 
(i) restraining expenditure increases, as opposed to further increases in the overall tax 
burden, is widely regarded as a more credible and efficient option. Among the issues 
which should be addressed are the need to place pension provisions on a sustainable 
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footing, to curb the rise in health care costs and to reduce distortionary and costly 
subsidies, 
(ii) re-directing, to the greatest extent possible, government spending towards productive 
activities such as investment in infrastructure, human capital and active labour market 
measures, while not endangering the necessary reduction in budget deficits; 
(iii) improving the efficiency of public services through inter alia more flexible 
management practices, better incentives for public employees, and in some cases 
increased use of privatisation and user-fees to the extent that Member States judge it 
compatible with their objectives; 
(iv) ensuring that a reduction in the overall tax burden, which is desirable in most Member 
States, is conditional upon initially putting the budget deficit on a firm downward path. 
In the interim, however, Member States stand to gain from a broadening of the tax 
base and a modification in tax structures so as to reduce the tax burden on labour. In 
particular, reductions in non-wage labour costs at the lower-end of the wage scale 
should be considered. 
1.5. Better functioning of product and service markets 
To foster growth, and thus employment, whilst maintaining low inflation, it is essential that 
action on the macro side is added to by measures aimed at ameliorating the functioning of 
product and service markets in general and at generating higher competition and a more 
flexible functioning of the price mechanism in particular. This will essentially require a 
further reinforcement of competition policies and a curbing of state aids in full respect of 
the objectives of Article 130a of the Treaty concerning economic and social cohesion. 
It is also crucial to fully exploit the internal market potential in an open and competitive 
environment through the transposition into national law and effective enforcement of single 
market legislation. In sectors where transposition is lagging behind, a particular effort is 
needed to present all necessary proposals to national parliaments before the end of 1996. 
To enhance the Community's competitiveness, measures aimed at promoting innovation, at 
favouring the emergence of the information society and at achieving a working 
environment more conducive to initiative and to the development of SMEs should be 
swiftly implemented. ' Of course, in these areas the individual Member States largely hold 
the key. However, the potency and effectiveness of national actions, which are essential, 
can be significantly added to via co-ordination and appropriate actions at the Community 
level. At this level, among the wide range of activities currently being pursued, specific 
attention should be given to a number of recent proposals of the Commission. Action to 
remove the remaining obstacles to the effective implementation of the TENs projects 
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should be initiated. Further work is also needed to ease the impediments currently 
hampering the development of the SME sector. A more co-ordinated R & D effort is 
required both at the level of the Member States themselves and between the latter and 
specific EC-funded research programmes. The Commission will also pursue its policy to 
improve competition in EU-markets. Finally, to increase the job-creating potential of 
environmental policies, these policies should - to a greater extent than at present - rely on 
market-based instruments, including fiscal ones, both at the national and Community 
levels. 
1.6. Fostering employment and labour market reforms 
More than 2'/2 years after the publication of the Commission's While Paper on Growth, 
Competitiveness and Employment and with the Essen employment strategy set in place for 
some time, the Community finds itself with a dismal employment record over the period in 
question. Although the expected recovery will lead to renewed job creation and will 
reverse the current upward trend in unemployment, it is likely that more than 17 million 
people will still be unemployed in 1997 in the Community. Assuring a sustained and 
significant improvement in employment and unemployment requires not only durable, 
high, economic growth and efficient product and service markets, but also a broad range of 
labour market reforms. 
Eliminating existing rigidities as well as ensuring a more efficient operation of labour 
markets is at the heart of national efforts to ensure both a tension-free and stronger 
medium-term expansion and a more employment-creating growth pattern. Member States 
have been making efforts to reform their labour markets. They are encouraged to intensify 
their actions while ensuring both equity and efficiency in the social protection system. The 
implementation of policies aimed at improving the occupational and regional mobility of 
the labour force and at enhancing the efficiency of employment services should reduce 
bottlenecks which could lead to an early end to the growth process. 
Suitable policies should be conducted in order to adapt the whole educational system — 
including vocational training ~ both to the needs of markets and to the improvement of 
human capital, thereby fostering the growth potential of the economy. In this respect, 
priority should be given to enhancing the employability of young people, women and the 
unemployed, in particular low skilled, inexperienced labour, and to reducing skill 
mismatchs on the labour market by providing training better fitted to the changing needs of 
the labour market. 
A higher labour-content of growth should be favoured by the maintenance of appropriate 
average wage trends and in some cases by a larger wage differentiation according to 
qualifications, regions and, to some extent, sectors and firms. A reduction in the labour 
costs of low-productivity jobs, either through direct wage developments (e.g. by 
introducing entry wages in appropriate cases) or through a targeted reduction in non-wage 
labour costs, should increase the incentives to the employment of low-skilled labour. Such 
measures should be compatible with Community competition policy. Adaptations, at the 
firm level, of working-time and work organisation will also act in this direction. Finally, 
the promotion of local and regional initiatives in the field of new services containing a high 
labour-intensive dimension, such as those identified in the Communication from the 
Commission on a European strategy for encouraging local development and employment 
initiatives, should also be encouraged. 
All the above elements are featured in the Community's common employment strategy, 
initiated at the Essen European Council and refined subsequently at both the Cannes and 
Madrid Councils. The procedures adopted at these European Councils need to be made 
more efficient. In this respect, Member States' multi-annual employment programmes 
must be developed further, to make them more effective instruments in the area of labour 
market policy. Furthermore, the Commission's initiative to mobilise all actors around the 
top priority of fighting unemployment is aimed at making maximum use of the existing 
instruments at the level of the Union. 
•10-
IL EXPLANATORY MEMORANDUM 
11.1 Progress report on the implementation of the 
1995 Broad Economic Policy Guidelines 
II. 1.1. Introduction 
In conformity with the Maastricht Treaty, Broad Economic Policy Guidelines were adopted 
in December 1993, July 1994 and again in July 1995. Following mandates from the 
European Council, the implementation of the 1993 Guidelines was assessed in December 
1994. The execution of the 1994 Guidelines was examined on two separate occasions, 
once in December, and again in June 1995. 
This document reviews, following a request from the Cannes-European Council, the 
progress made in implementing the 1995 Broad Economic Policy Guidelines2 since their 
adoption by the EcoFin Council in July of last year. In an attempt both to streamline the 
surveillance procedures and to present the necessary information and analysis for the 
adoption of the new guidelines, an assessment of the past guidelines will henceforth form 
an integral part of the Commission's explanatory memorandum. Such an assessment 
constitutes a valid test of the degree of commitment of the individual Member States to 
shared policy responsibilities. Because of the medium-term orientation of economic 
policies, this report examines trends evident since the adoption of the first guidelines 
Recommendation in 1993. 
The policy issues raised in the 1995 Guidelines were addressed against a background 
where the economic recovery process, which commenced towards the second half of 1993, 
had apparently become firmly established. The pace and composition of the economic 
expansion in 1994 had given rise to optimism that growth rates of the order of 3 per cent 
could be realised in both 1995 and 1996. 
Since then, however, there has been a marked slowdown in growth. An extended analysis 
of the factors behind the slowdown was presented in the Commission's 1996 Annual 
Economic Report with only the key points of that analysis being summarised here. The 
quarterly rates of GDP growth of the order of VA to 4 percent (annualised rate) witnessed 
throughout most of 1994 decelerated to around 2 percent in the second and third quarters of 
1995 culminating in virtual stagnation in the last quarter of last year. This lower than 
expected output performance was reflected in adverse labour market developments. The 
An initial review of the 1995 guidelines took place in December 1995. 
11 -
moderate rise in overall employment in the Community since the middle of 1994 came to a 
standstill towards the end of 1995. Particularly in the countries which were hardest hit by a 
worsening in their competitive position following the exchange rate crisis of spring 1995, 
employment trends turned markedly negative. But also in several other countries, the 
economic slowdown brought employment gains to a halt. In sum, employment is 
estimated to have grown by only Vi a per cent last year in the Community as a whole. 
Apart from the fading of the initial impulse from stockbuilding, the significant slowdown 
during 1995 essentially reflected two adverse developments in financial markets. Firstly, 
the marked rise in long-term interest rates on world and Community financial markets 
during 1994 appear to have exerted a stronger-than-expected restraining influence on 
companies' and households' spending decisions in 1995. The rise in yields varied 
considerably across EC Member States, reflecting inter alia their economic performance, 
policy stance and credibility. In particular, long-term interest rates rose significantly more 
in countries whose public finances were not yet perceived by the'markets as having been 
put on a clearly sustainable downward path. 
Table 1 
Nominal interest rates 
(per cent) 
B 
DK 
D 
GR 
E 
F 
IRL 
I 
NL 
A 
P 
FIN 
S 
UK 
EUR Dec. 
1993 Dec. 
1994 April 
1995 Jan. 
1996 April 
1996 
Short-term1 
7.2 
7.3 
6.1 
19.9 
8.9 
6.5 
6.3 
8.6 
5.6 
5.8 
11.7 
5.9 
7.7 
5.3 
6.9 5.4 
6.2 
5.3 
17.9 
8.2 
5.9 
6.3 
9.0 
5.4 
4.8 
10.5 
5.7 
8.2 
6.4 
6.6 5.3 
6.9 
4.6 
17.2 
9.4 
7.7 
6.8 
10.8 
4.7 
4.5 
10.8 
6.0 
8.9 
6.7 
7.2 3.6 
4.4 
3.5 
14.6 
8.9 
4.7 
5.4 
9.9 
3.3 
3.7 
8.5 
4.2 
8.4 
6.4 
5.8 3.3 
4.0 
3.3 
14.1 
7.8 
3.9 
5.1 
9.4 
2.9 
3.0 
7.6 
3.9 
6.6 
6.0 
5.3 Dec. 
1993 Dec. 
1994 April 
1995 Jan. 
1996 April 
1996 
Long-term2 
6.6 
6.2 
5.7 
8.3 
5.8 
8.8 
5.7 
9.0 
6.3 
(6.8) 8.3 
8.8 
7.5 
11.5 
8.1 
8.6 
11.9 
7.6 
7.6 
11.5 
10.3 
10.7 
8.5 
(90) 7.9 
8.8 
7.1 
12.1 
7.8 
8.7 
13.0 
7.2 
7.4 
12.1 
9.4 
11.5 
8.4 
(8.9) 6.5 
7.0 
5.9 
9.5 
6.5 
7.2 
10.2 
5.9 
6.2 
9.4 
7.0 
8.3 
7.4 
7.3 6.7 
7.3 
6.4 
9.3 
6.5 
7.6 
10.1 
6.4 
6.5 
9.2 
7.5 
8.4 
8.1 
7.6 
' Three-month money market rate. 
2 Yield on benchmark 10 year bonds, unless for EUR until April 1995 where data refer to 
yields on government bonds.. 
Source: Commission's Spring 1996 forecasts. 
Secondly, and perhaps more importantly, the currency turmoil in the spring of 1995 had a 
significant impact on the economies of the appreciating as well as the depreciating 
countries. It was triggered by a marked weakening of the US-dollar in the wake of the 
Mexican Peso crisis. But the subsequent sizeable and abrupt movements between EC 
currencies seem to reflect the deeper, underlying, problem of the lack of credibility of 
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national budgetary consolidation plans and structural reforms and/or perceived risks of 
renewed inflationary tensions in a number of individual Member States. In Germany and 
the countries whose currencies are closely linked to the DM, the appreciation of the 
exchange rate implied a considerable tightening of overall monetary conditions, in spite of 
an easing in short-term interest rates, and a 
worsening of competitiveness and industry 
profitability. This in turn had knock-on effects 
on investment and led to a marked deterioration 
in business confidence. On the other hand, in 
countries whose currencies depreciated 
significantly, the short-term boost to export 
market shares was to some extent offset by 
lower growth on export markets, and by rising 
interest rates and the erosion of consumer 
purchasing power from higher inflation on the 
home market. Furthermore, at the level of the 
Community as a whole, si/.eable and abrupt 
intra-Community exchange rate movements 
jeopardise the proper functioning of the internal 
market, leading inevitably to suboptimal 
resource allocation. Table 2 
Nominal effective exchange rates 
Index, August 1992 = 100 
B 
DK 
D 
GR 
E 
F 
IRL 
1 
NL 
A 
P 
FIN 
S 
UK 
EUR Dec. 
1993 
99.9 
100.5 
100.8 
87.5 
78.4 
100.9 
92.8 
75.1 
102.6 
101.5 
8/7 
8?.5 
74 6 
887 
78.2 Dec. 
1994 
103.3 
102.2 
103.1 
82.9 
78.2 
102.4 
94.5 
72.7 
"Î04.3 
102.8 
88.3 
915 
77.5 
87.1 
80.2 April 
1995 
107.9 
107.2 
109.3 
82.9 
77.1 
106.3 
93.3 
63.2 
109.0 
107.3 
90.2 
96.8 
73.0 
83.2 
80.4 Jan. 
1996 
105.9 
106.8 
106.7 
80.2 
80.6 
106.7 
94.3 
71.8 
107.0 
105.5 
89.6 
95.8 
83.2 
82.1 
84.6 April. 
1996 
104.6 
105.4 
104.9 
80.9 
80.2 
106.0 
94.6 
73.9 
105.8 
104.2 
89.3 
91.1 
84.8 
82.4 
83.6 
Source: Commission. 
The above developments point to the need for increased policy co-ordination at the 
international level. They also clearly highlight the adverse impact on growth, employment 
and confidence of insufficient actions in those policy areas, directly under Member States' 
own responsibility, needed to further rebalance the policy-mix as recommended in the 1995 
Broad Economic Policy Guidelines. 
The progress review given below follows the four broad headings used in the Council 
Recommendation namely: price and exchange rate stability; sound public finances; 
competitiveness and employment and the labour market. 
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//. 1.2. Price and exchange rate stability 
stability ~ The 1995 Guidelines reaffirmed the objective, set in the 1993 and 1994 
exercises, of a rate of inflation of no more than 2 to 3 percent, as a step towards price 
stability, adding that this target was likely to be achieved in the majority of Member States 
in 1996. 
Chart 1 
10 INFLATION 
Interim indices of consumer prices* 
(March 1996 - average over 12 months) 
Range indicated jn the 
Guidelines 
o 
B DK D GR E F IRL I L NL A P FIN S UK 
" Interim Indices of Consumer Prices represent the first stage of a process towards 
Community harmonisation of national CPI calculations ItMt. M Indation has been on a steady 
downward Irend in (he 
Community since 1991 with 
the rate of increase of the 
deflator of private consumption 
falling from around 5/4 percent 
to a little over 3 percent last 
year, with most Member States 
. achieving the inflation 
objective already in 1995. As 
regards developments so far in 
1996, consumer price inflation in the Community in March of this year, as measured by the 
12 month average of the annual change in the interim indices of consumer prices (IICPs)3, 
stood at 2.9 percent. In ten of the Member States, inflation was within the range indicated 
by the Guidelines and in the majority of them the rate of inflation even stood at below 2 per 
cent. In the United Kingdom, inflation was close to 3 per cent. Of the remaining Member 
States, Portugal has come relatively close to the range in recent months. In Spain and Italy, 
inflation is falling visibly following last year's blip which reflected the combined impact of 
their currency depreciations and increases in indirect taxes. Finally, further marked 
progress was achieved last year in Greece but the disinflation process seems to have lost 
momentum in recent months. However, this development is related to exogenous factors. 
This relatively encouraging inflation performance since the adoption of the Guidelines 
reflects the combined impact of several forces. It incorporates not only influences such as 
a persistent, and even widening, negative output gap and subdued raw material price 
developments but also structural improvements in such areas as central bank independence, 
wage behaviour and competition. The notable success in bringing inflation down in 
several Member States and appropriate actions by the monetary authorities in countries 
whose currencies depreciated, has led to an enhanced credibility of anti-inflationary 
policies. Wage developments were fairly moderate last year broadly moving in line with 
3 These IICPs represent the first stage of a process towards harmonisation of CPI calculations The IICPs and the 
subsequent HICPs (Harmonised Indices of Consumer Prices), which will commence in January 1997, will be used in 
the context of the evaluation of compliance with the Maastricht inflation criterion 
-14 
price increases in most Member States, with nominal compensation of employees per head 
accelerating mildly to 3lA percent in the Community as a whole. This figure compares with 
an annual average rate of increase of close to 6 percent over the period 1991-93. Real unit 
labour costs contributed to improved profitability by declining by about I pel cenl or more 
in many Member States and by 1.3 per cent in the Community as whole, thereby respecting 
the Guidelines recommendation. 
Table 3 
Inflation developments 
(% change pa.) 
B 
DK 
D 
GR 
E 
F 
IRL 
1 
L 
NL 
A 
P 
FIN 
S 
UK 
EUR Private consumption 
deflator 
1993 
3.1 
0.3 
3.9 
13.7 
5.5 
2.2 
1.7 
5.4 
7.0 
2.3 
3.4 
7.1 
4.2 
5.7 
3.5 
4.1 1994 
3.0 
1.7 
2.7 
10.8 
4.9 
1.8 
2.7 
4.6 
24 
2.4 
3.0 
5.2 
1.3 
3.-1 
2.5 
3.2 1995 
1.5 
1.8 
2.0 
9.3 
4.6 
1.6 
2.5 
5.7 
20 
1.1 
2.2 
4.2 
1.1 
27 
2.6 
3.0 Nominal compensation 
of employees per head 
1993 
3.3 
1.6 
4.3 
10.1 
6.5 
2.2 
4.9 
3.7 
5.2 
3.1 
4.6 
9.1 
1.0 
4.4 
4.3 
4.0 1994 
4.8 
3.6 
3.2 
11.9 
3.1 
2.1 
3.2 
3.0 
3.4 
2.3 
3.1 
5.2 
3.5 
5.4 
3.5 
3.2 1995 
1.9 
3.3 
3.8 
12.5 
2.4 
2.4 
3.1 
5.2 
3.9 
3.0 
3.8 
4.6 
5.3 
3.0 
3.1 
3.5 Real unit labour costs 
1993 
-0.4 
-1.5 
-0.1 
-0.4 
-0.5 
0.1 
-1.7 
-24 
-?{•> 
06 
03 
0.8 
-6.6 
-1.4 
-2.6 
-1.0 1994 
-0.7 
-3.0 
-2.6 
1.3 
"* -3.4 
-1.9 
-2.0 
-40 
-0.9 
-2.5 
0.6 
-1.4 
-2.9 
-1.1 
-2.4 
-2.5 1995 
-15' 
0.5 
-0.7 
1.9 
-2.6 
-0.3 
-2.6 
-3.1 
08 
-0 1 
-0.3 
-3.5 
-0.4 
-2.4 
-1.0 
-1.3 
Source: Commission's Spring 1996 forecasts. 
Nevertheless, in some countries wage trends were disappointing; not only in those where 
the disinflation process has not yet been completed but also for instance in Germany where 
wage settlements were relatively high compared with the stated inflation objective of the 
monetary authorities. Together with the appreciation of the DM, these wage agreements 
contributed to the erosion of competitiveness and profitability in the internationally 
exposed sectors. In Italy, wage costs accelerated in 1995 but the rate of increase remained 
slightly below inflation. Continued vigilance is necessary to avoid the development of a 
wage-price spiral which, if it were allowed to get hold, would raise the future costs of 
achieving price stability. In Finland, wages rose significantly in both nominal and real 
terms in 1995. However, due to the moderate two-year incomes policy agreement, the rise 
in wages and salaries will decelerate substantially in 1996 and 1997. 
Exchange rate stability — Following the exchange rate turmoil of Spring 1995, a broad 
degree of stability slowly began to re-emerge over the months to September 1995. Among 
the factors contributing to this process was a strengthening of the US dollar in the months 
-15-
through to August, a monetary easing by the Bundesbank in March and reinforced efforts 
at budgetary consolidation in several Member States. This benign situation was to some 
extent interrupted in September with a renewal in exchange rate volatility amongst 
European currencies. The factors responsible for this re-emergence of tensions included a 
renewed weakening of the dollar and specific economic and political factors in a number of 
Community countries allied to a resumption of concerns with regard to the prospects for 
EMU. However, despite this interruption, calm has returned to the markets with the 
currency movements in the period 1994-95 having been largely reversed in the early 
months of this'year. 
The currencies of Greece, Italy and the United Kingdom have continued to be outside the 
ERM. Of the three new Member States, only Austria entered the ERM at the beginning of 
1995. 
Developments in relation to short- and long-term interest rates in 1-995 in part reflected the 
tensions on the foreign exchange markets. The Bundesbank cut the discount rate on four 
occasions since March 1995 against the background of slow money supply growth and 
better inflation prospects in Germany, thereby providing most other Member States with 
the necessary room to follow suit. Having widened sharply amid the exchange rate 
tensions in the spring, short-term interest rate differentials with respect to corresponding 
rates in Germany narrowed in most Member States in the course of 1995. The pace of 
narrowing in differentials has varied among Member States and has in most cases reflected 
developments in their exchange rates against the DM. Significant differentials remain in 
several Member States where financial markets remain concerned at the credibility of anti-
inflation and/or budgetary policies. 
At the long end of the market, the sustained decline in interest rates in 1995 (following the 
increase in 1994) was sharply reversed in the early months of this year. The recent rise 
across the Community largely reflects spillover effects from developments in the United 
States, where evidence of buoyancy in the economy has been seen as heightening the 
possibility of a monetary tightening by the Federal Reserve. As with short-term interest 
rates, the trend in differentials between Germany and other Member States has been 
generally downward, although substantial differentials persist in some Member States 
where exchange rate credibility remains closely tied to inflation and/or budgetary 
developments. 
-16-
II. 1.3. Sound public finances 
Many countries came out of recession in 1993 with serious budgetary imbalances. The 
need for urgent action in this area was recognised in the earlier Guidelines exercises. 
Unfortunately, many Member States, despite the relatively good economic conditions 
prevailing in 1994 and early 1995, had not made substantial inroads into their budgetary 
problems at the time of last year's Guidelines exercise. 
The public finance objectives of the 1995 Guidelines were that in the short run Member 
States should not only rely on the positive benefits which were expected from the workings 
of the automatic stabilisers to improve their budgetary positions but that they must also 
take full advantage of all the growth opportunities to step up fiscal consolidation by 
reducing structural deficits. Member States were urged to reduce their budget deficits to 
below 3 percent of GDP as soon as possible. Any additional room for manoeuvre provided 
by stronger than expected growth or a more favourable interest rate evolution was 
recommended to be used to accelerate the process of budgetary consolidation. 
Developments in 1995 ~ In overall terms, the budgetary position of a large majority of 
the Member States registered some progress in 1995. However, the degree of improvement 
was insufficient given both the extent of the fiscal difficulties to be surmounted and the 
official commitments to do more. The sharp cyclical slowdown experienced in some 
Member States over the course of the year, and especially in the last quarter of 1995, 
obviously made progress towards sounder public finances more difficult. However, fiscal 
slippages in several countries were a clear factor behind the overall insufficient 
improvement in the underlying budgetary positions, as measured by the Commission 
services estimates of the cyclically-adjusted budget balances. 
In fact, general government net borrowing in the Community in 1995 came down by only 
half of a percentage point to a still unacceptably high level of 5 percent of GDP, which is 
substantially higher than the figure anticipated at the time of the drafting of the Guidelines 
in May of last year. Of the budgetary adjustment which took place, roughly half of the 
improvement was due to non-cyclical factors; the estimated reduction in the cyclically-
adjusted budget deficit (lA of a percentage point ) was smaller than expected earlier. 
At the level of actual budget deficits, ten of the fifteen Member States have registered some 
progress in 1995, varying from gains of lA a percentage point m the case of Portugal to 
nearly 3 percentage points in Greece. Nine of these ten countries also registered an 
improvement in their structural deficits. The exception was Finland where the widening in 
the adjusted deficit was mainly explained by the timing of tax repayments. Four countries, 
namely Denmark, Greece, Italy and Sweden, achieved improvements in their cyclically-
•17-
adjusted deficits of between 1 and 3 percentage points. All the latter four Member States, 
with the exception of Denmark, still have deficits well above the 3 per cent of GDP 
reference value at the start of 1996. Belgium, Spain, France and the United Kingdom 
achieved discretionary reductions of the order of a XA to VA of a percentage point. 
Table 4 
Actual and cyclically-adjusted general government budget balances 
(per cent of GDP) 
B 
DK 
D 
GR 
E 
F 
IRL 
1 
L 
NL 
A 
P 
FIN 
S 
UK 
EUR Actual budget balance 
(level) 
1993 
-6.7 
-3.9 
-3.5 
-14.2 
-7.5 
-6.1 
-2.4 
-9.6 
1.8 
-3.2 
-4.3 
-7.1 
80 
-123 
-7.8 
-6.2 1994 
-5.3 
-3.5 
-2.5 
-12.1 
-6.9(2) 
-5.8 
-2.0 
-9.0 
2.2 
-3.2 
-4.5 
-5.8 
-6.3 
108 
6.8 
-5.5 1995 
-4.5 
-1.4 
-3.5 
-9.2 
^.2(2) 
-5.0 
-2.4 
-7.1 
0.3 
-3.4 
-6.2 
-5.4 
-5.6 
-8.1 
6.0 
-5.0 Change in actual 
budget balance* 
1993 
0.4 
-1.0 
-0.7 
-1.9 
-3.3 
-2.0 
0.1 
0.0 
1.0 
0.7 
-2.2 
-3.7 
-2.2 
-4.5 
-1.5 
-1.1 1994 
1.4 
0.4 
1.0 
2.1 
0.6 
0.3 
0.4 
0.6 
0.4 
-0.0 
-0.2 
1.3 
17 
1b 
1.0 
0.8 1995 
0.8 
2.1 
-1.0 
2.9 
0.7 
0.8 
-0.4 
1.9 
-1.9 
-0.2 
-1.7 
0.4 
0.7 
2.7 
0.8 
0.5 Change in cyclically-
adjusted balance' 
1993 
2.6 
-0.7 
1.0 
-0.9 
-1.1 
-0.4 
1.3 
1.4 
2.3 
-1.4 
-2.2 
0.7 
-1.7 
-1.5 
0.2 1994 
1.2 
-1.3 
0.8 
2.2 
0.7 
-0.4 
-0.5 
0.4 
0.1 
-0.3 
-0.5 
1.8 
0 3 
03 
0 1 
0.3 1995 
0.5 
1.6 
-0.9 
2.6 
0.4 
0.5 
-2.0 
1.3 
-2.0 
-0.2 
-1.6 
0.2 
12 
1.1 
0.6 
0.3 
1) Commission services estimates. A "+" indicates an improvement; a "-" indicates a deterioration in the budget balance. 
2) This time series includes social security contributions still on a cash basis. Preliminary accounting on an accruals basis by national sources 
shows figures of -6.2 per cent of GDP for 1994 and -5.8 per cent of GDP for 1995. The time series will be updated on an accruals basis 
once certain issues concerning the correct application of statistical definitions have been clarified. 
Source: Commission's Spring 1996 forecasts. 
The five remaining countries experienced a worsening in both their actual and cyclically-
adjusted budget deficits. As regards cyclically-adjusted budget balances, deteriorations of 
around a VA of a percentage point were registered in the Netherlands, VA of a percentage 
point in Germany and between VA and 2/4 percentage points in Ireland, Luxembourg and 
Austria. In the case of Germany, the overrun was partly due to unexpected revenue 
weakness. In Ireland, against a background of strong growth, policy appears to have been 
pro-cyclical although special factors, such as the social security settlement were also at 
play. Despite some slippage, Luxembourg, as with Ireland, still respects the Maastricht 
budgetary reference value. Finally, in Austria although the new government is tackling the 
problem, it is clear that there was a serious budgetary deterioration in 1995. Efforts to 
reverse the structural deterioration which occurred last year are appropriate in all these five 
Member States but are especially necessary in those countries with cyclically-adjusted 
deficits in excess of 3 per cent of GDP. 
-18-
On a more positive note, the bulk of the fiscal adjustmeni which took place over (he hist 
two years was centred on the spending side, with the share of government expenditure in 
GDP falling by about 1% percentage points in the Community as a whole, though 
remaining above 50 per cent of GDP. A drop in the government spending ratio was a 
common trend amongst a large majority of Member States. Furthermore, in all countries, 
with the exception of Portugal, there was a decline in non-interest expenditure. 
Table 5 
Receipts, expenditures and interest payments of general government 
(in % of GDP) 
1 Receipts 
I 1993 
B 
DK 
D 
GR 
E 
F 
IRL 
1 
L 
NL 
A 
P 
FIN 
S 
UK 
EUR 49.6 
58.3 
465 
34.4 
42.0 
49.3 
38.9 
47.4 
45.0 
53.1 
49.4 
36.3 
53.8 
60.3 
35.9 
46.2 1994 
50.4 
588 
46.8 
35.8 
41.0 
48.9 
39.5 
45.2 
44.6 
50.8 
48.1 
38.0 
54.6 
59.6 
36.4 
45.9 1995 
499 
583 
463 
36.8 
39.9 
49.3 
37.3 
44.8 
41.6 
48.6 
46.9 
39.4 
52.8 
59.5 
37.6 
45.7 Expenditure 
1993 
56.3 
62.2 
50.0 
48.5 
49.5 
55.5 
41.3 
57.0 
43.2 
56.3 
53.7 
43.4 
61.9 
72.6 
43.7 
52.5 1994 
556 
62 3 
493 
48.0 
47.9 
54.7 
41.6 
54.2 
42.4 
54 1 
52.6 
43.8 
60.9 
70.4 
43.2 
51.4 1995 
544 
59.7 
49.8 
46.0 
46.0 
54.3 
39.7 
51.8 
41.3 
51.9 
53.1 
44.8 
58.4 
67.6 
43.6 
50.8 (of which) Interest payments 
1993 
10.5 
78 
33 
12.8 
5.2 
3.7 
6.7 
12.1 
0.4 
6.4 
4.3 
6.7 
4.6 
6.2 
2.9 
5.5 1994 
10? 
7 1 
34 
142 
5 1 
3.8 
5.9 
10.7 
0.4 
6 1 
4 1 
5.8 
5.1 
68 
3.3 
5.3 1995 
9? 
67 
3.8 
12.9 
5.4 
3.7 
5.2 
11.2 
0.3 
5.8 
4.3 
5.8 
5.4 
7.1 
3.7 
5.4 
Source: Commission's Spring 1996 forecasts. 
As regards government receipts, a moderate decline was noticeable in the Community as a 
whole and in several Member States. A rather marked drop in the proportion of 
government receipts to GDP occurred in the Netherlands, Austria and Luxembourg over 
the last two years. Conversely, the tax burden showed a rising tendency in Greece, France, 
Portugal and the United Kingdom. 
Table 6 
Gross government debt 
(pot cent of GOP) 
B 
DK 
D 
GR 
E 
F 
IRL 
1 
L 
NIL 
A 
P 
FIN 
S 
UK 
EUR 1993 
Level 
137.9 
80.1 
48.2 
111.8 
60.5 
45.4 
97.5 
119.4 
62 
81.1 
628 
672 
57.3 
76.0 
48.5 
66.2 1994 
Level 
136.0 
76.0 
50.4 
110.4 
63.1 
48.3 
91.1 
125.6 
5.9 
77.6 
65.0 
70.0 
59.5 
79.3 
50.2 
682' Annual 
Change 
-1.9 
-4.1 
+2.2 
-1.4 
+2.6 
+29 
-6.4 
+6.2 
-0.3 
-3.5 
+22 
+28 
+2.2 
+3.3 
+ 17 
+2.0 1995 
Level 
1337 
71.9 
58.1 
111.5 
657 
524 
85.5 
1248 
59 
790 
694 
71 6 
' 59.6 
799 
540 
71 2 Annual 
Change 
-2.3 
-4.1 
+7.7 
+ 1.1 
+26 
+4.1 
-5.6 
-08 
0.0 
+ 1 4 
+4.4 
+ 1 6 
0.0 
+06 
+3.8 
+3.0 
Source: Commission's Spring 1996 forecasts. The insufficient degree of progress in 
reducing the Community's government 
budget deficits was reilccted in the 
average debt/GDP ratio figures for the 
Community which increased in 1995 by 
three percentage points to over 71 percent. 
While the inclusion in the German figure 
of the unification-related debt take-over 
by the Gerrrian federal government, 
essentially the Treuhand-anstalt, was 
clearly an important factor in explaining 
the increase for the Community as a 
whole, it should be noted that the debt-to-
GDP ratio continued to worsen in a total 
o( 9 Member States in 1995. In 
Luxembourg and Finland the debt ratio 
did not change, whereas Denmark, Belgium, Ireland and Italy managed to reduce their debt 
ratios by between almost 1 and 6 percentage points. Finally, it should be stressed that 
rising debt ratios in a majority of Member States at a time of overall budgetary 
improvement demonstrates the need for an intensification of fiscal retrenchment efforts. 
In overall terms therefore, the 
contribution of discretionary fiscal 
consolidation has been less than had 
been hoped for in 1995. This failure 
to fully realise earlier expectations is 
disappointing given that the 
importance of making steady 
progress towards meeting the fiscal 
convergence criteria has been 
publicly acknowledged by Member 
States in their national convergence 
programmes. It is also disappoint­
ing given the extent of the fiscal 
divergence which continues to 
persist, as reflected in the LcoFin 
Council decisions with regard to the 
existence of Treaty-defined Table 7 
Government deficits in 1995: 
Convergence programme (CP) projections 
and latest Commission (COM) forecasts 
B 
DK 
D 
GR 
E 
F 
IRL 
I 
NL 
A 
P 
FIN 
S 
UK Date 
6/92 (6/94) 
11/94 
11/93 
6/94 
7/94 
11/93 (7/95) 
6/94 
9/92 (6/95) 
10/94 
5/95 
11/93 (10/94) 
9/95 
6/95 
3/95 CP(a) 
3.8(4.3) 
3.0 
2 to 3 
107 
5.9 
4.2/4.1 (5.0) 
<3 
4.7(7.5) 
3.7 
4% 
3 V. (b) 5.8) 
5.3 
9.0 
3 V (C) COM 
45 
1.4 
3.5 
9.2 
6.1 
5.0 
2.4 
7.2 
34 
6.2 
5.4 
5.6 
8.1 
6.0 
a) Figures in brackets are revised official targets, not submitted 
as convergence programmes at Community level 
b) Average for 1995-97 
c) Financial year 1995/96 
Source Commission's Spring 1996 forecasts 
-20-
excessive deficits. 
Budgetary outlook — The crucial task facing a large number of countries is to continue to 
make progress towards putting their public finance positions onto a firmer footing. With 
regard to actual budget deficits, the vast majority of countries are forecast to reduce their 
deficits in 1996. Nevertheless, on the basis of concrete measures announced so far and the 
more prolonged than expected pause in the recovery, progress would appear insufficient 
when compared with the targets set both in the Guidelines and in national convergence 
programmes. Only 3 Member States (Denmark, Ireland and Luxembourg) are now likely 
to have deficits below the 3 percent reference value this year compared with an expectation 
of 7 countries at the time of the adoption of the 1995 Guidelines. 
Since the adoption of the Guidelines in July 1995, almost all the Member States have 
announced new budget proposals for 1996 and, in some cases, for 1997. These proposals 
all aim for further reductions in government deficits this year and next, to 3 per cent of 
GDP or below by 1997 at the latest in all countries except Greece and Italy. Particularly 
sizeable packages of adjustment measures were announced by the governments in Belgium 
in September 1995 (tax increases and expenditure cuts), Finland in September 1995 
(expenditure cuts in 1996 and 1997, Italy in September 1995 (measures to fight tax 
evasion, increases in social security contributions and cuts in transfers to non-government 
institutions), France in August 1995 (fiscal measures to reduce the central government 
deficit), in November 1995 (fundamental reform of the social security system) and in May 
1996 (expenditure cuts and restoration of social security account), by the newly formed 
government in Austria in April 1996 (expenditure cuts, tax increases and reform measures 
aimed at the pension system) and by the German government also in April 1996 
(expenditure cuts). 
Slower economic growth, on average in 1996, than expected when most of these budget 
plans were drawn up is making deficit reduction more difficult this year. Several Member 
States have already announced additional measures (e.g. freezes on certain expenditure 
items in Germany and France ) to offset some of the slippage caused by the impact of the 
weaker growth on tax revenues and social transfers, and others are likely to do so in the 
coming months. 
Provided that all the measures which have been decided are fully implemented by the 
respective Member States then a substantial correction of underlying budgetary positions is 
in prospect. However, it must be reiterated that, while these measures are clearly welcome, 
-21 -
in a number of cases they are still insufficient in relation to both the size of the problem to 
be addressed and the targets set in national convergence programmes. 
11.1.4. Competitiveness 
The 1995 Guidelines reiterated the importance of implementing reforms aimed at 
strengthening the underlying growth forces and enhancing the dynamism and 
competitiveness of the Community economies. 
It is clear that'the major onus is on the individual Member States to provide the conditions 
in which a truly competitive environment can be established and sustained. This can only 
be done by correctly focusing economic, fiscal and social policies in order to ensure that 
they continue to remain consistent with the Member States objectives in this area. These 
national efforts need however to be complemented and reinforced by action at the 
Community level. 
At the Community level, the importance of fully exploiting the opportunities provided by 
the internal market needs to be continuously stressed. As of April 1996, the global rate of 
transposition of internal market Directives was 89.7 percent. Denmark has the highest rate 
of transposition (96.6 %) followed by the Netherlands, the United Kingdom, Luxembourg 
and Spain. The sectors which continue to present the most problems in terms of the 
implementation of White Paper directives are public procurement, insurance and 
intellectual and industrial property. 
Action on the competitiveness front is being intensified in the context of the Commission's 
recent proposal for a Confidence Pact for Employment to reinforce efforts in the particular 
areas of research and development, Trans-European networks and in encouraging dynamic 
small and medium-sized enterprises (SMEs). 
This initiative by the Commission reinforces the actions already taken in the Community 
in a large number of areas dealing with competitiveness. The Community has continued its 
efforts over the last number of years to complement the single market initiative by setting 
in place an effective competition framework to ensure the successful operation and 
efficiency of Member State enterprises. The following are the most important 
developments: 
• The Commission presented important initiatives in the area of telecommunications last 
year with the objective to ensure a greater liberalisation of the regulatory framework. 
Such liberalisation is crucial to the Community's ambitions in relation to the 
Information Society. The implementation of full competition in telecommunications 
-22 
markets affects the competitiveness of the whole Community economy. The 
Commission also presented initiatives concerning the Community's postal services. 
Competition policy has also been taking on growing importance in boosting the 
competitiveness of the Community's industries. In 1995, the Commission has reviewed 
the Community frameworks for aids to SMEs, to shipbuilding and to R&D. 
Action has been undertaken in the area of legislative and administrative simplification 
The Competitiveness Advisory Group, consisting of high level experts and 
industrialists, presided over by Mr Ciampi, was nominated by the Commission and 
presented a report to the Madrid European Council in December 1995. 
The Madrid European Council took note of a Commission report on the key role that 
could be played by SMEs as a potentially important sector for generating growth and 
employment opportunities. The Commission's report, however, pointed out that these 
SMEs needed support through specific measures and a business-environment favourable 
for the development of SMEs. The Council therefore asked the Commission to make 
proposals to realise SMEs potential, to improve their competitive position and to 
encourage them in their business activities both in Europe and internationally. The 
Commission, in response, approved on 20 March 1996 a proposal for a new Multi-
annual Programme for SMEs for 1997-20004 which has been submitted to the Council. 
Some progress was also achieved last year with regard to Trans-European networks 
(TENs) in the transport, telecommunications and energy sectors. The Madrid European 
Council urged Member States to give top priority to the effective implementation of 
TEN projects and asked the EcoFin Council to take the necessary decisions to 
complement the financial resources currently earmarked for these networks. 
Community actions in the context of the Structural and Cohesion Funds, aimed at 
bolstering the physical and human capital of the weaker Community regions, continue 
to make an important contribution to the balanced development of all areas. 
Finally, environmental protection initiatives are being actively pursued by the 
Community internally and at the level of international fora. To increase the job-creating 
potential of environmental policies, the Madrid European Council emphasised that such 
policies should be based upon market instruments, including fiscal instruments. 
Document COM(96) 98 final of 20 March 1996. 
-23 
//. 1.5. Employment and the labour market 
The 1995 Guidelines emphasised the crucial role to be played by more active and more 
efficient labour market policies in achieving both a high rale of economic growth over 
many years and in increasing the capacity of that growth to generate jobs. As discussed in 
section 1, growth trends in 1995 were generally disappointing, with the pace of output 
expansion being insufficiently high to generate a substantial increase in employment. But 
provided that resolute progress will be made in further rebalancing the macro-economic 
policy framework, the Community could progressively move towards a sustained, 
employment-creating, growth path. 
One vital element of the Community's strategy for job creation is the importance of 
increasing the number of jobs associated with a given level of output ("the employment 
content of growth"). It should be noted, however, that it is difficult to assess whether 
underlying progress is being made in this area on the basis of observations for only a short 
period of lime. This is because measured labour productivity varies considerably over the 
economic cycle, reflecting the lagged response of employment to changes in economic 
growth. Nevertheless, the available evidence seems to indicate that there has been some 
improvement in the employment content of growth in a few countries, but no significant 
change in the majority of countries or for the Community average. 
Table 8 
Growth, employment and productivity 
Real GDP growth (% pa.) Employment (% p.a.) Labour productivity (% pa.) 
74-85 86-90 91-95 Memo 
f995 74-85 86-90 91-95 Memo 
1995 74-85 86-90 91-95 Memo 
1995 
B 
DK 
D 
GR 
E 
F 
IRL 
NL 
A 
P 
FIN 
S 
UK 
EUR 
USA 
JAP 1.8 
2.0 
1.7 
25 
1.9 
2.2 
3.8 
2.8 
1.8 
1.9 
2.2 
2.2 
2.7 
1.8 
1.4 
2.0 
2.3 
3.6 3.0 
1.4 
3.4 
19 
4.5 
3.2 
4.6 
3.0 
4.6 
3.1 
3.0 
5.1 
3.4 
2.3 
3.3 
33 
2.8 
4.5 1.3 
2.0 
18 
13 
1.4 
1.1 
4.8 
1.1 
2.4 
1.9 
2.0 
1.1 
-0.8 
0.1 
1.2 
1.3 
2.2 
1.3 1.9 
2.6 
1.9 
20 
3.0 
2.2 
8.6 
3.0 
3.2 
2.4 
1.8 
2.5 
4.2 
3.0 
2.4 
2.5 
2.0 
0.9 -0.3 
0.5 
-0.2 
10 
-1.4 
0.1 
0.1 
0.9 
0.5 
-0.1 
0.7 
-0.4 
0.3 
0.8 
-0.2 
0.0 
18 
0.7 1.1 
0.3 
1.5 
0.9 
3.3 
0.8 
1.0 
0.6 
3.1 
1.9 
0.7 
1.1 
0.2 
1.0 
1.8 
13 
2.1 
1.5 -0.4 
-0.4 
0.0 
0.9 
-0.4 
-0.1 
1.5 
-1.0 
2.7 
0.7 
1.1 
-0.4 
-3.6 
-2.2 
-1.2 
-0.5 
1.0 
08 0.4 
1.5 
-0.3 
0.9 
2.7 
1.2 
3.8 
-0.4 
2.5 
1.4 
-0.1 
-0.6 
2.2 
1.6 
0.6 
0.6 
15 
0.3 2.1 
1.5 
19 
16 
3.4 
2.1 
3.7 
1.8 
1.2 
2.0 
1.6 
26 
2.4 
1.0 
1.6 
20 
0.5 
3.0 1.9 
1.2 
19 
1 0 
1.2 
2.4 
3.6 
2.4 
1.5 
1.2 
2.2 
3.9 
3.2 
1.2 
1.5 
1.9 
0.6 
3.0 1.7 
2.4 
26 
0.7 
1.8 
12 
3.3 
2.3 
-0.3 
1.2 
0.9 
1.5 
29 
2.3 
2.4 
20 
1.1 
0.5 1.6 
1.1 
22 
1 1 
03 
1.0 
4.6 
3.4 
0.7 
1.0 
1.9 
3.1 
2.0 
1.4 
1.8 
1.9 
06 
0.6 
Source: Commission's Spring 1996 forecasts. 
-24-
In Spain, labour market reforms introduced in the most recent years seem to have 
contributed to a very strong employment growth in 1995 (2.7 per cent against a background 
of 3 per cent GDP growth) and this is expected to continue in 1996. Also in France, the 
Netherlands and to a lesser extent Belgium, recent measures seem to have contributed to a 
somewhat more favourable employment response to growth in 1995 than would have been 
expected on the basis of historical trends. For Denmark the favourable employment 
response may be partially due to the active labour market policies pursued. Essentially 
reflecting buoyant economic activity, Ireland experienced very strong employment growth 
in 1995 for the second consecutive year. In contrast, the employment performance in 
Germany has been hampered by a continuing shake-out in the country's large 
manufacturing industries under the pressure of a deterioration in international cost 
competitiveness, while significant job losses have been experienced in Italy in those 
service sectors increasingly exposed to competitive pressures and hurt by several years of 
very weak domestic consumption growth. 
The Guidelines also underlined the importance of both the 5 priority areas identified by the 
Essen European Council and of the latter's call to Member States to implement this strategy 
by preparing multi-annual programmes spelling out their policy intentions in this area. By 
providing a coherent presentation of the existing or planned national measures for the 
implementation of the strategy, these programmes should become an important instrument 
for monitoring and assessing progress in implementing labour market policies. To ensure 
their effectiveness, they should be better coordinated with the convergence programmes, 
indicating that the achievement of convergence, growth and employment is inextricably 
linked. Some changes in their present content and format will also be required, including 
national targets for specific measures and greater emphasis on medium and longer-term 
issues. 
The first assessment of the progress achieved in implementing the Community's 
employment strategy was presented in a joint report from the EcoFin and Social Affairs 
Councils and the Commission to the Madrid European Council. The report highlighted and 
commended the major efforts deployed by the Member States since Essen, in particular the 
acceptance by countries of the necessity of adopting an integrated approach based on the 
link between macroeconomic and structural employment policies. However, it also 
stressed that if a decisive improvement in the Community's employment situation was to be 
realised then an additional impetus would have to be given to labour market reforms in the 
Member States. A range of measures were singled out in the report as being essential to 
the strengthening of national initiatives in relation to employment reforms. On the basis of 
the recommendations contained in the joint report, the Madrid European Council urged 
Member States to prioritise a number of areas of action in their multi-annual employment 
-25-
programmes. On the basis of the programmes and a set of indicators, the joint effort to 
improve both the employment situation and the effectiveness of measures will be assessed 
at the Community level. 
Finally, since Madrid the debate on labour market reform has centred on, and is 
encapsulated in, the proposal of the Commission President for a Confidence Pact for 
Employment. The Pact is intended to give substance to the Madrid Council's affirmation 
that the objective of job creation remains the key policy priority for the European Union 
over the coming years. The macroeconomic and structural policy framework of the pact 
will be based on the strategy developed in the present and previous Guidelines with the 
relevant Community instruments also being used to engender dynamism, growth and 
employment. The Pact aims at arriving at concrete policy commitments involving the 
Social Partners with measures specifically related to employment creation. 
26-
11.2. Economie outlook 
The worsening economic climate in late 1995 and early 1996 has complicated the task of 
making progress towards the objectives of reducing unemployment and restoring sound 
public finances in the Community. However, a recovery in economic activity is expected 
to take place in the second half of 1996 and in 1997. This will lead to renewed job creation 
and reverse the current upward trend in unemployment. But in order to achieve a 
significant and durable reduction of unemployment, it is necessary to maintain strong 
growth of economic activity over a sustained period and to make further progress in the 
area of structural reform. 
11.2.1. Growth prospects 
The recent economic slowdown, job insecurity and uncertain income prospects have 
sapped confidence among consumers. Business confidence has suffered from large 
unwarranted shifts in exchange rates, from the absence of clear signs of a pick-up in final 
demand and from persistent structural weaknesses. Nevertheless, signs are emerging that 
the decline in confidence has come to a halt and demand may be picking up again in a 
number of countries. Consequently, economic activity in the Community is expected to 
bottom out in the course of the first half of this year. 
On the basis of sound supply-side fundamentals (in 
particular low inflation and relatively strong average 
investment profitability) and more favourable 
monetary and financial conditions, the Community 
economy is expected to see a recovery in the second 
half of 1996, reinforced by the end of the ongoing 
stock adjustment. The expansion is expected to 
gradually strengthen in 1997. In the Commission 
services' latest Economic Forecasts, economic 
growth in the Community as a whole is expected to 
be around 1 lA per cent this year followed by growth 
of around 2'/2 per cent in 1997. The upswing is 
expected to be driven by relatively strong extra-
Community exports, a renewed strengthening of 
capital formation and continued moderate but 
gradually accelerating private consumption. Table 9 
Real GDP 
(Real annual percentage change) 
B 
DK 
D 
GR 
E 
F 
IRL 
1 
L 
NL 
A 
P 
FIN 
S 
UK 
EUR 1993 
-1.6 
1.5 
-1.2 
-1.0 
-1.2 
-1.5 
3.1 
-1.2 
0.0 
0.2 
0.4 
-1.2 
-1.2 
-2.2 
2.2 
0.6 1994 
2.2 
4.4 
2.9 
- 1.5 
2.1 
2.7 
6.7 
2.1 
3.3 
2.7 
3.0 
1.0 
4.0 
2.6 
3.8 
2.8 1995 
1.9 
2.6 
1.9 
2.0 
3.0 
2.2 
8.6 
3.0 
3.2 
2.4 
1.8 
2.5 
4.2 
3.0 
2.4 
2.5 1996 
1.1 
1.3 
0.5 
2.0 
2.0 
1.0 
5.6 
1.8 
2.6 
1.8 
0.7 
2.3 
3.0 
1.2 
2.4 
1.5 1997 
2.3 
2.7 
1.8 
2.5 
2.9 
2.1 
4.9 
2.7 
3.0 
2.5 
1.1 
2.8 
3.6 
2.0 
3.0 
2.4 
Source: Commission's Spring 1996 Forecasts. 
- 27 -
In Germany, France and a number of neighbouring countries, the adverse effects of the 
strong currency appreciation in spring 1995 will gradually subside, partly due to a 
significant reversal of the initial currency overshooting. Aided furthermore by a 
considerable reduction in interest rates and an expected restoration of confidence, activity 
is expected to pick up during 1996, strengthening into 1997. In Italy, Sweden, Spain and 
other countries, a continued rebalancing of the macroeconomic policy-mix, which has 
helped their currencies regain, to varying degrees, lost ground, is likely to help lower short-
and long-term interest rates and spur confidence, thereby supporting a recovery in domestic 
demand no later than the second half of 1996 while reducing the reliance on exports for 
growth. In the United Kingdom, the recent easing of monetary conditions, improvements 
in the housing market and a favourable competitive position should sustain continued, non-
inflationary growth. 
Nevertheless, the economic outlook remains subject to substantial uncertainties. In 
countries whose currencies appreciated in 1995 the effects of competitiveness losses have 
not yet been fully overcome, and in most countries whose currencies depreciated in 1994-
95 interest rate differentials relative to the DM remain relatively high. In the current 
apprehensive climate and given high unemployment, the positive response of business and 
consumer spending to improved monetary and financial conditions and to the reduction in 
fiscal imbalances could be weaker or take place later than normal. 
Furthermore, if progress towards sounder public finances and structural reform were to be 
hampered by rising social and political resistance, this would undermine the credibility of 
stated economic policy objectives and might add to doubts amongst some observers as to 
whether a sufficient number of Member States would be ready to participate in EMU at the 
starting date of 1 January 1999. Such developments would likely lead to an increase in 
long-term interest rates and could create a risk of tensions in foreign exchange markets. 
This would have severe implications for the chances of a renewed and sustained recovery 
and job creation. 
However, some of the uncertainties surrounding the outlook may also point in a positive 
direction. Since the Community is currently enjoying favourable underlying economic 
fundamentals and the rebalancing of the policy-mix is expected to continue, the revival in 
economic activity could surprise in a positive manner once confidence is restored. 
28 
11.2.2. Employment trends 
Employment -- Given the anticipated weak expansion of economic activity in early 1996, 
employment trends are expected to remain weak in the months ahead. However, provided 
economic growth picks up as forecast, job creation should turn positive again in the course 
of the second half of 1996 and gain momentum in 1997. Overall employment is forecast to 
grow by a meagre lA of a per cent this year and by V* of a per cent next year. 
Table 10 
Labour market prospects 
Employment 
growth 
(percent per year) Unemployment rate 
(% of labour force) 
1995 1996 1997 1995 1996 1997 Not all Member States are expected to share in 
this modest pick-up in job creation in 1996. In 
Germany and Austria, employment is expected 
to fall considerably. If this prediction holds 
true, 1996 will be the fifth consecutive year of 
job losses in Germany where the economy is 
beset by a high relative cost level. In most 
other Member States, the expectations of job 
growth have likewise been revised 
downwards. In Belgium, Denmark, France 
and Portugal, employment is now expected to 
stagnate or fall this year. On the other hand, 
employment creation is expected to remain 
relatively strong (1 per cent or more) in 
Greece, Spain, Ireland, Luxembourg, the 
Netherlands, Finland and the United Kingdom. 
On current growth assumptions, employment 
is forecast to pick up more widely in 1997. 
But with significant job shake-outs expected to continue in the manufacturing sector, 
employment growth is expected to remain negative in Germany and, due to low economic 
growth, also in Austria. 
Unemployment trends — Against the background of sluggish job growth in the 
Community in 1996-97, unemployment is expected to rise further in the coming months, 
before starting to head downwards slowly in the course of the second half of 1996. For the 
year as a whole, the unemployment rate is expected to remain unchanged at last year's level 
of almost 11 per cent of the civilian labour force. Next year, it may decline slowly to \(?A 
per cent on average, possibly reaching WA per cent by the end of the year. B 
DK 
D 
GR 
E 
F 
IRL 
I 
L 
NL 
A 
P 
FIN 
S 
UK 
EUR 0.4 
1.5 
-0.3 
0.9 
2.7 
1.2 
3.8 
-0.4 
2.5 
1.4 
-0.1 
-0.6 
2.2 
1.6 
0.6 
0.6 -0.1 
0.0 
-0.8 
1.0 
1.4 
0.0 
2.3 
0.2 
1.7 
1.0 
-1.0 
-0.1 
1.7 
0.6 
0.9 
0.2 0.7 
0.7 
-0.1 
1.2 
1.5 
0.6 
1.7 
0.4 
2.6 
1.4 
-0.4 
0.5 
2.1 
1.0 
1.0 
0.6 9.9 
6.8 
8.3 
9.1 
22.9 
11.5 
14.4 
11.8 
2.9 
7.3 
4.0 
7.2 
17.2 
9.2 
8.8 
10.9 10.1 
6.1 
9.3 
9.1 
22.5 
11.7 
13.4 
11.8 
3.0 
7.2 
4.6 
7.4 
16.3 
8.8 
8.4 
10.9 9.8 
5.8 
9.4 
9.0 
22.1 
11.7 
12.8 
11.7 
2.9 
7.0 
5.1 
7.2 
15.0 
8.3 
8,0 
10.8 
Source: Commission's Spring 1996 Forecasts. 
The trends in unemployment in the individual Member States are largely a reflection of the 
expected employment trends. This year, the jobless rate is expected to rise significantly 
-29-
(by Vi a percentage point or more) in Germany and Austria although relative to the 
Community average joblessness remains relatively low in the latter country. Belgium, 
France and Portugal may also see a deterioration and the slow growth of employment is 
sufficient only to stabilise unemployment in Italy. 
On the other hand, unemployment is likely to continue falling in six Member States. This 
includes the three countries which are hardest hit by high unemployment (Ireland, Finland 
and Spain) although the level of joblessness continues to be extremely high in these 
countries. In all three, the impact of strong employment growth on the jobless figures is 
partly off-set by a significant increase in the labour force. The most positive developments 
are expected in the United Kingdom and Denmark where a further reduction of around Vj a 
percentage point is expected to bring the unemployment rate to a level significantly below 
the Community average. In 1997, the level of unemployment is forecast to fall to varying 
degrees in all Member States except three countries. In Germany and France, the jobless 
rate is likely to stabilise and in Austria it may rise further. 
For the Community at large, recent growth and unemployment trends have been 
disappointing. Progress towards the objectives stated in Article 2 of the Treaty, namely the 
promotion of sustainable, non-inflationary growth and a high level of employment, have 
not been adequate. And recent as well as prospective developments has cast doubts on the 
feasibility of achieving the objectives set out in the Commission's 1993 White Paper on 
Growth, Competitiveness and Employment of creating 15 million additional jobs and 
cutting unemployment by half (relative to its 1994 level) by the year 2000. Therefore, 
resolute efforts in both the macroeconomic and the structural fields aimed at strengthening 
sustainable job creation must be undertaken. 
11.2.3. Convergence 
Price stability — Progress in reducing inflation in the Community and in the Member 
States is expected to continue this year and next. Average inflation in the Community, as 
measured by the deflator of private consumption, is expected to fall to some 2!/2 per cent 
this year and stay slightly below that level in 1997. 
The outlook for low and falling inflation is due not only to the recent widening and the 
expected persistence of a negative output gap in the Community economy, but also to the 
reinforced anti-inflation credibility of the economic policy framework. This credibility is 
well established in Germany and in the countries whose currencies are closely linked to the 
30-
Price and wage trends1 
(Annual percentage change) 
Prices Nominal wages 
per head DM. In a number of other countries, monetary Table 11 
policy has been conducted with considerable 
success with the aim of bringing inflation down 
to a pre-set target. In Italy, Sweden, Spain and 
Portugal, anti-inflation credibility has been 
enhanced by the establishment of central bank 
independence and in Finland by significant 
moves towards that goal. In these countries, the 
conduct of fiscal policy has a particularly 
important role to play in anchoring low 
inflation expectations and in maintaining the 
credibility of the currency. In all of them, a 
determined anti-inflationary stance of monetary 
policy combined with more credible efforts to 
place the public finances on a sound footing 
has, at various times, led to a significant 
appreciation of their currencies from previous 
lows. This is likely to further help the process 
of disinflation and, in turn, should facilitate a gradual relaxation of the monetary policies 
which have been restraining domestic demand in these countries. B 
DK 
D 
GR 
E 
F 
IRL 
NL 
A 
P 
FIN 
S 
UK 
EUR 1995 
TT 
1.8 
2.0 
9.3 
4.6 
1.6 
2.5 
5.7 
2.0 
1.1 
2.2 
4.2 
1.1 
2.7 
2.6 
3.0 1996 
To* 
1.8 
1.6 
8.3 
3.6 
1.8 
2.3 
4.1 
1.7 
1.9 
2.1 
3.1 
1.0 
1.7 
2.7 
2.6 1997 
_, 
2.4 
1.6 
7.0 
3.2 
1.6 
2.4 
3.5 
2.1 
2.0 
1.6 
3.0 
1.5 
2.5 
2.5 
2.4 1995 
"TT 
3.3 
3.8 
12.5 
2.4 
2.4 
3.1 
5.2 
3.9 
3.0 
3.8 
4.6' 
5.3 
3.0 
3.1 
3.5 1996 
1.7 
3.9 
2.6 
11.1 
3.8 
2.3 
4.0 
5.4 
3.5 
1.9 
3.0 
4.6 
4.0 
5.2 
3.6 
3.4 1997 
TT 
3.6 
2.4 
9.6 
3.6 
2.5 
5.0 
4.8 
3.8 
2.5 
2.9 
4.0 
4.0 
4.5 
3.6 
3.2 
' Private consumption deflator and nominal compensation 
per employeo, respectively. 
Source: Commission's Spring 1996 Forecasts. 
In the Community as a whole and in the majority of Member States the rise in nominal 
compensation per employee is expected to remain compatible with the need to lock in low 
inflation and promote job creation. On average, nominal wages are expected to increase by 
about VA per cent this year and slightly less next year, against the background of an 
expected inflation rate of around 2]A per cent per year. Real wage costs arc likely to 
continue expanding at a rate below productivity growth, thereby contributing to a further 
rise in overall business profitability. 
In some low-inflation countries, particularly in Germany, relatively subdued demand and 
the competitiveness losses associated with currency appreciation have limited the extent to 
which labour costs can be passed on to prices, implying a significant squeeze on profit 
margins in the exposed sectors. Obviously, wage trends cannot adjust instantaneously to 
movements in exchange rates and in cases of clear overshooting, a market-induced 
correction of exchange rates is certainly the most desirable option. Still, in order to 
safeguard the country's competitive position and its attractiveness for private sector 
investment, it is essential to contain pay settlements whilst at the same time implementing 
measures to enhance productivity and employment. 
-31 -
Conversely, in some depreciating countries, especially Italy, real wages are expected to 
recover some of the ground lost over previous years. In these countries, there is a risk that 
workers will seek to catch up too rapidly on previous years' losses in purchasing power 
through higher pay claims thereby fuelling a price/wage spiral. Instead, continuing 
adequate wage behaviour in combination with credible fiscal rectitude should engender an 
appreciation of these currencies, thereby lessening (imported) inflationary pressures. Such 
a policy mix was successfully implemented in Sweden last year. But in 1996, the rate of 
nominal wage increases in Sweden is forecast to rise significantly despite the expected 
deceleration in consumer prices. This wage behaviour risks being in conflict with the 
stability objective and docs not appear to adequately reflect the need to maintain and create 
jobs. Moreover, allied with the considerable appreciation of the Krona, it may threaten its 
external competitive position. 
Inflation (deflator of private consumption) is expected to stay below 3 per cent in 1996-97 
in the countries which already satisfy this goal. And in the seven countries where inflation 
did not exceed 2 percent last year (Belgium, Denmark, Germany, France, Luxembourg, 
Netherlands and Finland) it is expected to remain below that value this year and next (with 
the possible exceptions of Denmark and Luxembourg). The 1995 Broad Guidelines 
contained a recommendation that countries with an inflation rate in the range of 2 to 3 per 
cent should aim at progressing towards or below 2 per cent. In this regard, some progress 
is expected to take place in 1996 (Ireland, Austria and Sweden) but, at least on current 
forecast assumptions, less so in 1997 (due to a possible upward movement in Denmark, 
Ireland, Luxembourg and Sweden). 
Visible progress is expected to take place in the four countries where inflation currently 
exceeds 3 percent. Assuming continued efforts, inflation in Spain and Portugal is likely to 
approach the upper limit of the Guidelines objective (3 per cent) by 1997. Against the 
background of a marked slowing in import price increases and no further indirect tax 
increases, consumer price inflation in Italy is expected to decelerate to VA per cent in 1997. 
In Greece, with more determined efforts, especially on the budgetary front, it should be 
possible to reduce inflation further than the 7 per cent currently anticipated for 1997. 
Budgetary outlook for 1996-97 — A large number of Member States have taken 
significant steps to consolidate their public finances in 1996 and, in many cases, also in 
1997. According to the Commission services' estimates of cyclically-adjusted fiscal 
balances, present budget plans imply a reduction in the underlying fiscal deficit of the order 
of % of a percentage point of Community GDP in 1996 and, on currently known policies, a 
further VA a percentage point in 1997. Nevertheless, in the latest forecasts of the 
32-
Commission services, which take into account slower growth than previously foreseen, the 
outlook is for a considerably smaller reduction in the general government net borrowing in 
the Community in 1996 than had previously been envisaged. The average fiscal deficit is 
expected to be reduced by lA a percentage point to just below 4!/2 per cent of Community 
GDP in 1996 (versus VA per cent of GDP forecast in Autumn 1995). 
The Economic Forecasts include a scenario for 1997 on the basis of measures which have 
already been adopted or announced in sufficient detail. This does not include general 
policy intentions for which specific measures are not yet known. The forecasts take into 
account the economic policy packages announced in detail during April and early May by 
the German, French, Austrian and Swedish governments. However, they do not 
incorporate the planned adjustment measures recently announced by the Belgian 
government for 1997 because the measures to be taken were not known in sufficient detail 
at the time of the elaboration of the forecasts. In addition to those mentioned, a number of 
other Member countries are expected to take measures to improve their budgetary position 
between now and 1997. On the basis of currently known measures, and aided by 
improving cyclical conditions and low interest rates, the scenario for 1997 points to a 
reduction in the average actual budget deficit to VA per cent of GDP next year. 
Table 12 
Actual and cyclically-adjusted 
general government budget balances 
(percent of GDP) 
B 
DK 
D 
GR 
E 
F 
IRL 
NL 
A 
P 
FIN 
S 
UK 
EUR Actual balance 
Level 
1995 1996 1997 
-4.5 
-1.4 
-3.5 
-9.2 
6.23 
-5.0 
-2.4 
-7.1 
0.3 
-3.4 
-6.2 
-5.4 
-5.6 
-8.1 
-6.0 
-5.0 -3.2 
-0.9 
-3.9 
-8.1 
-4.8 
-4.2 
-2.0 
-6.3 
0.7 
-3.5 
-4.6 
-4.4 
-3.3 
5.2 
-4.4 
-4.4 -3.7 
-0.6 
-2.9 
-6.9 
-3.7 
-3.0 
-1.6 
-5.2 
0.3 
-2.9 
-3.1 
-3.7 
-1.6 
-3.1 
-3.7 
-3.4 Cycl. adj. balance 
Annual change1 
1995 1996 19971 
0.5 
1.6 
-0.9 
2.6 
0.4 
0.5 
-2.0 
1.3 
-2.0 
-0.2 
-1.6 
0.2 
-1.2 
1.1 
0.6 
0.3 1.8 
1.0 
0.3 
1.0 
1.5 
1.1 
0.3 
0.8 
0.4 
0.2 
2.2 
0.9 
1.5 
2.8 
1.5 
0.9 -0.9 
-0.2 
1.2 
0.8 
0.7 
0.9 
0.6 
0.8 
-0.6 
0.4 
2.0 
0.5 
0.7 
1.5 
0.3 
0.8 
' Based on currently announced measures. 
1 A positive number denotes an improvement in the 
cyclically-adjusted balance. 
3 This time series includes social security contributions 
still on a cash basis. Preliminary accounting on an 
accruals basis by national sources shows figures of • 
5.8% of GDP for 1995. The time series will be 
updated on an accruals basis once certain issues 
concerning the correct application of statistical 
definitions have bet::i clarified. 
Source: Commission's Spring 1 996 Forecasts. Table 13 
- General government gross debt 
(percent of GDP) 
B 
DK 
D 
GR 
E 
F 
IRL 
I 
L 
NL 
A 
P 
FIN 
S 
UK 
EUR Level 
1995 
133.7 
71.9 
58.1 
111.5 
65.7 
52.4 
85.5 
124.8 
5.9 
79.0 
69.4 
71.6 
59.6 
799 
54.0 
71.2 1996 
132.2 
71.0 
61.5 
111.8 
67.8 
56.1 
81.3 
124.5 
6.2 
79.4 
72.4 
72.2 
62.5 
80.8 
555 
73.9 1997' 
130.6 
687 
62.4 
111.4 
68.0 
57.8 
77 3 
122.8 
6.8 
787 
739 
718 
632 
796 
562 
74 3 Annua! 
change 
1996 
-1.5 
-0.9 
3.4 
0.3 
2.1 
3.7 
-4.2 
-0.3 
0.3 
0.4 
3.0 
0.6 
2.9 
0 9 
1.5 
2/ 19971 
-1.6 
-2.3 
0.9 
-0.4 
0.2 
1.7 
-4.0 
-1.7 
0.9 
-07 
1.5 
-0.4 
0.7 
-1.2 
0 7 
0.4 
' Based on currently announced measures. 
Source: Commission's Spring 1996 Forecasts. 
33 
The expected degree of budgetary improvement is insufficient to halt (he rise in the average 
gross debt-to-GDP ratio in the Community, which is projected to increase by almost 3 
percentage points to 74 per cent of GDP this year before roughly stabilising at that level in 
1997. In 1996, debt ratios are expected to rise in all Member Slates except four (Belgium, 
Denmark, Ireland and Italy) but in 1997 debt ratios are expected to stabilise or fall in about 
two thirds of the Member States. 
All countries except Germany and the Netherlands are forecast to reduce their actual 
deficits in 1996, but progress is generally expected to fall short of the targets set both in 
national convergence programmes and in the 1995 Guidelines. Only 3 Member States 
(Denmark, Ireland and Luxembourg) are expected to have actual deficits below the 3 
percent reference value this year. Particularly large reductions in the budget deficit (close 
to 1 percentage of GDP or more) are expected this year in Belgium, France, Greece, Spain, 
Italy, Austria, Portugal, Finland, Sweden and the United Kingdom. 
In the "unchanged policy" scenario for 1997, Germany, France, the Netherlands and 
Finland would join the group of countries with deficits below the Maastricht reference 
value and Austria and Sweden are expected to come very close to this value. In a number 
of countries, where further measures have not yet been disclosed in sufficient detail the 
additional effort required to reach the 3 per cent reference value would be of the order of VA 
percent of GDP (Belgium, Spain, Portugal, and the UK). Only in Italy and in Greece is the 
deficit expected to exceed the reference value by a wider margin in the current scenario 
with the deficit forecast at 5lA and 7 percent of GDP, respectively. 
* * 
Faced with an unsatisfactory growth and employment performance, there is an urgent need 
to relaunch the recovery process in the Community. The challenge facing policy-makers is 
to generate a renewed strengthening of confidence and job creation over the short-run while 
enhancing the conditions for stronger growth and employment over the medium term. This 
requires both the provision of a supportive macroeconomic policy framework, entailing a 
sound rebalancing of the macroeconomic policy mix, and intensified efforts in structural 
policies to reduce unemployment and enhance the Community's competitiveness. The 
Commission's 1996 Annual Economic Report gave a detailed analysis of the available 
policy options in the current situation. Furthermore, the Commission has received opinions 
of the European Parliament and the Social and Economic Committee on this report and 
34 
discussed it with the Social Partners. Against this background, the Recommendation for 
the 1996 Broad Economic Policy Guidelines sets out the policies which are necessary for 
achieving the Community's objectives in terms of growth, employment and convergence. 

31) 
ISSN 0254-1475 
COM(96) 211 final 
DOCUMENTS 
EN 10 
Catalogue number : CB-CO-96-237-EN-C 
ISBN 92-78-04429-6 
Office for Official Publications of the European Communities 
L-2985 Luxembourg