Proposal for a Council decision adopting the annual economic report 1991/92 on the economic situation in the Community and determining the economic policy orientation for the Community in 1992 - Annual economic report 1991/92 - Strengthening growth and improving convergence
Date: 1991-12-04
Institutions: European Commission
Subjects: European Union, activity report, economic convergence, economic growth, economic policy, economic situation

COMMISSION  OF THE EUROPEAN  COMMUNITIES 

C0M(91)484  final 

Brussels,4  December  1991 

Proposal  for a 

COUNCIL  PECISIQN 

ADOPTING THE ANNUAL  ECONOMIC REPORT 1991/92 ON 
THE ECONOMIC SITUATION  IN THE COMMUNITY  AND 
DETERMINING THE ECONOMIC POLICY ORIENTATION 
FOR THE COMMUNITY  IN 1992 

ANNUAL  ECONOMIC  REPORT 1991/92 

STRENGTHENING  GROWTH  AND 

IMPROVING 

CONVERGENCE 

(presented  by  the Commission) 

m: 

Proposal  for a 

COUNCIL  DECISION 

ADOPTING THE ANNUAL  ECONOMIC REPORT  1991/92 ON 
THE ECONOMIC SITUATION  IN THE COMMUNITY  AND 
DETERMINING THE ECONOMIC POLICY ORIENTATION 
FOR THE COMMUNITY  IN 1992 

THE COUNCIL OF THE EUROPEAN  COMMUNITY, 

having  regard  to  the  Treaty  establishing  the  European  Economic 
Community, 

having  regard  to Council  decision 90/141/EEC of  12 March  1990 on the 
attainment  of  progressive  convergence  of  economic  policies  and 
performance  during  Stage One of  Economic  and Monetary  Union,  and  in 
particular  article 4 ('), 

having  regard  to the proposal  of  the Commission, 

having  regard  to the opinion of  the European Parliament (2), 

having  regard  to  the  opinion  of  the  Economic  and  Social  Committee 
(3). 

HAS ADOPTED THIS DECISION: 

Article 1 

The Annual  Economic Report  1991/92, annexed  to the present  decision 
is adopted,  and  the  economic  policy  orientations  for  the  Community 
for  1992 put  forward  in the report  are  adopted. 

This decision  is addressed  to the Member  States. 

Article 2 

Done at Brussels, 

For  the CounclI 

The President 

(1) O.J. No L 78, 24.03.1990, p. 24. 
(2) Opinion 
(3) Opinion 

ANNUAL ECONOMIC REPORT 1991/92 

INTRODUCTION AND SUMMARY 

1-V 

1 

ECONOMIC SITUATION AND OUTLOOK 

1.  1991, a phase of slower growth  — 

.... 

1 

A.  A less dynamic worId economy  ..... 

..... 

B.  A diversified growth pattern In the Community  ........ 

1 

1 

2.  The outlook for 1992 and 1993: a gradual recovery  ........ 

9 

11.  PROGRESS  IN ECQNQMIC CONVERGENCE  IS STALLINQ 

1.  Nominal convergence Is slipping, but fundamentals 

remain pos I1 Ive 

, 

10 

10 

2.  Real convergence Is slowing .............. 

.,.  14 

III. PRIORITi*« ftg m»»***  ptm t*y iu TUC  rr+MMmirv  ....  ..........  16 

IV.  tiACRO-P^NnyiC POLICIES AND  POLICIES  FOR  STRUCTURAL  ADJUSTMENT 

19 

1.  Monetary pol Icy and ttoe BUS  . 

.... 

*...., 

19 

2.  Budgetary Pol rcy 

........  21 

3.  Po 11 c les  for structura I adjustment 

26 

- 

/  -

ANNUAL  ECONOMIC REPORT  1 9 9 1 - 92 

INTRODUCTION  AND SUMMARY 

1991-1992:  two years  of  slower  growth 

In  real 

countries: 

terms.  Cyclical 

have  pushed  Into 

World  economic  growth  has  practically 
cent 
factors, 
the  Gulf  crisis, 
industrialized 
the  United  Kingdom. 
In  Central 
substantial 
Community  remains 
output 
the  expectation 

and  Eastern  Europe 
In  output 
decline 

In  some  countries 

of  a  recovery 

In  addition, 

limited 

ground 
reinforced 

to  a  halt 

by  the  negative  effects 

recession 

the  economies  of  many 

United  States,  Canada,  some  EFTA  countries 

the  far 
Is 
In 

reaching 

transformation 

provoking 

Inevitably 
those  countries: 
the 
Improvement 

a 
the 

recessionary 
In  world 

though.  The  end  of 

and  a  certain 

to  growth  rates  of  about  2  per  cent 

In  1991:  +0.2  per 
of 
Important 
and 
occurring 
but 
the 
In 
to 

temporary, 
Impact  on 

phase 
lead 
In  1992. 

trade 

the  European  Community  has  also  been  affected 

them  much  better 

In 

functioning 
the  1980s  and  the  strong  positive 

the 

Improvement 

It  has  withstood 

took  place  during 

but 
The  fundamental 

The  economy  of 
factors, 
regions. 
economy  which 
Impulses  stemming  from  German unification 
growth,  albeit 
estimated 
recorded 
2&  per  cent 
United  Kingdom  Is  offset 
unification 

to  drop 

peter 

out. 

for 

In  1990.  1992  should  see  a  slight 

have  ensured 
at  a  reduced  rate.  The  rate  of  growth 
In  1991  to  about  1\k per  cent 

the  Community  as  a  whole  -  as  the  expected 
In  Germany  once 

by  a  slow-down 

of 

by 

these 
than  many  other  world 
the  Community 
growth 
of 
the  Community  Is 
the  2.8  per  cent 
-  about 
the 
recovery 
In 
of 
the  effects 

the  continuation 
In 

from 

Improvement  of  growth 

rates  of  growth  of 

pace  since  1984.  The  last 

economic  slow-down  must  be  seen  against 

In  1990  the  amount  of 

high 

The  current 
strong  growth  which  preceded 
a  satfsfactory 
by  unusually 
susta/n: 
firms  was  about  50%  higher 
expectations 
have 
firms 
Internal  market  effects. 
the  political 
and  legislative 
lead  to  an  actual  dismantling 

created  by  the 

to  bring 

led 

the  backdrop  of 

Investment  which  were  difficult 

the 
It.  The  Community  economy  has  been  growing  at 
characterized 
few  years  have  been 
to 
In  equipment  made  by  Community 
of 
1984.  The 
In  1987-1989, 
the  actual 
of 
to  come as 
In  the  years 
Implemented  and 

terms 
Internal  market  programme  may, 

Investment 
real 
In 

In  anticipation 

taken  are 

already 

Investment 
These  effects  will  be  felt 

forward 

than 

that 

decisions 
of 

Internal 

barriers. 

the  residual 

-  // 

Trie  Community  economy -  Key 

Indicators 

Average 
1983-87 

Average 
1988-89 

1990 

1991 

** 
1992 

** 
1993 

(") 

(a) 

Real  GDP (annual  %  Increase) 
Inflation 
Real  compensation  per  head 
Employment 
Unemployment 
(%  of  active 
Budget  deficit 
Current  account  balance 

population) 
(b)(%  GDP) 

(") 

2.4 
5.9 
1.3 
0.1 
10.5 

4.9 
0.7 

3.7 
4.3 
1.6 
1.6 
9.3 

3.3 
0 

2.8 
5.2 
2.3 
1.4 
8.4 

1.3 
5.0 
2.0 
0.5 
8.6 

4.1 
-0.2 

4.4 
-0.8 

2¥L 
4k 
1hk 
# 
9 

4& 
-1 

2% 
4* 
7% 
hit 
9)4 

4* 
-3/4 

(%  of  GDP) 

**  Forecast 
(b)  general 

(a)  private 

consumption 

deflator 

government  borrowing 

requirement 

Slower  growth  contains 

risks 

for 

the  major  Community  projects 

The  current 
the  Community. 

economic  slow-down 

carries 

a  double  economic  policy  message 

for 

I) 

il) 

It 
the  margin 

The 
to  an  Increase 
downward 
risks 
structural 
thus 

On  the  one  hand, 
reducing 
countries. 
1991, 
continuous 
to  change 
present 
become 
Convergence 
further 
this 
for  a  rapid 

Is 
complIcates 

Is  still 

less 

catch/ng-up 

Interrupted 
the 

necessary 

represents 

an  unwelcome  development  which 

for  manoeuvre 

for 
of  growth 

economic 
are 

leading, 

policy 

lower 

rates 

In  unemployment, 
trend  evident 

thus  bringing 

1986.  Social 

since 
the  positive 

Increasing 

as 

consequences 

already 
to  a  halt 

adjustment 
visible 

take  more 
the 
negative 
run  up  to  EMU and  slower 

time 
temporary 

to  materialize 

than 
the 

In 
task 
and  creates 
process. 

of  budgetary 
less 

consol/dation 

favourable 

Is 
In  many 
In 
the 
resistance 
the 
and 
ones. 
growth 
where 
conditions 

of 

hand, 

It 
adjustment 

constitutes 

which 

a  powerful 
took  place 

reminder 
during 

the 

that 

On  the  other 
economic 
although 
moderation 
had  deteriorated 
and  of 
positive 
correction 
bring 
1960s. 

the 

policy 
substantial, 
helped 

Improve 
substantially 

was  not 

sufficient 
the  profitability 
In 

or 
of 

unsettled 

conditions 
came 

trend, 

however, 
was  not  yet  complete. 
profitability 

to 
Further 
back  at 

Investment 

efforts 

least 

to 

the  wake  of 

which 

a  halt 

the 
followed 
In 

the 
1980s, 
Wage 
which 
shocks 
This 
the 
to 
the 

complete. 
Investment 
two  oil 
them. 
1990  when 
are  necessary 
of 
level 
Its 

-  ///  -

the 

had 

even 

further 

too  high 

adjustment 

taken  place. 

the  rates  of 

process  where 

to 
In  some  Member 

this  was  necessary. 

Inflation, 
the  beginning  of 

If  substantially 
the  1980s,  were  at 
ambition 
the  stated 

for 
towards  Economic  and  Monetary  Union. 

The  strong  growth  of  1988-1990  was  not  exploited 
adjustment 
States 
comparison  with 
the  decade  still 
rapidly 
structural 
growth  of  1988-90 
notwithstanding 
still 
situation 
the  budgetary 
In 
offered  a  golden  opportunity, 
steps 
to  consolIdate 
many cases,  strong  consolIdatIon 
overheating  with  positive 
some  countries 
In 
competitiveness 
as 
positions. 
area  as  well  . 

reduced  by 
the  end  of 
of  moving 
Insufficient 
The  strong  employment 
In  1990 
Is 
the 
high  unemployment.  Equally  worrying 
of 
growth 
take  bold 
cost. 
In 
preventing 
pressures. 
external 
external 
this 

area.  The  strong 
which  was  not  seized, 

Very  often  efforts  were  Interrupted 

consequences  on  Inflationary 

the  budgetary  position 

to  unwarranted  wage 

would  have  helped 

too  soon  In 

shown  by 

little 
In 

continuing 

Increases 

remained 

problems 

fragile 

there 

rates 

led 

at 

to 

of 

The  policies  which  have  brought  about 
the  Community  economy during 
determination. 
flexible 
a 
adverse  external 
fundamental  Community economic  policy 

In  an  Interdependent  world  economy,  healthy 
that 

long  way  towards  ensuring 

the  turn  around  In  the  performance  of 
the  1980s  must  be  Implemented  again  with  more 
fundamentals  and 
of 
of 

the  effects 
the  pursuits 

economy  go  a 

developments 

do  not  put 

In  danger 

objectives. 

With  appropriate  policies  medium  term  perspectives  remain good 

rate  of  growth  of 

Jhe 
up  to  about  2te per  cent 
a  reflection 
Into 
conditions, 
sustainable 

fact 
aimed  at 

policies 

the 

of 

the  Community  economy  Is  currently 

In  1993.  The  slow  pace  of 

the  recovery 

that  many  Member States  are  expected 
resuming 

efforts. 

the  adjustment 
the  Community  economy could 
return 
In  both  economic  and  environmental 

to  stronger 
terms. 

expected 

to  pick 
constitutes 
to  embark 
these 
rates  of  growth 

Under 

The  processes 
the 
Internal 
reinforcement 
decisions 
on 
economic  growth. 

the  confidence 

launched  with 

the  great  Community  programmes 

market, 

transition 

to  Economic 

of  economic  and  social 

cohesion 

-  are 

and  determined  actions  would  have  a  substantial 

of  economic  agents  and  give  an 

and  Monetary 
Irreversible. 
positive 

-  completion  of 
Union, 
Bold 
effect 
to 

Impulse 

Immediate 

to  complete 

Internal  market  have  resulted 

the 
Initiative 

The  efforts 
ranging  supply  side 
the  required  decisions 
law,  however, 
to  be  solved.  The  recent  agreement  on  the  setting 
Area  will 
programme. 

have  been  taken.  Their 
lagging  behind  and  a  number  of  difficult 

the  Community. 

In  the  most  wide-
Most  of 
national 
still 
up  of  a  European  Economic 
market 
Internal 
of 

Into 
Issues  have 

In  the  history 

transposition 

the  effects 

reinforce 

extend 

and 

the 

of 

Is 

-  IV  -

type  of 
from  the  1992  programme.  Indeed  only  a  single 
to  be 
potential 
Integration 

the  Single  Market 

the 

the 

of 

After  many  years 
the  degree  of  nominal  convergence 

of 

that 

allow 

result 

follow 

benefits 

the  full 

the  trend 

to  strengthen 

In  an  amplification 

for  a  smooth  transition 

Its  economic  performance. 

the  Community  and  Improve 

Economic  and  Monetary  Union  will 
economic  benefits 
currency  will 
achieved.  The  primary  aim  of  EMU  Is  therefore 
of 
of  remarkable  progress, 
necessary 
Member States  are  yet 
considerable 
towards  greater 
ambitious  convergence  programmes.  It 
Implemented 
needs  are  still 
successful 
already  achieved  by  their  partners  and  by  enhanced  coordination 
at 

In  a  resolute  way.  The  Members  States,  where 
be  reinforced 

convergence,  Member  States  have  agreed 
Is 

towards 
to  EMU  has  come to  a  halt 

the  Maastricht  meetings, 

to  make  the 
the  need 

transition 
to 

the  Community 

In  a  position 

outcome  of 

Recognizing 

adjustment. 

large  will 

and  clear 

Important 

resume 

level. 

their 

that 

In 

In  1989/90.  Few 
to  EMU  without 
the  movement 
to  embark  upon 
these  programmes  be 
the  adjustment 
by  a 
results 
procedures 

determination 

the 

The  Community policy  priorities 
appropriate  macroeconomlc  policies  and  policies 

require  a  consistent 

for  structural 

Implementation  of 
adjustment. 

to 
the  economy.  The  coexistence  of  very  high  overall 

In  all  countries 

are  required 

Continued  efforts 
of 
and  bottle-necks 
greater 
efforts 
mismatches.  At 
wage  determination 
setting 
considerations 

procedures 

In  certain 

sectors 

must  be  deployed 
to 
the  same  time,  greater 

of 
the 
Improve 
flexlbl 
It 

Improve  the 

labour  market  suggest 
and  reduce 
training 
I Ity  will 
be  needed  both 
Is 

flexlblIIty 
levels  of  unemployment 
that 
skill 
In 
to  review  wage 
to  macroeconomlc 

Important 

and  the  wage  structure. 
so  as 

to  make  them  more  responsive 

and  to  the  need  of 

furthering 

structural 

adjustment. 

In  the 

Investment 

In  1991  are  high  which  points 

The  Community,  and  the  whole  world,  are 
risks  becoming  more  acute 
demand for 
rates 
Insufficient 
even  less 
pent-up  capital 
actual  demand  for 
of  all  structural 

to  come.  Notwithstanding 
I zed  world, 
fact 
the 
to  meet  the  demand for  capital. 
favourable  once  Investment  activity 
demand  from  Central 
funds.  Authorities 
Impediments  to 

facing  a  shortage  of  savings  which 
a  subdued 
Interest 
savings  are 
risks  becoming 
picks  up  again  and  the  huge 
Into 
review 

translates 
and  Eastern  Europe 
should  embark  on  a  systematle 

In  the  years 
Industrial 
to 

long 
that  available 

This  situation 

saving. 

term 

real 

Important 

Various  Member  States 

The  single  most 
however,  would  be  a  significant 
countries. 
Netherlands, 
unsatIsfactory 
Improve  macroeconomlc  conditions 
for  a  smooth  transition 
would  also  help 
the  burden  presently 

Ireland 
budgetary  positions. 

to  reduce 

contribution 

reduction 
(Greece, 

to 

Italy, 

Portugal, 

national 
deficits 

Increased 
In  public 

saving, 
In  most 
the 
degrees, 
to 
concerned  and  to  allow 
these  goals 
shortage  of  savings  and  would  ease 

These  positions  must  be  corrected 
the  countries 

Belgium, 

different 

towards 

to 

In 

to  EMU. The  necessary  progress 

the  overall 

carried  by  monetary 

policy. 

and  Germany)  present, 

-  y 

-

within 

rate  differentials 

The  success  of  monetary  authorities 
exchange  rate  stability 
markets  and  Interest 
down  substantially. 
market  between 
Under 
extremely 
Given  the  continued  strength  of 
of  Member  States, 
cautious. 

these  conditions 
It 
reduced. 

the  currencies 

however, 

therefore 

the 

of 

Is 

In  preserving 

the  Community  has  been  acknowledged  by 
among  the  EMS currencies 
at 

the  short  end  of 

They  have  all  but  disappeared 

the 

Initial 

narrow  band 

room  for  manoeuvre  at 

the  more  urgent 

Inflationary 
overall 

pressures 

monetary 

policies 

price 

stability 

and 
the 
have  come 
the 
participants. 
Is 
full  EMU. 
In  the  vast  majority 
remain 

should 

level 

the  national 
to  move  to 

In 

that 

conducive 

conditions 

conditions 

Integration 

and  regions 

for  structural 

policy  measures 

task  of  creating 

adjustment.  Member  States 

now  prevailIng 
the 

the  high  degree  of  economic 

the  constraints 
Given 
exchange  rate  stability 
and  budgetary  policy, 
harmonious  development  of  all  Community  countries 
adjustment.  Such  policies 
policies 
appropriate 
In  key  sectors  of 
required 
supply 
Conditions  must  be  created  which  will 
unemployment 
Is  high. 
catchlng-up  process, 
the 
cooperation, 
penalize  entrepreneurial 
Member  States  should  give 
place 
and  supply  side  policies 
macro-economic 

and 
the  Community  exert  on  monetary 
to  an 
falls  more  on 
need  to  be  supported  by 
the 
that 
employment. 
Investment  where 
the 
of 
closer 
which  do  not 
factors. 
a  prominent 
level 
to 

the  Community  must  ensure 
additional 

Such  conditions 
that  could  be  further 

would  also 
reinforced 
Better 

to 
by  a  strengthening 

economic  policy  concept.  Cooperation 

Improvement  of  supply  policies 

are  a  necessary  complement 

the  economy  to  facilitate 

labour  markets  and 

Improve  everywhere 

are  all  particularly 

cohesion 
rigid 

activities 
the 

In  Member  States 

the  Community 

tax  structures 

Infrastructure, 

Community's 

Job  creating 

to  create 

strategies. 

contribute 

Important 

policies. 

In  their 

attract 

less 

and 

at 

competition. 

Improvement  of  supply  conditions  must  go  hand  In  hand  with  maintaining 
and  undlstorted 
a  competitive 
of 
competing  companies. 
closer 
subsidization 

open 
functioning 
can  threaten 
to 
specific 
aids  should  come  under 
limit 

Improve  convergence. 
Incorporate 

market  process 
the 

The  Commission  strives 

Public  subsidies 

In  a  context  of 

to  EMU  state 

by  confining 

restructuring. 

advantages 

scrutiny 

and  to 

run-up 

the 

to 

to 

In 

It 

In 

of 

to 

of 

the 

trading 

system. 

areas  of 

International 

a  more  open 

traditional 
of  mult  I lateral 

A  commitment  to  more  disci  pi  I ne  on  subsidies  would  also  contribute 
achievement 
conclusion 
reduced  protect 
allow 
relevance 
International 
markets 
countries 
textiles, 
carried 
partners, 
In  particular 
and  open  Community  economy  will 
developing  world  and  Central 

the 
timely 
the  Uruguay  Round  would  not  only  ensure  market  access  and 
but  also 
Ion 
to  new  areas  of  great 
the  extension 
and 
for 
trade 
European 
agriculture, 
not  be 
other 
competitive 
the 

the  Community.-  services, 
Investment  . 
It 
those  products  with  which  Central 

assist 
In  their  development . 

can 
coal  and  steel. 

relations 
Only  a  strong, 

the  expense  of  existing 

In  market  access  will 

rules 
Intellectual 

and  Eastern  Europe 

compete  effectively 

trade  negotiation 

rights 
to  our 

to  satisfactorily 

Improve  access 

and  Eastern 

Improvement 

the  world 

commercial 

developing 

I y  agreed 

countries. 

Important 

be  able 

property 

out  at 

stage: 

This 

with 

for 

on 

to 

Is 

A 

-  1 

-

L 

ECONOMIC SITUATION AND OUTLOOK 

1. 

1991. Phase of slower  growth 

A.  A  less dynamic world  economy 

Over  the  last  two years the Community  has had  to operate  in an  In-

T K. « i^.^nD^ 
TaUe  1 : Real GDP. domestic demand and world trade 

\  ^  -...—^ 

^-^_ 

(% change) 

1981-85  1986-89  1990  1991*  1992*  1993* 

World (excl. EC) 
U . 8A 
Japan 
EC 

U.S.A. 
Japan 
EC 

2.6 
2.9 
3.9 
1.5 

3.7 
2.9 
0.9 

World imp.(excl. EC) 
German imports 
EC imports** 

3.0 
1.6 
2.0 

G DP 

1.8 
0.9 
5.6 
2.8 

-0.2 
-0.4 
4.6 
1.3 

3.8 
3.5 
4.4 
32 

Domestic demand 

3.0 
5.6 
42 

0.5 
5.8 
2.9 

-1.0 
3.4 
1.1 

World trade 

6.0 
6.1 
8.8 

3.0 
11.4 
4.7 

1.8 
12.8 
2.5 

2.1 
2.1 
3.5 
2.2 

2.1 
3.7 
2.2 

5.1 
5.0 
5.2 

3.1 
2.2 
3.5 
2.4 

2.1 
3.7 
2.6 

6.1 
4.7 
5.5 

creaslngly  unfavourable  eco-

nomlc climate. After  peaking  In 

" 

1988  at  around  4%,  the  growth 

of  worUd  output  excluding  the 

EC 

has 

been 

slowing 

continuously  and  was  near  zero 

In 1991, the weakest  rate since 

1982.  The  growth  In  the  volume 

of world  trade  (again excluding 

the  EC)  has  declined  even  more 

from  a  rate  In excess  of  7%  in 

Current account (% of GOP) 

1988  to  less  than  2%  In  1991 

U.S.A. 
Japan 
EC**'*:::: 

-1.2 
1.9 

-2.8 
3.2 

-1.6 
1.2 

-0.1 
1.5 

-0.7 
1.6 
;£bi»:: 

-0.6 
1.7 
-OX 

Forecast 

* 
**  EC excl. Germany 
***  EC including Unified Germany from 1991 onwards. 
Source : Commission Services 

(table  1 ).  The  decline  in 

activity 

has 

been 

more 

pronounced  than  assumed  at  the 

beginning  of  the  year  with  the 

expected  recovery  less forth 

coming.  The  previous  assessment  of  the  economic  outlook  has  been 

clearly  too optimistic. 

B.  A diversified  growth  pattern  In the  Community 

The  picture  of  the Community  Is rather  differentiated:  relatively 

weak  activity  In  France,  Italy  and  a  recession  In  the  United 

Kingdom,  which  seems  to have  reached  Its bottom,  contrast  sharply 

-  2 -

with  continued  rates  of  expansion  In  Germany,  Luxembourg  and 

Spain, while  the other  countries  hover  between  these extremes. 

a)  Expansion  continued,  particularly  In  Germany,  but  at  a  slowing 

rate 

Germany  continued  Its buoyant  growth  path  under  the  Impact  of  the 

significant  expansionary  impulse  of  fiscal  policy  stemming  from 

unification.  Fiscal  policy  gave  a  strong  boost  to  private 

consumption,  while  the  Investment  performance  was  underpinned  by 

Investors'  intentions  to  widen  production  capacities  in  order  to 

serve  the  market  of  the  five  new  Lander.  These  demand  pressures 

could  not  be met  by  domestic  supply,  resulting  In a  strong  spill 

over  to  foreign  suppliers  implying  a  swing  in the  current  account 

position  from  a surplus of  4.7% of  GDP  (West  Germany)  In 1989  to a 

deficit  of  1.1% of  GDP  (unified  Germany)  in 1991. 

But  even  this  strong  external  leakage  of  domestic  demand  was  not 

sufficient  to  prevent  Internal  pressures  from  developing.  A 

number  of  factors,  including  Indirect  tax  Increases,  have 

contributed  to  an  upward  movement  of  the  price  level.  Core 

inflation  crept  up  and  Inflation  in West-Germany  is now  above  4%. 

Wage agreements  have been  concluded  that  granted  pay  rises of  6  to 

7%.  With  productivity  growth  declining,  this  resulted  in  an 

increase  of  unit  labour  costs  of  almost  6%  with  profit  margins 

declining,  although  from  high  levels. 

On  account  of  the  strong  rise of  transfer  payments  in  the  context 

of  unification,  the  fiscal  balance  has shifted  from  equilibrium  in 

1989  to  a  deficit  of  3.6%  of  GDP  in  1991,  despite  revenue 

increasing  and  expenditure  dampening  measures  of  about  2%  of  GDP 

adopted  In early  1991. 

- 3 -

Since  about  mid  1991 the growth  process  has been  losing  momentum 

as the expansionary  Impulse  from  unification  Is petering  out and 

as  It  had  to  be  flanked  with  a  restrictive  monetary  policy 

intended  to  quell  inflationary  expectations.  Furthermore  the 

outlook  for profitability  has deteriorated  following  the Increase 

in  unit  labour  costs.  At  the same  time,  the  capacity  widening 

effect  of the  Investment  of recent  years  has led to some  fali  in 

the  high  rate  of  capacity  utilization  since  the spring  of  this 

year.  Although  the  danger  of  a  demand-led  inflation  has  eased 

somewhat,  there  are  considerable  risks  of  tax  and  cost-push 

Inflation  Implied  in the present  fiscal  policy  choices, which  have 

unduly  relied on the revenue  side. 

b)  Slower  growth  In the rest of the Community 

The  United  Kingdom  registered  a deep  recession  in 1991, with GDP 

declining  by  close  to 2%. Private  consumption  and  particularly 

Investment  declined  significantly  under  the delayed  influence of 

the  restrictive  monetary  policy  pursued  In 1989 and 1990 to cool 

off  the overheating of the economy  in the previous  consumer  boom. 

The  rest Of the Community  registered a 

more 

subdued 

rate  of 

Graph  1 : Confidence  indicators  -  EC 
(businness  s u r v e y s) 

10 

I 

a 

I 
1088 

o 

I 

a 
1989 

Source  :  Commission  Ssrvlcaa 

growth of 1.5% compared to 

2.7%  In 1990. Overall, it 

was  In  particular,  the 

growth 

of 

private 

consumption  and  exports 

that 

retreated, 

while 

Investment  even  stagnated. 

Confidence  of  consumers 

and  Industry  has been low 

since  the outbreak  of the 

Gulf  crisis  and has shown 

a  limited  recovery  since 

(graph 1 ). 

- 4 -

Investment  stagnated  for  the  first  time  after  a  particularly 

strong  Investment  boom  during  the  last  five  years,  in the course 

of  which  the European  capital  stock  grew  by close  to 15% in real 

terms. Such a pause for breath was almost  unavoidable  after  the 

Table  2:  Key  indicators  of the  EC  economy 

first  wave  of  invest-

ment  In  anticipation of 

the  completion  of  the 

1983-871988-89 

1990 

1991*  1992*  1993* 

Internal 

market.  The 

Employment 

0.3 

1.6 

1.4 

0.5 

0.3 

0.5 

::Reàt:cQ'mpèiroat^ 

Inflation*** 

5.8 

4.3 

5.2 

5.0 

4.5 

4.2 

effects  of  the  Internal 

market  measures  will  be 

felt  In  the  years  to 

come  as  the  political 

' ;RQai:urtit labour costs •ï:::-i:.i:;:;:;:-i:;o^::ïà5::::ï:b:.6:::^o;7::;::-o:.7: 

and 

legislative  deci 

Investment 

2.6 

7.9 

4.1 

- 0 .5 

2.2 

3.7 

:. erf which; -equipment- ;;••;•: :: 4 . 9 : :;; Ï - 9 , 9:: Ï ::: 4 : . 7 Ï:  ^Q^4;  >x:2,e^-;>:;4;.e; 

Forecast 

* 
**  Real compensation  ot employees  per  head(private consumtion  deflator) 
* **  Private consumption  deflator 
Source:  Commission  Services 

sions  already  taken are 

Implemented  and  lead to 

an actual  dismantling of 

the  residual 

internal 

barriers  (table 2 ). 

However,  the dent  in growth  would  have  been  more  pronounced  In 

the  absence  of German  unification.  Indeed  the growth  performance 

of  the Community  countries  was strongly  sustained  by  the demand 

effects  coming  from  the  German  economic  expansion.  The  total 

Impact  of German  unification  on the other  Community  countries  Is 

estimated  at 0.5 of a  percentage  point  per year  on  average  over 

the period  1990-91  (see  box). 

The  slowdown  In growth  was  largely  cyclical  in countries  such as 

Spain,  Portugal,  the  Netherlands,  Belgium,  Luxembourg,  Ireland, 

Italy  and  France.  The  cyclical  downswing  has  brought  out 

underlying  structural  weaknesses  in  some  countries.  Italy  and 

France  would  have  had difficulty  In maintaining  a more  sustained 

pace  of  economic  activity  relative  to  their  trading  partners  in 

- 5 -

Economic  consequences  of  German  unification 

for  the  Community 

In  general  terms,  German  unification  had  both  real  effects  via 
and monetary effects  via 

rate  and exchange rate movements. 

Interest 

Intra-Community  trade  Impulses 

the  transmission  mechanisms  are  working  via  real 

On the  real  side, 
considerable  current  and  capital 
Into  additional 
advantages  (geographical  proximity,  common 
West-  Germany's final  demand  In  turn  results 
World  and,  notably  to  the  other  Member  States  of  the  Community,  with  positive 
own  final  demand  and GDP  growth,  all  other  things  being  equal. 

demands  mostly  addressed  to  Hest-German  firms, 

In  favour  of  the  5  new Under 

given 
language,  common  currency).  The  Induced  boost  on 
In  Increased  Imports  addressed  to  the  rest  of  the 

Is  partly  converted 
comparative 

trade  balance  effects: 

Impacts  on  their 

transfers 

their 

the 

Table  1: Quarterly bilateral  exporte  to Germany, 

(X change over  same quarter of the previous year) 

1990 

1991 

III 

IV 

I 

II 

BLEU 

7.8 

3.2 

12.1 

31.9 

28.8  27.0 

Denmark 

10.8 

8.8 

22.8 

31.2 

33.9  29.2 

Greece 

Spain 

Fronce 

Ireland 

Italy 

3.4  -2.7 

3.8 

8.4 

8.1 

4.9 

16.3  9.8 

30.8 

38.0 

48.7  41.2 

18.9  -«.4 

15.1 

10.6 

21.0  38.7 

9.0  8.8 

11.7 

6.9 

13.6  13.3 

13.0 

8.0 

17.8 

20.1 

22.0  19.1 

Netherlands 

8.7  -0.8 

8.7 

17.1 

20.9  18.8 

Portugal 

21.8  14.8 

17.8 

20.1 

22.8  21.3 

United Kingdom 

6.7  -0.8 

7.1 

13.4 

17.8  21.6 

Source: Bundesbank, monthly report, supplement  3, 1991 

the 

to  Germany  In 

these  positive  effects  of 
The  amplitude  of 
relative 
course  depends  not  only  on 
total 
Importance  of  exports 
In 
exports  but  also  on  the  share  of  exports 
GDP (cfr. 
table  2).  Thus,  the  smaller,  open 
economies  having  close  ties  with  Germany like 
the  Benelux  countries  and  Denmark  are 
likely 
to  be  more  positively 
to  GDP, than  the  larger  countries. 

affected, 

relation 

In 

the 

first 

twelve  months  since 
the 
In 
unification, 
trade  movements confirmed  the 
estimates  made  in  Hay/June  1990:  purchases of 
the  5  new Lender  from  the  rest  of  the  world 
Including  tlest  Germany  went  up  from  18  bil 
lion  DU to  about  130  billion, 
an  amount  close 
to 
transfers 
received  by  these  Under.  At  the  same time 
except  Greece 
all 
registered 
their 
In 
trade  with  Germany  (see  table  1). 
bilateral 

considerable  upswings 

EC-countries 

equivalent 

public 

other 

the 

of 

From  these  elements, 
(second  semester)  and  1991  would  be  respectively  around  0.4  and  0.6  points 
Smaller  and  more open economics  generally  display  a  higher  Impact,  particularly 
year  when  they  also  benefit 

from  the  Indirect  effects  of 

the  growth  Impact  for 

It  can  be  estimated 

unification. 

that 

the  Community 

In  1990 

(see  table  2). 

In  the second 

Table 2:  Impact of German unification on the growth  rate 

of  the other Member  Countries 

Memorandum  Items  1990 

Impact on 

rate of growth 

Share of exp. 

Share of 

in  % points 

to 0  In total 

exports 

per year 

exports X 

In GOP (X) 

1990» 

1991 

BLEU 

Denmark 

Greece 

Spain 

Fronce 

Ireland 

Italy 

Netherlands 

Portugal 

United Kingdom 

19.8 

18.2 

28.1 

11.1 

18.7 

12.2 

17.4 

28.1 

18.8 

12.7 

78.3 

38.1 

23.4 

17.7 

23.4 

63.8 

20.6 

86.4 

37.3 

24.8 

40.6 

4-1.0 

40.4 

40.7 

40.2 

40.4 

40.3 

40.8 

40.4 

40.7 

40.3 

40.8 

40.3 

40.6 

40.7 

40.9 

40.3 

40.4 

40.2 

40.8 

EUR  11 

12.8 

28.0 

40.4  40.6 

*  Second semester,  in yearly  terms 

Source: Corrmlesion Services 

It  was  expected  that 
rise 

the 
In  May/June  1990, 
In 
unification  would  cause  a  general 
German Interest 
rates  and  a  revaluation  of 
the  DM,  movements that  would  have  to  be 
followed  by  all  other  countries  member  of  the 
ERM with  negative  effects  on  their  growth 
rates.  The  reaction  of  financial  markets  In 
the  first  quarters  of  1990  seemed to  confirm 
the 
those  views.  Since 
Initial 
effective 
revaluation, 
pre-
uniflcatlon 
rates 
for  most  EC-countries, 
both 
rise 
followed 
followed  by  a  decrease. 

Its 
level  and  nominal  Interest 

however, 
Its 

the  same  profile 

long  and  short 

exchange  rate, 

back  near 

Initial 

then, 

after 

fell 

of 

- 6 -

the  monetary  effects  of  the  unification  on  Member  States 

It  may therefore  be  estimated  that 
will  be  somewhat  weaker  than  initially 
presented 
economics,  It  may  be  estimated 
followed  the  same downward  cyclical  movement  as  the  other  countries  and  the  EC-economy  would 
have  registered  very  low growth  In  1991. 

in 
effect,  Germany would  have 

expected  and  will  not  have  much  Impact  on  the  estimates 

table  2.  Thus,  although  ceteris  paribus 

Is  always  difficult 

the  unification 

that,  without 

reasoning 

In 

is  moreover to  be  noted  that 

In  this  document  all  historical 

problems  impede to  present  a  reliable  picture 

It 
West Germany  only  since  major  statistical 
whole of  Germany.  However,  there  are  a  few  noteworthy  exceptions  to  this  general  rule, 
trade  figures  based on  customs data 
a  methodological  break  In  the  time-series  concerned.  First, 
cover  exports  and  Imports  of  goods of  Unified  Germany.  Second,  the  forecast  of  the  general 
government account  includes  public  transfers 
to  the  five  new Under  as  well  as  the  deficit  of 
the  territorial 
of  these  Lander  from  1991  onwards.  Third,  current  account  data 
authorities 
relate  also  to  Unified  Germany.  When  expressed  as  a  percentage  of  GDP,  In  these  three  cases  the 
GDP  of  Unified  Germany  Is  used. 

labelled  Germany  are  for 

for  the 
Implying 

data 

the  aggregation  of  national  data  to  an  EC  total 

Obviously, 
treatment  for  Germany.  In  the  table  below,  an  Idea  Is  given  to  what  extent 
unified  Germany,  uncertain  though they  are,  affect 
In  particular  with  regard  to  real  growth,  the  unemployment  rate  and 

takes 

the  aggregates  for  the  Community  as  a  whole, 
Inflation. 

Into  account  the  retained 
for 

the  forecasts 

1991 

1992 

1993 

Heal  GDP  growth  (%  p.a.) 

E  C 
EC* 

E  C 
EC* 

1.3 
0.9 

8.6 
9.3 

2.2 
2.2 

Unemployment  rate 

9.1 
9.8 

Inflation  (% p.a.)a 

E  C 
EC* 

5.0 
5.3 

4.5 
4.7 

Met  borrow Ingb 

E  C 
E  C 

-4.3 
-4.4 

-4.3 
-4.4 

Current  account  balance0 

E  C 
E  C 

-0.3 
-0.8 

-0.3 
•0.9 

2.4 
2.5 

9.2 
9.9 

4.2 
4.3 

-4.1 
-4.3 

-0.4 
-0.8 

*  E  C 

Including  the  new five  German  Lender 

a)  Deflator  of  private  consumption 
b)  General  government; as a  percentage  of  GDP 
c)  As a  percentage  of  GDP 

- 7 -

view  of  the  fragility  of  their  external 

accounts.  Price 

competitiveness  has  significantly  deteriorated  In  Italy.  In 

France, the sectoral  composition of the trade  balance  gives  reason 

for  concern:  while  the  surplus  on  agricultural  products  is 

growing,  Its  surplus  on manufactured  goods  of  the mid  1980s has 

turned  into a significant  deficit, although  some  improvement  could 

be  noticed  in recent  months. 

The  lower  growth  performance  has  had, of  course,  significant 

consequences  for the employment  situation  In the Community,  which 

had  developed  favourably  over  the 1980s  with  a net addition  of 9 

million  jobs  since  1984 (table  3 ). Despite  the fact  that  growth 

became  more  employment  intensive,  employment  growth  slowed  down 

markedly  for  the  first  time  since  1982,  resulting  In  a 

significant 

increase  In  the  unacceptable 

high 

level  of 

unemployment. 

Table 3 : Employment in the Community 

Nonetheless,  despite  the greater 

Total employment 
in million  %change 

Unemployment 

slack  In the labour  market,  wage 

rate  ** 

pressures  abated  only  marginally: 

1980 

128.0 

1984 

124.8 

-0.6  *** 

1990 

133.6 

1.4 

1991 

134.2 

0.5 

1992 

134.6 

0.3 

1993 

135.3 

0.5 

*  Forecast 
**  in percent of the civilian labour force 
*** average 1980-84 
Source : Commission  Services 

6.0 

10.7 

8.4 

8.6 

9.1 

9.2 

nominal  compensation per employee 

rose  by 7% in 1991, a  rate  only 

marginally  below  the one in 1990 

(7.6%). 

With 

the 

cyclical 

slowdown  In  productivity  growth 

this  resulted  in a  new  increase 

in  nominal  unit  labour  cost and, 

due  to  the  inability  to  raise 

sufficiently  prices,  In a further 

rise  In  real  unit  labour  costs  with  a consequent  negative  impact 

on  profitability and international  competitiveness. 

-  8  -

Graph  2  : Profitability  of  fixed  capital 

Net  profit  rate  of  fixed  capital 
(1961  -  73  •  100) 

<l«lt  »0«l*> 

Gross  fixed  capital  formi 
(In  %  of  OOP.  right  «oal») 

wee 

«TO 
luro*  :  Cemmlaalon  8»rvlo»« 

«re 

1 

Despite 

this 

decline, 

pro 

fitability  remains  at  a  high 

level.  But  if unit  profit  rates 

per  value  added  have  recovered 

to  levels  prevailing 

In  the 

period 

1961-73, 

the 

profi 

tability  of  the  capital  stock 

has not yet. The productivity of 

capital  declined  sharply  from 

1970  to  1983 and  only  recovered 

slowly  from  1985  onwards.  As  a 

consequence,  the  profitability 

of  fixed  capital  Is still  below 

Its 

1961-73 

level 

so 

that 

further  efforts  are  needed  to 

achieve  a  full  restoration of 

profItablIity  (graph  2) 

Table 4  : Supply-side factors in the  Community 

(annual % change, unless otherwise stated) 

1981-86  1987-89  1990-91 

1991*  1992* 

The  deterioration  of  pro-

f itabl I ity  in  1990 and 1991 

Is  certainly  not  dramatic 

7.1 

1.8 

-0.5 

2.2 

(table  4 ).  However,  while 

Total investment 
of which : 

equipment 
construction 

capital stock 
capital productivity 
real compensation 
per employee  ** 

0.1 

1.7 
-1.0 

2.3 
-0.6 
0.9 

9.4 
4.9 

2.7 
0.7 
1.7 

2.2 
1.7 

2.9 
-0.8 
2.1 

-0.4 
-0.5 

2.6 
1.8 

2.8 
2.6 
-1.5  -0.6 
1.3 
2.0 

real unit labour costs 
profitability  *** 
real l.t. interest rate**** 

-1.0 
73.8 
4.3 

-0.7 
90.2 
5.0 

0.5 
92.5 
5.3 

0.6 

-0.7 
91.6  92.9 

5.1 

Forecast 

* 
**  Adjusted by the private consumption deflator 
"**  Net return on net capital stock (1961-73 -  100) 
""Adjusted by the GOP deflator 

relative  factor  prices  and 

profitability  have  only  a 

limited 

Impact 

over  the 

short-term  on 

Investment, 

their 

impact 

becomes 

stronger  in  the  longer  run. 

A 

continuation 

of 

this 

tendency  of  faltering  prof I 

tabillty  would  therefore 

be  detrimental  for  a  recovery  In 

investment  and  employment 

Since  1985  Investment  has  strongly 

- 9 -

recovered  on  the  basis  of  significantly  Improved  profitability: 

real  Investment  Is  now  about  one  third  higher  than  In  1985. 

Nevertheless  the  Investment  GDP  ratio  Is still  more  than  a  full 

percentage  point  below  the  average  level  of  the  1961-73  period. 

Further  progress  In  this  ratio  is  still  warranted  In  view  to 

reduce  the high  level of unemployment  in the Community. 

Sustained  wage  pressures  and  increases  in  taxation  in  some 

countries  did  not  allow  price  Increases  to  abate  despite  the 

cyclical  slowdown.  Consumption  prices  and  the  GDP  deflator 

increased  at  the same pace as  In 1990 at around  5%. 

The outlook  for  1992 and  1993: a gradual  recovery 

After  bottoming  out  In  the  second  half  of  1991,  activity  is 

expected  to pick  up moderately  In 19J22 mainly  because  of  domestic 

factors. Although  the external  environment  is expected  to  Improve 

as  a  result  of  a  take  off  of  world  output  and  trade,  the  Member 

States of  the Community  may only  benefit  to a  limited  degree  from 

this  recovery,  since  this  positive  development  would  be 

compensated  by  the  petering  out  of  the  demand-pull  effect  of 

German  unification. The  foreign  balance  therefore  Is not  expected 

to  significantly  support  GDP  growth  In  most  countries.  Still, 

extra Community  markets are expected  to play  a more  important  part 

In the growth of Community  exports  than  In the  last  few years. The 

preservation of external  competitiveness  Is therefore crucial. 

Confidence  is  expected  to  be  restored  gradually  leading  to  a 

modest  recovery  In  private  consumption  and  investment  in  1992. 

With  the pursuit  of sound policies, the price and cost  performance 

is  expected 

to  improve,  reversing  the  deterioration  in 

profitability during  the period  1990-91. 

As  a  result  of  slower  activity,  employment  growth  Is expected  to 

slow  down  further  from  1.5% on  average  over  the period  1988-90 to 

-  10  -

0.5%  in  1991  and  to  0.3%  in  1992.  Combined  with  the  sustained 

growth  of  the  labour  force  in  the  Community,  this  slower 

employment  growth  will  lead  to  a  further  increase  in  the 

unemployment  rate  from  8.6%  In 1991  to 9.1%  In 1992. 

For  1993  a  further  strengthening  of  the  recovery  is  anticipated 

with  real  GDP  growth  rising  to  around  2%%.  Still  the  higher  level 

of  activity  Is  not  yet  expected  to  result  in  sufficient  job 

creation  to  match  the  rise  in  the  labour  force  resulting  in  a 

further,  but  marginal  rise  In the unemployment  rate. 

The  risk  factors  surrounding  the  outlook  lie  clearly  more  within 

the  Community  than  outside  it,  although  external  uncertainties 

could  still  affect  significantly  the outcome  in the Community.  The 

outlook  for  a  gradually  strengthening  recovery  Is  very  much 

predicated  on  the maintenance  of  adequate  policies. 

An  improvement  in  the  cost  performance  after  the  deterioration  In 

1990-91  is  likely  to  support  a gradual  pick  up  of  investment.  But 

if  this  improvement  were  not  to  materialize,  it  Is uncertain  how 

Investment  would  respond.  Stronger  growth  is,  however,  needed  to 

reduce  the  still  high  level  of  unemployment  and  to  facilitate  the 

structural  adjustment  In  relation  to  the  completion  of  the 

internal  market  and  the  transition  towards  Economic  and  Monetary 

Union. 

II. 

P R O G R E SS  IN E C O N O M IC C O N V E R G E N CE  iS STALLING 

1• 

Nominal  convergence  is slipping,  but  fundamentals  remain  positive 

After  deteriorating  significantly  in 1990, price  convergence  (measured 
by  the  dispersion  of  private  consumption  deflators1^  has  improved 

somewhat  in  1991  but  on  a  less  favourable  Infiatlon  average  than  in 

1) 

Dispersion  is  measured  as  the  unweighted  mean  of  the  absolute 
deviation  from  the weighted  mean. 

-  11  -

Graph  3  : Price  convergence  in the 

Community  <  m %  ) 

20 

the period  1987-89  (graph  3 ). This 

was  mainly  due to an  Increase of 

the  average 

inflation  in  the 

original 

narrow-band 

countries 

(EUR-7)  attributable  essentially 

to special  developments  in Germany 

and  the Netherlands,  while  price 

performance  generally  Improved  in 

the  other  ERM  countries,  in the 

countries not originally  belonging 

to the narrow-band  price  Increases 

declined  and  particularly  In the 

United  Kingdom.  Price  developments 

In  the  Community  are,  however, 

still  a matter of concern,  because 

1980 

« 82 

1988 
1964 
Eur  7  •  B,  Dk,  D,  F,  I R L,  L,  NL 

1986 

Eur  5  •  G R,  E,  I T,  P,  UK 

1990 

1992 

the  average  level  of  Inflation  Is 

st111  near  5%  at  a  moment  of 

slowing  down of economic  activity. 

Graph 4 : Wage convergence in the 
Community  ( m %  ) 

Wage 

developments 

and 

tax 

increases  seem  to  be  the  main 

Average 

factors 

responsible 

for  the 

slippage  in  price  performance. 

Among  the  original 

narrow-band 

countries  wage  developments  have 

been  unsatisfactory  In 1991 (graph 

4) and In Germany,  In particular, 

there  is a  potential  risk  of the 

development 

of 

cost-push  in 

flation. 

Dispersion 

\ E UH  5 

EUR  12 

EUR  7 

1980 

1982 

1984 

1988 

1988 

1990 

1992 

Eur  7  •  B,  D K,  D,  F,  I R L,  L,  N L. 
Eur  5  •  GR,  E,  I T,  P,  U K. 

The  growing  tendency  to rely  more 

on  the  revenue  side  to  correct 

budget  deficits  is  not  without 

danger  for  price  performance,  as 

- 12 -

It may reignlte the struggle  over  the distribution of  income. 

In the framework of EMU, the Community's  price and cost  performance Is 

still  unsatisfactory.  For EMU It would  be  desirable  to have  average 

price  Infiatlon  down  to the 2-3% range,  while  divergence  is  being 

reduced  at the same  time. 

in  the budgetary  area  the  lack  of  Improvement  In convergence,  as In 

the  field  of  prices  and costs,  Is  due mainly  to a  less  favourable 

situation  in countries  that  performed  well  In the years  before. In 

Table 5  : General government net lendwig (+)  or borrowing (-)  ** 

(in%ofGDP) 
1981 

1985 

1989 

1990  1991*  1992* 

EC 

-5.3 

-5.2 

-2.9 

-4.1 

-4.4 

-4.4 

Greece 
Italy 
Belgium 
Portugal 
Netherland» 
Germany 
Ireland 
Spain 
United Kingdom 
Denmark 
France 
Luxemburg 

-11,0 
-11.4 
-12.8 
-9.3 
-5.5 
-3.6 
-13.4 
-3.9 
-2.6 
-6.9 
-1.9 
-3.5 

-13.6 
-12.5 
-8.5 
-10.1 
-4.8 
-0.9 
-11.2 
-6.9 
-2.8 
-2.0 
-2.9 
5.3 

-10.3 
-10.1 
-«.7 
-3.4 
-5.Z 
0.2 
-3,5 
-2.7 
1.3 
-0.5 
-15 
4.3 

-19,0 
-10.6 
-5.6 
-5.8 
-5.3 
-1.9 
-3.6 
-4.0 
-0.7 
-1.5 
-1.6 
4.7 

-17,3 
-9.9 
-6.3 
-5.4 
-4.4 
-3.6 
-4,1 
-3.9 
-1.9 
-1.7 
-1.5 
1.9 

-14.0 

-9.3  * *' 
-6.2 
-4.6 
-4.1 
-3.4 
-4,1 
-3.6 
-3.6 
-1.5 
-1.7 
2.0 

*  Forecast on the basis of unchanged policies. 
••  Countries are ranked by size of deficit In  1981. 
* **  Does not fully Incorporate the effect of the measures of the convergence  program 

Source: Commission Services 

1990,  the  budget  situation 

worsened  In  most  countries, 

despite  a  still 

sustained 

level  of  activity,  but the 

deterioration 

was 

parti 

cularly  marked  in Germany and 

the  United  Kingdom  (table 5 ). 

In  1991  again,  the  less 

favourable  budget  position in 

the  Community  as a  whole  is 

mainly  due  to  the  widening 

deficit  In  the  UK  and  in 

Germany. 

In 

most 

other 

countries the deficit  more or 

less  stabilised  In  terms  of GDP, In  a  context  of  slower  activity. 

Hence,  even  automatic  stabilizers  have not been  allowed  to exert  their 

full  effect.  This  was needed  to  prevent  a  further  increase  of the 

budget  deficits. 

German  unification  has also  contributed  to a significant  change  In the 

external  position  of  the EC. The EC  current  account  position  has 

deteriorated  continuously  since  1986 from a surplus of 1.4% of GDP to 

an  expected  deficit  of close  to 1% of GDP In 1991 (table  6 ). This is 

-  13  -

Table  6  : Balances  on  current  transactions 
(in % of GDP) 

due  to  a weakening  of  the  current 

account  In most  countries,  except 

1980  1986  1990  1991*  1992* 

Denmark,  Ireland  and  the  Nether 

EC  •:•:•:•:•:•:•:• 

:-:t.-2: 

1^4 

-0 2 

-ae 

-o:9 

lands.  The 

deterioration 

was 

Belgium 
Denmark; ; ;  ; 
Germany 

-4.3 

2.1 

-1.7 

4.4 

1.0 
1.1 
1.0 
;o,é:;:;:vi:4x>:x2.2; 
- 1 .1 
3.2 

- 0 .9 

particularly  marked  In  the  United 

Kingdom  (from  1986 to  1989), Spain 

Greece 
Spain  :  : ::  : 
France 

Ireland 
Italy' 
:  : : 
Luxemburg 

Netherlands 
Portugal  :  : 
United  Kingdom 

0.5 
-2.4: 
-0.6 

11.8 

18.7 

- 1 .5 

1.5 

*  Forecast 
Source : Commission Services 

- 4 .1 

-5.3 
- 6 .1 
^tèïx^à.fifxï-^à.ï: 
0.5 

- 1 .0 

- 0 .7 

- 2 .9 
0,5 
39.4 

3.4 

2.3 
^1;.4:ï:^1.3: 
28.1 
31.2 

3.8 

4.1 

-3.4 
:3 . 2: 

-0.8 

2.0 
^1,5 
26.1 

4.4 

- 2 .6 

- 1 .1 

- 1 .4 

2.7 
•:-:2-.:4-
- 0 .9 

(from  1987-1989) and Germany  (from 

1989-1991). But  also  in France and 

Italy 

the 

external 

accounts 

weakened  significantly. This dete 

rioration 

resulted 

in 

most 

countries 

from 

high 

domestic 

demand  In  relation  to  production 

potential. 

The  most  outstanding  development  of  recent  years  In  the  external 

accounts  Is the  complete  disappearance  of  the  German  current  account 

surplus.  The  counterpart  of  the  disappearance  of  this  surplus  is not 

to  be  fully  found  within  the  Community.  About  half  of  the  demand 

impact  of  German  unification  seems  to  have  leaked  outside  the 

Community.  The  deterioration  In the external  accounts  is particularly 

marked  in the  trade of  manufactured  goods: extra-community  imports of 

manufactured  goods  have  grown  on  average  more  rapidly  than  intra-EC 

imports;  among  high-tech  products  more  specifically,  Community 

producers  seem  to  have  conceded  some  ground  to  extra-EC  producers. 

Also on  the export  side  the growth  of  export  of manufactures  has been 

modest, well  below  the rate of growth of  Intra-EC export  volumes. This 

trend  points  to  a  reorientation  of  trade  flows  to  a  particularly 

dynamic  internal  market. 

However,  of  great  concern  is  the  fact  that  this  deterioration  In the 

external  account  also  signals  a  reduced  level  of  competitiveness, 

particularly  in third markets and, even more disquieting,  in the high-

tech  segment  of  the  market.  The  Community's  currencies  have,  on 

- 14 -

balance, continuously  appreciated  in real  terms  since  1984,  leading to 

a  loss of market  shares.  This  development  raises  questions  about the 

strength  of  the economy  in some  Member  States,  and  its capacity  to 

compete  effectively  with  the outside  world.  Wage  competitiveness  is 

therefore  an  Issue  that  certainly  warrants  closer  scrutiny  in the 

cases  of  France  and  Italy,  where  the  external  position  remains 

fragile. 

In order  to  improve  convergence  during  Stage  I of EMU, Member  States 

have  therefore  been  called  upon  to  draw  UP  so-called  convergence 

programs  that  are to be  discussed  and agreed  upon  at  the  Community 

level  in the context of  multilateral  surveillance.  Such  programs  have 

been  presented  or  are  In the  process  of  being  formulated  by  most 

Member  States,  with  a  view  to  achieving  lasting  progress  on 

convergence. 

Real  convergence  Is slowing 

Table  7  : The  catching  up  process  in the  Community 

(GDP per  head of population, EC  =  100) 

Over 

recent 

years, 

the 

catchlng-up  countries, with the 

Spain  Greece 

Ireland  Portugal 

exception  of 

Greece, 

have 

1975 

1980 

1986 

1991 * 

1992 * 

Differences 

1986-80 

1991-86 

81.9 

74.2 

72.8 

79.0 

79.9 

-1.4 

6.2 

57.3 

58.1 

55.9 

52.5 

52.1 

62.7 

64.0 

63.4 

68.9 

68.9 

-2.2 

-3.4 

-0.6 

5.5 

52.2 

55.0 

52.5 

56.3 

56.3 

-2.5 

3.8 

*  Forecast 
**  Reference to GDP may overstate  progress to the ex-
tent that  income transfers to abroad  may  have out-
I 
! 
paced nominal GDP growth. 
ÎSource: Commission  Services 

succeeded  in  reducing  their 

income  gap  with  the  Community 

average  (table  7 ). Appropriate 

domestic 

policies  and  the 

doubling  of  resources 

made 

available  through  the  Struc 

tural  Funds,  have  contributed 

to  this outcome. 

Spain 
In 
catching-up 

and 

was 

Portugal, 
by 
led 

-  15 -

investment  as  a  result  of  strongly  Improved  profitability  and  the 

opening  up  of  the  Community  market.  The  share  of  Investment  In  GDP 

expanded  by almost  a quarter  between  1986 and  1990  (table 8 ). Domestic 

savings were  Inadequate  to support  such expansion  so that  the current 

Table  8  :  Investment  a nd  export  shares  a nd  real  unit  labour 

costs  in t he  catching-up  countries 

account  of  the  balance  of 

payments 

moved 

to 

a 

GR 

IRL 

EUR  4 

EUR  8 

significant 

deficit. 

The 

Investment  shares  (in  %  of  G D P) 

continuation of  the catch Ing-

1986 

18.5 

19.5 

18.1 

22.1 

19.6 

18.9 

1990 

18.9 

24.4 

18.6 

26.7 

23.7 

20.3 

1992* 

18.5 

24.1 

18.7 

26.0 

23.4 

19.6 

Export  shares  On %  of  G D P) 

1986 

22.4 

19.9 

55.2 

33.2 

23.8 

28.0 

1990 

22.6 

17.2 

62.1 

36.4 

22.8 

28.9 

up process  in these countries 

will  therefore  rely,  among 

other  Important  factors,  on 

the  generation  of  adequate 

domestic 

saving 

resulting 

1992* 

21.2 

17.3 

65.0 

30.0 

22.0 

29.9 

mainly 

from 

further 

re 

Real  unit  labour  costs  ( 1 9 6 1 - 73  =  100) 

ductions  in public  dissaving. 

1986 

102.3 

91.1 

92.8 

98.4 

1990 

102.4 

87.5 

1992* 

95.0 

86.3 

88.9 

92.5 

93.8 

97.6 

94.2 

98.1 

90.8 

96.8 

90.0 

96.9 

*  Forecast 
Source : Commission Services 

In  Ireland,  however,  the 

acceleration  of  growth  was 

mainly 

export-led.  Budget 

consolidation efforts and 

moderate  wage  developments  dampened  domestic  demand  while  at  the  same 

time  improved  competitiveness  boosted  exports.  This  export  led 

expansion  made  Ireland more  vulnerable  than Spain  and  Portugal  to the 

deterioration  In the  international  economic  climate. Now  that  Ireland 

has  established  a  sound  basis  for  further  catching-up,  more  emphasis 

should  be  given  to  the  development  of  domestic  production  potential. 

The  investment  ratio  is  still  relatively  low  and  has  not  Increased 

much.  The  supply  side  of  the  economy,  In  particular,  needs  further 

improvement. 

In Greece,  the catchlng-up process  has  receded  over  recent  years  as a 

result  of  Inadequate  policies.  The  1991  stabilization  and  structural 

- 16 -

adjustment  programme  adopted  by the government  is a serious  effort to 

reverse  the  country's  macro-economic  decline  and  restore  Its 

production  potential.  The  broad  aims  of  the  programme  are  fiscal 

reform  and structural  renewal. The measures for fiscal  adjustment and 

structural  reform are Interdependent  and if applied effectively  should 

allow  Greece  to  exploit  the  gains  from  the  process  of  European 

integration.  Recent  developments 

Indicate,  however,  that  the 

implementation  of the programme  has encountered  serious  difficulties 

and  delays.  Failure  to  fully  Implement  the  programme  will  further 

delay the resumption of the catching-up  process. 

III.  PRIORITIES OF ECONOMIC POLICY IN T HE  TOMMUNITY 

With the international  environment  likely to improve only moderately  in the 

year  ahead,  It Is particularly  Important  for the Community to reinforce its 

internal  potential.  Economic  policies  should  therefore  contribute  to the 

swift  realization of the major  Community  projects. 

Graph 5 : Transposition of internal market directives *  The  complet ion  of  the  Internal 

maJLfcûi 

remains 

an 

Immediate 

priority for the Community  and the 

remaining 

work 

is 

still 

considerable:  of  the  282  White 

Paper  measures, 69 still  require a 

Council 

decision.  The  trans 

position 

of 

directives 

Into 

national  law needs  to be  speeded 

up.  166 White  Paper  measures  have 

entered  Into force of which 134 

Ssss  Transposed 

• 

Derogations 

J  Not  t r a n s p o s ed 

Î 2J  No  a c t i on  required 

Source  :  Commission  Services 

situation  as  of  15/10/91 

require  national  implementing  measures.  Of  these  national  measures  on 

average  71% have  ai ready  been  taken  (graph  5 ). Member  States  seem  to have 

recognized  their  responsibilities and the need  for greater  haste. 

-  17 -

The  Internal  market  programme  has  already  been  a decisive  driving  force  in 
adding  to  EC  growth  prospects  and  prosperity:  economic  agents  have  already 
to  some  extent  anticipated  the  highly  competitive  environment  and  the  new 
operating  conditions  and  opportunities  that  will  prevail  by  1993. This  has 
resulted  In a strong  expansion  of  investment  In the  period  1986-1990. 

The  real  effects  of  the  Internal  market  measures  will  be  felt  In  the  years 
to  come,  especially  as  residual  Internal  barriers  are  actually  dismantled. 
Determined  actions  and  decisions  would  have  a  substantial  positive  effect 
on  the  confidence  of  economic  agents  and  give  a  new  impulse  to  economic 
growth. 

An  Eçonom IC  m$  Monetary  Union  in  the  Community  will  result  in  an 
amplification  of  the  economic  benefits  that  will  follow  from  the  1992 
programme.  Indeed  only  a  single  currency  will  allow  the  ful!  potential 
benefits of  a Single Market  to be  achieved. 

The  primary  aim  of  EMU  is  to  strengthen  the  integration  of  the  Community 
and  improve,  its  economic  performance.  EMU  will  ensurs  a  climate  of 
stability  so  that  the  process  of  self-sustaining  growth  would  be 
strengthened.  The  experience  of  the  1980s  has  clearly  confirmed  that  there 
is no  long-term  trade-off  between  higher  inflation  and  lower  unemployment. 
On  the  contrary  a  climate  of  stability  is  Increasingly  perceived  as  an 
essential  prerequisite  for  an  Improved  real  economic  performance. 

T he  Income gap  between  the  catchlng-up  countries  and  the  Community  average 
remains  sizable  and  it  will  therefore  take  many  years  to  bridge  the  gap. 
This  process  can  only  be  built  on  the  basis  of  sound  growth,  which 
increases domestic  production  potential. 

Policies  at  the  national  and  Community  level  have  to  provide  the  basis  for 
a  continuous  relative  stronger  growth  of  real  GDP,  without  Inflationary 
pressures  and  unsustainable  internal  and  external  imbalances.  First  and 

-  18 -

foremost,  responsibility  for  rapid economic  and  social  convergence  lies for 

the  most  part  In  the  least  favoured  countries  themselves.  Recent 

developments  have  confirmed  that  sound  macro-economic  policies  are  an 

essential  condition  to  improve  their  internal  growth  conditions  by  all 

aval I able means. 

The economically  stronger  countries must  also contribute  to this process by 

supporting  dynamic medium-term  growth. 

The  Community  shall  take  into  account  the  objective  of  strengthening 

economic  and  social  cohesion  In  the  implementation  of  Its  common  policies 

and of  the  Internal  market. The economic  policy  actions  at  Community  level 

must  act  In  a  synergetlc  way  to  national  policies  to  strengthen  economic 

performance  in  the  least  favoured  Member  Countries.  The  structural  Funds 

and  other  financial  Instruments,  provided  they  are  efficiently  used  in a 

conducive  national  framework,  will  considerably  Improve  both  supply  and 

demand  conditions  In  the  recipient  countries.  These  Instruments  should  be 

reinforced  to  take  account  of  previous  developments  and  the  stronger 

integration  In the  Community. 

The envIronment  and  Its  Importance  In the overall  context  of  the quality of 

life  is  Increasingly  becoming  a  matter  for  Community  preoccupation.  The 

Commission  has  recently  outlined  a  coherent  Community  strategy  aiming  to 

stabilise  C 02  emissions  in  the  Community  by  the  year  2000  at  their  1990 
level.  The  strategy  consists  of  a  range  of  regulatory,  voluntary  and 

possible  fiscal  measures  taken  at  the  Community  level  In  combination  with 

complementary  national  programmes.  The  envisaged  reliance  on  fiscal 

Instruments,  notably  a  new  combined  C02/energy  tax,  which  respects  fiscal 

neutrality,  is  considered  an  Important  condition  for  reaching  ~the 

Community's  C 02  emission  stabilization  objective  in  the  most  cost 
effective  way.  By  giving  the  right  price  signals  all  economic  agents  will 

be  induced  to adopt  environmentally  sound  behaviour.  It  Is  In  the  Interest 

19 -

of  long-term  economic  sustalnablIIty  and  prosperity,  as  well  as  of  the 

environment, 

that 

environmental 

considerations  are 

satisfactorily 

integrated  Into  the  Community's  other  policies,  notably  In  the  fields  of 

energy, transport  and agriculture. 

IV.  MACRO-ECONOMIC POLICIES AND POLICIES FOR STRUCTURAL ADJUSTMENT 

1.  Monetary  policy and the EMS 

The  aim  of  the  EMS  Is to  contribute  to  achieving  price  stability  and 

nominal  convergence  In  the Community  through  exchange  rate  stability 

and  an  appropriate  monetary  policy. The conditions  for  attaining  this 

have become more difficult  over  the past  year.  In the autumn of  1990, 

monetary  conditions  In  the  Community  were  tightened  In  response  to 

rising  oil  prices. But  during  the course of  1991, monetary  conditions 

appear  to have eased  again. This easing  occurred  against  a background 

in which  Inflationary  pressures  In several  countries of  the  Community 

persisted  or  even  strengthened  despite  the  fall  In oil  prices  after 

the Gulf war. 

With  the  Community  economy  slowing  In  1991,  a  certain  easing  of 

monetary  conditions was welcome  and  does not  appear  to  have  adversely 

affected  long-term  Inflation expectations: yield  curves have  tended  to 

shift  downwards  this year  rather  than simply  to steepen  In response  to 

the  easier  monetary  policy,  and  long  rates  In  most  markets  are 

somewhat  lower  than a year  ago. Despite  this easing, monetary  policies 

still  remain  tight.  It  is  Indeed  essential  to  ensure  that  nominal 

convergence  goes  together  with  an  absolute,  not  a  relative,  standard 

of  price  stability  and  that  the  functioning  of  the  EMS  remains  a 

powerful  force  for preserving  price stability up  to a full  EMU. 

In  this  respect,  the  mechanism  through  which  monetary  policy  in  the 

-  20  -

Community  appears  to  have  eased  this  year  presents  some  difficulties. 

During  the  1980s  the  disinflation  process  in  the  Community  was 

determined  by  Germany  and  transmitted  through  the  exchange  rate 

discipline  of  the  EMS  to  other  ERM  narrow-band  countries.  This  link 

was  reinforced  after  the  last  realignment  In  January  1987,  when 

anticipation  of  further  realignments gradually  disappeared.  The  German 

strategy  was  based  on  fiscal  consolidation  and  the  successful 

targeting  of  monetary  aggregates.  This  strategy  left  underlying 

Inflation  at  low,  If  gradually  rising,  levels  even  when  monetary 

targets  were  applied  with  greater  flexibility  in  response  to  external 

circumstances. 

The  progressive  disappearance  of  realignment  expectations  have 

significantly 

altered 

this 

configuration. 

The 

considerable 

expansionary  swing  In  fiscal  policy  in  Germany  as  a  result  of 

unification  coupled  with  the  pursuit  of  a  stability  oriented  monetary 

policy  leads  to  a  real  appreciation  of  the  currency  as  real  demand 

exceeds  real  domestic  supply.  This policy  mix  and  the  impossibility  to 

allow  the  ensuing  real  appreciation  to  take  place  through  a  nominal 

exchange  rate  adjustment  in  the  ERM,  put  considerable  additional 

pressure  on  Interest  rates  in  Germany.  Indeed  the  excessive  demand 

pressures  have  had  a  strong  influence  on  the  wage  bargaining  process, 

feeding  creeping  price  rises. This  process  has been  exacerbated  by  the 

heavy  reliance  on  revenue  measures  to  limit  the  fiscal  impact  of 

un ification. 

Uncertainty  over  the  extent  to  which  the  Bundesbank  will  be  able  to 

preserve  the same  policy  strategy  as  in the  past  has  at  times  surfaced 

in  the  markets.  These  uncertainties  and  the  expectations  of  stable 

exchange  rates  and  decreasing  inflation  differences  have  resulted  in a 

significant  reduction  within  the  ERM  In  interest  rate  differentials 

vis-à-vis  the  DM,  where  the  exchange  risk  premium  has  more  or  less 

disappeared. 

-  21  -

Given  that  Inflationary  pressures  remain  significant  In  the  Community 

as  a  whole,  any  further  loosening  of  the  stance  of  overall  monetary 

policy  is at  present  not  warranted.  The  necessary  collective  character 

of  the  EMS  Implies  that  other  members  of  the  ERM  than  Germany,  and  In 

particular  the  bigger  countries  must  accept  a  share  of  responsibility 

for  achieving  a  monetary  policy  In  the  Community  consistent  with  the 

lowest 

level  of  price 

Increases  and  with  continued  downward 

convergence  by  the high-infI at Ion  countries. 

In  the  two  countries  not  yet  participating  in  the  ERM,  Portugal  and 

Greece,  inflation  is  In  double  digits  although  It  has  recently 

decelerated  in both  countries.  In Portugal,  the  Immediate  priority  is 

to maintain  monetary  policy  tight  enough  to  reduce  overheating  In  the 

labour  market.  Given  the  scale  of  capital  inflows,  this  will  probably 

have  to  Involve  some  continued  upward  flexibility,  for  a  time,  of  the 

real  exchange  rate.  The  aim  should  be  to  adhere  to  the  ERM  at  a  time 

when  sufficient  steam  had  already  been  taken  out  of  the  economy  to 

ensure  that  the  ERM  constraint  did  not  lead  to  an  Inappropriate 

loosening  of  monetary  policy. 

In  Greece,  monetary  policy  must  continue  to  try  to  contain  the 

inflationary  pressures  created  by  a  clearly  excessive  budget  deficit. 

But  monetary  policy  cannot  cope  Indefinitely  with  the  consequences  of 

the public  finance  problem. Only  adherence  to  the budget  ceilings  laid 

down  In  the  stabilization  programme  can  hope  to  ensure  early  and 

lasting  nominal  convergence  In Greece. 

Budgetary  DO I lev 

Since  budgetary  authority  will  remain  at  the  level  of  the  member 

state,  progress  towards  EMU  necessitates  Increased  coordination  by 

reference  to  principles  or  rules  that  ensure  that  fiscal  policy  will 

not  undermine  stability  in the  Community. 

-  22 -

A  first  group  of  countries  (Greece  and  Italy)  have  been  showing 

excessive  budget  deficits  for  many  years  and  steadily  Increasing 

public debt  burdens  (table 5 and graph 6 ). 

Graph 6: Trends in gross public debt 
(in  %  of  GDP) 

140 

1 20 

100 

ao 

60 

40 

20 

I 

I 

! 
i 

I 
i 

j  140 

!  120 

j  100 

i  BO 

;  so 

75 

ao 

BS 

90 

92 

71 

75 

80 

85 

Source  :  C o m m l a a l on  S e r v i e ** 

In Greece, budgetary  developments 

In  1991  show  a  departure  from 

previous  trends  as  a  result  of 

the  Implementation  of  the  new 

three-year  convergence programme. 

Budgetary  adjustment  and  reform 

will,  however,  fall  short  of  the 

targets.  The  programme  needs  to 

be  Implemented more vigorously to 

ensure a significant  reduction of 

the 

budget 

deficit 

and 

a 

stabilization  of  the  public  debt 

rat io. 

The  budgetary  performance  of 

Italy,  continues  to  diverge  from 

the other  narrow-band  members of 

the ERM. The budget  deficit  has remained  persistently  above  10% of GDP 

despite  repeated  attempts  to  correct  It.  As  a  result  the  public 

debt/GDP  ratio  passed  the  100%  mark  In  1990  and  has  continued  to 

increase  since  then.  There  has  clearly  been  no  lack  of  adjustment 

programmes but  rather of  forceful  implementation. More emphasis should 

be  laid on  the  Instruments  that  will  be  used  to meet  the  targets  and 

on  structural  measures  to  Improve  the  public  finances.  Even  If 

forcefully  implemented,  the  present  programme  still  risks  falling 

short  of  the  announced  targets  as  it  rests on  a  very  positive  growth 

scenario.  Moreover,  this  programme  is  markedly  tax-centred.  The 

forward  shifting  of  increases  in direct  taxation, on  the  part  of  tax 

-  23 -

payers,  on  to  higher  wage  claims  could  contribute  to  Inflationary 

pressures.  It  Is encouraging  though,  that  the  Italian  Government  has 

confirmed  its willingness  to  take  corrective  measures  should  targets 

not be met. 

A  second  group  of  countries  (Belgium,  Netherlands,  Portugal  and 

Ireland) still  has  sizable  deficits  and  excessively  high  public  debt 

ratios.  In Belg I urn. consolidation efforts undertaken during  the period 

of  strong  growth  (1988-90) were  not  sufficient  to prevent  a  new  rise 

of  the public debt  ratio  in 1991, when economic  activity  slowed down. 

The  double  government  norm  aimed  at  freezing  real  non-interest 

expenditures  and  keeping  the  central  government  deficit  constant  in 

nominal  terms, is clearly  insufficient and needs to be extended  to all 

levels  of  government,  including  social  security.  A  significant 

reduction  of  the  deficit  is  needed  to  bring  the  public  debt  ratio, 

which  is  still  double  the  Community  average,  on  to  a  clearly 

dec IInlng trend. 

Consolidation  efforts  In  the  Netherlands  have  also  been  inadequate 

during the period of strong growth  (1988-90). Additional  measures have 

been  taken  In 1991 so that public  finance targets will  be reached. The 

persistence  of  public  dissaving,  however, would  warrant  a  tightening 

of  government  medium  term  targets  in order  to  reduce  the  public  debt 

ratlo. 

The  reduction  In  public  finance  Imbalances  in  Portugal  in  recent 

years reflects the complete overhaul  of  the tax system which  Increased 

its  efficiency,  an  effort  of  expenditure  restraint,  the  cyclical 

upturn  of  the  economy  and  the  privatization  process.  However,  the 

relative  size  of  both  the general  government  deficit  and  public  debt 

are  above  the  Community  average.  Consequently  and  also  in  order  to 

assist  the  disinflationary  process,  fiscal  adjustment  remains  one  of 

the  main  priorities  of  economic  policy  and  should  continue  to  be 

vigorously  implemented. 

-  24  -

Ireland  has  been  remarkably  successful  In  consolidating  Its  public 

finances  In  the  late  eighties.  Further  consolidation  has  since  been 

slowed  because  of  the  effects  of  weaker  growth  on  revenue  and 

pressures on  public  expenditure  from  rising  unemployment  and  increases 

in public  sector  pay.  Consolidation  efforts  should  be  maintained  over 

the medium  term  to keep  the public  debt  ratio on  a  firm  downward  path. 

Germany  and  the United  Kingdom  are separate  cases. 

In  Germany.  as  a  direct  consequence  of  the  large  financing  needs 

arising  from  unification,  the  swing  in the  public  sector  accounts  has 

been  significant  close  to  4%  of  GDP  between  1989-91  despite  a 

sustained  level  of  activity.  Even  If  the  present  deficit  is  less  a 

matter  of  concern,  apart  from  contributing  to a biased  policy mix,  the 

medium-term  prospects  for  bringing  the  deficit  under  control  are 

rather  disquieting.  Even  If  consumption  supporting  outlays  will  be 

reduced,  they  will  gradually  be  replaced  by  large  scale  infra-

structural  Investment;  the  dynamics  between  a  steeply  rising  public 

sector  indebtedness  and  Interest  charges  will  put  further  pressure  on 

outlays.  Fiscal  consolidation  will  therefore  be  a  major  policy 

challenge  for  the years  to come. 

Moreover,  considerable  emphasis  has  recently  been  laid  on  Increasing 

revenues. Higher  direct  or  Indirect  taxes  are, however,  very  likely  to 

be  reflected  in higher  wage  demands  to compensate  for  the  Income  loss. 

In  these  conditions,  excessive  reliance  on  tax  increases  may  Initiate 

a  new  cycle  of  ever  rising  claims  on  income  distribution.  There  is 

still  considerable  scope  on  the  expenditure  side  to  reduce  the  budget 

deficit.  In addition  income support  schemes  should  be designed  in such 

a way  as  to ensure  their  temporary  character. 

In  the  United  kingdom,  deterioration  In  the  budget  balance  is 

-  26 -

primarily  due  to  the working  of  the  automatic  stabilizers  during  the 

severe  recession.  The  authorities  medium-term  objective  remains  that 

of  attaining  broad  budget  balance  on  a  cyclically  adjusted  basis. A 

cautious policy stance  remains appropriate to maintain  compliance with 

the medium-term  objective  of  a balanced  budget  and  continued  positive 

pub IIc saving. 

In the  last group of countries  (Denmark, Spain, France and  Luxembourg) 

budget  balances  and  public  debt  burdens  are  broadly  under  control. 

These countries have positive public savings, meet  the golden  rule and 

have a public debt  ratio below  the Community  average. There  Is still a 

need  to  maintain  a  cautious  policy  stance  In  these  countries  since 

some  of  them  have  strong  inflationary  pressures  and  large  external 

deficits  (Spain) or a high  foreign debt  (Denmark). 

The  Insistence  on  bjidflej  consolidation  Is  motivated  by  several 

considerations: first  It  is  Intended  to redress  the presently  lopsided 

policy  mix  of  a  relatively  loose  fiscal  policy  combined  with  a 

relatively  restrictive monetary  policy.  Even when  budget  deficits  are 

Justifiable  by  temporary  and  exceptional  factors,  It  would  still  be 

appropriate  to  reduce  them  as  fast  as  possible  to  achieve  a  more 

balanced  policy  mix. Second,  there  Is a need  for  higher  saving  within 

the  Community  for  which  the  reduction  of  public  deficits  should 

provide  a significant  contribution.  Finally,  a more  restrained  fiscal 

policy  Is  likely  to  result  in more  balanced  wage  developments,  which 

would  contribute to better  convergence. 

A  desired  additional  Increase  in  the  Investment  ratio  to  Increase 

growth  and  employment  raises  the  Issue  of  the  adequacy  of  aavIno. 

Although  there  are  few  signs  that  the  low  level  of  saving  has  had 

major  repercussions on economic  performance  so far,  It has contributed 

to  keeping  real  long  interest  rates  high.  The  inadequacy  of  saving, 

-  26 -

however,  risks  becoming  a  more  decisive  constraint  on  growth  in  the 

future,  particularly  for  the  newly  liberalizing  countries  in  Eastern 

and Central  Europe and  the developing  world. A saving  surplus can only 

be  realized  if the considerable  public  dissaving  in the Community  and 

In  the  other  major  Western  countries  is  reversed.  The  generation  of 

sufficient  public  saving  Is  therefore  also  an  essential  precondition 

for  a  successful  take-off  of  market  economies  in Central  and  Eastern 

Europe. 

Finally,  in a full  fledged  EMU  fiscal  policy and particularly monetary 

policy will  have  less room  for manoeuvre. Therefore more emphasis will 

have  to  be  laid  on  structural  measures  to  bring  about  the  necessary 

adjustment  in the Community  economies. 

3.  Policies  for structural  adjustment 

The  efforts  to establish  an  internal  market  have  resulted  in  the most 

wide-ranging  supply  side  Initiative  In  the  history  of  the  Community. 

The  dynamic  of  the  Internal  market  has,  however,  not  only  Increased 

the  growth  potential  of  the  Community,  it  has  also  highlighted  the 

still  sizable  rigidities  present  in  markets.  Such  rigidities  become 

more  visible  when  competition  increases.  In  the  present  less 

supportive  International  environment  It  is  also  important  for  the 

Community  to reinforce  its own  domestic growth. 

Policies  of  structural  adjustment,  supported  by  adequate  industrial 

policies  ,  Improve  the  adaptability  and  efficiency  of  the  Community 

economies.  In  line with  the  implementation of  the  1992-programme,  the 

Commission  has  emphasized  the  need  for  industrial  policy  measures  in 

various  Important  sectors  and  has  put  forward  proposals  to  this 

effect.  Policies  of  structural  adjustment  must  accompany  the 

completion  of  the  internal  market  in  order  to  ensure  that  its  full 

benefits are actually  forthcoming. 

-  27 -

Furthermore  in  EMU  the  nominal  exchange  rate  will  no  longer  be 

available  between  full  participants  as  an  Instrument  for  adjustment. 

Increased  flexibility  in  all  markets  will  therefore  be  necessary  to 

ensure  a  balanced  development  of  all  areas  of  the  union.  In  EMU, 

adaptability  of  the  labour  market  will  be  an  important  element  for 

adjustment  If one wants to avoid  further  Increases  in unemployment. 

Both  national  and  Community  policies  for  structural  adjustment  will 

have  to play  an even more  important  role. Together  with prudent  macro-

economic  policies  and  the  Community  policy  on  economic  and  social 

cohesion  which  will  have  to  be  reinforced,  this  must  constitute  the 

Community's  response  to  restore  sustainable  growth  rates  above  3të% a 

year  in  order  to  reduce  the  still  high  level  of  unemployment.  Four 

areas 

in  particular  deserve  further  structural 

improvements: 

cooperation,  the  labour  market,  competition  policy  and  international 

trade. 

Cooperation  can  Improve  the  underlying  conditions  within  which 

companies  operate  and  strengthen  the  Community's  international 

competition  by mustering  energies  and  Innovation. A  policy  to  improve 

infrastructure,  and  especially  transportation,  is  an  indispensable 

element  In  the  creation  of  the  internal  market.  It  is  equally  an 

element  In  the  cohesion  process  in  the  sense  that  a  better  working 

Infrastructure  lowers  transportation  and  communications  costs  and 

brings  the peripheral  regions closer  to the centre of  the  Community. 

Further  efforts  will  also  have  to  be  undertaken  in  the  area  of 

Innovation,  research  and  development.  Research  and  development 

policies  will  stimulate  the  competitiveness  of  the  Community 

companies,  but,  In  a  period  of  intense  technological  change  often 

involving  massive  development  costs, the  results of  such  efforts must 

be  spread  more  widely  through  Increased  cooperation.  This wl I I hasten 

the adjustment  of our  economies  to new  technological  advances. Also  In 

-  28 -

the  area  of  industrial  restructuring  and  the  environment,  increased 

cooperation  is  likely  to  facilitate  adjustment.  Cooperation  in  these 

areas  should  allow  the  Community  to  better  face  International 

competition.  The  Community  can  play  an  important  stimulating  role  in 

bringing enterprises together. 

Labour  markets  In  the  Community  have  been  showing  greater  adap 

tability,  but  this  Improvement  is  still  Insufficient.  Rising  wage 

pressures  at  a  time when more  than 9% of  the civilian  labour  force  Is 

still  unemployed  suggest  that  significant  structural  problems  persist 

in  labour markets. 

The  completion  of  the  internal  market  at  a  time  of  reduced  growth  in 

the Community  economy  and  increased  competition  from abroad  means that 

companies  and  workers  have  to  adapt  working  methods  and  practices  to 

these  new  circumstances.  Flexibility  In  companies'  responses  to  the 

new  operating  environment  have  to  be  matched  by  flexibility  in  the 

labour  market  In  terms  of  training  and  skills  as  well  as  In  the 

employment  conditions and practices. 

In most  countries,  the adjustment  of wage  costs  is still  Insufficient 

to ensure  full  employment.  If  Increased unemployment  is to be avoided, 

the  social  partners  must  take  the  need  for  adjustment  more  into 

account  in  their  negotiations.  Member  States'  authorities  should 

therefore  make  their  policy  objectives  more  visible  so  that  macro-

economic  prospects  can  be  better  taken  Into  consideration  in  wage 

negotiations. Credible commitment  to convergence  by member  governments 

provides one such  approach. 

Rigid  wage  structures, employment  practices  and  lack of  training  have 

accentuated  the  problems  of  those  outside  the  work  force.  The  large 

number  of  untrained  unemployed  illustrates  the  problem  of  cost  and 

adequate  skills  in  relation  to  their  productive  potential.  Member 

States  should  examine  labour  market  regulations  and  social  security 

-  29 -

provisions  In order  to rectify  features  that  Impede  entry  or  re-entry 

into the  labour  market. 

Finally,  there  seems  to be  a good  case  for  encouraging  a more  active 

labour  market  policy  with  greater  emphasis  on  retraining  than  on  the 

provision of unemployment  support. 

Competition  is bound  to  Intensify  with  the completion  of  the  Internal 

market  as barriers are systematically  reduced. European  companies must 

be prepared  for  this greater  competition,  that  has already  generated a 

wave  of  merger  activities  within  the  Community.  To  avoid  dominant 

positions  that  reduce  competition  and  lower  overall  welfare,  the 

Community  pursues an active competition policy. 

Increased  competition  may  also  lead  to  calls  for  more  aid  to  defend 

companies  or  Industries  that  are  coming  under  pressure  from  such 

competition. State subsidies can  threaten, however, the functioning of 

the  market  process  by  confining  specific  advantages  to  competing 

companies.  They  also  risk  preventing  the  necessary  restructuring  of 

Industry. Therefore  the Commission  strives  to  limit  subsidization  and 

to  Incorporate  It  in a context  of  restructuring. 

The economically  stronger  countries  In the Community  should  resist  the 

temptation  to compensate  by domestic  subsidies  the greater  competition 

resulting  from  the  opening  of  markets.  Indeed  such  subsidies  risk 

cancelling out  the competitive  advantages gained  by  the  least  favoured 

countries  In specific sectors. 

Free  and  undistorted  competition  In the Community  requires  efficient 

surveillance of  state  aids. The  Commission  has undertaken  two  surveys 

on  public  aids  in  the  European  Community  In  1988  and  In  1990  and  is 

consistently  striving  for  greater  transparency  In  this  field.  Public 

aids  still  absorb  a  significant  share  of  public  resources  In  Member 

States  (table  9 ). The  second  survey  Identified  total  national  public 

aids  amounting  to  2.2%  of  Community  GDP,  or  more  than  twice  the 

- 30 -

Community  budget.  The  differences  between  Member  States  are 

considerable, with Denmark and the United Kingdom  spending  Just 1% of 

their  GDP, but Belgium,  Greece,  Italy and Luxembourg  spending  3% and 

more. 

Table 9  : State aids in the Community  * 

(average 1986-88) 

in%of 
GDP 

in%of 
public 
expenditure 

Granted in the form of  (%) 

public 

tax 

expenditure  expenditure 

B 
Ok 
D 
Gr 
E 
F 
hi 
It 
L 
NI 
P 
UK 

3.2 
1.0 
2.5 
3.1 
2.3 
2.0 
2.7 
3.1 
4.1 
1.3 
2.3 
1.1 

5.8 
1.7 
5.3 
6.5 
5.5 
3.8 
5.2 
6.2 
7.6 
2.1 
5.3 
2.6 

100 
36 
100 
100 
82 
63 
64 
91 
70 
41 
94 

11 
0 
64 
0 
0 
18 
37 
36 
9 
30 
60 
6 

*  Refers to subsidies thai are subject to Community rules. The total of sub 
sidies granted Is drfficut to establish due to the various forms subsidies 
can take and the lack of comprehensive national data. 

Source : Commission, Second survey on state aids. 

State 

aids 

are 

heavily 

concentrated:  the  manufacturing 

sector  took  41%, the  transport 

sector  30%„  the coal  industry 16% 

and  agriculture  (national  aids) 

13%. 

In  the  run-up  to  EMU,  national 

expenditures  on  subsidies  should 

come  under  closer  scrutiny  to 

improve  convergence.  A  commitment 

to more  discipline on subsidies 

would  also  contribute  to  the 

achievement  of  a 

more  open 

international  trading  system. 

The  resurgence of protectionist  tendencies  In  International  trade  is 

a  worrisome  development.  Friction  among  trading  partners  has  been 

intense, particularly  with  regard  to the subsidization of agriculture 

and  some  declining  Industries.  The use of  non-tariff  measures  to 

protect  domestic  products  has  Intensified  In  various  parts  of the 

world. The Community  is committed  to achieving  by the end of 1991 an 

ambitious,  global  and balanced  result  to the Uruguay  Round,  which Is 

presently  in a crucial  phase. This  is necessary  in order to strengthen 

the  multilateral  trading  system  and  to  reverse  the  trend  towards 

protectionism.  Further  delays  could  undermine  the adjustment  strategy 

of  many  developing  and Central  and Eastern  European  countries  which 

have adopted an outward-looking market  oriented approach to growth and 

-  31 -

development.  The  major 

Industrial 

countries  carry 

a 

large 

responsibility  In this area  and  should  strive  for  an early  conclusion 

of  the Uruguay  Round. 

A  successful  outcome  of  the  Round  would  not  only  serve  the  interests 

of  the  Community  by  ensuring  market  access  and  reduced  protection  In 

the  traditional  areas of  trade  negotiations.  It would  also  allow  the 

extension  of  mult I laterally-agreed  rules  to  new  areas  of  great 

relevance  for  the  Community:  services,  Intellectual  property  rights 

and  International  Investment. 

The negotiations between  the Community  and EFTA countries with  the aim 

of  erecting  an  European  Economic  Area  have  been  concluded  and  will 

increase  the benefits of  the  Internal  market  to an even  greater  area. 

By  facilitating  the  flow  of  goods,  services,  capital  and  labour 

between  the  EC  and  EFTA,  the  agreement  wl 11  make  a  further 

contribution  to  more  competition  and  the  improvement  of  the  supply 

side of  the economy. 

The  Community  is  actively  involved  in  assisting  Central  and  Eastern 

European  countries  to  advance  political  and  economic  reforms.  The 

Commission  not  only  manages  the  Community's  own  programmes  of 

assistance,  but  Is also  coordinator  for  the  G-24,  a  group  comprising 

all major  industrialized countries. 

Assistance  takes  a  variety  of  forms,  Including  support  for  economic 

reconstruction, 

food-aid 

and 

emergency 

assistance, 

technical 

assistance, balance of payments support,  investment  finance and export 

credits.  The  Community  has  become  the  main  source  of  funds  for 

Central  and  Eastern  European  countries,  providing  about  half  of  the 

total  aid  they  receive.  Moreover,  the  Community  has  completed 

negotiation 

for 

Europe  agreements  establishing 

relations  of 

association  with  Hungary,  Poland  and  Czechoslovakia. These  agreements 

-  32  -

will  enable  Central  and  Eastern  European  countries  to  participate  in 

the  process  of  European  integration.  They  are  of  an  overriding 

political  and  economic  importance,  at  a  time  when  these  countries' 

reforms  are  at  a  crucial  stage  and  their  main  traditional  export 

market  (the  USSR)  has  collapsed.  The  establishment  of  free  trade  will 

encourage  private  investment  in  these  countries,  which  is one  of  the 

main  conditions  for  the  economic  reforms  to  be  successful.  The 

Community  is  ready  to  negotiate  similar  agreements  with  other  Central 

and  Eastern  Europe  countries  which  satisfy  the  necessary  political  and 

economIc  condItIons. 

The  Community  has  shown  Its  willingness  to  Improve  access  to  its 

markets  to  Central  and  Eastern  Europe  for  products  with  which  these 

countries  can  compete  effectively  on  world  markets 

including, 

agriculture,  textiles,  coal  and  steel.  Account  should  be  taken  of  the 

implications  and  difficulties  of  this  Improved  access  for  the  sectors 

and  regions  concerned  In  the  Community.  This  Improvement  in  market 

access  will  not  be  carried  out  at  the  expense  of  existing  commercial 

relations  with  other  partners,  In particular  developing  countries  with 

which  the  Community  has  cooperation  agreements.  Such  market  access  is 

critical  for  successful  development  of  these  economies. 

MAIN  ECONOMIC  INDICATORS  1989-1993 

Community,  USA and Japan 

GDP  at constant  prices  (1) 
(annual  %  change) 

(b) 

Domestic  demand at constant  prices 
(annual  %  change) 

1989 

1990 

1991* 

1992* 

1893* 

1989 

1990 

1991' 

1992* 

1993* 

3.9 
1.2 
3.3 

2.8 
4.8 
3.6 

5.9 
3.2 
6.1 

4.0 
5.4 
2.2 

3.3 

2.8 
4.9 

3.7 
2.1 
4.7 

-.3 
3.7 
2.8 

5.7 
2.0 
.9 

3.9 
4.0 
.8 

2.8 

.9 
5.6 

1.3  2 1/4  2 1/2 
1.8  3 
3 1/4 
3.3  2 1/4  1 3/4 

.7 
2.5 
1.3 

1 1/4 
3 
2 1/4 

2 
3 1/4 
2 1/2 

1/4 

1.3  2 
1.1  2 
3.0  3 1/2 

2 3/4 
2 1/2 
3 1/2 

2.3  1 1/4  2 
2.0  1 3/4  2 
-1.8  2 

2 3/4 

1.3  2 1/4  2 1/2 

-.4 
4.6 

2 
3 1/2 

2 1/4 
3 1/2 

B 
DK 
D 

GR 
E 
F 

IRL 
I 
L 

NL 
P 
UK 

EC 

USA 
JAP 

4.9 
.3 
2.7 

3.3 
7.8 
3.2 

6.0 
3.6 
7.8 

4.9 
4.0 
3.1 

3.7 

22 
5.7 

3,4 
-.7 
5.0 

3.3 
4.6 
3.2 

5.4 
1.9 
2 2 

36 
58 

-1 

2.9 

.5 
5.8 

1.2 
.4 
3.0 

-.3 
3.1 
1.1 

.6 
1.5 
4.3 

2.1 
4.6 
-3.0 

2  1/4 
2 
2  1/4 

1 
3  1/2 
2 

1  1/4 
2  1/4 
3  3/4 

1/4 
3  1/4 
2  1/4 

2 
1/4 
3  1/4 
2 

2  1/4 
3  1/2 
2  1/4 

1  3/4 
2  3/4 
3  3/4 

1  1/2 
3  1/4 
3 

1.1 

2  1/4 

2  1/2 

-1.0 
3.4 

2 
3  3/4 

3/4 

Deflator  of private  consumption 
(annual  %  change) 

(d) 

Balance  on current  transactions 
(as  a  %  of  GDP) 

1989 

1990 

1991' 

1992* 

1993* 

1909 

1991' 

1992* 

1993* 

3.5 
5.1 
3.1 

14.7 
6.6 
3.5 

3.9 
5.8 
3.4 

2.9 
12.8 
5.9 

4.9 

4.5 
1.7 

3.5 
2.5 
2.6 

20.2 
6.4 
2.9 

2.6 
6.2 
4.2 

2.5 
13.6 
8.4 

52 

5.0 
2.4 

3.2 
2.4 
3.5 

18.3 
5.8 
3.0 

3.0 
6.4 
3.4 

3.2 
11.7 
6.5 

1/2 
1/4 
1/4 

14  1/4 
5  1/2 

1/4 
3/4 

3  1/2 
9  1/2 
4  1/2 

1/2 
1/2 

3 
2 
4 

11 
5 
2 

1/4 
3/4 

2 
5 
3 

3/4 
1/4 
1/4 

3  1/4 
7  3/4 
4 

50 

4  1/2 

4  1/4 

4.4 
2.8 

4  3/4 
2  1/2 

5 
2  1/2 

B 
DK 
D 

GR 
E 
F 

IRL 

NL 
P 
UK 

EC 

USA 
JAP 

1.1 
-1.2 
4.7 

-4.8 
-3.2 
.1 

1.3 
-1.4 
34.4 

3.3 
-2.9 
-4.8 

-.1 

-1.9 
2.1 

1.0 
.8 
3.2 

-6.1 
-3.5 
-1.0 

3.4 
-1.4 
31.2 

3.8 
-.3 
-2.6 

1.0 
1.4 
-1.1 

4.1 
-3.1 
-.7 

2.3 
-1.3 
28.1 

4.1 
-1.1 
-1.1 

1 
2  1/4 

-1 

3  1/4 
-3  1/4 
-3/4 

1  1/4 
2  1/2 
-3/4 

-2  3/4 
-3  1/4 
-3/4 

2 
-1  1/2 
26 

1  3/4 
-1  3/4 
25  1/2 

4  1/2 
-1  1/2 
-1  1/2 

4  3/4 
-2  1/2 
-1  1/4 

-1 

-3/4 

-1.6 
1.2 

-.1 
1.5 

-3/4 
1  1/2 

-3/4 
1  3/4 

(a) 

B 
OK 
O 

GR 
E 
F 

IRL 

NL 
P 
UK 

EC 

USA 
JAP 

(c) 

B 
DK 
D 

GR 
E 
F 

IRL 

NL 
P 
UK 

EC 

USA 
JAP 

(*)  Based on  the forecasts  of  October  1991. 
(  I)  GNP for  USA and Japan  from  1990  onwards. 
Source  : Commission  services. 

d3 

(e) 

Number  of  unemployed  as  %  of  the 
civilian  labour  force 

(f) 

General  government  lending  and 
borrowing  (as  a  %  of  GDP) 

1990 

1991' 

1992* 

1993* 

1989 

1990 

1991' 

1992* 

1993* 

8.5 
7.7 
5.5 

7.5 
17.1 
9.4 

16.0 
10.7 
1.8 

8.7 
4.8 
7.0 

8.9 

5.3 
2.3 

8.1 
7.9 
5.1 

7.5 
16.1 
9.0 

15.6 
9.8 
1.8 

8.1 
4.6 
6.4 

8.4 

5.5 
2.1 

8.6 
9.2 
4.6 

8.8 
15.8 
9.5 

16.8 
9.4 
1.6 

7.2 
4.0 
8.4 

8  1/2 
9 
5 

8  1/2 
8  1/2 
5  1/2 

9  1/4 
15  1/2 
10 

9  3/4 
15  1/4 
10  1/4 

18 

9  1/2 
1  1/2 

18  1/2 
9  1/4 
1  1/2 

7  3/4 
4  1/4 
9  3/4 

7  3/4 
4  3/4 

10 

8.6 

9 

6.7 
2.2 

7 
2  1/4 

9  1/4 

6  3/4 
2  1/4 

B 
DK 
D 

GR 
E 
F 

IRL 
I  (2) 
L 

NL 
P 
UK 

EC 

USA 
JAP 

-6.7 
-.5 
.2 

-18.3 
-2.7 
-1.2 

-3.5 
-10.1 
4.3 

-5.2 
-3.4 
1.3 

-2 9 

-1.7 
2.5 

-5.6 
-1.5 
-1.9 

-19 8 
-4  0 
- 16 

-3.6 
-10.6 
4.7 

-5.3 
-5.8 
-.7 

-4.1 

-2.4 
2.2 

-6.3 
-1.7 
-3.6 

-6  1/4 
-1  1/2 
-3  1/4 

-5  3/4 
-1/2 
-3  3/4 

-17.3 
-3.9 
-1.5 

-14 

-3  1/2 
1  3/4 

-10 
-3 
-1 

1/4 
1/4 
1/2 

-4.1 
-9.9 
1.9 

-4.4 
-5.4 
-1.9 

1/4 

-4 
-9 
2 

1/2 

4 
-4  1/2 
-3  1/2 

-3  3/4 
-4 
-3 

1/4 

-4.4 

-4  1 / 2 -4 

1/4 

-2.3 
1.8 

1/2 

-1 
2 

Total  employment 
(annual  %  change) 

(h) 

Real  compensation  of  employees  per  head 
(annual  %  change)  (3) 

1989 

1990 

1991' 

1992" 

1993* 

1989 

1990 

199V 

1992* 

1993* 

1.6 
-.6 
1.4 

.4 
3.6 
1.1 

-.1 
.2 
4.0 

1.6 
1.0 
2.8 

1.5 

2.3 
1.9 

.9 
-.4 
2.8 

.2 
2.6 
1.2 

1.3 
1.0 
4.2 

2.1 
1.1 
.4 

1.4 

.5 
2.0 

-.3 
-1.0 
2.8 

-.8 
.7 
.4 

.0 
.9 
1.9 

1.0 
1.1 
-2.3 

0 
0 
1 

-0 
1  1/4 
-0 

1/4 
1/2 

0 

-1/4 

-3/4 

1/4 

1 

1/4 

1/4 

1/4 
1  1/2 
1/2 

3/4 
3/4 
1  1/2 

-1/2 
1/2 

1/2 

-.8 
1.6 

1 
1  1/2 

1  1/2 
1  1/2 

B 
DK 
D 

GR 
E 
F 

IRL 

NL 
P 
UK 

EC 

USA 
JAP 

.1 
-1.6 
-.2 

2.9 
.5 
1.2 

2.2 
3.0 
3.0 

-2.4 
.8 
2.8 

1.1 

-1.0 
2.5 

2.8 
1.0 
1.5 

.0 
1.2 
1.9 

5.9 
3.9 
.8 

1.1 
3.7 
2.7 

2.3 

-.1 
1.8 

2  1/4 
1  1/4 
1  1/2 

•2  1/4 
1  1/4 
1 

3 
1  1/2 
1  1/4 

1/2 
1/2 
1/4 

1  1/4 

1.9 
1.1 
2.6 

-1.7 
1.8 
1.5 

3.5 
1.7 
1.3 

1.5 
6.6 
1.7 

2.0 

.3 
1.0 

1/2 
1/2 

-3/4 
1/4 

1/4 
1/2 
3/4 

1/2 

1/4 

-1/4 

B 
DK 
D 

GR 
E 
F 

IRL 

NL 
P 
UK 

EC 

USA 
JAP 

(g) 

B 
DK 
D 

GR 
E 
F 

IRL 
I 
L 

NL 
P 
UK 

EC 

USA 
JAP 

( * )  Based on  the forecasts  of  October  1991. 
(2)  1992 and  1993 : Does  not  fully Incorporate the  effects  of  the  measures  of  the convergence  program. 
(3)  Deflated  by  the deflator  of private  consumption. 
Source  : Commission  services. 

Bk 

(I) 

Investment  in construction  at constant  prices 
(annual  %  change) 

(j) 

Investment  in equipment  at constant  prices 
(annual  %  change) 

1989 

1990 

1991' 

1992* 

1993* 

1989 

1990 

1991* 

1992" 

1993" 

B 
DK 
D 

GR 
E 
F 

IRL 
I 
L 

NL 
P 
UK 

EC 

8.9 
-4.6 
5.1 

2.0 
14.9 
5.3 

9.8 
3.6 
4.4 

1.6 
3.5 
2.5 

5.3 

6.7 
-6.1 
5.3 

2.1 
10.7 
2.3 

8.4 
2.5 
.9 

1.3 
6.5 
-1.1 

3.6 

-1.4 
-6.5 
3.5 

-5.0 
5.3 
1.2 

-2.9 
.4 
5.8 

3  1/4 
-1 
2  1/2 

2  3/4 
4 
1  3/4 

2  1/2 
4 
2 

4 
1  1/4 
4  1/2 

5 
4 
3 

4 
1  1/4 
3 

1  1/4 
4 
4  3/4 

-.6 
4.5 
-12.9 

-1 
3 

-3/4 

B 
DK 
D 

GR 
E 
F 

IRL 
r 
L 

NL 
P 
UK 

EC 

18.2 
6.3 
10.0 

17.4 
13.0 
5.8 

15.3 
6.2 
26.3 

4.5 
10.0 
8.3 

8.5 

10.3 
3.0 
12.9 

7.9 
1.2 
5.0 

6.8 
3.5 
6.0 

7.7 
8.5 
-3.6 

47 

3.0 
3.0 
10.0 

3.0 
-2.5 
-1.8 

1.8 
-1.1 
6.7 

2  3/4 
5 
5 

2  3/4 

10 

4  1/2 

4  1/2 
3 
1  1/2 

3  3/4 
3  1/2 
5 

6 
4 
3  1/2 

4  1/2 
4  1/2 
5 

1/2 
1/2 

3.0 
4.5 
-12.8 

-1  1/4 
3 
1 

-.5 

1  3/4 

2  3/4 

2  1/2 

4  3/4 

(k) 

Gross  fixed  capital  formation  at  constant 
prices  (annual  %  change) 

(I) 

GDP per  head  (EC =  100) at  current 
prices  and current PPS 

1989 

1990 

1991' 

1992" 

1993* 

1960 

1973 

1986 

1992* 

1993* 

B 
DK 
D 

GR 
E 
F 

IRL 
I 
L 

NL 
P 
UK 

EC 

USA 
JAP 

13.6 
.2 
7.1 

8.6 
13.7 
5.8 

11.3 
5.1 
13.4 

3.0 
7.5 
4.8 

6.7 

2.7 
11.0 

8.3 
-1.9 
8.8 

4.8 
6.7 
3.8 

7.5 
3.0 
3.3 

4.2 
7.5 
-2.4 

4.1 

.9 
10.9 

.6 
-1.9 
6.6 

-1.2 
2.2 
-.6 

-.4 
-.4 
6.2 

1.1 
4.5 
-12.8 

3 
2 
3  3/4 

3  1/2 
3  3/4 
1  3/4 

3  3/4 
2  1/2 
4  3/4 

-3/4 

2  3/4 
7  1/4 
3 

5  1/2 
4 
3  1/4 

4  1/4 
3 
4 

2 
3  3/4 
6  1/2 

2  1/4 

3  3/4 

B 
DK 
D 

GR 
E 
F 

IRL 
I 
L 

NL 
P 
UK 

EC 

95.4 
118.3 
117.9 

38.6 
60.3 
105.8 

60.8 
86.5 
158.5 

118.6 
38.7 
128.6 

101.2 
113.1 
111.1 

56.8 
79.0 
110.4 

58.9 
93.3 
141.9 

113.1 
56.4 
108.5 

100.6 
117.0 
114.0 

55.9 
72.8 
110.1 

63.4 
103.0 
126.2 

106.0 
52.5 
105.4 

103.4 
110.2 
113.6 

52.1 
79.9 
108.8 

68.9 
103.2 
130.0 

102.7 
56.3 
102.1 

103.8 
111.4 
112.3 

52.0 
80.7 
108.8 

69.2 
103.4 
132.6 

102.0 
56.2 
102.5 

100.0 

100.0 

100.0 

100.0 

100.0 

-4.4 
4.6 

4  1/2 
3  1/2 

5  1/2 
4 

USA 
JAP 

189.6 
55.8 

161.6 
96.2 

155.7 
110.6 

146.8 
124.3 

145.9 
125.6 

(*)  Based on  the forecasts  of  October  1991. 
Source  Commission  services. 

25 

ISSN 0254-1475 

COM(91) 484 final 

DOCUMENTS 

EN 

01 

Catalogue number : CB-CO-91-572-EN-C 

ISBN 92-77-78557-8 

Office for Official Publications of the European Communities 
Lr2985 Luxembourg