Commission' s Recommendation for the Broad Guidelines of the Economic Policies of the Member States and the Community
Date: 1995-05-31
Institutions: European Commission
Subjects: EU Member State, European integration, economic convergence, economic policy, fight against unemployment, market stabilisation

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels,  31.05.1995 
COM(95) 228  final 

Commission's  Recommendation 
for  the  Broad  Guidelines  of  the  Economic 
Policies  of  the  Member  States  and  the 
Community 

-  A  ~ 

EUROPEAN COMMISSION 

Commission's  Recommendation 
for  the  Broad  Guidelines  of  the  Economic 
Policies  of  the  Member  States  and the 
Community 

drawn up in conformity with article  103 (2) of the 

Treaty establishing the European  Community 

-4*r 

Table of contents 

BROAD ECONOMIC  POLICY  GUIDELINES  FOR THE COMMUNITY 
AND THE MEMBER  STATES 

1. 

Introduction 

2.  Economic  policy guidelines 

Price and exchange  rate stability 
Sound public finances 
Competitiveness 
Employment  and the labour market 

II.  EXPLANATORY DOCUMENT 

1. 

Introduction 

2.  The economic  situation and outlook 

2.1  Growth  prospects 

2.2  Employment trends 

2.3  The outlook for inflation and budgetary  convergence 

3.  The  policy objectives and risks 

4.  The  Policies 

4.1  Macroeconomic  policies 

4.2  Policies for greater competitiveness 

4.3  Employment  and labour market  policies 

1L, 

1  I 
o 

2 

2 
4 
6 
7 

10 

10 

11 

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12 

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21 

24 

24 

27 

29 

41-

I.  Broad  Economic  Policy  Guidelines  for  the  Member 
States  and  the  Community 

1.  Introduction 

Since  the  Summer  of  1994,  when  the  previous  Broad  Guidelines  were  adopted, 

economic growth in the Community has become firmly  established.  However,  as the 

recent  foreign  exchange  turmoil  following  the  decline  of  the  dollar  has  highlighted, 

significant  risks  and  important  policy  issues  remain  unresolved. 

In  order  to  ensure 

that  the  growth  prospects  are  fully  taken  advantage  of  to  increase  employment  and 

enhance  convergence,  economic  policies  must  respond  to  the  challenges  and 

opportunities presented by the emerging economic expansion. 

The present  set of policy guidelines - prepared  and adopted  according to article  103(2) 

of the  Treaty  establishing  the European  Community  - will constitute the reference  for 

the  conduct  of  economic  policies  in  the  Community  and  the  Member  States.  It  re 

affirms  both  the  objectives  proposed  in  the  earlier  versions  and  the  conclusions  on 

fighting  unemployment  reached  by the  European  Council,  notably  those  of  the  Essen 

meeting  which  recommended  five  areas  where  action  had  to  be  intensified. 

Full 

implementation  of these  guidelines will make possible  a strengthening  of  convergence 

and  a  realisation  of  the  good  growth  and  employment  prospects,  thus  achieving 

significant  reductions in the rate of unemployment. 

Two  policy  concerns  should  be  given  prominence  in the  present  environment.  First, 

there  is the possibility  that  the  favourable  impact  of  economic  growth  could  give  rise 

to  "adjustment  neglect".  This may take the form  of a weakening  commitment,  induced 
by the  cyclical  improvement  of the budget  deficit,  to  resolve  in a  durable  manner  the 
structural  fiscal  imbalances,  or,  as employment  begins to  recover,  it may be  reflected 
in  a  reluctance  to  initiate  and  implement  those  measures  which  are  necessary  to 
remove  labour  market  imperfections. 
It  is  essential  that  either  type  of  "adjustment 
neglect" should be vigorously resisted. 

Secondly,  recent  exchange  rate  changes  have  not  only  contributed  to  greater  risks  of 
inflation  dispersion,  but  they  have  also  contributed  to  a potential  fragmentation  of the 
internal market  and to threatening the beneficial  achievements of economic  integration. 

- 2-

Exchange  rate  misalignments will have  detrimental  effects  for  all the  Member  States. 
It  is  clear  that,  in  order  to  minimise  the  occurrence  of  such  episodes,  creating  the 
conditions  for  exchange  rate  stability  within  the  Community  must  become  a  key 
priority of economic policies. 

The  present  guidelines  re-affirm  the  policy  objectives  set  in  the  December  1993  and 

July  1994 guidelines:  it is essential for  the Community  and the Member  States to  turn 

the  present  recovery  into  a  strong,  sustainable,  non-inflationary  medium-term  growth 

and  employment  creation  process,  so  that  the  rate  of  unemployment  is  substantially 

reduced  and to make possible the achievement  of the necessary degree of convergence 

to  facilitate  the transition  to  stage  III  of EMU.  Achievement  of these  objectives  will 

require  a  stable,  investment-enhancing,  short-  and  medium-term  macroeconomic 

framework  characterised by: 

-  a  stability-oriented  monetary  policy  whose  task  is  not  undermined  by 

inappropriate budgetary and wage developments; 

-  sustained efforts  to consolidate the public finances in most Member  States 

consistent with the objectives of their convergence programmes; 

-  nominal wage trends incorporating the price stability objective;  at the same 

time, real wage developments should take into acount the need to 

strengthen the profitability  of employment-creating  investment. 

An  essential  complement  of  this  framework  are  structural  reforms  aimed  at  fostering 

the  competitiveness  of  the  economies  of  the  Member  States  and  at  improving  the 

functioning  of  their  labour  markets.  The  policies  necessary  for  sustaining  long-term 

growth, 

increasing  employment,  and  strengthening  convergence  are  mutually 

consistent. 

2.  Economic Policy Guidelines 

Price  and  Exchange  Rate  Stability 

Substantial  progress in reducing inflation  in the Community  and  in the Member  States 
has been made since the beginning of the decade.  Nine Member  States (B, DK,  D, F, 
IRL,  L,  NL,  A,  UK)  are  now  expected  to  see  a  rate  of  inflation  in  the  range  of 
between  2 and  3 per  cent  in  1996, consistent  with the  objective  of the  1993  and  1994 
guidelines;  Finland and  Sweden are forecast  to experience rates of inflation just  above 

this  range  next  year.  Spain,  Italy  and  Portugal,  on the  other  hand,  are  projected  to 
record  rates of inflation  of about  4 Vi per cent while inflation  in Greece is expected  to 
decline to about 9 per cent. 

This  means,  above  all, 
Further  progress  towards  price  stability  must  be  made. 
enlarging substantially the group of Member  States where inflation  performance  can be 
Those  Member  States  that  are  currently  expected  to 
considered  satisfactory. 
experience  rates  of inflation  between  2 and  3 per  cent  should  maintain  a policy  aimed 
at  preventing  any resurgence  of inflationary  pressures  and  at  progressing  towards  the 
lower end of this range.  Other countries should substantially increase their  efforts. 

The  recent  exchange  rate  changes  have 

important 

implications  for 

inflation 

convergence.  Thus, in Member  States experiencing  currency  appreciations in nominal 

effective  terms,  inflation  convergence  is  expected  to  strengthen  and  inflation  is 

projected  to remain below 3 per cent this year and next.  In these Member  States wage 

trends  are expected  to  develop broadly in line with the objective  of price  stability  too. 

However,  it  will  be  necessary  to  ensure  that  wage  developments  do  not  lead  to 

reductions  in investment  profitability,  particularly  in the  export-oriented  sectors.  On 

the  other  hand,  in  the  Member  States  experiencing  currency  depreciations,  price 

stability  is  less  secure  and  the  risks  of  an  acceleration  of  inflation  dominate  the 

outlook. 

In these countries utmost  caution is needed. 

In particular,  in the context  of 

strong  economic  growth,  it  will  be  important  to  prevent  increases  in  import  prices 

from  generating  a vicious circle of price and wage inflation.  Otherwise,  the  achieved 

credibility  of  moving  towards  a  stability  oriented  policy  framework  would  be  lost 

rapidly. 

The  combination  of the  marked  depreciation  of the  dollar  and  of  uncertain  fiscal  and 
inflation  prospects  in  some  Member  States  have  led  to  substantial  exchange  rate 
instability within the Community.  The exchange rate  changes which have taken  place 
exceed  what  would  have  been  warranted  by  the  differentials  in  the  rates  of  inflation 
and  have  resulted  in  a  competitiveness  penalty  for  the  countries  who  have  followed 
sound  policies  and  increased  inflationary  pressures  for  those  whose  currencies  have 
depreciated.  Such exchange rate misalignments  are detrimental  to  all Member  States; 
in  the  ones  whose  currencies  have  appreciated  short-term  growth  prospects  will 
deteriorate,  while  in those whose  currencies  have  depreciated  inflation  prospects  will 
worsen  and  the  stability-oriented  medium-term  policy  will  be  in jeopardy.  Moreover, 
the  proper  functioning  of  the  internal  market  has  been  put  at  risk.  Not  only  is  it 

possible that investment  decisions may be made with the view to exploit  exchange-rate 
induced  competitiveness  gains,  but  also  it  is  possible  that  special  interest  groups 
supporting devaluation policies will be encouraged. 

Therefore,  all  Member  States  must  pursue  policies  supporting  stable  exchange  rates 

within the Community.  Exchange rate stability will not  only contribute to  reaping  the 

full  benefits  of  the  internal  market  and  to  improving  resource  allocation  within  the 

Community,  but  it  will  also  make  possible  the  realisation  of  improved  price  stability. 

In this respect  a key  role will be played  by budgetary  policy  and  by  the  credibility  of 

the fiscal  consolidation commitments. 

Sound  Public  Finances 

Despite  the  consolidation  of  economic  growth,  prospects  for  the  resolution  of  the 

fiscal  imbalances  remain  uncertain  and  fiscal  convergence  continues  to  be  elusive. 

According  to  current  estimates,  net  borrowing  as  per  cent  of  GDP  is  expected  to 
decline by approximately  1 lA percentage points between  1994 and  1996, about  half of 
which is reflecting  the contribution of the automatic stabilisers on the budget balance. 

The  failure  to  realise  greater  progress  in  budgetary  consolidation  sustains,  in  many 
cases, a situation where fiscal policy is severely constrained by a high and rising burden 
of  interest  payments;  it  also  undermines  price  and  exchange  rate  stability,  increases 
uncertainty  about  the  course  of  fiscal  policy  and  erodes  the  credibility  of  policies,  it 
contributes  to  an  unbalanced  policy  mix,  and  it  undermines  the  task  of  monetary 
imbalances  will  have  adverse 
policy.  Over  the  medium  term,  persistent  fiscal 
implications  for  economic  growth  and  for  employment  creation.  A  sound  fiscal 
position is a positive  supply factor  as it opens up the possibility for  tax reductions  and 
Indeed  the  arguments  for  budgetary 
for  increases  in  productive  public  investment. 
consolidation  based  on  growth  and  employment  considerations  are  at  least  as 
important  as those  based  on  the  need  to  improve  the  sustainability  of  debt  positions 
and  nominal  convergence. 
If budget  deficits  cannot  be  reduced  in  a durable  manner 
now, during a period of relatively strong growth, when will they be reduced ? 

The  clear task  confronting  virtually  all the Member  States is to  ensure that  advantage 
is  taken  of  all  the  growth  opportunities  to  promote  fiscal  consolidation  by  reducing 
structural  deficits.  The Member  States should  aim to bring their budget  deficit  below 
3  per  cent  of GDP  as  soon  as possible,  as a first  step towards  the  medium  term  goal, 
particularly  important  during  Stage III,  of reducing  it  to  between  0  and  1 per  cent  of 

5-

GDP  as  indicated  in  the  1993  Broad  Guidelines.  With  such  a  policy  it  would  be 
possible to have the average budget deficit in the Community below 3 per cent of GDP 
by 1997. 

The  current  estimates  suggest  that,  all the Member  States,  including  those  where  the 

forecast  deficit  for  this  year  will be  below  the  3 per  cent  mark  (Denmark,  Germany, 

Ireland,  and  Luxembourg),  ought  to  exploit  any  room  provided  by  economic  growth 

higher than in budget  plans,  or by a decline in interest  rates, to  accelerate the  process 

of  budget  consolidation. 

In  the  event  that  the  exchange  rate  turbulence  lowers 

economic  growth  this  year,  the  efforts  to  achieve  the  targets  of  the  convergence 

programmes should not be relaxed. 

The  forecast  for  1996  indicates  that,  on  the  basis  of  the  adjustment  measures  which 
have  been  clearly  specified  so  far  among  those  Member  States  which  have  set  fiscal 

targets  in their  convergence  programmes,  the fiscal objectives will  not  uniformly  met. 

Adjustment  to  achieve  the  deficit  target  of  the  convergence  programme  is  required, 

albeit  of  different  magnitude,  in  the  cases  of  Belgium,  Germany,  Greece,  Spain, 

France,  and  Portugal;  in all these  cases, the projected  deficit  is larger  than that  set in 

the  convergence  programme.  On the  other  hand,  Denmark,  Ireland,  the  Netherlands, 

and the UK are expected to meet the deficit  objectives by next year. 

In many  countries,  restraining  expenditure  increases  should  be the preferred  approach 

since,  apart  from  their  impact  on  employment,  there  are  undoubtedly  limits  to  higher 

taxation  and  social  charges.  But  the  rationalisation  of  the  public  expenditure  and 

taxation  systems  can  also  contribute  to  economic  growth  and  employment  creation. 

In particular,  as proposed  in the  1994 guidelines,  the tax  structure  should  be  adjusted 

in  a manner  consistent  with  employment  support,  while  public  expenditure  should  be 

re-allocated  away  from  consumption  and  in  favour  of  productivity-enhancing 
spending;  in the  latter,  strengthening  public  investment  and  immaterial  investment  in 
human  capital  should  be  accorded  a priority.  In this  context  as well,  taxation  on  the 
use  of  labour  should  be  reduced,  especially  at  the  lower  end  of  the  wage  and 
productivity  scale. 
It  is  important,  however,  that  the  necessary  reduction  in  budget 
deficits is not endangered, which implies that compensatory  additional revenues  should 
be  found. 

Fiscal  difficulties  continue  to  characterise  the  public  finances  of  several  Member 
States.  In Greece  and  Italy, the persistence  of the fiscal  imbalances  continues  to  have 

-6 

wider implications, undermining  price and  exchange rate stability,  contributing  to  high 

risk premia  on  interest  rates,  and  inhibiting  progress  towards  convergence.  Decisive 

measures,  in a multi-annual  framework,  are required  in  order  to  restore  confidence  in 

the  course  of  economic  policies.  In  the  case  of  Sweden,  which  is  confronted  with 

similar  difficulties,  a  multi-annual  adjustment  fiscal  framework  has  already  been 

announced;  it  is  necessary  that  the  adjustment  path  is  adhered  to. 

In Belgium,  the 

high  indebtedness  necessitates  that  the  fiscal  component  of  the  Global  plan  is  fully 

implemented  and that  further  progress  in reducing  the  deficit  below  the  3 per  cent  of 

GDP mark is required in order to  also achieve a more significant  reduction in the  debt 

ratio. 

In Spain and Portugal, greater commitment and more ambitious targets are required  in 

the  area of fiscal consolidation;  more ambitious fiscal objectives  are  also necessary in 

the  cases  of Austria  and  France. 

In Austria  and  Sweden,  further  efforts  will  also  be 

necessary  to  bring the  debt  ratio  on  a  downward  course.  Finally,  while  Finland  has 

not  yet  prepared  a  convergence  programme,  the  forecasts  suggest  that  its  fiscal 

objectives  are ambitious; efforts  to realise these objectives should be sustained. 

Fiscal  developments  and  prospects  in  Ireland  and  Luxembourg  suggest  that  they will 

continue  to  show  no  excessive  deficit.  In the  former,  the  decline  in the  debt  ratio  is 

projected  to  continue  at  a  healthy  pace,  while  the  state  of  the  public  finances  of  the 

latter continues to be robust. 

Competitiveness 

Following 

the  proposals  of  the  White  Paper  on  "Growth,  Competitiveness, 

Employment",  Member  States  are  implementing  reforms  aimed  at  strengthening  the 

forces  contributing  to  endogenous  growth  and  at  enhancing  the  dynamism  and 

competitiveness of the Community economies. 

In  order  to  benefit  fully  from  the  opportunities  offered  by  the  internal  market,  the 
transposition  of  Community  directives  into  national  law  now  stands  at  92.4  per  cent 
while the  dispersion ranges from  86.3 per  cent to  98.6 per  cent.  Progress  is  required, 
however,  in  the  areas  of  insurance,  intellectual  and  industrial  property,  public 
procurement,  new  technologies  and  services  and  freedom  of  movement.  Moreover, 
progress has been slow in the extension of the single market to telecommunication  and 
energy,  while  the  internal  market  in  transport  remains  incomplete.  Furthermore, 
additional  progress  is  necessary  in  reinforcing  competition  rules,  reducing  state  aids, 

and  reducing  the  role  of the  public  sector.  Privatisation,  to  the  extent  that  Member 

States  judge  it  compatible  with  their  objectives,  could  further  the  progress  already 

made in this direction. 

State of implementation of the internal market White Paper measures 
(breakdown of situation  by Member State, in percent; May  17, 1995) 

DK 

NL 

UK 

B 

IRL 

GR 

98.6 

95.9 

95.4 

95.0 

92.7 

92.2 

90.9 

90.4 

90.0 

89.5 

89.0 

86.3 

Source: European Commission 

E C - 1 2:  92.4 

Several  initiatives  have  been  taken  at  the  Community  level. 

Following 

the 

recommendation  of  the  Essen  Council,  a  Competitiveness  Advisory  Group  has  been 

set up and it plans to prepare a report for the Cannes European  Council on the state of 

Community  competitiveness  and  related  issues;  moreover,  the  Group  for  Legislative 

and  Administrative  Simplification  has  been  established.  In  order  to  enhance  overall 

competitiveness,  several  issues  are  being  reviewed  at  the  Community  level,  including 

improving  financing  for  SMEs,  enhancing  labour  market  flexibility,  and  improving  the 

quality of vocational training. 

It  is  essential  for  the  dynamism  of  the  Community  economies  that  material  and 

immaterial  investment  be  stepped  up. 

This  relates  in  particular  to  investment  in 

education  and  training  and  in the  infrastructure  of the  Community  which  needs  to  be 

developed  to  match  the  requirements  of  the  21st  century.  The  Trans-European 

Networks  should be realised  and the Action plan on the Information  Society  should be 

carried  through.  In  addition,  for  the  active  promotion  of  research  and  development 
initiatives,  greater  co-ordination  between  Member  States  activities  is  essential. 
Parallel,  co-ordinated,  efforts  at the level of the Community  and  of the Member  States 
is an essential building block to realising the potential for job creation and growth. 

Employment  and  the  Labour  Market 

The  economic  recovery,  if  it  progresses  as  predicted,  will  absorb  the  cyclical 
component  of  unemployment  by  1997.  Nevertheless,  to  continue  to  reduce 
unemployment  in a significant  and progressive manner, it is necessary to  achieve a high 
rate  of economic growth  over  many years  and to  increase the  capacity  of that  growth 

to  generate  jobs.  An  essential  component  of  the  efforts  to  achieve  these  goals  is 
represented  by more active and more efficient  labour market policies.  These must aim 
at a comprehensive,  integrated  and coherent  effort  to bring  about  structural  change in 
the  fields  of  the  educational  systems,  labour  law,  work  contracts,  contractual 
negotiation  systems  and  the  social  security  system  to  improve  the  functioning  of  the 
labour market as a whole. 

In  the  context  of the  White  Paper,  the  Essen  European  Council  identified  within  the 

wide array of measures working in the directions  outlined  presently,  the following five 

priorities: 

• 

Improving  the  employment  opportunities  for  the  labour  force  by  promoting 

investment in vocational training, 

• 

Increasing the employment intesiveness of growth, 

•  Reducing non-wage labour costs, 

• 

• 

Improving the effectiveness  of labour market policies, 

Improving  measures 

to  help  groups  which  are  particularly  hard  hit  by 

unemployment. 

Member  States  were  invited  to  implement  measures  adapted  to  their  own  specific 

situation  and  to  prepare  multi-annual  programmes  spelling  out  their  policy  intentions. 

Various  measures  have  already  been  taken,  but  greater  and  more  determined  efforts 

are needed. 

Active  and  more  efficient  labour  market  policies  contribute  to  the  goal  of  increasing 

employment through three main channels: 

i) 

they  improve  the  employment  opportunities for  the  labour force  by  promoting 

investment  in  vocational  training,  notably in SMEs,  and thus raise the quality  of 
human capital which improves competitiveness,  potential  output  and the  flexibility 
of,  and opportunities for,  the workforce; 

ii) 

they  increase  the  employment  intensity  of growth,  without  affecting  negatively 

the rate of growth itself, by: 

the  Social  Partners  examining  at  the  appropriate  levels whether  employment 
could  be  promoted  without  endangering  competitiveness 
the 
allocation  of  productivity  gains  to  contribute  to  innovative  forms  of  work 
organisation  such  as  reduction  and  new  patterns  of  working  time  and  new 
combinations of work and leisure; 

through 

increasing the incentives to employment by reducing non-wage  labour  costs, 

especially  at  the  lower  end  of  the  wage  and  productivity  scale,  without 

harming  other  parts  of  the  labour  market;  from  a  macroeconomic  point  of 

view this must  be  achieved  in ways which  do  not  compromise  the  reduction 

of  budgetary  deficits  nor  the  competitiveness  of  enterprises.  Reforms 

including,  where  appropriate,  alternative  financing  sources  of  social 

protection systems are therefore  required; 

encouraging 

the  development  of  new  employment  opportunities  and 

activities,  e.g.  those  linked  to  the  service  society  and  environmental 

sustainability. 

iii)  they promote the employability of people when new jobs become available by: 

improving  the  effectiveness  of  labour  market policy  through enhancing the 
flexibility  with respect  to  professional  and  geographical  mobility  (particularly 

for those workers readily employable); 

improving  measures  to  help  groups  which  are  particularly  hard  hit  by 

unemployment 

through  special  retraining  schemes  which  concentrate  on 

target groups hit by exclusion. 

Labour  market  policies  contributing  to  exploiting  these  three  channels  constitute  not 

only an indispensable complement to macroeconomic  policies and  structural policies in 

the  area  of  competitiveness  but  they  also  contribute  to  maintaining  and  reinforcing 

cohesion  and  the social consensus inside the Union in the long and  difficult  process  of 

absorbing  unemployment. 

In order to  enhance the effectiveness  of the work which is currently under way and  to 

increase  the  overall  consistency  of  the  individual  policy  actions,  the  Commission,  on 

8 March  1995  presented  a  Communication  to  the  Council  in  which  it  suggests  the 

implementation,  in  the  context  of  Article  103  of  the  Treaty,  of  a  procedure  for  the 

surveillance of employment trends and policies. 

It  is now  important  that  Member  States  adopt  rapidly  their  multi-annual  programmes 
which will constitute the benchmark in the continuous monitoring of the policies aimed 
for  job  creation. 
These  programmes  should  be  mutually  consistent  with  the 
macroeconomic framework  defined  by the Broad Economic Policy Guidelines. 

40-

tt.  Explanatory  document 

This explanatory  document  reviews the  economic  situation  and  outlook,  the  progress 

made  in  implementing  the  previous  Broad  Guidelines  and  the  current  stance  of 

economic policy. 
In accordance with what was announced  in the  Communication  to 
the  Council  on  the  Follow-up  to  the  Essen  European  Council  on  Employment1, 
employment trends and policies are given greater prominence. 

On the basis  of the  analysis  outlined  in this explanatory  document,  the  Commission  is 

recommending  a new set of guidelines for the economic policies of the Member  States 

and  of  the  Community  which  are  firmly  oriented  towards  achieving  economic 

convergence  and fostering job  creation.  These guidelines  confirm  the thrust  of those 

adopted  in  December  1993  and  July  1994,  but  take  into  account  the  fact  that  the 

economies of the Community are now at a much more advanced  stage of the  recovery 

and  that  a  number  of  risks  are  appearing  on  the  way  to  transforming  the  current 

recovery into strong medium-term growth. 

1.  Introduction 

The economic outlook  for the Community  continues to be favourable.  The recovery, 

which  had  just  become  visible  a  year  ago  when  the  1994  Broad  Guidelines  were 

adopted,  has gathered  strength and its pattern  - exports  and investment  continue to  be 

the most dynamic components - remains conducive to  sustained  medium-term  growth. 

Notwithstanding the negative effects  of the recent  foreign  exchange turmoil, growth is 

expected  to  remain  satisfactory  also  in  1996.  The  recent  episode  of  exchange  rate 

instability  has  certainly  affected  business  confidence  negatively,  but  the  fundamental 

factors  determining growth remain  favourable. 

Progress has taken place in achieving the degree of nominal convergence necessary  for 
the transition to EMU.  But more needs to be done and,  in certain cases, progress has 
been disappointing relative to what  could have been achieved  in the current  favourable 
economic environment.  The recent instability of foreign  exchange markets, even if its 
origin lays to a great extent outside the Community, highlights the lack of convergence 
which  still  characterises  the  economic  performance  of  several  Member  States,  and 
especially the lack of credibility of their budgetary consolidation plans. 

' 

"Follow-up to the Essen European Council on Employment" Com (95) 74 final of 8 March 1995 

11 -

in 

labour  market  conditions,  even 

Given that  employment  always responds with a lag to  a recovery in economic  activity, 
the improvement in the economic situation is not yet contemporaneously  reflected  in a 
similar  upturn 
the  reduction  of 
unemployment  in this cycle is expected to be much more pronounced  than that  seen in 
the  early  1980s.  Employment,  which  declined  again  in  1994,  is  now  projected  to 
increase  this  year  and  in  1996  by  about  one  per  cent  a  year,  with  the  rate  of 
unemployment  also starting to decline. 

though 

Under  these  circumstances,  economic  policy  must  be  resolutely  oriented  towards  the 

twin  objectives  achieving  economic  convergence  and  fostering  job  creation. 

This 

means  achieving  strong,  non-inflationary  and  more  employment-creating  rates  of 

growth. 

2.  The economic situation and outlook 

2.1 Growth prospects 

Economic  growth  in the  Community  is projected  to  average  3.1  per  cent  in  1995  and 

2.9  per  cent  in  1996, up from  an estimated  2.7  per  cent  last year.  Thus, the  recovery 

which  commenced  towards  the  second  half  of  1993,  is  now  being  transformed  into 

robust economic growth so that, by  1996, real output  in the Community will be almost 

10 per cent above the  1991 level. 

The  economic  expansion  has  been,  and  is  expected  to  continue  to  be,  sustained  by 

strong  exports,  investment  spending  and,  to  a  lesser  extent,  private  consumption 

growth.  Buoyant  world  trade conditions  are expected  to  sustain  Community  exports 

which  should  increase,  in real terms, by 7.5  and  6.5  per  cent,  respectively,  during  this 
year and next.  Investment  spending, which is estimated  to have grown by 2.4  per cent 
in  1994, is projected  to  increase by 6.3  per  cent this year and by just  below  6 per  cent 
in  1996.  Finally, private consumption,  is projected  to expand by 2.1 per cent this year 
and  by 2.5  per  cent  in  1996.  This pattern  of growth  - with  investment  growing  at  a 
brisk  pace  -  corresponds  closely  to  what  is  necessary  to  create  the  conditions  for  a 
long period  of strong growth. 

The recent weakening of the dollar in the foreign  exchange markets and the  substantial 
depreciations experienced by some European  currencies are having a twofold  effect  on 

-  12 

Community  growth  prospects. 

On  the  one 

Table  1 

hand,  overall  growth 

is  slowed  down  as 

Community  exports  become,  on  average,  more 

expensive  on  world  markets  and  as  business 

confidence 

is  negatively  affected  by 

the 

uncertainty  induced  by exchange rate instability. 

On 

the  other  hand, 

the  exchange 

rate 

movements  within the  Community  may result in 

short-term  differential  effects  on  the  growth 

prospects  of  countries  whose  currencies  have 

depreciated 

compared  with 

those  which 

appreciated. 

The fundamental  factors  which  shape  economic 

growth  in  the  Community,  however,  remain 

Economic growth in the Community 
(percentage change in real GDP) 

1993 

1994 

1995 

1996 

B 
DK 
D 

GR 
E 
F 

IRL 
I 
L 

NL 
A 
P 

FIN 
S 
UK 

EC 

-1.7 
1.5 
-1.1 

-0.5 
-1.1 
-1.5 

4.0 
-0.7 
2.1 

0.3 
-0.1 
-1.2 

-1.6 
-2.6 
2.0 

-0.5 

2.3 
4.4 
2.9 

1.2 
2.0 
2.7 

6.3 
2.2 
3.0 

2.5 
2.7 
1.1 

3.9 
2.2 
3.8 

2.7 
3.3 
3.0 

1.6 
3.1 
3.1 

6.9 
3.3 
3.3 

3.2 
2.7 
3.0 

5.3 
2.8 
3.1 

2.6 
2.9 
2.6 

1.8 
3.4 
2.9 

5.5 
3.4 
2.9 

2.8 
2.5 
3.2 

4.2 
3.0 
2.8 

2.7 

3.1 

2.9 

favourable. 

World 

trade  is  expected 

to 

Source: Commission Spring 1995 economic forecasts 

continue  expanding 

strongly  while 

labour 

productivity  and 

investment  profitability 

trends  within 

the  Community  are 

encouraging.  As  a  result,  most  Member  States  are  expected  to  show  satisfactory 

rates of economic growth (see Table  1), with Ireland  projected  to post remarkably  fast 

rates of output and employment growth throughout  the period. 

2.2 Employment trends 

Following three years of net job  losses,  employment  in the  Community  is projected  to 

expand  again  in  1995  and  1996. 

Employment  in  the  Community  declined  by  a 

cumulative  3.9  percentage  points  over  the  period  1992-1994:  5.8  million jobs  were 
lost. 
1995-96  should  see  an  increase  in  employment  of  about  one  per  cent  a  year 
which implies the net creation,  over the two years, of about  3 million jobs.  Given that 
in  1995-96  the  active  population  will  increase  by  about  1.4  million  persons,  the 
expected  job  creation  will  allow  a  net  reduction  of  unemployment  by  approximately 
1.6 million. 

This  year  and  next  employment  is  expected  to  rise  in  all  the  Member  States,  with 
particularly  strong  rates  of increase  in Denmark,  Spain,  the Netherlands,  Sweden,  the 
United Kingdom, and especially so in Luxembourg, Finland and Ireland (see table 2). 

- 1 3-

In  recent  years,  labour  productivity  growth  evolved  in  a  way  similar  to  that  of  all 
previous  cyclical  episodes:  it  decelerated  substantially  during  the  recession  (see 
table 3) and  accelerated  at the beginning  of the recovery  (3.2 per  cent in  1994).  For 
1995 and  1996, however, the forecasts  suggest a return to the trend  of the last twenty 
years (about 2 per cent).  In the present forecast  the Community economy is  therefore 
expected to  show an employment  content  of growth which is not inferior,  but  also not 
greater, than that of the last twenty years. 

Table 2 

B 
DK 
D 

GR 
E 
F 

IRL 
1 
L 

NL 
A 
P 

FIN 
S 
UK 

EC 

Employment  and  Unemployment 
(percentage change and per cent of the labour force) 

Employment  growth 

Unemployment  rates 

1994 

1995 

1996 

1994 

1995 

-0.7 
-0.1 
-0.9 

1.3 
-0.9 
0.1 

2.6 
-1.6 
2.6 

-0.0 
0.2 
-0.1 

-0.8 
-0.9 
0.3 

-0.5 

0.7 
2.3 
0.7 

1.0 
1.5 
1.1 

2.7 
0.3 
2.8 

1.3 
0.5 
0.4 

3.0 
2.0 
1.2 

1.0 

1.0 
1.1 
0.9 

1.0 
2.0 
1.0 

2.6 
0.8 
2.7 

1.9 
0.4 
0.7 

2.5 
1.8 
1.1 

1.1 

10.0 
10.2 
8.4 

9.6 
24.1 
12.5 

15.1 
11.4 
3.5 

7.7 
4.0 
6.9 

18.5 
7.8 
9.4 

11.2 

9.6 
8.6 
7.8 

9.6 
23.7 
12.1 

14.1 
11.4 
3.6 

7.6 
3.9 
6.7 

16.3 
7.2 
8.3 

10.7 

1996 

9.1 
8.0 
7.3 

9.5 
22.8 
11.5 

13.1 
10.9. 
3.4 

7.2 
3.8 
6.3 

14.6 
6.5 
7.8 

10.1 

Source: Commission Spring 1995 economic forecasts 
N.B.  At the beginning of 1995 Eurostat has significantly revised its unemployment figures 

Employment  in the manufacturing  sector,  where productivity  increases  are  particularly 

strong,  declined  by  about  2.5  per  cent  last  year,  but  is now  expected  to  recover  to  a 

projected  growth  of 0.5  per cent  in  1995 and  1.1  per  cent in  1996.  The expansion in 

employment  in  this  sector  as  well  suggests  that  the  recovery  has  given  way  to  a 

sustained growth process. 

The  projected  increases  in  employment  will  produce  a  decline  in  the  unemployment 
rate from  a peak of  11.2 per cent of the labour force  in  1994 to  10.1 per  cent  in  1996. 
Large declines in unemployment in the period  1994-1996 are projected  to take place in 
Finland (3.9 percentage points), Denmark (2.2 points) and Ireland (2 points). 

-14 

High  unemployment,  however,  is  projected  to  continue  to  mark  the  labour  market 

experience  of  Spain,  Ireland,  Finland;  in Italy  and  France  unemployment  is  expected 

to  remain  between  10.5  and  11.5  per  cent  in  1996; 
in  Belgium  and  Greece 
unemployment  is projected  to  remain between 9 an 9 XA per  cent;  finally,  with  regard 
to the remaining  eight Member  States, the rate  of unemployment  is expected  to  range 
from  a low  of 3 XA per  cent  in the  case  of Luxembourg  to  a high  of  8 per  cent  in  the 
case of Denmark. 

Table 3 

B 
DK 
D* 

GR 
E 
F 

IRL 
1 
L 

NL 
A 
P 

FIN 
S 
UK 

EC* 

Labour Productivity Growth 
(annual percentage changes) 

1961-73 

1974-90 

'91 

4.3 
3.2 
4.0 

8.1 
6.5 
4.7 

4.3 
5.5 
3.0 

3.9 
5.0 
6.6 

4.5 
3.5 
2.9 

4.4 

2.0 
1.4 
1.9 

1.4 
2.7 
2.2 

3.8 
2.0 
1.3 

1.7 
1.5 
3.4 

2.6 
1.1 
1.6 

2.0 

2.1 
2.9 
2.5 

5.6 
1.8 
0.7 

2.9 
0.4 
-1.0 

0.9 
0.9 
1.3 

-2.0 
0.4 
1.1 

1-5 

'92 

2.3 
1.2 
3.9 

-0.6 
1.9 
2.2 

4.5 
1.8 
0.0 

0.4 
0.0 
1.7 

3.7 
3.2 
1.6 

2.3 

•93 

-0.3 
2.2 
0.7 

-1.5 
3.3 
-0.3 

3.3 
2.2 
0.0 

0.5 
0.4 
0.8 

5.0 
3.2 
3.7 

1.5 

'94 

3.1 
4.5 
3.8 

-0.1 
2.9 
2.6 

3.6 
3.8 
0.4 

2.5 
2.5 
1.3 

4.7 
3.1 
3.4 

3.2 

'95 

'96 

1991-96 

1.9 
1.0 
2.3 

0.6 
1.6 
1.9 

4.1 
3.0 
0.4 

1.9 
2.2 
2.5 

2.3 
0.9 
1.8 

2.1 

1.6 
1.8 
1.8 

0.7 
1.4 
1.8 

2.9 
2.6 
0.1 

0.9 
2.1 
2.5 

1.6 
1.2 
1.7 

1.8 

1.8 
2.2 
1.7 

0.8 
2.1 
1.5 

3.6 
2.3 
0 

1.2 
1.4 
2.8 

2.5 
2.0 
2.2 

2.1 

Source: Commission Spring  1995 economic forecasts 

* For the averages until 1991 Germany = West Germany 

While  employment  trends  and the pace  of the reduction  of unemployment  correspond 

closely  to  expectations,  unemployment  continues  to  be  a  major  policy  concern. 
Current  and  projected  trends  suggest  the  need  to  ensure  that  the  rate  of  economic 
growth  remains  strong  over  many  more years  so  as to  make  possible  the  recovery  of 
the  ground  lost  during  the  recession  and  to  set  in  train  reductions  in  unemployment 
below the level achieved  at the peak of the previous cycle. 

2.3 The Outlook for Inflation and Budgetary Convergence 

Of  all  areas  of  convergence  in  the  Community,  most  progress  has  taken  place  with 
regard  to  inflation.  Measured  by the  private  consumption  deflator,  the  Community 
average rate of inflation  declined to  3.2  per  cent  in  1994,  from  a peak  of  5.6  per  cent 

15 

in  1991, and is expected to remain at its  1994 level during this year and in  1996.  The 

guidelines goal  of the Community  achieving a rate of inflation  of between  2 and  3 per 

cent by  1996, as a first  step towards price stability, will therefore  not be fully  met. 

In  1994,  ten  Member  States  had  inflation  at  or  below  3 per  cent  while  the  remaining 

had  inflation  in  excess  of  3  per  cent.  Changes  in  the  country  composition  of  these 

groups  are  projected  to  take  place  in  1995  and  in  1996,  with  Ireland's  and  Austria's 

inflation  falling below 3 per cent this year and easing to 2.7 per cent in  1996 in Ireland 

while  stabilising  at  somewhat  below  3  per  cent  in  Austria;  Sweden's  and  Finland's 

inflation  accelerating  to  around  3.3  per  cent next  year;  and  the UK's  staying  flat  at  3 

per cent this year and next. 

Price  convergence  appears  secure  in the  group 

of  Member  States  which  are  seeing  effective 

Table 4 

Inflation 
(percentage change, 
private consumption deflator) 

exchange  rate  appreciations.  Inflation  in  eight 

1993 

1994 

1995 

1996 

Member  States  (Belgium,  Denmark,  Germany, 

France,  Ireland,  Luxembourg,  the  Netherlands, 

Austria) is expected to be below 3 per cent this 

year and next. 

In  Portugal  and  Finland,  which  have  also  seen 

recently 

effective 

exchange 

appreciations, 

inflation  prospects  are  less  encouraging. 

In 

Portugal,  after  a  significant  decline  from  the 

level  of  1993  ànd  a  smaller  one from  last  year, 

inflation  is  expected  to  stabilise  at  4.5  per  cent 

B 
DK 
D 

GR 
E 
F 

IRL 
1 
L 

NL 
A 
P 

FIN 
S 
UK 

this  year  and  next. 

In  Finland,  on  the  other 

EC 

2.6 
1.0 
3.8 

13.6 
5.6 
2.2 

1.6 
5.1 
3.6 

2.1 
3.5 
7.9 

3.9 
5.8 
3.4 

4.0 

2.4 
1.7 
2.7 

10.9 
5.1 
1.8 

3.0 
4.7 
2.2 

2.2 
3.3 
5.1 

1.6 
3.0 
2.5 

3.2 

1.9 
2.3 
2.3 

9.6 
4.9 
1.9 

2.9 
5.2 
2.3 

1.8 
2.8 
4.5 

1.7 
3.2 
3.0 

3.2 

2.4 
2.7 
2.5 

8.9 
4.5 
2.1 

2.7 
4.5 
2.5 

2.2 
2.9 
4.5 

3.3 
3.2 
3.0 

3.2 

hand, 

inflation 

is 

forecast 

to  accelerate 

Source: Commission services Spring 1995 forecasts 

markedly next year. 

The inflation  outlook  remains uncertain  in the Member  States which have  experienced 
currency  depreciations  in  recent  months  (Italy,  Greece,  Sweden,  Spain  and  the  UK). 
While,  it  may be  argued,  the  inflationary  consequences  of the  depreciation  would  not 
emerge  until  actual  output  rises  above  potential,  uncertainty  about  the  exact  level  of 
the  output  gap,  and  the possibility  that  potential  output  may have  declined  during  the 

recession,  would  suggest  that  the  risk  for  an  acceleration  of  inflation  dominates  the 

outlook. 

16-

Greece,  Spain,  Italy  and  Portugal  are  recording  and  are  expected  to  record,  a  less 

satisfying,  albeit  to  different  degrees,  price  convergence  in  the  Community,  and 

Sweden's inflation is not expected to post any deceleration over the forecast  period. 

Inflation  in  the  UK  is  projected  to  remain  stable  at  3  per  cent  in  1995  and  1996. 

However,  there  is  considerable  uncertainty  about  the inflation  outlook  in view  of  the 

fact  that, in addition to recent  exchange rate developments,  the UK will have had  four 

years  of  strong  economic  growth  by  1996  and  the  level  of  excess  capacity  will  have 

narrowed  substantially. 

In the UK,  but  also  in Finland  and  Sweden  where  monetary 

policy  pursues  an  inflation  target,  vigilance  is  an  essential  ingredient  of  the  policy 

stance. 

Table  5 

Nominal  effective  exchange  rate  changes 
(relative to 19 industrial partners) 

Annual  percentage  changes 

Cumulative  c h a n g es  s i n ce  1991 

1992 

1993 

1994 

1995* 

1992 

1993 

1994 

1995* 

B 
DK 
D 

GR 
E 
F 

IRL 
I 

NL 
A 
P 

FIN 
S 
UK 

EC 

2.3 
2.8 
3.3 

-7.7 
-1.8 
3.6 

2.8 
-2.7 

2.4 
2.6 
3.6 

-12.7 
1.3 
-3.6 

0.8 
2.1 
2.7 

-9.6 
-13.1 
1.9 

-5.9 
-16.9 

3.0 
2.4 
-7.6 

-14.8 
-19.3 
-9.0 

1.6 
0.1 
0.1 

-7.1 
-6.7 
0.6 

0.3 
-4.6 

0.4 
0.0 
-4.7 

7.5 
-1.2 
0.2 

5.3 
5.3 
6.8 

-3.3 
-2.1 
4.0 

-0.4 
-14.3 

5.2 
4.9 
2.8 

9.3 
-4.7 
-4.0 

B 
DK 
D 

GR 
E 
F 

IRL 
I 

NL 
A 
P 

FIN 
S 
UK 

2.3 
2.8 
3.3 

-7.7 
-1.8 
3.6 

2.8 
-2.7 

2.4 
2.6 
3.6 

-12.7 
1.3 
-3.6 

3.1 
4.9 
6.1 

-16.6 
-14.7 
5.5 

-3.3 
-19.2 

5.5 
5.1 
-4.3 

-25.7 
-18.2 
-12.3 

4.8 
5.0 
6.3 

-22.5 
-20.4 
6.1 

-3 
-22.9 

6.0 
5.0 
-8.7 

-20.1 
-19.1 
-12.1 

10.3 
10.5 
13.4 

-25.0 
-22.1 
10.4 

-3.5 
-33.9 

11.4 
10.1 
-6.2 

-12.6 
-22.8 
-15.6 

2.2 

-13.1 

-2.2 

1.4 

EC 

2.2 

-11.2 

-13.2 

-12.0 

Source: Commission Services 

* on the assumption that exchange rates will remain constant at their April 1995 level 

A  notable  feature  of the  inflation  performance  since  1993  is that,  despite  the  severity 

of the recession,  the average rate of inflation  in the Community  has remained  at over 3 

per  cent. 

Certainly  a  large  number  of  countries  are  currently  experiencing  a 

satisfactory  price performance,  but in about  a third  of the Member  States, inflation  still 
In  addition,  no  further  progress  in  lowering  inflation  is 
gives  cause  for  concern. 

projected  for this year and next. 

17 

The  apparent  stickiness  of inflation  could  reflect  the influence  of  several,  reinforcing, 

factors.  On the  one hand,  the  amount  of spare  capacity  created  during the  recession 

may  be  smaller  than  currently  estimated.  This  could  be  the  result  of  measurement 

errors  or  of  an  acceleration  in  the  scrapping  of  obsolete  capacities.  On  the  other 

hand,  the  credibility  of announced  monetary  and,  above all, fiscal  policies may  still be 

too  low  and  unable  to  affect  significantly  expectations  about  future  inflation. 

In 

addition, in some Member States currency depreciations have contributed to  sustaining 

inflation.  Finally, it is possible that  non-competitive  conditions  continue to  prevail in 

several Community countries despite the efforts  to implement the internal market. 

An implication of these considerations is that further  reductions in inflation  will require 
measures  which  foster  the  credibility  of  policies,  which  improve  the  adaptability  of 
In 
workers in a changing  economic  environment,  and which  also foster  competition. 
particular,  it  is important  to  strengthen  the  credibility  of the  low  inflation  targets,  so 
that  they  can  be  incorporated  into  pay  trends,  and  of  the  budgetary  consolidation 
programmes. 

Budgetary  convergence  in  the  Community  continues  to  be  elusive.  Table  6  shows 

that,  for  the  Community  as  a  whole,  the  net  borrowing  of  the  general  government, 

which peaked at 6.3 per cent of GDP in the recession year  1993, is currently  estimated 

to decline gradually to 4.5 per cent of GDP in  1995 and to 3.9 per cent by 1996. 

Between  1994 and  1996, the largest  reduction  in the deficit  is projected  to  take  place 

in Finland  and  Sweden  (4.6 and 4.5 percentage  points in terms  of GDP, respectively), 

followed  by  the  UK  (4  points),  Denmark  (2.8  points),  and  Greece  (2.3  points). 

In 

addition to these five countries, five more, Belgium,  Spain, France,  Italy  and  Portugal, 

are  expected  to  register  deficit  reductions  ranging  between  one  and  two  percentage 

points  of  GDP,  with  Spain  and  France  envisaged  to  make  the  greatest  degree  of 

progress  amongst this group.  No  significant  change is expected  in relation to the  five 

remaining  Member  States which,  with the Netherlands  and  Austria,  includes the  three 

countries which were below the reference value of 3 per  cent  of GDP in  1994,  namely 

Germany,  Ireland  and  Luxembourg.  On  the  basis  of  the  present  forecasts  seven 

Member  States will have a general government  deficit  at  or below the reference  value 

of 3 per cent of GDP by 1996. 

The  forecasts  are  based  on  the  assumption  of unchanged  policies;  however,  not  all 
Member  States  have  announced  their  concrete  budgetary  intentions  for  1996.  An 
implication  of  this  assumption  for  the  projected  fiscal  adjustment  is  provided  by  the 

18 

decomposition  of the change in net borrowing  into  a cyclical and  a discretionary  part. 

Table  7  shows  that  over  a  three-year  period  of  strong  economic  growth  (1994-96) 

only  small  reductions  in the  structural  deficits  are  expected  to  take  place.  The  1.6 

point in terms of GDP cumulative decline in Community net borrowing  between  1994 

and  1996 reflects  only 0.8 of one per cent of GDP discretionary deficit  reduction. 

Table 6 

B 
DK 
D 

GR 
E 
F 

IRL 
1 
L 

NL 
A 
P 

FIN 
S 
UK 

EC 

General government deficit 
(per cent of GDP) 

1993 

1994 

1995 

1996 

6.6 
4.5 
3.3 

13.2 
7.5 
6.1 

2.4 
9.6 
-2.1 

3.3 
4.1 
7.0 

7.8 
13.4 
7.8 

6.3 

5.3 
4.0 
2.5 

12.5 
6.6 
6.0 

2.3 
9.0 
-2.3 

3.1 
4.0 
5.8 

5.6 
10.4 
6.9 

5.5 

4.2 
1.9 
2.1 

11.3 
6.0 
4.9 

2.8 
7.9 
-1.4 

3.2 
4.6 
5.6 

5.0 
9.1 
4.8 

4.5 

3.9 
1.2 
2.4 

10.2 
4.8 
3.9 

2.6 
8.1 
-1.5 

2.5 
3.9 
4.7 

1.1 
5.8 
2.9 

3.9 

Source: Commission Spring 1995 economic forecasts; (-) indicates a surplus 

The  persistence  of fiscal disequilibrium  has  contributed  significantly  to  the  growth  in 
the  general  government  indebtedness  in  the  Community.  At  the  beginning  of  the 
present  decade  the  ratio  of  general  government  debt  to  GDP  in  the  Community  was 
55.8  per  cent;  as  can  be  seen  in table  8,  it  grew  to  66.2  per  cent  in  1993, and  it  is 
currently  expected  to  grow to  70.4 per  cent  of GDP by  1996.  In  1996, four  Member 
States (Germany, France, Luxembourg,  and the UK) are projected  to have a debt  ratio 
below the 60 per cent  of GDP mark.  Of the remaining Member  States, the  debt  ratio 
is  projected  to  increase  in  six  (Greece,  Spain,  Austria,  Portugal,  Finland,  Sweden), 
while  in  another  five  (Belgium,  Denmark,  Ireland,  Italy,  the  Netherlands)  it  is 
projected  to  decline.  Despite  the  good  growth  prospects,  these  trends  suggest  that 
substantially  more  ambitious  fiscal  plans  than  those  currently  contemplated  are 
necessary  in  order,  in  several  cases,  to  stabilise  the  debt  ratio  and  to  place  it 
unambiguously on a downward  path. 

19 

From  a medium-term  perspective,  covering  the period  1993-1996,  in four  Member 

States  (Belgium,  Denmark,  Ireland,  the Netherlands)  the debt  ratio  is  projected  to 

decline,  with  the largest  decline  projected  to take  place  in Ireland  (16.2 percentage 

points in terms  of GDP),  followed  by Belgium  and Denmark  (4.9  points)  and by the 

Netherlands (4.3 points). 

Table 7 

Changes  in the  actual and cyclically  adjusted  general  government  deficit 
(per cent of GDP) 

Changes in the actual deficit 

Changes in the cyclically-adjusted  deficit 

1993 

1994 

1995 

1996 

1993 

1994 

1995 

1996 

-0.1 

1.6 

0.4 

0.9 

3.3 

2.2 

0.0 

0.1 

-1.3 

-0.6 

2.1 

3.7 

1.9 

5.6 

1.7 

1.2 

-1.3 

-0.5 

-0.8 

-0.7 

-0.9 

-0.1 

-0.1 

-0.6 

-0.2 

-0.2 

-0.1 

-1.2 

-2.2 

-3.0 

-0.9 

-1.1 

-2.1 

-0.4 

-1.2 

-0.6 

-1.1 

0.5 

-1.1 

0.9 

0.1 

0.6 

-0.2 

-0.6 

-1.3 

-2.1 

-0.3 

-0.7 

0.3 

-1.1 

-1.2 

-1.0 

-0.2 

0.2 

-0.1 

-0.7 

-0.7 

-0.9 

-3.9 

-3.3 

. 

-1.9 

-2.4 

1.2 

-1.4 

0.2 

0.9 

0.5 

-0.8 

-1.2 

-2.0 

-2.2 

0.9 

2.1 

0.1 

2.4 

1.4 

-1.0 

0.8 

-0.7 

-0.8 

-1.3 

0.1 

0.5 

-0.4 

-0.4 

-0.2 

0.1 

-1.7 

-0.6 

-2.0 

-0.1 

-0.8 

-1.3 

-0.3 

-1.1 

-0.2 

-0.7 

1.2 

-0.6 

1.1 

0.7 

0.7 

0.1 

1.9 

0.0 

-1.6 

0.1 

-0.4 

0.3 

-0.9 

-0.7 

-0.5 

-0.2 

0.8 

-0.3 

-0.4 

-0.6 

-0.4 

-2.4 

-1.9 

-1.6 

-0.8 

-1.0 

-0.6 

-0.4 

-0.5 

-0.5 

-0.3 

B 

DK 

D 

GR 

E 

F 

IRL 

1 

L 

NL 

A 

P 

FIN 

S 

UK 

EC 

B 
DK 
D 

GR 
E 
F 

IRL 
1 
L* 

NL 
A 
P 

FIN 
S 
UK 

EC 

Source: Commission Spring 1995 economic forecasts;  (-) indicates a reduction, (+) indicates an increase in the respective deficits 
* Luxembourg has a surplus, thus a (-) indicates an increase, (+) a reduction in its surplus. 

In  France  the debt  ratio  is projected  to increase  to 52.8 per cent  of GDP  by  1996, 

while in the  UK it is projected  to stabilise at 51.5 per cent of GDP this year  and  next. 
In Germany, the sharp rise in the debt ratio this year is a reflection  of the take-over by 
the general government of off-budget  liabilities related to unification. 

In Greece and Italy a rise in the debt  ratio by 1 and 5 points,  respectively,  is projected 
between the period  1993-1996.  In Italy the debt  ratio  is expected  to have  peaked in 
1994 and relative to this mark a modest  adjustment  is projected  for this year  and  next. 
In  Greece,  where  the debt  ratio  is also  already  very  high,  debt  convergence  will be 
worsening this year and next. 

-20 

Finally,  worsening  convergence  on the  basis  of the  debt  criterion  is  also  expected  to 
take place in Spain and Portugal, where the debt ratio is projected  to rise by 5.3 and by 
4.1  points, respectively,  between  1993  and  1996  and  to  reach  65.2  and  70.7  per  cent 
of GDP,  respectively, in 1996. 

Table 8 

B 
DK1) 
D 

GR 
E 
F 

IRL 
I 
L 

NL 
A 
P 
FIN 

S 
UK 

EC 

General government  gross  debt 
(per cent of GDP) 

1993 

1994 

1995 

1996 

137.2 
80.3 
48.2 

115.2 
59.9 
45.8 

97.0 
119.4 
6.9 

81.4 
62.8 
66.6 
57.1 

76.2 
48.5 

66.2 

136.1 
75.6 
50.1 

114.1 
62.3 
48.5 

89.8 
125.4 
7.2 

78.1 
64.5 
69.2 
60.1 

79.1 
50.1 

68.1 

134.3 
76.1 
58.2 

115.3 
64.6 
51.2 

84.6 
124.9 
7.6 

78.1 
66.2 
70.5 
64.4 

84.6 
51.5 

70.3 

132.3 
75.4 
58.1 

116.2 
65.2 
52.8 

80.8 
124.4 
7.8 

77.1 
67.4 
70.7 
64.6 

85.7 
51.5 

70.4 

Source: Commission Spring 1995  economic forecasts 
1)  Government deposits with the central bank, government holdings of non-governmental bonds and public enterprises  related debt  amounted 
to 23.4% of GDP in 1994 
2)  The sharp increase in the German debt  ratio in 1995 is mainly  caused by the take-over  by the government  of off-budget  unification-related 
liabilities, the most important of which is the debt of the "Treuhandanstalt" 

Worrying trends have also  emerged  in the  debt  ratio  in the three  new Member  States. 

While  the  large  increases  occurring  over  the  period  1993-1996  reflect 

to  a 

considerable  extent the impact  of the recession,  it is also clear that  adjustment  plans of 
greater  ambition  are  necessary  in  order  to  halt  the  rise,  and  to  ultimately  reverse 
direction,  in the path of the debt ratio.  In May  1995 Austria presented  a convergence 
programme and  Sweden is expected to do so in June. 

It is possible that the persistence  of fiscal  imbalances in the Community  countries,  and 
the  failure  to  decisively  advance  fiscal  consolidation  in  periods  of  strong  economic 
growth,  reflect  also  the  importance  of  budget  institutions  and  procedures  in  the 
determination  of fiscal  deficits  as well  as the  nature  of  political  discourse.  In  several 
Community  countries  the  rules  according  to  which  budgetary  policy  is  approved  and 

-21  -

amendments  to budget  plans are admissible,  play a key role  in fiscal outcomes. 

It  is 

also  possible  that  the  form  the  commitment  to  fiscal  consolidation  takes  may  not  be 

conducive to fiscal  discipline;  for example, it may be appropriate to combine improved 

budget procedures with numerical fiscal targets in order to enhance the probability that 

fiscal programmes are actually implemented  as planned. 

The  importance  of  these  considerations  has  now  become  more  pronounced,  both 

because  it  is  necessary  to  explore  all  avenues  to  strengthen  fiscal  discipline  in  the 

Member  States and in order to increase the probability  that  fiscal  convergence  criteria 

are  met  by  the  largest  possible  group  of  countries  prior  to  the  move  to  stage  III  of 

EMU. 

The  forecast  for  1996  indicates  that,  on  the  basis  of  the  adjustment  measures  which 

have  been  clearly  specified  so  far  among  those  Member  States  which  have  set  fiscal 

targets  in  their  convergence  programmes,  the  fiscal  objectives  will  not  be  uniformly 

respected.  Adjustment  to  achieve the deficit  target  of the  convergence  programme  is 

required,  albeit  of  different  magnitude,  in  the  cases  of  Belgium,  Germany,  Greece, 

Spain, France, and Portugal;  in all these cases, the projected  deficit  is larger than that 

set  in  the  convergence  programme.  On  the  other  hand,  Denmark,  Ireland,  the 

Netherlands,  and the UK are expected  to  meet  the  deficit  objectives  by next year.  Of 

the new Member  States, Austria has recently submitted  a convergence programme and 

Sweden is expected  to  do  so  in June.  In both  cases more  ambitious targets would  be 

required  to  ensure  that  fiscal  convergence  is  secure.  Finally,  in  Finland  where  a 

substantial  fiscal  consolidation  effort  is  under  way,  policies  should  ensure  that  the 

projected  reduction of the deficit  in  1996 is in fact  realised. 

3.  The policy objectives and risks 

The Broad  Guidelines of December  1993 and July  1994 have laid out the broad  thrust 
of  the  policies  needed  to  achieve  economic  convergence  and  to  foster  job  creation. 
The  1995  Broad  Guidelines  should  confirm  these  objectives. 
In  addition,  the 
recommended  policies should take account of the risks and concerns characterising  the 
current economic  outlook. 

The Community  economy  is still broadly  expanding  at the pace forecast  a few  months 
The 
ago,  even  if  growth  prospects  have  become  somewhat  less  favourable. 
improvement  in  the  consumer  and  business  confidence  indicators  stalled  at  the 
In 
beginning  of this year,  even before  the  recent  period  of  exchange  rate  instability. 

-22 

addition,  a new period  of weakness  of the US dollar vis-à-vis the European  currencies 

would  create an atmosphere of greater uncertainty that might jeopardise the  projected 

positive  growth.  On the  other  hand,  it  should be stressed  that,  as  already  noted,  the 

main  factors  affecting  growth  prospects  -  notably  world  trade  and  investment 

profitability  -  remain  good  and  that  a  rate  of  growth  stronger  than  the  one  now 

projected  cannot  be  ruled  out. 

Economic  policy  must  therefore  act  to  prevent 

developments that might jeopardise the continuation of the growth process. 

The first risk to be considered  is that of a renewed resurgence of inflation.  As regards 

the consequences  of the recent  currency movements for  inflation  two  different  groups 

of  countries  may  be  identified:  on  the  one  hand  the  countries  whose  currencies 

appreciated  in effective  terms  and  who  are therefore  likely  to  "import"  price  stability 

and on the other hand the ones whose currencies devalued  (especially Italy) and whose 

inflation,  all other things held  equal, will tend to  increase.  Overall,  this risks  making 

inflation  performances  more  divergent  than  prior  to  the  recent  exchange  market 

episodes. 

Inflationary  pressures  may  appear  due  to  the  fact  that  the  economy's  actual  rate  of 

growth  may  approach  to  or  exceed  the  potential  rate  of  growth,  especially  in  1996, 

which would  cause capacity constraints leading to inflationary  tensions.  This risk will 

be  less  apparent  if business  investment  in the  Community  increases  significantly  over 

the next few  years.  Furthermore,  there may be a danger that wage  settlements will be 

higher  than  currently  forecast  and  put  upward  pressure  on  prices  and/or  lead  to 

reduced  investment  profitability. 

This  danger  could  also  arise  from  a  desire  to 

compensate,  too  rapidly  and  at  the  expense  of  growth  and  employment,  for  the  low 

increases or,  in some cases, actual  declines in real wages during the  1993-94 period  of 

sluggish  economic  growth  and  of  rising unemployment.  Some  countries  are  already 

expected to record inappropriately high wage increases in 1995-96. 

The  second,  and  more  worrying,  concern  is  that  budgetary  positions  in  several 
Member  States  remain  unsatisfactory. 
Increased  consolidation  efforts  are  therefore 
necessary  and  the  elimination  of  structural  budgetary  deficits  must  be  tackled  now, 
during  the  recovery,  when  the  Member  States  can  also  take  advantage  of  the 
functioning  of  automatic  stabilisers. 
In  addition,  with  the  still  high  levels  of  public 
debt,  several Member  States continue to be very vulnerable to interest  rate shocks that 
are  possibly  associated  with  uncertainties  about  fiscal,  exchange  rate  and  price 

- 2 3-

developments  and  could  in  those  countries  effectively  eliminate  the  budgetary  gains 
likely to occur during the recovery. 

Finally,  as  already  put  forward  in  the  Commission's  1995  Annual  Economic  Report, 
the  favourable  economic  conditions  created  by  the  recovery  may  give  rise  to 
"adjustment  neglect".  This could  take the form  of a less  determined  commitment  by 
the  public  authorities  to  tackle the  structural  causes  of the high budget  deficits  as  the 
recovery  makes  a  positive  cyclical  contribution  to  tax  receipts  and  to  the  budget 
balance.  Furthermore,  the  efforts  aimed  at  the  removal  of  labour  market  rigidities 
may seem less urgent  in the  short term when  employment  is starting  to  rise  again and 
unemployment  is falling.  Such a relaxation in consolidation  and reform  efforts  would 
seriously put  at risk the successful  transformation  of the recovery  into  a sustained  and 
job-creating  growth process, would  contribute to an unbalanced  policy mix and would 
increase the risk of a new recession. 

Strengthening  convergence  and  sustaining  economic  growth  will  require  that  the 

opportunities  emerging  in  the  present  recovery  are  wisely  taken  advantage  of. 

It  is 

clear  that  an  important  contribution  to  inflation  convergence  will  be  made  by  wage 

developments. 

If  nominal  wage  increases  begin  to  accelerate  with  the  consolidation  of  economic 

growth,  especially  before  unemployment  declines  substantially,  also  giving  rise  to  an 

acceleration  of inflation,  the Member  States may have to  undergo  another  deflationary 

cycle;  at  current  levels  of  unemployment, 

such  an  episode  they  can  ill  afford. 

Moderate  wage  growth  will  also  contribute  to  fostering  investment.  The  recent 

recovery of private investment  is a reflection  of the propitious  economic prospects and 

of a wage growth inferior to labour productivity  increases.  The strength of investment 

expenditure, if sustained, will contribute to raising potential output  and to fostering job 
creation. 

A  wise  use  of  the  recovery  will  require  that  the  Member  States,  first  and  foremost, 
Sustainable  fiscal  positions  are  a  necessary 
consolidate  their  public  finances. 
condition to  support  economic growth  and durable employment  creation.  It  is evident 
that  the  policies which  are  required  to  sustain  long-term  economic  growth,  foster  job 
creation  and  reduce  unemployment,  and  strengthen  convergence  are  mutually 
consistent. 

-24 

Recent  developments  in  the  foreign  exchanges  indicate  how  important  stability  of 

exchange  rates  within  the  Community  is  for  furthering  economic  integration  and 

completing  the  single  market. 

Exchange  rate  changes  can  lead  to  resource 

misallocation  when  investment  decisions,  made  on  the  expectation  of  depreciation-

induced  competitiveness  gains,  prove  ultimately  obsolete  when  competitiveness  is 

eroded  either  as  a  result  of  nominal  exchange  appreciation  or  because  of  higher 

inflation.  Furthermore, the possibility of exchange depreciation undermines wage  and 

price  discipline  since losses in competitiveness  can be,  temporarily  at  least,  recovered 

through  exchange  devaluations;  as a result,  reductions  in inflation  and  price  stability 

become  difficult  to  achieve.  Finally,  as  devaluations  offer  a prospect  of  temporarily 

improving  competitiveness,  they raise the possibility of practising  beggar-thy-neighbor 

policies, which are not compatible with the completion of the internal market. 

4.  The Policies 

The principal task of economic policy at this stage of the cycle is to  ensure that the on 

going recovery translates into non-inflationary,  employment-creating,  growth.  In view 

of  the  risks  impinging  upon  the  economic  outlook,  and  the  progress  yet  to  be 

accomplished  in  convergence,  macroeconomic  and  structural  policies  should  be 

directed 

towards  securing  price  stability, 

fostering 

fiscal  consolidation,  and 

strengthening the dynamism and competitiveness of the Community. 

4.1  Macroeconomic  policies 

The  main  task  of  macro-economic  policies  will  be  to  maintain  a  stable  framework 

which  will  prevent  the  appearance  of  the  tensions  which  have  contributed  to  the 

recession  of  1992-93  and  which  will  foster  a  continued  steady  increase  in  potential 

output.  As  the  previous  sections  have  underlined,  key  developments  give  cause  for 

concern  on  both  counts.  At  the  same  time,  with  the  consolidation  of  economic 

growth and the approach to  stage III of EMU, the challenges  confronting  the Member 

States have become more pronounced,  while the diverging trends which have emerged 

as  a  result  of  exchange  rate  changes  have  also  raised  important  questions  about  the 

appropriate economic policies. 

Securing  and  furthering  the  progress  made  on  inflation,  and  sustaining  economic 
growth  is  a  crucial  challenge  for  monetary  and  exchange  rate policy  in  the  current 
cycle.  A necessary  contribution  to the task  of defending  price stability  in this  context 
will have to be provided  by fiscal  consolidation policies.  While in virtually all Member 

25 

States  such  policies  are  required,  these  are  especially  urgent  in those  Member  States 

where fiscal deficits  and rising debt burdens, and the associated  inflation  and  exchange 

market  developments,  place  the  greatest  burdens  on  the  conduct  of  monetary  policy 

and  where  the  risks  of  a  substantial  acceleration  of  inflation  are  greatest.  Equally 

necessary will be policies encouraging non-inflationary  wage developments and, over a 

longer-term horizon, increased competition in product markets. 

Stability  of  exchange  rates  within  the  Community  is  essential  for  the  proper 

functioning  of  the  internal  market. 

In  Member  States  where  fiscal  positions  are 

diverging  and  which  have  experienced  exchange  depreciations  (Greece,  Spain,  Italy, 

and  Sweden)  it  is  essential  that  a  bold  and  credible  efforts  are  undertaken  to  foster 

fiscal  consolidation.  More  generally,  credible  fiscal  consolidation  measures  will 

contribute  to  reducing  exchange  rate  instability.  This  will  contribute  not  only  to 
resolving concerns about competitive disruptions of the internal market, but it will also 

create the conditions for reductions in interest  rates, and it will ultimately facilitate  the 

implementation of the fiscal adjustment  programme. 

Budgetary  policy  directed  towards  consolidation  will  play  a  crucial  role  in  reducing 

the  risks  of  an  acceleration  of  inflation,  of  exchange  rate  instability,  and  of  further 

worsening fiscal imbalances. 

Fiscal  consolidation  is  necessary  not  only  in  order  to  foster  stable  inflationary 

expectations  but  also  to  sustain  the  progress  made  in  reducing  inflation.  This  is 

particularly important in Member  States with persistent fiscal  imbalances and  persistent 

inflation  (Greece,  Italy,  Spain).  Failure  to  make  decisive  progress  in  redressing  the 

fiscal  imbalances,  especially  in  an  environment  of  strong  economic  growth,  will 

increase  uncertainty  about  the  intentions  of  the  fiscal  authority.  This uncertainty  has 

been  contributing  to  raising  real  interest  rates  and  to,  in  turn,  making  fiscal 
consolidation  more difficult  to achieve in several Member States. 

Incomplete  credibility  of  the  fiscal  consolidation  plans  may  also  be  reflected  in 
exchange  rate  instability,  higher  real  interest  rates  and  increases  in  interest  rate 
differentials  vis-à-vis  other  countries.  Domestic  and  international  investors  holding 
government  debt require an increase in the rate of return,  or a strong exchange rate, to 
compensate for  the increased  risk,  a combination  of circumstances which is inimical  to 
both  economic  growth  and  to  fiscal  adjustment.  The  instability  characterising 

26 

exchange  rates  in  Greece,  Spain,  Italy  and  Sweden  is  partly  a  reflection  of  the 
continuing lack of resolution of the fiscal  difficulties. 

Over  the  medium  term,  fiscal  consolidation  will  contribute  to  raising  the  level  of 
national  saving  and  will,  through  this  channel,  contribute  to  increasing  the  level  of 
potential  output. 

Respecting  the fiscal  convergence  criteria remains an area where  sustained  efforts  will 

have  to  be  expended.  According  to  the  Spring  1995 forecast,  seven  Member  States 

are  expected  to  have  deficits  below  the  3 per  cent  of  GDP  mark  in  1996  (Denmark, 

Germany,  Ireland,  the Netherlands,  Finland,  and the UK;  Luxembourg  is expected  to 

have a surplus).  In these Member  States the efforts  to  consolidate  the public finances 

must  be  pursued  with  determination.  In  Belgium,  France,  and  Austria,  attaining  the 

reference  value  for  the  deficit  in  1996  would  be  within  reach,  provided  that  the 

adjustment  effort  gains  renewed  momentum.  While  no  forecasts  exist  for  the  outer 

years,  it  is  clear  that  for  the  remaining  Member  States  the  objective  to  respect  the 

fiscal  convergence  criteria  by  1999  must,  even  more  than  today,  become  a  principal 

policy objective. 

The  policy  mix  required  in  the  individual  Member  States  reflects  the  uneven 

distribution  of policy  risks.  The  Member  States  whose  currencies  have  experienced 

depreciations  over  the  recent  months  will  likely  see  an  increase  in  the  inflationary 

pressures  while  the  interest  rate  implications  of  the  exchange  rate  instability  will 

undoubtedly  make budgetary consolidation  more difficult. 

In general, these  countries 

had  already  unsatisfactory  starting  positions.  The  depreciations  will  lead  to  higher 

import  costs  and,  through  the  effects  on  export  growth  and  economic  activity  in 

general, will contribute to narrowing the output gap. 

In these Member  States the policy mix must be resolutely  oriented  towards  containing 
the  inflation  risks  and  towards  stepping  up  the  efforts  to  consolidate  budgetary 
positions. 
In these  countries  it will be particularly  important  to  prevent,  through  the 
instruments  available in each country,  that  the increase in imports  costs  may lead  to  a 
price and wage inflation  spiral. 

In  the  Member  States  whose  currencies  have  experienced  appreciations,  inflationary 
risks will be generally  contained.  However,  given that the  success  of these  countries 
in  containing  inflation  owes  much  to  the  external  constraint,  it  will  be  important  to 

27 

make sure that pay trends do not lead to reductions in investment  profitability.  There 
are indications that this may be happening in Germany. 

Investment  profitability  must  still increase  substantially in most  countries if investment 

is to  expand  to  the  extent  necessary  to  ensure  sustained  growth  in the  medium  term. 

In  some  cases,  the  stability  of  exchange  rates  could  only be maintained  at  the  cost  of 

increases  in the  interest  rate  differentials  with  Germany.  This  suggests  that  markets 

still  perceive  some  risks  in  the  budgetary  positions  of  these  countries.  Determined 

corrective  action  could  bring  substantial  benefits  through  the  reduction,  or  the  total 

elimination, of these  differentials. 

4.2. 

Policies for greater competitiveness 

Structural  measures  aimed  at  promoting  the  competitiveness,  dynamism  and  overall 

productivity  of the Member  States'  economies  are  essential  to  the  achievement  of  the 

Community's  twin  policy  objectives  of  strong,  employment-creating  growth  and 

enhanced  nominal  convergence. 

Such  measures  are  particularly  important  at  the 

present time to  strengthen  economic growth,  but  also given the renewed  anxiety  about 

inflation  especially  in  those  Member  States  which  have  witnessed  substantial 

depreciations of their currencies. 

The  1993 White Paper advocated  reforms  directed towards increasing the  endogenous 

growth  forces  of the  Community's  economy  as the means to  securing the basis  for  its 

long-term  prosperity.  A  variety  of  proposals  aimed  at  making  the  Community 

economies  more  dynamic  were  subsequently  incorporated  in  the  1993  and  1994 

Guidelines  exercises.  Such  proposals,  which  were  to  be  carried  out  at  both  the 

Community and individual Member  State levels, were essential to the quest to  promote 

the  productivity  and  competitiveness  necessary  to  underpin  stronger  growth  and 
employment  creation. 

Efforts  at  enhancing  productivity  and  employment  growth  can  only  be  successful  if 
carried  out  in  the  context  of  a  flexibly  functioning  economy  which  is  capable  of 
exploiting  the  opportunities  generated  by  a  rapidly  changing  technological  and  social 
environment.  In this regard  efforts  are being undertaken to: 

exploit  the  opportunities  associated  with  the  internal  market,  an  open  world 
trading system and to  safeguard  the Community's competitiveness; 

accelerate the realisation of the Trans-European  networks; 

2 8-

push  through  rapidly  the  Action  Plan  concerning  the  development  of  the 
information  society; 

exploit the growth and employment potential offered  by SMEs; 

and  actively  promote  Community  initiatives  in  Research  and  Development 
(R & D)  and  call for  a greater .degree of co-ordination  of Member  States'  R &D 
policies. 

In relation to the internal market,  strong efforts  have been undertaken to transpose  the 
relevant  directives  into  Member  States'  legislation.  However,  transposition  has  been 
slow in the key sectors of insurance, company law, intellectual  and  industrial  property, 
public procurement,  new technologies  and  services, financial  services,  and  freedom  of 
movement. 

The  Essen  European  Council  stressed  the  intention  of  the  Council  to  pay  particular 

attention  in  the  future  to  the  competitiveness  of  the  European  economy. 

In  this 

the  Commission  has  established  a  high-level  group 

connection 
to  deal  with 
competitiveness  and  to  submit  appropriate  reports  on  these  matters2.  This  the 
Commission  duly  followed  through  on  with  the  formation  of  the  Competitiveness 

Advisory  Group  at  the  beginning  of  1995.  The  high-level  Legislative  Administrative 

Simplification  Group  ("Deregulation  Group")  has begun  its work.  It  has  stressed  the 

need  to  monitor  Community  and  national  law for  over-regulation  and  it requested  the 

"Deregulation  Group" to submit a report by June  1995. 

Initiatives  in  the  area  of  the  Trans-European  networks  in  the  transport,  energy  and 

environmental  spheres  have  also  been  receiving  a  lot  of  attention.  The  Group  of 

Personal Representatives of Heads of State or Government  (the Christophersen  group) 

submitted their report to the December  1994 European  Council.  It confirmed  that  the 

eleven priority projects  decided upon  at the Corfu  European  Council in June  1994 and 

the three  new  projects  concerning  the Nordic Member  States  and  Ireland  had  already 

been started  or were in a position to commence shortly. 

In relation  to  the  establishment  of the  information  society,  this  has been  the  object  of 

an  Action  Plan  adopted  by  the  Commission  in  July  1994,  which  encompassed  all 

See also "An  Industrial  Competitiveness  Policy for the  European  Union", Communication  from the  Commission to 
the  Council,  COM(94)  319  final,  September  14,  1994  and  two  companion  documents:  "Report  on  the 
Implementation  of the  Council  Resolutions  and  Conclusions  on  Industrial  Policy",  SEC(95)  437  final,  March  22, 
1995 and "Action Programme and Timetable for  Implementation of the Action Announced in the Communication on 
an Industrial Competitiveness  Policy for the European Union", COM(95) 87 final, March 30, 1995. 

- 2 9-

aspects  addressed  in  the  report  of  the  Bangemann  group. 

In  its  November  1994 

meeting  this  Council  discussed  the  Commission's  liberalisation  timetable.  The 

December  European  Council  emphasised  that  the  Commission's  Action  Plan  and  the 

conclusions  of the Ministers for  Industry  and  Telecommunications  had  set the  agenda 

for  the development  of an information  society.  With regard  to  developments in  1995, 

as  a  follow-up  to  the  G-7  ministerial  meeting  of  February  1995,  the  Group  of 

Commissioners on the Information  Society was established 

Raising  the  productivity  of  the  Community's  economy  using  these  initiatives  has  the 
potential  to  contribute to  strengthening  employment  creation.  There  is no  necessary 
contradiction between productivity growth and employment  creation. 

However  three  conditions  must  be  met  to  ensure  that  the  relative  price  mechanism 

makes possible a redistribution  of productivity  gains between  sectors, enabling  sectors 

with  low  productivity  growth  to  create  new jobs  and  to  maintain  similar  wages  for 

similar work: 

relative  prices  must  continue  to  change  without  artificial  rigidities,  and  the 

increased competition and flexibility on all markets should help this; 

sectoral  changes  need  to  be  socially  acceptable,  with  market  mechanisms  being 

complemented by forward  looking active policies and social dialogue; 

the  overall  macroeconomic  rate  of growth  must  be  strong  enough  to  allow  for  a 

positive balance between job creation and job destruction  across sectors. 

4.3 Employment and labour market policies 

The economic recovery, if it progresses as predicted,  could absorb by  1997 the cyclical 
This  component  is  estimated  at  about  3 million 
component  of  unemployment. 
unemployed  or  only  2  percentage  points  of  the  present  eleven  per  cent  rate  of 
unemployment  in  the  Community.  To  absorb  3 million  unemployed  is  indeed  a first 
important  step  and  an  essential  one  towards  the  achievement  of  the  White  Paper 
objectives.  Nevertheless,  in order  to  reduce,  in  a significant  and  progressive  manner, 
the remaining  9 per cent of unemployment,  it is necessary not only to  achieve a strong 
and  sustainable medium-term growth process, brought  about by investment  in order  to 
create the  necessary  working  posts, but  it  is also  necessary  to  implement  more  active 
and  more  efficient  labour  market  policies  which  may  need  to  bring  about  significant 
changes  in  the  areas  of  educational  systems,  labour  law,  work  contracts,  wage 
settlement arrangements and the social security systems. 

30 

To this end, the Essen European Council, identified  the following five priorities: 

1) 

Improving  the  employment  opportunities  for  the  labour  force  by  promoting 

investment in vocational training, 

2) 

Increasing the employment intesiveness of growth, 

3)  Reducing non-wage labour costs, 

4) 

5) 

Improving the effectiveness  of labour market policies, 

Improving  measures  to  help  groups  which  are  particularly  hard  hit  by 
unemployment. 

Active  and  more  efficient  labour  market  policies  contribute  to  the  goal  of  increasing 
employment through three main channels: 

i) 

reinforce  the  growth  potential  itself  by  an  improvement  in  the  quality  of  human 
capital; 

ii)  make  growth  more  employment-creating  without,  however,  negatively  affecting 

the growth process itself; and  finally 

iii)  facilitate,  to the  extent  that the new jobs will become  available, the  absorption  of 

those unemployed  who  are still easily employable as well as to help the  long-term 

unemployed  and  particular  disadvantaged  groups  who  cannot  easily  occupy  the 

available working posts and who risk being affected  by social exclusion. 

Labour  market  policies  in the  above  three  areas  constitute  not  only  an  indispensable 

complement  to  macroeconomic  policies  and  to  structural  policies  in  the  area  of 

competitiveness  but  they  also  contribute  to  maintaining  and  reinforcing  cohesion  and 

social  consensus  inside  the  Union  in  the  long  and  difficult  process  of  absorbing 

unemployment. 

i)  As  regards  the  improvement  of  the  quality  of  human  capital,  it  is  a  matter  of 

strengthening  the systems of professional  training,  in particular  that  of the young, 

and  to  promote  continuous  training  of  the  workforce  in  order  to  prepare  and 

adapt the latter to social and technological  change in a world  of free  trade and in a 

process of strong structural  adjustment.  These policies will improve the  flexibility 

of the labourforce,  individual opportunities,  and the comparative advantage  of the 

European  economy  in  comparison  with  other  geographical  regions  of  the  world 

[Essen priority  n°  1 ]. 

31 

These  policies  will  increase  the  growth  potential  of  the  European  economy  and, 
like the policies for  competitiveness, will generate their full  benefit  from  the  point 
of view of both their costs and their creation of employment,  if simultaneously the 
effective  rate of economic growth can develop without  encountering the  obstacles 
of inflation  and of capacity constraints. 

ii)  The  contribution  of  the  medium-term  growth  process  to  the  reduction  of 

unemployment  is  indispensable,  but  it  must  be  complemented  by  a  large  effort, 

targeted  and  concrete,  to  increase  the  employment  content  of  growth  [Essen 

priority  n°  2J.  Actions  in  three  areas,  which  must  not  hold  back  the  growth 

process itself, are necessary in this regard: 

• 

the  examination,  by  the  social  partners,  of  whether  a  reorganisation,  a 

reduction  and/or  new patterns  of working  time  could  lead to  increases  in the 

employment  content of growth without reducing the competitiveness of firms. 

In particular,  the  de-coupling  of the working  time  of individuals  from  that  of 

the  enterprise  may  open  promising  opportunities:  the  existing  capital  stock  -

equipment,  premises,  etc.  -  could  be  better  exploited  with  significant 

productivity gains which may be used to encourage different  working  patterns 

among the employees.  Development  of part-time and other atypical forms  of 

employment  may  also  help. 

Progress  in  this  area  might  also  require  a 

revision of existing regulations [Essen priority  n° 2]. 

• 

increasing  the  incentives  to  employment  by reducing  non-wage  labour  costs, 
especially  at  the  lower  end  of  the  wage  and  productivity  scale,  without 
harming  other  parts  of  the  labour  market;  from  a  macroeconomic  point  of 
view  this  must  be  achieved  in ways which  do  not  compromise  the  reduction 
of  budgetary  deficits  nor  the  competitiveness  of  enterprises.  Reforms, 
including where appropriate alternative financing sources for  social  protection 
systems, are therefore  required [Essenpriority  n° 3J; 

• 

easing  the  development  of new  employment  opportunities  and  activities,  e.g. 

those  linked  to  the  service  society  and  environmental  sustainability  [Essen 

priority  n° 2]. 

iii)  The task  of facilitating  the absorption without tensions of the unemployed  and the 
new  entrants  to  the  labour  market,  when  the  economy  makes  available  the  new 
working posts,  concerns firstly  the efficiency  of labour  and manpower  offices  and 
the  promotion  of flexibility in the  areas  of professional  and  geographical  mobility 

32 

[Essen  priority  n°4J.  An  important  part  of  the  non-cyclical  component  of 

unemployment  could  be  progressively  integrated  into  working  life  by  reasonable 

efforts  in  these  areas  provided  that  the  recovery  can  be  transformed  into  the 

medium-term  growth  and  employment  creation  process  described  by  the  White 

Paper and aimed at by the present economic policy guidelines. 

Nevertheless,  to  significantly  reduce  the  hard  core  of  structural  unemployment  -

which could represent  about half of the 9 per cent of non-cyclical unemployment  -

different  and  much  greater  efforts  will  be  necessary.  It  is  a  matter  not  only  of 

strengthening  the  link  between  the  granting  of  social  allowances  and  the 

availability  of the unemployed  to  accept work,  but  especially  of reinforcing  active 

labour  market  policies  aimed  at  improving  the  "employability"  of  long-term 

unemployed  workers by giving access to  specific training and of concentrating  the 

latter  on  particularly  disadvantaged  groups  i.e.  women,  young  people  and  older 

citizens who risk to being affected  by social exclusion [Essenpriority  n°5]. 

These  relatively  expensive  policies  also  only  achieve  their  full  benefit  if  labour, 

which in this way is rendered  employable, has the opportunity  in practice to find a 

job.  Nevertheless,  these  policies  must  not  only  be  evaluated  in  terms  of  their 

immediate economic benefit;  taking into account the inevitable and necessary time 

to  significantly  reduce  the  hard  core  of  structural  unemployment,  these  policies 

must  also  act to  safeguard  the  existing  human  capital  of the unemployed  in  order 

to prevent  social exclusion and to maintain social cohesion. 

In order to  better  organise the implementation  of the priorities  identified  by the  Essen 

European  Council,  the Commission,  on 8 March  1995, presented  a Communication  to 

the  Council  in which  it  suggests  the  implementation,  in the  context  of  Article  103  of 

the Treaty, of a surveillance procedure with regard to employment trends and policies. 

• 

• 

Bearing  these  considerations  in mind,  the  Commission  is proposing  the  present  broad 
economic policy  guidelines  for  the  Community  and the Member  States which  confirm 
the  medium-term  framework  of those  of  June  1994,  and  assert  the  policy  priority  of 
reducing  unemployment. 

"33 

ISSN  0254-1475 

COM(95) 228 final 

DOCUMENTS 

EN 

10 

Catalogue number  :  CB-CO-95-270-EN-C 

ISBN 92-77-89585-3 

Office for Official  Publications of the European Communities 

L-2985 Luxembourg