Commission' s Recommendation for the Broad Guidelines of the Economic Policies of the Member States and the Community
Date: 1996-05-15
Institutions: European Commission
Subjects: EU policy, economic convergence, economic growth, economic policy, employment policy

COMMISSION  OF THE EUROPEAN  COMMUNITIES 

Brussels,  15.05.1996 
COM(96)211  final 

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

drawn up in conformity with article 103 (2) of the 
Treaty establishing the European Community 

EUROPEAN  COMMISSION 

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

drawn up in conformity  with article  103 (2) of the 
Treaty establishing the European Community 

I. 

BROAD ECONOMIC POLICY GUIDELINES FOR THE COMMUNITY 
AND THE MEMBER STATES 

II.  EXPLANATORY  MEMORANDUM 

11.1.  PROGRESS REPORT ON THE 1995 BROAD ECONOMIC POLICY GUIDELINES 

11.2.  ECONOMIC OUTLOOK 

A&-

-  Il  -

Table  of  contents 

I. 

BROAD ECONOMIC POLICY GUIDELINES FOR THE COMMUNITY 

AND THE MEMBER STATES 

1.1.  Main objectives and general guidelines 

1 

1 

1.2.  Macroeconomic policy mix conducive to growth, employment and convergence 2 

1.3.  Price and exchange rate stability 

1.4.  Sound public finances 

1.5.  Better functioning of product and service markets 

1.6.  Fostering employment and labour market reforms 

II. 

EXPLANATORY MEMORANDUM 

11.1  Progress report on the implementation 

of the 1995 Broad Economic Policy Guidelines 

11.1.1. Introduction 

11.1.2. Price and exchange rate stability 

11.1.3. Sound public finances 

11.1.4. Competitiveness 

11.1.5. Employment and the labour market 

11.2.  Economic outlook 

11.2.1. Growth prospects 

tl.2.2. Employment trends 

H.2.3. Convergence 

3 

5 

7 

8 

10 

10 

10 

13 

16 

21 

23 

26 

26 

28 

29 

4i> 

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

1.1.  Main objectives and general guidelines 

Contrary  to  expectations  prevailing  at  the  time  of  the  adoption  of  the  1995  Broad 

Economic  Policy  Guidelines,  the  Community's  economy  experienced  a  marked  slowdown 

in  economic  activity  over  the  last  twelve  months  and  a  renewed  rise  in  unemployment. 

Whereas  inflation  declined  broadly  as  anticipated  and  price  convergence  strengthened, 

progress  towards  sounder  public  finances  proceeded  at  an  insufficient  pace  and  was  made 

more difficult  by the economic  downturn. 

As  a  result,  the  Community  did  not  succeed  in  making  significant  progress  towards 

realising  important  economic  objectives  such  as those  stipulated  in Article  2 of  the  Treaty, 

namely  the  promotion  of  sustainable,  non-inflationary  growth  and  a  high  level  of 

employment.  This  failure  to  reduce  the  gap  between  aspirations  for  and  the  realisation  of 

economic  and  social  well-being  is the major  cause of the present  less confident  mood  in the 

Community. 

Nonetheless,  the  Community  enjoys  quite  favourable  economic  fundamentals.  Inflation  is 

historically  low  and  contained,  interest  rates  are  falling,  exchange  rates  are  progressively 

being  brought  into  line  with  underlying  conditions,  world  trade  is  expanding  at  a  healthy 

pace  and  investment  profitability  has  been  improving  and,  in  overall  terms,  is  noticeably 

higher  than  in  the  second  half  of  the  1980s.  However,  rising  long-term  interest  rates  in 

1994,  the  currency  turmoil  in  the  spring  of  1995,  persistent  structural  weaknesses  and 

deteriorating  confidence  have  prevented  these  fundamentals  from  asserting  themselves 

during  1995  and  early  1996.  With  the  impact  of  the  first  two  factors  progressively  fading 

out, allied  with an end to destocking, expectations  centre on a rebound  in economic  activity 

in  the  second  half  of  this  year.  The  pace  of  the  expected  recovery  will  mainly  be 

determined  by  the  extent  to  which  the  policy  mix  becomes  more  conducive  to  growth  and 

succeeds  in  restoring  confidence.  The  opportunities  offered  by  the  expected  recovery 

should  be  fully  seized  upon  to accomplish  the  necessary  degree  of convergence  in order  to 

ensure  a successful  transition  to Economic and  Monetary  Union  on  1 January  1999. 

Meeting  these  challenges  will  primarily  require  a  macroeconomic  policy  strategy  geared 

towards  growth  and  stability.  Appropriate  structural  initiatives  in  both  the  goods  and 

A  L 

services  markets and  in the area of labour market  reform  should  accompany  and  reinforce  a 

durable rebalancing  of the macroeconomic  policy-mix. 

In  essence,  therefore, 

the  present  Guidelines  corroborate  and  augment 

the  policy 

recommendations  outlined  in  previous  exercises. 

If  this  strategy  does  not  yet  seem  to 

deliver  satisfactory  results  in  the  Community  at  large,  this  is  because  it  has  been 

implemented  with  insufficient  vigour  and  credibility.  All  actors  are  therefore  encouraged 

to  conduct  their  economic  policies  with  a  view  to  contributing  to  the  achievement  of  the 

objectives  of the  Community  (Article  102a of the Treaty), to  demonstrate  with  action  what 

has  been  promised  since  more  than  two  years  and  to  co-ordinate  better  their  economic 

policies.  The  latter  is  not  only  a  Treaty  obligation  (Article  la)  but  also  a  practical 

obligation  made  all  the  more  critical  by  the  increased  integration  of  the  economies  of  the 

Member  States. 

It  should  be  underlined  that  the  present  guidelines  constitute  not  only  the  logical 

dénouement  of  the  analyses  undertaken  in  the  context  of  the  Commission's  1996  Annual 

Economic  Report  but  also  take  into  account  the  opinions  prepared  by  the  European 

Parliament  and the Economic and  Social  Committee on the latter  report. 

1.2.  Macroeconomic  policy mix conducive to growth, employment and 

convergence 

Achieving  the  Community  objectives  in  terms  of  growth,  employment  and  convergence 

will  continue  to  require  the  establishment  of  a  stable,  investment-enhancing,  short  and 

medium-term  macroeconomic  policy  mix, characterised  by: 

(i)  a stability-oriented  monetary  policy; 

(ii)  sustained  efforts  to  consolidate  the  public  finances  in  most  Member  States  consistent 

with the timetable and the objectives  of the Treaty; and 

(iii)  nominal  wage  trends  consistent  with  the  price  stability  objective  as  well  as  real  wage 

developments  consistent  with  the  conditions  for  strengthening  employment-creating 

investment. 

To  relaunch  the  recovery  process  and  to  strengthen  medium-term  growth  and  job-creation, 

a durable détente of the macroeconomic  policy  mix  is essential.  The more the stability  task 

of  monetary  policy 

is  facilitated  by  appropriate  budgetary  measures  and  wage 

developments,  the  more  monetary  conditions,  including  exchange  rates  and  long-term 

interest  rates,  will  be  favourable  to  growth  and  employment.  In  such  a context,  monetary 

policy  can  contribute  substantially,  in  accordance  with  the  spirit  of  Article  105(1)  of  the 

-3 -

Treaty,  to  the  achievement  of  the  Community's  objectives  as  laid  down  in  Article  2 of  the 

Treaty. 

High and  sustained  economic  growth  over  the medium  term, driven  by  capacity-expanding 
investment  is essential: 

(i) 

to  reduce  significantly  and  durably  the  Community's  unacceptably  high  level  of 

unemployment  and to combat the spread of social  exclusion; 

(ii)  to  make  the  necessary  improvement  in  the  competitiveness,  and  in  particular  the 

productivity,  of  the  Community  economy  compatible  with  the  safeguarding,  in  the 

context  of  an  open  market  economy,  of  the  basic  social  values  which  characterise  the 

Union; and 

(iii)  to  ensure  the  lasting  success  of  Economic  and  Monetary  Union  in  which  stability, 

competitiveness  and employment  must be assured  concurrently. 

Responsibility  for  bringing  about  the  desired  détente  of  the  macroeconomic  policy  mix  is 

assumed  by  three  different  groups  of  actors  (central  banks,  national  governments  and  the 

social  partners).  Efficient  co-ordination  between  actors  and  between  countries  is  essential 

in order  to ensure  policy  consistency.  The  Commission  will  intensify  its dialogue  with  the 

social  partners  on  macroeconomic  issues  and  invite  the  EMI  to  participate  in  these 

meetings.  The  social  dialogue  itself  should  also  be  intensified,  where  possible  and 

according to prevailing traditions, at the national  level. 

To  reinforce  both  the  credibility  of  the  macro-economic  policy  framework  and  the 

efficiency  of  the  co-ordination  process  within  the  Community,  Member  States  should 

present  updated  and  politically  strengthened  convergence  programmes.  These  programmes 

should  clearly  demonstrate  that  the  planned  policy  measures  to  improve  convergence  go 

hand  in  hand  with  the  promotion  of  growth  and  employment  in  the  medium  term.  The 

Commission  and  the  Council  will  assess  their  consistency  at  the  Community  level  with  a 

view to a tightening-up  of the surveillance  of economic  policies  under  Article  103(3) of the 

Treaty. 

1.3.  Price and exchange-rate stability 

The  achievement  and  maintenance  of  a  stable  macroeconomic  environment 

is  a 

precondition  for  achieving  sustained  medium-term  growth.  For  this  purpose,  and  given 
that  inflation  in  the  Community  on  average  is expected  to  fall  to  2XA per  cent  this  year,  the 
Community  should  aim  to  keep  it  at  this  low  level  and  to  make  further  progress  towards 

reaching  2 per cent. 

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At present, ten of the Member  States already respect  the objective  established  in previous 
guidelines exercises of a rate of inflation1  of no more than  2 to 3 percent as a step towards 
price  stability  and  in  the  United  Kingdom  inflation  is  close  to  3  per  cent.  In  the  seven 
countries (Belgium, Germany, France, Luxembourg, the Netherlands, Austria and  Finland) 
where inflation  is below 2 per cent and in Denmark and Ireland, where it is just above 2 per 
cent,  the  anti-inflation  credibility  of  the  monetary  policy  framework  is  generally  firmly 
established  and  the  task  is  to  consolidate  this  performance  over  the  medium  term.  In 
Sweden,  where  inflation  has recently  come  down  significantly,  and  the  United  Kingdom, 
policies  should  aim  at  maintaining  and,  where  appropriate,  reinforcing  anti-inflationary 
policies. 

Those countries where inflation  is expected to be between 3 and 5 per cent in  1996 (Spain, 
Portugal  and  Italy),  should  endeavour  to  reduce  inflation  further  to  below  3 per  cent  by 
1997.  Spain  and  Portugal  should  persevere  with  their  existing  policies  with  a  view  to 
achieving  the  desired  inflation  range  in  the  near  future. 
In  Italy,  the  conduct  of  fiscal 
policy  will  in  essence  dictate  the  pace  of  progress  with  regard  to  the  establishment  of 
exchange rate credibility and in anchoring low inflation expectations. 

Despite  visible  progress  in  Greece  over  recent  years,  it  is  evident  that  efforts  must  be 
continued  and  enhanced.  In  this  regard,  emphasis  should  be  placed  in  particular  on  the 
maintenance of the corrective  fiscal  policy  stance operated  over the  last two years as well 
as continuing with the prudent monetary and exchange rate policies evident since the early 
1990s. 

As  stressed  in  the  previous  Guidelines,  all  Member  States  must  continue  to  treat  their 
exchange-rate  policies  as  a  matter  of  common  interest  within  the  framework  of  the 
European  Monetary  System  and,  where  appropriate,  its  exchange  rate  mechanism.  The 
exchange rate movements  in early  1995 pointed  to the need  for  several  Member  States to 
put  their  overall  policy  framework  on  a  more  credible  footing.  Policies  credibly  and 
resolutely  geared towards a rebalancing of the policy  mix and achieving price stability, as 
recommended  in  the  present  Guidelines,  will  not  only  be  conducive  to  an  appropriate 
alignment  of  exchange  rates  within  the  Community  but  also  at  the  world  level.  For 
countries  which  are  not  currently  participating  in  the  exchange  rate  mechanism,  these 
policies  would  also  contribute  to  creating  the  conditions,  where  appropriate,  for  such 
participation. 

As measured by the 12 month average of the annual change in the interim indices of consumer prices 

1.4.  Sound public finances 

Some,  but  only  limited,  progress  towards  fiscal  consolidation  was  made  last  year  in  the 

Community.  Slippages  relative  to announced  budgetary  targets  only  partially  reflected  the 

adverse  impact  of  the  growth  slowdown. 

Insufficient  credibility  of  budgetary  policies 

contributed  importantly  to the currency  turbulence  in the  spring  of  1995, sapped  economic 

confidence  and  led  to  doubts  in  financial  markets  regarding  the  likelihood  of  a  successful 

realisation of the Community's  single currency  goal. 

Meanwhile,  a  large  number  of  countries  have  taken  significant  steps  to  consolidate  their 

public  finances  in  1996  and,  in  many  cases,  also  in  1997.  Nevertheless,  the  still 

unsatisfactory  state  of the  public  finances  in the  Community  should  lead  Member  States  to 

review  and,  where  necessary,  to  strengthen  their  fiscal  consolidation  plans.  Credible,  pre-

announced  and  socially  balanced  efforts  to reduce high budgetary  imbalances  will  allow  for 

a  revival  in confidence,  for  the transformation  of the expected  recovery  into a durable, job-

creating,  medium-term,  growth  process  and  for  a  sound  transition  to  EMU  on  1 January 

1999. 

While  the economic  conditions  are presently  less  favourable  than  anticipated  at the time  of 

the adoption  of the  1995 Guidelines, a further  delay  in the  inevitable  consolidation  process 

is not  a justifiable  option.  Any  postponement  risks provoking  an  adverse  financial  market 

reaction  and  would  aggravate  the  consolidation  task  in  future  years. 

In  the  present 

circumstances,  a  policy  of  allowing  the  automatic  stabilisers  to  work  is  therefore  largely 

inappropriate  in  the  vast  majority  of Member  States.  Progress  made  in  reducing  structural 

budget  deficits  this  year  will  of  course  persist  and  reinforce  consolidation  when  cyclical 

conditions  improve.  Moreover,  the adverse  near-term  growth  impact  of credible  reductions 

in  budget  deficits  is  likely  to  be  limited  provided  that  the  appropriate  Hanking  conditions, 

in both  the monetary  and  structural  area, are set  in place. 

On  the  basis  of  the  adjustment  measures  decided  up  until  early-May  1996,  the  net 

borrowing  of  general  government  in  the  Community  as  a  whole  is  likely  to  fall  to  just 

below  VA  per  cent  of  GDP  in  1997, which  compares  with  a deficit  of  5 per  cent  in  1995. 

Virtually  all  Member  States  should  aim  at  lowering  the  budget  deficit  to,  at  most,  3  per 

cent  of  GDP  in  1997,  as  a  step  towards  the  objective  of  close  to  balance  in  the  medium 

term.  In  this  respect,  it  is encouraging  that  several  countries  have  recently  announced  and 

are implementing  substantial  measures to redress budgetary  imbalances. 

As  regards  the  individual  Member  States,  12  of  the  14  Member  States  with  convergence 

programmes  (the  exception  being  Luxembourg)  are committed  to  reducing  their  deficits  to 

3  per  cent  of  GDP  or  below  by  1996  or  1997  at  the  latest.  Two  of  these  countries 

-6-

(Denmark  and  Ireland)  already  respect  the  3 per  cent  budget  deficit  reference  value  and 
they should consequently  move towards the achievement  of more ambitious  medium-term 
targets. 

As  regards  the  remaining  ten  countries,  the  additional  effort  needed  to  respect  the  3 per 
cent reference value is undoubtedly feasible and should be pursued vigorously.  Within this 
group,  several  countries  (Germany,  France,  Austria,  Finland,  Sweden)  have  this  year 
announced  substantial  measures or reinforcements  with a view to achieving a reduction in 
their  budget  deficits  to  3 per cent  of  GDP  or  less  in  1997.  These  countries,  as  with  the 
Netherlands, should  resolutely  implement  their programmes  of fiscal  consolidation  and, if 
necessary, strengthen them in order to ensure that their objectives are fully  met. 

In Belgium both the impact of weaker-than-anticipated  output growth on tax revenues and 
social  transfers  and  the  non-recurrent  nature  of  some  of  the  measures  previously  taken 
require  supplementary  efforts  to  respect  the  3  per  cent  reference  value  in  1997.  The 
Belgian  government  is firmly  committed  to specifying  the  necessary  measures during  the 
preparation  of  its  1997 budget  in June-July  of  1996.  In the  United  Kingdom,  substantial 
reductions in the budget deficit  are expected to continue over the next two years mainly as 
a  result  of  planned  expenditure  restraint.  But  to  respect  the  convergence  programme 
targets, further  action  is needed  both to compensate  for  the fiscal  slippage  in  1995 and an 
expected  less rapid  budgetary  improvement  in the  short  run  which  is partly  due to  lower 
Finally,  in  Spain  and  Portugal,  a  determined 
growth  than  previously  predicted. 
implementation  of the  budgetary  component  of the  convergence  programmes  is  required, 
with special attention to be given in Spain to a re-evaluation of the social security system. 

With  regard  to  the  two  remaining  Member  States,  Italy  needs  to  introduce  significant 
measures to achieve and improve upon the planned budgetary consolidation which remains 
the central policy priority in terms of restoring market confidence.  Action should primarily 
focus  on the fight against  tax evasion, on greater  budgetary  discipline  of local  authorities 
and  on  improved  efficiency  of  the  public  administration.  As  regards  Greece,  sustained 
efforts  on a wide range of  fronts,  most notably a continuation  of the existing  privatisation 
initiatives, an expansion of the tax base and current expenditure reductions, are all required. 

Although  the  extent,  timing  and  design  of  consolidation  measures  need  to  be  tailored  to 
country-specific  conditions,  some  general  principles  have  been  identified  in  previous 
Guidelines exercises.  These include: 

(i)  restraining  expenditure  increases,  as  opposed  to  further  increases  in  the  overall  tax 
burden, is widely regarded as a more credible and efficient  option.  Among the issues 
which  should  be addressed  are the need  to place  pension  provisions  on a sustainable 

- 7-

footing,  to  curb  the  rise  in  health  care  costs  and  to  reduce  distortionary  and  costly 

subsidies, 

(ii)  re-directing,  to  the  greatest  extent  possible,  government  spending  towards  productive 
activities  such  as  investment  in  infrastructure,  human  capital  and  active  labour  market 

measures, while not endangering  the necessary  reduction  in budget  deficits; 

(iii)  improving 

the  efficiency  of  public  services 

through 

inter  alia  more 

flexible 

management  practices,  better  incentives  for  public  employees,  and  in  some  cases 

increased  use  of  privatisation  and  user-fees  to  the  extent  that  Member  States judge  it 

compatible  with  their  objectives; 

(iv)  ensuring  that  a reduction  in the overall  tax  burden,  which  is desirable  in  most  Member 

States, is conditional  upon  initially  putting the budget deficit  on  a firm  downward  path. 

In  the  interim,  however,  Member  States  stand  to  gain  from  a  broadening  of  the  tax 

base  and  a modification  in  tax  structures  so  as to  reduce  the  tax  burden  on  labour.  In 

particular,  reductions  in  non-wage  labour  costs  at  the  lower-end  of  the  wage  scale 

should  be  considered. 

1.5.  Better functioning of product and service markets 

To  foster  growth,  and  thus employment,  whilst  maintaining  low  inflation,  it  is essential  that 

action  on  the  macro  side  is added  to  by  measures  aimed  at  ameliorating  the  functioning  of 

product  and  service  markets  in  general  and  at  generating  higher  competition  and  a  more 

flexible  functioning  of  the  price  mechanism  in  particular.  This  will  essentially  require  a 

further  reinforcement  of  competition  policies  and  a  curbing  of  state  aids  in  full  respect  of 

the objectives  of Article  130a of the Treaty  concerning economic  and  social  cohesion. 

It  is  also  crucial  to  fully  exploit  the  internal  market  potential  in  an  open  and  competitive 

environment  through  the transposition  into national  law and effective  enforcement  of  single 

market  legislation. 

In  sectors  where  transposition  is  lagging  behind,  a particular  effort  is 

needed  to present  all necessary  proposals to national  parliaments  before  the end of  1996. 

To enhance the  Community's  competitiveness,  measures  aimed  at promoting  innovation,  at 

favouring 

the  emergence  of  the 

information  society  and  at  achieving  a  working 

environment  more  conducive  to  initiative  and  to  the  development  of  SMEs  should  be 

swiftly  implemented. ' Of  course,  in these  areas  the  individual  Member  States  largely  hold 

the  key.  However,  the  potency  and  effectiveness  of  national  actions,  which  are  essential, 

can  be  significantly  added  to  via  co-ordination  and  appropriate  actions  at  the  Community 

level.  At  this  level,  among  the  wide  range  of  activities  currently  being  pursued,  specific 

attention  should  be  given  to  a  number  of  recent  proposals  of  the  Commission.  Action  to 

remove  the  remaining  obstacles  to  the  effective  implementation  of  the  TENs  projects 

- 8-

should  be  initiated.  Further  work  is  also  needed  to  ease  the  impediments  currently 

hampering  the  development  of  the  SME  sector.  A  more  co-ordinated  R  &  D  effort  is 

required  both  at  the  level  of  the  Member  States  themselves  and  between  the  latter  and 

specific  EC-funded  research  programmes.  The  Commission  will  also  pursue  its  policy  to 

improve  competition  in  EU-markets.  Finally,  to  increase  the  job-creating  potential  of 

environmental  policies, these policies should  -  to a greater extent than at present  -  rely on 

market-based  instruments,  including  fiscal  ones,  both  at  the  national  and  Community 

levels. 

1.6.  Fostering employment and labour market reforms 

More  than  2'/2  years  after  the  publication  of  the  Commission's  While  Paper  on  Growth, 

Competitiveness  and  Employment  and  with  the  Essen  employment  strategy  set  in place  for 

some  time, the Community  finds  itself with  a dismal  employment  record  over  the  period  in 

question.  Although  the  expected  recovery  will  lead  to  renewed  job  creation  and  will 

reverse  the  current  upward  trend  in  unemployment,  it  is  likely  that  more  than  17  million 

people  will  still  be  unemployed  in  1997  in  the  Community.  Assuring  a  sustained  and 

significant  improvement  in  employment  and  unemployment  requires  not  only  durable, 

high, economic  growth  and  efficient  product  and  service  markets, but also a broad  range  of 

labour market  reforms. 

Eliminating  existing  rigidities  as  well  as  ensuring  a  more  efficient  operation  of  labour 

markets  is  at  the  heart  of  national  efforts  to  ensure  both  a  tension-free  and  stronger 

medium-term  expansion  and  a  more  employment-creating  growth  pattern.  Member  States 

have  been making efforts  to reform  their  labour  markets.  They  are encouraged  to  intensify 

their actions while ensuring  both equity  and efficiency  in the social  protection  system.  The 

implementation  of  policies  aimed  at  improving  the  occupational  and  regional  mobility  of 

the  labour  force  and  at  enhancing  the  efficiency  of  employment  services  should  reduce 

bottlenecks which could  lead to an early end to the growth process. 

Suitable  policies  should  be  conducted  in  order  to  adapt  the  whole  educational  system  — 

including  vocational  training  ~  both  to  the  needs  of  markets  and  to  the  improvement  of 

human  capital,  thereby  fostering  the  growth  potential  of  the  economy. 

In  this  respect, 

priority  should  be  given  to  enhancing  the  employability  of  young  people,  women  and  the 

unemployed, 

in  particular  low  skilled,  inexperienced 

labour,  and  to  reducing  skill 

mismatchs on the labour market by providing  training better fitted  to the changing  needs of 

the  labour  market. 

A  higher  labour-content  of  growth  should  be  favoured  by  the  maintenance  of  appropriate 

average  wage  trends  and  in  some  cases  by  a  larger  wage  differentiation  according  to 

qualifications,  regions  and,  to  some  extent,  sectors  and  firms.  A  reduction  in  the  labour 

costs  of 

low-productivity  jobs,  either 

through  direct  wage  developments  (e.g.  by 

introducing  entry  wages  in  appropriate  cases)  or  through  a targeted  reduction  in  non-wage 

labour  costs, should  increase  the incentives  to the employment  of low-skilled  labour.  Such 

measures  should  be  compatible  with  Community  competition  policy.  Adaptations,  at  the 

firm  level,  of  working-time  and  work  organisation  will  also  act  in  this  direction.  Finally, 

the promotion  of local  and  regional  initiatives  in the field of new services containing  a high 

labour-intensive  dimension,  such  as  those  identified 

in  the  Communication  from  the 

Commission  on  a  European  strategy  for  encouraging  local  development  and  employment 

initiatives, should  also be  encouraged. 

All  the  above  elements  are  featured  in  the  Community's  common  employment  strategy, 

initiated  at  the  Essen  European  Council  and  refined  subsequently  at  both  the  Cannes  and 

Madrid  Councils.  The  procedures  adopted  at  these  European  Councils  need  to  be  made 

more  efficient. 

In  this  respect,  Member  States'  multi-annual  employment  programmes 

must  be  developed  further,  to  make  them  more  effective  instruments  in  the  area  of  labour 

market  policy.  Furthermore,  the  Commission's  initiative  to  mobilise  all  actors  around  the 

top  priority  of  fighting  unemployment  is  aimed  at  making  maximum  use  of  the  existing 

instruments  at the level of the Union. 

•10-

IL  EXPLANATORY MEMORANDUM 

11.1  Progress report on the implementation of the 
1995 Broad Economic Policy Guidelines 

II. 1.1.  Introduction 

In conformity  with the Maastricht Treaty, Broad Economic  Policy  Guidelines  were  adopted 

in  December  1993,  July  1994  and  again  in  July  1995.  Following  mandates  from  the 

European  Council,  the  implementation  of  the  1993  Guidelines  was  assessed  in  December 

1994.  The  execution  of  the  1994  Guidelines  was  examined  on  two  separate  occasions, 

once  in  December,  and  again  in  June  1995. 

This  document  reviews,  following  a  request  from  the  Cannes-European  Council,  the 
progress  made  in  implementing  the  1995  Broad  Economic  Policy  Guidelines2  since  their 
adoption  by  the  EcoFin  Council  in July  of  last  year.  In  an  attempt  both  to  streamline  the 

surveillance  procedures  and  to  present  the  necessary  information  and  analysis  for  the 

adoption  of  the  new  guidelines,  an  assessment  of  the  past  guidelines  will  henceforth  form 

an  integral  part  of  the  Commission's  explanatory  memorandum.  Such  an  assessment 

constitutes  a  valid  test  of  the  degree  of  commitment  of  the  individual  Member  States  to 

shared  policy  responsibilities.  Because  of  the  medium-term  orientation  of  economic 

policies,  this  report  examines  trends  evident  since  the  adoption  of  the  first  guidelines 

Recommendation  in  1993. 

The  policy  issues  raised  in  the  1995  Guidelines  were  addressed  against  a  background 

where  the economic  recovery  process, which  commenced  towards  the  second  half of  1993, 

had  apparently  become  firmly  established.  The  pace  and  composition  of  the  economic 

expansion  in  1994  had  given  rise  to  optimism  that  growth  rates  of  the  order  of  3 per  cent 

could  be realised  in both  1995 and  1996. 

Since  then,  however,  there  has  been  a marked  slowdown  in growth.  An  extended  analysis 

of  the  factors  behind  the  slowdown  was  presented  in  the  Commission's  1996  Annual 

Economic  Report  with  only  the  key  points  of  that  analysis  being  summarised  here.  The 

quarterly  rates  of  GDP  growth  of  the  order  of  VA  to  4 percent  (annualised  rate)  witnessed 

throughout  most of  1994 decelerated  to around  2 percent  in the second  and  third  quarters  of 

1995  culminating  in  virtual  stagnation  in  the  last  quarter  of  last  year.  This  lower  than 

expected  output  performance  was  reflected  in  adverse  labour  market  developments.  The 

An initial review of the  1995 guidelines took place in December  1995. 

11  -

moderate  rise in overall  employment  in the Community  since the middle of 1994 came to a 

standstill  towards the end of 1995.  Particularly  in the countries which were hardest  hit by a 

worsening  in their  competitive  position  following  the  exchange  rate  crisis  of spring  1995, 

employment  trends  turned  markedly  negative.  But also  in  several  other  countries, the 

economic  slowdown  brought  employment  gains  to  a  halt. 

In  sum, employment  is 

estimated  to have grown  by only  Vi a per cent  last year in the Community  as a whole. 

Apart  from  the  fading  of the  initial  impulse  from  stockbuilding,  the significant  slowdown 

during  1995  essentially  reflected  two  adverse  developments  in financial  markets.  Firstly, 

the  marked  rise  in  long-term  interest  rates  on world  and Community  financial  markets 

during  1994 appear  to  have  exerted  a  stronger-than-expected  restraining  influence  on 

companies'  and  households'  spending  decisions  in  1995.  The  rise  in  yields  varied 

considerably  across  EC Member  States,  reflecting  inter  alia  their  economic  performance, 

policy  stance  and  credibility.  In particular,  long-term  interest  rates  rose  significantly  more 

in  countries  whose  public  finances  were  not yet perceived  by the'markets  as having  been 

put on a clearly  sustainable downward  path. 

Table  1 

Nominal interest rates 
(per  cent) 

Dec. 

Dec. 

April 

Jan. 

April 

Dec. 

Dec. 

April 

Jan. 

April 

1993 

1994 

1995 

1996 

1996 

1993 

1994 

1995 

1996 

1996 

Short-term1 

Long-term2 

B 
DK 

D 

GR 

E 

F 

IRL 

I 

NL 

A 

P 

FIN 

S 
UK 

7.2 

7.3 

6.1 

5.4 

6.2 

5.3 

19.9 

17.9 

8.9 

6.5 

6.3 

8.6 

5.6 

5.8 

11.7 

5.9 

7.7 

5.3 

8.2 

5.9 

6.3 
9.0 
5.4 

4.8 
10.5 

5.7 

8.2 

6.4 

5.3 
6.9 
4.6 

17.2 
9.4 
7.7 

6.8 
10.8 
4.7 

4.5 

10.8 

6.0 

8.9 

6.7 

3.6 

4.4 

3.5 

14.6 
8.9 
4.7 

5.4 

9.9 

3.3 

3.7 

8.5 

4.2 

8.4 

6.4 

3.3 
4.0 
3.3 

14.1 

7.8 

3.9 

5.1 
9.4 
2.9 

3.0 
7.6 
3.9 

6.6 

6.0 

6.6 
6.2 
5.7 

8.3 

5.8 

8.8 
5.7 

9.0 

6.3 

8.3 
8.8 
7.5 

7.9 
8.8 
7.1 

11.5 

12.1 

8.1 

8.6 
11.9 

7.6 

7.6 
11.5 
10.3 

10.7 

8.5 

7.8 

8.7 

13.0 
7.2 

7.4 

12.1 
9.4 

11.5 
8.4 

6.5 
7.0 
5.9 

9.5 

6.5 

7.2 

10.2 
5.9 

6.2 
9.4 
7.0 

8.3 
7.4 

EUR 

6.9 

6.6 

7.2 

5.8 

5.3 

(6.8) 

(90) 

(8.9) 

7.3 

6.7 
7.3 
6.4 

9.3 

6.5 

7.6 

10.1 
6.4 

6.5 
9.2 
7.5 

8.4 

8.1 

7.6 

'  Three-month  money  market  rate. 
2  Yield  on  benchmark  10  year  bonds,  unless  for  EUR until  April  1995  where  data  refer  to 

yields  on government  bonds.. 

Source:  Commission's  Spring  1996  forecasts. 

Secondly,  and  perhaps  more  importantly,  the currency  turmoil  in the  spring  of 1995  had a 

significant  impact  on  the  economies  of  the  appreciating  as  well  as  the  depreciating 

countries.  It was triggered  by a  marked  weakening  of the  US-dollar  in the wake  of the 

Mexican  Peso  crisis.  But the subsequent  sizeable  and abrupt  movements  between  EC 

currencies  seem  to  reflect  the deeper,  underlying,  problem  of the lack  of  credibility  of 

-12 

national  budgetary  consolidation  plans  and  structural  reforms  and/or  perceived  risks  of 

renewed  inflationary  tensions  in  a  number  of  individual  Member  States.  In  Germany  and 

the  countries  whose  currencies  are  closely  linked  to  the  DM,  the  appreciation  of  the 

exchange  rate  implied  a considerable  tightening  of  overall  monetary  conditions,  in  spite  of 

an  easing  in  short-term  interest  rates,  and  a 

Table  2 

worsening  of  competitiveness  and 

industry 

profitability.  This  in  turn  had  knock-on  effects 

on  investment  and  led  to a marked  deterioration 

in  business  confidence.  On  the  other  hand,  in 

countries  whose 

currencies 

depreciated 

significantly,  the  short-term  boost  to  export 

market  shares  was  to  some  extent  offset  by 

lower  growth  on  export  markets,  and  by  rising 

interest  rates  and  the  erosion  of  consumer 

purchasing  power  from  higher  inflation  on  the 

home  market.  Furthermore,  at  the  level  of  the 

Community  as  a  whole,  si/.eable  and  abrupt 

intra-Community  exchange 

rate  movements 

jeopardise  the proper  functioning  of the  internal 

market, 

leading 

inevitably 

to 

suboptimal 

resource  allocation. 

N o m i n al  e f f e c t i ve  e x c h a n ge 

r a t es 

Index,  August  1992  =  100 

Dec. 
1993 

Dec. 
1994 

April 
1995 

Jan. 
1996 

April. 
1996 

99.9 

100.5 

100.8 

87.5 

78.4 

103.3 

102.2 

103.1 

82.9 

78.2 

107.9 

105.9 

107.2 

109.3 

106.8 

106.7 

82.9 

77.1 

80.2 

80.6 

100.9 

102.4 

106.3 

106.7 

92.8 

75.1 

94.5 

72.7 

93.3 

63.2 

94.3 

71.8 

104.6 

105.4 

104.9 

80.9 

80.2 

106.0 

94.6 

73.9 

102.6 

"Î04.3 

109.0 

107.0 

105.8 

101.5 

102.8 

107.3 

105.5 

104.2 

8/7 

8?.5 

74 6 
887 

88.3 

915 

77.5 
87.1 

90.2 

96.8 

73.0 
83.2 

80.4 

89.6 

95.8 

83.2 
82.1 

89.3 

91.1 

84.8 
82.4 

84.6 

83.6 

B 

DK 

D 

GR 

E 

F 

IRL 

1 

NL 

A 

P 

FIN 

S 
UK 

EUR 

78.2 

80.2 

Source: Commission. 

The  above  developments  point  to  the  need  for  increased  policy  co-ordination  at  the 

international  level.  They  also clearly  highlight  the adverse  impact  on  growth,  employment 

and  confidence  of insufficient  actions  in those policy  areas, directly  under  Member  States' 

own responsibility,  needed to further  rebalance the policy-mix  as recommended  in the  1995 

Broad  Economic  Policy  Guidelines. 

The  progress  review  given  below  follows  the  four  broad  headings  used  in  the  Council 

Recommendation  namely:  price  and  exchange  rate  stability;  sound  public  finances; 

competitiveness  and employment  and the  labour  market. 

//. 1.2.  Price  and exchange  rate  stability 

- 1 3-

stability 

~  The  1995  Guidelines  reaffirmed  the  objective,  set  in  the  1993  and  1994 

exercises,  of  a  rate  of  inflation  of  no  more  than  2  to  3 percent,  as  a  step  towards  price 

stability,  adding  that this target  was  likely  to be  achieved  in the  majority  of  Member  States 

in  1996. 

Chart 1 

10 

INFLATION 

Interim indices of consumer  prices* 
(March 1996 - average over  12 months) 

Range indicated jn  the 
Guidelines 

o 

B  DK  D  GR  E  F 

IRL 

I 

L  NL  A  P  FIN  S  UK 

" Interim Indices of Consumer  Prices represent  the first stage of a process  towards 
Community harmonisation of national CPI calculations 

I t M t.  M 

Indation  has  been  on  a  steady 

downward 

Irend 

in 

(he 

Community  since  1991  with 

the  rate  of 

increase  of 

the 

deflator  of private  consumption 

falling  from  around  5/4  percent 

to  a  little  over  3 percent  last 

year,  with  most  Member  States 

.  achieving 

the 

inflation 

objective  already  in  1995.  As 

regards  developments  so  far  in 

1996, consumer  price inflation  in the Community  in  March  of this year, as measured  by  the 
12 month  average  of the  annual  change  in the  interim  indices  of  consumer  prices  (IICPs)3, 
stood  at  2.9 percent.  In  ten  of the  Member  States,  inflation  was  within  the  range  indicated 

by the Guidelines  and  in the majority  of them  the rate of inflation  even  stood  at below 2 per 

cent.  In the  United  Kingdom,  inflation  was close to  3 per cent.  Of  the  remaining  Member 

States, Portugal  has come relatively close to the range in recent  months.  In Spain and  Italy, 

inflation  is falling  visibly  following  last year's  blip which  reflected  the combined  impact  of 

their  currency  depreciations  and  increases  in  indirect  taxes.  Finally,  further  marked 

progress  was  achieved  last  year  in  Greece  but  the  disinflation  process  seems  to  have  lost 

momentum  in recent  months.  However, this development  is related  to exogenous  factors. 

This  relatively  encouraging  inflation  performance  since  the  adoption  of  the  Guidelines 

reflects  the  combined  impact  of  several  forces.  It  incorporates  not  only  influences  such  as 

a  persistent,  and  even  widening,  negative  output  gap  and  subdued  raw  material  price 

developments  but also  structural  improvements  in such  areas as central  bank  independence, 

wage  behaviour  and  competition.  The  notable  success  in  bringing  inflation  down  in 

several  Member  States  and  appropriate  actions  by  the  monetary  authorities  in  countries 

whose  currencies  depreciated,  has  led  to  an  enhanced  credibility  of  anti-inflationary 

policies.  Wage  developments  were  fairly  moderate  last  year  broadly  moving  in  line  with 

3 

These  IICPs  represent  the  first  stage  of  a  process  towards  harmonisation  of  CPI  calculations  The  IICPs  and  the 
subsequent  HICPs  (Harmonised  Indices  of  Consumer  Prices),  which  will  commence  in  January  1997,  will  be  used  in 
the  context  of  the  evaluation  of  compliance  with  the  Maastricht  inflation  criterion 

-14 

price  increases  in most  Member  States, with  nominal  compensation  of  employees  per  head 
accelerating  mildly  to 3lA percent  in the Community  as a whole.  This figure  compares  with 
an  annual  average  rate of  increase  of close  to 6 percent  over  the  period  1991-93.  Real  unit 

labour  costs  contributed  to  improved  profitability  by  declining  by  about  I pel  cenl  or  more 

in many  Member  States and  by  1.3  per cent  in the Community  as whole, thereby  respecting 

the Guidelines  recommendation. 

Table  3 

Inflation  developments 
(%  change  pa.) 

Private consumption 
deflator 

Nominal compensation 
of employees per head 

Real unit labour costs 

1993 

1994 

1995 

1993 

1994 

1995 

1993 

1994 

1995 

3.1 
0.3 
3.9 

13.7 
5.5 
2.2 

1.7 
5.4 
7.0 

2.3 
3.4 
7.1 

4.2 
5.7 
3.5 

4.1 

3.0 
1.7 
2.7 

10.8 
4.9 
1.8 

2.7 
4.6 
24 

2.4 
3.0 
5.2 

1.3 
3.-1 
2.5 

3.2 

1.5 
1.8 
2.0 

9.3 
4.6 
1.6 

2.5 
5.7 
20 

1.1 
2.2 
4.2 

1.1 
27 
2.6 

3.0 

3.3 
1.6 
4.3 

10.1 
6.5 
2.2 

4.9 
3.7 
5.2 

3.1 
4.6 
9.1 

1.0 
4.4 
4.3 

4.0 

4.8 
3.6 
3.2 

11.9 
3.1 
2.1 

3.2 
3.0 
3.4 

2.3 
3.1 
5.2 

3.5 
5.4 
3.5 

3.2 

1.9 
3.3 
3.8 

12.5 
2.4 
2.4 

3.1 
5.2 
3.9 

3.0 
3.8 
4.6 

5.3 
3.0 
3.1 

3.5 

-0.4 
-1.5 
-0.1 

-0.4 
-0.5 
0.1 

-1.7 
-24 

-?{•> 

06 
03 
0.8 

-6.6 
-1.4 
-2.6 

-1.0 

-0.7 
-3.0 
-2.6 

1.3 
"*  -3.4 
-1.9 

-2.0 
-40 
-0.9 

-2.5 
0.6 
-1.4 

-2.9 
-1.1 
-2.4 

- 1 5' 
0.5 
-0.7 

1.9 
-2.6 
-0.3 

-2.6 
-3.1 
08 

-0  1 
-0.3 
-3.5 
-0.4 
-2.4 
-1.0 

-2.5 

-1.3 

B 
DK 
D 

GR 
E 
F 

IRL 
1 
L 

NL 
A 
P 

FIN 
S 
UK 

EUR 

Source: Commission's Spring 1996 forecasts. 

Nevertheless,  in  some  countries  wage  trends  were  disappointing;  not  only  in  those  where 

the disinflation  process  has not yet  been completed  but also  for  instance  in Germany  where 

wage  settlements  were  relatively  high  compared  with  the  stated  inflation  objective  of  the 

monetary  authorities.  Together  with  the  appreciation  of  the  DM,  these  wage  agreements 

contributed  to  the  erosion  of  competitiveness  and  profitability 

in  the  internationally 

exposed  sectors.  In  Italy,  wage  costs  accelerated  in  1995  but  the  rate  of  increase  remained 

slightly  below  inflation.  Continued  vigilance  is  necessary  to  avoid  the  development  of  a 

wage-price  spiral  which,  if  it  were  allowed  to  get  hold,  would  raise  the  future  costs  of 

achieving  price  stability. 

In  Finland,  wages  rose  significantly  in  both  nominal  and  real 

terms  in  1995.  However,  due  to the  moderate  two-year  incomes  policy  agreement,  the  rise 

in wages and  salaries will decelerate  substantially  in  1996 and  1997. 

Exchange  rate  stability  —  Following  the  exchange  rate  turmoil  of  Spring  1995, a  broad 

degree  of stability  slowly  began  to re-emerge  over  the months  to  September  1995.  Among 

the  factors  contributing  to  this  process  was  a strengthening  of  the  US  dollar  in  the  months 

-15-

through  to  August,  a  monetary  easing  by  the  Bundesbank  in  March  and  reinforced  efforts 

at  budgetary  consolidation  in  several  Member  States.  This  benign  situation  was  to  some 

extent  interrupted  in  September  with  a  renewal  in  exchange  rate  volatility  amongst 

European  currencies.  The  factors  responsible  for  this  re-emergence  of  tensions  included  a 

renewed  weakening  of the dollar and  specific  economic  and  political  factors  in a number  of 

Community  countries  allied  to  a  resumption  of  concerns  with  regard  to  the  prospects  for 

EMU.  However,  despite  this  interruption,  calm  has  returned  to  the  markets  with  the 

currency  movements  in  the  period  1994-95  having  been  largely  reversed  in  the  early 

months of this'year. 

The  currencies  of  Greece,  Italy  and  the  United  Kingdom  have  continued  to  be  outside  the 

ERM.  Of the  three  new  Member  States, only  Austria  entered  the  ERM  at the  beginning  of 

1995. 

Developments  in relation  to short-  and  long-term  interest  rates  in  1-995 in part  reflected  the 

tensions  on  the  foreign  exchange  markets.  The  Bundesbank  cut  the  discount  rate  on  four 

occasions  since  March  1995  against  the  background  of  slow  money  supply  growth  and 

better  inflation  prospects  in  Germany,  thereby  providing  most  other  Member  States  with 

the  necessary  room  to  follow  suit.  Having  widened  sharply  amid  the  exchange  rate 

tensions  in  the  spring,  short-term  interest  rate  differentials  with  respect  to  corresponding 

rates  in  Germany  narrowed  in  most  Member  States  in  the  course  of  1995.  The  pace  of 

narrowing  in differentials  has varied  among  Member  States  and  has  in  most  cases  reflected 

developments  in  their  exchange  rates  against  the  DM.  Significant  differentials  remain  in 

several  Member  States  where  financial  markets  remain  concerned  at  the  credibility  of  anti-

inflation  and/or budgetary  policies. 

At  the  long end  of the  market, the  sustained  decline  in  interest  rates  in  1995 (following  the 

increase  in  1994)  was  sharply  reversed  in  the  early  months  of  this  year.  The  recent  rise 

across  the  Community  largely  reflects  spillover  effects  from  developments  in  the  United 

States,  where  evidence  of  buoyancy  in  the  economy  has  been  seen  as  heightening  the 

possibility  of  a  monetary  tightening  by  the  Federal  Reserve.  As  with  short-term  interest 

rates,  the  trend  in  differentials  between  Germany  and  other  Member  States  has  been 

generally  downward,  although  substantial  differentials  persist  in  some  Member  States 

where  exchange  rate  credibility  remains  closely 

tied  to  inflation  and/or  budgetary 

developments. 

II. 1.3.  Sound public finances 

-16-

Many  countries  came  out  of  recession  in  1993  with  serious  budgetary  imbalances.  The 

need  for  urgent  action  in  this  area  was  recognised  in  the  earlier  Guidelines  exercises. 

Unfortunately,  many  Member  States,  despite  the  relatively  good  economic  conditions 

prevailing  in  1994  and  early  1995,  had  not  made  substantial  inroads  into  their  budgetary 

problems at the time of last year's Guidelines  exercise. 

The  public  finance  objectives  of  the  1995  Guidelines  were  that  in  the  short  run  Member 

States should  not only rely on the positive benefits  which were expected  from  the  workings 

of  the  automatic  stabilisers  to  improve  their  budgetary  positions  but  that  they  must  also 

take  full  advantage  of  all  the  growth  opportunities  to  step  up  fiscal  consolidation  by 

reducing  structural  deficits.  Member  States  were  urged  to  reduce  their  budget  deficits  to 

below  3 percent of GDP  as soon as possible.  Any  additional  room  for  manoeuvre  provided 

by  stronger  than  expected  growth  or  a  more  favourable  interest  rate  evolution  was 

recommended  to be used  to accelerate the process of budgetary  consolidation. 

Developments 

in  1995  ~  In  overall  terms, the  budgetary  position  of  a  large  majority  of 

the Member  States registered  some progress  in  1995.  However, the degree of  improvement 

was  insufficient  given  both  the  extent  of  the  fiscal  difficulties  to  be  surmounted  and  the 

official  commitments  to  do  more.  The  sharp  cyclical  slowdown  experienced  in  some 

Member  States  over  the  course  of  the  year,  and  especially  in  the  last  quarter  of  1995, 

obviously  made  progress  towards  sounder  public  finances  more  difficult.  However,  fiscal 

slippages 

in  several  countries  were  a  clear  factor  behind 

the  overall 

insufficient 

improvement  in  the  underlying  budgetary  positions,  as  measured  by  the  Commission 

services estimates of the cyclically-adjusted  budget  balances. 

In  fact,  general  government  net  borrowing  in the  Community  in  1995  came  down  by  only 

half  of  a percentage  point  to  a still  unacceptably  high  level  of  5 percent  of  GDP,  which  is 

substantially  higher  than  the  figure  anticipated  at the  time  of the  drafting  of the  Guidelines 

in  May  of  last  year.  Of  the  budgetary  adjustment  which  took  place,  roughly  half  of  the 

improvement  was  due  to  non-cyclical  factors;  the  estimated  reduction  in  the  cyclically-
adjusted  budget deficit  (lA of a percentage  point ) was smaller than expected  earlier. 

At the level of actual  budget deficits, ten of the fifteen  Member  States have  registered  some 
progress  in  1995,  varying  from  gains  of  lA a  percentage  point  m  the  case  of  Portugal  to 
nearly  3  percentage  points  in  Greece.  Nine  of  these  ten  countries  also  registered  an 

improvement  in their structural  deficits.  The exception  was  Finland  where  the  widening  in 

the adjusted  deficit  was  mainly  explained  by the timing  of tax  repayments.  Four  countries, 

namely  Denmark,  Greece,  Italy  and  Sweden,  achieved  improvements  in  their  cyclically-

•17-

adjusted  deficits  of  between  1  and 3 percentage  points.  All  the  latter  four  Member  States, 

with  the  exception  of  Denmark,  still  have  deficits  well  above  the  3  per  cent  of  GDP 

reference  value  at  the  start  of  1996.  Belgium,  Spain,  France  and  the  United  Kingdom 
achieved  discretionary  reductions of the order of a  XA to  VA of a percentage  point. 

Table  4 

B 
DK 
D 

GR 
E 
F 

IRL 
1 
L 

NL 
A 
P 

FIN 
S 
UK 

EUR 

Actual and cyclically-adjusted general government  budget  balances 

(per  cent  of  GDP) 

Actual budget balance 
(level) 

Change in actual 
budget balance* 

Change in cyclically-
adjusted balance' 

1993 

1994 

1995 

1993 

1994 

1995 

1993 

1994 

1995 

-6.7 
-3.9 
-3.5 

-14.2 
-7.5 
-6.1 

-2.4 
-9.6 
1.8 

-3.2 
-4.3 
-7.1 

80 
-123 
-7.8 

-6.2 

-5.3 
-3.5 
-2.5 

-12.1 
-6.9(2) 
-5.8 

-2.0 
-9.0 
2.2 

-3.2 
-4.5 
-5.8 

-6.3 
108 
6.8 

-5.5 

-4.5 
-1.4 
-3.5 

-9.2 
^.2(2) 
-5.0 

-2.4 
-7.1 
0.3 
-3.4 
-6.2 
-5.4 

-5.6 
-8.1 
6.0 

-5.0 

0.4 
-1.0 
-0.7 

-1.9 
-3.3 
-2.0 

0.1 
0.0 
1.0 

0.7 
-2.2 
-3.7 

-2.2 
-4.5 
-1.5 

-1.1 

1.4 
0.4 
1.0 

2.1 
0.6 
0.3 

0.4 
0.6 
0.4 

-0.0 
-0.2 
1.3 

17 
1b 
1.0 

0.8 

0.8 
2.1 
-1.0 

2.9 
0.7 
0.8 

-0.4 
1.9 
-1.9 

-0.2 
-1.7 
0.4 

0.7 
2.7 
0.8 

0.5 

2.6 
-0.7 
1.0 

-0.9 
-1.1 
-0.4 

1.3 
1.4 

2.3 
-1.4 
-2.2 

0.7 
-1.7 
-1.5 

0.2 

1.2 
-1.3 
0.8 

2.2 
0.7 
-0.4 

-0.5 
0.4 
0.1 

-0.3 
-0.5 
1.8 

0 3 
03 
0  1 

0.3 

0.5 
1.6 
-0.9 

2.6 
0.4 
0.5 

-2.0 
1.3 
-2.0 

-0.2 
-1.6 
0.2 
12 
1.1 
0.6 

0.3 

1) Commission services estimates.  A "+" indicates an improvement; a "-" indicates a deterioration in the budget balance. 

2) This time series includes social security contributions still on a cash basis.  Preliminary accounting on an accruals basis by national sources 

shows figures of -6.2 per cent of GDP for 1994 and -5.8 per cent of GDP for 1995.  The time series will be updated on an accruals basis 

once certain issues concerning the correct application of statistical definitions have been clarified. 

Source: Commission's Spring 1996 forecasts. 

The  five  remaining  countries  experienced  a  worsening  in  both  their  actual  and  cyclically-

adjusted  budget  deficits.  As  regards  cyclically-adjusted  budget  balances,  deteriorations  of 

around  a  VA  of  a  percentage  point  were  registered  in  the  Netherlands,  VA  of  a  percentage 

point  in  Germany  and  between  VA and  2/4  percentage  points  in  Ireland,  Luxembourg  and 

Austria. 

In  the  case  of  Germany,  the  overrun  was  partly  due  to  unexpected  revenue 

weakness.  In  Ireland,  against  a background  of  strong  growth,  policy  appears  to  have  been 

pro-cyclical  although  special  factors,  such  as  the  social  security  settlement  were  also  at 

play.  Despite  some  slippage,  Luxembourg,  as  with  Ireland,  still  respects  the  Maastricht 

budgetary  reference  value.  Finally,  in Austria  although  the  new  government  is tackling  the 

problem,  it  is  clear  that  there  was  a  serious  budgetary  deterioration  in  1995.  Efforts  to 

reverse  the  structural  deterioration  which  occurred  last  year  are appropriate  in  all  these  five 

Member  States  but  are  especially  necessary  in  those  countries  with  cyclically-adjusted 

deficits  in excess of  3 per cent of GDP. 

-18-

On  a  more  positive  note,  the  bulk  of  the  fiscal  adjustmeni  which  took  place  over  (he  hist 

two  years  was  centred  on  the  spending  side,  with  the  share  of  government  expenditure  in 

GDP  falling  by  about  1%  percentage  points  in  the  Community  as  a  whole,  though 

remaining  above  50  per  cent  of  GDP.  A  drop  in  the  government  spending  ratio  was  a 

common  trend  amongst  a  large  majority  of  Member  States.  Furthermore,  in  all  countries, 

with the exception  of Portugal, there was a decline  in non-interest  expenditure. 

Table  5 

1 

I 

B 
DK 
D 

GR 
E 
F 

IRL 
1 
L 

NL 
A 
P 

FIN 
S 
UK 

Receipts, expenditures  and  interest  payments  of  general  government 
(in % of GDP) 

Receipts 

Expenditure 

(of  which)  Interest  payments 

1993 

1994 

1995 

1993 

1994 

1995 

1993 

1994 

1995 

49.6 
58.3 
4 65 

34.4 
42.0 
49.3 

38.9 
47.4 
45.0 

53.1 
49.4 
36.3 

53.8 
60.3 
35.9 

50.4 
5 88 
46.8 

35.8 
41.0 
48.9 

39.5 
45.2 
44.6 

50.8 
48.1 
38.0 

54.6 
59.6 
36.4 

4 99 
5 83 
4 63 

36.8 
39.9 
49.3 

37.3 
44.8 
41.6 

48.6 
46.9 
39.4 

52.8 
59.5 
37.6 

56.3 
62.2 
50.0 

48.5 
49.5 
55.5 

41.3 
57.0 
43.2 

56.3 
53.7 
43.4 

61.9 
72.6 
43.7 

52.5 

5 56 
62  3 
4 93 

48.0 
47.9 
54.7 

41.6 
54.2 
42.4 

54  1 
52.6 
43.8 

60.9 
70.4 
43.2 

51.4 

5 44 
59.7 
49.8 

46.0 
46.0 
54.3 

39.7 
51.8 
41.3 

51.9 
53.1 
44.8 

58.4 
67.6 
43.6 

50.8 

10.5 
78 
33 

12.8 
5.2 
3.7 

6.7 
12.1 
0.4 

6.4 
4.3 
6.7 

4.6 
6.2 
2.9 

5.5 

10? 
7 1 
34 

142 
5 1 
3.8 

5.9 
10.7 
0.4 

6  1 
4  1 
5.8 

5.1 
68 
3.3 

5.3 

9? 
67 
3.8 

12.9 
5.4 
3.7 

5.2 
11.2 
0.3 

5.8 
4.3 
5.8 

5.4 
7.1 
3.7 

5.4 

EUR 

46.2 

45.9 

45.7 

Source:  Commission's  Spring  1996 forecasts. 

As regards  government  receipts, a moderate  decline  was  noticeable  in the  Community  as a 

whole  and  in  several  Member  States.  A  rather  marked  drop  in  the  proportion  of 

government  receipts  to  GDP  occurred  in  the  Netherlands,  Austria  and  Luxembourg  over 

the last two years.  Conversely, the tax burden  showed a rising  tendency  in Greece,  France, 

Portugal and the United  Kingdom. 

The  insufficient  degree  of  progress  in 

Table  6 

reducing 

the  Community's  government 

budget  deficits  was 

reilccted 

in 

the 

average  debt/GDP  ratio  figures  for  the 

Community  which  increased  in  1995  by 

three  percentage  points to over  71  percent. 

While  the  inclusion  in  the  German  figure 

of  the  unification-related  debt  take-over 

by 

the  Gerrrian 

federal  government, 

essentially 

the  Treuhand-anstalt,  was 

clearly  an  important  factor  in  explaining 

the  increase  for 

the  Community  as  a 

whole,  it  should  be  noted  that  the  debt-to-

GDP  ratio  continued  to  worsen  in  a  total 

o(  9 Member  States 

in  1995. 

In 

Luxembourg  and  Finland  the  debt  ratio 

B 
DK 
D 

GR 
E 
F 

IRL 
1 
L 

NIL 
A 
P 

FIN 
S 
UK 

Gross  government  debt 
(pot  cent  of  GOP) 

1993 
Level 

Level 

1994 

1995 

Annual 
Change 

Level 

Annual 
Change 

137.9 
80.1 
48.2 

111.8 
60.5 
45.4 

97.5 
119.4 
62 

81.1 
6 28 
6 72 

57.3 
76.0 
48.5 

136.0 
76.0 
50.4 

110.4 
63.1 
48.3 

91.1 
125.6 
5.9 

77.6 
65.0 
70.0 

59.5 
79.3 
50.2 

-1.9 
-4.1 
+2.2 

-1.4 
+2.6 
+ 29 

-6.4 
+6.2 
-0.3 

-3.5 
+ 22 
+ 28 

+2.2 
+3.3 
+ 17 

1337 
71.9 
58.1 

111.5 
6 57 
5 24 

85.5 
1248 
59 

7 90 
6 94 
71 6 

'  59.6 
7 99 
5 40 

-2.3 
-4.1 
+7.7 

+ 1.1 
+ 26 
+4.1 

-5.6 
- 08 
0.0 

+ 1  4 
+4.4 
+ 1  6 

0.0 
+ 06 
+3.8 

EUR 

66.2 

6 8 2' 

+2.0 

71  2 

+3.0 

Source:  Commission's  Spring  1996  forecasts. 

did  not  change, whereas  Denmark,  Belgium,  Ireland  and  Italy  managed  to reduce  their  debt 

ratios  by  between  almost  1 and  6  percentage  points.  Finally,  it  should  be  stressed  that 

rising  debt  ratios  in  a  majority  of  Member  States  at  a  time  of  overall  budgetary 

improvement  demonstrates  the need  for an intensification  of fiscal  retrenchment  efforts. 

In  overall 

terms 

therefore, 

the 

Table  7 

contribution  of  discretionary  fiscal 

consolidation  has  been  less  than  had 

been  hoped  for  in  1995.  This  failure 

to  fully  realise  earlier  expectations  is 

disappointing 

given 

that 

the 

importance 

of  making 

steady 

progress  towards  meeting  the  fiscal 

convergence 

criteria 

has 

been 

publicly  acknowledged  by  Member 

States  in  their  national  convergence 

programmes. 

It  is  also  disappoint 

ing  given  the  extent  of  the  fiscal 

divergence  which 

continues 

to 

persist,  as  reflected 

in  the  LcoFin 

Council  decisions  with  regard  to  the 

existence 

of 

Treaty-defined 

Government  deficits  in  1995: 
Convergence  programme  (CP)  projections 
and  latest  Commission  (COM)  forecasts 

Date 

CP(a) 

COM 

6/92  (6/94) 
11/94 
11/93 

6/94 
7/94 

3.8(4.3) 
3.0 
2  to  3 

107 
5.9 

11/93  (7/95) 

4.2/4.1  (5.0) 

6/94 
9/92  (6/95) 

10/94 

5/95 

11/93  (10/94) 

9/95 

6/95 
3/95 

<3 
4.7(7.5) 
3.7 

4% 
3 V.  (b)  5.8) 
5.3 

9.0 
3  V  (C) 

45 
1.4 
3.5 

9.2 
6.1 
5.0 

2.4 
7.2 
34 

6.2 
5.4 
5.6 

8.1 
6.0 

B 
DK 
D 

GR 
E 
F 

IRL 
I 
NL 

A 
P 
FIN 

S 
UK 

a)  Figures  in brackets  are  revised  official  targets,  not  submitted 

as  convergence  programmes  at  Community  level 

b) Average  for  1995-97 
c)  Financial  year  1995/96 
Source  Commission's  Spring  1996  forecasts 

-20-

excessive  deficits. 

Budgetary  outlook  — The crucial  task  facing  a large number  of countries  is to continue to 

make  progress  towards  putting  their  public  finance  positions  onto  a  firmer  footing.  With 

regard  to  actual  budget  deficits,  the  vast  majority  of  countries  are  forecast  to  reduce  their 

deficits  in  1996.  Nevertheless, on the  basis of concrete  measures  announced  so  far  and  the 

more  prolonged  than  expected  pause  in  the  recovery,  progress  would  appear  insufficient 

when  compared  with  the  targets  set  both  in  the  Guidelines  and  in  national  convergence 

programmes.  Only  3  Member  States  (Denmark,  Ireland  and  Luxembourg)  are  now  likely 

to have  deficits  below the 3 percent  reference  value this  year compared  with  an  expectation 

of  7 countries at  the time of the adoption  of the  1995 Guidelines. 

Since  the  adoption  of  the  Guidelines  in  July  1995,  almost  all  the  Member  States  have 

announced  new  budget  proposals  for  1996  and,  in  some  cases,  for  1997.  These  proposals 

all  aim  for  further  reductions  in  government  deficits  this  year  and  next,  to  3  per  cent  of 

GDP  or  below  by  1997  at  the  latest  in  all  countries  except  Greece  and  Italy.  Particularly 

sizeable  packages of adjustment  measures  were announced  by the governments  in  Belgium 

in  September  1995  (tax  increases  and  expenditure  cuts),  Finland  in  September  1995 

(expenditure  cuts  in  1996  and  1997,  Italy 

in  September  1995  (measures  to  fight  tax 

evasion,  increases  in  social  security  contributions  and  cuts  in  transfers  to  non-government 

institutions),  France  in  August  1995  (fiscal  measures  to  reduce  the  central  government 

deficit),  in November  1995  (fundamental  reform  of the  social  security  system)  and  in  May 

1996  (expenditure  cuts  and  restoration  of  social  security  account),  by  the  newly  formed 

government  in  Austria  in  April  1996 (expenditure  cuts,  tax  increases  and  reform  measures 

aimed  at  the  pension  system)  and  by  the  German  government  also  in  April  1996 

(expenditure  cuts). 

Slower  economic  growth,  on  average  in  1996,  than  expected  when  most  of  these  budget 

plans  were  drawn  up  is  making  deficit  reduction  more  difficult  this  year.  Several  Member 

States  have  already  announced  additional  measures  (e.g.  freezes  on  certain  expenditure 

items  in  Germany  and  France  ) to offset  some  of  the  slippage  caused  by  the  impact  of  the 

weaker  growth  on  tax  revenues  and  social  transfers,  and  others  are  likely  to  do  so  in  the 

coming  months. 

Provided  that  all  the  measures  which  have  been  decided  are  fully  implemented  by  the 

respective  Member  States then  a substantial  correction  of  underlying  budgetary  positions  is 

in prospect.  However,  it must  be reiterated  that, while these  measures  are clearly  welcome, 

-21 -

in a number  of cases they  are still  insufficient  in relation  to both  the  size of the  problem  to 

be addressed  and the targets set in national  convergence  programmes. 

11.1.4.  Competitiveness 

The  1995  Guidelines  reiterated  the  importance  of  implementing  reforms  aimed  at 

strengthening 

the  underlying  growth 

forces  and  enhancing 

the  dynamism  and 

competitiveness  of the Community  economies. 

It is clear that'the major  onus  is on  the  individual  Member  States  to  provide  the  conditions 

in  which  a truly  competitive  environment  can  be established  and  sustained.  This  can  only 

be  done  by  correctly  focusing  economic,  fiscal  and  social  policies  in  order  to  ensure  that 

they  continue  to  remain  consistent  with  the  Member  States  objectives  in  this area.  These 

national  efforts  need  however  to  be  complemented  and  reinforced  by  action  at  the 

Community  level. 

At  the  Community  level,  the  importance  of  fully  exploiting  the  opportunities  provided  by 

the  internal  market  needs  to be continuously  stressed.  As of  April  1996, the global  rate of 

transposition  of  internal  market  Directives  was  89.7 percent.  Denmark  has the  highest  rate 

of  transposition  (96.6 %)  followed  by  the Netherlands,  the  United  Kingdom,  Luxembourg 

and  Spain.  The  sectors  which  continue  to  present  the  most  problems  in  terms  of  the 

implementation  of  White  Paper  directives  are  public  procurement, 

insurance  and 

intellectual  and  industrial  property. 

Action  on the competitiveness  front  is being intensified  in the context  of the  Commission's 

recent  proposal  for  a Confidence  Pact  for  Employment  to  reinforce  efforts  in the  particular 

areas  of research  and  development,  Trans-European  networks  and  in encouraging  dynamic 

small and medium-sized  enterprises  (SMEs). 

This  initiative  by  the  Commission  reinforces  the  actions  already  taken  in  the  Community 

in a large number  of areas dealing with competitiveness.  The Community  has continued  its 

efforts  over  the  last  number  of  years  to  complement  the  single  market  initiative  by  setting 

in  place  an  effective  competition  framework  to  ensure  the  successful  operation  and 

efficiency  of  Member  State  enterprises. 

The  following  are 

the  most 

important 

developments: 

•  The  Commission  presented  important  initiatives  in  the  area  of  telecommunications  last 

year  with  the  objective  to  ensure  a  greater  liberalisation  of  the  regulatory  framework. 

Such 

liberalisation 

is  crucial 

to  the  Community's  ambitions 

in  relation 

to 

the 

Information  Society.  The  implementation  of  full  competition  in  telecommunications 

-22 

markets  affects 

the  competitiveness  of  the  whole  Community  economy. 

The 

Commission  also  presented  initiatives concerning  the Community's  postal  services. 

Competition  policy  has  also  been  taking  on  growing  importance  in  boosting  the 

competitiveness of the Community's  industries.  In  1995,  the  Commission  has  reviewed 

the Community  frameworks  for aids to SMEs, to shipbuilding  and  to R&D. 

Action  has been undertaken in the area of legislative and administrative  simplification 

The  Competitiveness  Advisory  Group,  consisting  of  high 

level  experts  and 

industrialists,  presided  over  by  Mr  Ciampi,  was  nominated  by  the  Commission  and 

presented  a report to the Madrid  European  Council  in December  1995. 

The  Madrid  European  Council  took  note  of  a  Commission  report  on  the  key  role  that 

could  be  played  by  SMEs  as  a  potentially  important  sector  for  generating  growth  and 

employment  opportunities.  The  Commission's  report,  however,  pointed  out  that  these 

SMEs  needed  support  through  specific  measures and  a business-environment  favourable 

for  the  development  of  SMEs.  The  Council  therefore  asked  the  Commission  to  make 

proposals  to  realise  SMEs  potential,  to  improve  their  competitive  position  and  to 

encourage  them  in  their  business  activities  both  in  Europe  and  internationally.  The 

Commission,  in  response,  approved  on  20  March  1996  a  proposal  for  a  new  Multi-
annual  Programme  for  SMEs for  1997-20004 which  has been  submitted  to the  Council. 

Some  progress  was  also  achieved  last  year  with  regard  to  Trans-European  networks 

(TENs)  in the transport, telecommunications  and  energy  sectors.  The  Madrid  European 

Council  urged  Member  States  to  give  top  priority  to  the  effective  implementation  of 

TEN  projects  and  asked  the  EcoFin  Council  to  take  the  necessary  decisions  to 

complement  the financial  resources currently  earmarked  for  these  networks. 

Community  actions  in  the  context  of  the  Structural  and  Cohesion  Funds,  aimed  at 

bolstering  the  physical  and  human  capital  of  the  weaker  Community  regions,  continue 

to make an important  contribution  to the balanced  development  of all areas. 

Finally,  environmental  protection 

initiatives  are  being  actively  pursued  by 

the 

Community  internally  and at the  level  of international  fora.  To  increase  the job-creating 

potential  of environmental  policies, the  Madrid  European  Council  emphasised  that  such 

policies  should  be based upon market  instruments, including  fiscal  instruments. 

Document  COM(96) 98 final  of 20 March  1996. 

//. 1.5.  Employment  and the labour  market 

-23 

The  1995  Guidelines  emphasised  the  crucial  role  to  be  played  by  more  active  and  more 

efficient  labour  market  policies  in  achieving  both  a  high  rale  of  economic  growth  over 

many  years and  in  increasing the capacity  of that  growth  to  generate jobs.  As discussed  in 

section  1,  growth  trends  in  1995  were  generally  disappointing,  with  the  pace  of  output 

expansion  being  insufficiently  high  to  generate  a substantial  increase  in  employment.  But 

provided  that  resolute  progress  will  be  made  in  further  rebalancing  the  macro-economic 

policy  framework, 

the  Community  could  progressively  move  towards  a  sustained, 

employment-creating,  growth  path. 

One  vital  element  of  the  Community's  strategy  for  job  creation  is  the  importance  of 

increasing  the  number  of jobs  associated  with  a  given  level  of  output  ("the  employment 

content  of  growth"). 

It  should  be  noted,  however,  that  it  is  difficult  to  assess  whether 

underlying  progress  is being  made  in this area  on  the  basis of  observations  for  only  a  short 

period  of  lime.  This  is  because  measured  labour  productivity  varies  considerably  over  the 

economic  cycle,  reflecting  the  lagged  response  of  employment  to  changes  in  economic 

growth.  Nevertheless,  the  available  evidence  seems  to  indicate  that  there  has  been  some 

improvement  in  the  employment  content  of  growth  in  a  few  countries,  but  no  significant 

change  in the majority  of countries or for the Community  average. 

Table 8 

Growth, employment and  productivity 

Real  GDP  growth  (%  pa.) 

Employment  (%  p.a.) 

Labour  productivity  (%  pa.) 

74-85 

86-90 

91-95 

Memo 
f995 

74-85 

86-90 

91-95  Memo 
1995 

74-85 

86-90 

91-95  Memo 
1995 

1.8 
2.0 
1.7 

25 
1.9 
2.2 

3.8 
2.8 
1.8 

1.9 
2.2 
2.2 

2.7 
1.8 
1.4 

2.0 

2.3 
3.6 

3.0 
1.4 
3.4 

19 
4.5 
3.2 

4.6 
3.0 
4.6 

3.1 
3.0 
5.1 

3.4 
2.3 
3.3 

33 

2.8 
4.5 

1.3 
2.0 
18 

13 
1.4 
1.1 

4.8 
1.1 
2.4 

1.9 
2.0 
1.1 

-0.8 
0.1 
1.2 

1.3 

2.2 
1.3 

1.9 
2.6 
1.9 

20 
3.0 
2.2 

8.6 
3.0 
3.2 

2.4 
1.8 
2.5 

4.2 
3.0 
2.4 

2.5 

2.0 
0.9 

-0.3 
0.5 
-0.2 

10 
-1.4 
0.1 

0.1 
0.9 
0.5 

-0.1 
0.7 
-0.4 

0.3 
0.8 
-0.2 

0.0 

18 
0.7 

1.1 
0.3 
1.5 

0.9 
3.3 
0.8 

1.0 
0.6 
3.1 

1.9 
0.7 
1.1 

0.2 
1.0 
1.8 

13 

2.1 
1.5 

-0.4 
-0.4 
0.0 

0.9 
-0.4 
-0.1 

1.5 
-1.0 
2.7 

0.7 
1.1 
-0.4 

-3.6 
-2.2 
-1.2 

-0.5 

1.0 
08 

0.4 
1.5 
-0.3 

0.9 
2.7 
1.2 

3.8 
-0.4 
2.5 

1.4 
-0.1 
-0.6 

2.2 
1.6 
0.6 

0.6 

15 
0.3 

2.1 
1.5 
19 

16 
3.4 
2.1 

3.7 
1.8 
1.2 

2.0 
1.6 
26 

2.4 
1.0 
1.6 

20 

0.5 
3.0 

1.9 
1.2 
19 

1 0 
1.2 
2.4 

3.6 
2.4 
1.5 

1.2 
2.2 
3.9 

3.2 
1.2 
1.5 

1.9 

0.6 
3.0 

1.7 
2.4 
26 

0.7 
1.8 
12 

3.3 
2.3 
-0.3 

1.2 
0.9 
1.5 

29 
2.3 
2.4 

20 

1.1 
0.5 

1.6 
1.1 
22 

1  1 
03 
1.0 

4.6 
3.4 
0.7 

1.0 
1.9 
3.1 

2.0 
1.4 
1.8 

1.9 

06 
0.6 

B 
DK 
D 

GR 
E 
F 

IRL 

NL 
A 
P 

FIN 
S 
UK 

EUR 

USA 
JAP 

Source: Commission's Spring 1996 forecasts. 

-24-

In  Spain,  labour  market  reforms  introduced  in  the  most  recent  years  seem  to  have 

contributed  to a very  strong employment  growth  in  1995 (2.7 per cent against  a  background 

of  3  per  cent  GDP  growth)  and  this  is  expected  to  continue  in  1996.  Also  in  France,  the 

Netherlands  and  to a lesser extent  Belgium,  recent  measures  seem  to  have contributed  to a 

somewhat  more  favourable  employment  response  to  growth  in  1995 than  would  have  been 

expected  on  the  basis  of  historical  trends.  For  Denmark  the  favourable  employment 

response  may  be  partially  due  to  the  active  labour  market  policies  pursued.  Essentially 

reflecting  buoyant  economic  activity,  Ireland  experienced  very  strong  employment  growth 

in  1995  for  the  second  consecutive  year. 

In  contrast,  the  employment  performance  in 

Germany  has  been  hampered  by  a  continuing  shake-out 

in 

the  country's 

large 

manufacturing 

industries  under  the  pressure  of  a  deterioration 

in  international  cost 

competitiveness,  while  significant  job  losses  have  been  experienced  in  Italy  in  those 

service  sectors  increasingly  exposed  to  competitive  pressures  and  hurt  by  several  years  of 

very  weak domestic  consumption  growth. 

The Guidelines  also  underlined  the  importance  of both the  5 priority  areas  identified  by  the 

Essen  European  Council  and of the latter's call to Member  States to implement  this  strategy 

by  preparing  multi-annual  programmes  spelling  out  their  policy  intentions  in this area.  By 

providing  a  coherent  presentation  of  the  existing  or  planned  national  measures  for  the 

implementation  of  the  strategy,  these  programmes  should  become  an  important  instrument 

for  monitoring  and  assessing  progress  in  implementing  labour  market  policies.  To  ensure 

their  effectiveness,  they  should  be  better  coordinated  with  the  convergence  programmes, 

indicating  that  the  achievement  of  convergence,  growth  and  employment  is  inextricably 

linked.  Some  changes  in  their  present  content  and  format  will  also  be  required,  including 

national  targets  for  specific  measures  and  greater  emphasis  on  medium  and  longer-term 

issues. 

The  first  assessment  of  the  progress  achieved 

in 

implementing 

the  Community's 

employment  strategy  was  presented  in  a joint  report  from  the  EcoFin  and  Social  Affairs 

Councils  and  the Commission  to the  Madrid  European  Council. The  report  highlighted  and 

commended  the major  efforts  deployed  by the Member  States  since  Essen,  in particular  the 

acceptance  by  countries  of  the  necessity  of  adopting  an  integrated  approach  based  on  the 

link  between  macroeconomic  and  structural  employment  policies.  However,  it  also 

stressed  that  if a decisive  improvement  in the Community's  employment  situation  was to be 

realised  then  an  additional  impetus  would  have  to be given  to  labour  market  reforms  in  the 

Member  States.  A  range  of  measures  were  singled  out  in  the  report  as  being  essential  to 

the strengthening  of national  initiatives  in relation  to employment  reforms.  On  the  basis  of 

the  recommendations  contained  in  the  joint  report,  the  Madrid  European  Council  urged 

Member  States  to  prioritise  a  number  of  areas  of  action  in  their  multi-annual  employment 

-25-

programmes.  On  the  basis  of  the  programmes  and  a  set  of  indicators,  the  joint  effort  to 

improve  both  the  employment  situation  and  the effectiveness  of  measures  will  be  assessed 

at the Community  level. 

Finally,  since  Madrid  the  debate  on  labour  market  reform  has  centred  on,  and  is 

encapsulated  in,  the  proposal  of  the  Commission  President  for  a  Confidence  Pact  for 

Employment.  The  Pact  is  intended  to  give  substance  to  the  Madrid  Council's  affirmation 

that  the  objective  of job  creation  remains  the  key  policy  priority  for  the  European  Union 

over  the  coming  years.  The  macroeconomic  and  structural  policy  framework  of  the  pact 

will  be  based  on  the  strategy  developed  in  the  present  and  previous  Guidelines  with  the 

relevant  Community  instruments  also  being  used  to  engender  dynamism,  growth  and 

employment.  The  Pact  aims  at  arriving  at  concrete  policy  commitments  involving  the 

Social  Partners with measures specifically  related to employment  creation. 

26-

11.2. Economie outlook 

The  worsening  economic  climate  in  late  1995  and  early  1996  has  complicated  the  task  of 

making  progress  towards  the  objectives  of  reducing  unemployment  and  restoring  sound 

public  finances  in the  Community.  However,  a recovery  in  economic  activity  is  expected 

to take place  in the second  half of  1996 and  in  1997.  This will  lead to renewed job  creation 

and  reverse  the  current  upward  trend  in  unemployment.  But  in  order  to  achieve  a 

significant  and  durable  reduction  of  unemployment,  it  is  necessary  to  maintain  strong 

growth  of  economic  activity  over  a  sustained  period  and  to  make  further  progress  in  the 

area of structural  reform. 

11.2.1.  Growth prospects 

The  recent  economic  slowdown,  job  insecurity  and  uncertain  income  prospects  have 

sapped  confidence  among  consumers.  Business  confidence  has  suffered  from  large 

unwarranted  shifts  in  exchange  rates,  from  the  absence  of  clear  signs  of  a pick-up  in  final 

demand  and  from  persistent  structural  weaknesses.  Nevertheless,  signs  are  emerging  that 

the  decline  in  confidence  has  come  to  a  halt  and  demand  may  be  picking  up  again  in  a 

number  of  countries.  Consequently,  economic  activity  in  the  Community  is  expected  to 

bottom  out  in the course of the first half of this year. 

On  the  basis  of  sound  supply-side  fundamentals  (in 

Table  9 

particular  low  inflation  and  relatively  strong  average 

Real  G DP 

investment  profitability) 

and  more 

favourable 

monetary  and  financial  conditions,  the  Community 

economy  is expected  to  see a recovery  in the  second 

half  of  1996,  reinforced  by  the  end  of  the  ongoing 

stock  adjustment.  The  expansion  is  expected  to 

gradually  strengthen  in  1997. 

In  the  Commission 

services' 

latest  Economic  Forecasts,  economic 

growth  in  the  Community  as  a whole  is  expected  to 
be  around  1 lA per  cent  this  year  followed  by  growth 
of  around  2'/2  per  cent  in  1997.  The  upswing  is 
expected  to  be  driven  by  relatively  strong  extra-

B 
DK 
D 

GR 
E 
F 

IRL 
1 
L 

NL 
A 
P 

FIN 
S 
UK 

(Real  annual  percentage  change) 

1 9 93 

1994 

1995 

1996 

1997 

-1.6 
1.5 
-1.2 

-1.0 
-1.2 
-1.5 

3.1 
-1.2 
0.0 

0.2 
0.4 
-1.2 

-1.2 
-2.2 
2.2 

2.2 
4.4 
2.9 

-  1.5 
2.1 
2.7 

6.7 
2.1 
3.3 

2.7 
3.0 
1.0 

4.0 
2.6 
3.8 

1.9 
2.6 
1.9 

2.0 
3.0 
2.2 

8.6 
3.0 
3.2 

2.4 
1.8 
2.5 

4.2 
3.0 
2.4 

1.1 
1.3 
0.5 

2.0 
2.0 
1.0 

5.6 
1.8 
2.6 

1.8 
0.7 
2.3 

3.0 
1.2 
2.4 

2.3 
2.7 
1.8 

2.5 
2.9 
2.1 

4.9 
2.7 
3.0 

2.5 
1.1 
2.8 

3.6 
2.0 
3.0 

2.4 

Community  exports,  a  renewed  strengthening  of 

EUR 

0.6 

2.8 

2.5 

1.5 

capital 

formation  and  continued  moderate  but 

Source:  Commission's  Spring  1996  Forecasts. 

gradually  accelerating  private  consumption. 

- 27 -

In  Germany,  France  and  a  number  of  neighbouring  countries,  the  adverse  effects  of  the 

strong  currency  appreciation  in  spring  1995  will  gradually  subside,  partly  due  to  a 

significant  reversal  of  the  initial  currency  overshooting.  Aided  furthermore  by  a 

considerable  reduction  in  interest  rates  and  an  expected  restoration  of  confidence,  activity 

is expected  to  pick  up  during  1996, strengthening  into  1997.  In  Italy,  Sweden,  Spain  and 

other  countries,  a  continued  rebalancing  of  the  macroeconomic  policy-mix,  which  has 

helped  their currencies  regain, to varying  degrees,  lost  ground,  is likely  to help  lower  short-

and  long-term  interest  rates and  spur confidence,  thereby  supporting  a recovery  in  domestic 

demand  no  later  than  the  second  half  of  1996  while  reducing  the  reliance  on  exports  for 

growth.  In  the  United  Kingdom,  the  recent  easing  of  monetary  conditions,  improvements 

in the housing market  and  a favourable  competitive  position  should  sustain  continued,  non-

inflationary  growth. 

Nevertheless,  the  economic  outlook  remains  subject  to  substantial  uncertainties. 

In 

countries  whose  currencies  appreciated  in  1995  the  effects  of  competitiveness  losses  have 

not  yet  been  fully  overcome,  and  in  most  countries  whose  currencies  depreciated  in  1994-

95  interest  rate  differentials  relative  to  the  DM  remain  relatively  high. 

In  the  current 

apprehensive  climate  and  given  high  unemployment,  the  positive  response  of  business  and 

consumer  spending  to  improved  monetary  and  financial  conditions  and  to  the  reduction  in 

fiscal  imbalances could  be weaker or take place later than  normal. 

Furthermore,  if  progress  towards  sounder  public  finances  and  structural  reform  were  to  be 

hampered  by  rising  social  and  political  resistance,  this  would  undermine  the  credibility  of 

stated  economic  policy  objectives  and  might  add  to  doubts  amongst  some  observers  as  to 

whether  a sufficient  number  of Member  States would  be ready  to participate  in EMU  at  the 

starting  date  of  1 January  1999.  Such  developments  would  likely  lead  to  an  increase  in 

long-term  interest  rates  and  could  create  a  risk  of  tensions  in  foreign  exchange  markets. 

This  would  have  severe  implications  for  the  chances  of  a renewed  and  sustained  recovery 

and job  creation. 

However,  some  of  the  uncertainties  surrounding  the  outlook  may  also  point  in  a  positive 

direction.  Since  the  Community  is  currently  enjoying  favourable  underlying  economic 

fundamentals  and  the  rebalancing  of  the  policy-mix  is  expected  to  continue,  the  revival  in 

economic  activity  could  surprise  in a positive manner once confidence  is restored. 

11.2.2.  Employment trends 

28 

Employment  -- Given the anticipated  weak expansion of economic activity  in early  1996, 
employment  trends are expected to remain weak  in the months ahead.  However,  provided 
economic growth picks up as forecast, job creation should turn positive again  in the course 
of the second half of 1996 and gain momentum in  1997.  Overall employment  is forecast to 
grow by a meagre  lA of a per cent this year and by V* of a per cent next year. 

B 

DK 
D 

Table  10 

been 

have 

9.9 
6.8 
8.3 

9.8 
5.8 
9.4 

(percent per year) 

-0.1 
0.0 
-0.8 

0.7 
0.7 
-0.1 

0.4 
1.5 
-0.3 

10.1 
6.1 
9.3 

(%  of  labour  force) 

Unemployment  rate 

Labour  market  prospects 

Employment 
growth 

1995  1996  1997  1995  1996  1997 

Not all Member States are expected to share in 
this modest pick-up in job creation in  1996.  In 
Germany and Austria, employment is expected 
to  fall  considerably.  If  this  prediction  holds 
true,  1996 will be the fifth consecutive year of 
job  losses  in  Germany  where  the  economy  is 
beset  by  a  high  relative  cost  level.  In  most 
other  Member  States,  the  expectations  of job 
growth 
revised 
likewise 
downwards. 
In  Belgium,  Denmark,  France 
and  Portugal, employment  is now expected  to 
stagnate  or  fall  this  year.  On the  other  hand, 
employment  creation  is  expected  to  remain 
relatively  strong  (1  per  cent  or  more)  in 
Greece,  Spain,  Ireland,  Luxembourg, 
the 
Netherlands, Finland and the United Kingdom. 
On  current  growth  assumptions,  employment 
is  forecast  to  pick  up  more  widely  in  1997. 
But  with  significant  job  shake-outs  expected  to  continue  in  the  manufacturing  sector, 
employment growth  is expected to remain negative in Germany and, due to low economic 
growth, also in Austria. 

Source: Commission's  Spring  1996  Forecasts. 

9.0 
22.1 
11.7 

9.1 
22.5 
11.7 

9.1 
22.9 
11.5 

14.4 
11.8 
2.9 

15.0 
8.3 
8,0 

12.8 
11.7 
2.9 

17.2 
9.2 
8.8 

16.3 
8.8 
8.4 

3.8 
-0.4 
2.5 

1.4 
-0.1 
-0.6 

1.0 
-1.0 
-0.1 

1.4 
-0.4 
0.5 

IRL 
I 
L 

1.7 
0.6 
0.9 

7.2 
4.6 
7.4 

2.2 
1.6 
0.6 

0.9 
2.7 
1.2 

2.3 
0.2 
1.7 

7.3 
4.0 
7.2 

GR 
E 
F 

1.2 
1.5 
0.6 

1.0 
1.4 
0.0 

1.7 
0.4 
2.6 

2.1 
1.0 
1.0 

7.0 
5.1 
7.2 

NL 
A 
P 

11.8 
3.0 

S 
UK 

13.4 

10.8 

EUR 

10.9 

10.9 

FIN 

0.6 

0.6 

0.2 

Unemployment 
trends  —  Against  the  background  of  sluggish  job  growth  in  the 
Community  in  1996-97, unemployment  is expected  to  rise  further  in the  coming  months, 
before starting to head downwards slowly in the course of the second half of  1996.  For the 
year as a whole, the unemployment rate is expected to remain unchanged at last year's level 
of almost  11 per cent of the civilian labour force.  Next year, it may decline slowly to \(?A 
per cent on average, possibly reaching  WA  per cent by the end of the year. 

The trends in unemployment  in the individual  Member States are largely a reflection  of the 
expected  employment  trends.  This year,  the jobless  rate  is expected  to  rise  significantly 

- 2 9-

(by  Vi  a  percentage  point  or  more)  in  Germany  and  Austria  although  relative  to  the 

Community  average  joblessness  remains  relatively  low  in  the  latter  country.  Belgium, 

France  and  Portugal  may  also  see  a  deterioration  and  the  slow  growth  of  employment  is 

sufficient  only to stabilise unemployment  in Italy. 

On  the  other  hand,  unemployment  is  likely  to  continue  falling  in  six  Member  States.  This 

includes  the  three  countries  which  are hardest  hit  by  high  unemployment  (Ireland,  Finland 

and  Spain)  although  the  level  of  joblessness  continues  to  be  extremely  high  in  these 

countries.  In  all  three,  the  impact  of  strong  employment  growth  on  the jobless  figures  is 

partly  off-set  by a significant  increase  in the  labour  force.  The most  positive  developments 

are expected  in the  United  Kingdom  and  Denmark  where a  further  reduction  of around  Vj  a 

percentage  point  is expected  to bring  the  unemployment  rate  to  a  level  significantly  below 

the  Community  average.  In  1997, the  level  of  unemployment  is  forecast  to  fall  to  varying 

degrees  in  all  Member  States  except  three  countries.  In  Germany  and  France,  the jobless 

rate is likely  to stabilise and  in Austria it may rise  further. 

For  the  Community  at  large,  recent  growth  and  unemployment 

trends  have  been 

disappointing.  Progress towards the objectives  stated  in Article 2 of the Treaty, namely  the 

promotion  of  sustainable,  non-inflationary  growth  and  a  high  level  of  employment,  have 

not  been  adequate.  And  recent  as well  as prospective  developments  has  cast  doubts  on  the 

feasibility  of  achieving  the  objectives  set  out  in  the  Commission's  1993  White  Paper  on 

Growth,  Competitiveness  and  Employment  of  creating  15  million  additional  jobs  and 

cutting  unemployment  by  half  (relative  to  its  1994  level)  by  the  year  2000.  Therefore, 

resolute  efforts  in  both  the  macroeconomic  and  the  structural  fields  aimed  at  strengthening 

sustainable job creation  must be  undertaken. 

11.2.3. Convergence 

Price  stability  — Progress  in  reducing  inflation  in  the  Community  and  in  the  Member 

States  is expected  to  continue  this  year  and  next.  Average  inflation  in the  Community,  as 

measured  by  the  deflator  of  private  consumption,  is  expected  to  fall  to  some  2!/2  per  cent 
this year  and  stay  slightly  below that  level  in  1997. 

The  outlook  for  low  and  falling  inflation  is  due  not  only  to  the  recent  widening  and  the 

expected  persistence  of  a negative  output  gap  in  the  Community  economy,  but  also  to  the 

reinforced  anti-inflation  credibility  of  the  economic  policy  framework.  This  credibility  is 

well  established  in Germany  and  in the countries  whose  currencies  are closely  linked  to  the 

30-

1996 

Prices 

B 
DK 
D 

8.3 
3.6 
1.8 

9.3 
4.6 
1.6 

GR 
E 
F 

1.7 
3.9 
2.6 

(Annual  percentage  change) 

1997 
_, 
2.4 
1.6 

Price  and  w a ge  trends1 

1997 
TT 
3.6 
2.4 

1995 
TT 
1.8 
2.0 

Nominal  wages 
per  head 

1995 
"TT 
3.3 
3.8 

1 9 96 
To* 
1.8 
1.6 

DM.  In a number of other countries, monetary  Table 11 
policy  has  been  conducted  with  considerable 
success with the aim of bringing inflation  down 
to a pre-set target.  In Italy, Sweden,  Spain and 
Portugal,  anti-inflation  credibility  has  been 
enhanced  by  the  establishment  of  central  bank 
independence  and  in  Finland  by  significant 
moves towards that goal.  In these countries, the 
conduct  of  fiscal  policy  has  a  particularly 
important  role 
low 
inflation  expectations  and  in  maintaining  the 
In  all  of  them,  a 
credibility  of  the  currency. 
determined  anti-inflationary  stance of monetary 
policy  combined  with  more  credible  efforts  to 
place  the  public  finances  on  a  sound  footing 
has,  at  various  times,  led  to  a  significant 
appreciation  of  their  currencies  from  previous 
lows.  This  is likely to further  help the process 
of disinflation  and,  in turn, should  facilitate  a gradual  relaxation  of the monetary  policies 
which have been restraining domestic demand in these countries. 

'  Private  consumption  deflator  and nominal  compensation 

Source: Commission's  Spring  1996  Forecasts. 

in  anchoring 

per  employeo,  respectively. 

to  play 

11.1 
3.8 
2.3 

12.5 
2.4 
2.4 

3.0 
3.8 
4 . 6' 

2.3 
4.1 
1.7 

FIN 
S 
UK 

2.5 
2.9 
4.0 

5.0 
4.8 
3.8 

1.9 
3.0 
4.6 

1.5 
2.5 
2.5 

1.0 
1.7 
2.7 

2.0 
1.6 
3.0 

4 .0 
4.5 
3.6 

4.0 
5.2 
3.6 

1.1 
2.2 
4.2 

7.0 
3.2 
1.6 

3.1 
5.2 
3.9 

4.0 
5.4 
3.5 

1.1 
2.7 
2.6 

2.5 
5.7 
2.0 

2.4 
3.5 
2.1 

9.6 
3.6 
2.5 

5.3 
3.0 
3.1 

1.9 
2.1 
3.1 

NL 
A 
P 

EUR 

IRL 

2.6 

3.0 

3.2 

2.4 

3.4 

3.5 

In the  Community  as a whole  and  in the  majority  of  Member  States the  rise  in  nominal 
compensation per employee is expected to remain compatible with the need to lock in low 
inflation  and promote job creation.  On average, nominal wages are expected to increase by 
about  VA  per  cent  this  year  and  slightly  less  next  year,  against  the  background  of  an 
expected  inflation  rate  of  around  2]A per  cent  per  year.  Real  wage  costs  arc  likely  to 
continue  expanding  at a rate  below  productivity  growth,  thereby  contributing  to a  further 
rise in overall business profitability. 

In some  low-inflation  countries, particularly  in Germany,  relatively  subdued  demand  and 
the competitiveness losses associated with currency appreciation  have limited the extent to 
which  labour  costs  can  be  passed  on  to  prices,  implying  a  significant  squeeze  on  profit 
margins  in the exposed  sectors.  Obviously,  wage trends  cannot  adjust  instantaneously  to 
movements  in  exchange  rates  and  in  cases  of  clear  overshooting,  a  market-induced 
correction  of  exchange  rates  is  certainly  the  most  desirable  option.  Still,  in  order  to 
safeguard  the  country's  competitive  position  and  its  attractiveness  for  private  sector 
investment,  it is essential to contain  pay settlements whilst at the same time  implementing 
measures to enhance productivity and employment. 

- 31  -

Conversely,  in  some  depreciating  countries,  especially  Italy,  real  wages  are  expected  to 

recover  some  of the  ground  lost  over previous  years.  In  these  countries, there  is a risk  that 

workers  will  seek  to  catch  up  too  rapidly  on  previous  years'  losses  in  purchasing  power 

through  higher  pay  claims  thereby  fuelling  a  price/wage  spiral. 

Instead,  continuing 

adequate  wage  behaviour  in combination  with  credible  fiscal  rectitude  should  engender  an 

appreciation  of these  currencies, thereby  lessening  (imported)  inflationary  pressures.  Such 

a  policy  mix  was  successfully  implemented  in  Sweden  last  year.  But  in  1996,  the  rate  of 

nominal  wage  increases  in  Sweden  is  forecast  to  rise  significantly  despite  the  expected 

deceleration  in  consumer  prices.  This  wage  behaviour  risks  being  in  conflict  with  the 

stability  objective  and  docs not appear to adequately  reflect  the  need  to  maintain  and  create 

jobs.  Moreover,  allied  with  the considerable  appreciation  of  the  Krona,  it  may  threaten  its 

external  competitive  position. 

Inflation  (deflator  of private  consumption)  is expected  to  stay  below  3 per  cent  in  1996-97 

in the  countries  which  already  satisfy  this goal.  And  in the  seven  countries  where  inflation 

did  not  exceed  2  percent  last  year  (Belgium,  Denmark,  Germany,  France,  Luxembourg, 

Netherlands  and  Finland)  it is expected  to remain  below  that  value  this year  and  next  (with 

the  possible  exceptions  of  Denmark  and  Luxembourg).  The  1995  Broad  Guidelines 

contained  a recommendation  that countries  with  an  inflation  rate  in the  range  of  2 to  3 per 

cent  should  aim  at  progressing  towards  or  below  2 per  cent.  In  this  regard,  some  progress 

is  expected  to  take  place  in  1996  (Ireland,  Austria  and  Sweden)  but,  at  least  on  current 

forecast  assumptions,  less  so  in  1997  (due  to  a  possible  upward  movement  in  Denmark, 

Ireland, Luxembourg  and  Sweden). 

Visible  progress  is  expected  to  take  place  in  the  four  countries  where  inflation  currently 

exceeds  3 percent.  Assuming  continued  efforts,  inflation  in  Spain  and  Portugal  is likely  to 

approach  the  upper  limit  of  the  Guidelines  objective  (3  per  cent)  by  1997.  Against  the 

background  of  a  marked  slowing  in  import  price  increases  and  no  further  indirect  tax 

increases, consumer  price inflation  in Italy  is expected  to decelerate to  VA per cent  in  1997. 

In  Greece,  with  more  determined  efforts,  especially  on  the  budgetary  front,  it  should  be 

possible  to reduce  inflation  further  than the 7 per cent currently  anticipated  for  1997. 

Budgetary 

outlook 

for  1996-97  — A  large  number  of  Member  States  have  taken 

significant  steps  to  consolidate  their  public  finances  in  1996  and,  in  many  cases,  also  in 

1997.  According  to  the  Commission  services'  estimates  of  cyclically-adjusted 

fiscal 

balances, present  budget  plans  imply  a reduction  in the underlying  fiscal  deficit  of the  order 

of % of a percentage  point  of Community  GDP  in  1996 and,  on  currently  known  policies, a 

further  VA a  percentage  point  in  1997.  Nevertheless,  in  the  latest  forecasts  of  the 

32-

Commission  services, which  take  into account  slower  growth  than  previously  foreseen, the 

outlook  is for a considerably  smaller  reduction  in the general  government  net  borrowing in 

the  Community  in  1996  than  had  previously  been  envisaged.  The average  fiscal  deficit  is 
expected  to be reduced  by lA a percentage  point  to just  below  4!/2 per cent  of Community 
GDP in 1996 (versus VA per cent of GDP forecast  in Autumn  1995). 

The  Economic  Forecasts  include a scenario  for 1997 on the  basis of measures  which  have 

already  been  adopted  or  announced  in  sufficient  detail.  This  does  not  include  general 

policy  intentions  for which  specific  measures  are not yet known.  The forecasts  take  into 

account  the  economic  policy  packages  announced  in detail  during  April  and  early  May by 

the  German,  French,  Austrian  and  Swedish  governments.  However, 

they  do not 

incorporate  the  planned  adjustment  measures  recently  announced  by  the  Belgian 

government  for 1997 because the measures to be taken were  not known in sufficient  detail 

at the time  of the elaboration of the forecasts.  In addition to those  mentioned,  a number of 

other  Member  countries  are expected  to take  measures to improve  their  budgetary  position 

between  now and  1997.  On  the  basis  of  currently  known  measures,  and  aided  by 

improving  cyclical  conditions  and low interest  rates,  the scenario  for  1997  points  to a 

reduction  in the average actual  budget deficit  to VA per cent of GDP next  year. 

Table  12 

Table  13 

A c t u al  a nd  cyclically-adjusted 

-  G e n e r al  g o v e r n m e nt  g r o ss  d e bt 

general  g o v e r n m e nt  budget  balances 

(percent  of  GDP) 

(percent  of  GDP) 

Actual  balance 

Level 

Cycl.  adj.  balance 
Annual  change1 

1995 

1996 

1997 

1995 

1996 

B 

DK 

D 

GR 

E 

F 

IRL 

NL 

A 

P 

FIN 

S 

UK 

-4.5 

-1.4 

-3.5 

-9.2 
6.23 

- 5 .0 

-2.4 

-7.1 

0.3 

-3.4 

-6.2 

-5.4 

-5.6 

-8.1 

-6.0 

-3.2 
-0.9 
-3.9 

-8.1 

-4.8 

-4.2 

-2.0 

-6.3 

0.7 

-3.5 

-4.6 

-4.4 

-3.3 

5.2 

-4.4 

-3.7 

-0.6 

0.5 

1.6 

-2.9 

-0.9 

-6.9 

-3.7 

-3.0 

-1.6 

-5.2 

2.6 

0.4 

0.5 

-2.0 

1.3 

0.3 

-2.0 

-2.9 

-3.1 

-3.7 

-1.6 

-3.1 

-3.7 

-0.2 

-1.6 

0.2 

-1.2 

1.1 

0.6 

0.3 

EUR 

-5.0 

-4.4 

-3.4 

19971 

-0.9 

-0.2 

1.2 

0.8 

0.7 

0.9 

0.6 

0.8 

-0.6 

0.4 

2.0 

0.5 

0.7 

1.5 

0.3 

0.8 

1.8 

1.0 

0.3 

1.0 

1.5 

1.1 

0.3 

0.8 

0.4 

0.2 
2.2 
0.9 

1.5 

2.8 

1.5 

0.9 

Level 

Annua! 

change 

1995 

1996 

1997' 

1996 

19971 

B 

DK 

D 

GR 

E 

F 

IRL 

I 

L 

NL 

A 

P 

FIN 

S 

UK 

133.7 

132.2 

130.6 

71.9 

58.1 

71.0 

61.5 

687 

62.4 

111.5 

111.8 

111.4 

65.7 

52.4 

85.5 

124.8 

5.9 

79.0 

69.4 

71.6 

59.6 

799 

54.0 

67.8 

56.1 

68.0 

57.8 

81.3 

77  3 

124.5 

122.8 

6.2 

79.4 

72.4 

72.2 

62.5 

80.8 

555 

6.8 

787 

739 

718 

632 

796 

562 

EUR 

71.2 

73.9 

74  3 

-1.5 

-0.9 

3.4 

0.3 

2.1 

3.7 

-4.2 

-0.3 

0.3 

0.4 

3.0 

0.6 

2.9 

0 9 

1.5 

2/ 

-1.6 

-2.3 

0.9 

-0.4 

0.2 

1.7 

-4.0 

-1.7 

0.9 

-07 

1.5 

-0.4 

0.7 

-1.2 

0  7 

0.4 

'  Based  on currently  announced  measures. 

'  Based  on currently  announced  measures. 

Source:  Commission's  Spring  1996  Forecasts. 

1  A  positive  number  denotes  an  improvement 

in  the 

cyclically-adjusted  balance. 

3  This  time  series  includes  social  security  contributions 
still  on  a  cash  basis.  Preliminary  accounting  on an 
accruals  basis  by  national  sources  shows  figures  of • 
5 . 8%  of  GDP  for  1 9 9 5.  The  time  series  will  be 
issues 
updated  on  an  accruals  basis  once  certain 
concerning 
statistical 
definitions  have  bet::i  clarified. 

the  correct  application  of 

Source:  Commission's  Spring  1 996  Forecasts. 

33 

The expected  degree of budgetary  improvement  is insufficient  to halt  (he rise  in the average 

gross  debt-to-GDP  ratio  in  the  Community,  which  is  projected  to  increase  by  almost  3 

percentage  points  to  74  per cent of GDP  this year  before  roughly  stabilising  at  that  level  in 

1997.  In  1996, debt  ratios are expected  to rise  in all  Member  Slates except  four  (Belgium, 

Denmark,  Ireland  and  Italy)  but  in  1997 debt  ratios are expected  to stabilise  or  fall  in  about 

two thirds of the Member  States. 

All  countries  except  Germany  and  the  Netherlands  are  forecast  to  reduce  their  actual 

deficits  in  1996,  but  progress  is  generally  expected  to  fall  short  of  the  targets  set  both  in 

national  convergence  programmes  and  in  the  1995  Guidelines.  Only  3  Member  States 

(Denmark,  Ireland  and  Luxembourg)  are  expected  to  have  actual  deficits  below  the  3 

percent  reference  value  this  year.  Particularly  large  reductions  in  the  budget  deficit  (close 

to  1 percentage  of GDP  or more) are expected  this year  in  Belgium,  France,  Greece,  Spain, 

Italy, Austria,  Portugal,  Finland,  Sweden  and  the  United  Kingdom. 

In  the  "unchanged  policy"  scenario  for  1997,  Germany,  France,  the  Netherlands  and 

Finland  would  join  the  group  of  countries  with  deficits  below  the  Maastricht  reference 

value  and  Austria  and  Sweden  are expected  to come  very  close  to  this  value.  In  a  number 

of  countries,  where  further  measures  have  not  yet  been  disclosed  in  sufficient  detail  the 

additional  effort  required  to reach the 3 per cent reference  value  would  be of the order of VA 

percent  of GDP  (Belgium,  Spain, Portugal, and  the UK).  Only  in  Italy  and  in  Greece  is the 

deficit  expected  to  exceed  the  reference  value  by  a  wider  margin  in  the  current  scenario 
with the deficit  forecast  at 5lA and 7 percent of GDP,  respectively. 

* 

* 

Faced  with  an  unsatisfactory  growth  and  employment  performance,  there  is an  urgent  need 

to relaunch  the  recovery  process  in the Community.  The challenge  facing  policy-makers  is 

to generate  a renewed  strengthening  of confidence  and job creation  over the short-run  while 

enhancing the conditions  for stronger  growth  and  employment  over the  medium  term.  This 

requires  both  the  provision  of  a  supportive  macroeconomic  policy  framework,  entailing  a 

sound  rebalancing  of  the  macroeconomic  policy  mix,  and  intensified  efforts  in  structural 

policies  to  reduce  unemployment  and  enhance  the  Community's  competitiveness.  The 

Commission's  1996  Annual  Economic  Report  gave  a  detailed  analysis  of  the  available 

policy  options  in the current  situation.  Furthermore, the Commission  has received  opinions 

of  the  European  Parliament  and  the  Social  and  Economic  Committee  on  this  report  and 

34 

discussed  it with the  Social  Partners.  Against  this background,  the  Recommendation  for 
the  1996 Broad  Economic Policy  Guidelines sets out the policies which are necessary  for 
achieving the Community's objectives in terms of growth, employment and convergence. 

31) 

ISSN 0254-1475 

COM(96) 211  final 

DOCUMENTS 

EN 

10 

Catalogue number  : CB-CO-96-237-EN-C 

ISBN 92-78-04429-6 

Office  for Official Publications of the European Communities 

L-2985 Luxembourg