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
Date: 1997-04-23
Institutions: European Commission
Subjects: economic growth, economic policy, labour market, member country, public finance

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 23.04.1997 
COM(97) 168 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 

Table of  contents 

1.  Main objectives: growth, employment and convergence 

2.  Growth and stability-oriented macroeconomic policy mix 

3.  Price and exchange rate stability 

4.  Sound and efficient  public finances 

5.  Structural reforms to promote growth and employment 

5.1.  Better functioning  product and services markets 

5.2.  Fostering labour market reforms and investment in knowledge 

1 

2 

3 

4 

7 

8 

8 

/**-

Broad Guidelines of the Econome Policies 
of the Member States and the Community 

1.  Main objectives: growth, employment and convergence 

Since the summer of  1996, when the previous Guidelines were adopted,  a moderate recovery  in 
economic  activity  has  taken  hold  in  the  Community.  Supply-side  fundamentals  continue  to 
improve  whereas  demand  prospects  are  brightening.  These  developments  in  combination  with 
an  increasingly  well-balanced  macroeconomic  policy  mix  and  the  emerging  improvement  in 
confidence  should allow for a gradual  strengthening  in output growth to about  its trend  rate this 
year and to well-above-trend  next year. 

ïn the present  environment, two fundamental  policy concerns should be given  prominence, with 
success on both  fronts  being mutually  reinforcing.  Firstly, although  employment  is expected  to 
increase  moderately  in the  short  run, there  is a need  to raise the Community's  low  employment 
rate  and  to  reduce  unemployment  significantly.  Secondly,  despite  appreciable  strides  in  recent 
years  towards  the  goals  of  price  stability  and  sustainable  public  finances,  further  progress  is 
required  in achieving and maintaining a high degree of nominal convergence  so that a  significant 
number  of  Member  States will  be  in a position  to participate  in EMU as  from  1 January,  1999. 
In  the  coming  quarters,  it  is  of  crucial  importance  ~  also  for  growth  and  employment  —  to 
avoid  any doubt about the  fulfilment  of the Maastricht  criteria  and the  1999  launch  date  for  the 
single  currency  so as to  reassure  European  citizens  and  businesses  that the opportunities  brought 
by  EMU  will  indeed  be  seized.  Since  the  pursuit  of  sounder  budgetary  positions  will  bring 
important  growth  and  employment  benefits  over  the  medium  term,  continuing  budgetary 
consolidation efforts  are in the interest of all Member States. 

With  the  Single  Market  and  EMU,  the  Community  is  becoming  one  of  the  most  important 
economic  entities  in  the  world.  Its  medium  to  longer  term  potential  in terms  of  technological 
progress,  labour and  wealth  creation  is considerable.  In  order to exploit  fully  this potential  for 
raising  the  standard  of  living,  the  Community  must  progressively  achieve  a  high  employment 
rate.  Such a performance  would also help to safeguard  the sustainability of pension  schemes, in 
a  reformed  manner,  which  form  an  integral  part of the social  protection  systems  in the  Member 
States. 

Restoring  a  sustained,  high  rate  of  non-inflationary  growth  is  the  most  favourable  way,  both 
from  a  political  and  social  point  of  view,  of  achieving  a  long-lasting  solution  to  the 
Community's  unemployment  problem  and  of  making  further  headway  towards  sound  public 
finances.  Furthermore,  since  structural  deficiencies  continue  to  restrain  both  growth  and  the 
degree to which growth can be translated  into additional  employment, most Member States need 
to  implement  structural  reforms.  However,  policies  to  improve  competitiveness  and  the 
functioning  of  product,  services  and  labour  markets  will  bear  full  fruit  when  the  economy  is 
expanding rapidly and  is generating a high number of jobs. 

/lb 

An  employment-friendly  growth  must  be  supported  by  higher  investment,  both  private  and 
public.  Due  to  the  relatively  weak  private  investment  trends  since  the  early  1990s  and  the 
squeeze on public  investment,  the current  investment  rate  in the Community  is rather  low.  The 
current  investment  ratio, if maintained  over the medium  term, would  sustain  a rate of growth  of 
It  is  essential  therefore  that  the  currently  favourable 
only  a  little  over  2  per  cent  per  year. 
investment conditions, in terms of high  profitability  and  lower interest  rates, are fully  exploited. 
In  addition,  the  realisation  of  the transeuropean  transport,  energy  and  communication  networks 
should be actively pursued, with the Community financial  instruments and the EIB playing a key 
role  and  with  a  greater  involvement  of  the  private  sector.  Moreover,  investment  in  human 
resources, knowledge and skills should also be stepped up. 

Against  this  background,  the  Member  States  and  the  Community  institutions  are  urged,  in 
conformity  with Article  102(a) of the Treaty, to conduct their  economic  policies with  a view  to 
making  significant  progress  towards  sustainable,  non-inflationary  growth  and  a  high  level  of 
employment,  which  are among the objectives  stipulated  in Article 2 of the Treaty.  To this end, 
they  are  also  called  upon  to  co-ordinate  their  policies  (Articles  3a,  102a  and  103)  within  the 
context of increased  integration of the Member States' economies. 

2.  Growth and stability-oriented macroeconomic policy mix 

The present Guidelines  reaffirm  that the achievement  of sustained,  investment-supported  output 
growth  and job creation  over the medium term without  inflationary  tensions continues to require 
a common macroeconomic  policy  strategy which builds further  on the following  three elements, 
as formulated  in the  1996 Guidelines: 

"A  stability-oriented  monetary  policy  whose  task  is  not  undermined  by  inappropriate 
budgetary and wage developments; 
sustained  efforts  to consolidate  the  public  finances  in most  Member  States  consistent  with 
the objectives of their convergence programmes; 
nominal  wage  trends  consistent  with  the  price  stability  objective;  at  the  same  time,  real 
wage developments  should  be below the  increase  in productivity  in order to strengthen  the 
profitability  of employment-creating  investment. 

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." 

With  regard  to medium-term  prospects,  it  is important  that  policy-makers,  the social  partners and 
economic  agents  take  fully  into  account  the  fact  that  EMU  will  imply  a genuine  regime  change, 
fundamentally affecting  the way macroeconomic policies and wage trends are set. 
(i)  A  common  monetary  policy  under  the  responsibility  of  an  independent  European  Central 
Bank  will  have  price  stability  as  its  primary  objective  while,  without  prejudice  to  this 
objective,  supporting the general  economic  policies  in the Community  so as to contribute  to 
the achievement of the objectives laid down in Article 2 of the Treaty. 

(ii)  The  Treaty  provisions  in  the  field  of  budgetary  policy  (Articles  104  to  104c)  and  the 
Stability  and  Growth  Pact  will  work  in the  direction  of  sound  and  disciplined  budgetary 
policies.  Subject to these  legal  provisions, responsibility  for budgetary policies will  reside 
with  the  sovereign  national  governments  which  will  have  to  co-ordinate  theiF budgetary 
policies in the framework of the Broad Economic Policy Guidelines. 

(iii)  As  regards  wages,  which  are  determined  by  autonomous  social  partners  according  to 
individual  countries'  practices,  stability-oriented  monetary  and budgetary  policies  and the 
impossibility  of  exchange  rate  movements  within  the  euro  area  will  reinforce  both  the 
conditions  and the  incentives  for  an  adequate  evolution.  These  incentives  should  also  be 
strengthened  by  an  intensified  social  dialogue,  where  possible  and  according  to  prevailing 
traditions,  at the  national  level.  Àt  the  Community  level, the  Commission,  in  conformity 
with  Article  118B, will  continue to develop the social  dialogue, notably en  macroeconomic 
policy  issues, with a view tc building on the common  understanding on the economic policy 
strategy  !aid  down  it:  the  Guidelines.  The  European  social  partners'  contribution  on  the 
macioeconomic  framework  transmitted  to  the  Dublin  European  Council  constitutes  an 
important step in the right direction which should be encouraged. 

If all actors involved  live up to the new exigencies, the macroeconomic  policy mix will continue to 
favour  sustained  high  and  employment-creating  growth  in  the  Community.  The  achievement  of 
EMU will thus be conducive to 'locking  in' the fundamental  change in the macroeconomic  policy 
mix which has been progressively established  in the Community. 

3.  Price and exchange rate stability 

Price  stability  ~  The  Community  has  made  considerable  headway  towards  price  stability  and 
inflation  convergence  which  is  an  essential  requirement  both  for  achieving  sustained  medium-
term  growth  and  for  adopting  a  single  currency. 
Inflation  in  the  Community  on  average  is 
expected to fall to VA per cent  in  1997, the  lowest rate since the Community's  inception.  In the 
EMU perspective, the Community  should aim at bringing down  its average  inflation  rate to 2 per 
cent and to target such a level over the medium term. 

In February  1997, nine Member  States (Belgium,  Denmark,  Germany,  France, Luxembourg,  the 
Netherlands. Austria, Finland  and  Sweden) had an inflation  rate1 of two per cent or less.  Having 
already achieved a satisfactory  degree of price stability,  these countries will  need to sustain  this 
performance  over  the  medium  term.  Against  the  background  of  a  sustained  recovery,  Ireland 
and the United  Kingdom2  will  need to maintain  a policy aimed  at  preventing  any  resurgence  of 
underlying  inflationary  pressures and, where adequate, progressing towards  lower  inflation. 

In Spain, Italy and Portugal, the average rate of inflation'  has edged down to the 3 to 3.5 per cent 
range  in February  1997, but in this month the  inflation  rate on  a year  earlier  reached  about  2.5 
per 

As  measured  by  the  arithmetic  average  of  the  latest  twelve  monthly  harmonised  indices  (HICP) 
relative to the arithmetic average of the twelve monthly harmonised indices of the previous period. 
Ireland  and  the  United  Kingdom  have  not yet  published  HICP data  in  a manner  which  allows the 
calculation  of the measure referred  to in footnote  Î.  However, the Commission's own estimates, on 
the  basis  of  available  information,  suggest  that  the  inflation  performance  (HICP)  in  these  two 
countries is in the 2 to 3 per cent range. 

cent.  In  these  three  countries,  it  is essential  to  persevere  with  stability-oriented  policies  with  a 
view  to  achieving  an  average  rate  of  inflation  of  2.5  per  cent  or  less  for  the  year  1997 and  to 
ensure that the disinflation  gains are preserved, and even  improved upon, as the recovery gathers 
strength. 

In  Greece,  where  progress  in  reducing  inflation  has  been  made  over  recent  years,  reinforced 
efforts  are needed  in order to bring inflation  down to the official  inflation  targets of 4.5 per cent 
by the end of  1997 and to below 3 per cent by the end of  1998. 

Exchange rate stability  —  In conformity  with Article  109m, all Member  States must continue to 
treat  their  exchange-rate  policies  as  a  matter  of  common  interest.  Sounder  and  more  credible 
economic  policies  and  favourable  developments  relative  to the  US dollar  have  contributed  to a 
more  appropriate  alignment  of  exchange  rates  within  the  Community.  Financial  market 
optimism  on  the  prospects  for  a relatively  wide  participation  in  EMU  from  the  outset  has  also 
helped  in this regard.  Finland  and  Italy entered  the ERM  in the autumn  of  last year and the vast 
majority  of  ERM  currencies  are  now  within  or  close  to  the  former  narrow  bands  of  the 
mechanism.  In this context, as well as with a view to participation  in EMU, it is imperative that 
Member  States  maintain  ~  and  where  appropriate  intensify  ~  their  commitments  to  stability-
oriented  macroeconomic  policies.  For  countries  which  are  not  currently  participating  in  the 
ERM,  these  policies  would  also  contribute  to  creating  the  conditions  for  making  such 
participation  possible.  Sound  macroeconomic  policy  management  creates  the  conditions  for 
stable exchange  rates and  low  long-term  interest  rates within  the Community  and contributes to 
a stable international monetary system. 

4.  Sound and efficient  public finances 

In the Community as a whole, the actual budget deficit  declined  from  5 per cent of GDP in  1995 
to  4.3  per  cent  of  GDP  in  1996.  Slow  economic  growth  in  1996  made  efforts  at  budgetary 
consolidation  more  difficult  and  masked  the  underlying  improvement  which  was achieved.  On 
the  basis  of  the  budget  measures  decided  upon  until  mid-April  1997,  the  net  borrowing  of 
general  government  in  the  Community  as  a  whole  is  likely  to  fall  to just  below  3  per  cent  of 
GDP in  1997, declining further  to 2.5 per cent of GDP in  1998. 

In their  budgets  for  1997, a large majority  of Member  States have taken  significant  measures to 
reduce  their  budget  deficits  to  3  per  cent  of  GDP  or  less.  It  is  of  paramount  importance  that 
Member  States  rigorously  implement  these  budgets  and  take  immediate  corrective  action  in the 
event  of  slippage  from  budgetary  targets.  As  regards  the  budgets  for  1998,  an  enactment  of 
additional  deficit-reducing  measures  is  required  in  most  Member  States.  This  would  serve  to 
provide die needed  confidence  about the sustainability  of the budgetary adjustment,  especially in 
those countries where the budget deficit  is not expected to be clearly below 3 per cent of GDP in 
1997 or  where the  1997 budget  contained  temporary  measures.  This  resolve  is needed  not only 
to comply  with  the  Maastricht  budgetary  criteria  but  also to  make  further  progress  towards  the 
attainment, over the medium-term, of the objective of a budgetary position  close to balance or in 
surplus  in  normal  circumstances  as  stipulated  in  previous  Guidelines  and  the  Stability  and 
Growth Pact, thereby safeguarding  a growth and stability-oriented macroeconomic policy mix. 

the  announced  deficit-reducing  measures, 

It is necessary that budgetary  adjustment  programmes are credible and  socially  balanced.  To be 
credible, it is important that programmes are transparent and sustainable.  Transparency  requires 
that  commonly  agreed  accounting  rules  and  economic  principles  are  strictly  applied.  It  also 
requires that,  in the presentation  of their  budgets, Member  States clearly  characterise the  nature 
indicating  which  «measures  are  one-off. 
of 
Furthermore, annual  budgets and medium-term  budgetary projections  should clearly  indicate the 
underlying  economic  assumptions.  To  be  sustainable,  it  is  essential  that  deficit-reducing 
measures  are  of  a  structural  kind.  Reliance  on  one-off  measures  and  actions  which  have to  be 
reversed  in  subsequent  years  have  in  some  cases  been  instrumental  in  heightening  the  pace  of 
budgetary  consolidation.  They  do  not,  however,  reduce  the  need  for  fundamental  budgetary 
adjustments  and should therefore  be complemented  by lasting budgetary  improvements. 

Realising  the economic  rewards of budgetary  consolidation  crucial!}' hinges  upon the  quality  of 
the measures taken.  ïn this respect, the present Guidelines reaffirm  the general  principles which 
have been  stipulated  in previous Guidelines,  Firstly, prominence  should  be given  to  restraining 
expenditure  as  opposed  to  further  increases  in  the  overall  tax  burden.  In  this  respect,  action 
needs to  focus  on  structural  measures  to  better  control  spending  on  public  consumption,  public 
pension  provisions, health  care,  unemployment  compensation  and  subsidies. If tax  increases  are 
unavoidable,  care  should  be  taken  to  minimise  the  adverse  effects  on  growth  and  employment 
and  to  avoid  a  revival  of  inflationary  pressures.  Secondly,  action  to  permanently  reduce  the 
share  in  GDP  of  public  expenditure  should  be accompanied,  to the  extent  possible  and  without 
threatening  the  necessary  reduction  in  budget  deficits,  by  a  shift  in  government  spending 
priorities  towards  productive  activities  such  as  investment  in  infrastructure,  human  capital  and 
active  labour  market  initiatives.  Thirdly,  the  desired  reduction  in  the  tax  burden  in  most 
Member  States,  especially  on  labour,  should  be  enacted  to  the  extent  that  tight  expenditure 
control  makes tax reductions  consistent  with  the  achievement  and  maintenance  of  sound  budget 
balances.  The  Community  policies  in  the  area  of  taxation  should  be  consistent  with  these 
guidelines. 

Given  the  interrelationship  between  taxation  policy  on  the  one  hand  and  the  Single  Market, 
EMU  and  the  fight  against  unemployment  on  the  other,  Member  States  stand  to  gain  from 
increased  co-operation  in  tax  measures.  Harmful  competition  between  the  tax  regimes  of  the 
different  Member  States  should  be avoided.  In this  respect,  Member  States  are  called  upon  to 
examine the possibility of establishing a code of conduct. 

As  regards  individual  Member  States,  five  ~  Denmark,  Ireland,  Luxembourg,  the  Netherlands 
and Finland  ~  already  respected  the 3 per cent  reference  value  in  1996.  In  Denmark  where the 
budget  balance  is expected  to turn  slightly  positive  this  year,  it  is  important  to  consolidate  this 
performance  over the business cycle, to keep the public debt-to-GDP ratio on a steady downward 
trajectory  and  to reduce the  growth  in  public  expenditure,  including  in  social  transfers.  Ireland 
should  take  advantage  of the  current  strong  growth  phase  to  intensify  efforts  to  restrain  public 
expenditure,  thereby  making  final  progress  towards  a  balanced  budgetary  position.  A 
continuation  of the restrained  expenditure policy  is also essential  in the Netherlands and  Finland, 
with  a  particular  focus  needed  on  social  security  transfers,  offering  the  opportunity  to  lower 
further  non-wage  labour costs or other employment-impeding taxes. 

In  Belgium,  the  budget  deficit  is expected  to  reach  3 per  cent  of GDP or  less  in  1997.  On  the 
basis of current policies, the deficit  is likely to fall  further  in  1998.  To put the public finances on 
a  sustainable  footing,  the  Belgian  government  should  strictly  adhere  to  its  new  convergence 
programme.  Particular  attention  should  be  given  to  ensuring  sound  social  security  accounts, 
with  key  elements  being the  introduction  of  effective  mechanisms  to  better  control  health  care 
spending and the continued pursuit of pension  reforms. 

In Germany, the budget  deficit  is expected  to reach  3 per cent of GDP or  less  in  1997.  On the 
basis  of  current  policies,  the  deficit  is  likely  to  fall  slightly  further  in  1998.  The  German 
government has made a firm commitment  to take all the necessary measures to respect the 3 per 
cent  reference  value  in  1997 and  should  take  the  necessary  action  to arrest  the upward  trend  of 
the  public  debt-to-GDP  ratio  already  in  the  current  year.  The  pace  of  budgetary  consolidation 
should  be  maintained  in  1998  in  line  with  the  new  convergence  programme.  Continued 
budgetary  consolidation  should  focus  on  a  permanent  reduction  in  the  share  of  government 
spending  in the economy which  would  facilitate  the  introduction  of structural  reforms  in the tax 
and  social  security  systems without threatening  a strict  adherence to the budgetary  objectives  of 
the new convergence programme. 

In Spain, the budget deficit  is expected  to reach 3 per cent of GDP or less in  1997.  On the basis 
of current policies, the deficit  is  likely to fall  slightly  further  in  1998.  In their  1998 budget, the 
Spanish authorities, which are fully  committed  to reaching the deficit target of 3 per cent of GDP 
in  1997,  should  pursue  further  budgetary  consolidation  as  envisaged  in  the  new  convergence 
programme. 
It  is  important  to  continue  the  implementation  of  structural  deficit-reducing 
measures,  particularly  to  curb  current  expenditure  and  improve  the  efficiency  in  budgetary 
management. 

In France, the budget deficit  is expected to reach  3 per cent of GDP or less in  1997.  On the basis 
of  current  policies, the deficit  might  not  fall  further  in  1998, reflecting  in part the  expiration  of 
one-off  measures.  It is essential  that budgetary  consolidation  is sustained  over the medium  term 
by  implementing  its  recently  agreed  convergence  programme  without  fail.  In  particular,  it  is 
necessary  to  contain  health  spending  and  to  balance  the  social  security  accounts  and  to  ensure 
that the  envisaged  tax  reductions,  in themselves  supportive  to growth  and employment,  will  not 
slow down the pace of deficit  reduction. 

In Italy, the budget deficit  may reach  3 per cent of GDP in  1997, if the measures already taken in 
the  1997  budget  and  in  March  of  this  year  have  a  full  effectiveness,  and,  if  necessary,  further 
measures are taken by the Italian  government.  On the basis of current policies, the deficit  might 
increase again  in  1998, reflecting  the expiration  of one-off  measures.  A further  reduction  should 
be envisaged  in the  1998 budget to provide assurance  regarding the continuity of adjustment  and 
to place public finances on a sound  medium-term  footing.  Measures taken  in  1997 which  had a 
temporary  nature  should  be  replaced  by  structural  measures  with  a  permanent  impact  on  the 
budget.  The  conditions  for  a durable  consolidation  of  the  Italian  budget  should  be specified  in 
the  convergence  programme  which  the  Italian  authorities  are  invited  to  present  as  soon  as 
possible. 

In  Austrias  the  budget  deficit  is expected  to  reach  3 per  cent  of  GDP  or  less  in  1997.  On  the 
basis  of  current  policies,  the  deficit  is  likely  to  fall  slightly  further  in  1998.  The  Austrian 
government  is urged  to take all the necessary  measures to meet  its budget deficit  target  of 3 per 
cent  of  GDP  in  1997  and  to  secure  the  sustainability  of  its  budgetary  consolidation  efforts  in 
subsequent  years  through  a  programme  of  ongoing  and,  where  necessary,  reinforced  structural 
adjustments. 

In  Portugal,  the  budget  deficit  is expected  to  reach  3 per  cent  of GDP  or  less  in  1997.  On  the 
basis  of current  policies, the  deficit  is  likely to  fall  slightly  further  in  1998.  The  new  strategic 
agreement  between  the  government  and  the  social  partners  should  be  strictly  complied  with  in 
order  to  achieve  significant  progress  in  reforming  public  administration  and  the  social  security 
and taxation systems. 

In  Sweden,  the  budget  deficit  is expected  to  reach  3  per  cent  of  GDP  or  less  in  1997.  On  the 
basis  of  current  policies,  the  deficit  is  likely  to  fall  considerably  further  in  1998.  Budgetary 
adjustment  should  concentrate  on curbing the growth  of expenditure, especially  social  transfers, 
and on reducing, as far  as possible, taxation on households and firms so as to  improve  incentives 
to economic activity and work. 

In the United Kingdom, the budget deficit  is expected to reach 3 per cent of GDP or less in 1997. 
On  the  basis  of  current  policies,  the  deficit  is  likely  to  fall  considerably  further  in  1998.  It  is 
recommended  to  adhere  firmly  to  the  path  of  deficit  reduction  envisaged  in  the  budget  for 
1997/98. 

As regards Greece, where announced  measures are expected  to  lead to a further  reduction  in the 
government  budget  deficit  in  1997,  sustained  efforts  on  a  wide  range  of  fronts  are  required  in 
order  to  meet  the  targets  of  the  convergence  programme,  including  reinforced  efforts  to  widen 
the tax base, to increase the efficiency  of the tax administration  and of the tax collection  system, 
to curb government spending and to pursue and extend privatisation plans. 

In some of the above Member States, further  progress  in reducing the government deficit  ratio in 
1998  is  likely  to  be  limited  or  indeed  absent,  in  part  reflecting  the  expiration  of  one-off 
measures.  Consequently,  in  their  budgets  for  next  year,  these  Member  States  should  take  this 
fact  into account. 

5.  Structural reforms to promote growth and employment 

In order to safeguard  and  promote the  EC's competitiveness  and employment  in a world  of  free 
trade and constant technological  change,  it is essential that  Member  States and  the  Community, 
in  line  wkh  the  Broad  Guidelines  for  Economic  Policies,  intensify  their  efforts  to  modernise 
their  markets  for  goods,  services  and  labour.  In  order  to  augment  the  ability  of  the  Member 
States'  economies to adapt to changing  conditions  and  to enhance the growth  potential, there  is 
also  a  need  to  promote  innovation,  research  and  development  and  to  improve  education  and 
systems. 
training 

To  increase  the  efficiency  of  environmental  policies,  they  should  rely  on  more  market-based 
instruments,  including  fiscal  ones,  both  at  the  national  level  and  —  if  EU-wide  action  appears 
necessary —  at the level of ti^e Community. 

5.1.  Better functioning product and services markets 

As  part  of the  strategy  to  foster  growth  and  employment,  while  maintaining  low  inflation,  it  is 
essential to improve the operation of product and service markets, to stimulate  competition and to 
ensure efficient  price setting.  This was the rationale for the Single Market Programme (SMP), the 
importance  of  which  has  clearly  been  highlighted  in  the  Commission's  recent  evaluation3.  The 
conclusion  of that  evaluation  was that  on the one hand  Member  States'  product  markets  are now 
generally highly integrated; on the other hand, the markets for services are less integrated, although 
the  situation  has  improved  significantly  since the  start  of the  SMP.  Particular  problems  clearly 
remain.  Services,  especially  construction,  insurance  and  banking,  should  become  the  subject  of 
more attention, particularly on the need to fully implement Single Market legislation. 

Furthermore, product markets associated with public procurement continue to escape the full  force 
of  competition;  other  product  markets,  notably  pharmaceuticals,  continue  to  be  excessively 
regulated by the Member  States.  Consumers face higher prices as a result.  State aids continue to 
distort  markets  and  blunt  competition  without  any  sign  of  improvement.  Taxation  around  the 
Community  is  continuing  to  segment  markets  and  to  increase  price  differentiation.  Product 
standards, especially the concept of "mutual  recognition" is another area where progress has been 
too slow.  The business environment for SMEs should be improved. 

Competition in, and the efficiency  of,  product and service markets will be improved by making the 
Single Market work better,  with  additional  Member  State commitment to: (i) implement fully  and 
ensure  proper  enforcement  of  the  existing  legislative  framework,  in  particularly  in  the  telecom 
sector;  (ii)  complete  the  legal  framework  in  areas  such  as  taxation  and  company  law  and  the 
liberalisation  of  the  energy  markets;  (iii)  reduce  the  burden  of  over-regulation  and  to  revise  or 
remove  national,  market  fragmenting  measures;  and  (iv)  avoid  using  state  aids  to  postpone 
essential  restructuring.  The  Commission's  Action  Plan  on the  Single Market  proposes  a number 
of concrete actions that should be in place before  1  January  1999 to redynamise the Single Market. 

5.2.  Fostering labour market reforms and investment in knowledge 

The positive experience of a number of Member States permits some important policy conclusions 
to be drawn both on the content and on the implementation  of reforms.  Firstly, structural  reforms 
need to be comprehensive in scope, as opposed to limited or occasional  measures, so as to address 
in  a  coherent  manner  the  complex  issue  of  incentives  in  creating  and  taking  up  a  job.  This 

See  Commission  Communication  on  "The  impact  and  effectiveness  of  the  Single  Market" 
(COM(96)520,  October  1996)  and  "Economic  Evaluation  of  the  Internal  Market" (European 
Economy, Reports and Studies, No. 4, 1996). 

8 

approach  allows  policy  complementarities  to  be  exploited,  thereby  increasing  the  overall 
effectiveness  of reforms  and,  by enhancing  their  social  and  political  acceptability,  reducing  the 
likelihood  of  policy  reversal.  Secondly,  mechanisms  to  monitor  the  impact  of  reforms  on  the 
labour  market  and on  employment  help assess the  effectiveness  of the  reforms  and  indicate  the 
need  for  possible  changes  in  priorities  or  implementation.  As  a  result,  the  multi-annual 
employment  programmes  need  to  focus  more  on  the  interplay  between  the  Guidelines  and 
specific  labour  market  measures  whereas  the  Joint  Employment  Reports,  which  monitor  their 
application,  need  to  pay  particular  attention  to the  identification  of good  practices  arising  from 
the Member States policies. 

A wide  array  of  measures  aimed  at  reinforcing  labour  market  efficiency  have  been  adopted  in 
recent  years  at  the  national  level  and  important  reforms  are  currently  under  discussion  in  a 
number of Member States.  This process should continue and, where necessary, be  intensified. 

In this context  priority should  usefully  be given to actions aimed at  increasing the  employment-
intensity  of  growth  through  the  implementation  of  pragmatic  measures  which  would  reconcile 
the attachment  of EU citizens to high  social  standards and  the need to open, to a certain  degree, 
the relatively compressed  wage cost structure  in most Member States.  These measures  include: 
(i)  more differentiation  in wage agreements  according to qualifications  and  regions  in order to 
reflect  adequately differences  in productivity  levels as well as the introduction  of temporary 
entry  wages  for  the  young,  inexperienced  or  long-term  unemployed.  This  is an  important 
task for the social partners; 

(ii)  soundly-financed  reductions  in  non-wage  labour  costs  or  lower  income  taxes  at  the  lower 

end of the wage scale; 

(iii)  new  patterns  of  work  organisation,  including  more  flexible  working-time  arrangements, 
tailored  to the specific  needs of firms and workers; greater use of voluntary  part-time  work; 
and the promotion of local employment  initiatives. 

Moreover,  measures  to  increase  the  employment-intensity  of  growth  should  be  linked  with  the 
necessary  re-orientation  of  government  spending  in  favour  of  inter  alia  education,  vocational 
training and research and  development. 

The shift  towards active labour market policies should  be closely  linked to the reform  of taxation 
and  social  protection  systems  so as to ensure  incentives, as well  as possibilities,  for job-seekers 
to  take  up  a job  or  to  participate  in  other  employment-enhancing  activities.  In  addition,  these 
In 
reforms  need  to  be  supported  by  a  stronger  employment  orientation  in  other  policies. 
particular,  measures  undertaken  with  the assistance  of the Community's  structural  funds  should 
also  fit  into  the  global  employment  strategy  and  the  multi-annual  employment  programmes  of 
the Member States. 

ISSN 0254-1475 

COM(97) 168  final 

DOCUMENTS 

EN 

10  01 

Catalogue  number  : CB-CO-97-165-EN-C 

ISBN 92-78-18925-1 

Office for Official  Publications of the European Communities 

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