Progress report on the implementation of the 1996 Broad Economic Policy Guidelines
Date: 1997-04-23
Institutions: European Commission
Subjects: economic growth, economic policy, member country, public finance, report

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 23.04.1997 
COM(97) 169  final 

Progress report on the implementation of the 
1996  Broad Economic Policy Guidelines 

(presented by the Commission) 

Table of  contents 

1.  Macroeconomic policy-mix conducive to growth, employment and convergence 

1.1.  Macroeconomic policy-mix 

1.2.  Upturn in economic activity 

1.3.  Gradually improving employment outlook 

1.4.  Social dialogue 

2.  Price and exchange rate stability 

2.1.  Price stability 

2.2.  Exchange rate stability 

3.  Sound public 

finances 

3.1.  The pace and size of consolidation efforts 

3.2.  The composition and durability of consolidation efforts 

4.  Better functioning  of product and services markets 

5.  Fostering employment and labour market reforms 

5.1.  Wage developments 

5.2.  Labour market reforms 

Box: Main labour market reforms  in EU countries in recent years 

1 

1 

3 

4 

4 

5 

5 

7 

8 

8 

12 

14 

16 

16 

17 

20 

Aa 

Progress  report on the implementation  of  the 
199S Broad Economic  PoEicy Guidelines 

The  1996  Broad  Economic  Policy  Guidelines  confirmed 
the  policy 
recommendations  laid  down  in  previous  Broad  Guidelines.  The  present  document  reviews  the 
progress  made in implementing  the  Community's  economic policy strategy  according to each  of the 
headings  in the  1996 Guidelines. 

and  developed 

1.  Macroeconomic  policy-mix  for  growth,  employment  and  convergence 

1.1  Macroeconomic policy-mix 
In  line  with  previous  Guidelines, 
"stable  macroeconomic  framework  characterised  by: 
-  a  stability-oriented  monetary  policy  whose 

the  1996  Broad  Economic  Policy  Guidelines  recommended  a 

task 

is  not  undermined  by 

inappropriate 

- 

budgetary  and  wage  developments; 
sustained  efforts  to  consolidate  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 
the 

should  be  below 

in  productivity 

to  strengthen 

the  increase 

in  order 

developments 
profitability  of employment-creating 

investment.  " 

In  overall  terms,  the  macroeconomic  policy-mix  in  the  Community  has  been  in  line  with  these 
recommendations.  Both  monetary  policies,  fiscal  policies  and  wage  trends  have  evolved 
favourably: 

-  Monetary  policies  have  been  credibly  oriented  towards  achieving  and  maintaining  price 
stability,  both  in  Member  States  where  inflation  was  already  low  and  in  Member  States  where 
further  progress  in  disinflation  was  needed.  At  the  same  time,  monetary  conditions  have 
provided  room  for  an upturn  in GDP  growth  in the  Community.  Short-term  interest  rates  have 
reached  historically  low  levels  in Germany  and  countries  whose currencies  are  linked  closely  to 
the  DEM,  and  they  have  fallen  considerably  in  most  other  Member  States.  This  was  mads 
possible  by  subdued  price  pressures  and  favourable  budgetary  and  wage  developments. 
Moreover,  the  credibility  of  the  monetary  policy  framework  has  increased  in  several  countries, 
particularly  those  which  have  established  central  bank  independence  and  have  made  large 
efforts  to fulfil  the Treaty's  convergence criteria for participation  in  EMU. 

-  Governments  in  virtually  all  countries  have  taken  significant  steps  to  consolidate  their  public 
finances  in  1996-97.  Although  some  countries  to  some extent  have  relied  on  one-off  measures 
which  will  need  to  be  complemented  by  lasting  budgetary  measures,  a  substantial  structural 
improvement  in the  budgetary  position  is  clearly  taking  place  in the  Community.  Furthermore, 
the  framework  for  the  maintenance  of  sound  public  finances  over  the  medium  term  has  been 
strengthened  with  the  political  agreement  on  the  Stability  and  Growth  Pact  at  the  Dublin 
European  Council. 

d 

In  most  countries,  wage  agreements  have  increasingly  been  consistent  with  the  Guidelines 
recommendation.  For  the  Community  as  an  average,  nominal  compensation  per  employee  rose 
by  3/2 per  cent  in  1996  and  the  average  rate  of wage  increases  is  expected  to  be  around  3  per 
cent  in  1997.  With  a  productivity  growth  trend  of  around  2  per  cent,  this  is  consistent  both 
with  the  price  stability  objective  and  with  the  objective  that  annual  real  wage  developments 
should  be  sufficiently  below  the  productivity  trend  to  strengthen  the  profitability  of  investment 
in the  Community. 

The  increasingly  well-balanced  macroeconomic  policy-mix  in  the  Community  as  a  whole  has 
already  brought  important  benefits.  The  exchange  rate misalignments  which  occurred  during  1995 
have  been  broadly  reversed  and  a  higher  degree  of  exchange  rate  stability  has  returned  within  the 
ERM.  Long-term  interest  rates  have  converged  towards  lower  levels.  The  most  spectacular 
reductions 
in  countries  where  the  prospects  for  budgetary 
convergence  have  improved  most  significantly.  Between  April  1995  and  March  1997,  the  yield  on 
ten-year  benchmark  bonds  declined  in  Spain,  Italy,  Portugal  and  Sweden  by  between  440  and  550 
basis  points.  Bond  yields  in  other  Member  countries  also  dropped  significantly  during  1995  and 
1996 as they managed to  decouple to  a significant  degree from  US long rates. 

in  bond  yields  have  occurred 

Table 1 

Improved  economic  policy-mix 

Real  effective 
exchange rate1* 
(unit labour costs) 
(1993  =  100) 
Q2 
Ql 
1997 
1995 
109.1 
101.2 

Change in interest 
rates since April  1995 

Short 
rates3) 
March. 
1997 
-1.8 

Long 
rates4) 
March 
1997 
-2.0 

-2.3 

-5.5 

-1.3 

-5.0 

-5.4 

-2.2 

-2.2 

-3.5 

-3.3 

-4.4 

-1.4 

-1.5 

-3.4 

-1.1 

82.5 

97.3 

97.6 

92.9 

112.5 

101.6 

105.4 

1 0 24 
96.7 

104.7 
106.8 

94.1 
103.8 

123.4 
93.8 
99.6 

B 
DK 
D 
EL 
E 
F 
IRL 
I 
NL 
A 
P 
FIN 
S 
UK 
EUR 
^Relative to 23 industrialised  countries. 
Z) Relative to 9 industrial  non-EC countries. 
3)  3-month inter-bank rate 
4)  10-year benchmark. 
5) Nominal unit  labour cost deflated  by GDP  deflator. 
Source.  Commission  services, Spring  1997 forecasts. 

105.4 
103.9 

101.92) 

100.12) 

117.1 

108.9 

110.3 

106.8 

114.4 

96.2 

99.6 

95.1 

-4.6 

-1.1 

-2.4 

-5.3 

-3.3 

-2.9 

-4.5 

-4.4 

-1.0 

-1.6 

-1.6 

-0.5 

-2.5 

Change in 
cyclically-
adjusted budget 
balance 

Nominal 
compensation 
per employee 
(% change p.a.) 

Real unit 
labour costs?) 
(% change  pa.) 

1996 

1997 

1996 

1997 

1996 

1997 

1.0 

0.2 

0.3 

1.7 

2.3 

1.2 

0.2 

0.6 

1.5 

1.8 

1.6 

1.7 

4.6 

1.7 

1.0 

0.5 

1.6 

0.8 

2.2 

1.2 

0.7 

-0.4 

3.6 

-0.2 

1.1 

0.9 

-0.7 

0.6 

1.2 

1.3 

1.8 

3.1 

2.5 

11.7 

4.6 

2.6 

2.7 

5.5 
1-2 

1.9 

6.5 

3.2 

7.4 

3.6 

3.5 

2.6 

3.4 

2.3 

9.4 

2.6 

2.5 

4.1 

4.9 

2.7 

1.8 

5.0 

3.0 

4.8 

4.2 

3.2 

-1.4 

-0.3 

-1.1 

1.1 

-0.6 

-0.4 

-2.5 

-0.1 

-1.1 

-1.5 
0.7 

0.3 
4.6 
-0.9 

-0.7 

-1.0 

-0.6 

-1.9 

0.6 

0.6 

-0.8 

-1.4 

0.9 

-0.6 

-1.9 

-0.7 

0.3 
-0.1 
-0.2 

-0.6 

Although  there  could  be  a  backlash  if  the  credibility  of  budgetary  objectives  were  undermined, 
sounder  macroeconomic  policies  are  now  underpinning  a  "virtuous  circle"  where  budgetary 
consolidation  has  led to  lower  interest  rates which strengthens the growth prospects  of the  economy 
and  lowers  government 
led  to  an 
interest  payments.  The  sound  economic  policies  have 
improvement  in economic confidence  and  a gradual  strengthening  in economic  activity. 

1.2  Upturn  in  economic  activity 

The  set-back  to demand growth  and the loss of confidence  among economic operators  in the  second 
half  of  1995  ~  which  occurred  mainly  as  a  result  of  unfavourable  interest  rate  and  exchange  rate 
developments  rooted  in  a  lack  of  credibility  of  economic  policies  in  some  Member  States  ~  has 
given  way  to  a  renewed  upturn.  Thus,  the  soundfy-based  recovery  which  began  in  mid-1993  and 
which  was  temporarily  interrupted  in  1995  is  now  entering  its  second  phase.  Economic  activity 
grew  at  a  pace  of  VA  per  cent  (annualised  rate)  in  the  first  half  of  1996,  in  spite  of  a  large 
correction  of  stock  levels.  In  line with  expectations,  the  pace  of  expansion  accelerated  to  around 
2V< per  cent in the second half of  1996. 

The  near  term  prospects  are  for  a progressive  strengthening  of the  recovery.  Economic  confidence 
improved  sharply  over  the  last  months  of  1996  and  the  first  months  of  1997.  Conditions  on  the 
supply  side  of  the  economy  are  favourable  to  a  sustained  pick-up  in  economic  activity  and  job 
creation,  and demand  prospects  are  improving. 

On the  supply  side, the  fundamentals  in terms  of prospects  for  moderate  wage increases  and  sound 
investment  profitability  are  better  even than they  were  during  the high-growth  period  1986-90  and 
the  first  leg  of the  recovery  in  1994  and  early  1995.  The  prospects  for  moderate  wage  increases 
are  underpinned  by  low  and  stable  inflation  expectations  related  to  the  enhanced  credibility  of  the 
stability  framework  and  by  efforts  to  improve  the  functioning  of  the  labour  market  in  several 
Member  States.  Real  wage  increases  have  generally  moderated  relative  to  productivity  and 
average  investment  profitability  in the  Community  is now  higher  than  at  any time  since the  1960s. 
Even  though  real  interest  rates  are  also  higher  than  in the  1960s,  the  current  and  prospective  level 
of  profitability  provides  a  good  basis  for  a  strong  pick-up  in  investment  as  demand  prospects 
strengthen. 

On  the  demand  side,  the  rebound  is  expected  to  be  broadly  based  and  well-balanced.  Internal 
demand  in  the  Community  is  underpinned  by  easier  monetary  and  financial  conditions,  and  the 
outlook  for  the  international  environment  remains  favourable.  On  balance,  the  competitiveness  of 
the  Community  has  improved  as  a  result  of  exchange  rate  movements  since  1995  and  modest 
increases  in  unit  labour  costs  in  the  EC.  Exports  are  likely  to  accelerate,  driven  both  by  healthy 
extra-EC  exports  and  a  rebound  in  intra-EC  trade  in  line  with  strengthening  internal  demand 
Private  consumption  growth  will  be  sustained  by  moderate  real  wage  increases,  gradually 
improving  employment  prospects  and  a  decline  in  precautionary  savings.  As  capacity  utilisation 
picks  up,  investment  in  equipment  will  be  boosted  by  better  demand  prospects,  sound  business 
profitability  and  low  interest  rates.  Low  long-term  interest  rates  and  rising  income  should  lead  to  a 
gradual  acceleration  in  construction  investment.  Against  this  background,  output  growth  is 
expected  to accelerate to around  its trend  rate in  1997 and above  its trend  rate  in  1998. 

The  main  risk  to  this  outlook  arises  from  the  possible  emergence  of  doubts  as  to  whether 
governments  will  meet  their  budgetary  objectives  in  1997.  Such  doubts  could  lead  to  pressure  on 
interest  and  exchange  rates  with  potentially  damaging  consequences  for  output,  investment  and 
employment.  Moreover,  consumers  wary  of  uncertain  job  prospects  could  hold  back  more  than 
expected  on  new  purchases.  On  the  other  hand,  as  the  positive  effects  of  lower  interest  rates 
progressively  comes  through  and  if  the  recent  improvement  in  confidence  is  sustained,  a  self-
feeding  cycle of increased  spending  and  employment  could  lead to a more positive  outcome. 

1.3  Gradually improving employment outlook 

Employment  growth,  which  typically  reacts  to  changes  in  output  growth  with  a  certain  lag, 
suffered  a  set-back  in  early  1996  in  most  countries.  But  as  economic  activity  gradually  firmed, 
total  employment  in the  Community  stabilised  and  then  began  rising  slowly  in the  second  half  of 
1996.  These  trends  were  reflected  in  the  evolution  of  unemployment.  Average  unemployment 
stabilised  during  the  first  half  of  1996  and  has  since  edged  down  marginally.  However,  trends 
varied  significantly  between  Member  States.  The  unemployment  rate  was  on  a  declining  trend  in 
late  1996/early  1997  in all the countries  where economic  activity was  expanding  at  a  healthy  pace, 
In  contrast, 
including  the  United  Kingdom,  Finland,  Ireland,  the  Netherlands  and  Denmark. 
unemployment  was  still  increasing  in Germany,  France and  Sweden  in  late  1996/early  1997 as  the 
recovery  was  still hesitant  and,  in some cases, as special factors  contributed to  a  rise  in the  number 
of  unemployed. 

The  rebound  in  economic  activity  will  lead  to  progressively  stronger  job  creation.  However,  the 
labour  force  will  also  increase  and  unemployment  is  likely  to  decline  only  gradually  during  1997 
and  somewhat  faster  in  1998. 

The  high  level  of  unemployment  points  to  the  need  for  a  continuation  and  reinforcement  of  the 
economic policy  strategy  for  growth  and  employment  in the  Community.  A stable  and  investment-
enhancing  macroeconomic  policy-mix  is  necessary  to  ensure  sustained  economic  growth  and  job 
creation  over  the  medium  term,  capable  of  ensuring  a  marked  reduction  in  unemployment  and  of 
employing  progressively the high  potential  residing in the unused  labour  reserve in the  Community. 

In  countries  (Denmark,  Ireland,  Luxembourg  and  the  Netherlands)  which  have  for  some  time 
followed  economic  policies  and  achieved  wage  trends  ~  helped  also  by  an  intensive  and  effective 
social  dialogue  ~  approximately  in  line  with  the  Broad  Economic  Policy  Guidelines  and  which 
have  reduced  their  budget  deficit  ratios  to  below  the  Maastricht  Treaty's  reference  value  of  3 
percent  of  GDP,  the  results  in  terms  of  sustainable  economic  growth  and job  creation  have  been 
favourable  and  are  clearly  among the best  in the  Community. 

1.4  Social 

dialogue 

The  1996  Broad  Guidelines  noted  that  the  Commission  intended  to  intensify  its dialogue  with  the 
social  partners.  The social  dialogue  should  also  be  intensified,  where  possible  and  according  to 
prevailing  traditions,  at  the national  level. 

The  Commission  has  continued  its  dialogue  with  the  social  partners  at  the  European  level  in  the 
framework  of  the  Confidence  Pact,  originally  proposed  by  President  Santer.  The  European  Social 
Partners  agreed  a committed  response on the themes of:  youth  unemployment,  lifelong  learning  and 
better  use  of  Structural  Funds  for  job  creation,  in  a  macroeconomic  environment  conducive  to 

growth  and  employment.  With  respect  to  the  macroeconomic  framework,  there  was  a  noteworthy 
consensus  in  favour  of  the  economic  policy  strategy  laid  down  in  the  Broad  Economic  Policy 
Guidelines.  The  Social  Partners  agreed  on  the  great  importance  of  completing  EMU  and 
recognised  that, to ensure credibility, the Treaty  provisions  must  be met  in full.  At the  heart  of the 
strategy  is  the  need  to  improve  competitiveness,  and  to  foster  higher  and  more  employment-
creating  growth,  mainly  supported  by  capacity-expanding  investment.  More  active  and  efficient 
labour  market  policies  must  also  be  implemented  to  increase  incentives  and  ensure  that  people  are 
able to take up the job  opportunities  thus  created. 

In  Germany,  the  government  and  the  social  partners  launched  an  "Alliance  for  jobs"  in  January 
1996 with the  aim  of halving  unemployment  by the year  2000,  but the  initiative has  not  progressed 
In  Ireland,  a  new  tripartite  agreement  (Partnership  2000)  was  concluded  covering 
as  hoped  for. 
In  Austria,  co-ordination  between  the  social  partners  was  re-
the  period  to  the  year  2000. 
intensified  in  order  to  help  meet  the  Maastricht-criteria. 
In  Italy,  an  accord  was  reached  in 
September  1996  to  introduce  more  flexibility  in  employment  contracts,  better  incentives  for  part-
time  work  and  co-ordinated  action  to  promote  business  expansion  in  less  developed  regions. 
In 
Spain,  agreement  between  the  social  partners  was  reached  on  specific  issues  on  a  case-by-case 
In 
basis  and  in  early  1997  agreement  was  reached  on  a  reform  of  job  protection  legislation. 
Portugal,  a  "strategic  agreement"  was  reached  covering  a  wide  range  of  issues, 
including 
employment,  education,  social  security,  tax  reform,  income  policies,  competitiveness,  productivity 
and  reform  of  the  public  administration.  In the  remaining  countries,  including  countries  such  as 
the  Netherlands  and  Denmark  where  long-standing  social  consensus  has  provided  a  basis  for 
comparatively  favourable  economic  performance,  the  social  dialogue  has  continued  according  to 
national  traditions. 

2.  Price  and  exchange  rate  stability 

2.1  Price stability 
inflation 
For  the  Community  as  a  whole,  the  1996  Guidelines  urged  that  the expected  2'A percent 
that  in  the  countries 
result  in  1996  be  improved  upon  in  1997.  The  Guidelines  recommended 
the  Netherlands, 
where  inflation  was  below  2 per  cent  (Belgium,  Germany,  France,  Luxembourg, 
the  task  would  be  to 
Austria  and  Finland)  or just  above  2  per  cent  (Denmark  and  Ireland), 
consolidate  this performance  over  the  medium  term.  In  Sweden,  where  inflation  had  come  down 
significantly,  and  in  the  United  Kingdom,  where  inflation  was  around  3  per  cent  and  on  a 
downward  trend,  economic  policies  were  to  aim  at  consolidating 
Spain, 
Portugal  and  Italy  were  urged  to  reduce  inflation  to  below  3 per  cent  by  1997  while  in  Greece, 
efforts  to  reduce  inflation  needed  to be  continued  and  enhanced. 

the  results  achieved. 

For  the  Community  as  a  whole,  inflation  declined  broadly  in  line  with  expectations  to  2 4  per  cent 
in  1996.  The  latest  trends  point  to  an  improved  outcome  in  1997.  As  described  in  the 
Commission's  1996  Report  on  Convergence,  the  generalised  fall  in  inflation  was  the  result  of  a 
number  of  factors  These  included  monetary  policies  targeted  at  price  stability,  an  improved 
credibility  of  the  price  stability  framework,  enhanced  wage  moderation,  stronger  competitive 
pressures  related  inter  alia  to the Single  Market,  reduced  pressure  from  fiscal  policy  and.  for  some 
countries,  currency  appreciation  from  previous  lows.  Cyclical  factors  as  reflected  in  a  significant 
output  gap  and  low domestic  demand  also contributed  to  lower  inflation  in many  cases. 

On  the  basis  of  the  latest  HICP  data1,  inflation  in  Belgium,  Denmark,  Germany,  France,  Ireland, 
Luxembourg,  the  Netherlands,  Austria  and  Finland  was  about  2  per  cent  or  less  and  price 
increases  are  likely to  remain around  VA  per cent or  less in all cases  in  1997. 

In  the  countries  mentioned,  low  inflation  in  1996  was  generally  underpinned  by  moderate  wage 
increases.  The  rate  of  increase  in nominal  compensation  per  employee,  including  employers'  social 
contributions,  was  below  3 % per  cent and  in some cases even below  2 per  cent. 

The  prospects  for  price  stability  in  1997  are  reinforced  by  the  outlook  for  moderate  wage 
increases.  In  Belgium,  Germany,  France,  the Netherlands,  Finland  and  Austria,  the  outlook  is  for 
increases  in nominal  labour  costs  per  employee  of  3 per  cent  or  less  in  1997.  In  Denmark,  recent 
wage  settlements  should  lead to  an  average  increase  in wage  costs  of  around  VA  per  cent  per  year 
over the next two to three years unless  wage drift  increases. 

Table 2 

Inflation  developments 
(% change p.a.) 

Private consumption 
deflator 

HICP 

1994 

1995 

1996 

Dec 961' 

Feb 971' 

| 
| 
| 
I 

Nominal 
compensation 
per employee 

1994 

1995 

1996 

1.8 
1.9 
1.2 
7.9 
3.6 
2.1 

4.0 
1.2 
1.5 
1.8 
2.9 
1.5 
0.8 

2.0 
2.1 
1.8 
8.3 
3.6 
1.8 
1.7 
4.3 
1.9 
2.0 
2.0 
3.1 
1.2 
1.2 
2.8 

1.9 
2.1 
1.3 
7.6 
3.4 
2.0 

3.5 
1.3 
1.5 
1.8 
3.0 
1.0 
0.8 

1.6 
2.1 
1.9 
9.3 
4.7 
1.7 
2.0 
5.8 
0.7 
0.9 
1.3 
4.2 
0.2 
2.4 
2.6 
3.0 

Feb 97 
t/t-12 
2.0 
2.0 
1.6 
6.5 
2.5 
1.7 
1.7 
2.3 
1.5 
1.6 
1.5 
2.4 
0.6 
1.1 
2.0 

4.6 
3.8 
3.4 
12.2 
2.2 
2.2 
2.6 
2.9 
4.0 
2.4 
3.4 
10.7 
3.5 
4.8 
3.6 

2.3 
3.6 
3.6 
12.5 
2.2 
2.3 
0.7 
4.8 
2.2 
2.0 
3.7 
2.5 
4.3 
2.9 
2.4 

1.8 
3.1 
2.5 
11.7 
4.6 
2.6 
2.7 
5.5 
1.6 
1.2 
1.9 
6.5 
3.2 
7.4 
3.6 
3.5 

2.4 

2.7 

3.3 

2.3 
hmetic  average  of  twelve  monthly  harmonised  indices  relative  to  the 
imetic  average  of  the  twelve  monthly  harmonised  indices  of  the  previous 
ad. 
zj_ Commission  services, Spring  1997 forecasts. 

2.0 

3.3 

3.1 

3.2 
1.8 
2.7 
10.8 
4.8 
2.1 
2.6 
4.6 
2.3 
2.7 
2.9 
4.8 
1.4 
3.0 
2.5 

B 
DK 
D 
EL 
E 
F 
BRL 
I 
L 
NL 
A 
P 
FIN 
S 
UK 
EUR 
"  Arit 
arith 
peri 
Soura 

the 
The  credibility  of 
price stability  framework 
is  well  established  in  the 
countries  mentioned.  On 
the  basis  of  the  results 
for  1996  and the  outlook 
these 
for  1997,  all  of 
to  be 
countries  appear 
consolidating  their  price 
stability  performance  in 
the 
accordance  with 
Guidelines 
1996 

recommendation. 

In  Sweden,  inflation  fell 
sharply 
1996. 
during 
This  was  partly  due  to 
temporary 
factors, 
including  a  reduction  in 
VAT  on  food  as  of  1 
January  1996  and 
the 
strong  appreciation  of 

1  Harmonised  Indices of Consumer Prices; inflation  is calculated on the basis of the arithmetic average of 
the  HICP of the  last  12 months  (March.  1996-Feb.  1997) relative to the average of the previous  twelve 
months  (March  1995-Feb. 1996): the Commission  services' assessment  for  Ireland  is based  on  quarterly 
data. 

the  Swedish  krona  from  previous  LOWS.  The  latest  trends  point  towards  continued  low  rates  of 
price  increases.  However,  labour  costs  per  employee  increased  by  around  7.4  per  cent  in  1996;  a 
rate  which  would  clearly  not  be  compatible  with  the  maintenance  of  price  stability,  growth  and 
employment  over  the  medium  tenn.  Recent  wage  agreements  have  been  concluded  at  lower  levels 
but  after  allowing  for  wage drift,  the  rate of labour  costs  increases  per  head  could  still  be close to 5 
per  cent  in  1997.  If Sweden  is to  live un  to the Guidelines  recommendation  and the  results  in terms 
of  price  stability  are  to  be  consolidated,  a  marked  deceleration  in  nominal  wage  increases  is 
required. 

In  the  UK,  the  large  appreciation  of  the  Pound  Sterling  in  late  1996  and  early  1997  exerted  a 
restraining  impact  on  price  pressures  in  early  1997.  On  the  other  hand,  consumption  growth  v/as 
buoyant  and the  output  gap  was  closing  at  a  fast  rate.  Unemployment  has  fallen  rapidly  to  levels 
which  have historically  been  associated  with  an upturn  in wage pressures.  Thus,  although  inflation 
is expected  to subside  slightly  and  the growth  of nominal  compensation  per  employee  is  forecast  to 
be  around  4  per  cent  in  1997,  the  risks  of  a  worse  outcome  cannot  be  disregarded.  The  UK 
authorities  need  to  be  vigilant  in  guarding  against  the  emergence  of  a  price-wage  spiral  if  the 
results  in terms  of low  inflation  are to be  consolidated. 

In  Portugal,  annual  inflation  fell  to  3.0  per  cent  by  February  1997  (latest  12 months  over  previous 
12  months;  HICP)  while  the  latest  figure  stood  at  2.4  per  cent  (February  1997  over  February 
1996;  HICP).  Disinflation  is  helped  by  lower  nominal  wage  increases  and  by  continued  labour 
productivity  gains  in excess  of the  Community  average.  In  Spain,  inflation  is on a downward  trend 
and  while  annual  HICP  inflation  amounted  to  3.4  per  cent  by  February  1997, the  latest  figure  was 
down  to  2.5  per  cent.  Given  the  continued  anti-inflationary  vigilance  of  the  monetary  authorities 
and  good  prospects  for  continued  moderate  wage  increases,  Spain  is  on  track  to  achieve  low 
inflation  in  1997.  In  Italy,  inflation  has  come  down  sharply  over  the  course  of  1996  and  early 
1997  (annual  inflation  at  3.5  per  cent  but  latest  figure  at  2.3  per  cent)  helped  by  stability-oriented 
monetary  policies,  slightly  moderating  wage  increases  and  a  large  appreciation  of  the  lira  since 
mid-1995.  The growth  of nominal  compensation  per  employee  is  expected  to edge downwards  but 
it  may  still  be  close  to  5  per  cent  in  1997.  Nevertheless,  with  a  stable  lira  and  pressure  on 
operating  margins,  the  government's  inflation  target  of  2.5  per  cent  for  the  year  as  an  average 
(CPI)  is  within  reach. 
In  all  three  countries,  the  1996  Guidelines  recommendation  is  set  to  be 
fulfilled  and  inflation  is expected  to  undershoot  the  3 per  cent mark  with  some  margin. 

In  Greece,  efforts  to  reduce  inflation  have  been  continued  and  enhanced  in  line  with  the  1996 
Guidelines  recommendation.  Annual  inflation  measured  by the  HICP  fell  to  7.6  per  cent  (latest  12 
months  over  previous  12  months)  while  the  latest  figure  (February  1997  over  February  1996; 
HICP)  stood  at  6.5  per  cent.  Continued  efforts  are  required  in  order  tc  reach  the  government's 
target  of 4.5  per  cent  inflation  by  year-end  (CPI). 

2.2  Exchange  rate  stability 

The  1996  Guidelines  reiterated 
that  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. 
to  an  appropriate 
alignment  of  exchange  rates  within  the  Community  and  would  contribute  to  create  the  conditions 
for  participation 

in  the  exchange  rate  mechanism  for  countries  not  already  participating. 

in  the  Guidelines  would  contribute 

The  policies  recommended 

Since  1995,  sounder  economic  policies  in  the  Community,  increased  budgetary  credibility  in  a 
number  of  Member  States  and  a  strengthening  US-dollar  have  contributed  to  a  more  appropriate 
alignment  of  exchange  rates  within  the  Community.  The  rebound  in  the  US-dollar  reflected  the 
relatively  strong  cyclical  position  of  the  US  economy  as  well  as  changes  in  the  respective  policy-
mix  in  the  US  and  (he Community.  Enhanced  policy  credibility  helped  the  Italian  lira,  the  Swedish 
krona  and  several  other  currencies  to  recuperate  much  or  all  of  earlier  losses  relative  to  the  DEM. 
The  pound  sterling  appreciated  markedly  relative  to  most  ERM  currencies  in  late  1996  and  early 
1997 against  the  background  of the  stronger  dollar,  high economic growth  and  prospects  for  a  rise 
in  interest  rates.  The  spring  1995  overvaluation  of the  DEM,  and  currencies  closely  linked  to  the 
DEM,  has been  unwound. 

Finland  and  Italy  joined  the  exchange  rate  mechanism  of  the  EMS  on  14  October  and  25 
November  1996,  respectively.  Currently,  12  Member  States  participate  in  the  exchange  rate 
mechanism  (ERM); only Greece,  Sweden and the  United  Kingdom  do not  participate. 

Within  the  ERM,  the  spread  between  the  strongest  and  weakest  currencies  in  the  grid  narrowed 
progressively  to  some 2 per  cent  in late  September  1996.  Subsequently,  this  spread  widened  as  the 
Irish  pound  appreciated  significantly  relative  to  other  ERM  currencies.  This  was  the  result  of 
three factors,  namely  the appreciation  of the  pound  sterling  and the  US-dollar  relative to the  ERM-
currencies,  the  strong  cyclical  position  of  the  Irish  economy  which  has  not  led  to  a  tightening  of 
budgetary  policies; and the higher  levels of interest  rates associated  with the  strong  growth. 

All  other  ERM  currencies  remained  within  narrow  margins  against  each  other.  In  overall  terms, 
exchange  rate  stability  within  the  ERM  has  been  maintained  and  improved  since  the  adoption  of 
the  1996  Broad  Guidelines. 

3.  Sound  public  finances 

3.1  The pace and size of consolidation efforts 
The  1996  Guidelines  stressed  that  the generally  unsatisfactory  state  of  the public  finances 
in  the 
Community  should  lead Member  States  to review  and,  where  necessary,  to strengthen  their  fiscal 
consolidation  plans.  The  Council  recommended 
that  virtually  all  Member  States  should  aim  at 
lowering  the  budget  deficit  to,  at  most,  3 percent  of  GDP  in  1997,  as  a step  towards  the  objective 
of  close  to balance  in  the  medium  term. 

that  Denmark  and  Ireland,  which  already  respected  the  3  percent 
The  Guidelines  stipulated 
reference  value,  should  move  towards  more  ambitious  medium-term 
In  the  case  of 
Denmark  these  targets  were set  out  in its May  1996  convergence  programme.  Germany,  France, 
Austria,  Finland,  Sweden  and  the  Netherlands  were  urged  to  resolutely  implement  their  fiscal 
consolidation  programmes  and.  if  necessary,  strengthen  them  to  ensure  that  the  objectives  were 
met.  In  the  United  Kingdom,  it  was  important  thai  action  be  taken  to  keep  spending  to  planned 
In  Spain  and  Portugal,  a  determined 
levels 
for  1997. 
Italy 
implementation  of  the  budget  component  of  their  convergence  programmes  was  required. 
was  urged  to  introduce  significant  measures  to achieve  and  improve  upon  the planned  budgetary 
In  Greece,  sustained  efforts  on a  wide  range  affronts  was  needed. 
consolidation. 

the  3  percent 

to  respect 

targets. 

target 

Budget  results  in  1996:  All Member  States  except Germany made progress towards  reducing their 
budget  deficit  in  1996.  For  the  average  of  the  Community,  the  budget  deficit  declined  to  4.3 
percent  of  GDP  in  1996  from  5.0  per  cent  of  GDP  in  1995.  This  improvement  was  achieved 
despite  the  deterioration  in the  cyclical  position  which  exerted  an  adverse  impact  on  tax  revenues 
and  public  spending.  Adjusted  for  cyclical  effects,  the  budget  balance  for  the  Community  as  an 
average  improved  by  1 percentage  point  of  GDP,  according  to  the  estimates  of  the  Commission 
services2.  This  represented  a  much  larger  reduction  in  the  cyclically-adjusted  budget  deficit  than 
had  been  achieved  in  the  preceding  years  (table  3).  The  cyclically-adjusted  deficit  was  reduced 
significantly  in  a  large  majority  of  Member  countries  in  1996.  Among  the  countries  subject  to  a 
1996  Council  decision  on  the  existence  of  an  excessive  deficit,  only  Germany  failed  to  make 
substantial progress  in reducing the cyclically-adjusted  budget deficit  in  1996. 

Table 3 

Actual  and  cyclically-adjusted  general  government  budget  balances 

(per cent of GDP) 

Actual budget balance 
(level) 

1994 
-5.1 
-3.6 
-2.4 
-12.1 
-6.3 
-5.6 
-1.7 
-9.6 
2.9 
-3.4 
-4.6 
-6.4 
-6.2 
-10.3 
-6.8 
-5.5 

B 
DK 
D2) 
EL 
E 
F 
IRL 
I 
L 
NL3> 
A 
P 
FIN 
S 
UK 
EUR 

1995 
-4.1 
-1.9 
-3.5 
-9.2 
-6.6 
-4.8 
-2.0 
-7.0 
1.7 
-4.0 
-5.3 
-6.0 
-5.1 
-7.9 
-6.1 
-5.0 

1996 
-3.4 
-1.6 
-3.8 
-7.4 
-4.4 
-4.1 
-0.9 
-6.7 
1.8 
-2.4 
-3.9 
-4.1 
-2.6 
-3.6 
-4.4 
-4.3 

Change in actual 
budget balance 
1995 
1.0 
1.7 
-1.1 
2.9 
-0.3 
0.8 
-0.3 
2.6 
-1.2 
-0.6 
-0.7 
0.4 
1.1 
2.4 
0.7 

1994 
2.3 
0.3 
1.0 
2.1 
0.4 
0.0 
0.7 
0.3 
1.3 
-0.2 
-0.2 
0.4 
1.8 
2.0 
1.0 

1996 
0.7 
0.3 
-0.3 
1.8 
2.2 
0.7 
1.1 
0.3 
0.1 
1.6 
1.4 
1.9 
2.5 
4.3 
1.7 

0.7 

0.5 

0.7 

Change in cyclically' 
adjusted  balance 
1995 
1.0 
1.3 
-0.9 
2.9 
-0.6 
0.5 
-2.4 
2.0 

1994 
2.0 
-1.0 
0.8 
2.0 
0.6 
-0.4 
0.1 
-0.1 

1996 
1.0 
0.2 
0.3 
1.7 
2.3 
1.2 
0.2 
0.6 

-0.7 
-0.3 
1.3 
-0.1 
0.2 
0.1 

0.2 

-0.3 
-0.5 
0.5 
-0.6 
0.6 
0.4 

0.3 

1.5 
1.8 
1.6 
1.7 
4.6 
1.7 

1.0 

1 ) A "+" indicates an improvement; a "-" indicates a deterioration in the budget balance. 
2)  Excluding  unification-related  debt  and  asset  assumptions  by  the  federal  government  in  1995  (Treuhand, 

eastern housing companies and Deutsche Kreditbank) equal to 229 bn. DEM 

3) Excluding for  1995 a net amount of 32.84 bn. NLG of exceptional expenditure related to the reform  of the 

financing of the social housing societies. 

&M«£g^Comnu^sionService^ 

In  1996,  the  budget  deficit  remained  below  3  per  cent  of  GDP  in  Denmark,  Ireland  and 
Luxembourg.  However,  Denmark made less-than-expected progress  in reducing  its  deficit  and  the 
objective  stated  in  the  convergence  programme  (1.0  percent  of  GDP)  was  not  achieved.  The 
budget  overrun  was  mainly  due  to  an  overshoot  in  public  spending. 
In  Ireland,  the  budgetary 
situation  improved  more  than  expected  as  revenues  were  boosted  by  high  economic  growth. 

2  The  Commission  services'  method  of  cyclical  adjustment  takes  a  cautious  approach  in  that  it  produces 
levels  of cyclically-adjusted  budget  deficits  which tend to be higher  compared to those  of other  methods, 
including  those  used  by  the  OECD  and  the  IMF.  Given  that  these  discrepancies  mainly  relate  to 
differences  in  the  estimated  level  of  trend  (potential)  GDP,  annual  changes  in  the  cyclically-adjusted 
deficit  typically do not vary  significantly  across the various  methods. 

However,  notwithstanding the positive effects  of the economic cycle, expenditure growth  breached 
the government's  initial  target  by  a considerable  margin  for  the second  year  running.  Despite the 
need  to  tighten  budgetary  policies  in  the  current  cyclical  environment  and  the  need  to  secure  a 
larger budgetary safety  margin for when cyclical  conditions become less  favourable,  there was no 
improvement in the cyclically-adjusted  budget deficit in 1996. 

Both the Netherlands  and  Finland  managed to reduce their deficits  to below 3 percent  of GDP in 
1996.  Although  helped  by  relatively  high  economic  growth,  this  was  mainly  the  result  of 
determined consolidation  efforts. 

Belgium, France, Austria, Portugal and Sweden succeeded in bringing their deficit down to around 
or below 4 per cent of GDP. In these countries, the budget improvement was considerable in  1996, 
and  for  several  of  them  the  outcome  was  better  than  the  government's  target.  In  Belgium,  the 
budget  deficit  was above  the original  objective  (3.4  per  cent against  3 per  cent of GDP), but the 
country  has  made  significant  headway  towards  the  3  per  cent  reference  value.  In  France,  the 
outcome was marginally above the target set in the convergence programme (4.1 per cent vs. 4 per 
cent of GDP). 
In Spain and the United Kingdom, the deficit  declined to 4.4 percent of GDP.  In 
all of these countries, fiscal consolidation programmes were resolutely implemented in line with the 
Guidelines  recommendation. 

Gennany was the only Member State in which the budget deficit increased in  1996.  As a result of 
adverse  cyclical  conditions,  the  deficit  reached  3.8  per  cent  of  GDP  after  3.5  per  cent  in  1995. 
Despite  efforts  to  strengthen  expenditure  control,  hardly  any  improvement  was  made  to  the 
cyclically-adjusted  budget balance in  1996.  Most of the budgetary  measures  agreed  in Germany 
during  1996 take effect  in 1997. 

Italy  achieved  only  a  modest  reduction  in the  budget  deficit  which turned  out  at  6.7  per  cent  of 
GDP  in  1996 against  7.0  percent  of GDP  in  1995.  Both worse-than-expected  cyclical  conditions 
and budgetary slippage contributed to the disappointing result.  With the adoption of the budget  for 
1997,  the  decision  was  taken  to  accelerate  the  pace  of  fiscal  adjustment.  With  respect  to  the 
budget discipline of local government an important new set of rules was included in the budget  for 
1997. 

In Greece, the budget deficit  was  reduced to 7.4 per cent of GDP in  1996.  The improvement was 
to a large extent due to a reduction  in the interest burden made possible by lower interest rates and 
a  stable  debt-to-GDP  ratio.  The  tax  base  has  not  been  broadened  as  expected  and  real  current 
expenditure has been reduced only marginally. 

Debt-to-GDP trends in 1996: Although the Member  States achieved a widespread  and  significant 
improvement  in  budgetary  positions  in  1996,  the  budgetary  imbalances  in  the  Community  were 
still  large.  This  resulted  in a continued  upward  trend  in the debt-to-GDP  ratio  in  1996.  For the 
Community as an average, the debt ratio rose from  71.2 per cent in  1995 to 73.2 per cent of GDP 
in  1996.  The  debt  ratio  continued  rising  in  Germany,  Spain,  France,  Austria  and  the  United 
Kingdom.  The debt ratio remained  at or below 60 per cent of GDP only in France,  Luxembourg, 
Finland and the United Kingdom, but it was declining in a number of Member States (see table 4). 

10 

stepped 

Budgetary  prospects  for  1997:  Efforts 
to  achieve  sound  public  finances  have 
the 
up 
been 
throughout 
Community. 
Virtually  all  Member 
States  are  aiming  to  reduce  their  budget 
deficits  to,  at  most,  3 percent  of GDP  by 
1997,  as  a  step  towards  the  objective  of 
close  to  balance  in  the  medium  term. 
The  only  exception  is  Greece  where  the 
government  aims  to  reduce  the  deficit  to 
4.2  percent  of  GDP. 

the  Netherlands 

These  countries  are 

Among the countries  which  had  a  budget 
surplus  or  a  budget  deficit  below  3  per 
cent of  GDP  in  1996  (Denmark,  Ireland, 
Luxembourg, 
and 
Finland),  the  deficit  is  expected  to  fall 
further  in  Denmark,  the  Netherlands  and 
Finland. 
thus 
moving 
the  direction  of  more 
In 
ambitious  medium-term 
Denmark,  the  budgetary  outlook  in  1997 
is  now  more  favourable  than  expected  in  the  May  1996  convergence  programme  and  a  small 
surplus  is  aimed  at.  However,  the budget  for  1997  includes  some  one-off  measures  and  is  buoyed 
by  a  favourable  cyclical  position.  Also,  reaching  the  objective  depends  on  the  ability  to  conduct 
tighter  discipline  in  1997  than  was  achieved  in  1996.  In  Finland,  a  general  government  surplus  is 
targeted  in  1999.  The  budget  for  1997  and  the  ceilings  for  central  government  expenditure  in 
1998-2001  are  in line with  a  steady  reduction  in deficits  in the coming  years. 

1 ) Government  deposits  with  the central bank,  government 
holdings  of  non-government  bonds 
public 
enterprises  related  debt  amounted  to  some  16  %  of 
GDP in 1996. 

Source:  Commission Services, Spring  1997 forecasts. 

targets. 

and 

in 

In  all  of  the  remaining  countries,  with  the  exception  of  Greece,  measures  have  been  adopted  to 
reduce  budget  deficits  to  3  per  cent  of  GDP  in  1997.  Furthermore,  governments  have  generally 
undertaken  strong  commitments  to  take  any  supplementary  measures  which  might  be  needed  to 
meet this  target. 

In  Belgium,  Germany,  France,  Austria,  Portugal  and  Sweden,  the  planned  improvement  in  1997 
relative  to  1996  to  reach  the  3  per  cent  target  is  around  1 percentage  point  of  GDP  or  less.  In 
Germany,  most  of the  measures  contained  in  the  policy  packages  for  growth,  investment  and  jobs 
presented  in  early  1996  have  been  agreed  and  are  taking  effect  from  1997  onwards.  The 
government  has  announced  that  further  corrective  measures  would  be  taken  if there  were  a  further 
shortfall  in  tax  revenues  in  1997.  In  France,  the  return  to  balanced  social  security  accounts  will 
not be  reached  in  1997  as  had  originally  been  planned,  but  measures  have  been taken  to  reduce  the 
social  security deficit,  and  to keep the general government  balance within the target  in  1997. 

In  Spain  and  in  the  United  Kingdom,  the  planned  deficit  reduction  in  1997  relative  to  1996  is 
around  1 Vz  percentage  points.  In  Spain,  the government  has  affirmed  its  commitment  to  reach  the 
3  percent  target  and  a  draft  law  on  expenditure  control  has  been  approved  to  prevent  expenditure 
overruns.  In  the  United  Kingdom,  deficit  reduction  is  helped  by  tight  expenditure  control  and  tax 
receipts  boosted  by  relatively  strong  economic  growth. 

Italy  has  adopted  measures  to  achieve  a  very  large  improvement  in the  budgetary  position  in  1997 
in  order  to  reach  the  3  per  cent  target.  Following  the  worse-than-expected  outcome  in  1996,  a 
mini-budget  was  put  forward  in  March. 

In Greece, the convergence  programme  aims at a general government  deficit  of  4.2  percent  of  GDP 
in  1997.  The government  has  adopted  a  series  of measures  to  reduce  government  expenditure  and 
to  reach the  target. 

3.2  The composition  and  durability  of consolidation  efforts 

The  1996  Guidelines  identified  the following  general  principles  for  budgetary  consolidation: 

(i)  restraining  expenditure  increases,  as  opposed  to further  increases  in  the  overall  tax  burden; 
among  the  issues  to be addressed  were pensions,  health  care  costs  and  subsidies. 

(ii)  redirecting  government  spending,  when  possible, 
infrastructure,  human  capital  and  active  labour  market  measures. 

towards  productive  activities  such  as 

the  efficiency  of  public  services; 

(Hi)  improving 
privatisation  and  user-fees. 
(iv)  reducing  the  overall  tax  burden,  but  conditional  upon  first  putting  the  budget  deficit  on  a 
firm  downward  path. 

increased  use  of 

in  some  cases 

through 

In  1996, the nature  of  Member  States'  consolidation  efforts  was  not always  in conformity  with  the 
Guidelines.  The  share  of  public  expenditures  in  GDP  was  reduced  in  the  majority  of  Member 
States  in  1996  but  it  increased  in  Denmark,  where  it  was  already  among  the  highest  in  the 
Community,  as  well  as  in  France  and  Italy.  Tax  pressure  increased,  to  a  varying  extent,  in 
Denmark,  Spain,  France,  Italy,  Austria,  Portugal,  Finland  and  Sweden  (table 5). 

In  1997,  budgetary  consolidation  is  expected  to  be  achieved  mainly  through  expenditure  restraint. 
For  the  Community  as  an  average,  the  expenditure  share  is  expected  to  decline  by  nearly  VA 
percentage  point  this  year.  Provided  current  spending  plans  are  adliered  to  and  economic  growth 
picks  up  broadly  as  expected,  the  share  of  public  expenditures  in  GDP  is  expected  to  fall  in 
virtually  all Member  States.  Average tax pressure  is expected to remain constant  in  1997. 

In a  number  of  countries,  the  emphasis  in  consolidation  efforts  has  shifted  to  expenditure  restraint 
m  1997.  In  France,  where  most  consolidation  measures  in  1996  took  the  form  of  tax  increases, 
measures  in  1997  (including  restraint  in  public  administration  and  a  reform  of  the  social  security 
system,  mainly  concerning  health  care)  are  expected  to  lead  to  virtually  no  increase  in  real 
expenditure  while taxes  are  slightly  reduced.  In  Germany,  consolidation  measures  concentrate  on 
reduced  spending  (pension,  sickness 
insurance  and  health  care,  subsidies,  public  sector 
employment  and  administrative  costs).  In  Spain,  key  measures  include  a  wage  freeze  in  the  public 
In 
sector,  a  reduction  in  government  employment,  pension  reforms  and  indirect  tax  increases. 
Austria,  the  emphasis  is  shifting  to  expenditure  restraint  and  includes  health  care  reforms. 
In 
Finland,  the  1997  budget  improvement  relies  almost  exclusively  on  expenditure  cuts  while  some 
taxes  arc  being  reduced.  In  the  UK,  the  government  is  aiming  to  keep  spending  within  narrow 
limits. 
In  Italy,  where  social  spending  was  not  affected  by  budgetary  consolidation  and  non-
interest  expenditure  grew  in  real  terms  in  1996,  progress  is  expected  to  be  made  in  reducing  the 
share  of  public  expenditures  in  GDP  in  1997.  However,  much  of  this  comes  from  lower  interest 
payments  and the tax  burden  will  increase  again. 

12 

Some  countries  have  relied  to  a  considerable  extent  on  deferrals  of  public  investment  to  achieve 
deficit  reduction  in  the  short  term  This  is  the  case  in  Spain  (albeit  From  a  high  level)  and.  to  a 
lesser  extent,  in Germany  and  France.  In the  United  Kingdom,  there  has  been  a  switch  from  public 
to  private  provisions.  Only  a  few  countries  (Portugal,  Finland)  have  raised  public  investment  as  a 
share of GDP  in recent years. 

Table  5 

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

Receipts 

Expenditure 

((if which)  Interest  payments 

1994 

50.2 
59.0 
46.8 
35.8 
41.4 
49.0 
38.2 
45.2 

50.6 
49.4 
41.3 
54.7 
59.4 
36.5 

1995 

50.3 
58.0 
46.3 
37.9 
39.6 
49.5 
35.6 
45.1 
45.6 
49.1 
48.3 
41.2 
53.7 
59.3 
37.8 

1996 

50.3 
58.8 
45.6 
37.3 
40.1 
50.4 
35.6 
45.9 
45.4 
48.4 
49.1 
42.3 
55.7 
62.6 
37.6 

1994 

55.3 
62.6 
49.3 
48.0 
47.7 
54.6 
39.8 
54.9 

53.9 
53.9 
47.4 
60.9 
69.8 
43.3 

B 
DK 
D 

EL 
E 
F 

I RL 
I 
L 

NL 
A 
P 

FIN 
S 
UK 

EUR 
Source.  Commission  services,  Spring  1997  forecasts. 

46.0 

45.9 

46.1 

51.5 

1995 

54.5 
59.9 
49.9 
47.0 
46.3 
54.3 
37.6 
52.1 
43.9 
53.2 
53.6 
46.8 
58.8 
67.2 
43.6 

50.9 

1996 

53.7 
60.3 
49.3 
44.7 
4 46 
54.5 
36.5 
52.7 
43.6 
50.8 
53.0 
46.0 
58.3 
66.2 
41.9 

50.3 

19S4 

1995 

1996 

10.1 
7.1 
3.4 

14.2 
5.1 
3.6 
5.7 
11.0 

5.9 
4.2 
6.5 
5.1 
6.8 
3.3 

5.3 

9.1 
6.7 
3.7 

12.4 
5.4 
3.7 
5.0 
11.4 
0.3 
6.0 
4.3 
6.5 
5.3 
7.1 
3.7 

5.4 

8.6 
6  5 
3.7 

11.5 
5.3 
3.8 
4.8 
10.8 
0.3 
5.6 
4.4 
4.9 
5.S 
7.1 
3.7 

5.4 

Budgetary  adjustments  in  Member  States  are  relying  to  a  varying  extent  on  one-off  measures, 
particularly  in  1997.  The  use  of one-off  measures  has  in  some  cases  contributed  to  strengthen  the 
credibility  of  meeting  the  3  per  cent  reference  value  by  1997  and  has  had  positive  effects  en 
interest  rates  in some countries.  Needless  to  say,  however,  the temporary  nature  of  such  measures 
does  not  contribute  to  a  sustained  improvement  in  the  fiscal  position.  Therefore,  in  order  not  to 
undermine  confidence  in the establishment  of  sound  public  finances,  they  must  be  supplemented  by 
measures  which  provide  a  lasting  improvement  to  the  budgetary  situation.  In  spring  1998,  when 
the  decision  will  be  made  as  to  which  countries  have  achieved  a  high  degree  of  sustainable 
convergence  required  for  the  participation  in  the  third  stage  of  EMU  from  1.1.1999,  the 
Commission  will  assess  the  durable  character  of  budget  improvements  also  on  the  basis  of 
Member  States'  budgets  for  1998 and  their convergence  programmes. 

With  respect  to  the  Guidelines  recommendation  to  reduce  the  tax  burden,  conditional  upon  first 
putting  the deficit  on  a  downward  path,  tax  pressure  has  been  reduced  considerably  in  recent  years 
only  in the Netherlands  and  Ireland.  In  the  Netherlands,  reforms  in  the  social  security  sector  have 
continued.  In  Ireland,  the  latest  budget  and  the  social  agreement  covering  the  period  up  to  the  year 
2000  will  accelerate  progress  on  this  front. 

4.  Better functioning  of product and services markets 

It  was  crucial  to  exploit  the  Single  Market  potential  through  the  transposition 

The  1996  Guidelines  recommended  a  reinforcement  of  competition  policies  and  a  curbing  of 
into 
State  aids. 
national  law  and  the  effective  enforcement  of  legislation. 
In  addition,  measures  should  be 
implemented  aimed  at promoting  innovation,  the  information  society,  and  SMEs.  Environmental 
policies  should  rely  more  on  market-based  instruments,  including  fiscal  ones. 

A  variety  of  measures,  too  numerous  to  be  reviewed  in  full  in  the  present  document,  have  been 
taken  at  both  the  Community  and  the  national  level  to  boost  the  competitiveness  and  efficiency  of 
the  European  economies.  The  present  review  concentrates  on  developments  at  the  Community 
level and  lists the most  important  initiatives taken at the national  level in  1996. 

Although  transposition  of  Single  Market  measures  continued  to  improve  in  1996,  inadequate 
transposition  still  emerges  as  a  major  concern  in some sectors  and  areas.  At the  Community  level, 
by  early  February  1997,  the  Council  had  adopted  259  Single  Market  proposals  from 
the 
Commission,  leaving just  11  outstanding.  Of  these,  4  concern  company  law  while  the  rest  cover 
company  taxation,  intellectual  property,  the  free  movement  of  persons,  foodstuffs, 
insurance, 
veterinary  controls  and  phytosanitary  controls. 

The  measures  adopted  include  218  directives  requiring national  implementation  laws.  On  average, 
Member  States  had  transposed  over  94  per  cent  of  these  into  their  domestic  legal  systems  by 
February  1997, with  64 per  cent correctly transposed  by all Members  States  and  80 per  cent  by  14 
Member  States. 

The  Commission  services'  1996  Single  Market  Review3  demonstrated  that  Member  States' 
product  markets  have  become  highly  integrated  as  a  result  of globalisation  and the  Single  Market, 
although  product  standards  continue  to  raise  difficulties;  however,  in  product  markets  associated 
with  public  procurement  and/or  subject  to  nationally  distinct  regulations  (e.g.,  pharmaceuticals) 
integration  has  failed  to  make  much  headway.  For  manufacturing  products,  Member  States' 
domestic  demand  has  increasingly  been  supplied  by  products  imported  from  other  Member  States. 
Reductions  in price-cost  margins  also show that the degree of competition  in manufacturing  sectors 
has  significantly  increased.  Only  in  sectors  associated  with  traditional  or  regulated  public 
procurement  has  the  effect  on  price  cost  margins  been  rather  insignificant.  Convergence  in  prices 
of  identical  products  around  the  Community  also  suggest that  the  Single  Market  has  led to  further 
integration  of goods  markets.  Markets  in  services  have  remained  significantly  less  integrated  than 
goods  markets,  but  substantial  progress  has taken place.  Around  the  Community,  competition  and 
efficiency  are  intensifying.  But  state  aids,  national  taxes  and  domestic  regulations  continue  to 
fragment  some markets,  particularly  for  services. 

3  See  Commission  Communication  on  "The 

impact  and  effectiveness  of  the  Single  Market" 
(COM(96)52(), October  1996) and "Economic  Evaluation of the  Internal  Market"  (European Economy, 
Reports and Studies,  No. 4,  1996). 

14 

The  chief  areas  where  work  still  remains  in  terms  of  transposing  am  implementing  Community 
legislation  in the  Member  States  concern  public  procurement,  intellectual  property  and  insurance. 
The  Single  Market  Review  also  indicated  that  uneven  enforcement  of  EU  legislation  is  a  persistent 
barrier  to trade  or  fair  competition.  This  problem  will be addressed  in the  Internal  Market  Action 
Plan currently  in  preparation. 

the  Community  made  further  progress 

foil 
In  the  field  of  telecommunications, 
libéralisation, most  notably  by the adoption  of two  Commission  Directives  opening  up  competition 
in  mobile  telephony  and  requiring  the  abolition  of  monopoly  rights  in  voice  telephony  in  most 
In  the  energy  sector,  the  Council  adopted  a  directive  on 
Member  States  by  I January  1998. 
common  rules  for  the internal  market  in electricity.  Tins directive provides  for  the gradual  opening 
of competition  over a period  of six  years.  The corresponding  proposal  concerning  the gas  industry 
is  still  before  the  Council. 
In  the  transport  sector,  the  Council  adopted  a  directive  opening  up 
competition  for  the provision  of ground  services  at  airports. 

towards 

With  a  view  to  removing  unnecessary  obstacles  to  the  diffusion  of  innovation,  the  Commission 
adopted  a  new  regulation  in January  1996,  simplifying  the  conditions  for  exemption  under  Article 
85  for  technology  transfer  agreements.  The  Commission  also  adopted  a  communication  updating 
its  1994  action  plan  for  the  information  society  and  announced  its  intention  to  bring  forward 
proposals to harmonise  legislation  concerning  intellectual property rights in this  field. 

In  order  to  give  a  new  impetus  to  the  promotion  of  SMEs  at  the  Community  level,  the  Council 
adopted  the  third  multi-annual  programme  for  SMEs  in  December  1996. 
In  its  "Integrated 
the  Commission  envisages 
the  craft  sector"  of  July  1996, 
programme 
complementing  the  measures  of  the  multi-annual  programme  with  other  measures  such  as  joint 
action  with  Member  States  to  facilitate  access  to  the  information  society  and  the  simplification  of 
Community  legislation. 

for  SMEs  and 

In  the  area  of  environment  and  taxation,  the  Commission  adopted  a  proposal  for  an  energy 
products  tax  in  early  19974.  This  proposal  represents  a  re-structuring  of  the  system  of  excise 
duties  which  would  both  extend  the  scope  of  taxation  to  all  energy  products  that  damage  the 
environment,  and  increase the  levels  of taxation  on these products  from  1998  and  again  in the  year 
2000.  Such  steps  provide  important  price  signals  to  energy  users,  encouraging  them  to  reduce 
consumption  and thereby  cause  less pollution.  The  Commission  also  adopted  a  Communication  on 
the  use  of  environmental  taxes  and  charges  in  the  internal  market5.  This  Communication  is 
intended  to  assist  the  Member  States  in  their  efforts  to  use  fiscal  instruments  for  environmental 
ends  while  respecting  the  requirements  of  the  Treaty  and  the  Single  Market.  The  Communication 
emphasises  that  there  is  considerable  room  for  action  by  the  Member  States,  who  are  encouraged 
to  increase the use of such taxes  and  charges. 

4  Proposal  for  a  Council  Directive  re-structuring  the  Community  framework  for  the  taxation  of  energy 

products (COM(97)30 final of  12/03/97). 

5  Communication  from  the  Commission  "Environmental  taxes  and  charges  in  the  Single  Market" 

(COM(97)9 final of 26/03/97). 

15 

At the  national  level,  a  comprehensive  programme  to  improve competitiveness  was  put  forward  by 
the  German  government  entitled  "Offensive  for  entrepeneurship  and  innovation"  This  included 
measures  to  promote  SMEs  (easing  of the  fiscal  burden  on founders  of  new  businesses,  mobilising 
risk  and  venture  capital,  credit  subsidies  etc.)  and  innovation  (financing  conditions  for  applied 
R&D,  reduced  patenting  costs  for  SMEs,  etc.).  Shopping  hours  have  been  liberalised  and 
numerous  other  measures  to  improve  the  functioning  of  the  economy  are  planned.  The  Spanish 
government  put  forward  a  package  of  structural  measures,  including  action  to  reduce  state  aid  to 
In  Portugal,  the  "strategic 
public  enterprises,  ease  taxation  on  SMEs,  and  boost  competition. 
agreement"  reached  between  the  social  partners  and  the  government  refers  to  the  reinforcement  of 
competition  policies  and  to  measures  aimed  at  promoting  innovation,  the  information  society  and 
In  Finland,  the  government  has  taken  a  large  number  of  measures  in  favour  of  SMEs 
SMEs. 
(better  access  to  financing,  training  measures,  etc.)  and  in  Austria,  increased  financial  and 
institutional  support  is  given  for  innovation,  research  and  development. 
In  Denmark,  a  new 
competition  law  was  put  forward  in  1996  which  aims  to  strengthen  anti-trust  rules  and  bring  the 
national  framework  more in line with that of other  Member  countries. 

5.  Fostering employment and labour market reforms 

in  order  to  strengthen  the profitability  of  employment-creating 

5. /  Wage developments 
that  real  wage  developments  should  be  below  the  increase  in 
The  1996  Guidelines  recommended 
investment.  Higher 
productivity 
employment  growth  would  be fostered  by  the  maintenance  of  appropriate  average  wage  trends 
and  in  some  cases  by  wage  differentials 
that  better  reflect  productivity  differentials.  Where 
possible,  the  1996  Guidelines  urged  that  a  reduction  in non-wage  labour  costs  should  be  used  to 
encourage  employment. 

In  recent  years,  wage trends  in  the  Community  have  increasingly  been  in  line with  the  objective  of 
price  stability,  thereby  allowing  monetary  and  financial  conditions  favourable  to  growth  and 
employment  creation,  as  well  as  with  the  objective  to  strengthen  investment  profitability,  thereby 
allowing  the  upswing  to  be  supported  by  rapidly  rising  investment. 
For  the  Community  as  a 
whole,  real  wage  costs  (nominal  compensation  per  employee  deflated  by  the  GDP  deflator) 
increased  by  less  than  1 per  cent  for  the  fourth  consecutive  year  in  1996.  This  was  sufficiently 
behind  both  trend  and  actual  growth  in  labour  productivity  (at  around  2  and  1.5  per  cent, 
respectively)  to  provide  remuneration  for  the  higher  stock  of  capital  employed  per  worker  and  to 
strengthen  the  return  on  investment  in the  Community.  The  prospects  for  1997 and  1998  are  for  a 
continued  respect  of this guideline  in the  Community. 

The  condition  that  real  wage  costs  should  increase  at  a  slower  rate  than  labour  productivity  was 
respected  in  nearly  all  Member  States  in  1996. 
In  Greece,  Portugal,  Finland  and  especially  in 
Sweden,  real  wage costs  outpaced  labour  productivity  in  1996.  In these  countries  a  deceleration  in 
real  wage increases  is needed to  enhance job  creation  in a durable  fashion. 

In the  Community,  the  restoration  of healthier  levels  of investment  profitability  has  laid  the  ground 
for  higher  economic  growth  sustained  by  capacity-widening  and  employment-creating  investment 
as  demand  prospects  brighten.  However,  aggregate  real  wage  moderation  impacts  only  slowly  on 
the  employment-intensity  of  growth.  Another,  more  rapid  route  towards  a  more  employment-
intensive  pattern  of growth  would  be to encourage  a downward  widening  of the  wage  cost  scale  as 
outlined  in the Commission's  1997 Annual  Economic  Report. 

16 

Some countries  have taken  steps  in the direction  of ensuring  that  wage  cost  differentials  take  better 
account  of  productivity  differentials  between  different  occupations  and  skill  levels  and  between 
different  regions. A targeted  reduction  of  non-wage  labour  costs  at the  lower  end  of the  wage  scale 
has  taken  place  in  France,  Belgium  and  the  Netherlands. 
In  the  Netherlands,  the  legislated 
minimum  wage has  increased  by  less than  median  wages.  In contrast,  there has  been  no  halt to  the 
process  towards  wage  equalisation  ahead  of  productivity  trends  between  the  former  western  and 
eastern  Lander  of  Germany.  High  wage  costs  relative  to  productivity  continues  to  hamper  job 
creation  in the eastern  Lander of  Germany. 

Table 6 

Growth, employment  and  productivity 

Real GDP growth 
(% change p.a.) 

Employment 
(% change p.a.) 

Labour productivity 
(% change p.a.) 

90-92 

93-96 

96 

90-92 

93-96 

96 

90-92 

93-96 

96 

Real wage costs per 
employee 
(% change p.a.) 
GDP  deflator 
93-96 

96 

90-92 

Real unit labour cost 
(% change p.a.) 

90-92 

93-96 

96 

0.5 
0.0 
1.8 
0.1 
0.3 
0.2 
1.8 
0.7 
3.6 

1.1 
2.7 
1.2 
1.8 
1.5 
1.2 
7.5 
1.1 
5.0 
2.3 
1.3 
1.6 
2.8 
1.4 
2.7 

1.4 
2.4 
1.4 
2.6 
2.2 
1.3 
8.4 
0.7 
3.6 
2.8 
1.0 
3.0 
3.3 
1.1 
2.1 

2.3 
1.0 
4.2 
1.2 
2.2 
1.5 
5.0 
1.3 
4.2 
2.8 
3.1 
2.9 
-3.6 
-0.4 
-0.7 

0.0 
B 
1.0 
DK 
-1.2 
D 
1.0 
EL 
2.9 
E 
F 
-0.1 
3.8 
IRL 
0.4 
I 
L 
2.4 
1.9 
NL 
A 
-0.7 
P 
0.7 
FIN 
1.4 
S 
-0.6 
UK 
0.7 
0.3 
EUR 
1.4 
USA 
0.6 
JAP 
Source: Commission services, Spring  1997 forecasts. 

-0.4 
-0.4 
-1.0 
1.2 
0.1 
0.0 
3.1 
-1.5 
2.3 
1.1 
1.1 
-0.5 
-0.9 
-1.4 
0.2 
-0.4 
1.7 
0.2 

2.1 
2.0 
0.9 
-4.2 
-2.1 
-1.5 

0.3 
0.3 
1.6 

1.6 
2.4 
3.6 

1.6 
3.0 
1.3 

1.7 
1.1 
3.4 

1.9 
2.1 
2.0 
0.9 
1.2 
1.3 
3.3 
1.1 
0.6 
1.2 
1.7 
2.0 
0.7 
1.3 
0.6 

1.4 
1.2 
1.8 

1.4 
2.4 
2.2 
0.6 
1.6 
1.3 
4.4 
2.3 
2.7 
1.3 
1.7 
2.4 
4.0 
2.8 
2.4 

2.0 
0.8 
1.0 

1.3 
1.5 
2.5 
1.5 
0.8 
1.5 
4.5 
0.5 
1.2 
1.0 
1.7 
2.4 
1.9 
1.7 
1.4 
1.5 
1.0 
2.9 

3.6 
1.5 
1.6 
-2.0 
2.5 
1.6 
4.2 
1.6 
2.6 
1.6 
1.9 
5.5 

2.5 
1.4 
1.6 
1.7 
1.7 
1.5 

0.7 
1.5 
1.1 
0.8 
-0.5 
0.6 
1.5 
-0.2 
0.8 
0.5 
1.0 
1.5 

1.2 
2.4 
0.9 
0.6 
1.0 
0.8 

-0.1 
1.2 
1.4 
2.6 
0.2 
1.0 
1.9 
0.4 
-1.0 
-0.2 
0.2 
3.1 

2.1 
6.4 
0.5 

0.8 
1.8 
0.5 

1.7 
-0.6 
-0.4 
-2.8 
1.3 
0.3 
0.9 
0.6 
1.9 
0.4 
0.2 
3.4 
1.8 
0.1 
0.9 
0.3 
0.5 
-0.3 

-0.7 
-0.8 
-1.1 
0.2 
-2.0 
-0.6 
-2.8 
-2.4 
-1.9 
-0.8 
-0.6 
-0.9 
-2.7 
-0.5 
-1.5 

-1.4 
0.2 
-0.1 

-1.4 
-0.3 
-1.1 
1.1 
-0.6 
-0.4 
-2.5 
-0.1 
-2.2 
-1.1 
-1.5 
0.7 
0.3 
4.6 
-0.9 
-0.7 
0.8 
-2.3 

5.2  Labour market reforms 
The  1996  Guidelines  encouraged  Member  States  to  intensify  their  actions  to  reform 
markets 
services,  education  systems,  active 
unemployed,  incentives  for  the  employment  of  low-skilled  labour,  and  working  time  adaptation. 

including  occupational  and  regional  mobility, 

labour  market  policies  particularly 

labour 
employment 
long-term 

in  a  number  of  areas, 

the 

for 

The  commitment  to  reduce  unemployment  as  the  main  aim  of  economic  policy  has  become  part  of 
the  EU-wide strategy  for  employment  initiated  by the  Essen  European  Council  in  1994.  Since  then, 
the policy  recommendations  have  been  refined  and  made  more  precise  in the  subsequent  European 
Councils  and  a  close  process  of  monitoring  of  their  implementation  has  been  developed  in  co 
operation  with the  Member  States. 

17 

Strategies  and  concrete  measures  at  the  national  level  have  been  embodied  in  multi-annual 
employment  programmes  (MAPs).  MAPs  allow  a  closer  monitoring  of  national  employment 
strategies  and  concrete  measures,  thereby  facilitating  identification  and  exchange  of  best  practices. 
A first  assessment  of their  implementation  has  been presented  to the  European  Council  in  Dublin. 

In  the  implementation  of  the  MAPs,  Member  States  have  taken  a  very  wide  array  of  measures 
covering  all  the  priority  issues  identified  in  Essen.  On  the  demand  side,  the  attention  has  focused 
on  wage  moderation  and  measures  to  reduce  non  wage  labour  costs  as  well  as  the  promotion  of 
flexible  types  of  work  arrangements  and  in  some  cases,  the  reduction  in  hiring  and  firing  costs, 
with  the  aim  of  increasing  the  employment  content  of growth.  On  the  supply  side,  work  incentives 
and  employability  have  been  fostered  through  reforms  of  the  social  protection  systems,  active 
labour  market policies  (ALMPs)  and training. 

The  attached  Box  provides  a  snapshot  of  some of the major  labour  market  measures  implemented 
in  EU  Member  States  in  recent  years.  Some  emerging  patterns  of  reform  involving  one  or  several 
countries  can be  identified: 

-  Countries  characterised  by  a  traditionally  high  degree  of  social  protection  have  started  to  curb 
their  support  levels  via  a  revision  of  benefit  duration  and  replacement  incomes  and,  more 
frequently,  through  tightening  of eligibility rules  and controls  on active job  search  by  recipients. 
This  has  been coupled  with  increased  flexibility  of working time  (for  instance,  the  Netherlands) 
and  emphasis  on  training  and  other  ALMPs  (the  Nordic  countries).  Although  some  effort  has 
been  done  to  improve  the  efficiency  and  effectiveness  of  the  latter  measures,  they  may  be 
expensive  for  public  finances,  at  least  in  the  short  run,  and  may  entail  dead-weight  and 
substitution  effects. 

-  Measures  to  deregulate  the  labour  market  have  been  implemented  in  high  unemployment 
countries.  Spain, 
in  particular,  relaxed  statutory  employment  protection  for  permanent 
employees,  moving  away  from  the  deregulation  "at  the  margin"  (spreading  of  temporary 
contracts)  which had  deepened  the segmentation  of the labour  market. 

-  Countries  relying  on  a  system  of  in-work  benefits  to  top  up  income  from  work  (the  UK  and 
Ireland)  have  implemented  measures  to  reduce  the  high  marginal  effective  tax  rates  in  order  to 
tackle potential  poverty  traps. 

-  Wage  moderation  has  largely  been  implemented  throughout  the  EU.  Furthermore,  a  large 
number  of  countries  have  introduced  reductions  in  non-wage  labour  costs,  either  through 
general  cuts  in  social  security  contributions  (e.g.,  Spain,  Portugal,  Finland,  the  UK,  the 
Netherlands)  or  via  reductions  targeted  on  low  wages  to  foster  demand  for  low  skilled  labour 
(for  instance,  France,  Belgium, the Netherlands). 

Although  it  is  too  early  to  assess  the  effectiveness  of  these  structural  reforms  on  employment 
creation  and  unemployment,  a  number  of  messages  seem  to emerge  from  EU  countries  which  have 
been  relatively  more  effective 
in  recent  years  (the  Netherlands, 
Denmark,  the  UK  and,  to  an  extent,  Ireland).  At  least  some  of  the  key  elements  of  their  success 
appear  to  lie in: 

in  tackling  unemployment 

- 

- 

the comprehensive  character  of the  structural  reforms,  including  those  in  product  and  service 
markets and a strengthening  of incentives  to take up work,  compared  to the case  of  numerous 
but sparse measures without a critical mass; 

the  involvement  of  a  large  share of the  working  population,  including  labour  market  insiders, 
thereby improving the perception of equity of the reforms, or the focus on a specific,  but highly 
relevant  "system  failure"  in the functioning  of the labour  market  or the operation  of the social 
protection system; 

- 

the appropriate macroeconomic conditions combining a reasonable growth performance  and the 
credibility of the commitment to sound macroeconomic management. 

These basic pre-conditions allow to optimise synergy between various measures and, by enhancing 
the political and social acceptability of the structural reforms, reduce the likelihood of future  policy 
reversal. 

19 

BOX:  Main labour  market  reforms  in EU countries in recent  years 

Vocational education and training 

Apprenticeship  schemes have been expanded (in A, B, FIN, F, D, IRL and E) and/or reviewed to 
respond more effectively  to market needs (in DK,  P, UK, D, IRL, I). A wide variety of innovative 
instruments to promote continued training have been implemented in IRL, F, NL, DK. 

Working time  flexibility 

Widespread  use of part-time contracts  in DK, NL,  S and the  UK.  Regulation  on part-time  work 
(E) and temporary  contracts  (D) have been  relaxed;  working time legislation  has  been  liberalised 
(P, FIN, A). Other forms  of working time flexibility have been introduced  (A, D, B, DK,  E, FIN, 
F). 

Hiring and firing costs 

Permissive  stance  of  employment  protection  legislation  in  the  UK  and  DK.  Move  to  ease 
legislation  for  permanent  workers  in  E  and  to  increase  the  threshold  for  the  application  of job 
protection from companies with 5 employees to  10 employees in D. Alternatively, higher  flexibility 
has been allowed via non standard  labour contracting  (fixed  term contracts, part time)  temporary 
work agencies, in a number of MS. 

Non-wage labour costs 

General  reductions  in non-wage  labour  costs  (E,  P,  FIN,  UK, NL)  and targeted  reduction  at low 
end of the wage scale (for instance, F, B, NL). 

Unemployment benefits  and tax wedge 

Replacement  ratios  and duration have been reduced  in DK,  IRL, NL,  E and  S and eligibility  and 
availability to work  requirements  have been tightened  in several  countries  (DK,  UK,  FIN,  S, D). 
Adaptation  of  in-work  benefits  in  UK  and  IRL  to  tackle  poverty  traps.  Action  to  curb  high 
marginal effective  tax  rates in F, UK, DK, IRL, S and NL  (the latter  reduced  also the overall  tax 
wedge on labour). 

Active labour market policies 

Substantive  reforms  of  Public  Employment  Systems  including,  in some  cases, the  elimination  of 
public monopoly in job  brokerage, in S,  FIN, DK,  D, A, NL and B. Special efforts  and targeting 
of  ALMPs  as  well  as  measures  under  the  above  headings  for  the  categories  most  affected  by 
unemployment in most of the MS. 

20 

ISSN 0254-1475 

COM(97) 169 final 

DOCUMENTS 

EN 

10  01 

Catalogue number  :  CB-CO-97-166-EN-C 

ISBN 92-78-18936-7 

Office  for Official  Publications of the European Communities 

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