Commission's recommendation for the board guidelines of the economic policies of the Member States and the Community
Date: 1998-05-13
Institutions: European Commission
Subjects: EU policy, Economic and Monetary Union, economic convergence, economic growth, economic policy

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 13.05.1998 
COM(1998)279 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 priorities: high employment and a successful  EMU 

2.  Price stability 

3.  Growth and stability-oriented  macroeconomic policy mix. 

4.  Monetary policy and exchange rates 

5.  Sound and efficient  public finances 

5.1.  General guidelines 

5.2.  Country-specific  guidelines 

6.  Wage developments 

7.  Structural  policies for growth and employment 

8.  Product, service and capital  markets 

9.  Labour markets and investment  in knowledge 

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

1.  Main priorities: high employment and a successful EMU 

The  introduction  of  the  euro  on  1 January  1999  marks  a  new  phase  in  the  process  of  European 
integration and  in the conduct of economic policy  in the Community. 

The  vigorous  and  credible  implementation  by  the  Member  States,  especially  over  the  last  two 
years,  of  policies  aimed  at  achieving  a  high  degree  of  sustainable  economic  convergence  in  the 
Community has yielded tangible results. 

Firstly,  reflecting  these  remarkable  convergence  efforts  and  results, the  Council  of  the  European 
Union, meeting  in the composition  of Heads of States or Government, decided on 2 May  1998 that 
eleven Member States fulfilled  the necessary conditions for the adoption of the euro. 

Secondly, these efforts  have  led to the establishment  of a macroeconomic  policy  mix conducive  to 
growth and  employment. 

However,  until  now,  insufficient  progress  has  been  made  in  reducing  unemployment  in  the 
Community. 

Since the summer of  1997, when the previous  Broad  Economic  Policy Guidelines were adopted, an 
increasingly  robust and  more  broadly  based  economic  recovery  has taken  hold  in the Community, 
in  a  context  of  historically  low  inflation.  With  spare  capacity  available  and  with  prospects  for 
healthy  growth  in  investment,  especially  in equipment,  solid  growth  should  be  able  to take  place 
without encountering capacity constraints or generating  inflationary  tensions, if,  as expected,  wage 
developments  continue  to  be  appropriate.  Monetary  conditions  may  thus  remain  favourable  for 
In  addition,  the  underlying  economic 
growth  and  employment  for  an  extended  period. 
fundamentals  are  sound  and  improving  continuously,  demand  prospects  are  brightening  and 
confidence  is strengthening  further. 

The  impact  on  Community  growth  prospects  from  the  financial  and  economic  events  in  Asia 
appears limited, provided  firstly  that the crisis neither deepens nor extends to other countries  in the 
region  and,  secondly,  it  is  properly  handled.  Although  the  Asian  events  will  exert  a  modest 
dampening  impact  on  economic  activity  in the Community,  mainly  on  export  volumes,  the  easier 
than otherwise warranted  monetary conditions and  the strengthening of domestic demand  will  help 
to maintain the growth  momentum. 

J h 

Against  the  background  of  a  further  strengthening  recovery,  employment  could 
increase 
moderately,  leading  to  a  slight  reduction  in  the  unemployment  rate  up  to  1999  in  the  EU  as  a 
whole.  This would  constitute  a first,  albeit  modest, step in the direction  of the objective  of a high 
level of employment aimed  for in Article 2 of the Treaty of Amsterdam. 

The level of employment  in the  EU (presently about 60 per cent of the working age population) is 
low.  This  is the  result  not only of high  unemployment  (about  18 million  people  in  1997) but also 
of  poor  employment  prospects  over  long  periods  which  have  discouraged  many  people  to  seek  a 
job, many of whom are beneficiaries  of other social  security  provisions.  Thus, rising employment 
has  to  absorb  not  only  the  unemployed  but  also  a  rising  participation  rate  and  still  some 
demographic  increase in the population of working age. 

In the short run, the present degree of non-employment  is undoubtedly  a weakness and the  source 
of  large  social,  economic  and  budgetary  costs.  But  the  labour  reserve  associated  with  it  also 
represents  a very  important  growth  potential  beyond  the growth  coming  from  labour  productivity 
increases and irrespective of the pace of the latter.  The utilisation of this potential over the medium 
and  longer term  would  greatly  alleviate the  burden  on  Member  States1  public  finances  and  social 
security  systems,  helping  to  fight  efficiently  against  poverty  and  social  exclusion  and  thus 
facilitating  the  safeguarding  and  development  of  common  European  social  values,  as well  as the 
reduction  of tax  pressure  both  on companies  and  on  individuals.  Furthermore,  the very  nature of 
most  of  the  new  employment  opportunities  would  also  make  the  transition  towards  a  more 
environmentally friendly  production mode significantly  easier. 

For  economic  policy,  the  tasks  are  to  set  the  conditions  for  (i)  a  further  strengthening  of  the 
recovery  and  (ii)  its transformation  into a non-inflationary,  self-sustaining,  high  economic  growth 
process  over  the  medium  and  longer  term  —  a  prerequisite  for  substantially  and  durably  higher 
employment.  This  will  require  a  strengthened  programme  of  macroeconomic  and  structural 
policies and a determined  implementation  of the  1998 Employment Guidelines to address a number 
of  key challenges  while  allowing  the  EU economies  to better  adapt  to changing  circumstances  in 
the years ahead. 

The  introduction  of the euro will  not  in  itself  solve the  Union's  unemployment  problem.  But in 
fulfilling  the above-mentioned  tasks, the move towards  Stage 3 of economic  and  monetary  union 
(EMU)  can  make  a  substantial  contribution.  This  is true  not  only  for  the  countries  adopting  the 
euro but also for the other four  Member states if  ~  as expected ~  they continue their convergence 
efforts. 

The  stability  framework  of  EMU  will  contribute  to  the  maintenance  of  a  policy  mix  that  is 
favourable  to growth and employment. 

In  the  macroeconomic field,  governments  and  social  partners  should  each  make  all  the  required 
efforts  for avoiding a conflict  with  the stability  objective  of the common  monetary  policy.  Under 
such conditions, monetary policy has no reason  for being restrictive. 

Simultaneously,  structural  policies  and  reforms  of  the  product,  service  and  labour  markets  are 
required  to  facilitate  a tension-free  growth  process,  to  reinforce  competitiveness,  to  increase  the 
labour content of growth and to make growth more respectful  of the environment. 

Only  if this policy  strategy  is pursued  with  resolve  by all actors  and  if  its  implementation  is well 
co-ordinated  in line with the Luxembourg European Council  resolution, will EMU  ~  as called  for 
in Article 2 of the Treaty  ~  reap its full  benefits  as a mean  of achieving the overall  objectives  of 
the Community,  including the promotion of sustained and non-inflationary  growth respectful  of the 
environment, a high level of employment and rising living standards. 

2.  Price stability 

Price  stability  is an  essential  requirement  for  realising  sustained  medium-term  economic  growth. 
Following  impressive  progress  in  recent  years,  the  Community  has  achieved  price  stability  in a 
sustainable  manner.  It  is necessary  that  all  policies  arc  predictable,  credible  and  consistent  with 
durable price stability. 

In  the  prospective  euro-area,  where  the  average  inflation  rate  has  fallen  to  below  2  per  cent,  all 
participating  Member  States  need  to conduct  their  economic  pojicies  with  a view  to  maintaining 
price  stability  at  the  euro-zone  level,  thereby  allowing  for  monetary  conditions  conducive  to 
growth.  They also need to avoid too wide inflation  differentials  that would create  competitiveness 
problems. 

Price stability has also been achieved  in Denmark, Sweden and the United Kingdom.  The task is to 
consolidate  this  inflation  performance  over  the  medium  term.  In  Denmark,  it  will  be essential  to 
preserve price stability  in the  light of several  years of growth  above trend  and a tightening  labour 
market.  In  Sweden  and  the  United  Kingdom,  inflation  in recent  years  has  been  low compared  to 
the historical  experience.  These two member states have to continue their efforts  in monetary and 
economic  policies  in  order  to  deliver  sustained  price  stability. 
In  the  UK,  in  particular,  the 
government  has  stated  that  it  will  monitor  its  inflation  target  in  the  light  of  the  practices  of  the 
European Central  Bank. 

Greece  has  made  substantial  progress  towards  price  stability  in  recent  years.  Together  with  the 
budgetary  consolidation  efforts  implemented  over  recent  years,  this  allowed  the  entry  of  the 
Drachma into the ERM in March  1998.  ERM membership will help to improve further  its  inflation 
performance.  Reinforced  efforts  are needed, however, to contain the inflationary  consequences o( 
the marked devaluation of the Drachma and to achieve price stability as soon as possible. 

3.  Growth and stability-oriented macroeconomic policy mix 

In  the  macroeconomic  field,  it  is  essential  that  Member  States  remain  committed  to  pursuing  the 
growth  and  stability-oriented  strategy  recommended  in  the  previous  Guidelines  and  which  has 
started to bear fruit.  This strategy contains three essential  ingredients: 

a stability-oriented monetary  policy; 
sustained  efforts  to  achieve  and  maintain  sound  budgetary  positions  consistent  with  the 
Stability and Growth  Pact; 
nominal  wage trends consistent  with  the  price  stability  objective;  at the same time, real  wage 
developments  with  respect  to  increases  in  productivity  should  take  into  account  the  need  to 
strengthen the profitability  of investment and to raise living standards. 

Indeed,  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. 

The  overall  macroeconomic  policy  mix  at  the  euro-zone  level  will  result  essentially  from  the 
interaction  of  the  common  monetary  policy  on  the  one  hand  with  the  average  budgetary 
developments and wage trends  in the participating countries, on the other.  This overall  policy mix 
will  be favourable  to growth  and employment  if all actors and group of actors behave according to 
the  guidelines  summarised  above.  In  the  framework  of  the  Treaty,  supplemented  by  the  Stability 
and Growth  Pact and the  Amsterdam  European  Council  resolution  on "Growth  and  Employment", 
the responsibilities are distributed  as  follows. 

(i)  The single monetary  policy  in the euro-area will be under the responsibility  of the  independent 
ECB and  ESCB. In conformity  with  Article  105(1), the  primary  objective  of monetary  policy 
will  be to  maintain  price  stability  and,  subject  thereto,  to  support  the  economic  objectives  of 
the  Union,  including,  in  particular,  sustained,  non-inflationary,  growth  and  a  high  level  of 
employment, as laid down  in Article 2 of the Treaty. 

(ii)  Budgetary  policies  will  remain  the  responsibility  of  national  governments  but  will  be  subject 
to  the  rules  of  the  Treaty  (Article  104  to  104c)  and  the  Stability  and  Growth  Pact,  which 
emphasises  the  need  to  have  a  budgetary  position  close  to  balance  or  in  surplus  in  normal 
economic  conditions  and  clarifies  the  key  Treaty  provisions  on  budgetary  policy.  National 
governments  will  have to co-ordinate  their  budgetary  policies  in the framework  of the  Broad 
Economic Policy Guidelines. 

(iii)  Wage  setting  will  remain  the  responsibility  of  the  social  partners  at  the  national,  regional, 
sectoral  or  even  at  a  more  decentralised  level  following  their  respective  traditions.  As 
underlined  in the Amsterdam  Resolution on "Growth and employment", the social partners are 
responsible  for  reconciling  high  employment  with  appropriate  wage  settlements  and  for 
setting  up a suitable  institutional  framework  for the wage formation  process.  Since they  have 
an important bearing on the overall macroeconomic  policy mix, aggregate wage developments 
are of general  interest. 

In the framework  of the overall macroeconomic  policy mix of the euro-zone, the policy  mix in each 
participating  country  will  depend  also  on  its  specific  economic  conditions  and  on  its  specific 
budgetary and wage developments.  In order to ensure an appropriate  policy mix both  in the whole 
euro  area  and  in  each  participating  Member  State,  macroeconomic  policies  will  form  an  integral 
part of the strengthened  multilateral  surveillance and co-ordination  of economic  policies as agreed 
at the Luxembourg European Council. 

For the countries that do not initially adopt the single currency, the need  for  stability-oriented  and 
convergent  macroeconomic  policies  will  be  equally  strong,  especially  if  they  participate  in  the 
ERM2,  as  countries  with  a  derogation  are  expected  to.  The  strong  economic  and  monetary 
interdependence  between  the  euro-area  countries  and  the  Member  States  not  as  yet  adopting  the 
euro  and  the  need  to ensure  further  convergence  and  a smooth  functioning  of the  single  market, 
will require that all Member States are included  in the co-ordination  of economic policies. 

4.  Monetary policy and exchange rates 

A smooth changeover to the euro on  I January  1999 is required  to ensure that  EMU  is launched  in 
the  most  favourable  circumstances.  To  this  end,  monetary  policy  co-ordination  between  the 
Member  States  adopting  the  euro  will  need  to  intensify  in  the  remaining  months  of  1998.  In 
particular,  a  co-ordination  of  national  monetary  policies  can  be  expected  so  as  to  ensure  that 
official  interest  rates  converge  smoothly  to  a  common  euro-area  rate,  which  will  apply  from  the 
beginning  of  EMU,  and  that  market  exchange  rates  converge  to  the  pre-announced  bilateral 
conversion  rates.  This will also ensure continuity  between  national  interest  rates and the euro rate 
and  will  avoid  uncertainties  concerning  euro  conversion  rates.  If  interest-rate  and  exchange-rate 
convergence  is  to  be  assured  ahead  of  EMU,  it  is  inevitable  that  euro-area  considerations  will 
become more  important as determinants of national  monetary  policies  in the participating  Member 
States. 

The  common  euro-area  interest  rate  will  depend  upon  the  prevailing  economic  conditions  and 
expectations when EMU is launched  but it is certain that the ECB will set this rate so as to maintain 
price  stability  in the  area  as  a whole.  As  the  euro-area  interest  rate  will  be consistent  with  price 
stability,  interest rate convergence among the Member  States will  not  present  any problems  for the 
euro area as a whole.  However, the  euro-area  interest  rate is unlikely to match exactly  the initially 
different  cyclical  conditions  in  each  of the  participating  Member  State  economies.  Accordingly, 
convergence to the  single  rate  —  and  to a  lesser extent  convergence  in exchange  rates to the pre-
announced  bilateral  conversion  rates  —  might  require  an  adjustment  of  the  policy  mix,  notably 
through  budgetary policy measures (see Section  5.2). 

The  Member  States  not  adopting  the  single  currency  from  the  outset  retain  competence  in  their 
national  monetary  policies  but,  in accordance  with  the Treaty, are expected  to treat their  exchange 
rates  as  a matter  of  common  interest.  The  ERM2  will  provide  a  useful  framework  for  monetary 
relations  between  the  pre-ins  and  the  euro  area  from  1999  onwards  and  will  support  their 
convergence  efforts  ahead  of  adopting  the  euro.  While  participation  in  the  ERM2  will  be 
voluntary, the pre-ins would be expected to join. 

5.  Sound and efficient  public  finances 
5. /.  General guidelines 

Following a peak of 6.1 per cent of GDP in  1993, the actual  government  deficit  in the Community 
as  a whole  has  fallen  steadily,  reaching  2.4  per  cent  of  GDP  in  1997.  In  the  EC on  average, the 
budgetary  adjustment  was entirely  made  up by a reduction  in government  spending  in GDP  (from 
52.4  per cent  in  1993 to 48.7  per cent  in  1997).  This remarkable  outcome  is essentially  the  result 
of  determined  consolidation  efforts  in all  of the  Member  States,  in particular  in  1997, assisted  by 
stronger economic growth  and falling  interest rates. 

On the  basis of  budget  measures decided  upon  until  mid-April  1998, the  net  borrowing  of general 
government in the Community as a whole is likely to be reduced  further  to just  below 2 per cent of 
GDP  in  1998 and,  on  the  basis  of  unchanged  policies,  to  decline  further  to  1.6  per  cent  in  1999. 
However, the government  budget deficit  adjusted  for cyclical  influences  is expected to post only a 
modest decline over the period  under review.  In the prospective euro area, the government  deficit 
stood  at  2.5  per  cent  of  GDP  in  1997  and  could  drop,  with  unchanged  policies,  to  2  per  cent  of 
GDP  in  1999.  A  strict  implementation  of the  country-specific  budgetary  guidelines  stipulated  in 
Section  5.2 could  reduce the budget  deficit  to below  1.5  per cent of GDP  in  1999 in the euro zone 
as a whole. 

Despite  the  achievement  of  sustainable  public  finances  in  virtually  all  Member  States,  additional 
progress  is required  in most countries  in compliance  with the Stability and Growth  Pact's medium-
term objective  of budgetary  positions close to balance or in surplus.  This requirement  holds for all 
Member  States  but  in  particular  for  those  adopting  the  euro  as of January  1999 for  the  following 
reasons. 

(i)  Sound  budgetary  policies, by fostering  low and  stable  inflationary  expectations, will  facilitate 
the  task  of  the  single  monetary  policy  in  maintaining  price  stability. 
In  the  present 
conjuncture,  a further  scaling back of government  deficits  will contribute  to the  sustainability 
of  the  economic  recovery  because  it  will  allow  continued  favourable  monetary  conditions, 
thereby supporting  investment and alleviating capacity constraints. 

(ii)  In many countries, public finances  have not yet regained the necessary room for manoeuvre to 
cope with  adverse economic developments.  Since after  the  introduction  of a single  currency, 
the  adjustment  to adverse  cyclical  developments  and  country-specific  disturbances  will  to an 
important  extent rest with  budgetary  policy,  it will  be of paramount  importance to ensure that 
the  automatic  stabilisers  will  be  able  to  fully  play  their  role.  Furthermore,  sound  budgetary 
policies  will  in  all  likelihood  also  increase  the  effectiveness  of  the  automatic  stabilisers. 
Proven  budgetary  discipline  will  strengthen  the  confidence  of  economic  agents  that  a  rising 
deficit  during  a  recession  will  not  permanently  disrupt  the  public  finances,  thereby  avoiding 
any adverse effects  emanating from  the financial  markets. 

(iii)  Sound  budgetary  positions  will  help  to  keep  long-term  interest  rates  at  alow  level,  thereby 
generating a crowding-in  of private  investment.  Since  in such circumstances governments  no 
longer absorb private  saving, but make a positive contribution  to savings  in the economy, the 
increase in the investment rate can  - other things being equal - take place without pressures on 
the balance of payments and long-term  interest rates. 

(iv)  Finally,  budgets  close  to  balance  or  in  surplus  will  allow  a  speedy  reduction  in  the  still 
relatively  high  public  debt  ratios  in  many  countries  and  hence  to  reduce  the  debt  service 
burden.  This  in turn  will  facilitate  the  needed  restructuring  of government  spending  towards 
more  productive  uses  and  the  lowering  of  taxes  and  social  security  contributions,  while 
making  the  taxation  system  more  employment  friendly. 
It  will  also  help  to  prepare  for  the 
budgetary consequences of population ageing. 

Against  this  background,  it  is  essential  that  Member  States  provide  assurance  regarding  the 
continuity of budgetary adjustment.  To this end, Member States should commit themselves: 

(i) 

to  fully  implement  their  1998  budgets, thereby  avoiding  any  backsliding;  a  strengthening  of 
economic  growth  beyond  the  current  expectations  should  be  applied  to  step  up  deficit 
reduction; 

(ii)  to  seize  the  unique  opportunity  offered  by  the  present  favourable  economic  conditions, 
especially  in  terms  of  output  growth  and  further  declines  in  debt  service  costs,  to  target 
ambitious  budgetary  objectives  aimed  at  achieving  as  soon  as  possible  positions  close  to 
balance or in surplus; 

(iii)  to  advance  the  submission  of  their  stability  and  convergence  programmes  with  a  view  to 
enabling  the  Commission  and  the  Council  to  assess  all  these  programmes,  including  the 
overall  budgetary stance and the policy mix in the euro area, at the start of Stage 3 of EMU; 

(iv)  to  assure,  where  appropriate,  a  further  steady  decline  in  public  debt  and  an  appropriate 
maturity structure with a view to reducing the vulnerability of their public  finances  to  adverse 
developments in interest rates. 

The timing, scale and composition  of budgetary  adjustments  are  important  in determining  whether 
they  will  be successful  in  having  a durable  impact  on the  government's  budgetary  position  and  in 
improving  economic dynamism,  competitiveness  and  employment.  Although  they will  need to be 
tailored to country-specific  conditions, previous guidelines exercises  identified  a number of general 
principles.  The present guidelines reaffirm  and build upon these principles. 

(i)  Budget deficit  reductions should  be achieved through  expenditure restraint rather than through 

tax increases. 

(ii)  In cases  where  government  deficits  and/or  government  debt-to-GDP  ratios  are still  relatively 
high, priority should  be given to a swift  reduction  of deficits.  A continued  decline  in the share 
of  government  spending  in  GDP  will  accelerate  deficit  reduction  and  put  it  on  a  more 
sustainable basis. 

(iii)  Budgetary  consolidation  needs  to  be  accomplished  in  a  socially  balanced  way  and  without 
impinging  on the  quality  of  government  services.  It must  be directed  towards  increasing  the 
effectiveness  and  the  efficiency  of  government  spending.  In  this  respect,  measures  should 
focus on better controlling or reforming  public consumption, public pension  provisions, health 
care,  passive  labour  market  measures  and  subsidies.  Furthermore,  in  recent  years, there  has 
been  a tendency  for  government  investment  to  be  reduced  relative  to GDP, although  part  of 
this  reflects  a  shift  towards  the  private  financing  and  operation  of  public  infrastructure 
investment.  To the extent  possible and without threatening the  necessary  further  reduction  in 
government  deficits,  spending  on  investment  in  infrastructure  as  well  as on  other  productive 
activities  such  as  on  human  capital  and  active  labour  market  initiatives,  should  be  favoured. 
Such  a  restructuring  is  likely  to  lead  to  an  increase  in  the  employment  rate  and/or  to  a 
reduction  in the  number  of  people of working  age  receiving  social  transfers,  thereby  helping 
to improve budgetary positions over the medium term. 

(iv)  In order to  improve  economic  efficiency  and  to promote  economic dynamism,  a reduction  in 
the  overall  tax  burden  is desirable  in  most  Member  States,  but  it  should  be  contingent  upon 
further  steady  progress  towards  sound  budgetary  positions. 
In  conformity  with  the  1998 
Employment  Guidelines,  Member  States  are  recommended  to  reduce  the  burden  of  social 
security  contributions  or  the  tax  wedge  as  a whole,  in  order  to  reverse  the  trend  towards  an 
increase  in the tax burden  borne  by employed  labour, especially  at the  lower end of the wage 
scale.  It  is  essential  that  the  timing  and  modalities  of  efforts  to  reduce  the  tax  burden  on 
labour are decided  upon  with  a view  to maximising  their employment  effects  while  fostering 
sound  public  finances  and  preserving  the  sustainability  of  social  protection  systems  through 
better controlling government spending and/or  identifying  alternative financing  sources. 

5.2.  Country-specific guidelines 

(i)  Euro-zone Member States 

In  Belgium, favourable  economic  growth  conditions  have contributed  to  bringing  forward  by  one 
year the budgetary targets set  in  its convergence  programme.  Efforts  are  still  needed, however, to 
ensure  that  the  government's  commitment  to  maintain  the  primary  surplus  at  6  per  cent  of  GDP 
over the medium term  is realised, thereby securing a fast decline in the debt ratio, which  is still at a 
very  high  level.  A  tight  control  needs  to  be  exerted  further  on  transfers  to  households  and 
especially on health care spending. 

Germany  needs  to  reduce  its  government  deficit  in  the  coming  years.  Subsidies,  transfers  to 
households  and  government  consumption  need  to  be  restrained  further.  Additional  efforts  to  cut 
spending  are  also  needed  if  the  government's  aim  of  reducing  the  expenditure  ratio  by  the  year 
2000 to its pre-unification  level of 46 per cent of GDP is to be realised.  Germany  needs to step up 
its budgetary  adjustment  to put  its debt ratio firmly on a declining  path and to swiftly  bring  it back 
below the 60 per cent of GDP reference  value in the near  future. 

In  Spain,  maintaining  the  current  budgetary  stance  would  allow  the  deficit  to  come  down  in  the 
coming years due to the favourable  economic growth conditions.  Spain would, however,  still need 
to  undertake  an  additional  effort  to  improve  the  budgetary  position  further  to  the  medium-term 
target of a budget close to balance or  in surplus.  A further  tightening of fiscal  policies  in Spain  is 
also  needed  to  prevent  the  risk  of  overheating.  Spending  needs  to  be  controlled  further  if  the 
government's  aim  of  reducing  the  expenditure-to-GDP  ratio  to just  below  42  per cent  of GDP by 
the year 2000  is to be realised. 

In France, the  medium-term  budgetary  strategy  must  be made clear.  Budgetary  adjustment  efforts 
should  be stepped  up to  bring  the  deficit  clearly  below  the  3 per  cent  of  GDP  reference  value  in 
1999 and pursued  beyond that year  in order to respect the medium-term  obligations of the Stability 
and  Growth  Pact.  These consolidation  efforts  are also needed  to stabilise the debt ratio and to put 
it on  a downward  path  in the very  near  future.  When  bringing  about  the deficit  reduction,  efforts 
must be made to continue the tight control of transfers to households and government  consumption. 

In Ireland, the  government  budget  is expected  to  show  increasing  surpluses  in  the  coming  years 
and the debt  ratio  is expected  to fall  below  60 per cent  of GDP  in  1998 and to continue  declining 
thereafter.  In view of the present  strong growth  of the economy and the possibility  of overheating, 
any revenues received over and above those anticipated  in the  1998 budget  should  be used to raise 
the  budget  surplus.  Moreover,  a  tight  fiscal  stance  is  required  in  Ireland  to  reduce  the  risk  o( 
overheating,  namely  in  1999,  and  such  a  stance  should  not  be jeopardised  by  any  further  tax 
reductions. 

After  having successfully  reduced  its government deficit  to below the 3 per cent of GDP  reference 
value  in  1997, Italy needs to step up further  its budgetary consolidation  efforts.  Efforts  are needed 
to  ensure  a  rapid  decline  in  the  deficit  ratio  through  an  appropriately  high  level  of  the  primary 
surplus  over  the  medium  term.  Such  developments  in  the  overall  deficit,  reinforced  by 
privatisation  revenues, should  secure a continued  decline in the debt ratio. 

Luxembourg  is  expected  to  keep  a  budget  surplus  in  the  coming  years,  while  its  debt  ratio  will 
remain at a very low level. 

The Netherlands must not allow its current budgetary position to deteriorate.  Given the  favourable 
economic  growth  conditions  expected  in  the  coming  years,  the  deficit  should  be  brought  down 
further.  The  budgetary  stance  should  therefore  not  be  relaxed  and  the  government  deficit  should 
not  be allowed  to  start  increasing  again.  Budgetary  adjustment  should  be maintained  to ensure a 
further  continuous decline  in the debt ratio. 

Austria  should  continue  its consolidation  efforts  in the coming years  in order to achieve  the target 
of a budgetary  position  close to balance or  in surplus over the cycle.  Austria  needs to exert a tight 
control  on  its budget  in order to ensure that ongoing  structural  reforms  in the  pension  system  and 
the adaptation  of family  taxation  to comply with a recent Constitutional  Court  ruling, do not  lead to 
a  build-up  of  pressures  on  the  budget.  Further  budgetary  consolidation  is also  needed  to  put  the 
debt ratio firmly  on a downward  path. 

Portugal should  seize the  opportunity  presented  by the favourable  economic  growth  conditions  in 
the  coming  years  to  rapidly  bring  down  its deficit  to a  position  close  to  balance  or  in  surplus,  as 
required  by the  Stability and Growth  Pact.  This would  also help to reduce the risk of overheating. 
Budgetary  adjustment  should  increasingly  focus  on  the  expenditure  side,  instead  of  relying 
predominantly  on  revenue  increases  and  reductions  in  interest  payments.  The  debt  ratio  is 
expected  to fall  to 60 per cent of GDP in  1998 and to continue declining  in the coming years. 

In Finland, the government  budget  is expected to turn  into surplus  in  1998 and  increasing surpluses 
are  aimed  for  in  the  coming  years.  Finland  plans  to  introduce  an  income  tax  reduction  in  1999. 
This  measure  should  be  implemented  in  such  a  way  that  the  process  of  further  budgetary 
adjustment  is continued. 

(ii)  Member  States  not  adopting  the  euro  as of January  1999 

Denmark is expected  to tighten  further  its budgetary  stance and to  increase  its budget  surpluses  in 
the  coming  years.  Tax  revenues  will  remain  buoyant,  while  government  investment  will  be 
reduced  further.  Given  the  increasing  budget  surpluses  and  the  sale  of  financial  assets  by  the 
government,  the debt ratio  is expected  to  fall  below  60  per cent  of  GDP in  1998 and  to  continue 
declining in the coming years. 

10 

Greece has made  substantial  progress  in  reducing the  large  imbalances  in  its public  finances  over 
recent years but  its deficit  remained  at 4.0  per cent of GDP  in  1997 and the high  government  debt 
ratio  has  only  been  reduced  during  one  year  so  far.  Greece  should  continue  its  budgetary 
consolidation  efforts  notably  through  the  rigorous  implementation  of the  measures  announced  by 
the  government  when  the  drachma  joined  the  ERM,  in  order  to  secure  its  smooth  and  orderly 
participation  in the  ERM.  These  measures  include a further  reduction  in primary expenditure, the 
reform  of  the  social  security  system  in  the  medium  term,  extended  privatisation  plans  and  the 
restructuring of large public enterprises. 

Sweden plans to continue  its budgetary  adjustment  efforts,  although  at a gradually easing pace, and 
to  realise  increasing  surpluses  in  the  coming  years.  Sweden  is  aiming  for  a  budget  surplus  of 
around  2  per  cent  of  GDP  over  the  cycle.  Budgetary  adjustment  should  focus  on  controlling 
expenditure, especially transfers  to households, while the burden of taxation  on the economy  needs 
to be alleviated. 

In the  United Kingdom, the  deficit  is targeted  to  be  reduced  further  towards  a budgetary  position 
close  to  balance  or  in  surplus  by  the  end  of  the  decade.  To  achieve  this  position,  the  United 
Kingdom  should  rigorously 
implement  the  announced  budgetary  measures.  Government 
expenditure  should  continue  to  be  controlled  tightly.  The  conduct  of  budgetary  policy  in  the 
United  Kingdom  should  also  take  into  account  the  need  to  bring  about  the  envisaged  overall 
stability conditions for the UK economy. 

6.  Wage developments 

The evolution  of aggregate wages and  wage differentials  has substantial  implications  for  inflation. 
growth,  employment  and  the  employment-content  of  growth.  In  EMU,  with  the  single  monetary 
regime, the  link  between  wages and  employment  will  become  more evident  and  stringent.  On the 
other  hand,  the  credible  and  stability-oriented  macroeconomic  framework  will  foster  adequate 
wage behaviour. 

For  wage  developments  to  contribute  to  an  employment-friendly  policy  mix,  the  social  partners 
should  continue  to  pursue  a  responsible  policy  course  and  conclude  national  and  regional  wage 
agreements in line with the following  general rules. 

(i) 

In  the  euro  area,  aggregate  nominal  wage  increases  must  be  consistent  with  price  stability. 
This  implies  that  wage  settlements  must  embody  the  inflation  objective  pursued  by  the 
European  Central  Bank.  The  known  and  credible  price  stability  objective  will  facilitate  the 
continued  respect  of this  rule.  Wage  increases  in  the  whole  euro  area  that  are  incompatible 
with price stability will  inevitably  lead to a tightening of monetary conditions  in the euro zone, 
with  adverse  effects  on  growth  and  employment.  Excessive  nominal  wage  increases  in  a 
country  or  region  will  not  necessarily  exert  a  significant  impact  on  inflation  in  the  entire 
monetary  union  but, 
they  will  worsen 
competitiveness and employment  conditions  in this country or region. 

their  effect  on  unit 

labour  costs, 

through 

11 

(ii)  Real  wage  increases  with  respect  to  labour  productivity  growth  should  take  into  account  the 
need  to  strengthen,  and  subsequently  maintain,  the  profitability  of  capacity-enhancing  and 
employment-creating  investment,  whilst  supporting  the  purchasing  power  of  wage  earners. 
This  implies that  in countries  where overall  labour  productivity  growth  is slowing  down, due 
to policies aimed  at increasing the employment-content  of growth (e.g. a reduction  in working 
time  and  a  cut  in  non-wage  labour  costs  at  the  low  end  of  the  wage  scale),  the  scope  for 
macroeconomic  real  wage  increases  will  be  reduced.  For  improved  profitability  to  result  in 
higher  investment  inside and not outside the Community,  it is essential to forge  an  investment-
supportive  environment  in terms of demand  developments,  labour market conditions, taxation 
and the regulatory  framework. 

(iii)  Wage  agreements  should  better  reflect  differentials  in  productivity  levels  according  to 
qualifications  and  skills,  regions  and,  to  some  extent,  sectors. 
In  this  context,  the  social 
partners  should  consider  the  introduction  of  entry  wages  for  the  young,  low-skilled  or  long-
term  unemployed,  whose  effects  would  be  enhanced  by  measures  to  promote  the 
employability and the adaptability of the labour  force. 

(iv)  "Wage  imitation  effects"  need  to  be  avoided,  implying  that  labour  cost  differences  between 
Member  States  should  continue  to  reflect  discrepancies  in  labour  productivity.  Due  to  the 
existence of a single currency, differences  in wage levels between  Member States will  become 
more transparent.  This may lead to a certain  increase  in labour mobility  but may also give rise 
to  wage  claims  in  lower-wage  countries  to  close  the  gap  with  higher  wage  countries.  An 
increase  in  wages  faster  than  warranted  by  productivity  levels  in  a  country  would  lead  to a 
deterioration 
in  competitiveness  and  investment  profitability  and  therefore  to  reduced 
attractiveness  as  a  production  location.  The  country's  export  performance  would  suffer, 
investment would be deterred  and unemployment would  increase. 

These  requirements  for  adequate  wage  behaviour  apply  in particular  to the countries  adopting  the 
single  currency,  but  also  to  the  other  Member  States,  as  they  should  be  equally  committed  to 
growth  and  stability-oriented  policies.  Compliance  with  these  requirements  does  not  imply, 
however,  that  wage developments  should  be uniform  across the  euro-area.  There  are  likely to be 
differences  in  productivity  growth  and  thus  in  the  available  room  for  real  wage  developments. 
Moreover,  differences  in  labour  market  situations  and  economic  conditions  need  to  be taken  into 
account.  In  EMU, wage  adjustment  will  need  to  play  a  more  important  role  in the adjustment  to 
changing  economic circumstances,  especially  in the case of country-specific  disturbances,  thereby 
requiring a higher degree of flexibility in the wage formation  process. 

Since  the  social  partners  are  primarily  responsible  for  achieving  wage  developments  compatible 
with  the  achievement  and  maintenance  of  high  employment,  thereby  playing  an  important  role  in 
achieving  an  appropriate  macroeconomic  policy  mix,  it  is  essential  to  strengthen  the  social 
dialogue  at  all  the  appropriate  levels.  At  the  national  level,  governments  may  have  to  take  a 
stronger  interest  in  fostering  dialogue  and  in  promoting  understanding  of  the  policy  strategy 
developed  in  the  Broad  Economic  Policy  Guidelines.  At the  Community  level, the  Commission 

12 

issues. 
will  continue  to  develop  the  social  dialogue,  notably  on  macroeconomic  policy 
Furthermore,  in the framework  of the strengthened  economic  policy  co-ordination,  there  is a need 
to establish credibility and a climate of confidence  between the major  policy actors which  could be 
reinforced  by  a  regular  dialogue  between  the  social  partners  on  the  one  hand  and  the  authorities 
responsible for budgetary and monetary policies on the other. 

7.  Structural policies for growth and employment 

Structural  policies  have  a  primary  role  to  play  in  fostering  economic  growth,  restoring 
competitiveness  and  raising  employment  levels.  Their  key  role  is  to  help  ensure  a  tension-free 
macroeconomic  growth  process,  to  reinforce 
the 
employment-content  of growth and to make growth  more respectful  of the environment.  However, 
to  reach  their  full  effectiveness,  they  must  be coherent  with  the  pursuit  of  sound  macroeconomic 
policies.  In this respect,  it  is essential  that the budgetary  costs of structural  reform  are  kept  under 
control  and  do  not  jeopardise  the  achievement  of  sound  budgetary  positions.  Their  economic 
benefits  also  emerge  only  gradually  over  time  and  they  are  clearly  more  efficient  in  a context  of 
higher economic growth. 

the  EU's  competitiveness,  to 

increase 

Given  insufficient  progress  in  the  implementation  of  structural  reforms  in  product,  service  and, 
especially,  labour markets  in most Member States, continued  and  intensified  efforts  are required  to 
remove often  deeply seated  structural  deficiencies.  This need  is made all the more pressing  by the 
introduction  of  a  single  currency.  Member  States'  adjustment  to  country-specific  economic 
disturbances  will  have  to  rely  to  a considerable  extent  on  the  flexibility  and  adaptability  of  their 
markets  for  products,  services  and  factors  of  production.  EMU  will  also  intensify  competitive 
pressures  on  enterprises  because  of  increased  price  transparency  and  the  elimination  of  possible 
exchange rate changes within the euro zone. 

Failure  to  make  resolute  headway  in  bringing  about  a  greater  flexibility  of  the  Member  States' 
economies  will  have  serious  consequences;  economic  growth  will  not  be  sufficiently  bolstered, 
employment  levels  will  not  be  significantly  raised  and  progress  towards  greater  economic  and 
social  cohesion  among the Member States will be jeopardised.  On the other hand, the  introduction 
of the euro is itself likely to act as a catalyst for structural  reform.  The single currency will  unleash 
competitive  forces  that will  strengthen  the  incentives  for  structural  reforms,  thereby  improving the 
chances  for  reducing  unemployment. 
Just  as  the  immediacy  of  the  Maastricht  exigencies 
galvanised  support  for  macroeconomic  adjustment,  the  commitment  to  a  properly  functioning 
EMU  and to durably  reduce  unemployment  should  now help to mobilise  support  for  a  programme 
of mutually reinforcing  structural  measures in areas such as taxation, social protection  systems, and 
product  and  labour  markets,  which  would  aim  at  enhancing  both  market  efficiency  and  social 
cohesion. 

13 

8.  Product, service and capital markets 

In order to safeguard  and promote the EU's competitiveness, employment and  living standards  in a 
world  of  free  trade  and  constant  technological  change,  it  is essential  that  Member  States  and  the 
Community  intensify  their efforts  to improve the efficiency  of product, service and capital markets. 
These efforts  should focus on four  major areas. 

(i)  Reforms to perfect  the Single Market 

Improvement  in  the  functioning  of  the  Single  Market  is  of  paramount  importance  for  a 
successful  EMU.  Despite  considerable  progress,  a  number  of  significant  problems  remain. 
The  legislative framework  of the Single Market remains incomplete, mainly due to the lack of 
full  implementation  of  EU  directives  at  national  level.  Efforts  to  reduce  the  degree  of  non-
implementation  of  Single  Market  directives  should  be  pursued  particularly  in  Portugal, 
France, Austria, Italy and  Belgium  where the implementation  deficit  ranges between  6 and  7.5 
per cent.  Recognising this problem, the Commission  and the Member States agreed an  Action 
Plan for the Single Market  in June  1997 committing the Member States to clear away the most 
serious  remaining  legislative  gaps  by  1 January  1999.  Among  the  areas  requiring  further 
action, public procurement and mutual recognition  deserve particular attention. 

Efforts  should  now  focus  on  ensuring  the  prompt  implementation  of  the  Action  Plan  and  on 
monitoring  the  progress  towards  an  effective  Single  Market.  To this  end, the  Single  Market 
Scoreboard  is  being  developed  for  regular  six-monthly  publication.  Furthermore,  in  its 
conclusions,  the  Luxembourg  European  Council  stressed  both  the  importance  of  paying  full 
attention  to those  national  economic  developments  and  policies which  may hinder the  smooth 
functioning  of the Single Market and the need for policy co-ordination to aim also at  fostering 
tax reform  in order to raise efficiency  and to discourage harmful  tax competition.  In this area, 
the  treatment  of tax  incentives  should  be consistent  with  Community  rules  for  State  aids and 
Member  States compliance  with  principles  of fair  tax competition  should  be monitored.  This 
is one of the main tasks of the Follow-up Group, which was established  on  1  December  1997. 

to 

The  Single  Market  and  overall  globalisation  exert  a  strong  pressure 
improve 
competitiveness,  but the  latter  is also  linked  to national  or Community  policies  in the field o\' 
R&D and,  notably,  the  information  society.  To  this end,  it  is essential  to  implement  swiftly 
those actions  programmed  in the  Action  Plan  which  promote  innovation  and a wide  diffusion 
of  new technologies.  The  logistic  environment  of firms needs also a strengthening  of  efforts 
in  TEN  and  national  infrastructure  projects  both  in  keeping  an  adequate  share  of  public 
investment  in overall  public  expenditure  and  by  searching  for joint  ventures  with  the  private 
sector where appropriate.  Efforts  should  also  focus  on encouraging  an enterprise  culture and 
in  stimulating  growth,  employment  and 
promoting  entrepreneurship,  a  key 
competitiveness  in the Community. 

factor 

14 

(iï)  Reforms to enhance competition 

In the area of competition  policy, the Commission  has recognised  the  need  to streamline  and 
decentralise  anti-trust  enforcement  in order  to enhance  its effectiveness  and  reduce  the  costs 
imposed  on  enterprises.  Member  States  should  also  make an  important  contribution  towards 
achieving  the  objective  of  a  more  efficient  enforcement  of  anti-trust  rules  by  revising  their 
laws so that the national  competition  authorities can apply anti-trust  policy effectively  and by 
reviewing  their  competition  laws  with  a  view  to  eliminating  any  unnecessary  burden  on 
businesses. 

For state aids, there  is a need  for the Commission  to strictly control them  and for the  Member 
States  to exercise  rigorous  self-discipline.  This discipline  should  be  particularly  welcome  in 
those  Member  States  where  state  aids  as  a  percentage  of  GDP  are  above  the  Community 
average  (Germany,  Luxembourg,  Italy,  Belgium  and  Greece) or where  ad  hoc aid  for  rescue 
and restructuring  is relatively  large, resulting in greater distortionary effects  (Portugal, France, 
Italy  and  Spain).  These  state  aids  may  create  artificial  cost  advantages  for  low-tech,  low-
demand  sectors.  In  the  Community,  this  has  contributed  to  maintaining  a  specialisation  in 
weak-demand  sectors,  reducing  its  competitiveness  without  succeeding  in  creating  or 
maintaining  employment.  Part  of the  resources  devoted  to the financing of  these  aids  could 
therefore  be  diverted  towards  other  structural  policies  aimed  at  promoting  innovation, 
accumulating  human  capital  and  boosting  competitiveness  and  productivity.  This  would 
improve the capacity of  European  economies to meet the challenge of a fast-moving  world  of 
constant technical change. 

(Hi)  Regulatory reforms 

An  adequate  regulatory  framework  is  a  pre-condition  for  boosting  productivity  growth  and 
raising  the  competitiveness  of  European  firms.  In  part  reflecting  an  excessive  regulatory 
burden,  productivity,  relative  to  the  manufacturing  sector  as  a  whole,  in  high-tech  sectors, 
such  as  aerospace,  pharmaceuticals,  precision  instruments,  has  been  growing  slower  in  the 
Community  than  in the  United  States.  Governments  and  the  Commission  therefore  have  the 
responsibility  to continuously  review  existing  regulations  to  assess  their  appropriateness  and 
to  reduce  the  costs  of  implementing  and  monitoring  these  regulations  and  to  increase  their 
transparency  and enforceability.  This also holds for environmental  legislation  and  regulation, 
which  should  be  incentive-based  so  as  to  allow  economic  agents  to  achieve  well-defined 
environmental  objectives  in  a  cost-effective  way.  As  there  are  still  wide  disparities  in 
regulatory  practices  between  countries, a  benchmarking  approach  to  the  identification  of  the 
best  regulatory  practices  could 
in  the  regulatory 
lead  to  a  significant 
environment  of enterprises.  This  initiative  could  be co-ordinated  by  the  Commission  on  the 
basis of contributions  from  the Member States. 

improvement 

15 

Administrative  regulations  and  cumbersome  procedures  tend  to  weigh  especially  heavy  on 
small  and  medium-sized  enterprises,  particularly  during  the  start-up  phase.  The  outcome  of 
the  BEST Task  Force highlights  priority areas for action  in this regard.  Therefore,  a first area 
where this  benchmarking  exercise  could  be  launched  is the administrative  regulations  for  the 
start-up of business.  Similarly,  identifying  and  removing any remaining regulatory  barriers to 
the  development  of  venture  capital  and  new  financial  products,  particularly  those  that  may 
assist in the financing of SMEs, should  be a priority. 

Special  attention  needs also to be paid to job creation  at  local  level  in the social economy and 
new  activities  linked  to  the  needs  not  yet  satisfied  by  the  market,  which  have  an  important 
spillover  effect  both  in terms  of economic  activity  and  social  cohesion.  To exploit  fully  the 
opportunities  offered  in these  areas, a more  favourable  regulatory  and fiscal framework  need 
to be developed. 

(iv)  Financial markets 

EMU  will  bring  important  changes to  European  financial  markets.  From  1  January  1999, the 
ECB will  define  and  implement  its monetary  policy  in euro.  The  interbank  markets,  money 
markets,  foreign  exchange  and  capital  markets  of  the  Member  States  in  EMU  will  switch  to 
the  new  currency.  All  new  issues  and  existing  stocks  of  government  debt  of  the  Member 
States  adopting  the  euro  will  be  denominated  in  euro  and  an  increase  is  expected  in  the 
issuance of private-sector debt and equity  in euro.  Private sector usage of the euro will also be 
encouraged  by  the  facility  for  cross-border  payments  through  the  TARGET  system  and 
through  the harmonisation  of market conventions.  EMU will  result  in the emergence of  large 
and  highly  liquid  euro  financial  markets,  which  should  provide  an  important  stimulus  to 
economic growth  in the euro area.  To this end, it is important that the national authorities take 
the  necessary  measures  to  remove  legal  and  financial  obstacles  to  market  integration.  As 
segmentation  between  Member  States' financial markets diminishes  in EMU, any  inefficiency 
will  become  more  apparent  amid  intensified  competition  between  euro-area  financial 
institutions.  Moreover,  the  new  euro  financial  markets  are  likely  to  prove  attractive  to 
financial  institutions  from  outside  Europe.  It  is essential,  therefore,  that  operators  should  be 
fully  prepared  for  EMU  if  the  potential  of  the  new  euro  financial  markets  is  to  be  fully 
realised. 

For these reforms  to be highly effective,  they  need to be co-ordinated  at the Community  level and 
be  closely  monitored  through  a  regular  multilateral  surveillance,  thereby  complementing  the  on 
going  macroeconomic  multilateral  surveillance.  To  this  end  and  to  ensure  steady  progress  with 
economic  reform,  Member  States  and  the Commission  should  submit  short  annual  reports  setting 
out their policies aimed  at making their product, service and capital  markets more efficient.  These 
reports  will  provide  an  input  to  the  Broad  Economic  Policy  Guidelines,  starting  from  next  year. 
The  Commission  will  also  elaborate  an  extended  scoreboard  with  indicators  of  effective  market 
integration, including price differentials,  and  implementation  of Single Market measures. 

16 

9.  Labour markets and investment in knowledge 

A  durable  reduction  in  the  presently  high  levels  of  unemployment  and  non-employment  in  the 
Community  is  possible.  It  requires  however  a vigorous  and  unremitting  use  of  a  broad  range  of 
mutually  reinforcing  policies  with  success  often  emerging  only  over  the  medium  to  longer  term. 
Macroeconomic  policies,  in  interaction  with  structural  policies,  should  ensure  the  realisation  of  a 
protracted  period  of  strong,  non-inflationary  growth  supported  by capacity-enhancing  investment. 
The required  policies  in this respect form  the essence of the present and previous  Broad  Economic 
Policy  Guidelines.  But  solving  the  Community's  unemployment  and  non-employment  problem 
will  require a simultaneous  and comprehensive  modernisation  of the Community's  labour  markets 
with a view to increasing the employment-content  of growth  and ensuring the employability  of the 
labour  force.  This  second  component  of  the  Community's  strategy  for  high  employment  was 
developed  in the Luxembourg  Employment Guidelines. 

The  Employment  Guidelines  --  based  on  the  four  pillars  of  improving  employability,  developing 
entrepreneurship, encouraging  adaptability  of businesses and their employees and  promoting  equal 
opportunities  —  will  be  implemented  via  the  National  Action  Plans  (NAPs)  for  employment. 
Adapted  to  the  specific  national  circumstances,  these  plans  must  integrate  the  employment 
measures  in  a  strategy  of  sound  macroeconomic  policy  including  budgetary  consolidation  in 
conformity  with  the  requirements  of  the  Growth  and  Stability  Pact.  Furthermore,  they  must 
provide  a  vehicle  for  action  aimed  at  both  reducing  mismatches  in  the  labour  market  and  at 
enhancing the responsiveness of firms to economic change.  In this way, the NAPs will serve as an 
important  policy  tool  directed  towards  reinforcing  the  Community's  growth  and  employment 
potential  and  as  such  they  will  undoubtedly  form  an  important  ingredient  of  future  Broad 
Economic  Policy Guidelines. 

Member  States' actions should  put the emphasis  on a preventive  strategy,  which  focuses  on  active 
policies  to  increase  the  supply  of  an  adequate,  educated  and  trained  labour  force.  Such  active 
measures  need  to  be  combined  with  efforts  to  increase  incentives  to  seek  and  create  jobs  via  a 
review of tax and benefit  systems. 

(i)  Active labour market policies 

Over a 5-year  period, Member  States must tackle youth  unemployment  and prevent  long-term 
unemployment  by offering  every  unemployed  young  person  and adult a new start before  they 
reach  6 and  12 months  of Unemployment  respectively.  This  requires  increased  resources  for 
the employment  services to perform  efficient  job  searching  and job  matching  services.  Such 
measures  should  be combined  with  accompanying  measures  like  training  and  in  some  cases 
wage subsidies and reductions of social charges, especially  for the  low skilled.  Around  15-30 
per cent of all  unemployed find a job  within  one year.  It will  be  important  to concentrate  the 
scarce  resources of the employment  services on  the other  70 to  85 per cent  that  need  help to 
find a job. 

17 

Long-term  unemployment  is  particularly  important  in  Belgium,  Ireland,  Italy  and  Spain,  while 
youth  unemployment  is  high  in  Finland,  France,  Greece,  Italy  and  Spain.  These  Member  States 
would  have to make a special effort  to respect the guidelines. 

(ii)  Taxation 

For  more  than  15 years,  the  structural  development  of  the  taxation  systems  (tax  and  social 
security  contributions)  in  the  Member  States  has  been  unfavourable  to  employment.  The 
implicit  tax  rate on  employed  labour  increased  from  35 per cent to over  42  per cent  between 
1981  and  1996  in  the  Community  on  average,  whilst  that  on  other  factors  of  production 
followed  a declining trend.  As a result,  labour taxes have driven  an  increased wedge between 
what  workers  receive  and  what  firms  pay.  High  taxes  hamper  economic  efficiency,  growth 
and,  eventually, job  creation.  High  labour  taxes are especially  harmful  at the  low end  of the 
wage scale where  it leads to the pricing-out  of the market  for  low-skilled,  low-pay jobs and an 
increase  in "black  market" activities. 

In the medium  run, the Member States should aim at reducing taxation  —  in overall terms and, 
especially,  on  labour.  This,  however,  should  not  jeopardise  budgetary  consolidation. 
In 
Belgium,  France,  the  Netherlands,  Denmark,  Austria,  Finland  and  Sweden,  the  tax  wedge  is 
higher  than  thé  EU  average,  demanding  a  special  effort  from  these  Member  States.  A 
significant  and  across  the  board  reduction  in  labour  taxes  would  imply  either  a  strong 
reduction  in  social  benefits  or  high  budgetary  costs.  In  the  short  run  and  with  a  view  to 
assisting  employment,  a  reduction  in  labour  taxes,  especially  employers  social  security 
contributions, would  be most efficient  when targeted at specific  labour force  groups at the low 
end  of  the  wage  scale  (young  workers,  long-term  or  low  skilled  unemployed)  where  its 
employment  impact  might  be  more  substantial,  especially  when  combined  with active  labour 
market  measures  in  education,  apprenticeship  schemes,  vocational  training  and  re-training. 
To  make  the  taxation  system  more  employment-friendly,  the  possibility  of  shifting,  in  a 
revenue  neutral  way,  part  of  the  tax  burden  away  from 
labour  towards  energy  and 
environmental  pollution  needs to be examined  and, where appropriate, to be actively  pursued. 

(Hi) Welfare reform 

Welfare  systems  need  to be reformed  with  the aim  of  increasing  incentives  and  opportunities 
to  take  up jobs  and,  more  generally,  improving  the  functioning  of  the  labour  market.  This 
means  switching  from  passive  income  maintenance  to  welfare  support  through  work. 
However,  in  some  countries,  taking  up  a  job  compared  to  receiving  benefits  offers  little 
advantage,  especially  for  low-income  earners  experiencing  long  unemployment  spells: 
combined  benefits  for unemployment, housing and childcare can  in some circumstances  result 
in net replacement  rates of over 80 per cent  in Belgium, Denmark,  Finland, France, Germany, 
the Netherlands, Sweden and the UK. 

18 

Making work  pay requires a double strategy.  Firstly, acting on the benefit  side, by tightening 
eligibility  criteria,  job  search  requirements  and,  in  some  cases,  revising  the  time  profile  of 
benefits.  Many  countries,  for  example  Denmark  and  the  Netherlands,  have  had  positive 
results  in  this  field.  However,  the  interaction  between  different  benefit  systems  should  be 
reviewed  to ensure  that  it would  always  pay to take  up a job  compared  to receiving  benefits. 
Secondly,  implementing  reforms  boosting take  home  pay,  such  as  in-work  benefits,  negative 
income tax  or  low-wage  subsidies.  The  UK's  "welfare-to-work"  opens  an  interesting  policy 
avenue. More generally, benefit  and tax systems should be viewed  in relation to labour market 
regulations.  Member  States,  especially  those  with  relatively  generous  benefit  systems  and 
high employment  protection  resulting  in a double safety  net, should review their labour market 
legislation  with  a  view  to  reconciling  flexibility  and  security  while  making  their  benefit 
systems more  efficient. 

(iv)  Working time  arrangements 

Over the last century, Member States' economies have seen a decline in the number of weekly 
and  annual  working  hours  per  worker.  This  has  been  an  important  factor  in  terms  of  social 
progress  and welfare.  Most  progress  in this field was made during  periods of fast  growth  and 
high  employment  and  were  part  of  a  "work  versus  leisure"  choice.  The  trend  is,  in  fact, 
nothing  more  than  a  distribution  of  productivity  growth,  with  lower  working  times  and  less 
growth  in real  wages.  A return  to this  secular  trend  when  growth  recovers  may  therefore  be 
expected  and  would  be quite  normal  and  welcome  as an  improvement  in working  conditions 
and quality of life.  A compulsory and across the board  reduction  in working time, however, in 
part  prompted  by  the  desire  to  increase  the  level  of  employment,  may  have  adverse 
consequences and should therefore  be avoided. 

Conversely,  where  appropriate,  employment  could  be  favoured  by  specific  measures  of 
working time  reduction  at the microeconomic  level  where  it  is warranted  by  local  conditions, 
involves a de-coupling of capital  hours from  labour hours, is negotiated  by the social  partners 
and  is either reversible or can  be seen as being integrated  into the secular trend  of reduction  in 
working time.  In this context, some initiatives suggest that measures combining a reduction of 
working  time  with job  creation  and  fiscal  advantages  could  entail  positive  results.  Another 
approach  for  increasing the labour content of growth  would be to encourage the maximum  use 
of  voluntary  part-time  and  new  forms  of  employment.  The  possibilities  in  that  field  are 
obviously  very  different 
in  the 
proportion of part-time workers that one may observe at present.  In these areas, the exchange, 
at Community  level, of experiences and best practices needs to be encouraged. 

in  Member  countries  given  the  very  large  differences 

19 

ISSN 0254-1475 

COM(98) 279 final 

DOCUMENTS 

EN 

10  01  08  02 

Catalogue number  : CB-CO-98-334-EN-G 

ISBN 92-78-36418-5 

Office  for Official  Publications of the European Communities 

L-2985 Luxembourg