98/454/EC: Council Recommendation of 6 July 1998 on the broad guidelines of the economic policies of the Member States and of the Community
Date: 1998-07-06
Institutions: Council of the European Union
Subjects: EU employment policy, EU policy, Economic and Monetary Union, economic policy

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II

(Acts whose publication is not obligatory)

COUNCIL

COUNCIL RECOMMENDATION

of 6 July 1998

on the broad guidelines of the economic policies of the Member States and of
the Community

(98/454/EC)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European
Community, and in particular Article 103(2) thereof,

Having regard to the recommendation from the Commis-
sion,

Having regard to the conclusions of
Council in Cardiff of 15 and 16 June 1998,

the European

Whereas a resolution on the recommendation from the
Commission was adopted by the European Parliament,

HEREBY RECOMMENDS:

1. MAIN PRIORITIES: A SUCCESSFUL EMU, PROS-

PERITY AND JOBS

The introduction of the euro on 1 January 1999
marks a new phase in the process of European inte-
gration and in the conduct of the economic policies
of the Member States and of 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 sus-
tainable economic convergence in the Community
has yielded tangible results.

remarkable

the Council of

reflecting these

convergence
Firstly,
efforts and results,
the European
Union, meeting in the composition of Heads of State
or Government, decided on 3 May 1998 that eleven
Member States fulfilled the necessary conditions for
the adoption of the euro.

Secondly, these efforts are fostering the development
of a macroeconomic policy mix conducive to growth
and employment.

However, until now, insufficient progress has been
made in reducing unemployment in many Member
States.

robust

broadly

adopted,

and more

Since the summer of 1997, when the previous Broad
an
Economic Policy Guidelines were
increasingly
based
economic recovery has taken hold in the Com-
munity,
in a context of historically low inflation.
With spare capacity currently available in most
Member States and with prospects for subsequent
healthy growth in investment, especially in equip-
ment, solid growth should be able to take place
without encountering capacity constraints or generat-
ing inflationary tensions, if, as expected, wage devel-
opments continue to be appropriate. In addition, the
underlying economic fundamentals are sound and
are
improving
brightening and confidence is strengthening further.
The impact on Community growth prospects from
the financial and economic events in Asia appears
limited, provided that the crisis neither deepens nor
spreads to other countries in the region.

continuously, demand prospects

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 Community as a whole. This
would constitute a first, albeit modest, step in the
direction of the objective of a high level of employ-
ment aimed for
the Treaty of
Amsterdam.

in Article 2 of

The present level of employment in the Community
is the result not only of high unemployment (about
18 million people in 1997) but also of poor employ-

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ment prospects over long periods which have dis-
couraged many people from seeking a job, many of
whom are beneficiaries of other social security provi-
sions. Thus, the creation of new jobs will have to
absorb not only the unemployed but also a rising
participation rate
some demographic
and still
increase in the population of working age.

The increase in employment over the medium and
longer term would greatly alleviate the burden on
Member States’ public finances and social security
systems. Moreover, it would help to fight efficiently
against poverty and social exclusion.

For economic policy, the tasks are to set the condi-
tions for (i) a further strengthening of the recovery,
and (ii) its extension into a self-sustaining, non-infla-
tionary economic growth process over the medium
and longer term — a pre-requisite for substantially
and durably higher employment. This will require a
strengthened programme of macroeconomic and
structural policies and a determined implementation
the 1998 employment guidelines to address a
of
number of key challenges while
allowing the
Community’s economies to adapt better to changing
circumstances in the years ahead.

The introduction of the euro will not in itself solve
the Community’s unemployment problem. But in
fulfilling the abovementioned tasks,
the stability
framework of economic and monetary union (EMU)
will contribute to the maintenance of a policy mix
that is favourable to growth and employment.

In the macroeconomic area, governments and,
in
their respective field, the social partners should each
make all the required efforts to support the stability
objective of the single monetary policy.

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 translate growth into employ-
ment and to make growth more respectful of the
environment.

More generally, there is a need for a better func-
tioning of the single market for which all Member
States are responsible.

Only if this policy strategy is pursued with resolve by
all actors and if its implementation is well coord-
inated in line with the Luxembourg European
Council resolution, will EMU — as called for in
Article 2 of the Treaty — reap its full benefits and

contribute to achieving the overall objectives of the
Community, including the promotion of sustained
and non-inflationary growth respectful of the en-
vironment, a high level of employment and rising
living standards.

2. GROWTH- AND STABILITY-ORIENTED MACRO-

ECONOMIC POLICY MIX

that,

is essential

In order to achieve the objectives mentioned above,
it
in the macroeconomic area,
Member States remain committed to pursuing the
growth- and stability-oriented strategy recommended
in the previous guidelines, which has started to bear
fruit.

The strategy contains three essential ingredients:

— a monetary policy oriented to price stability,

— 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 should be consistent with increases
in productivity and should take into account the
need to strengthen the profitability of investment
in order to create more jobs.

The more the task of monetary policy to maintain
price stability is supported by appropriate budgetary
policies and wage developments, the more likely it is
that monetary conditions will be favourable to
growth and employment.

The overall macroeconomic policy mix of the euro-
area will result essentially from the interaction of the
single monetary policy on the one hand and the
specific budgetary developments and wage trends in
the participating countries on the other. The latter
will be subject to the closer surveillance and coord-
ination of economic policies in order to achieve an
appropriate policy mix in the whole euro area as well
as in each participating country.

currency,

initially adopt

the
For the countries that do not
single
stability-oriented
the need for
macroeconomic policies will be equally strong. The
close and deep economic and monetary interdepen-
dence between the euro-area countries and the non-
euro area Member States 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 coordination of economic policies.

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3.

PRICE STABILITY

Price stability is an essential requirement for real-
ising sustained medium-term economic growth.
Following impressive progress in recent years, the
Community as a whole has achieved a high degree of
price stability. It is necessary that all policies aim at
credibility and consistency with durable price stab-
ility.

In the prospective euro-area, where the average infla-
tion rate, measured by the harmonised index of
consumer prices, has fallen below 2 %, all parti-
cipating Member States need to conduct
their
economic policies with a view to maintaining price
stability, thereby allowing for monetary conditions
favourable to growth. They also need to avoid too
wide
create
competitiveness problems.

inflation differentials

that would

Average inflation has also fallen to below 2 % in
Denmark, Sweden and the United Kingdom. The
task is to maintain monetary and economic policies
which continue to deliver price stability.

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

4.

THE TRANSITION TO THE EURO

A smooth transition to the euro on 1 January 1999 is
required to ensure that EMU is launched in the most
favourable circumstances. The primary objective of
the monetary policies of the national central banks
of participating Member States in the remaining
months of 1998, during which they retain the
responsibility for monetary policy, is to ensure that
the current environment of a high degree of price
stability is maintained at national level and thus for
the euro area as a whole. Official interest rates will
have converged to the common euro-area rate by the
end of 1998. This will be consistent with a situation
in which market exchange rates are equal to the
pre-announced rates, i.e. the current ERM bilateral
central rates.

From 1 January 1999, the single monetary policy in
the euro area will be the responsibility of the inde-
pendent European Central Bank (ECB) and Euro-
pean System of Central Banks (ESCB).

the Treaty,

The Member States not adopting the single currency
from the outset retain competence for their national
also committed to
and are
monetary policies
pursuing stability-oriented monetary policy. Under
Article 109m of
these Member States
shall treat their exchange-rate policies as a matter of
common interest. The ERM 2 will provide the
framework for monetary relations between Member
States participating in the mechanism and the euro
area from 1999 onwards and will support
their
convergence efforts. While participation in the ERM
2 will be voluntary, it can be expected that Member
States with a derogation will join.

5.

SOUND PUBLIC FINANCES

5.1. General guidelines

Despite considerable consolidation efforts in virtually
all Member States, additional progress is required in
most countries in order to ensure compliance with
the Stability and Growth Pact’s medium-term objec-
tive of budgetary positions close to balance or in
surplus. That will allow all Member States to deal
with normal cyclical situations while keeping the
government deficit within the reference value of 3 %
of gross domestic product (GDP). In accordance with
the Treaty, consolidation is also required in order to
ensure that debt ratios above 60 % continue to dim-
inish sufficiently and to approach the reference value
at a satisfactory pace. These requirements hold for all
Member States for the following reasons:

(i) sound budgetary policies, by fostering low and
stable inflationary expectations, will facilitate the
the single monetary policy and the
task of
the non-euro Member
monetary policies of
States
In the
in maintaining price stability.
present conjuncture, a further scaling back of
government deficits will contribute to the sus-
tainability of the economic recovery and might
allow for continued favourable monetary condi-
tions, thereby supporting investment;

(ii) sound budgetary positions will help to keep
long-term interest rates at a low level, thereby
generating a crowding-in of private investment.
If governments absorb a smaller part of private
saving, or if they make a positive contribution to
savings in the economy, an increase in the
investment rate can — other things being equal
— take place without pressures on the balance
of payments and long-term interest rates;

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(iii) 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 fully to play
their role. Furthermore, sound budgetary policies
will in all likelihood also increase the effective-
ness of those stabilisers. Proven budgetary dis-
cipline will
of
strengthen the
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;

confidence

(iv) finally, budgets close to balance or in surplus
will
allow a speedy reduction in the still
relatively high public debt ratios in many coun-
tries. This will reduce the debt service burden
and so facilitate the restructuring of government
spending. It could also facilitate the lowering of
the tax burden and make it possible to address
all aspects of social security systems in view of
ageing populations.

management strategy with a view to reducing the
vulnerability of the public finances.

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 im-
proving 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 while respecting the competence of the
Member States for the conduct of their budgetary
policies:

(i) budget deficit reductions in most Member States
should be achieved through expenditure restraint
rather than through tax increases;

(ii) in order to improve economic efficiency and to
promote economic dynamism, a reduction in the
overall tax burden is desirable in most Member
States. Tax reforms also enable markets to func-
tion more efficiently and by strengthening
investment promote lastingly competitive jobs;

Against this background, it is essential that Member
States provide assurances regarding the continuity of
budgetary adjustment. To this end, Member States
have committed themselves:

(iii) in cases where government deficits or govern-
ment debt-to-GDP ratios are still high,
is
necessary that any tax reduction should not slow
down the pace of deficit reduction;

it

(i) to ensure that the national budget objectives set
for 1998 are fully met, if necessary by taking
timely corrective action;

(ii) if economic conditions develop better

than
expected,
to use the opportunity to reinforce
budgetary consolidation so as to reach the me-
dium-term objective of government
financial
positions close to balance or
in surplus, as
embodied in the commitments of the Stability
and Growth Pact;

(iii) to submit

their

and convergence
stability
programmes at the latest by the end of 1998
with a view to enabling the Commission and the
Council
in-
cluding the overall budgetary stance and the
policy mix in the euro area, at the start of stage 3
of EMU;

these programmes,

to assess all

(iv) to ensure, where appropriate, a further steady
decline in public debt and an appropriate debt

(iv) budgetary consolidation should be implemented
in a fair and just way. It must be directed
towards increasing the effectiveness and effi-
thereby also
ciency of government spending,
enhancing the supply side of the economy. In
this respect, measures should focus on control-
ling better or on reforming public consumption,
public pension provision, health care,
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
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, spend-
ing on productive investment 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,
through its positive effects on growth and
employability, 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.

this

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the same way as the Member States,

In just
the
Community also is called upon to continue to main-
tain strict budgetary discipline. Strict budgetary dis-
cipline must be applied to all categories of the fin-
inter-
ancial perspectives, while
institutional Agreement on budget discipline and the
improvement of the budget procedure.

respecting the

5.2. Country-specific guidelines

(i) Euro-area Member States

In Belgium, favourable economic growth condi-
tions have contributed to bringing forward by
one year the budgetary targets set in its conver-
gence programme. It is important to ensure that
the government’s commitment to maintain the
primary surplus at 6 % 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 tighter control needs to be exerted on transfers
to households and especially on health care
spending.

to

and

households

Germany needs
to continue its government
deficit reduction in the coming years. Subsidies,
government
transfers
consumption need to be restrained further.
Continued efforts to restrict 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 % of GDP is
to be
realised. Germany needs to step up its budgetary
adjustment to put its debt ratio firmly on a de-
clining path and to bring it back swiftly below
the 60 % of GDP reference value in the near
future.

growth conditions.

In Spain, maintaining the current budgetary
stance would allow the deficit to come down in
the coming years, partially due to the favourable
economic
Spain would,
however, still need to undertake efforts to accel-
erate the achievement of the medium-term target
of a budget close to balance or in surplus. Indeed,
the present cyclical position of
the Spanish
economy and the sustainability of the present
expansion would call for the quick attainment of
this objective. Spending needs to be controlled
further if the government’s aim of reducing the
expenditure-to-GDP ratio to just below 42 % of
GDP by the year 2000 is to be realised.

In France, further budgetary adjustment efforts
should be pursued in 1999 and in particular
beyond 1999, in order to respect the obligations

of the Stability and Growth Pact. These consoli-
dation efforts are also needed to stabilise the debt
ratio and to put it on a downward path. The
control of transfers to households and govern-
ment consumption should contribute to bringing
about the deficit reduction.

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 %
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 anti-
cipated 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 of
overheating. It is noted that the authorities are
resolved to propose a budget for 1999 having as
its primary objective the continuation of
low
inflation in Ireland.

After having successfully reduced its government
deficit to below the 3 % of GDP reference value
in 1997, Italy needs to step up further its budge-
tary consolidation efforts in order to respect the
obligations of the Stability and Growth Pact. In
order to secure a fast reduction in the debt ratio,
it
to ensure that high levels of
primary surplus of 5,5 % of GDP should be kept,
over the medium term as envisaged in the three-
year plan approved by the Italian Parliament.
This, reinforced by privatisation revenues, should
secure a continued decline in the debt ratio.

is important

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

the deficit

The Netherlands must not allow its present
budgetary position to deteriorate. Given the
favourable economic growth conditions expected
should be
in the coming years,
brought down further in order to respect
the
obligations of the Stability and Growth Pact. 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. Austria needs to exert a tight budget
control and should obviate additional pressures
on the budget. Due to the recent reform of

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family taxation, which originated from a ruling of
the Constitutional Court, and within the context
of the envisaged tax reform, substantial additional
budgetary consolidation efforts will be required.
It is also recalled that the debt ratio has to be
kept on a downward path.

Portugal should seize the opportunity presented
by the favourable economic growth conditions in
the coming years to improve its budgetary posi-
tion further in order to respect the obligations
under the Stability and Growth Pact. This would
also help to prevent any risk of overheating.
Budgetary adjustment should increasingly focus
on primary expenditure. 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
in 1998 and increasing
turn into surplus
surpluses are aimed for in the coming years.
Finland plans to introduce an income tax reduc-
tion in 1999. This measure should be imple-
mented 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 its budgetary
stance further 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 the debt ratio is expected to fall below
60 % of GDP in 1998 and to continue declining
in the coming years.

Greece has made substantial progress in reducing
the large imbalances in its public finances over
recent years. Its deficit declined to 4,0 % of GDP
in 1997 and is projected to decline to below the
Treaty reference value in 1998, while the govern-
ment debt ratio, after remaining practically stable
since 1993, started to decline in 1997. Greece
should continue
consolidation
efforts, notably through the rigorous implementa-
tion of the measures announced by the govern-
ment when the drachma joined the ERM,
in
order to secure its smooth and orderly participa-
tion and to realise the government’s intention to
join the euro area by 2001. These measures
include a further reduction in primary expend-

its budgetary

iture, extended privatisation plans, the extensive
the public sector, and the
rationalisation of
reform of
security system in the
medium term.

the social

In Sweden the government budget is expected to
turn into surplus
in 1998 and increasing
surpluses are expected thereafter. Sweden is
aiming for a budget surplus of 2 % of GDP over
the
should
continue to be controlled tightly.

cycle. Government

expenditure

In the United Kingdom, the budget is projected
to reach a position that is close to balance 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

for

substantial

implications

The evolution of aggregate wages and wage differen-
tials has
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 macroeco-
nomic framework will
foster adequate wage be-
haviour.

traditions. As

Wage setting will remain the responsibility of the
social partners at the national, regional, sectoral or
even at a more decentralised level following their
the
respective
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.

underlined

in

For wage developments to contribute to an employ-
ment-friendly policy mix, the social partners should
continue to pursue a responsible policy course and
conclude wage agreements in Member States in line
with the following general rules:

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(i) aggregate nominal wage increases must be
consistent with price stability. 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, through their effect on unit labour costs,
they will worsen competitiveness and employ-
ment conditions in this country or region;

(ii) real wage increases with respect

to labour
productivity growth should take into account the
need to strengthen, where necessary, and subse-
quently maintain, the profitability of capacity-
enhancing and employment-creating investment.
This implies that
in countries where overall
labour productivity growth is slowing down, the
scope for real wage increases will be reduced.
More specifically, a reduction in working time
should not lead to an increase in real unit labour
in
costs. For
is
higher
essential to forge an investment-supportive en-
vironment in terms of demand developments,
labour market conditions, taxation and the regu-
latory framework;

improved profitability to result
it

in the Community,

investment

(iii) wage agreements should better take into account
differentials in productivity levels according to
qualifications, skills and geographical areas. In
this context, and where appropriate, entry wage
costs for the young,
low-skilled or long-term
unemployed should be such as to enhance their
employability;
lower
entry wage costs could be enhanced further by
measures to promote the adaptability of
the
labour force;

the beneficial effects of

(iv)

‘wage imitation effects’ need to be avoided,
implying that labour cost differences between
Member States should continue to reflect discre-
pancies in labour productivity. Due to the exis-
tence 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
than warranted by productivity
wages
levels in a country would lead to a deterioration
in competitiveness and investment profitability
and therefore to reduced attractiveness as a

faster

production location. The country’s trade perfor-
mance would suffer,
investment would be
deterred and unemployment would increase.

Compliance with these requirements does not imply
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 adjust-
ment will need to play a more important role in the
adjustment
to changing economic circumstances,
especially in the case of country-specific disturb-
ances,
of
requiring
adaptability in the wage formation process.

a higher degree

thereby

it

Since, in general, the social partners are responsible
for achieving wage developments compatible with
the achievement and maintenance of high employ-
ment, thereby playing an important role in achieving
an appropriate macroeconomic policy mix,
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
Commission will continue to develop the social
dialogue, notably on macroeconomic policy issues.
Furthermore, in the framework of the strengthened
economic policy coordination, there is a need to
establish credibility and a climate of confidence
between the major policy actors which could be rein-
forced by a regular dialogue between the social part-
ners on the one hand and the authorities responsible
for economic policies on the other.

the Community level,

7.

STRUCTURAL POLICIES FOR GROWTH AND
EMPLOYMENT

Structural policies have a primary role to play in
promoting economic welfare, improving productivity
and raising employment levels. Their key role is to
help ensure a tension-free macroeconomic growth
process, to reinforce the Community’s competitive-
ness, to increase the employment content of growth
and to make growth more respectful of the environ-
ment. To reach their full effectiveness, structural
policies must be coherent with the pursuit of sound
macroeconomic policies.

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Structural policies are about
improving the func-
tioning of markets; where they involve budgetary
costs, it is essential that they are kept under control
and do not
jeopardise the achievement of sound
budgetary positions. Their economic benefits also
emerge only gradually over time.

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. Member States’
adjustment
to country-specific economic disturb-
ances 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 enter-
prises because of the elimination of exchange rate
changes within the euro zone and of increased price
transparency.

7.1. Product, service and capital markets

In order to safeguard and promote competitiveness,
employment and living standards in a world of free
trade and constant technological change, it is essen-
tial 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

for

importance

framework of

is of paramount

Improvement in the functioning of the Single
Market
a
successful EMU. Despite considerable progress, a
number of significant problems remain. The
the Single Market
legislative
remains incomplete, mainly due to the lack of
full implementation of Community directives at
national level. Efforts to reduce the degree of
non-implementation of Single Market directives
should be pursued forcefully in most Member
States as identified by the Single Market score-
board established by the Commission. Recog-
nising this challenge, the Commission and the
Member States agreed an action plan for the
in June 1997 committing the
Single Market
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
particular attention.

recognition deserve

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 conclu-
sions,
the Luxembourg European Council
stressed both the importance of paying full
attention to those national economic develop-
ments and policies which may hinder
the
smooth functioning of the Single Market and the
need for policy coordination to aim also at fost-
ering 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
fair tax competition should be monitored.
of
This is one of the main tasks of the follow-up
group, which was established on 1 December
1997.

the

the latter

and, notably,

The Single Market and overall globalisation exert
a strong pressure to improve competitiveness,
is also linked to national or
but
Community policies in the field of research and
development
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 environment
of firms in terms of communications also calls
for a strengthening of efforts in infrastructure
projects, both in keeping an adequate level of
public investment and by searching for joint
ventures with the private sector where appro-
priate. Efforts should also focus on encouraging
an enterprise culture and promoting entrepre-
neurship, a key factor in stimulating growth,
employment
the
Community.

competitiveness

and

in

(ii) Reforms to enhance competition

In the area of competition policy, the Commis-
sion 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

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16. 7. 98

achieving the objective of a more efficient en-
forcement of anti-trust rules by revising their
laws so that the national competition authorities
can apply anti-trust policy effectively. For State
there is a need for the Commission to
aids,
control them strictly and for the Member States
to exercise rigorous self-discipline.

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 needs
to be developed.

(iv) Financial markets

(iii) Regulatory reforms

An adequate regulatory framework is a pre-
condition for boosting productivity growth and
raising the competitiveness of European firms.
Governments and the Commission therefore
have the responsibility to review existing regula-
tions continuously 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 regula-
tion, 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, different bench-
marking exercises have been initiated by in-
ternational bodies to identify the best regulatory
practices. Such exercises could lead to a signi-
ficant improvement in the regulatory framework
of enterprises. As regards the Community, the
Commission could coordinate such initiatives on
the basis of contributions from the Member
States.

regulations

Administrative
and cumbersome
procedures tend to weigh especially heavy on
small and medium-sized enterprises, particularly
during the start-up phase. Therefore, a first area
where such benchmarking exercises could be
launched is the administrative regulations for the
start-up of business. Similarly,
identifying and
removing any remaining unjustified regulatory
barriers to the development of venture capital
and new financial products, particularly those
that may assist in the financing of small and
medium-sized enterprises (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 satis-
fied by the market, which have an important

take

authorities

EMU will bring important changes to European
financial markets. They will result in large and
highly liquid euro markets. It is important that
the national
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 ap-
parent amid intensified competition between
euro-area financial
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 poten-
tial of the new euro financial markets is to be
fully realised.

institutions. Moreover,

To improve the efficiency of these reforms, they
need to be closely monitored and, if appropriate,
coordinated at the Community level through a
regular multilateral surveillance, thereby comple-
menting the ongoing macroeconomic multila-
teral surveillance. To ensure steady progress with
economic
and the
reform, Member States
Commission should submit short annual reports
setting out their policies aimed at making their
product, service and capital markets more effi-
cient. These reports will provide a basis for
monitoring these reform efforts at the Commu-
nity level and 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.

7.2. Labour markets

A durable reduction in the presently high levels of
unemployment and an increase in the employment
rate in the Community is possible.
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
in interaction with
term. Macroeconomic policies,

It

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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 employ-
ment problems will
require a simultaneous and
comprehensive modernisation of the Community’s
labour markets with a view to increasing the employ-
ment-content of growth and ensuring the employ-
ability of the labour force. This second component of
the Community’s strategy for high employment was
developed in the Luxembourg employment guide-
lines.

(NAPs)

The employment guidelines — based on the four
pillars of improving employability, developing entre-
preneurship, encouraging adaptability of businesses
and their employees and promoting equal opportun-
ities — will be implemented via the national action
for employment. Adapted to the
plans
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
they
the Stability and Growth Pact. Furthermore,
must provide a vehicle for action aimed at both re-
ducing mismatches in the labour market and at en-
hancing the responsiveness of
firms to economic
the NAPs will serve as an
change. In this way,
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 guide-
lines.

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 the structure and
administration of tax and benefit systems.

(i) Active labour market policies

Over a five-year period, Member States must
tackle youth unemployment and prevent long-
term unemployment by offering every unem-
ployed young person and adult a new start
before they reach 6 and 12 months of unem-
ployment respectively. This requires increased
efforts for the employment services to perform
efficient job searching and job matching services.
Such measures should be combined with accom-

panying measures
like training and, where
appropriate, wage subsidies and reductions of
social charges, especially for the low skilled. It
will be important
to concentrate the scarce
resources of the employment services on those
who most need help to find a job.

Long-term unemployment is particularly high 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) Taxes and social security contributions

In view of

For more than 15 years,
the increase in the
overall tax burden and the structural develop-
the taxation systems (tax and social
ment of
security contributions) in the Member States has
been unfavourable to employment. As a result of
the increase in the overall burden of taxation
security contributions, a growing
and social
wedge has developed between what workers
receive and what firms pay. This larger wedge
hampers economic efficiency, growth and, even-
tually,
job creation. Its effects 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.
these harmful
effects, it is important for the Member States to
take the necessary action to reverse this trend,
for example through reform of social security
and taxation systems. Such measures should,
however, not jeopardise budgetary consolidation.
The employment effect of such measures would
be increased if supported by active labour market
measures in education, apprenticeship schemes,
vocational training and retraining. In order to
make the taxation system more employment-
friendly, Member States should also examine, if
appropriate, the desirability of introducing a tax
on energy or on pollutant emissions or any other
tax measure. Any such changes should take into
account
the impact on competition and any
additional burdens on individual and corporate
tax payers.

(iii) Welfare reform

Welfare systems need to be reformed with the
aim of increasing incentives, opportunities and
and, more
responsibilities
generally,
the
labour market. This means moving from passive

improving the functioning of

to take up jobs

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income maintenance systems 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
rates of over 80 % in
Belgium, Denmark, Finland, France, Germany,
the Netherlands,
Sweden and the United
Kingdom.

replacement

Making work pay requires a double strategy.
Firstly, implementing reforms which boost take
home pay. The United Kinbgdom ‘welfare-to-
work’ reforms open an interesting policy avenue.
Secondly, acting on the benefit side, by adjusting
job search and
carefully eligibility criteria,
training requirements
cases,
in some
and,
revising the time profile of benefits. Many coun-
tries have had positive results
field.
However,
interaction between different
benefit systems should be reviewed to ensure
it would always pay to take up a job
that
compared to receiving benefits. More generally,
benefit and tax systems should be viewed in rela-
tion to labour market
regulations. Member
States, especially those combining relatively
generous benefit systems and high employment
protection, should review their relevant legisla-

in this

the

tion with a view to reconciling security and flex-
ibility while making their benefit systems more
efficient.

(iv) Working time arrangements

is important

It
that where there are arrange-
ments to reduce working time, they should be
implemented in ways which do not undermine
in the
adaptability and which do not result
reduction of labour supply and output. Where
appropriate, employment could be favoured by a
greater flexibility of working time at the micro-
economic level. In this context, some initiatives
suggest that agreements combining a reduction
of working time with job creation could entail
positive results, provided unit labour costs do not
increase. 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 Member
States given the very large differences 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.

Done at Brussels, 6 July 1998.

For the Council

The President

R. EDLINGER