Report from the Commission on the implementation of the 1999 broad economic policy guidelines
Date: 2000-03-14
Institutions: European Commission
Subjects: economic growth, economic policy, economic reform, report, tax system

COMMISSION OF THE EUROPEAN COMMUNITIES

Brussels, 14.3.2000
COM(2000)143 final

REPORT FROM THE COMMISSION

on the implementation of the
1999 Broad Economic Policy Guidelines

TABLE OF CONTENTS

EXECUTIVE SUMMARY

.....................................................................................................3
0. INTRODUCTION..................................................................................................................8

1. THE ECONOMIC SITUATION IN THE EU .............................................................................8
2. GROWTH AND STABILITY-ORIENTED MACROECONOMIC POLICIES................................. 10

2.1 The macroeconomic policy mix in the euro area ....................................................................... 10

2.2 The macroeconomic policy mix in the member states outside the euro area........................ 11

3. SOUND AND EFFICIENT PUBLIC FINANCES ...................................................................... 13

3.1 1999 budgetary targets met despite growth slowdown.............................................................. 13

3.2 Budget plans for 2000 and beyond ............................................................................................... 14

3.3 Quality and sustainability of public finances ............................................................................... 15

4. APPROPRIATE WAGE DEVELOPMENTS.............................................................................. 18

5. MORE EFFICIENT PRODUCT (GOODS AND SERVICES) MARKETS ...................................... 19
.................. 20

5.1 Single Market - established legal framework  must be  properly   implemented
.

5.2 Competition policy - modernised legislation and some progress regarding State aid .......... 21

5.3 Public utilities - progress in the telecommunications and the electricity sector .................... 21

5.4 Distribution -  further liberalisation is necessary........................................................................ 22

5.5 Public administration - increasing efficiency and avoiding unfair competition..................... 23

5.6 Other regulatory reforms - reducing the regulatory burden of starting new businesses...... 23

5.7 Innovation - reforms to improve the technological performance are necessary................... 24

6. MORE INTEGRATED AND DEEPER CAPITAL MARKETS .....................................................25

7. BETTER FUNCTIONING LABOUR MARKETS ......................................................................27

7.1 Overall trends................................................................................................................................... 27

7.2 Active labour market programmes - considerable progress realised....................................... 28

7.3 The tax burden on labour - many reforms to reduce labour taxes.......................................... 29

7.4 Benefit systems - little overall progress despite good results in some countries................... 29

7.5 Work organisation and flexibility - some but insufficient progress......................................... 30

BOXES .................................................................................................................................. 31

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EXECUTIVE SUMMARY

The 1999 BEPGs were the first to be adopted after the launch of the euro. They recommended a
balanced  and  mutually-reinforcing  three-pillar  strategy  conducive  to  the  achievement  of  sustained
growth, increased living standards, high employment and social inclusion.

The  present  report  offers  an  in-depth,  overall  assessment  of  the  implementation  of  policy
orientations set in the 1999 BEPGs. It contributes  to  the  on-going  multilateral  surveillance  of  the
economic  policies  of  the  Member  States  and  the  Union  in  conformity  with  Article  99(3)  of  the
Treaty.  Furthermore,  the  appraisal  of  the  achievements  made  under  the  1999  BEPGs  will  form  a
key  input  in  the  preparation  of  the  forthcoming  BEPGs.  Indeed,  this  report  together  with  the
assessment  of  the  macroeconomic  environment  as  contained  in  the  Commission  services'  Spring
2000  Economic  Forecasts  and  the  new  policy  developments  and  challenges  identified  in  recent
reports  under  the  various  co-ordination  processes  as  well  as  in  the  Commission's  contribution  to
the  Lisbon  Summit  ("An  agenda  for  economic  and  social  renewal  for  Europe)  and  its
Communication  "Strategic  objectives  2000-2005",  will  form  the  basis  for  the  formulation  of  the
2000 BEPGs. Amongst the key challenges identified in the documentation for the Lisbon Summit
are the transition to an inclusive, knowledge-based economy while aiming at full employment as the
core objective of economic and social policy.

The report draws on and synthesises the key findings and conclusions of the monitoring and peer
review  in  the  different  co-ordination  processes  at  the  Union  level  whilst  adding  an  integrated
appraisal.1 It is accompanied by a working document of the Commission services which presents a
detailed examination of the implementation of the country-specific recommendations.

The following key messages emerge from the report.

Improved macroeconomic environment

The  externally-induced  slowdown,  that  interrupted  the  solid  recovery  of  1997-98,  gave  way  to  an
accelerating upswing in the course of 1999. The recovery has spread recently to all Member States
and  is  close  to  maturity in  those  countries  which are  in  the  vanguard.  Prospects  are  for  sustained
output  growth  above  the  potential  rate  in  the  years  ahead.  Job  creation  has  continued  at  a  strong
pace  as  growth  has  become  richer  in  employment.  Unemployment  has  thus  edged  down  steadily
over the last two years and could approach in the near future a level not seen since the early 1990s.
Low inflation was secured throughout 1999. Whilst the inflation outlook remains favourable, it has
become  somewhat  less  benign  under  the  combined  impact  of  a  surge  in  oil  prices  and  the
depreciation of the euro.

1  The present report subsumes the information and findings of the various documents and reports prepared under the
different co-ordination processes, including: the updated stability and convergence programmes,  their  assessment  by
the  Commission  and  the  Council  opinions;  the  National  Action  Plans  for  employment  and  the  Joint  Employment
Report  1999;  Member  States'  progress  reports  on  product,  services  and  capital  markets,  the  Commission's  second
report on "Economic reform: Report on the functioning of Community product and capital markets, 1999"  and  the
EPC's "Annual Report on Structural Reforms, 2000".

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Sound macroeconomic policy mix

The  1999  BEPGs  stressed  the  need  for  a  macroeconomic  policy  mix  in  the  euro  area  that
encourage growth and employment, and in conjunction with continued structural reforms, make it
sustainable,  i.e.  non-inflationary.  The  combination  of  brightened  growth  prospects,  falling
unemployment  and  low  inflation  reflects  favourably  on  euro-area  wide  macroeconomic  policies.
The  appropriate  management  of  macroeconomic  policies  mitigated  the  size  and  duration  of  the
downturn and contributed to the current upswing. In the context of low and decelerating inflation,
the  judicious  easing  of  monetary  policy  provided  an  adequate  support  to  domestic  demand  and
economic activity.  At  the  same  time,  Member-State  governments  maintained  – and  in  some  cases
enhanced – budgetary discipline despite the economic slowdown. Wage growth remained moderate.
Notwithstanding the decisions by the ECB in recent months to raise its key interest rates, prevailing
monetary conditions are growth supportive. The pre-emptive moves to address the possible build-
up  of  inflationary  pressure  in  the  strengthening  euro-area  economy  augment  the  chances  of
achieving a lasting, sustained, non-inflationary recovery. With a view to bringing the economy on a
sustained  high  growth  and  employment  path  whilst  preserving  price  stability,  the  task  ahead  is  to
maintain strict budgetary discipline, to encourage the social partners to exercise continued restraint
in wage settlements and to implement the necessary structural reforms.

Progress towards more efficient public finances; sustainability finally started
to be addressed

The quality and sustainability of public finances is an issue that, now that sound budgetary positions
are  progressively  being  achieved,  is  becoming  increasingly  important.  The  composition  of  public
finances, the distortions created by taxation and the long-term sustainability need to be addressed.

•

•

Most Member States have started to reform their tax system. Some Member States have lowered
taxes  on  labour,  some  have  shifted  the  burden  towards  energy  and  environmental  taxes  and
some  tax  reforms  have  made  venture  capital  more  attractive.  In  the  area  of  VAT, in  1999  an
agreement was reached on the possibility to reduce VAT on labour-intensive services. The size
and impact of these adjustments are, however, often not sufficient. Since the overall tax burden
and,  in  particular,  the  tax  burden  on  labour  remain  high  in  many  Member  States,  more
substantial  measures  are  called  for  whilst  respecting  the  need  for  further  fiscal  consolidation.
Although  co-ordination  is  required  in  certain  areas,  especially  for  taxes  on  certain  mobile
categories of capital income, in general this does not seem to be forthcoming.

The long-term sustainability of pension systems requires considerable reforms in most  Member
States.  The  fact  that  reorganisations  are  now  taking  place  is a first  step  in  the  right  direction,
but  more  are  needed  in  order  to  cope  with  the  problem  of  an  ageing  population.  The
heightened  awareness  of  the  problem  is  certainly  a  major  step  forward.  Many  Member  States
have plans for reforms, but they generally tend to postpone their implementation.

Well integrated product markets, but scope for further improvement

As  a  result  of structural  reforms  in  the  past  decade,  product  markets within  the  European  Union
are relatively well integrated and market competition has been increasing. However, price dispersion
within the EU is  still  high,  in  particular  in  comparison  with  the  United  States,  and  the  process  of

4

price convergence has slowed down in comparison with the early nineties. Therefore, room remains
for improvement, especially in certain services sectors, construction and public procurement.

•

•

•

•

•

•

The degree of implementation of the Single Market legislation has improved over  the  last  year.
Some  Member  States  are  markedly  lagging  behind,  however,  and  in  some  areas  (veterinary
checks  and  transport)  progress  has  been  slow.  Similarly,  progress  has  been  made  with  public
procurement,  whilst  there  are  remaining  problems,  to  judge  by  a  number  of  indicators,  such  as
directives not yet transposed, number of reasoned opinions and a low value of calls for tender
published in the Official Journal.

National competition policy has been tightened up and brought in line with Community legislation
in many Member  States.  In  a  majority  of  Member  States,  the  national  competition  authorities
now have powers to enforce Articles 81 and 82 of the EU Treaty which deal with agreements
between enterprises and abuse of dominant positions. In several other countries, progress  has
been made in that direction. The focus  should  now  shift  towards  increasing  transparency  and
improving monitoring and enforcement.

State  aid  has  fallen  in  recent  years  and  they  have  become  more  generic  and  less  specific.
However, the level of State aid is generally still too high. It should be reduced.

The  regulatory  framework  has  improved  in  a  number  of  industries,  leading  to  more  intense
competition and to a better price/quality ratio,  the  telecommunication  industry  being  perhaps
the most striking example (but even there problems remain with the incumbent operator often
occupying a dominant position, and regulatory bodies lacking power or transparency). Progress
can be speeded up in a number of industries, particularly the railways, water and postal services
sectors, where progress has been slow, as well as in the gas and electricity sectors.

Improving the efficiency of the distribution sector is essential for the good functioning of product
markets, leading to a broader variety of products offered to consumers and lower prices. Land-
use  planning,  limits  on  opening  hours  and  specific  restrictions  on  large-scale  retail  outlets
continue  to  limit  competition  in  this  sector.    While  these  issues  are  being  tackled  by  some
Member States, most could benefit from further liberalisations in this area.

Many  Member  States  have  undertaken  programmes  and  measures  to  improve  the  regulatory
environment  of  business  (obstacles  to  business  start-ups,  such  as  complex  administrative
procedures, inadequate financing possibilities, and limited information) and have lightened tax
burdens  on  SMEs.  The  regulatory  regime  is  still  business  unfriendly  in  many  Member  States,
however, and needs to be reformed further.

Innovation – a key source of dynamism

On aggregate, the EU lags behind the United States in terms of innovative capacity. All Member States
are  pursuing  policies  to  promote  R&D  and  innovation.  Nevertheless,  large  differences  between
Member  States  persist 
and
compartmentalisation.

fragmentation 

the  Union's 

efforts 

suffer 

from 

and 

•

This points to the need for the EU to increase and improve its effort in R&D and to increase the
production and diffusion of ICT.

5

•

•

•

Most Member States would benefit from better education and training enabling them to seize the
job  potential  of  the  information  society  which  is still impeded  by  a  huge  skill  gap.  Additional
benefits  would  be  derived  from  a  more  adequate  financial  backing  for  R&D  and  innovation,  an
appropriate  regulatory  framework  for  the  information  and  telecommunication  industries  and
increased competition in these markets.

A number of Member States have undertaken steps to encourage innovation by strengthening
the  links  between  research  centres  and  enterprises  but  a  true  "European  research  area"  to  enhance
scientific  and  technological  activities  in  the  Union,  while  fully  taking  advantage  of  the  high
potential of the Member States, is still lacking.

A more business-friendly patent system would stimulate R&D and innovation.  A reform  of  the
European patent system would be helpful.

Capital markets - full integration not yet realised, but the euro helps

The introduction of the euro has had significant effects across the spectrum of European financial
markets, contributing to the creation of deep, broad and liquid markets. However, obstacles remain
to the achievement of fully integrated financial markets.

•

•

•

The removal in a number of Member States of some of the quantitative constraints on investment
by  institutional  investors  is  contributing  to  the  deepening  of  financial  markets.  The
Commission has issued a Communication on Funded Pension Schemes and is preparing a draft
directive on the prudential supervision of pension funds.

Some Member States have introduced the distinction between professional and retail investors into their
legislation.  This  distinction  should  be  applied  more  widely  and  more  uniformly.  The
Commission is currently preparing a Communication on this issue.

The  issue  of  risk  capital  has  been  addressed  to  varying  degrees  in  all  Member  States.
Nevertheless, the availability and allocation of risk capital remains sub-optimal. In this context,
the  Commission  has  issued  a  Communication  setting  out  concrete  proposals  for  speeding  up
the implementation of the Risk Capital Action Plan.

Considerable progress in active labour market policies, but modest  progress
in labour market reforms

In  spite  of  the  steady  gains  in  employment  of  the  last  years,  unemployment  is  still  at  an
unacceptably high level and the participation rate is low in the EU  on  average.  As  documented  in
the  Joint  Employment  Report  1999,  there  is  now  a  clear  move  towards  a  preventive  approach  in
combating  youth  and  adult  long-term  unemployment  in  line  with  the  employment  guidelines.
However,  some  Member  States  are  more  advanced  than  others.  While  some  reforms  have  been
undertaken,  progress  on  policies  to  improve  the  functioning  of  labour  markets  has  on  the  whole
been modest, especially when compared to the reforms in product and capital markets.

•

Many Member States have made significant progress in implementing a preventive approach to
tackling youth and long-term unemployment, based on active labour market programmes (ALMPs).
Some  Member  States  have also  taken important  steps  towards  combining  active  policies  with
an assessment of benefit duration and eligibility criteria. For others, however, much progress is

6

•

•

•

still  required  to  meet  the  medium-term  deadline  for  the  quantified  targets  for  preventive
measures set out in the employment guidelines. For all Member States it is important to ensure
the  efficiency  of  these  measures,  in  particular  by  targeting  those  with  most  difficulties  in
integrating into the labour market.

A majority of Member States have enacted or will enact reforms to reduce income taxes and social
security contributions for labour, with reductions often targeted at the lower end of the wage scale.
These efforts have been underway since the mid-90s and have resulted in a modest fall in  the
direct  tax  burden  on  labour.  This  reduction  in  the  direct  tax  burden  on  labour  has  been
financed  mainly  by  shifting  the  burden  to  indirect  taxes,  such  as  VAT  or  energy  and
environmental taxes. These changes are welcome and need to be continued.

A  few  countries  have  started  a  systematic  review  of  their  benefit  systems  and  have  started  to
undertake  major  reforms,  particularly  with  regard  to  eligibility  conditions.  Apart  from  these
Member States – where reform efforts have paid off in contributing to important reductions in
structural unemployment – reform efforts in the area of benefit systems have so far been often
very modest and piecemeal. More efforts are needed in this area.

Some  progress  has  been  made  in  modernising  work  organisation.  A  number  of  Member  States
have  taken  measures  to  facilitate  part-time  work.  Limited  progress  was  achieved  in  some
Member States in the areas of flexible and annualised working time. Progress in  these areas  is
also important from the perspective of promoting gender equality. In addition, some Member
States  have  made  efforts  to  facilitate  female  labour-market  participation,  for  example  by
improving child-care facilities, although further progress is needed. Very little has been done to
address the problems of rigidities, which tend to discourage the recruitment of new permanent
staff.  The  failure  of  labour  costs  to  adjust  to  significant  regional  productivity  differentials  in
certain  Member  States  is  indicative  of  a  general  lack  of  labour  market  flexibility.  With  a  few
exceptions, the social partners have not been active enough in modernising the organisation of
work.

Conclusion

The overall implementation of the 1999 BEPGs is encouraging. Virtually all Member States met or
surpassed  their  budgetary  targets  in  1999  and  there  are  prospects  for  further  improvements  in
budgetary  positions  in  the  years  ahead.  The  quality  and  sustainability  of  public  finances,  in
particularly  the  reform  of  tax  and  pension  systems,  have  finally  come  to  the  fore  as  issues  of
concern.  As  regards  economic  reforms  of  product  markets,  progress  has  been  most  visible in  the
implementation  of  Single  Market  legislation  and  the  liberalisation  of  telecommunications  and
electricity  markets.  Some,  but  insufficient,  progress  has  been  made  in  disciplining  State  aids.  In
addition  to  tax  reform,  facilitating  part-time  work  and  implementing  a  preventative  approach  to
tackling  youth  and  long-term  unemployment  have  been  the  most  notable  areas  of  progress  in
labour  markets.  On  the  other  hand,  little  progress  has  been  made  in  implementing  and  enforcing
public  procurement  rules, liberalising  the  railway, water,  gas  and  postal  sectors,  deregulating  retail
outlets,  promoting  R&D  and  innovation,  developing  risk  capital  markets,  reforming  benefit
systems, and modernising work organisation. The degree of implementation varies across Member
States.  Overall,  it appears  that  Member  States  that  have  pursued  a  comprehensive  strategy  in  line
with the BEPGs have achieved the best results in terms of economic performance.

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INTRODUCTION

0.
The 1999 Broad Economic Policy Guidelines (BEPGs) were the first to be adopted after the launch
of the euro. They set out a comprehensive strategy designed to achieve strong, sustainable growth
and employment. The policy recommendations of the strategy can be regrouped under three main
headings: sound macroeconomic policies, actions to improve the functioning of labour markets and
economic reforms  to  enhance  the  efficiency and  flexibility  of  goods,  services  and  capital  markets.
The  1999  BEPGs  were  the  first  in  which  the  general  guidelines,  applicable  to  all  Member  States,
were supplemented  with a  full set  of  country-specific guidelines which  identified  economic  policy
priorities for each Member State, taking account of their particular circumstances.

For the economic policy strategy to work, it is crucial to secure effective implementation by means
of  an  adequate  and  regular  surveillance.  The  present  report  serves  a  twofold  purpose.  First,  it
constitutes  a  valid  test  of  the  degree  of  commitment  by  the  Member  States  to  the  shared  policy
strategy.  Second,  it  presents  the  necessary  information  and  analysis  for  the  preparation  and
adoption  of  a  new  set  of  guidelines.  Indeed,  this  report  together  with  the  assessment  of  the
macroeconomic  environment  as  contained  in  the  Commission  services'  Spring  2000  Economic
Forecasts  and  the  new  policy  developments  and  challenges  identified  in  recent  reports  under  the
various co-ordination processes as well as in the Commission's contribution to the Lisbon Summit
("An  agenda  for  economic  and  social  renewal  for  Europe)  and  its  Communication  "Strategic
objectives  2000-2005",  will  form  the  basis for  the  formulation  of  the  2000  BEPGs.  Amongst  the
key  challenges  identified  in  the  documentation  for  the  Lisbon  Summit  are  the  transition  to  an
inclusive,  knowledge-based  economy  while  aiming  at  full  employment  as  the  core  objective  of
economic and social policy.

The  present  assessment  draws  together  and  synthesises  the  key  findings and  conclusions  of  these
various processes whilst adding an integrated appraisal. It should be noted from the onset that the
present  report  must  be  viewed  as  an  interim  assessment  and  as  part  of  an  on-going  surveillance
process.

The  structure  builds  largely  on  the  main  lines  of  the  1999  BEPGs.  Section  1  presents  a  concise
overview  of  the  economic  situation  in  the  EU.  Section  2  reviews  the  macroeconomic  policy  mix.
Section 3 reviews the progress towards sound and efficient public finances whilst Section 4 assesses
wage  developments.  Finally,  Sections  5  to  7  report  the  main  results  from  the  assessment  of  the
progress made with structural reforms in the product, capital and labour markets, respectively.

1.

●

THE ECONOMIC SITUATION IN THE EU

Mild and temporary slowdown gave way to a robust growth recovery

The 1999 BEPGs were adopted against the background of a marked growth slowdown in the wake
of the 1997-98 financial crises. The annual rate of real GDP growth in the Union decelerated to a
mere 1½ per cent in the first half of 1999 from about 3 per cent in the first half of 1998. Exports
decelerated noticeably and the weakness in external demand combined with less favourable growth
prospects  led  to  an  important  downward  adjustment  in  stocks.  Investment  in  equipment  also
decelerated,  but  to  a  lesser  extent  than  initially  feared.  Since  early  summer  1999,  the  Union  has
experienced  a  progressive,  broadly-based  strengthening  of  economic  activity.  Output  growth

8

accelerated significantly in the second half. As a result, real GDP is estimated to have expanded at
2.2 per cent in 1999 (see Graph 1 and Table 1).

Domestic demand was the driving force of economic growth in 1999. It proved even more resilient
than  anticipated.  Private  consumption  remained  strong  under  the  combined  impact  of  strong
employment growth, a steady expansion of credits facilitated by low interest rates, low inflation and
buoyant stock markets. Ongoing improvements on the labour market coupled with steady gains in
real  per  capita  incomes  boosted  consumer  confidence  to  a  historical  high.  Investment  was
surprisingly  resistant,  reflecting  in  part  good  profitability.  Capital  spending  was  increasingly
underpinned  by  brightening  demand  prospects  and  a  strengthening  of  business  confidence.  With
the  effects  of  the  crisis  in  emerging  markets  waning  and  the  US  economy  continuing  on  a  brisk
expansion path, exports rebounded strongly in the second half. As a result, for the year 1999 as the
whole, the growth of exports decelerated somewhat less than projected in the spring of last year.

Differences  in  growth  performance  among  Member  States  continued  in  1999.  They  reflect  the
impact  of  essentially  three  factors:  the  different  exposure  to  the  crisis-hit  emerging  market
economies,  the  delayed  impact  of  the  policy  adjustment  in  the  run-up  to  Stage  3  of  EMU  and
disparities in potential growth rates. Growth remained very brisk in Ireland and also Luxembourg,
showed  continued  buoyancy  in  Spain,  the  Netherlands,  Portugal  and  Finland,  and  was  strong  in
Sweden.  Activity  in  Germany  and  Italy  was  still  lagging,  but  clearly  accelerated  in  the  course  of
1999.

Short-term  prospects  are  for  a  further  strengthening  of  the  recovery.  The  external  side  of  the
economy  will  continue  to  benefit  from  the  global  upswing,  that  is  gathering  momentum,  and
improved competitiveness following the depreciation of the euro. Domestic demand is expected to
remain  the  backbone  of  robust  growth.  Private  consumption  will  be  underpinned  by  high
consumer  confidence  and  continuous  improvements  on  the  labour  market  coupled  with  steady
gains in real per capita incomes. Improving demand prospects, rising business confidence and high
profitability bode well for investment. Moreover, growth differences among Member States are set
to narrow as the uneven impact of the crises in emerging markets wanes and the lagged effects of
different  adjustments  in  the  macroeconomic  policy  mix  in  the  run-up  to  Stage  3  of  EMU  are
petering out.

● Employment has become more responsive and unemployment is declining

The employment performance in the EU has become increasingly encouraging over recent years as
growth has become richer in employment. With GDP growth falling temporarily to slightly above 2
per cent, indications are that employment gains were nevertheless of the order of 1¼ per cent. This
suggests that employers perceived the slowdown as temporary. But it also reflects, over and above
any  purely  cyclical  influences,  the  effects  of  several  years  of  wage  moderation  and  of  structural
reform  to  enhance  both  employability  and  adaptability  and  to  strengthen  the  effective  labour
supply. This also bodes well for the future, when job creation will benefit from a strengthening of
growth  and  a  continued  shift  towards  the  more  labour  intense  services  sectors.  The  improving
employment  situation  has  increasingly  been  reflected  in  declining  unemployment  rates.  Having
reached historical highs in 1997 in many member countries, unemployment fell gradually to 9.2 per
cent in 1999 in the EU as a whole (see Graph 2).

9

Employment  gains  remained  particularly  brisk  in  the  rapidly  growing  economies  of  Ireland  and
Luxembourg  while  they  were  still  subdued  in  Germany  and  Italy  in  1999.  Job  creation  was  also
strong  in  Finland  and  Spain.  In  the  latter  country  the  fall  in  unemployment  continued  at  a  rapid
pace while Luxembourg again recorded the lowest unemployment rate in the EU.

●

Absence of inflationary pressure

In 1999, the EU economy continued to enjoy a  high  degree  of  price  stability.  Inflation  (measured
by the harmonised  index  of  consumer  prices,  HICP)  bottomed  out  in  early  1999 at  1  per  cent.  It
has  since  crept  up  to  1.8  per  cent  in  January  2000  owing  to  the  sharp  reversal  of  energy and  raw
material prices, particularly crude oil, and the weakening of the euro. The energy component added
directly  0.9  percentage  points  to  the  January  headline  figure.  On  the  other  hand,  internal  demand
and  supply  conditions  have  been  conducive  to  lower  underlying  inflation  in  the  EU  economy.
Wage  increases  continued  to  be  moderate  and  deregulation  and  increased  competition  in  certain
utility  markets  (notably  telecommunications  and  electricity)  exerted  downward  pressure  on  prices.
As a result, core inflation (i.e. excluding energy prices and food) fell to a record low of about 1 per
cent in 1999 (see Graph 3 and Table 2).

Another feature of 1999 was a widening of inflation differentials between Member States. In early
1999, inflation fell rapidly to very low levels in  a  number  of  countries  (Germany,  France,  Austria)
and  accelerated  in  some  others  (Spain,  Ireland,  the  Netherlands,  Portugal).  The  dispersion  in
inflation  rates  tended  to  narrow  gradually  since  then.  The  inflation  differentials  largely  reflected
structural differences and short-term cyclical disparities in the euro area. In countries like Spain and
Ireland,  the  price  increases  were indicative  of  overheating  risks  and  required  policy  adjustment  in
terms of demand restraint by budgetary policy.

As regards future trends, following a further rise in oil prices and a weakening in the external value
of  the  euro  in  the  past  months,  the  inflation  outlook  has  become  somewhat  more  uncertain  and
less benign. It cannot be excluded that headline inflation may slightly but temporarily exceed the 2
per  cent  mark  in  the  euro  area  in  early  2000.  Future  trends  will  importantly  depend  both  on  the
extent to which the depreciation of the euro will be passed through to import and consumer prices
and on future wage developments.

2.

GROWTH AND STABILITY-ORIENTED MACROECONOMIC POLICIES

2.1 The macroeconomic policy mix in the euro area

The 1999 BEPGs recommended a policy mix conducive to growth, employment and stability that should consist
of  a  monetary  policy  aimed  at  maintaining  price  stability  in  accordance  with  the  Treaty,  sustained  efforts  to  bring
budgets securely to close to balance or surplus over the medium term, wage developments consistent with price stability
and job creation and commitment to economic reform.

1999,  with  the  successful  launch  of  the  euro,  was  the  first  year  to  test  in  practice  the
macroeconomic management in the single currency zone. The test result was positive.

Euro-area monetary conditions were generally growth-supportive in 1999, against a background of
an economic slowdown and sustained price stability. With the balance of inflation risks seen to be
on the downside, the ECB lowered its key policy rate by 50 basis points to 2.5 per cent in April and
left  its  rates  unchanged  until  November.  The  fall  in  money-market  rates  in  response  to  the  ECB

10

action was accompanied by a substantial depreciation in the nominal effective exchange rate of the
euro. The implied easing in monetary conditions was offset to some extent by a substantial rise in
euro-area bond yields which, despite the absence of internal inflation pressures, were pulled higher
by developments in the United States (see Graph 4 and 5).

With a brightening growth outlook in the euro area, the prospect of higher capacity utilisation and
tightening  labour  markets,  the  ECB  has  considered  that  the  risk  of  inflation  has  shifted  to  the
upside, reversed its prior move in November and raised policy rates by a further 25 basis points in
early February.

The  conduct  of  monetary  policy  was facilitated  by  the  resolve  of  Member  States'  governments  to
abide  by  their 1999  budgetary  targets,  despite  on  average  lower  growth  than  expected  at  the  time
when the plans were made. Indeed, virtually all euro-area Member States met or even overachieved
these targets. Several factors contributed to this positive outcome, including a further decline in the
debt service burden (see Section 3). As a result, general government net borrowing in the euro area
as a whole fell to about 1¼ per cent of GDP in 1999. Last year also saw a notable improvement in
the cyclically-adjusted balance of ¾ of a per cent of GDP in the euro area. The cyclically-adjusted
primary balance posted a moderate improvement of a ¼ of a percentage point to close to 3½ per
cent  of  GDP.  The  1999  results  also  imply  that  more  Member  States  than  hitherto  anticipated
achieved a sound underlying budgetary position in line with the Stability and Growth Pact.

Wage  developments  in  the  euro  area  continued  to  be  consistent  with  price  stability  in  1999.  On
average,  settlements  remained  moderate,  resulting  in  an  increase  of  nominal  compensation  per
employee  of  about  2¼  per  cent.  This  implied,  after  taking  into  account  productivity  growth,  an
increase  in  unit  labour  costs  of  approximately  1¼  per  cent,  which  did  not  give  rise  to  inflation
concerns.  Moreover,  real  wages  advanced  approximately  in  line  with  labour  productivity,  thereby
maintaining the rate of  return  on  investment  at  a  level which  should  be  conducive  to  investment,
growth and employment creation as demands strengthens further (see also Section 4).

All  in all,  the  judicious  conduct  of  monetary  policy,  budgetary  policies  that  remained  on  a  steady
course  and  appropriate  wage  trends  resulted  in  an  adequate  policy  mix  in  view  of  the  prevailing
economic  situation.  The  euro-area  economy  has  passed 
its  first  test  of  macroeconomic
management.  Moreover,  continued  moves  to  enhance  vitality and  responsiveness  of  the  economy
through an EU wide process of structural reform have underpinned confidence of economic agents
and thereby supported activity (see Sections 5 to 7).

2.2 The macroeconomic policy mix in the member states outside the euro area
Noting  that  Member  States  not  participating  in  the  euro  area  retain  national  responsibility  for  monetary  and
exchange rate policy, the 1999 BEPGs recommended to maintain stability-oriented macroeconomic polices. For
the  two  Member  States  participating  in  the  ERM  II,  the  main  focus  must  be  to  maintain  sound  monetary  and
budgetary policies in order to respect exchange rate commitments. For the two Member States with a direct inflation
target, it is important that the conduct of monetary and fiscal policy be consistent with the achievement of that target,
thus creating the conditions for exchange rate stability.

Denmark is relatively advanced in the economic cycle and some inflation pressure has emerged as
labour-market  conditions  have  tightened.  The  Danish  National  Bank  is  committed  to  keep  the
krone within the narrow fluctuation band of the ERM II and the exchange rate has remained very
steady at slightly above the central rate since the  inception  of  the  mechanism  as  the  Central  Bank

11

has  closely  shadowed  euro  rates  (see  Graph  6).  With  a  view  to  securing  the  basis  for  sustainable
growth  while  respecting  the  commitment  to  a  fixed  exchange  rate  against  the  euro,  budgetary
measures  to  calm  domestic  demand  were  implemented  in  1999,  in  line  with  the  1998  "Whitsun"
package.  While  the  measures  have  temporarily  slowed  growth  they  should  help  to  arrest
competitiveness losses notably against the euro area. Moreover, the discretionary move has further
improved public finances which are now in surplus and comfortably meet the requirements of the
Stability and Growth Pact.

Greece has advanced in the process of real catching up  while  making  further  progress  in  nominal
convergence in 1999. The  inflation  differential  with  the  euro  area  has  narrowed  considerably,  and
key interest rates were lowered progressively towards year end while the  drachma  remained above
its  ERM  II  central  rate,  within  the  standard  15  per  cent  fluctuation  band.  In  view  of  a  closing
output  gap,  budgetary  policy  succeeded  in  scaling  further  back  the  deficit,  implying  also  an
improvement  in  the  underlying  position.  In  recognition  of  the  progress  already  achieved  in  1998,
the  Ecofin  Council,  on  a  recommendation  from  the  Commission,  abrogated  the  decision  on  the
existence of an excessive deficit last November. In January, the drachma's central rate vis-à-vis the
euro was revalued by 3½ per cent which should support the authorities in their efforts to keep the
economy on a path of sustainable growth with price stability.

Sweden enjoyed a strong and broadly based upswing in 1999 as the economy seems to have entered
a  virtuous  circle  against  a  background  of  good  fundamentals.  Inflation  (as  measured  against  the
HICP index) is among the lowest in the EU, the current account in surplus and public finance in a
much  better  shape  than  only  a  few  years  ago.  The  stance  of  budgetary  policy  was  eased  in  1999.
The  surplus  continues  to  meet  the  requirements  of  the  Stability and  Growth  Pact  and  the  scaling
back of taxation is to be welcomed in view of the high tax burden. Nevertheless, some care might
be  warranted  in  adopting  a  pro-cyclical  budgetary  stance  as  the  output  gap  is  closing  and  is
expected  to  turn  positive  in  the  coming  years.  This  holds  even  more  as  the  commitment  of  the
Swedish Riksbank  to  price  stability as  an  objective  has  been  further  underlined  by  new  legislation
that  came  into  force  in  1999.  The  Riksbank  has  an  explicit  inflation  target  of  2  per  cent  with  a
tolerance  interval  of  +/-1  percentage  point.  Inflation  is  still  low,  albeit  edging  higher  and  short-
term rates have already been channelled up over recent months.

The  UK  economy  weathered  relatively  well  the  emerging  markets'  crises  and  growth  has  gained
momentum in the course of 1999. Following major improvements in earlier years, budgetary policy
turned more steady while still making some progress in reaching a budget surplus of close to 1 per
cent  of  GDP  in  1999.  This  favourable  development  reflects  the  Government's  commitment  to
conduct  budgetary  policy  in  a  manner  consistent  with  safeguarding  macroeconomic  stability.
Inflation  has  remained  contained  and  fell  even  below  the  euro-area  average  in  the  second  half  of
last  year  in  terms  of  the  HICP.  However,  there  are  upside  inflation  risks  as  the  economy  is
operating at close to capacity. The Bank of England's monetary policy committee reversed a steady
downward trend in policy rates in September 1999. This and the moves since are to ensure that the
inflation  target  of  2½  per  cent,  in  terms  of  the  retail  price  index  excluding  mortgage  interest
payments, continues to be met.

12

3.

SOUND AND EFFICIENT PUBLIC FINANCES

In  1999,  budgetary  policy  in  the  EU  was  conducted  for  the  first  time  in  the  framework  of  the
Stability and Growth Pact. The 1999 BEPGs recommended that Member States (i) achieve budgetary
positions  of  close  to  balance  or  in  surplus  no  later  than  by  the  end  of  2002,  in  conformity  with  the  stability  and
convergence programmes; (ii) meet fully their 1999 budgetary targets; and (iii) improve simultaneously the quality and
sustainability  of public  finances  (see  Box  1  for  the  country-specific  recommendations).  Below  are  first
addressed  developments  in  1999  and  then  the  short  term  outlook  and  medium-term  plans  as
presented in the recent updates of the stability and convergence programmes.

3.1

1999 budgetary targets met despite growth slowdown

When Member State governments prepared their budget plans for 1999 in the second half of 1998,
the extent of the slowdown in economic activity then under way in many EU countries was not yet
apparent. This holds generally also for the first round of stability and convergence programmes as
these were typically based on the budget plans (see Tables 3 and 5).  In  about  half  of  the  Member
States,  GDP  growth  turned  out  lower  than  projected  in  the  programmes.  The  slowdown  was
especially  noticeable  in  Germany,  Italy  and  Austria  while  in  Belgium,  Greece  and  Spain  growth
almost  matched  initial  expectations.  However,  in  other  countries  growth  was  actually  higher  than
projected, e.g. in France, Ireland, the Netherlands, Sweden and the United Kingdom.

Nevertheless,  regardless  of  the  varying  growth  performances,  the  1999  budgetary  targets  were
generally met or even overachieved. Seven out of the fifteen Member States  recorded  a  budgetary
surplus. The group of countries in surplus consists of the Nordic countries, Ireland, Luxembourg,
the Netherlands and the United Kingdom. Four countries had a deficit between 1 and 1.5 per cent
of GDP while the deficit in France, Italy, Austria and Portugal was still close to or above 2 per cent
of GDP (see Table 3). Government debt ratios also came down faster than expected.

Some  Member  States  with  stronger  growth  than  anticipated  also  overachieved  initial  budgetary
targets.  Notable  outcomes  in  this  respect  were  obtained  by  the  Netherlands,  Sweden  and  the
United  Kingdom.  Maybe  more  noteworthy  is  the  budgetary  performance  in  those  countries  that
experienced  a  marked slowdown.  This  holds in  particular  for  Germany  where  the  budget  balance
came  out  appreciably  better  than  targeted.  In  Italy,  where  the  deficit  objective  had  been  adjusted
upward in the course of the year in view of  the  slowdown,  the  deficit  outcome  posted  a  marginal
improvement  on  the  initial  2  per  cent  of  GDP  deficit  target.  Only  Ireland  and  Austria  appear  to
have undershot their 1999 budgetary targets.

Several  factors  contributed  the  better  than  expected  1999  budgetary  figures,  although  they  are
sometimes  difficult  to  quantify in  any  precise  way.  The  main  factors were:2  the  budget  results  for
1998 were better than expected and thus improved the starting position; sustained efforts to tightly
control  expenditures;  unexpectedly  buoyant  tax  receipts,  which  moreover  benefited  from  the  tax
friendly  composition  of  growth  underpinned  by  domestic  demand;  and  finally  a  tendency  for
Member  States  to  build  in  contingency  reserves  in  their  budgetary  targets,  especially,  as  it  seems,
regarding interest payments. All in all, the 1999 budget deficit in the EU as a whole fell to ¾ of a
per cent of GDP and the underlying position also improved (see Table 4).

2  The changeover of the reference economic accounting system from ESA79 to ESA95 (the budget targets were set on
an  ESA79  basis  while  outcomes  are ESA95  based)  also  played  a  role.  The  ESA  changeover  had  a  small  impact  on
1999 budget balance figures on average, but was notable in Portugal and Sweden.

13

Most of the improvement in budget balances in 1999 can be attributed to an increase in the ratio of
revenues  to  GDP.  The  ratio  of  total  expenditures  to  GDP  decreased  marginally,  but  this  was
entirely  due  to  the  fact  that  the  lower  interest  burden  offset  an  increase  in  primary  expenditures.
The  decline  in  the  government  investment  to  GDP  ratio  was arrested.  In  the  EU as a whole  this
ratio improved slightly to 2.3 per cent, but  is  still  well  below  the  levels  reached  in  the  early  1990s
(see  Graph  7).  While  in  most  countries  the  investment  ratio  was  stable,  it  increased  visibly  in
Ireland  and  Italy.  Furthermore,  many  Member  States  have  undertaken  efforts  to  increase
investment in human capital.

The higher tax and primary expenditure ratios may be seen as a less positive feature of the overall
budgetary  adjustment  in  1999  given  the  general  acknowledgement  that  a  high  quality  budgetary
adjustment strategy should be led by expenditure restraint which then also allows for a lowering of
tax burdens. However, it should be noted that the on-going tax reforms in Member States generally
envisage  cutting  tax  rates  together  with  a  broadening  of  tax  bases.  In  the  short  term,  while
economic agents adapt, this may lead to fluctuations in tax intakes. Moreover, to the extent that the
collection  of  taxes  has  been  made  more  efficient  -  a  precondition  in  some  cases  for  lowering  tax
rates - this should also lead to higher tax revenue. On the expenditure side, beyond the somewhat
higher  investment  ratio,  the  working  of  the  automatic  stabilisers  contributed  also  to  increase
expenditures. In fact, according to the presented medium term budgetary plans it is likely that both
revenue and primary expenditure ratios peaked in 1999.

3.2 Budget plans for 2000 and beyond

Regarding the short-term prospects for  public finances in 2000,  in  most  Member  States  no  major
consolidation efforts seem to be incorporated in current plans. Judging from the budgetary targets
presented  so  far  for  2000,  budget  balances  on  average  will  nevertheless  continue  to  improve
somewhat  due  to  cyclical  reasons  and  lower  interest  expenditures.  Cyclically-adjusted  primary
balances are probably set to deteriorate slightly should the nominal targets just  be  met.  Whilst  the
targets  are  not  very  ambitious,  it  should  be  noted,  however,  that  most  budgets  are  based  on
deliberately  prudent  economic  assumptions.  As  a  consequence,  with  the  brightened  economic
prospects  for  2000,  there  is  a  good  chance  that  the  budgetary  targets  for  this  year  can  again  be
bettered.

Since  last  September,  all  but  one  of  the  Member  States  have  submitted  updated  stability  and
convergence programmes. Only Austria has not yet submitted its update, because of  the delays in
the formation of a new government and of the subsequent absence of a budget for 2000. The new
Austrian  government  is  expected  to  submit  its  updated  stability  programme  before  the  end  of
March.

The  updated  programmes  stick  to  or  strengthen  the  medium  targets  of  the  original  programmes,
often making use of the additional year at  the  end  of  the  programme  to  make  further  progress  in
deficit reduction (see Table 5). These updates indicate that the fourteen Member States either fulfil
or will fulfil by 2002 at the latest the requirement of  achieving  the  minimum  benchmark  position,
which allows the automatic stabilisers to work without risk of the deficit breaching the 3 per cent of
GDP reference value. By 2002 or 2003, eight of the Member States aim for a budget surplus and a
further five expect a deficit of no more than half a per cent of GDP.

14

These  updates  are  generally  based  on  cautious  assumptions  about  growth  and  interest  rates.
Consistent  with  the  1999  BEPGs,  Member  States  would  be  expected  to  hasten  the  adjustment
process  and  the  reduction  in  the  still  high  debt  ratios  if  the  improved  economic  outlook  were  to
materialise. A more ambitious strategy might have been more appropriate for those Member States
which  were  called upon  to  create  additional  safety  margins  or  those  where  very  high  government
debts  still  are  a  matter  of  concern.  An  additional  consideration  in  this  context  is  the  cyclical
position. Countries where economic growth has remained strong and where the economy recovery
is at a mature stage, a stronger and front-loaded adjustment would help diminish overheating risks.

The  composition  of  the  planned  budgetary adjustment  outlined in  the  updates  generally  seems  to
be beneficial in the sense that total revenue and total expenditure ratios stabilise and start declining
gradually  over  the  medium-term,  while  remaining  on  historically  high  levels.  As  regards
expenditure,  government  investment  is  expected  to  remain  broadly  constant.  Furthermore,  many
Member  States  explicitly  or  implicitly  adopt  a  budgetary  strategy  built  on  primary  expenditure
control to create room for an easing of the tax burden.

Government  debt  to  GDP  ratios  are  set  to  continue  their  downward  trend  towards  more
sustainable levels.  All  Member  States  which  have  submitted  updates  so  far,  project  debt  to  GDP
ratios lower than in last year's programmes. In fact, most Member States will already in 2001 have
debt ratios below the 60 per cent of GDP threshold. The remaining high debt countries, Belgium,
Greece  and  Italy,  continue  to  reduce  their  debt  burdens  and  approach  the  100  per  cent  to  GDP
level in 2002/2003 (see Table 6).

3.3 Quality and sustainability of public finances

Pension reform

•
Given  the  very  long-term  consequences  of  changes  to  pensions  and  health  care  systems,  it  is
important that reforms are well thought through and achieve a broad consensus in society. Hence,
it  would  be  inappropriate  to  assess  the  implementation  of  the  BEPGs  solely  on  the  basis  of
measures enacted in one year, without taking into account proposals for reforms and  consultations
with social partners.

There  is  a  great  deal  of  diversity  in  the  public  pension  systems  amongst  the  Member  States,  and
countries are at different stages in the reform process. Nonetheless, it is clear that the issue of long-
term  budgetary  sustainability,  in  particular  as  regards  public  pension  systems,  was  high  on  the
political agenda in almost all Member States (see Box 2). Overall, a number of common trends can
be identified in the reforms underway: (i) steps are being taken to curb early retirement and increase
participation rates  amongst  the  elderly;  (ii)  a  better  balance is  being sought  between  contributions
and  expenditures;  (iii)  there  is  a  shift  towards  more  funding  public  pensions:  and  (iv)  a  better
balance  is  being  sought  in  the  pension  systems  via  the  strengthening  of  funded  second  and  third
pillar pension schemes.

Concrete  measures  were  enacted  or  past  reform  entered  into  force  in  several  countries,  notably
Denmark, Ireland, Netherlands, Finland, Sweden and the United Kingdom. In Germany agreement
was  reached  to  reduce  the  contribution  rates  of  employers  and  employees which  will  be  financed
via higher energy taxes.

15

The year 2000 could mark a major milestone in the reform of public pensions in Europe, with the
possibility of significant reforms in Belgium, Germany, Greece, Spain, France and Portugal. Further
reform of the public pension system is also possible, indeed desirable, in Italy and Austria. It is vital
that  such  reforms  address  the  issue  of  long-term  sustainability  of  public  pension  systems  in  a
comprehensive manner, taking into account the need to make them more employment-friendly and
to ensure a fair distribution both within and between generations.

In  several  Member  States,  reforms  to  public  pensions  have  been  suspended  by  incoming
governments following elections. In recent years, this has occurred in Germany and France. While
it is important that governments achieve a broad consensus in society of pension reform, it is vital
that  hard  decisions  are  not  repeatedly  postponed.  There  is  a  short  window  of  opportunity  to
address the challenge before the retirement of the baby-boom generation around 2010.

Overall, the BEPGs as regards sustainability have been respected even though many Member States
are in a consultation phase. However, compliance in the year 2000 should be judged on the basis of
the extent to which proposals and consultations will have turned into concrete action.

During  1999,  a  working  group  was  established  in  the  Economic  Policy  Committee  (EPC)  to
provide comparable estimates of the long-term budgetary implications of ageing populations. This
work should be completed in 2000. It is vital that consistent and comparable estimates are available
to  improve  policy  making  at  EU  level.  Moreover,  the  emphasis  until  now  has  been  on  public
pensions.  More  work  is  required  on  the  impact  of  ageing  populations  on  public  health  care
expenditure and tax revenues. The work of the EPC will provide essential input to that of the High-
Level  Working  Party  set  up  by  the  Portuguese  Presidency,  which  will  assess  the  long-term
sustainability of social protection schemes, in particular pensions.

Tax reform

•
Reducing the overall tax burden

Most Member States have taken or plan tax reforms affecting social security contributions, personal
income  taxes,  corporate  taxes,  and,  to  a  much  lesser  extent,  indirect  taxation  (see  Box  3).  Such
reforms, because of their coverage and degree of ambition, so far seem to have had a limited effect
on  government  receipts  in  many  cases.  However,  over  the  period  2000-2003,  the  tax  burden  (as
measured  by  the  ratio  of  total  government  receipts  to  GDP)  is  expected  to  fall  in  most  Member
States, particularly in Denmark, Germany, France, Ireland,  Luxembourg,  the  Netherlands,  Finland
and Sweden.

Reducing the tax wedge on labour on the lower paid and tax shifting

A  majority  of  Member  States  (Belgium,  Germany,  Greece,  Spain,  France,  Italy,  the  Netherlands,
Finland  and  the  United  Kingdom)  have  undertaken  measures  to  reduce  non-wage  labour  costs.
They  are  targeted  at  the  lower  paid  (Belgium,  France,  Italy,  the  Netherlands  and  the  United
Kingdom),  as  well  as  at  improving  incentives  for  new  and  permanent  labour  contracts  (Greece,
Spain and Italy). Furthermore, a number of Member States are reforming personal income taxes to
reduce  the  total  burden  on  labour  income.  In  Germany,  Spain,  Ireland,  the  Netherlands,  Finland
and  Sweden,  general  reductions  of  marginal  and  standard  rates  have  been  planned  or  applied.
Targeted reforms (Denmark, Greece, Italy, Austria and the United Kingdom), consisting of tax cuts
at  the  bottom  of  the  income  distribution  and  of  increasing  minimum  exempted  incomes,  aim  at

16

making  work  pay.  In  the  UK  (within  the  so-called  welfare  to  work  programme),  the  minimum
guaranteed income (Working Families Tax Credit) has been raised as well.

The  reforms  of  personal  income  taxes  seem  to  be  inducing  modest  reductions  in  the  direct  tax
burden borne by labour.3 The reduction of non-wage labour costs has started moderately (see Table
7).4 Overall, reduction of social security contributions might have a negligible impact on non-wage
labour costs.5 This is not surprising since most of the measures are targeted (new jobs, low end of
the wage scale) and might be affecting just a small fraction of the tax base.

Reforms  of  indirect  taxation  are  rather  limited.  Only  in  Denmark,  Germany,  France,  Finland  and
the United Kingdom have energy and environmental taxes risen. In some cases they aim at shifting
the  tax  burden  away  from  labour.  In  Germany  and  the  United  Kingdom  additional  revenues  are
meant  to  finance  cuts  in  non-wage  labour  costs.  In  France  ecological  taxes  will  contribute  to
finance  the  budgetary impact  of  the  reduction  in working time.  In  addition,  nine    Member  States
(Belgium,  Greece,  Spain,  France,  Italy,  Luxembourg,  the  Netherlands,  Portugal  and  the  United
Kingdom,  only  for  the  Isle  of  Man)  plan  to  apply  reduced  VAT  rates  to  labour-intensive  service
sectors with a view to enhancing the demand for labour in such activities.

Improving the efficiency of taxation systems

Although making tax systems more employment-friendly seems to be a major goal of tax policy in
Member States, improving their efficiency is also behind certain tax policies. In some countries, the
reform of the personal income tax has consisted of an across-the-board reduction  of  marginal  tax
rates.  In  addition,  targeted  tax  cuts  will  reduce  certain  distortionary  effects  of  taxes  such  as
unemployment  traps.  Nevertheless,  cases  of  evasion  and  fraud  suggest  that  further  efforts  are
needed  to  increase  efficiency  and  effectiveness  in  administration  and  enforcement.  Furthermore,
tax  cuts  at  the  bottom,  as  well  as  the  rise  of  the  minimum  exempted  income,  may  cause
discontinuities in marginal tax rates and enhance progressivity of personal taxes at the lower half of
the income distribution.

Reforms  of  capital  and  corporate  taxes  do  not  seem  to  respond  to  potential  tax  competition
pressures.  They  aim  at improving  the  functioning  of  capital  markets  (Denmark,  Germany,  France
and  Italy)  and  at  creating  incentives  for  venture  and  intangible  capital  (Greece,  Spain,  France,
Ireland and Italy). In Germany and  Finland  the  reforms  are  more  general.  Corporate  rates  will  be
reduced in the former country, while in Finland rates will be raised by 1 percentage point.

Where the overall capital income is concerned, current levels and evolution of effective tax rates on
capital  seem  to  support  the  view  that  reforms  of  corporate  and  other  capital  taxes  are  not
introducing fundamental changes in the tax burden on capital.6 It rather seems that reforms of the

3

This direct tax burden on labour consists of social security contributions, plus taxes on payroll and workforce and the
part  of  personal  income  taxes  attributable  to  labour  income.  It  is  usually  expressed  in  percentage  points  of  gross
wages.

4  Table 7 also shows the so-called  effective  tax  rates  of  labour. Whilst  conceptually  broadly  similar  to  the  implicit tax
rates published by Eurostat, there are some methodological differences. Largely based on macroeconomic data, they
allow, however, to be updated in line with the Commission services' economic forecasts, thus enabling an assessment
on the basis of the most recent information.
These are calculated as the ratio of social security contributions and taxes on payroll and workforce to gross wages.
The  effective  taxation  on capital  comprises  personal  taxes  on  capital  income,  property  and  corporate  income  taxes
expressed in percentage points of the operating surplus.

5

6

17

personal income tax, which also tax capital income, are reducing the tax burden on both labour and
capital income. A lowering of the capital effective tax rate is expected over the period 2000-2001.

Harmonisation of VAT and other indirect taxes

Indirect  taxation  is  the  field  where  the  EU  has  progressed  most  in  the  past.  However,  further
progress  is  needed  to  ensure  a  smooth  functioning  of  the  Single  Market.  Where  statutory  and
effective  VAT  rates  are  concerned,  large  differences  still  exist  across  Member  States,  not  to
mention  differences  in  exemptions  and  special  treatment  of  goods  and  services.  In  addition,
technology is changing the nature of consumption taxes. E-commerce might have large influence in
the  operation  of  tax  systems  in  the  EU  since  a  third  of  government  receipts  come  from  indirect
taxes. Electronic transactions make final consumption highly mobile and expose VAT to potential
tax avoidance. They can also radically change basic concepts of tax administration and enforcement.
These  challenges  call  for  renewed  and  further  harmonisation  efforts  in  VAT  and  other  indirect
taxes.7

Pursuing tax co-ordination and avoiding harmful tax competition

Tax  competition  has  important  positive  consequences:  it  is  a  means  of  benefiting  citizens,  of
imposing  downward  pressure  on  government  spending  and  of  ensuring  that  tax  policies  take
account of the European Union's global  competitiveness.  At  the  same  time,  however,  the  erosion
of certain national tax bases through unrestrained tax competition for mobile activities represents a
threat  to  the  tax  revenues  of  the  Member  States  and  might  lead  to  shift in  the  balance  of  the  tax
burden  towards  less  mobile  bases,  namely  labour.  Such  harmful  tax  competition  also  undermines
the very basis of the Single Market, namely a level playing field in terms of fair competition between
companies.

The  package  of  measures  to  tackle  harmful  tax  competition,  including  the  Code  of  Conduct  for
business  taxation,  is  based  on  the  principle  that  a  co-ordination  (rather  than  a  harmonisation)  of
certain direct tax policies is necessary. It provides a means of developing co-ordinated solutions to
problems which the Member States are unable to resolve by acting individually. In this context, in
line with  progress in  the  Code  of  Conduct,  further  co-ordination  efforts  between  Member  States
are needed, especially in taxes on certain mobile categories of capital income.8

4.

APPROPRIATE WAGE DEVELOPMENTS

The 1999 BEPGs maintained that: (i) nominal wage increases must be consistent with price  stability;  (ii)  real
wage increases in relation to labour productivity should take into account the need to strengthen, where necessary, and
subsequently  maintain  the  profitability  of  investment;  (iii)  wage  agreements  should  better  take  into  account
differentials according to qualifications, skills and geographical areas; and (iv) wage imitation should be avoided and
labour cost differences between Member States should continue to reflect discrepancies in labour productivity.

7  Following  a  proposal  by  the  Commission  in  November  1998  for  a  Directive  on  certain  legal  aspects  of  electronic

commerce in the Internal Market, the Council reached agreement on a common position in December 1999.

8  While the 1999 BEPGs stated that the Council awaited the outcome of the ongoing discussion on the taxation of the
interest  on  savings  in  line  with  the  conclusions  of  the  European  Council  held  in  Vienna  in  December  1998,  no
agreement has been reached yet.

18

Compensation per employee, i.e. including employer's social security contributions, rose by close to
3  per  cent  in  the  EU  in  1999, in  line  with  the  trend  observed  over  recent  years.9  The  increase  in
nominal unit labour costs accelerated to about 2 per cent, in part due to a cyclically-induced dip in
labour productivity (see Table 8). This situation is still perfectly compatible with price stability, but
can carry inflationary risks when other factors put additional pressure on prices. Unit labour  costs
rose at rates close to or above 3 per cent in some of the cyclically advanced Member States, such as
Denmark  and  Ireland.  In  Portugal,  the  pace  of  unit  labour  costs  accelerated  to  4  per  cent  and
continued  to  exceed  4  per  cent  in  the  United  Kingdom.  Such  rates,  if  sustained,  would  put  price
stability and competitiveness at risk.

Real  wage increases  (nominal  compensation  adjusted  by  the  GDP  deflator),  which  rose  at  a  pace
well below the growth of labour productivity since the mid-1980s and thereby allowed a remarkable
improvement in the profitability of investment, accelerated somewhat in 1999 and slightly exceeded
productivity  gains.  This lead  to  a  temporary  halt  in  the  rise  in  profitability  in  the  EU  as  a  whole.
Real  unit  labour  costs  rose  rapidly  in  particular  in  Sweden  and  the  United  Kingdom.  While  both
countries  have  in  fact  enjoyed  levels  of  profitability  above  the  EU  average,  a  further  marked
acceleration in wage settlements not matched by a corresponding quickening in labour productivity
would threaten to erode competitiveness.

Some  countries  have  taken  or  plan  steps  to  ensure  that  wage  cost  differentials  better  reflect
productivity  differences  between  different  qualifications,  skill  levels  or  geographical  areas.  A
targeted reduction in non-wage labour costs was implemented in Spain, France and in Italy in 1999,
and  further  reductions  are  planned  in  Belgium.  In  Greece,  territorial  employment  pacts  offer  in
principle an opt-out from sectoral wage agreements in high unemployment regions and in Italy, the
"Social Pact for Development and Employment" allows for area contracts to deviate from national
standards of wage setting.

Especially  within  the  euro  area  it  is  important  that  wage  trends  in  the  participating  countries  stay
tuned  to  productivity.  While  the  1999  developments  do  in  general  not  signal  problems  in  this
respect, unit labour costs in Portugal rose clearly faster than in the single currency area as a whole,
which,  if  continued  unabatedly,  risks  impairing Portuguese  price  competitiveness.  In  contrast,  the
level  of  the  minimum  wage  in  Ireland  will  need  to  be  carefully  monitored  to  ensure  that  low-
productivity workers are not priced out of the labour market.

5. MORE EFFICIENT PRODUCT (GOODS AND SERVICES) MARKETS

The 1999 BEPGs asserted that: (i)  the Single  Market and  competition  policy  should  be  strictly  applied  and  closely
monitored; (ii) Member States need to exercise self-discipline with respect to State aids and the Commission needs to control
these; (iii) regulatory reforms should be pursued and speeded up in telecommunications, transport and  energy;  (iv)  further
progress  should  be  made  with  improving  the  quality  of  the  legal  and  regulatory  environment,  especially  for  SMEs  and
business  start-ups;  (v)  VAT  should  be  further  revised  and  simplified;  (vi)  further  progress  should  be  made  to  avoid
harmful  tax  competition;  and  (vii)  Member  States  should  also  put  more  emphasis  on  the  environmental  dimension  of
economic policy (see Box 4 for the country-specific recommendations).

9  Compensation per employee rose by  2.4  per cent  in 1998.  This  figure  however includes  the  effect  of  the  Italian  tax
reform, which reduced employers' social security contributions. Without this one-off effect, compensation for the EU
as a whole would have risen to a similar extent as in 1999.

19

Product  markets  within  the  European  Union  are  relatively  well  integrated  and  competition  in  the
markets  is  increasing.  The  exposure  of  domestic  product  markets  to  international  competition,  as
measured  by  the  degree  of  trade  openness,  the  importance  of  foreign  direct  investment  and  cross-
border  mergers  and  acquisitions,  still  varies  between  Member  States  (see  Table  9).  For  instance,
countries  like  Belgium,  Ireland,  Luxembourg,  the  Netherlands  and  the  United  Kingdom  are  relatively
more exposed to the pressures of external competition while this is less the  case  in  the  other  Member
States. In the latter countries, the regulatory reforms undertaken are therefore even more important to
raise the level of competition in the product markets as well as to cope with future competitive pressure.

Despite the significant advancement in European integration and intense trade linkages, price dispersion
within the EU is still high, in particular in comparison with the United States.10 Moreover, the process
of price convergence has slowed down in recent years in comparison with the early nineties. Significant
differences in price levels persist between Member States (see Box 5).

There remains considerable room for improvement in the functioning of the Internal Market, especially
in certain services sectors, construction and public procurement. Sectors not covered by Single Market
legislation  would  also  benefit  from  stronger  competition.  To  overcome  these  problems  and  tackle
structural  impediments,  in  recent  years  the  Member  States  have  undertaken  a  significant  number  of
reforms in the product markets.

5.1

Single Market - established legal framework must be properly implemented

The degree of implementation of the Single Market legislation has increased further. The legal framework
for the Single Market has now been largely established in almost all the Member States. As indicated in
the last Scoreboard, 10 out of the 15 Member States have a transposition deficit below 4 per cent (see
Table  10).  Similar  efforts  are  now  required  by  the  5  Member  States  (Greece,  France,  Ireland,
Luxembourg and Portugal) whose transposition deficit continues to be above 4 per  cent.  Progress  has
been relatively slow in veterinary checks and transport.

As transposition increases, the focus must now shift to the correct implementation of the Single Market
directives. In this respect, reasoned opinions are a useful indicator because they signal that a breach of
Community law has occurred. Four countries (Belgium, Greece, France and Italy) together account for
more than half of the reasoned opinions issued between September 1998 and August 1999.

Given  its  economic  importance,  public  procurement  is  a  key  area  of  the  Internal  Market  where  the  legal
framework  needs  to  be  properly  implemented  and  enforced.  Published  public  procurement  contracts
have  a  value  of  a  little  less  than  2  per  cent  of  GDP  whereas  public  procurement  markets  (including
those  of  the  Ministries  of  Defence)  amount  to  14  per  cent  of  EU  GDP.  Several  indicators  (directives
not yet transposed, number of reasoned opinions, low value of calls for tenders published in the Official
Journal)  point  to  remaining  problems  in  this  area  in  a  few  Member  States  (Germany,  Italy,  the
legislative
Netherlands  and  Austria).11  The  New  Approach  to 
harmonisation of essential product requirements, has gradually grown in importance for the elimination
of the remaining technical barriers to trade in the Union.

technical  standardisation, 

i.e.  the 

10  Caution is required when comparing price dispersion in the EU with that in the United States.
11  See also the second Commission report under the Cardiff process, "Economic reform: Report on the functioning of

Community product and capital markets", COM (2000) of 26.01.2000.

20

5.2 Competition policy - modernised legislation and some progress regarding State

aid

Competition  policy  has  an  important  role  to  play  in  safeguarding  and  enhancing  the  flexibility  and  the
efficiency  of  product  markets.  In  this  area,  a  majority  of  the  Member  States  have  made  an  important
effort  to modernise their competition legislation and to reduce State aids. In the United Kingdom, the
new Competition Act, strengthening the powers and independence of the competition agencies, comes
into  force  on  1  March  2000  and  in  six  other  Member  States  (Belgium,  Germany,  Spain,  France,  the
Netherlands  and  Austria)  the  competition  law  was  tightened  up  or  simplified  in  1999.  However,  a
number of Member States still lack a fully independent competition authority.

In  nine  Member  States,  the  national  competition  authorities  now  have  powers  to  enforce  Articles  81
and 82 of the EU Treaty, dealing with agreements between enterprises and abuse of dominant positions.
This is not yet the case in Denmark, Ireland,  Luxembourg,  Austria, Finland  and  Sweden.  However,  in
Sweden,  the  government  is  examining  the  possibility  of  giving  power  to  the  national  authority  to
enforce  Articles  81  and  82  and  it  has  presented  a  bill  to  simplify  merger  control.  It  is  foreseen  that
appropriate  measures  will  be  taken  by  April  2000.  In  Austria,  the  new  Cartel  Act  was  adopted  in  July
1999,  extending  the  scope  of  the  prohibition  of  cartels.  Finally,  in  Denmark,  it  is  expected  that
Parliament will this year adopt a new Law to give the Competition Council powers to control  mergers
and to fine companies for infringements.

Regarding  State  aid,  its  relatively  high  levels  demonstrate  the  need  for  continued  strict  control  and
rigorous  application  of  the  Community  rules.  However,  there  have  been  some  positive  developments
over  the  recent  years.  In  particular,  the  declining  trend  observed  since  the  beginning  of  the  nineties
appears to be continuing.  State  aid  levels  (excluding  agricultural  aids) as  a  percentage  of  GDP  are still
relatively high in Germany, Italy and Portugal.

The  composition  of  State  aid,  not  just  its  total  volume,  influences  its  impact  on  competition  in  the
Internal Market. The share of ad hoc and sector-specific aid should be reduced. In this respect, another
encouraging  evolution  is  the  decline  in  the  share  of  ad  hoc  aid  in  almost  all  Member  States  with  the
notable exception of France, where this type of aid still accounts for almost a quarter of its total aid, the
highest proportion in the Union. A substantial decline has been observed in Germany where ad hoc aid
has been halved. Sector-specific aid is still relatively high in Belgium (railways), Germany (coal, railways
but  again  declining  in  absolute  terms),  Greece  (railways  and  airlines,  where  a  large  reduction  is  now
seen),  Spain  (railways,  coal,  shipbuilding)  and  France  (railways  and  financial  services)  and  Ireland
(financial services). In Italy, a positive development is the reduction in the  share  of  sector-specific  aid.
Regarding  the  structure  of  State  aid,  the  share  of  regional  aid  has  increased  at  the  expense  of  other
horizontal  objectives.  Horizontal  aid  clearly  predominates  in  countries  such  as  Denmark,  the
Netherlands, Austria and Finland.

5.3 Public utilities - progress in the telecommunications and the electricity sector

The efficiency of certain key utilities is crucial in order to ensure a supportive business environment and
to increase the potential for economic growth. It is vital to continue efforts to increase competition and
improve the regulatory framework in sectors such as public utilities, distribution and financial services.
In  the  public  utilities,  liberalisation  is  under  way  but  at  a  speed  which  differs  between  sectors  and
Member States. Progress has been faster in telecommunications and the introduction of competition has
progressed in electricity as well. On the other hand, the liberalisation of gas, railways, water and postal
services has been slower.

21

During  the  last  decade,  the  telecommunications  sector  has  been  opened  up  to  competition  in  all  the
Member  States.  New  entrants  have  penetrated  the  market,  reducing  the  market  share  of  incumbents,
and,  as  a  result,  a  substantial  reduction  in  prices  was  observed  in  most  Member  States.  For  example,
according to the Fifth Report on the Implementation of  the  Telecommunications  Regulatory  Package,
the prices of long-distance national and international telephone calls in the European Union fell  by  an
average  of    27  per  cent  and  38  per  cent  respectively  over  the  period  1997-1999  (see  Table  11).  The
decline in prices was very significant for national calls in Ireland (54 per cent), Austria (41 per cent) and
Sweden (39 per cent) and for international calls, in the Netherlands (89 per cent), Germany (67 per cent)
and  Luxembourg  (63  per  cent).  Despite  this  progress,  the  incumbent  operators  still  have  a  dominant
position  in  most  Member  States,  particularly  in  the  local  access  market.  In  some  Member  States
(Belgium, Spain and France), the lack of powers of the regulatory authority or of transparency is a cause
for concern.

The  introduction  of  competition  in  electricity  and  gas  markets  has  progressed  as  well.  The  Community
Electricity  Directive  providing  for  a  progressive  opening  of  national  markets  to  competition  has  been
transposed  in  all  the  Member  States  (see  Box  6).  Most  Member  States  have  set  themselves  ambitious
liberalisation targets in terms of market shares and segments open to competition, and price reductions
have  already  been  reported  in  some  countries.  The  deadline  for  the  implementation  of  the  Gas
Directive  is  August  2000.  Greece  and  Portugal,  where  the  use  of  natural  gas  is  in  its  infancy,  have
received a  ten-year  derogation  period  for  the  liberalisation  of  this sector.  Important  measures  to  open
up the gas market have been taken in the United Kingdom (where all consumers can now choose their
suppliers) and Spain (where 46 per cent of the market was opened up  in 1998).  This  year,  Austria will
open up its markets completely while Ireland plans to implement legislation to open up 75 per cent of
its gas market. The Netherlands and Belgium will open up 45 per cent and 47 per cent, respectively.

In the railways, water and postal sectors, the liberalisation process has progressed at a slower pace. However,
some measures have been taken to increase competition. In the railways sector, there has been a trend
toward the separation of the management of infrastructure from the operation of services. The extent to
which  this  has  been  carried  out  varies  from  the  creation  of  internal  divisions  to  legally  separate
companies. Steps in this direction have been taken in Belgium, Denmark, Germany, Spain, France, Italy,
Netherlands, Austria, Portugal, Finland, Sweden and the United Kingdom. All Member States have now
formally  separated  the  accounts  of  infrastructure  management  and  rail  operations  as  required  by
Directive 91/440. In the postal sector, a Community Directive has been adopted opening up the sector
to competition. However, it still awaits transposition in several Member States.

Competition in or for the provision of services provides a spur to encourage improvement in this area.
With  regard  to  management  of  the  infrastructure,  new  challenges  are  emerging,  such  as  the  need  to
improve the regulatory oversight of the railways so as to provide adequate incentives for investment and
efficiency  while  protecting  consumer  interests.  This  issue  has  been  particularly  acute  in  the  United
Kingdom. This balance between safeguarding the interests of producers and consumers is crucial for all
the network industries (see Box 7).

5.4 Distribution - further liberalisation is necessary

Improving the efficiency of the distribution sector is essential for the good functioning of product markets.
An  efficient  distribution  sector  could  widen  the  variety  of  products  offered  to  consumers  and  lead  to
lower prices. The greater transparency of prices associated with the advent of the euro could stimulate

22

the development of arbitrage operations and, in this respect, the distributors will have a crucial role  to
play in the process of downward convergence of price levels.

However, land-use planning (in the Netherlands and Sweden), limits on shop-opening hours (Belgium,
Denmark,  Germany  and  Austria)  and  specific  restrictions  on  large-scale  retail  outlets  (Spain  and
Portugal) continue to limit competition in this sector. In some of these countries (Denmark, Germany
and  Sweden),  the  impact  of  these  regulations  is  being  investigated.  In  Italy,  a  significant  process  of
liberalisation of the retail distribution sector started in 1998, leading to a deregulation of shop-opening
hours and a simplification of start-up procedures. The retail distribution sector is highly concentrated in
several  Member  States,  most  notably  in  Finland  and  Sweden,  and  this  can  contribute  to  the  relatively
higher price levels in these countries. In France, the government, which is concerned about the risk of
abuse of a dominant position in the relations between producers and retailers, will submit a draft law in
2000 to regulate these relationships.

5.5 Public administration - increasing efficiency and avoiding unfair competition

A modern public administration is crucial for the good functioning of an economy. This is particularly
true  in  the  EU  due  to  the  relatively  large  size  of  government  in  most  Member  States.  Therefore,
measures to improve  the  efficiency  of  public  administration,  such as  the use  of  new  management  and
communication  (e-commerce,  internet)  techniques,  are  welcome  and  more  particularly  so  in  those
Member States, such as the Nordic countries where the share of the public sector is higher than the EU
on  average.  In  this  respect,  Finland  has  made  a specific  effort  to  promote  the  use  of  market-oriented
procedures  for  the  provision  of  public  services.  In  general,  and  particularly  in  those  countries,  it  is
essential to avoid unfair competition being imposed on private companies by the public sector.

Some  Member  States  (notably  Belgium,  Ireland,  the  Netherlands,  Finland,  Sweden  and  the  United
Kingdom)  have  chosen  to  promote  Public-Private  Partnerships  in  order  to  bring  in  private  sector
management  and  expertise  and  efficient  risk  sharing  to  public  sector  services.  These  initiatives  can
contribute  to  increasing  efficiency  in  public  services  by  introducing  market  mechanisms  into  their
provision. However, attention should be directed to avoiding a lack of transparency in the relationships
between the public and the private sectors which could distort competition or indicate a State aid to the
private partner.

5.6 Other  regulatory  reforms  -  reducing  the  regulatory  burden  of  starting  new

businesses

In  recent  years,  governments  have  been  increasingly  aware  of  obstacles  to  business  start-ups,  such  as
complex  administrative  procedures, 
information.
Administrative  procedures  were  particularly  heavy  in  Germany,  Greece,  Spain  and  Italy,  and  lower  in
the Nordic countries, Luxembourg  and the United Kingdom.

inadequate  financing  possibilities  and 

limited 

Many  Member  States  have  now  undertaken  programmes  and  measures  to  improve  the  regulatory
environment  of  business.  These  measures  include  the  establishment  of  one-stop  shops  for  small
companies (Spain, France, Italy, Portugal and the United Kingdom), the simplification of bureaucracy in
order to reduce business set-up times (Belgium, France, Ireland, the Netherlands, Portugal, Finland and
Sweden)  and  the  reduction  of  the  costs  of  registering  a  company  (France  and  Austria).  In  addition,
some Member States have reduced tax burdens on SMEs (Germany, Greece, Austria, Portugal and the
United Kingdom). Further effort to improve the business environment could be made in Greece, Spain
and Italy.

23

5.7

Innovation - reforms to improve the technological performance are necessary

Innovation is a driving force behind competitiveness and employment. Europe lags behind the United
States  in  terms  of  innovative  capacity  and  this  gap  seems  to  have  increased  since  the  mid-1990s.  In
1998,  R&D  expenditures  accounted  for  1.8  per  cent  of  GDP  in  the  European  Union  against  2.8  per
cent in the United States. R&D expenditures show quite a large dispersion between the Member States:
they range between 0.5 per cent of GDP in Greece and 3.9 per cent in Sweden (see Table 12). On the
one hand, one finds Portugal, Spain and Italy, with percentages of R&D expenditures around or below
1 per cent and on the other, Germany, France, the Netherlands and Finland with percentages between 2
and  3  per  cent.  Austria  has  set  a  target  of  raising  R&D  spending  to 2.5  per  cent  of  GDP  by  the  year
2005  (up  from  1.6  per  cent  of  GDP  in  1998).  Furthermore,  the  Union's  research  efforts  suffer  from
fragmentation  and  compartmentalisation.  The  regulatory  and  administrative  frameworks  and  the
reference  systems  for  research  show  wide  variations  and  there  is  hardly  a  real  "internal  market"  for
scientific knowledge and technology.

Europe  also  lags  behind  the  United  States  in  the  production  and  diffusion  of  Information  &
Communication  Technologies  (ICT)  with  great  variation  across  Member  States.  Two  countries,
Germany and the United Kingdom, are responsible for almost half of the total EU production of ICT
goods. In terms of ICT penetration, the Nordic countries are in  the  lead.  The  diffusion  of  ICT in  the
Benelux  countries,  Germany,  France  and  the  United  Kingdom  is  at  an  intermediate  level  while  the
lowest ICT penetration rates are found in Southern Europe.

This  comparison  with  the  United  States  points  to  the  need  for  the  European  Union  to  increase  and
improve its effort in R&D and to increase the production and diffusion of  ICT.  Many  Member  States
have  started  to  undertake  reforms  to  that  end.  In  Ireland,  where  the  level  of  government  R&D
expenditure is particularly low, additional budgetary resources have been allocated for the period 2000-
2006.  Regarding  innovation,  initiatives  have  been  taken  to  encourage  a  better  collaboration  between
research  institutes  and  industry  (Denmark,  Germany,  Greece,  France,  the  Netherlands,  Portugal,
Finland  and  Sweden),  since  the  major  handicap  of  Europe  is  its  difficulty  in  converting  scientific
research into commercial results. Other measures include the funding of R&D projects (Ireland) and tax
incentives to stimulate R&D spending (Spain, Austria and United Kingdom).

The  importance  of  the  diffusion  of  ICT  has  been  recognised  by  Community  policies  and  several
Member  States.  This  issue  was  taken  up  in  the  evaluation  process  of  the  national  Action  Plans  for
Employment.  In  the  Employment  Guidelines  2000,  Member  States  have  agreed  to  provide  access  to
Internet  and  other  PC  facilities  in  schools  by  the  end  of  2002.  Furthermore,  several  Member  States
(Belgium, Germany,  France,  Portugal  and  the  United  Kingdom)  have  taken  measures  encouraging  the
use of the Internet and PCs.

But in order to reduce the fragmentation of the Union's research effort, a true «European research area»
must  be  created.  This  would  enhance  scientific  and  technological  activities  in  the  Union,  while  fully
taking advantage of the high potential already existing in the Member States.

Finally,  serious  skill  shortages  are  a  further  barrier  to  fully  exploit  the  innovation  potential  of  the
information society, and thus of growth and employment in the Union. While the skill gap at the expert
level  is  estimated  to  be  important,  the  information  society  changes  skill  requirements  outside  the  ICT
sector. This requires an improvement in human capital formation and, in particular, demands basic ICT
literacy across the economy.

24

6. MORE INTEGRATED AND DEEPER CAPITAL MARKETS

The  1999  BEPGs  urged  Member  States  to:  (i)  co-ordinate  their  efforts  for  reducing  differences  in  national
regulations  and  tax  regimes,  while  preserving  the  consistency  with  prudential  and  fiscal  national  requirements;  (ii)
ensure, where appropriate, that additional host country requirements only apply to  financial  services  offered  to retail
customers  and  not to professionals;  (iii)  ensure   that  existing  national  “general  good”  rules,  which  aim  at  ensuring
consumer protection and promoting cross-border business, are applied in a transparent and proportionate manner; and
the  Union  (see  Box  8  for  the  country-specific
(iv)  promote  risk 
recommendations).

taking  and 

innovation 

in 

The  1999  BEPGs  stressed  the  need  to  eliminate  the  differences  in  national  regulatory  and  fiscal
regimes  which  continue  to  fragment  the  EU  financial  markets,  and  to  develop  deeper  and  better
functioning risk capital markets. Particular consideration was to be given  to  the rules applying to
institutional investors, to the pursuit of a policy distinguishing between professional and individual
consumers when imposing additional host country requirements, to increasing  transparency  in  the
application of national "general good" rules aimed at consumer protection, and to the facilitation of
access to risk capital for SMEs and to R&D financing for all enterprises.

The introduction of the euro has had significant effects across the spectrum of European financial
markets, contributing to the creation of deep, broad and liquid  markets.  However,  as  identified in
the  1999  BEPGs,  obstacles  remain  to  the  achievement  of  fully  integrated  financial  markets.
Progress has been made during 1999 both on the basis of initiatives taken at the EU level and as a
result of the reforms introduced by  Member States.

At the EU level, implementation of the Financial Services Action Plan is progressing on the basis of
the work of the Financial Services Policy Group and of five groups of market experts. A progress
report was issued in November 1999. Within this framework measures corresponding to the 1999
BEPGs  recommendations  have  been  taken:  the  Commission  has  issued  a  Communication  on
Funded Pension Schemes and is actively preparing a draft directive on the prudential supervision of
draft  Communication  on  the  distinction  between  "sophisticated"  investors  and
pension  funds.  A
retail  investors  is  under  preparation  in  close  co-operation  with  FESCO.12  The  Commission  is
preparing, with the assistance of a group of market experts, a  Communication  codifying  clear  and
comprehensible  information  for  purchasers  of  retail  financial  products  and  services.  Finally,  the
Commission has issued a Communication setting out concrete proposals for moving forward with
the  implementation  of  the  Risk  Capital  Action  Plan,  based  on  a  review  of  developments  on  risk
capital markets and of measures already taken.

At the level of the Member States, the issue of risk capital has been addressed by all Member States
and  various  measures  have  been  taken  which  have  contributed  to  the  growth  of  these  markets.
However, despite these efforts,  the European venture capital market remains significantly  smaller
than  in  the  US and  insufficiently  oriented  towards  young  and  innovative  companies.  Measures  of
particular interest have been taken in Denmark, France, Ireland, Italy, the Netherlands, Finland and
the United Kingdom mainly in the  form of financial assistance programs to innovative SMEs, tax
relief  schemes,  employee  ownership  schemes  and  stock  options,  relaxation  of  quantitative
investment  controls  on  pension  funds  and  insurance  companies.  Measures  to  provide  financial
support  need  of  course  to  comply  with  State  aid  rules  to  ensure  they  do  not  distort  competition.

12  The Forum of European Securities Commissions.

25

 
Other  initiatives  such  as  the  reform  of  the  legislation  on  insolvency  and  bankruptcy  have  been
considered crucial by many Member States, but up to now have only been implemented by few of
them.

Beyond the issue of risk capital, information on other reforms introduced by the Member States to
increase  the  integration  and  the  efficiency  of  their  capital  markets,  information  is  less  systematic
and  an  overall  assessment  is  difficult  to  make.  Some  Member  States  have  undertaken  reforms  to
reduce  specific  quantitative  constraints  on  investment  rules  for  pension  funds  (in  Belgium  for
example), insurance companies (in Sweden) or investment funds (Spain and France). A law allowing
the  creation  of  pension  funds  have  been  introduced  in  Luxembourg  and  the  reforms  of  pension
systems underway in Germany and Sweden should have an impact on the deepening and widening
of the financial markets. The notion of ‘qualified investor’ has been introduced in French law, while
in the UK an exemption from investment promotion rules will enable companies to communicate
directly  with  sophisticated  investors.  In  a  large  number  of  Member  States,  legislative  changes
introduced or being considered to improve corporate governance will increase transparency.

A  revision  of  the  financial  services  sector  supervisory  framework  has  been  launched  in  several
Member States with the aim of setting up a single authority to supervise all financial institutions (as
in Ireland) or to improve supervision of financial groups (as in Denmark).

Disengagement  of  the  State  from  the  financial  sector  has  continued  in  Greece,  France  and  Italy,
and  is  starting  in  Ireland.  The  banking  sector  is  in  general  undergoing  a  major  restructuring  and
consolidation  process.  This  has  been  particularly  noticeable  in  Belgium,  the  Netherlands  and  in
Spain, giving rise to new concerns in terms of competition and of supervision of the new entities.

Finally there  have  also  been  important  developments  among  market  institutions  with  the  creation
of  links  and  alliances  among  national  stock  exchanges  and  markets,  and  the  creation,  in  several
Members  States,  of  stock  markets  for  young  and  growing  companies.  These  new  markets  which
offer  high-growth  companies  a  new  source  of  financing,  have  grown  strongly  and,  by  the  end  of
1999, some 750 companies were listed on the Euro.NM network (consisting of the Paris, Frankfurt,
Amsterdam, Brussels and Milan new markets), EASDAQ and AIM.

26

7.

BETTER FUNCTIONING LABOUR MARKETS

The  1999  BEPGs  recommended  that  the  integrated  four-pillar  strategy  set  out  in  the  employment  guidelines
should  be  fully  implemented and  in a prompt and transparent manner.  In  particular,  it insisted  on  (i)  policies
that  acted  on  both  the  demand  for  and  supply  of  labour  by  applying  the  preventive  approach  of  the  employment
guidelines and (ii) reviewing and adapting, where appropriate, the tax and benefit systems to ensure that they actively
support employability and job creation and encouraged the social partners to  modernise  the  organisation  of  work
and to prevent any overall reduction of working time from increasing unit labour costs whilst taking future needs in
terms of increased labour supply into account (see Box 9 for the country-specific recommendations).

7.1 Overall trends

In  the  EU  as  a  whole, labour  market  performance  improved  during  1999  as  the  economy  picked
up.  Unemployment  fell  to  8.8  per  cent  s.a. in  January  2000,  the  lowest  level  since  June  1992, and
employment  growth  is  forecast  to  remain  robust  over  the  next  two  years.  The  job-content  of
growth in the 1990s appears to be high by historical standards, with GDP growth in the expansion
phase of the present decade being comparable to that achieved in the 1980s, but with employment
now  growing  at  a  faster  pace.  As  a  result,  apparent  labour  productivity  growth  seems  to  have
experienced a slowdown.

It  must  be  stressed  that  the  picture  among  and  even  within  the  various  Member  States  is  highly
diverse (see Graphs 8 and 9). Some – Denmark, Luxembourg and the Netherlands – have matched
or surpassed the US in achieving robust employment growth and low unemployment. In Denmark,
Spain,  Ireland,  the  Netherlands,  Finland  and  the  United  Kingdom,  the  particularly  sharp  fall  in
unemployment  in  recent  years  strongly  suggests  a  fall  in  structural  unemployment,  given  the
relatively  moderate  wage  growth  at  this  point  in  the  economic  cycle.  Thus,  while  the  improved
employment performance is partly due to the favourable macroeconomic environment, the policies
pursued in some Member States have played an important part – in particular, structural reforms of
labour  markets,  including  a  shift  in  focus  from  benefit  dependency  to  the  preventive  approach
based on active labour market measures. The benefits of comprehensive reforms are most evident
in the cases of Denmark, the Netherlands and the United Kingdom.

However,  there  also  remain  considerable  grounds  for  concern.  The  low  employment  rate  is
constricting  the  EU’s  growth  potential  and  undermining  the  long-term  sustainability  of  public
finances. Moreover, as cyclical unemployment has fallen, wage pressures have begun to emerge in a
number  of  Member  States,  although  in  general  these  remain  moderate  to  date.  Structural
unemployment is still unacceptably high, particularly in the large euro-area countries.  Moreover, it
is  highly  concentrated  –  in  deprived  communities,  among  women,  young  people  and  the  low-
skilled.    There  are  very  wide  regional  disparities  in  unemployment  within  several  Member  States,
particularly Belgium, Spain, Italy and Germany.  Finally, around half of total unemployment is still
long-term,  which  is  symptomatic  of  the  structural  nature  of  the  problem  (see  Graph  10).  The
proportion is at 50 per cent on average in the euro area, and much higher in several Member States

27

that experience particular structural problems in the labour market.  Much  remains  to  be  done,  in
particular, in Belgium, Germany, Greece, Spain and Italy.13

Progress on policies to improve the functioning of labour markets has on the whole been modest,
when  compared  with  structural  reforms  in  product  and  capital  markets  and  the  consolidation  of
public finances.  It is therefore important to underline the important role of structural reforms and
active  measures  in  raising  the  employment  rate  and  in  bringing  down  structural  unemployment.
Significant  progress  here  would  make  an  important  contribution  to  raising  the  EU’s  longer-term
growth potential as well as fostering social inclusion.

7.2 Active labour market programmes - considerable progress realised

Many  Member  States,  as  documented  in  the  Joint  Employment  Report  199914,  have  made
significant  progress  in  implementing  a  preventive  approach  to  tackling  youth  and  long-term
unemployment, based on active labour market programmes (ALMPs) in line with the employment
guidelines.  Such  policies,  by  improving  skills  and  employability,  and  by  keeping  people  in  touch
with the labour market, can make an important contribution to reducing structural unemployment.
Of  course,  they  can  also  involve  displacement  and  administrative  costs,  and  programmes  need  to
focus on those with most difficulties in integrating into the labour market. In the case of Sweden,
where active labour market programmes have been an important component of economic policies
for  decades,  the  scope  of  ALMPs  grew  rapidly  as  unemployment  rose  in  the  early  1990s.  More
recently, the coverage has been reduced to 3 per cent of the labour force and the composition has
been changed in favour of labour market training, an alteration designed to improve the efficiency
of  these  programmes.  In  France,  where  the  ‘New  services  –  jobs  for  young  people’  scheme  had
created 200,000 jobs by June 1999, there may be a risk of high displacement and dead-weight costs,
especially as economic growth is picking up.

Some  Member  States  have  also  taken  important  steps  towards  combining  active  policies  with  an
assessment of benefit duration and eligibility criteria, and towards increasing the efficiency of active
measures  through  targeting  programmes  to  individual  needs.    Recent  reforms  in  Spain  and  the
United Kingdom provide examples of this shift from passive to active measures. In Denmark and
the  Netherlands,  activation  measures are  clearly  targeted  according  to  an  assessment  of  individual
needs.    In  Finland,  the quality  of  the  employment  services  has  been  improved,  as  have  results  in
terms of activation of young and long-term unemployed people.

Other countries, however, still have important progress to make if they are to meet the quantified
medium-term targets for active measures set out in the employment guidelines. In Belgium, Greece
and  Italy  there  are  concerns  regarding  delays  in  implementing  preventive  measures  on  youth  and
long-term unemployment, while concrete progress is somewhat lacking in Germany. In Portugal, an
adequate benefit system is still needed to support active measures.

13  In  the  case  of  Ireland,  figures  on  long-term  unemployment  are  only  available  up  to  1997.    However,  national
estimates suggest that long-term unemployment as a percentage of total unemployment fell considerably during 1998.
14  The  "Joint  Employment  Report  1999"  presents  a  detailed  assessment  of  the  implementation  of  the  employment
guidelines. Its findings led to the issuance of country-specific recommendations which  were  adopted  by  the  Council
in late 1999. The present report supplements this assessment and focuses on the recommendations made in the 1999
BEPGs.

28

7.3 The tax burden on labour - many reforms to reduce labour taxes

A  majority  of  Member  States  have  reduced  income  taxes  and  social  security  contributions  for
labour, with reductions often targeted at the lower end of the wage scale. These efforts have been
underway since the mid-1990s and have resulted in a modest fall in the direct tax burden on labour
(shown in Table 7 as  the  labour  effective  tax  rate).  A  number  of  Member  States  have  adopted  or
announced  additional  reductions  in  this  area.  Measures  to  reduce  the  tax  burden  on  labour  have
recently been taken or announced in Germany,  Ireland,  Italy,  Austria,  Finland  and  Sweden and  in
addition,  reductions  have  been  targeted at  the  lower  end  of  the  wage scale  in  Belgium,  Denmark,
Greece,  Spain,  France,  Italy,  the  Netherlands  and  the  United  Kingdom.  In  many  Member  States,
tax/benefit  systems  hamper  female labour  supply.  In  several  Member  States,  tax  systems  create  a
disincentive to women's participation in the labour market by imposing high marginal tax rates on
second incomes, for example.

This overall reduction in the direct tax burden on labour has been financed mainly by shifting the
burden to indirect taxes such as VAT or energy and environmental taxes. Over the next few years,
in line with further tax reforms already announced, even the tax wedge on labour is forecast to fall.

7.4 Benefit systems - little overall progress despite good results in some countries

High levels of unemployment benefits, if combined with long duration and lax eligibility rules and
administration of benefit systems, tend to undermine incentives to search for a job or to participate
in active labour market programmes (see Table 13). Thus, in some Member States, there is a risk of
keeping  people  dependent  on  benefit  schemes  for  longer  than  appropriate.  On  top  of  this,  other
benefit  systems  –  early  retirement  or  disability  schemes  –  are  frequently  used  instead  of
unemployment benefits with similar if not worse results in terms of discouraging engagement with
the labour market and reducing effective labour supply. A high proportion of the  population  is  in
long-term  benefit  dependency  in  a  number  of  Member  States,  including  some  of  those  with  very
low official unemployment rates such as Denmark and the Netherlands.

A  few  countries  have  started  a  systematic  review  of  their  benefit  systems  and  have  begun  to
undertake major reforms. Common themes on the reform agenda include addressing the combined
incentive  effects  of  the  tax  and  benefit  system,  tightening  eligibility  criteria  and  job  availability
requirements while linking receipt of benefits more closely to active labour market programmes to
improve  employability,  and  introducing  employment-contingent  benefits  and  tax  credits.    The
United Kingdom’s labour market reforms have gone a long way in these areas, and the Netherlands
too plans to introduce tax credits for working people on low incomes, although it is too early for a
full evaluation of these  schemes.  Denmark  stands  out as  a  positive  example  where job  availability
criteria  for  unemployment  benefits  and  social  assistance  have  been  tightened  up  significantly,  in
combination with better education and training opportunities.

Apart from these few countries – where reform efforts have paid off by contributing to important
reductions  in  structural  unemployment  –  reforms  in  the  area  of  benefit  systems  have  so  far  been
often very modest and piecemeal. There have been no substantial reforms as of yet in Germany or
in Belgium (where unemployment insurance is still of indefinite duration for some types of worker,
although  the  government  is  reviewing  this).  Reforms  are  under  consideration  in  Italy,  but  this  is
proving politically and financially difficult. In Finland, since the measures taken to recover from the
last recession, efforts to reform benefits have been weak.

29

7.5 Work organisation and flexibility - some but insufficient progress

Some  progress  has  been  made  on  modernising  work  organisation.    A  number  of  Member  States
have taken measures to facilitate part-time work while limited progress was made in some member
States in the areas of flexible and annualised working time. Progress in these areas is also important
from  the  perspective  of  promoting  gender  equality.  In  addition,  some  Member  States  have  made
efforts  to  facilitate  female  labour-market  participation,  for  example  by  improving  child-care
facilities, although further progress is needed. Very little has been done to address the problems of
rigid  employment  protection  legislation  (EPL)  and  excessive  dismissal  costs  in  some  Member
States, which tend to discourage the recruitment of new permanent staff. The failure of labour costs
to  adjust  to  significant  regional  productivity  differentials  in  certain  Member  States,  particularly
Belgium, Germany, Spain and Italy, is indicative of a general lack of labour market flexibility. There
is little  evidence  to  suggest  that  the  social  partners  have  taken  initiatives  to  the  extent  required  in
response  to  the  invitation  in  the  1999  BEPGs  and  the  employment  guidelines  to  negotiate  at  all
appropriate levels agreements to modernise the organisation of work.

There have been no substantial reforms of EPL in Belgium, Germany or Italy and, in France, it has
been  tightened  slightly,  if  anything.  In  Spain,  the  share  of  temporary  contracts  is  still  high,  and
further  reductions  in  the  costs  of  dismissals  are  needed.  In  Portugal,  there  is  also  some  concern
over  the  share  of  temporary  contracts,  as  well  as  the  lack  of  progress  on  flexibility  and  dismissal
costs.  In Greece, new legislation on part-time work, informal working hours and working time is in
place, but not fully implemented. In Austria, there has been no substantial modernisation of work
organisatin.

30

BOXES

Box 1: 1999 country-specific recommendations for budgetary policies

Belgium: (1) Meet the 1999 budget target of 1.3% of GDP in 1999. (2) Ensure that the real annual growth of
primary expenditure rate is contained within the 1½% limit set in the stability programme. (3) In future years,
maintain the primary surplus at 6% of GDP. (4) Renew the “co-operation”  agreement  between  the  Federal
government, the Regions and Communities.

Denmark:  (1)  Seek  to  maintain  a  strong  government  surplus  in  1999,  in  line  with  the  planned  surplus  of
2.5% of GDP. (2) In the medium term, maintain the reduction of distortions in the tax system (included in
the “Whitsun package”).

Germany: (1) Respect the target for the government deficit of 2% of GDP in 1999. (2) Make faster progress
with the medium-term objective of the deficit if the strengthening of the economy in  2000 is  stronger  than
foreseen. (3) The tax reform, implying a cut in tax rates and a simultaneous widening of the tax base, should
also result in an effective simplification of the tax code.

Greece:  (1)  Achieve  the  target  for  a  government  deficit  in  1999  of  1.9%  of  GDP.  (2)  Aim  for  a  further
decline in the budget deficit for 2000, helped by a reduction in the primary current expenditure ratio to GDP.
(3) Increase further the efficiency of the tax system by combating tax avoidance and evasion. (4) Reform the
public sector.

Spain: (1) Meet the target for the government deficit of 1.6% of GDP. (2) Reaffirm in the budget for 2000 a
deficit  of  1.0%  of  GDP;  adopt  a  tighter  fiscal  stance,  if  evidence  of  overheating  emerges.  (3)  Reinforce
control  of  government  expenditure;  monitor  closely  and  respect  fully  the  existing  internal  stability  pact
between the regions and the State.

France:  (1)  Respect  the  target  for  the  government  deficit  of  2.3%  of  GDP.  (2)  Control  government
expenditure in 1999 and subsequent years. (3) Use the expected  strengthening  of  economic  activity  in  2000
and beyond to make progress towards the medium-term objective for the deficit projected in the favourable
scenario of the stability programme.

Ireland: (1) Restrain the economy by appropriately using budgetary policy if there evidence of wage inflation
that  continues  to  gather  pace.  (2)  Restrain  the  growth  in government consumption  from  the  estimated  5%
volume increase in 1998 to 2% in 2001.

Italy: (1) Avoid any significant slippage from the target for the primary surplus and limit any weakening in the
primary surplus to no more than due to the operation of the automatic stabilisers; respect the target for the
total  deficit  of  2%  of  GDP,  helped  by  savings  in  interest  payments.  (2)  Aim  to  re-establish  the  primary
surplus  of  5.5%  of  GDP  with  the  budget  of  2000.  (3)  Tightly  control  government  current  primary
expenditure in 1999 and subsequent years. (4) Re-assess the reform of the pension system.

Luxembourg: (1) Monitor closely public expenditure. (2) Pursue the necessary long-term reforms, especially
in the field of social security.

Netherlands: (1) Respect the target for the government deficit of 1.3% of GDP. (2) Pursue as a minimum
objective the very limited reduction in the deficit to 1.1% of GDP in 2002 as set out in the cautious scenario
of the stability programme.

Austria:  (1)  Meet  the  target  of  2%  of  GDP  for  the  government  deficit  in  1999  through  tight  control  of
government  expenditures.  (2) Overachieve  the  budgetary  targets  set  in  the  stability  programme  and  ensure
that the general government debt ratio is kept firmly on a downward path. (3) Realise significant savings on
the expenditure side.

Portugal: (1) Ensure the target for the government deficit of 2% of GDP. (2) Pay close attention to primary
current expenditure, especially health expenditure and the government’s wage bill. (3) Implement swiftly the
structural  reforms  with  a  direct  impact  on  the  budget  outlined  in  the  stability  programme.  (4)  Introduce
private-public partnerships in healthcare systems and review eligibility criteria of pensions.

Finland: (1) Increase the government  surplus  further  so  as  to cope  with  the  rapidly  ageing  population  and
the  pressure  that  this  will  impose  on  the  social  accounts.  (2)  Give  priority  to  the  reduction  in  central
government deficit. (3) Base further fiscal consolidation on a reduction in government expenditure. (4) Firmly
respect  the  stability  programme’s  annual  ceilings  on  central  government  expenditure  for  the  years  2000  to
2002.

31

Sweden:  (1)  Adhere  to  the  announced  policies  since  these  are  expected  to  achieve  the  government's
budgetary targets of a rising government surplus. (2) Ensure the maintenance of the tight expenditure control
on which its budgetary outlook is heavily reliant. (3) Seek ways of reducing the tax burden further.

United  Kingdom:  (1)  Adhere  strictly  to  expenditure  plans  so  that  the  government’s  fiscal  rules  can  be
respected  and  the  medium-term  objective  of  public  finances  broadly  in  balance  by  1999/2000.  (2)  Take
promptly corrective action if the government balance deteriorates unexplainable by the economic cycle.

32

B

DK

D

EL

E

F

Box 2: Recent developments as regards public pensions

Building  on  important  reforms  introduced  in  1997  for  private  sector  employees,  the  new
government  together  with  social  partners  is  reflecting  upon  further  reforms  to  cover  for  public
sector  employees  and  the  self  employed.  Consideration  is  also  being  given  to  promote  private
funded pensions.

The  transformation  a  largely  unfunded  system  to  one  with  a  much  higher  degree  of  funding  has
been  underway  for  some  years.  1999  saw  a  temporary  contribution  to  the  ATP  (Labour  market
supplementary pension) amounting to 1% of the average wage made permanent and a tightening up
of early retirement rules.

Pension  reform  was  very  high  on  political  agenda.  A  tax  reform  package  was  agreed  enabling
increased  revenues  from  energy  taxes  to  partially  offset  a  reduction  in  the  contribution  rate  to
pensions by employees and employers. Changes were also agreed for 2000/2001 linking increases in
public  pensions  to  inflation  rather  than  the  evolution  of  net  wages.  However,  important  reforms
agreed in 1998 and due to come into force in 1999 were suspended by the new Government for two
years, pending important reforms due to be announced in 2000.

A  two  phase  reform  strategy  was  announced  in  1998.  The  first  phase  was  largely  organisational,
involving for example the introduction of single social security number. The second phase requires a
major  overhaul  of  public  pensions,  and  could  involve  the  consolidation  of  retirement  ages  in
different  pension  regimes,  adjusting  contribution  and  eligibility  rates  to  sustainable  levels,  and  the
introduction of compulsory occupational pension scheme. Announcements on the second phase are
still being awaited.

Important  reforms  were  introduced  in  1997  (based  on  the  1995  Pacto  de  Toledo)  which  placed
public  pensions  on  a  more  sustainable footing. Further  reforms are  scheduled for  2000.  They  will
need  to  address  measures  to  increase  the effective  retirement  age  and  discourage  early  retirement,
and special  pension regimes  (e.g. covering  self-employed,  agricultural  workers).  In 2000,  minimum
pensions will increase by between 5.4 and 16 per cent depending on the type of pension, though on
average by only slightly above 5.4 per cent. In 2000 a Social Security fund reserve has been created
to  address  the  problem  of  the  ageing  population  . The  initial  fund  amounts  to  0.1%  of  GDP  and
there  is  a  commitment  in  the  updated  Spanish  Stability  Programme  to  further  increase  this  fund
reserve.

After  postponing  reforms adopted in 1997,  a  report  was  presented  in 1999  to  serve  as  a  basis  for
dialogue between authorities and social partners which is now taking place. Reforms are  scheduled
for 2000 and could include measures to  raise  the effective retirement  age,  whether  special  pension
regimes need to be brought in line with the ‘general regime’, and possible strengthening of a Social
Security reserve fund which was established in the 1998 budget.

IRL

In May 1998, the Government outlined its plans for creating a fully developed pension  system.  As
part of the 1999 budget, an annual provision of 1% of GDP will be made to pre-fund future public
pension costs. This fund was supplemented with part of the proceeds from the privatisation of the
State  telecom  company.  Part  of  the  proceeds  were  also  use  to  buy-out  the  State’s  future  pension
liabilities to pre-privatisation staff.

I

L

A  series  of  reforms  in  the  1990s,  the  last  one  in  1997,  have  contributed  to  stabilise  the  ratio  of
pension expenditure to GDP in the medium term, but it remains high. The main weaknesses of past
reforms are excessively long transition  periods,  ‘excessive’ generosity,  and uncertainty about future
reforms. No reforms were undertaken in 1999.

Reforms  were  introduced  in  1998  to  align  the  pension  regime  for  new  public  servants  with  that
applying to the private sector.

NL

With  a  large  proportion  of  pensions  already  funded,  the  impact  of  ageing  populations  is  being
addressed via the reduction of public debt and measures to increase employment rates.

33

A

P

Large  reform  packages  were  adopted  in  1993  and  more  recently    in  1998.  The  latter  reform
addressed incentives for early retirement, tightened up eligibility for disability pensions, and aligned
the pension system for civil servants to the general system. Also an annual adjustment formula was
introduced  making  an  adjustment  for  the  financial  impact  of  increased  life  expectancy.  This  was,
however, suspended in 1998 and 1999 and must be addressed in 2000.

A new framework law was presented by the new Government in late 1999 in  response  to  a  White
Paper  presented  in 1999.  Reforms  are  therefore expected  to  be  adopted  in  2000.  Inter  alia,  it  will
need to address the creation of a compulsory second pillar contributory based scheme, and tackling
early retirement.

FIN During 1999, agreement was reached between labour market organisations on measures to postpone
early  retirement  and  extend  active  participation.  Together  with  a  large  primary  balance,  this  will
make  it  easier  to  meet  increased  age-related  expenditures  in  coming  years.  However,  questions
remain about  the  long-term  sustainability  of  existing  public  pension  schemes,  and  further  reforms
are likely to be required to tackle imbalances at source.

S

UK

Reforms  adopted  1998  are  currently  being  phased  in.  They  are  increasing  the  degree  of  funding
pensions.  They  also  establish  a  closer  link  between  contribution  paid  and  benefits  received,  and
indexation clauses were adjusted.

Projections  released  in  1999  show  a  broadly  sustainable  long-term  position  for  the  UK's  public
finances. Extensive  reforms were  proposed  in  late  1998  and  adopted  in  1999.  They  provide  for  a
‘minimum income guarantee’ and a replacement of SERPS (state earnings related pension  scheme)
with a second flat rate pension.

34

Box 3: Tax reforms in EU countries

Social security
contributions

Personal income
taxes

Corporate and
capital taxes

Consumption
taxes

Others
(Energy,
environment)

B

Lowering    of  SSC,
specially 
the
low-paid.

for 

DK1)

The 
temporary
contribution  to  the
supplementary
pension  systems  is
made permanent.

Reduction 
of
marginal  tax  rates
for low incomes.

D2)

Reduction  of  SSC
to 
pension
system by 0.8 pps.

the 

Across-the  board
reduction 
of
taxes.
income 
Minimum  marginal
rate  from  25.9%
19.9%;  maximum
from 
to
48.5%.  Minimum
exempted 
income
will be raised.

53% 

of
Simplification 
tax-rules 
on
sharehold-ings  for
individuals.  A  5%
tax on stock-return
to  pension  funds
intro-
has  been 
Gradual
duced. 
tax
in 
reduction 
deductions 
for
interest  payments
on 
mortgages
(1999-2001).

Corporate  tax  rate
cut  to  25%  (from
40%  and  30%  for
non-distributed
and 
profits, resp.

distributed

No taxes on capital
gains  when  hol-
sold
dings 
are 
between 
com-
panies.

Lowering  of  VAT
on labour-intensive
services.

Increase 
taxes.

energy

taxes
Ecological 
have 
been
introduced  in  1999
and  will  gradually
increase  to  finance
reductions in SSC.

Reduction 
employers' 
(50%) 
on 
staff.

of
SSC
new

Targeted  SSC  cuts
for 
permanent
contracts  (0.2  pps
0.05
employers, 
employees (2000).

Employers’ 
SSC
cuts  at  the  lower
end  of  the  wage
scale.

EL

E

F

IRL

Tax  cuts  for  low
incomes.

relief 

Tax 
venture capital.

for

No 
withholding
tax  on  securities.
Tax  incentives  for
venture capital.

Reduction  (8  pps)
of marginal rates at
the top.

Increasing 
exempted 
(1999).

of
income

rate 

Reduction  of  the
top 
to
44%)  and  of  the
standard rate (24 to

(46 

Tax  incentives  for
young 
innovative
companies.

VAT
Reduced 
rates 
on
households  repairs
and services.

Rise  in  ecological
finance
taxes 
to 
reduction 
in
working time

relief 

Tax 
reduce 
rates 
capital  gains 
venture capital.

and
for
for

Increase in indirect
taxes on tobacco.

35

22%).  Increase  of
the 
minimum
exempted income.

Tax  rate  of  the  2nd
break  down  1  pp
(from 27 to 26%).

SSC 
for
rebates 
new jobs, as well as
at the lower end of
the wage scale.

I

L

NL3)

Reduction  of  SSC
at the lower end of
the wage scale.

the

Increasing 
minimum
exempted income.

Harmonisation  of
SSC  for  the  self-
employed  and  the
employed.

P

A

FIN4) Reduction in SSC

S

Reduction 
taxes  on 
income (2001).

direct
labour

Increase  of    family
allowances.
Reduction  of rates
at  the  bottom  and
the middle.

Rates  reduced  by
1.5  pps  sin  1997-
99.  New 
reduc-
tions  planned  for
2000-2003.

of
Lowering 
taxes 
in
income 
1999 
and  2000.
Further  reductions
planned  for  2000-
2001.

More  incentives  to
capitalisation 
of
profits.  Incentives
for risk capital.

Reduced 
rates  on 
intensive services.

VAT
labour-

VAT
some

on 

Reduced 
rates 
labour-intensive
services.

on 

VAT
some

Reduced 
rates 
labour-intensive
services. 
Increase
of  VAT  (1.5pps  –
2001).

Increase  of  energy
and  environmental
taxes in 1999.

Increase  in  energy
taxes in 2000.

Rates 
increased
from  28  to  29%  in
2000.

Corporate  taxes  to
be 
in
reduced 
2000.  Tax  reliefs
2000-01.  Coupon
tax on dividends to
foreign  companies
partly abolished.

36

UK

the 

Reduction  of  SSC
bottom.
at 
Reduction 
of
employers  SSC  by
0.3% (2001).

the

Increasing 
minimum
exempted 
income
when  working  and
guaranteeing 
a
minimum 
income
(Working  Families
Tax Credit).

Climate 
change
levy to finance SSC
cuts.

1)

This refers to the 1998 tax reform, named the "Whitsun package", which was adopted in June 1998 and is being gradually implemented

between 1999 - 2002.

2)

3)

4)

Tax Relief Act 1999/2000/2002. A further reduction in the tax burden is planned for 2003, with a reduction in the basic rate to 17% and in
the top rate to 45%. Basic allowances will also be raised.

The Dutch stability programme (update 1999) foresees the review of the tax system by 2001.

The reductions in personal income taxes are meant to be partially financed by higher capital, corporate, energy and environmental taxes.

Source: Commission services.

37

Box 4: 1999 country-specific recommendations
for structural reforms in product markets

Belgium:  (1)  Improve  the  record  on  implementing  Single  Market  directives,  especially  in  telecoms  and
transport. (2) Open up further the network industries: telecommunications, post, energy and transport.

Denmark:  (1)  Strengthen  and  apply  more  vigorously  the  existing  competition  regulations.  (2)  Introduce
competitive  tendering  in  the  provision  of  public  services.  (3)  Implement  reforms  in  the  electricity  sector
without delay. (4) Further review liberalisation of shop-opening hours.

Germany:  (1) Improve  implementation  of Single  Market  measures  in  public  procurement.  (2)  Continue  to
decrease  State  aids.  (3)  Increase  efforts  in  liberalising  services,  including  in  retail  distribution.  (4)  Further
accelerate business registration procedures for creating SMEs.

Greece: (1) Improve transposition record on  implementing  Single Market legislation,  particularly  for  public
procurement.  (2)  Sustain  efforts  to  privatise  state-owned  enterprises.  (3)  Reduce  further  administrative
burdens for registering a new company. (4) Stimulate business R&D expenditure.

Spain:  (1)  Improve  further  the  transposition  of  Single  Market  legislation,  particularly  for  transport.  (2)
Reduce sector-specific state aids. (3) Deregulate retail distribution. (4) Reduce the number of procedures and
time  taken  for  company  registration.  (5)  Continue  efforts  to  promote  industrial  innovation.  (6)  Reinforce
competition policy.

France:  (1)  Improve  implementation  of  Single  Market  Directives,  particularly  in  telecommunications.  (2)
Reduce rescue and restructuring State  aids and increase  emphasis  on  horizontal  measures.  (3)  Realise  faster
progress in liberalisation of network industries, particularly in the energy sector. (4) Monitor closely measures
to simplify formalities and encourage innovation.

Ireland:  (1)  Accelerate  the  reduction  of  its  transposition  deficit  on  Single  Market  legislation  especially  in
transport. (2) Give power to the Competition Authority to enforce Articles 81 and 82 of the EC Treaty. (3)
Consider initiatives to promote competition in telecommunications, electricity and gas supply, and domestic
and international transport sectors. (4) Encourage venture capital, local R&D, and government participation
to improve R&D performance.

Italy: (1) Make further progress in the transposition of the Single Market legislation, especially in areas such
as  transport  and  public  procurement.  (2)  Reduce  non-agricultural  State  aids  and  improve  its  overall
composition of aids. (3) Intensify transport liberalisation. (4) Reduce the number of procedures and the time
spent on registering a company.

for
Luxembourg: 
telecommunications and transport. (2) Evaluate the necessity and effectiveness of regional aids. (3) Consider
abolishing the price regulation system and shift to a more active competition policy.

implementation  of  Single  Market 

regulations,  particularly 

(1)  Speed  up 

Netherlands: (1) Speed up transposition of Single Market regulations, particularly in transport. (2) Monitor
strictly  the  implementation  of  measures  to  strengthen  competition  and  remove  regulatory  obstacles  to
business start-ups. (3) Speed up  liberalisation  of  public  transport.  (4)  Review  the  impact  of  spatial  planning
regulations on the efficiency of the retail sector.

Austria:  (1)  Accelerate  transposition  of  Single  Market  Directives  in  transport  and  public  procurement.  (2)
Speed up the reform of the 1988 cartel law and the creation of an independent Cartel Office. (3) Continue to
reform public services and accelerate deregulating process of utilities. (4) Consider liberalising shop-opening
hours further. (5) Continue and expand initiatives to simplify procedures to  start  new  businesses.  (6)  Reach
the objective of raising R&D expenditure.

Portugal:  (1)  Accelerate  transposition  of  Single  Market  regulations,  especially  in  public  procurement,
telecommunications and transport. (2) Reduce restructuring  aids  and  aids  to  specific  sectors.  (3) Bring  anti-
trust legislation in line with EU legislation. (4) Pursue further liberalisation of network industries. (5) Review
the law restricting licensing of large retail outlets. (6) Reduce administrative  burdens  on  creating  businesses.
(7) Improve innovative activity.

Finland: (1) Give power to national authorities to enforce articles 81  and  82  of  the EC  treaty.  (2)  Monitor
closely  areas  where  public  and  private  enterprise  compete,  and  continue  efforts  to  create  a  competitive
environment in these areas.

38

Sweden:  (1)  Give  the  Swedish  competition  authority  the  powers  to  enforce  Articles  81  and  82  of  the  EC
treaty.  (2)  Improve  the  efficiency  of  the  public  sector.  (3)  Take  further  measures  to  increase  competition,
avoid  market  dominance,  and  promote  new  entry  in  the  utilities  sectors.  (4)  Review  regulation  that  limits
competition in retail distribution.

United Kingdom: (1) Improve the record of Single Market legislation, particularly in the area  of  transport.
(2) Apply strictly new legislation that strengthens the powers of the Office of Fair Trading. (3) Adjust the tax
structure in favour of SMEs.

39

Box 5:Differences in price levels between EU Member States

Price dispersion between Member States (as measured by the coefficient of price variation) declined in the run-up
to  the  completion  of  the  Single  Market,  from  20.1%  in  1985  to  16.2%  in  1993.  In  the  period  1993-1997,  this
process of price convergence slowed down, which may be attributed in part to exchange rate fluctuations. In 1997,
price dispersion equalled 14.8%. This figure is based on relative price levels including value added and excise taxes.
The corresponding figure based on relative price levels excluding indirect taxes equalled 13.7%, which is above the
11% price dispersion reported for the United States.

In 1997, price levels were generally high in the Nordic countries, Germany, France and Luxembourg, but relatively
low  in  the  southern  countries  (see  table  below).  Macroeconomic  factors  such  as  exchange  rate  developments,
standards of living and indirect taxation levels may help explain these differences in price levels. However, other
more  microeconomic  factors  such  as  the  opening  up  to  international  competition  and  an  early  liberalisation  of
public utilities may play a role as well. In order to eliminate the influence of some of the macroeconomic factors,
the  graph  below  presents  a  regression  analysis  of  the  pre-tax  1997  price  levels  on  GDP  per  capita  in  Member
States. Countries located above the estimated regression line had pre-tax price levels above what one would expect
given  their  standard  of  living.  This  is  the  case  most  evidently  in  Sweden  and  Finland.  The  opposite  is  true  for
countries located below the regression line.

Relative price levels in the EU Member States
(1997, EU-15=100)

B

DK

D

E

EL

F

IRL

I

L

NL

A

P

FIN

S

UK

Aggregate price
levels
incl. tax

98

121

108

81

80

108

96

90

108

98

104

65

109

120

100

Aggregate price
levels
excl. tax
96

116

110

83

81

106

96

90

111

98

104

65

106

115

101

GDP per capita
at current market
prices (PPS)

111

120

109

79

67

104

100

102

168

109

110

70

98

100

100

EU-15 price dispersion 1

14.8%

13.7%

n.a.

1 As measured by the coefficient of variation of the price level indices.
Source: Commission services.

40

Aggregate price levels (excl. tax) and living standards (1997)

y = 0.74x + 25.27
R2 = 0.67

DK

S

FIN

F

UK

IRL

I

D

A

NL

B

EL

E

P

)
0
0
1
=
5
1
-
U
E

(

x
e
d
n

i

l
e
v
e
l

e
c
i
r
p

e
t
a
g
e
r
g
g
A

125

120

115

110

105

100

95

90

85

80

75

70

65

60

60

65

70

75

80

85

90

95

100

105

110

115

120

125

GDP per capita (PPS, EU-15=100)

41

Box 6: Electricity market liberalisation

The  electricity  industry  in  the  Community  generates  about  2%  of  GDP,  accounts  for  one-fifth  of  final  energy
demand (close to half if the transport sector is excluded), and has a turnover of L165 billion.

Liberalisation of the Community’s electricity market under the terms of Directive 96/92 got underway in February
1999.  Greece  has  a  two  year  derogation;  two  Member  States  –  Belgium  and  Ireland  –  received  a  one-year
derogation, so that they have now  started  opening  their  markets.  As  a  consequence  of  delays  in  transposing  the
Directive into national law, both France and Luxembourg enjoyed a de facto derogation.

The  Directive  requires  that  an  increasing  share  of  domestic  electricity  consumption  be  gradually  opened  up  to
competition, from approximately 26% in 1999 to 30% in 2000 and will be about 35% by 2003; the Commission
will review the situation in the coming years, and may propose further liberalisation to take effect from 2006. In
practice,  many  Member  States  are  already  going  beyond  the  minimum  provisions  of  the  directive:  in  Germany,
Finland, Sweden and the United Kingdom, all customers are free to choose their electricity supplier. In the latter
three countries, liberalisation preceded Community legislation.

Liberalisation  of  the  Community’s  electricity  market  has  taken  place  against  a  background  of  several  years  of
falling prices, linked to declining energy costs and technological improvements in generation. The downward trend
in  electricity  prices  continued  during  the  first  half  of  1999,  notwithstanding  a  recovery  in  oil  prices:  in  most
Member  States,  median  prices charged  to  industry  fell  by  at  least 3% compared  with  twelve  months  previously.
Although  it  is  too  early  to  make  a  definitive  judgement  on  the  impact  of  liberalisation  on  prices  to  consumers,
some  indication  of  what  may  be  expected  may  be  gleaned  from  experience  in  the  United  Kingdom:  when  full
market liberalisation took effect in 1999, all distributors cut their prices in an effort to attract new customers.

Experience  in  the  United  Kingdom  also  suggests  that  fears  that  cheaper  electricity  will  lead  to  higher  levels  of
pollution may be unfounded. Emissions of carbon dioxide fell sharply as new gas-fired power stations entered the
market  and  displaced  older,  dirtier  coal-fired  generation  capacity.  Indeed,  it  is  not  liberalisation,  but  rather
government  intervention  to  protect  the  remnants  of  the  domestic  coal  industry  which  has  been  bad  for  the
environment.  Nevertheless,  the  Commission  continues  to  monitor  the  environmental 
implications  of
liberalisation, and has launched a study to examine the likely effects, including  the impact  of enlargement  of  the
Community.

Further progress on the setting of transmission tariffs, in particular for cross-border  electricity  flows,  remains  to
be  made  before  a  truly  pan-European  electricity  market  can  emerge.  The  Commission  continues  to  work  with
national electricity regulators and operators within the framework of the Florence European Regulatory Forum in
order to reach a satisfactory agreement on this issue.

42

Box 7: Transport

Even when one neglects the large volume of transport that is undertaken on the own account of companies and
private individuals, the annual turnover of the transport sector in the EU is well over L 500 bn (see Table ). This
indicates a large untapped potential of economic efficiency improvements, as much of the sector  remains  tightly
regulated.  Nevertheless,  liberalisation  and  improvements  in  the  functioning  of  the  internal  market  continue  to
occur in small steps.

The road haulage industry can be considered to be broadly liberalised with a high degree of competition also across
borders  since  the  last  restrictions  on  cabotage  have  been  abolished.  In  Greece,  Italy,  and  Spain  however,  price
constraints  for  intra-country  transport  limits  the  degree  of  competition.  Furthermore,  the  ever  increasing
importance of cross-border haulage makes it more pressing to reduce potentially harmful tax competition through
differing diesel charges, as was foreseen in the Commission Energy tax proposal. This was witnessed by the UK
abandoning  its  fuel  escalator  in  the  face  of  complaints  from  the  road  haulage  industry.  The  degree  to  which
working hour regulations and taxes on trucking require closer harmonisation also needs to be examined.

Turnover by mode of transport 1995 (

€

billion)

Railways

1.54

1.05

10.20

2.40

0.10

8.00

0.50

6.40

0.08

2.36

1.52

0.29

0.54

1.30

9.07

B

DK

D

E

EL

F

IRL

I

L

NL

A

P

FIN

S

UK

EU-15

45.35

Source: Commission services.

Other land
transport
8.49

Water
transport
1.60

Air
transport
2.46

Auxiliary
transport
12.59

2.98

35.80

14.00

4.41

30.30

1.50

22.70

0.40

8.91

6.02

2.37

3.30

7.56

24.57

173.31

4.42

3.78

2.00

4.15

3.24

0.20

3.46

0.04

4.05

0.22

1.30

1.69

2.72

4.44

37.31

1.37

7.78

6.00

1.53

9.96

0.40

9.37

0.50

5.04

1.41

1.63

1.15

2.04

3.71

49.42

13.00

3.13

24.22

0.32

23.48

0.25

7.67

8.15

4.93

3.00

9.59

15.06

65.60

32.09

195.55

Total
transport
26.68

13.53

106.98

37.40

13.32

75.72

2.92

65.31

1.27

28.03

17.32

10.52

9.68

23.21

85.23

517.12

In  urban  public  transport,  local  authorities  resort  increasingly  to  tendering  procedures  for  the  operation  of  their
transport networks. This has allowed for substantial cost savings and  reductions in  subsidies,  for  instance in  the
UK  and  Denmark  (see  Table  ).  In  some  instances,  however,  a  narrow  focus  on  budget  constraints  has  lead  to
higher fares and reduced passenger-trips.

Air  transport  continues  to  grow  rapidly.  Prices  have  been  pushed  down  somewhat  due  to  the  still  ongoing
adjustments  to  the  completion  of  the  single  market  for  aviation  of  April  1997.  However,  air  transport  services
towards third countries are still ruled by bilateral agreements which weaken the benefits  of  the  single  market.  In
particular,  the  bargaining  situation  of  the  EU  with  respect  to  getting  access  to  the  important  US  market  is
extremely  weak  because  Member  States  have  preferred  to  negotiate  bilaterally  with  the  US.  These  “open  sky”
agreements  distort  internal  competition  among  Community  carriers  and  endanger  a  proper  functioning  of  the
internal  market.  Moreover  they  normally  give  no  right  to  operate  flights  within  the  other  country,  but  give
unlimited rights to operate between the other country and third countries. Because of extremely differing shares of

43

intra-country and foreign flights, the overall result of the open sky agreements is disadvantageous: Americans get
access to roughly 80 % of the European market, while Europeans can enter only 20 % of the American market.
The Commission referred cases against eight Member States to the ECJ for concluding such aviation agreements
in violation of EU competition law. Furthermore, air traffic management is not yet integrated and is  responsible
for increasing delays. At last, despite paying for its own infrastructure, air transport clearly enjoys a preferential tax
treatment  vis-à-vis  other  modes  as  it  is  largely  exempted  from  transport  specific  or  environmentally  motivated
charges  (such  as  fuel  taxes)  or  from  general  taxation  (such  as  VAT).  The  discriminatory  tax  treatment  in  some
Member States between domestic and intra-community flights in the context of value added taxation also remains
questionable.  However,  a  first  step  towards  harmonisation  was  made  with  the  abolition  of  duty  free  shopping,
which acted as an indirect subsidy to air transport.

The  development  of  the  railway  sector  continues  to  lag  that  of  other  transport  sectors  and  it  continues  to  lose
market share. There is evidence of substantial inefficiency, slow take up of new technology, and services are still
almost entirely planned and operated on a national basis. Member States are attempting to make railway operations
more business oriented and to reduce subsidies and this is noticeable in particular in cost-cutting efforts involving
a  substantial  reduction  in  personnel.  Nevertheless,  with  the  exception  of  the  UK,  railways  continue  to  be  state
owned.

An important step was made at the December 1999 transport Council, where Member States agreed to a package
of  measures  relating  to  the  rail  sector.  This  addresses  some  of  the  issues  relating  to  the  regulation  of  rail
infrastructure  and  includes  an  extension  of  access  rights  to  allow  undertakings  from  other  countries  to  operate
international rail freight services on a Trans-European Rail freight Network including the use of infrastructure for
access to the final customer.

44

Box 8: 1999 country-specific recommendations
for structural reforms in capital markets

Greece:  Help  the creation  of  new  firms  by  further  developing  venture  capital  markets  and  expanding  the  stock
market.

Ireland: Continue to be take measures to create incentives encouraging venture capital and local R&D.

Austria: Take measures to develop and facilitate access to venture capital.

Portugal: Develop venture capital market and improve innovative activity.

United Kingdom: Adjust the tax structure in favour of SMEs and alter of laws on insolvency and bankruptcy, to
ensure that a greater share of venture capital goes to early-stage business.

45

Box 9: 1999 country-specific recommendations
 for structural reforms in labour markets

Belgium:  (1)  Focus  more  on  activation  of  unemployed  adults.  (2)  Review  benefit  duration  and  the  availability
requirements. (3) Rethink strict employment protection legislation for white collar workers.  (4)  Facilitate  regional
opening clauses in wage agreements.

Denmark: (1) Increase labour supply, e.g. via benefit reforms. (2) Evaluate tax reform with a view to reducing high
tax wedge. (3) Reconsider leave schemes.

Germany:  (1)  Review  benefit  and  assistance  schemes.  (2)  Continue  income-tax  and  non-wage-labour  costs  cuts,
especially at the lower end of the wage scale. (3) Assess employment protection legislation for SMEs.

Greece:  (1)  Reinforce  preventive  approach  and  reform  education  and  training  system.  (2)  Encourage  the  use  of
new part-time contracts and more flexible working hours.

Spain: (1) Shift from passive to active labour market policies with particular emphasis on training and education.
(2)  Continue  efforts  to  reduce  the  tax  wedge  on  labour  and  discourage  early  retirement.  (3)  Reinforce  recent
agreements to reduce the cost of dismissal. (4) Adapt wage developments to reflect productivity differentials.

France: (1) Review the unemployment  benefit  schemes  and employment  protection  legislation.  (2) Continue  the
policy  of  tax  cuts  at  the  lower  end  of  the  wage  scale  and  promote  jobs  in  the  service  sector.  (3)  Monitor  the
introduction of the 35 hour working week.

Ireland: (1) Pursue  a balanced approach involving preventive as well as active measures, increase the participation
rate  of  the  long-term  unemployed  and  low-skilled  in  education  and  training  programmes.  (2)  Ensure  continued
wage  moderation  through  adherence  to  the  social  pact.  (3)  Avoid  potential  negative  effects  from  setting  the
minimum wage level too high.

Italy: (1) Increase the coverage of active labour market measures. (2) Continue efforts to shift the tax burden away
from labour. (3) Reform benefit schemes to reduce the numbers being transferred to pensions and other schemes.
(4)  Encourage  early  activation  and  adequate  unemployment  benefits  to  ensure  an  increased  labour  supply  and
greater labour mobility. (5) Review employment protection legislation. (6) Encourage tripartite local agreements in
the South which introduce wage flexibility in line with labour productivity.

Luxembourg: Focus reform  on  the low employment  rate  of women  and  older workers  by, inter alia,  increasing
on-the-job-training in firms and the creation of additional childcare facilities.

Netherlands: (1) Continue efforts to reduce the overall tax burden on labour, especially for low-wage earners. (2)
Make further efforts to ensure that there are sufficient incentives in benefit and  assistance  schemes  to  encourage
the take-up of job offers.

Austria: (1) Review early retirement conditions, improve incentives to work and modernise organisation of work.
(2) Pay special attention to low-skilled and low-wage workers.

Portugal: (1) Reform the benefit system to ensure appropriate incentives to take up job offers and to participate in
active measures. (2) Pursue further recent policies to enhance labour market flexibility.

Finland: (1) Reduce the overall tax burden on labour. (2) Increase job availability, make job search more effective
and increase the incentives to take up job offers in the benefit system. (3) Review early retirement conditions.

Sweden: (1) Reduce the overall number of participants and focus the ALMPs more precisely, while increasing the
share  in  labour  market  training.  (2)  Implement further  reduction  of  taxes  on  labour,  with  a  priority  for  low  and
medium-paid workers. (3) Review further benefit and assistance schemes.

United Kingdom:  (1)  Continue efforts  to lower  marginal effective  tax rates  on  low-paid  workers.  (2)  Deal  with
regional unemployment differences and address the issue of social inclusion.

46

REPORT FROM THE COMMISSION

on the implementation of the 1999 Broad Economic Policy
Guidelines

STATISTICAL ANNEX

47

TABLE OF CONTENTS

GRAPHS
1.   Recent trends in economic activity, EU-15 ..................................................................................................... 49

2.   Employment and unemployment, EU-15........................................................................................................ 50

3.   Inflation trends, euro area .................................................................................................................................. 51

4.   Policy mix, euro area. .......................................................................................................................................... 52

5.   Monetary and financial indicators, euro area................................................................................................... 53

6.   Monetary and financial indicators, "pre-in" countries ................................................................................... 54

7.   Investment performance, EU-15....................................................................................................................... 55

8.   Unemployment- and employment rate in the Member States...................................................................... 56

9.   Growth and labour market performance, 1995-1999 .................................................................................... 57

10. Share of long-term unemployment in total unemployment, 1998 ............................................................... 58

TABLES

1.   Macroeconomic developments in the EU ....................................................................................................... 59

2.   Inflation ................................................................................................................................................................. 60

3.   Evolution in estimates of government budgets for 1999 .............................................................................. 61

4.   Change in actual and cyclically adjusted budget balances in 1999 ............................................................... 62

5.   Projections for general government surplus (+)/deficit (-) .......................................................................... 63

6.   Government debt in the updates of the stability and convergence programmes...................................... 64

7.   Non-wage labour costs and tax burden on labour ......................................................................................... 65

8.   Wage developments in 1999 .............................................................................................................................. 66

9.   Exposure to international competition, 1993-1998........................................................................................ 67

10. Transposition and implementation of Single Market directives................................................................... 68

11. Telecommunications- market structure and price evolution ........................................................................ 69

12. R & D expenditures and internet hosts ............................................................................................................ 70

13. Benefit duration and job availability requirements ......................................................................................... 71

48

Graph 1: Recent trends in economic activity, EU-15

Annual

%

10

8

6

4

2

0

-2

-4

-6

-8

GDP growth

Industrial prod.

Q1-92

Q1-93

Q1-94

Q1-95

Q1-96

Q1-97

Q1-98

Q1-99

%

10

Quarter on quarter, in annualised terms

Q1-92

Q1-93

Q1-94

Q1-95

Q1-96

Q1-97

Q1-98

Q1-99

Real GDP Annualised

Ind.Prod _Annualised

%

Contributions to real GDP, Annual

DD incl stock

Net export

GDP growth

8

6

4

2

0

-2

-4

-6

-8

5

4

3

2

1

0

-1

-2

-3

Q1-92

Q1-93

Q1-94

Q1-95

Q1-96

Q1-97

Q1-98

Q1-99

Source: Commission services.

49

Graph 2: Employment and unemployment, EU-15

% yoy

Employment growth

Q1-94

Q1-95

Q1-96

Q1-97

Q1-98

Q1-99

% of population 15 to 64 years

Employment rates

Japan

USA

EU-15

2

1.5

1

0.5

0

-0.5

-1

82

79

76

73

70

67

64

61

58

1992

1993

1994

1995

1996

1997

1998

1999

Unemployment rate; total and long-term unemployment

Long-term unemployment

Unemployment rate

%

14

12

10

8

6

4

2

0

1992

1993

1994

1995

1996

1997

1998

1999

Source: Commission services.

50

Graph 3: Inflation trends, euro area

Annual percentage change

HICP

Core HICP*

Services

Jan-98

Jan-99

Jan-00

Annual percentage change

Energy

HICP

%

4.0

3.0

2.0

1.0

0.0

Jan-97

%

14

12

10

8

6

4

2

0

-2

-4

-6

Jan-97

%

Jan-98

Jan-99

Jan-00

Producer prices; annual percentage change

Total goods

Intermediate goods

Capital goods

Consumer goods

8

6

4

2

0

-2

-4

-6

Jan-97

Jan-98

Jan-99

Jan-00

* HICP excluding unprocessed food and energy.
Source: Commission services.

51

Graph 4: Policy mix, euro area

MFCI index

Short-term real interest rate

Long-term real interest rate
Real effective exchange rate

Total

1994

1995

1996

1997

1998

1999

2000

Last data point Jan-2000

4

3

2

1

0

-1

-2

-3

% of GDP

General government balance

0

-1

-2

-3

-4

-5

-6

%

5

4.5

4

3.5

3

2.5

2

1.5

1

0.5

0

Actual net lending/borrowing

Cyclically adjusted

1994

1995

1996

1997

1998

1999

Nominal compensation per employee and NULC

Nominal compensation
per employee; total
economy

NULC

1994

1995

1996

1997

1998

1999

Source: Commission services.

52

Graph 5: Monetary and financial indicators, euro area

%

%

4

Short and long-term interest rates

Differential with US rates

Long-term interest rate

Short-term interest rate

Main refinancing rate

Long-term
interest rate

Short-term
interest rate

3.5

3

2.5

2

1.5

1

0.5

0

Jan-99

Jan-00

Jan-98

Jan-99

Jan-00

8

7

6

5

4

3

2
Jan-98

%

Money supply growth

M1

M3

16

14

12

10

8

6

4

2

0

Jan-98

Jan-99

Jan-00

Source: Commission services.

Index number: 31/12/1998 = 100

Nominal effective exchange rate
development, euro area

EUR11 vs USA

EUR11 vs IC24

EUR11 vs G43

110

105

100

95

90

85
Jan-98

Jul-98

Jan-99

Jul-99

Jan-00

53

Graph 6: Monetary and financial indicators
("pre-in" countries in comparison with the euro area)

%

25

Short-term interest rate spread

20

15

10

5

0

-5

%

Long-term interest rate spread

DK

EL

S

UK

DK

EL

S

UK

7

6

5

4

3

2

1

0

-1

Jan-97

Jan-98

Jan-99

Jan-00

Jan-97

Jan-98

Jan-99

Jan-00

Index Jan. 1998 = 100

Exchange rates against the euro

DKK/Euro
GRD/Euro
SEK/Euro
GBP/Euro

120

115

110

105

100

95

90

85

106

104

102

100

98

96

94

92

90

Index Jan. 1998 = 100

Nominal effective exchange rate

Denmark

Greece

Sweden

United Kingdom

Jan-98

Jan-99

Jan-00

Jan-98

Jan-99

Jan-00

Source: Commission services.

54

Graph 7: Investment performance, EU-15

% of GDP

22

General government

Private sector

21

20

19

18

17

16

5

4

3

2

1

1970

1974

1978

1982

1986

1990

1994

1998

Source: Commission services.

55

Graph 8: Unemployment- and employment rate
in the Member States

%

Unemployment rate

'94

'99

26

24

22

20

18

16

14

12

10

8

6

4

2

0

B

DK

D

EL

E

F

IRL

I

L

NL

A

P

FIN

S

UK EU-

15

'94

'99

%

100

Employment rate

90

80

70

60

50

40

30

20

10

0

B

DK

D

EL

E

F

IRL

I

L

NL

A

P

FIN

S

UK EU-

15

Source: Commission services.

56

Graph 9: Growth and labour market performance, 1995-1999

6

5

4

3

2

1

0

)
.
a
.
p
%

(

t
n
e
m
y
o
l
p
m
E

0

-1

-2

-5

)
s
t
n
i
o
p
%
n
i

9
9
9
1
-
5
9
9
1

e
g
n
a
h
c

e
t
u
l
o
s
b
a

(

e
t
a
r

t
n
e
m
y
o
l
p
m
e
n
U

IRL

L

FIN

E
NL

P

UK

DK

S

F

EL

B

A

2

3

4

5

6

7

8

9

10

Real GDP growth (% p.a.)

I

D

1

D

2

1

0

-1

-2

-3

-4

-5

-6

-7

-8

-9

EL

I A

0

5

B

10

15

L

20

25

30

F

S

P

UK

DK

NL

FIN

E

IRL

Employment (cumulative growth 1995-1999 in %)

Source: Commission services.

57

Graph 10: Share of long-term unemployment in total
unemployment, 1998

Unemployment rate %

20

16

12

8

4

0

50%

60%

62%

55%

50%

53%

57%

48%

42%

38%

28%

48% 45%

33%

30%

27%

31%

B

I

IRL

EL

D EUR-

E

EU-15 NL

P

F

S

UK

L

A

FIN

DK

11

Source: Labour Force Survey 1998, except Ireland which is 1997.

58

Table 1: Macroeconomic developments in the EU
(annual percentage change unless otherwise stated)

1993

1994

1995

1996

1997

1998

1999

Spring
1999
forecast

Provisional
Outturn*

Real economy

GDP growth

Private consumption

Public consumption

Investment

- construction

- equipment

Stockbuilding

Exports (G & S)

Imports (G & S)

Growth contributions
Domestic demand 1)
Net exports

Labour market

Employment
Employment rate (%)2)
Employment rate (%)3)

Unemployment rate (%)

Labour productivity
RULC 4)

Inflation trends
HICP5)

GDP deflator

Compensation per
employee
NULC6)

-0.4

-0.4

1.1

-5.9

-3.1

-10.7

-0.4

1.4

-3.1

-1.7

1.3

-1.7

59.5

57.1

10.7

1.6

-0.7

3.4

3.5

4.3

2.7

2.8

1.7

1.0

2.6

1.9

3.8

0.2

9.0

7.8

2.4

0.4

0.0

59.3

55.8

11.1

2.8

-2.3

2.8

2.7

3.1

0.3

2.4

1.8

0.6

3.3

0.1

8.1

0.5

8.3

7.3

2.1

0.3

0.7

59.6

55.4

10.7

1.7

-1.4

2.8

3.0

3.4

1.6

1.6

1.9

1.8

1.9

-0.7

4.8

0.0

4.8

4.1

1.3

0.3

0.4

59.7

55.4

10.8

1.3

-0.5

2.4

2.5

3.3

2.0

2.5

2.0

0.3

3.2

0.8

6.2

0.3

9.6

9.0

2.2

0.3

0.8

60.1

55.2

10.6

1.8

-0.9

1.7

2.0

2.9

1.0

2.6

3.0

1.3

5.6

1.8

10.0

0.7

5.6

8.6

3.5

-0.8

1.3

60.8

55.3

9.9

1.3

-1.0

1.3

2.0

2.4

1.0

2.1

2.6

1.7

3.7

3.5

3.8

1.0

3.5

4.7

2.4

-0.4

0.8

61.3

n.a.

9.6

1.3

-0.1

1.2

1.7

2.9

1.6

* Based on the Commission service's provisional Spring 2000 forecast.
1) Domestic demand including stockbuilding.
2) Benchmark series.
3) Full time equivalent.
4) RULC = Real unit labour costs.
5) CPI until 1996.
6) NUCL = Nominal unit labour costs.
Source: Commission services.

2.2

2.7

1.6

4.8

3.7

5.9

0.5

3.9

5.5

2.8

-0.5

1.3

61.7

n.a.

9.2

1.0

0.3

1.2

1.5

2.8

1.8

59

Table 2: Inflation (HICP)
(annual percentage change)

Headline inflation

Core inflation1)

1998
0.9

1999
1.1

1998
1.2

1999
1.1

0.6

1.8

0.7

2.1

2.0

1.0

1.8

0.8

2.2

1.4

1.1

1.3

4.5

1.0

1.6

1.3

0.6

2.2

1.6

0.61

0.6

2.2

0.6

2.5

1.7

1.0

2.0

0.5

2.2

1.4

1.1

2.1

2.3

0.6

1.3

1.2

1.1

2.1

0.9

2.4

2.3

1.3

1.9

1.2

1.5

1.5

1.4

1.4

5.3

1.1

1.9

1.6

Dispersion in euro area

0.5

2.5

2.0

0.73

0.9

2.4

1.5

0.51

0.4

2.4

0.7

2.3

1.8

0.9

1.9

0.7

2.5

1.4

1.1

1.6

2.7

0.5

1.2

1.2

0.4

2.5

2.1

0.76

B

D

E

F

IRL

I

L

NL

A

P

FIN

EUR-11

DK

EL

S

UK

EU-15

Min

Max

Range

Standard deviation

1) HICP excluding unprocessed food and energy.
Source: Commission services.

60

Table 3: Evolution in estimates of government budgets for 1999
( general government net lending/borrowing)

Initial stability/
convergence
programme*

Provisional
outturn**

Difference

Real GDP
growth
(% change)
2.4

Budget
balance
(% GDP)
-1.3

Real GDP
growth
(% change)
2.3

Budget
balance
(% GDP)
-0.9

2.0

3.8

2.4

6.7

2.5

3.4

2.3

2.8

3.5

4.0

2.6

1.7

3.7

2.2

1-1½

2.4

-2.0

-1.6

-2.3

1.7

-2.0

1.1

-1.3

-2.0

-2.0

2.4

-1.8

2.5

-2.1

0.3
-0.31)

-1.4

1.4

3.7

2.8

8.3

1.4

5.0

3.3

2.1

3.0

3.6

2.2

1.4

3.5

3.7

1.9

2.2

-1.2

-1.1

-1.8

1.4

-1.9

n.a.

0.5

-2.2

-2.0

2.6

-1.3

3.1

-1.5

1.9

1.2

-0.7

B

D

E

F

IRL

I

L

NL

A

P

FIN

EUR-11

DK

EL

S

UK

EU-15

* ESA79 basis.
** ESA95 basis.
1) Financial year.
2) Indicative, since comparison between financial year and calendar year figures.
Source: Commission services.

Real GDP
growth
(% change)

Budget
balance
( % GDP)

-0.1

-0.6

-0.1

0.4

1.6

-1.1

1.6

1.0

-0.7

-0.5

-0.4

-0.4

-0.3

-0.2

1.5

0.8

-0.2

0.4

0.8

0.5

0.5

-0.3

-0.1

n.a

1.8

-0.2

0.0

0.2

0.5

0.6

0.6

1.6
1.52)

0.7

61

Table 4: Change in actual and cyclically adjusted budget balances in 1999
(% of GDP)

Actual
deficit

1

-0.9
-1.2
-1.1

-1.8
1.4

-1.9
n.a.

0.5
-2.2

-2.0
2.6

-1.3

3.1
-1.5

1.9
1.2

-0.7

Change
in
deficit
98/99

2
= 3-4-5
= 6+7
+0.1
+0.5
+1.5

1.0
-0.6

+0.9
n.a.

+1.2
+0.2

-0.5
+1.3

+0.6

+2.2
+1.0

-0.4
+0.9

+0.7

B

D

E

F

IRL

I

L

NL

A

P

FIN

EUR-11

DK

EL

S

UK

EU-15

Source: Commission services.

Change in deficit due to:

Change in deficit
due to:

Change in CAB
due to:

Change
revenues

Change
primary
exp.

Change
interest
exp.

Change
cyclical
comp.

3

4

5

6

Change
CAB

7
= -5+9

Change
interest
exp.

5

Change
primary
CAB
9

-0.1
+0.7
+0.4

+0.8
+0.7

+0.4
n.a.

+1.0
+0.3

+3.0
+0.5

+0.5

+0.6
+0.7

-1.1
+0.3

+0.5

+0.2
+0.2
-0.4

0.0
+1.6

+0.7
n.a.

+0.1
+0.4

+3.0
-0.6

+0.3

-0.6
+0.1

-0.3
-0.2

+0.1

-0.4
-0.1
-0.7

-0.2
-0.3

-1.3
n.a.

-0.4
-0.3

-0.2
-0.3

-0.4

-0.6
-0.4

-0.5
-0.4

-0.4

-0.2
-0.3
+0.2

+0.2
+0.3

-0.1
n.a.

0.0
-0.1

0.0
-0.1

-0.1

-0.9
+0.2

+0.9
-0.3

-0.1

+0.4
+0.8
+1.3

+0.8
-0.9

+1.0
n.a.

+1.2
+0.3

-0.5
+1.4

+0.7

+3.1
+0.8

-1.3
+1.2

+0.8

-0.4
-0.1
-0.7

-0.2
-0.3

-1.3
n.a.

-0.4
-0.3

-0.2
-0.3

-0.4

-0.6
-0.4

-0.5
-0.4

-0.4

-0.1
+0.7
+0.6

+0.6
-1.2

-0.3
n.a.

+0.8
0.0

-0.6
+1.1

+0.3

+2.5
+0.4

-1.8
+0.8

+0.3

62

Table 5: Projections for general government surplus(+)/deficit(-)
(% of GDP)

1999

2000

2001

2002

2003

Stability programmes

B

D

E

F

IRL

I

L

NL

A

P

FIN

EUR-11

DK

EL

S

UK2)

EU-15

SP98

UD99

SP98

UD99

SP98

UD99

SP98
UD991)

SP98

UD99

SP98

UD99

SP98

UD99

SP98
UD991)

SP98

COM

SP98

UD99

SP98

UD99

SP98

UD99

CP98

UD99

CP98

UD99

CP98

UD99

CP98

UD99

SP98

UD99

-1.3

-1.1

-2.0

-1.2

-1.6

-1.3

-2.3

-2.1

1.7

1.4

-2.0

-2.0

1.1

2.3

-1.3

-0.6

-2.0

-2.2

-2.0

-2.0

2.4

3.1

-1.8

-1.4

-1.0

-1.0

-2.0

-1.0

-1.0

-0.8

-2.0

-1.7

1.4

1.2

-1.5

-1.5

1.2

2.5

-0.6

-1.7

-2.6

-1.5

-1.5

2.2

4.7

-1.6

-1.1

-0.7

-0.5

-1.5

-1.5

-0.4

-0.4

-1.6

-1.3

1.6

2.5

-1.0

-1.0

1.3

2.6

-1.3

-1.5

-2.4

-1.2

-1.1

2.1

4.2

-1.1

-1.0

Convergence programmes

2.5

2.9

-2.1

-1.5

0.3

1.7

-0.3

0.3

-1.4

-0.9

2.8

2.1

-1.7

-1.2

1.6

2.1

-0.3

0.2

-1.2

-0.7

2.6

2.2

-0.8

-0.2

2.5

2.0

-0.1

0.2

-0.8

-0.7

-0.3

0.0

-1.0

-1.0

0.1

0.1

-1.2

-0.9

2.6

-0.6

1.7

2.9

-1.1

-1.1

-1.4

-0.8

-0.7

2.3

4.6

-0.8

-0.6

2.3

0.2

2.0

0.2

-0.1

-0.5

-0.4

CP = convergence programme; SP = stability programme; UD = updated stability/convergence
programme; COM = Commission 1999 autumn forecasts.
1) Based on the cautious scenario for growth.
2) On a financial year basis, 1999 = FY 1999/2000.
Source: National stability and convergence programmes and Commission services.

0.2

-0.5

0.2

-0.5

-0.1

3.1

-0.3

4.7

-0.3

2.5

-0.4

-0.1

63

Table 6: Government debt in the updates
of the stability and convergence programmes
(% of GDP)

1999

114.9

61.0

63.5

60.3

52.0

2000

112.4

61.0

62.8

59.4

46.0

2001

108.8

2002

2003

105.0

101.3

60.5

60.6

59.0

40.0

59.5

58.1

58.4

36.0

58.5

55.8

57.7

n.a.

20021)
106.8

59.5

59.3

58.3

43.0 (2001)

114.7

111.7

108.5

104.3

100.0

107.0 (2001)

4.3

64.3

n.a.

n.a.

46.6

72.4

52.8

n.a.

62.3

n.a.

57.1

42.9

71.1

50.1

104.2

103.3

66.1

44.9

67.7

58.8

43.1

65.9

n.a.

61.8

n.a.

55.2

40.7

69.7

47.5

99.5

54.1

41.3

64.2

n.a.

61.0

n.a.

53.3

38.0

67.9

44.6

98.0

52.0

39.9

62.5

n.a.

n.a.

n.a.

51.0

35.2

66.0

41.6

n.a.

n.a.

38.8

60.6

n.a.

64.5

60.0

53.2

43.2

68.3

49.0 (2001)

99.8 (2001)

58.0 (2001)

42.0

63.5

B

D

E

F

IRL

I

L

NL

A

P

FIN

EUR-11

DK

EL

S
UK2)

EU-15

1) 2002 target in last year's SP/CP.
2) Financial years.
Source: Commission services.

64

Table 7: Non-wage labour costs and tax burden on labour

Non-wage labour costs1)
(% of gross wages)

Labour effective tax rate
on total employment2)

1995
26.3

1999
27.0

Change
0.7

1995
42.7

1999
44.1

Change
1.4

4.5

30.5

21.1

21.0

34.8

11.9

25.4

n.a.

28.3

25.7

17.9

25.8

23.8

12.0

26.0

5.6

31.7

22.0

22.0

31.6

11.3

23.5

19.0

27.8

26.3

20.9

23.7

22.0

11.9

24.7

1.1

1.2

0.9

1.0

-3.2

-0.6

-1.9

n.a.

-0.5

0.6

3.0

-2.1

-1.8

-0.1

-1.3

43.7

42.4

26.2

29.6

41.0

24.3

38.3

n.a.

38.8

38.8

25.2

46.2

46.4

24.3

37.7

44.8

43.7

28.0

29.9

40.8

23.3

37.2

n.a.

36.3

41.5

28.5

44.1

47.6

24.5

37.2

1.1

1.3

1.8

0.3

-0.2

-1.0

-1.1

n.a.

-2.5

2.7

3.3

-2.1

1.2

0.2

-0.5

B

DK

D

EL

E

F

IRL

I

L

NL

A

P

FIN

S

UK

EU-15

1) Non-wage labour costs is the ratio of total social contributions to total labour costs.

2) Labour effective tax rate on total employment is the ratio of social security contributions plus personal income

taxes on labour income to gross wages.
Source: Commission services and OECD.

65

Table 8: Wage developments in 1999
(Provisional outturn)

Nominal
compensation
per employee
2.4
1.9
2.4

1.9
7.0

1.8
1.9

3.7
2.8

5.4
2.9

2.2

4.6
4.8
3.5

5.0

2.8

B
D
E

F
IRL

I
L

NL
A

P
FIN

EUR-11

DK
EL
S

UK

EU-15

Real wages1)

Labour
productivity

NULC2)

RULC3)

1.6
0.9
-0.3

1.5
3.3

0.2
0.9

2.0
1.8

2.4
1.9

0.9

1.9
1.4
2.8

2.3

1.3

1.2
1.1
0.4

1.4
4.0

0.4
0.5

1.1
1.1

1.2
0.3

1.0

0.8
2.2
1.5

0.8

1.0

1.1
0.8
2.0

0.5
2.9

1.3
1.4

2.6
1.7

4.1
2.6

1.3

3.7
2.5
2.0

4.1

1.8

0.3
-0.1
-0.6

0.0
-0.7

-0.2
0.3

1.0
0.7

1.2
1.6

0.0

1.1
-0.8
1.3

1.4

0.3

1) Nominal compensation adjusted by the GDP deflator.
2) Nominal unit labour costs.
3) Real unit labour costs.
Source: Commission services.

66

Table 9: Exposure to international competition, 1993-1998

Average of
imports+exports
as a % of GDP

Total
FDI inflows
as a % of GDP

Total cross border
M&As
as a % of GDP

B

BLEU

DK

D

E

EL

F

IRL

I

L

NL

A

P

FIN

S

UK

Large MS average

Small MS average

EU-15 average

Source: Commission services.

n.a.

59.0

26.7

20.8

18.7

16.1

19.4

57.7

18.6

n.a.

46.1

27.9

27.1

28.0

29.3

21.9

20.1

37.6

23.7

n.a.

5.2

1.7

0.6

1.2

n.a.

1.0

n.a.

0.6

n.a.

5.0

n.a.

1.5

2.2

4.2

2.8

1.1

3.4

1.6

2.6

n.a.

0.8

0.6

0.3

0.1

1.1

1.9

0.4

6.8

2.0

0.3

0.3

3.0

2.5

1.4

0.8

1.7

1.0

67

Table 10: Transposition and implementation of Single Market directives

Transposition
deficit
Nov. 1999

Number of reasoned
opinions
Sep. 1998-Aug. 1999

Tenders published in the
OJ as a % of total public
procurement 1998

B

DK

D

E

EL

F

IRL

I

L

NL

A

P

FIN

S

UK

3.5

1.3

2.9

2.2

6.2

5.6

4.4

3.9

5.7

2.8

3.7

4.9

1.7

2.1

2.8

27

2

24

23

26

43

10

33

7

8

6

13

4

3

9

EU-15 1)

12.6

238

27.3

15.1

7.6

13.9

44.7

18.8

18.9

12.3

22.7

10.0

8.4

15.5

11.3

15.3

13.8

13.1

1) For EU-15, percentage rate of Internal Market Directives not yet transposed across the whole of the Union.
Source: Commission services.

68

Table 11: Telecommunications - market structure and price evolution

Long distance calls
(200 km; 10’)

International calls
to US (10’)

Number of
operators
1999
10
11

47
10
1 1)
31

6
12

6
24

20
1 2
19
22
26

n.a.

Total % price
variation
1997-1999
-23
-36
-36

-18
-25

-29
-54

-28
n.a.

-33
-41

-34
3

-39
-10

-27

Number of
operators
1999
9
11

47
10
1 1)
31

8
12

7
24

20
1 2)
14
22
66

n.a.

Total % price
variation
1997-1999
-21
-30
-67

-27
-16

-55
-37

-50
-63

-89
-34

-49
-32

0
0

-38

Digital
mobile
market
Number of
operators
1999
4
3

4
4

3
3

3
4

4
2

2
5

3
4
4

n.a

B

DK

D

E

EL

F

IRL

I

L

NL

A

P

FIN

S

UK
EU-15 1)

1) Greece has been granted a derogation until 2001 for the introduction of competition in the national market.
2)

In Portugal 4 licenses for the public network have been issued to date, but operators were not able to start commercial
activity

until 1 January 2000, owing to Portugal’s derogation for the introduction of competition in the national market.

Source: Commission services.

69

Table 12: R & D expenditures and internet hosts

Gross expenditure on R&D
as a % of GDP
1998 1)

Internet hosts per 1000
inhabitants
July 1999

36.6

73.9

25.6

16.2

8.1

22.8

29.9

12.7

39.0

57.2

35.5

8.1

123.2

96.5

44.1

42.0

B

DK

D

E

EL

F

IRL

I

L

NL

A

P

FIN

S

UK

EU-15

1) 1998 or latest year available.
Source: Commission services and OECD.

1.6

1.9

2.3

0.9

0.5

2.2

1.4

1.0

n.a

2.1

1.6

0.7

2.9

3.9

1.9

1.8

70

Table 13: Benefit duration and job availability requirements

Unemployment
insurance 1997

Unemployment
assistance 1997

Job availability
requirement

months 1)

index 4)

B
DK
D

EL
E
F

IRL
I
L

NL
A
P

months 1)

no limit 2)
60
12 3)
12 2)
24 2)
60 2) 3)

15
12
12

60 2) 3)
12 3)
30 3)
23 3)
10 3)
6

no limit

no limit
6
no limit

no limit

24
no limit
10

FIN
S
UK
1) For a 40 year old single worker with a long employment history.
2) Depends on the length of the employment history.
3) Depends on the age of the worker becoming unemployed.
4) The index is a weighted average of points from 1 to 5 dedicated to 8 categories of job

no limit
5
no limit

3.2
2.8
2.6

..
..
2.8

1.8
..
4

3.7
2.3
2.9

2.8
3.8
2.6

availability criteria. 5 points are given to the maximum strictness.

Sources: OECD (1999) and Ministry of Finance, Denmark (1998).

71