Commission recommendation for the 2000 broad guidelines of the economic policies of the Member States and the Community (drawn up in conformity with Article 99(2) of the Treaty establishing the European Community)
Date: 2000-04-11
Institutions: European Commission
Subjects: economic growth, economic policy, economic union, labour market, sustainable development

COMMISSION OF THE EUROPEAN COMMUNITIES

Brussels, 11.4.2000
COM(2000)214 final

COMMISSION RECOMMENDATION

for the 2000 Broad Guidelines of the Economic Policies
 of the Member States and the Community

drawn up in conformity with Article 99(2) of the Treaty
establishing the European Community

TABLE OF CONTENTS
I. GENERAL ECONOMIC POLICY GUIDELINES ...............................................................................3

1.

2.

Introduction........................................................................................................................................................3

Main priorities and policy requirements.........................................................................................................4

2.1 The state of the EU economy at the start of the new millenium......................................................4

2.2 Key challenges ...........................................................................................................................................5

2.3 Moving forward the strategy: strengthening the EU economy's potential for growth..................7

3.

Policy recommendations...................................................................................................................................9

3.1 Ensure growth and stability-oriented macroeconomic policies ........................................................9

3.2 Maintain sound public finances........................................................................................................... 10

3.3 Improve the quality and sustainability of public finances ............................................................... 11

3.4 Promote appropriate wage developments ......................................................................................... 12

3.5 Foster a knowledge-based society....................................................................................................... 13

3.6 Ensure efficient product (goods and services) markets................................................................... 13

3.7 Promote capital markets through further integration and deepening. .......................................... 14

3.8 Invigorate labour markets .................................................................................................................... 15

3.9 Enhance sustainable development ...................................................................................................... 16

II. COUNTRY-SPECIFIC ECONOMIC POLICY GUIDELINES....................................................... 17

1.

2.

3.

4.

5.

6.

7.

8.

9.

Belgium ............................................................................................................................................................ 17

Denmark  ......................................................................................................................................................... 19

Germany .......................................................................................................................................................... 21

Greece .............................................................................................................................................................. 23

Spain  ................................................................................................................................................................ 25

France  .............................................................................................................................................................. 27

Ireland .............................................................................................................................................................. 29

Italy  .................................................................................................................................................................. 31

Luxembourg  ................................................................................................................................................... 33

10. Netherlands  .................................................................................................................................................... 34

11.

12.

13.

14.

Austria  ............................................................................................................................................................. 36

Portugal  ........................................................................................................................................................... 38

Finland ............................................................................................................................................................. 40

Sweden ............................................................................................................................................................. 42

15. United Kingdom  ............................................................................................................................................ 44

2

matters  in  more  detail.  Furthermore,  the  shift  in
the  focus  of  the  BEPGs  also  reflects  the  clear
emphasis  in  the  Lisbon  conclusions  towards  a
simplification  and  streamlining  of all  the  existing
instruments.  To  enhance  co-ordination,  other
Council formations are called upon to  contribute
to  the  preparation  by  the  ECOFIN  Council  of
the BEPGs.

the  2000  BEPGs, 

The  background  for  the  2000  BEPGs  is  the
economic situation and outlook as outlined in the
Commission  services'  spring  2000  Economic
Forecasts.  Moreover,  the  Commission  has  been
mindful of the need to develop synergies between
the  various  co-ordination  processes,  in  particular
the  Employment  Guidelines  and  the  monitoring
of  structural  reform.  Finally,  in  formulating  its
the
recommendation  for 
Commission  has  drawn  also  on  the  findings  and
conclusions of its Implementation Report  on  the
1999  BEPGs.  The  Report  concluded  that  the
overall  implementation  of  the  1999  BEPGs  is
encouraging.  The 
overall  macro-economic
management  was  appropriate.  Progress  with  the
reform  of  labour  markets  is  mixed:  while  active
labour market policies were implemented in many
Member  States,  benefit  systems  and 
rigid
employment  protection 
legislation  have  been
tackled  in  only  a  few.  With  respect  to  economic
reforms,  progress  has  been  most  visible  in  the
implementation of internal market legislation and
the 
liberalisation  of  telecommunications  and
electricity  markets.  A  certain  improvement,  but
not  enough,  has  been  made  in  disciplining  State
aid  and  the  development  of  risk  capital  markets.
Little  progress  has  been  made  in  a  number  of
other  areas,  including  the  enforcement  of  public
procurement  rules,  and  the  promotion  of  R&D
and innovation.

I. GENERAL ECONOMIC
POLICY GUIDELINES

1.

INTRODUCTION

The  Treaty  requires  Member  States  to  conduct
to
their  economic  policies  with  a  view 
contributing to the achievement of the objectives
of  the  Union  and  in  the  context  of  the  Broad
Economic  Policy  Guidelines  (BEPGs)  (Article
98). It also requires Member States to regard their
economic  policies  as  a  matter  of  common
concern  and  to  co-ordinate  them  within  the
Council  (Article  99).  To  this  end,  since  the  start
of  Stage  2  of  Economic  and  Monetary  Union,1
the  Council,  upon  a  recommendation  of  the
Commission,  has  adopted  each  year  the  BEPGs.
At  the  centre  of  the  economic  policy  co-
ordination  process,  they  provide  the  framework
for  the  definition  of  the  overall  policy  objectives
and  orientations  for  the  Member  States  and  the
Union.  The  BEPGs  acquire  an 
increased
significance  in  view  of  the  Council  Report  on
"Economic  policy  co-ordination"  endorsed  by
the  Helsinki  European  Council  and  the  Lisbon
Special  European  Council  on  "Employment,
economic  reform  and  social  cohesion",  in  which
the European Council decided that it will hold an
annual  Spring  meeting devoted  to  economic  and
social questions.

Building upon and extending the existing strategy,
the  present  BEPGs  are  centred  on,  and  give
operational  content  to,  the  conclusions  of  the
Lisbon Summit. In particular, the present BEPGs
focus on the medium and long-term implications
of  structural  policies  and  on  reforms  aimed  at
promoting 
potential,
employment  and  social  cohesion,  as  well  as  on
a  knowledge-based
the 
towards 
economy.  The  Cardiff 
and  Luxembourg
processes  will  deal  with  their  respective  subjects

economic 

transition 

growth 

1 

In  anticipation  of  the  start  of  Stage  2  of Economic  and
Monetary  Union  on  1  January  1994,  the  first  BEPGs
were adopted in December 1993. Since then, the BEPGs
have been adopted in the summer of each year.

3

2. MAIN 

PRIORITIES  AND

POLICY REQUIREMENTS

2.1 The  state  of  the  EU  economy
the  new

the  start  of 

at 
millennium

The  heritage  of  the  1990s  –    Over  the  last
decade,  the  European  Union  has  significantly
fostered  economic  integration  and  has  created  a
solid  framework  for  the  conduct  of  economic
policies.  The  internal  market  is  largely  complete
and  previously  over-regulated  industries  have
been  liberalised  and  exposed  to  the  forces  of
competition. A stability-oriented monetary policy,
supported  by  sound  budgetary  policies  and
appropriate  wage  developments,  has  been  put  in
place. The euro has been successfully introduced.
A  comprehensive 
the  co-
ordination of economic and employment policies
has been established.

framework 

for 

In  spite  of  these  impressive  achievements,  the
European  Union's  economic  performance  in  the
1990s  was  disappointing,  both  in  comparison
with the past and with the United States.

Real GDP growth in EU-15 and USA

% p.a.

USA

EU-15

6

5

4

3

2

1

0

1960s

1970s

1980s

1990s

Source: Commission services.

Economic  growth  was  relatively  weak,  no  net
gains  in  employment  were  made  and  the  current
unemployment rate is still higher than at the start
of the decade. Living standards in the EU are on
average  about  35  per  cent  lower  than  in  the
United  States  despite  the  near  convergence  of
output  per  hour  worked  to  US  levels  after  four
decades  of  catching  up.  The  large  gap  in  per
capita income can in part be ascribed to low  and
stagnating  participation  and  employment  rates.
Furthermore,  real  investment  in  the  EU  hardly
rose  in  the  1990s  leading  to  a  further  fall  in  the
investment-to-GDP ratio while real investment in
the United States nearly doubled.

the 

paradox 

The 
impressive
between 
improvement  in  the  framework  conditions  and
the lacklustre economic performance is indicative
of the severity of the macroeconomic imbalances
and  structural  rigidities  prevalent  at  the  start  of
the  previous  decade.  In  part,  it  also  reflects  the
late  start  to  economic  reforms  in  many  Member
States and the time it takes before an appropriate
policy  mix  starts  to  bear  fruit.  In  this  context,  it
should  be  noted  that  several  Member  States
experienced 
economic
performance over the last decade. Although most

impressive 

an 

Trends in living standards and labour productivity, EU-15
(PPS; USA = 100)

%

100

95

90

85

80

75

70

65

60

55

50

45

GDP per working hour

GDP per capita

GDP per person employed

1960

1965

1970

1975

1980

1985

1990

1995

2000

Source: Commission services.

4

that 

they 

enjoyed 

subsequently 
reduced 

were  also  affected  by  the  recession  in  the  early
1990s, 
strong
recoveries 
unemployment
significantly,  in  some  cases  to  levels  not  seen
since  the  early  1970s.  Whilst  country-specific
factors  played  a  role,  these  countries  have  in
common that a swift macroeconomic adjustment
in  hand  with  a  comprehensive
went  hand 
structural reform package  and  that  this  mutually-
reinforcing  strategy  was 
implemented  with
resolve.

On the verge of a virtuous circle –  Since early
summer  1999,  when  the  latest  BEPGs  were
adopted,  an  increasingly  robust  and  broadly-
based  economic  recovery  has  taken  hold  in  the
Union. Under the combined impact of supportive
macroeconomic  policies,  a  competitive  euro
exchange  rate  and  buoyant  global  economic
activity,  the  upswing  is  expected  to  gain  further
momentum this year and next. With considerable
slack remaining in product and labour markets in
most  Member  States  and  with  prospects  of  a
healthy  rebound  in  investment,  solid  growth
should be able to take place without encountering
capacity  constraints  and  generating  inflationary
tensions  if,  as  expected,  wage  developments
continue 
in
countries  with  more  mature  recoveries  there  are
some  signs  of  bottlenecks  and  overheating  risks.
Furthermore,  the  marked  depreciation  of  the
euro  combined  with  a  strong  rise  in  oil  prices
point to a heightened risk of imported inflation.

to  be  appropriate.  However, 

Job  creation  has  continued  at  a  strong  pace  as
in  employment,
growth  has  become  richer 
leading 
the
to  a  progressive  decline 
unemployment  rate.  On  the  back  of  auspicious
growth  prospects,  continued  shifts  towards  the
more  labour-intensive  service  sectors  and  efforts
to  enhance  effective  labour  supply,  employment
growth  is  expected  to  continue  at  a  strong  pace,
leading to a further reduction in unemployment.

in 

Contributions to growth in EU-15

%

Real GDP growth

Domestic demand

Net exports

4

3

2

1

0

-1

-2

1993

1994

1995

1996

1997

1998

1999

2000

2001

Source: Commission services.

the 
Provided 

The brightened economic outlook reflects in part
the influence of favourable cyclical factors.  More
importantly,  though,  it  is  the  result  of  skilful
macroeconomic  management, 
increasingly
right  structural  policy
underpinned  by 
policy
environment. 
recommendations  of  the  present  BEPGs  are
implemented with resolve, the EU economy may
enter a virtuous circle of vigorous output growth,
high confidence and strong employment creation.
Under  these  conditions,  an  annual  economic
growth rate of around 3 per cent for the EU as a
whole  should  be  a  realistic  prospect  for  the
coming years.

that 

the 

2.2 Key challenges

On  these  sound  foundations,  European  policy
makers  face  new  challenges  and  opportunities  in
the coming years and beyond. The key challenges
consist  of  the  return  to  full  employment,  the
transition  to  a  knowledge-based  economy,  the
impact  of  a  rapidly  ageing  population  and  the
improvement  of  social  cohesion.  All  Member
States  are  confronted  with  these  challenges,  but
there are marked differences both in the extent to
which  countries  are  exposed  to  them  and  in  the
degree  to  which  they  have  already  prepared
themselves.

5

therefore 

Restoring full employment –  Although edging
down  gradually,  at  around  9  per  cent  of  the
Union 
is  still
labour  force,  unemployment 
unacceptably high - with an important gender gap
remaining in most Member States. Moreover, the
Union's  employment  and  participation  rates  are
low,  in  particular  those  of  women  and  older
workers  in  a  large  number  of  countries.  The
present  degree  of  non-employment  is  the  source
of large economic and social costs. The return to
the  key
full  employment  remains 
objective  of  economic  and  social  policy  and
implies  in  particular  the  creation  of  jobs  in  the
services  sector,  an  increase  in  the  rate  of  female
employment  and  a  greater  participation  of  older
workers.  As  emphasised  by  the  Lisbon  Special
European Council,  the  overall aim  is  to  raise  the
employment rate from an  average  of 61  per  cent
today  to  as  close  as  possible  to  70  per  cent  by
2010  and  to  increase  the  number  of  women  in
employment  from  an  average  of  51  per  cent
today  to  more  than  60  per  cent  by  2010,  for  the
EU as a whole. The realisation of these objectives
over  the  medium  to  long  term  would  not  only
help  to  bring  the  EU  economy  onto  a  durably
higher  growth  path,  it  would  also  considerably
alleviate  Member  States'  public  finances  and
social  security  systems  and  help  fight  effectively
against social exclusion.

in 

for 

Promoting  the  transition  to  a  knowledge-
based economy –  Innovation  and  accumulation
of  knowledge  are  increasingly  becoming  key
productivity,
competitiveness, 
drivers 
economic  growth,  employment  and  standards  of
living.  Yet,  the  Union  lags  behind  the  United
States both in  terms  of  innovation  capacity, with
the  gap  having  increased  since  the  mid-1990s,
and 
the  production  and  diffusion  of
information  and  communication  technologies
there  are  serious  skill
(ICT).  Furthermore, 
shortages,  in  particular  within  the  sciences  and
engineering,  and  there  is  a  lack  of  basic  ICT
literacy for all workers and of expert skills needed
in the Information Society. Meeting this challenge
will therefore require the adaptation of economic
structures,  the  allocation  of  resources  among
sectors,  firms  and  occupations  as  well  as  an  im-
provement in the match between skills and jobs.

Preparing for population ageing –  The EU is
expected  to  witness  a  substantial  increase  in  the
proportion  of  people  in  older,  non-active  age
groups  after  2010  and  a  decrease  in  the  size  of
the  labour  force.  Apart  from  the  potentially
important  effects  on  the 
level  of  aggregate
savings,  a  rising  dependency  ratio  will  have
considerable consequences for the contribution

Employment in EU-15

%

Total employment rate

Female employment rate

75

70

65

60

55

50

45

40

35

30

%

Dependency ratios in EU-15

Total

Old age

80

70

60

50

40

30

20

10

0

1970

1975

1980

1985

1990

1995

1980

1990

2000

2010

2020

2030

2040

2050

Source: Commission services.

Note: Total dependency ratio = the ratio of the number of people in age groups 0-14 and 65+
divided by the population in the working age groups 15-64 year old.
Old age dependency ratio = the ratio of the number of people in age group 65+ divided by the
population in the working age groups 15-64 year old.
Source: Commission services.

6

it 

is  offset  by 

the  budgetary 

of the factor labour to economic  growth  and  for
the  sustainability  of  public  finances.  A  rising
dependency  ratio  will  result  in  lower  economic
sustained
growth  unless 
in  factor  productivity  growth.
improvements 
Regarding 
impact  of  ageing
populations,  unchanged  policies  are  expected  to
lead  to  large  increases  in  expenditures  on  public
pensions  and  health  care  systems.  To  tackle  this
issue,  Member  States  will  need  to  develop
comprehensive  strategies,  including  measures  to
ensure  the  sustainability  of  public  finances,  the
reform  of  pension  and  health  care  systems  and
action 
force
labour 
for  older  workers.
participation,  especially 
Recognising  this  challenge,  the  Lisbon  European
Council  has  called  for  stronger  co-operation
between  Member  States,  notably  on  the  future
evolution of social protection from a longer-term
perspective.

stimulate  higher 

to 

Improving social cohesion  –   Although Union
citizens  enjoy,  on  average,  high  living  standards
and high social protection levels, social  exclusion
still  abounds.  Unemployment  remains  the  prime
cause of social exclusion in  the  EU.  Exclusion  is
especially  due  to  the  high  proportion  of  long-
term  unemployment  and  the  highly  concentrated
nature  of  unemployment  –  in  particular  regions
or communities, and among special social groups
or  categories  of  workers.  Although  social
inclusion  goes  beyond  labour  market  issues,  the
best  safeguard  against  social  exclusion  is  a  job.
Creating  better  framework  conditions  for  high
employment  and  low unemployment  is  therefore
the  strongest  contribution  economic  policies  can
make to social inclusion.

2.3 Moving  forward  the  strategy:

strengthening the EU
economy's potential for growth

The  challenges  of  restoring  full  employment,
creating  a  knowledge-based  economy,  preparing
for  population  ageing  and  safeguarding  social
cohesion  are  inter-linked  and  will  need  to  be
addressed  by  a  coherent  and  comprehensive
economic policy strategy for the  medium-to-long
term.  The  focus  of  this  strategy  should  be  to
enhance  the  capacity  of  the  EU  economy  to
generate  high  rates  of  non-inflationary  growth
over  a  prolonged  period.  Although  important
progress  in  meeting  the  key  challenges  can  be
expected  in  the  context  of  the  current  cyclical
upturn,  it  is  difficult  to  see  how  this  pace  of
progress  can  be  maintained  over  time  without  a
substantial  rise  in  the  potential  output  of  the
Union's  economy.  To  this  end,  the  EU  policy
response should be

●

●

●

to  maintain  growth  and  stability-oriented
macroeconomic policies;

to  promote  the  development  of  knowledge-
based economic activity;

to  press  ahead  with  deep,  comprehensive,
reforms  of  product,  capital  and 
labour
markets; and

:

●

to modernise social protection systems.

Investment performance in EU-15

% of GDP

30

25

20

15

10

5

0
1970

Total investment

Private investment

Public investment

1975

1980

1985

1990

1995

2000

Source: Commission services.

7

(iv) promote appropriate wage developments;

(v)

foster a knowledge-based economy;

(vi) ensure efficient  product  (good  and  services)

markets;

(vii) promote  capital  markets  through  further

integration and deepening;

(viii) invigorate labour markets; and

(ix) enhance sustainable development.

*

*     *

the 

policy 

Member  States  face  broadly  the  same  challenges
and 
general
needs.  Hence 
recommendations set out in Section 3 apply to all
of them. At the same time, there  is an  important
degree  of  diversity  among  Member  States  in
terms of economic performance and prospects as
well  as  structures  and  institutions.  This  means
that  within  the  overall  strategy,  policy  priorities
differ somewhat across Member States. These are
addressed  in  Part  II  which  identifies  country-
specific economic guidelines. It must be noted in
this  context  that  Member  States  are  currently
for
revising 
Employment  to 
the  2000
Employment  Guidelines.  The  country-specific
guidelines,  in  so  far  as  labour  market  issues  are
the  2000
therefore  complement 
concerned, 
Employment  Guidelines  and  underpin 
the
implementation  of  the  revised  National  Action
Plans.

their  National  Action  Plans 
take  account  of 

efficiently 

The  four  responses  are  all  of  great  importance.
They  are  inter-linked,  mutually  support  each
other  and  must  be  carried  out  simultaneously  in
order to be able to meet the EU's key challenges.
Sound  macroeconomic  conditions  provide  the
best  framework  for  reaping,  as  quickly  as
possible,  the  full  benefits  of  moving  towards  a
knowledge-based  economy  and  of  economic
reforms.  Conversely, 
functioning
markets  and  modernised  social  security  systems
will  make  macroeconomic  policies  work  better.
In sum, an effective policy approach needs  to  be
comprehensive,  which  in  turn  is  more  likely  to
inspire  confidence  among  consumers 
and
investors  and  so  produce  benefits  more  rapidly.
The  explicit  link  between  the  need  for  reforms
the  Union's  key
and 
objectives, 
full
employment  and  social  cohesion,  will  enhance
the  citizens'  support  for  the  strategy  and  the
process of change that it will involve.

the  achievement  of 

the  goals  of 

in  particular 

the 

The  main  planks  of  the  strategy  are  sketched
below,  with 
recommendations
specific 
contained  in  Section  3.  This  policy  strategy
should  be  pursued  with  resolve  by  all  policy
in  a  co-ordinated
actors  and 
manner, 
and
a 
comprehensive  mix  of  policies  which  mutually
reinforce  conditions  for  job  creation,  for  the
capacity  to  innovate  and  accumulate  knowledge
and for greater social inclusion:

implemented 
achieve 

balanced 

to 

(i)

and 
ensure 
macroeconomic policies;

growth 

stability-oriented

(ii) maintain sound public finances;

(iii)

improve  the  quality  and  sustainability  of
public finances;

8

3. POLICY RECOMMENDATIONS

3.1 Ensure growth and stability-
oriented macroeconomic
policies

The  macro-economic  policy  mix  plays  a  key  role  in
promoting growth and employment and in preserving price
stability. Over the short term, it should assist the recovery
and  ensure  the  full  realisation  of  the  current  growth
potential.  Over  the  medium-term,  it  should  contribute  to
the establishment of the framework conditions ensuring the
positioning  of  the  economy  on  a  sustained,  higher,  non-
inflationary,  growth  and  employment  path,  inter  alia
through  adequate  levels  of  saving  and  investment.  In  the
euro area, an appropriate policy consists of:

monetary policy aimed at maintaining price
stability in accordance with the Treaty;

sustained  efforts  to  achieve,  as  rapidly  as
possible,  and  maintain,  over  the  medium-
term,  budgetary  positions  close  to  balance
or in surplus (see section 3.2); and

the  social  partners 

a continuation of responsible behaviour on
the  part  of 
that
that  are
supports  wage  developments 
job
consistent  with  price  stability  and 
creation (see section 3.4).

%

Interest rates, euro area

Long-term

Short-term

Main refinancing rate

i.

ii.

iii.

6

5

4

3

2

1

0

The  Member  States  outside  the  euro  area,  which  retain
national  responsibility  for  monetary  and  exchange  rate
policy, 
stability-oriented
also  maintain 
macroeconomic  policies  as  the  basis  for  sustained  growth
and employment creation. They should:

should 

continue  the  rigorous  implementation  of
their convergence programmes;

conduct  monetary  and  budgetary  policies
so  as  to  maintain,  and  where  appropriate
foster,  price  stability  and  the  sustainability
of the  government  financial  position.  This
would  also  help  to  prepare  countries  for
the adoption of the euro; and

in  ERM2 

maintain  sound  monetary  and  budgetary
policies  in  order  to  respect  exchange  rate
commitments,  for  the  two  Member  States
participating 
(Denmark  and
Greece),  or  to  achieve  the  inflation  target,
thus  creating  the  conditions  for  exchange
rate  stability  for  the  two  Member  States
that pursue direct inflation targets (Sweden
and the United Kingdom).

Actual and cyclically-adjusted budget balances,
euro area

% of GDP

Cyclically-adjusted budget balance

Actual deficit

iv.

v.

vi.

1

0.5

0

-0.5

-1

-1.5

-2

-2.5

Jan-99

Jul-99

Jan-00

1998

1999

2000

2001

Source: Commission services.

Source: Commission services.

9

3.2 Maintain sound public

iii.

finances

Sound  budgetary  positions,  in  line  with the  Stability  and
Growth  Pact,  will  create  the  necessary  scope  for  the  full
working  of  the  automatic  stabilisers  without  the  risk  of
breaching  the  budget  deficit  threshold  of  3  per  cent  of
GDP. It will also contribute to keeping interest rates low,
to the crowding-in of investment, to the further reduction in
the government debt to GDP ratio and,  by  increasing  the
credibility  of  the  budgetary  framework  of  EMU,  to  a
strengthening  of  investors'  confidence.  Given  expected
output growth above the potential rate, a pro-cyclical stance
of  budgetary  policy  should  be  avoided.  With  budgetary
in  underlying
prospects 
positions for the euro area and the EU as a whole, there is
a  need  for  further  budgetary  consolidation  efforts.  Since
economic  and  budgetary  situations  differ  across  Member
States,  the  scope,  timing  and  speed  of  further  adjustment
will  need  to  be  tailored  to  national  circumstances.  In
general, however, Member States should:

indicating  no 

improvement 

i.

ii.

in  2000  clearly  below 

take advantage of the better-than-expected
economic  growth  to  achieve  budgetary
positions 
the
objectives  set  in  the  updated  stability  and
is 
convergence  programmes; 
in
year's
with 
conformity 
the
to 
recommendation 
budgetary  adjustment  as  of  the  year  2000
and  should  be  all  the  more  possible  in
most Member States given the better-than-
planned outcomes in 1999;

front-load 

this 

last 

meet  a  budgetary  position  of  close  to
balance or in surplus earlier than envisaged
in  the  updated  stability  and  convergence
programmes  so  that  a  sufficient  margin  to
cope  with  the  impact  of  adverse  cyclical
fluctuations will have been achieved at  the
latest in 2001; and

where 

appropriate, 

fiscal
pursue, 
consolidation  beyond 
the  minimum
requirements  of  the  Stability  and  Growth
Pact  so  as  to  create  additional  room  for
manoeuvre  for  cyclical  stabilisation,  to
cope 
budgetary
developments,  to  put  the  debt  on  a  more
to
rapidly  descending 
prepare 
the  budgetary  challenges
for 
associated with population ageing.

trajectory  and 

unexpected 

with 

General government net lending(+)/borrowing(-)
in the updated stability- and convergence programmes
(% of GDP)

Date1)

19992)

2000

2001

2002

2003

Stability programmes

B

D

E

F4)

IRL

I

L

NL5)

A

P

12/99

12/993)

01/00

01/00

12/99

01/00

02/00

11/99

03/00

02/00

FIN

09/99

EUR-11

-0.9

-1.1

-1.1

-1.8

2.0

-1.9

2.4

0.5

-2.0

-2.0

2.3

-1.2

-1.0

-1.0

-0.8

-1.7

1.2

-1.5

2.5

-0.6

-1.7

-1.5

4.7

-1.1

-0.5

-1.5

-0.4

-1.2

2.5

-1.0

2.6

-1.3

-1.5

-1.1

4.2

-1.0

0.0

-1.0

0.1

-0.7

2.6

-0.6

2.9

-1.1

-1.4

-0.7

4.6

-0.6

Convergence programmes

12/99

12/99

11/99

12/99

DK

EL

S

UK6)

EU-15

3.0

-1.6

1.9

1.2

-0.6

2.1

-1.2

2.1

0.2

-0.7

2.2

-0.2

2.0

0.2

-0.6

2.3

0.2

2.0

-0.1

-0.3

0.2

-0.5

0.2

-0.3

n.a.

-0.1

3.1

n.a.

-1.3

-0.3

4.7

-0.2

2.5

n.a.

n.a.

-0.4

-0.2

 1) Date of adoption.
2) Outturn.
3) Addendum to the updated stability programme of February 2000.
4) Favourable scenario; cautious scenario projections: -1.3, -0.9 and

-0.5 % of GDP, respectively, in the years 2001 to 2003.

5) Cautious scenario; the programme contains also a middle and a
favourable scenario. The projections for the latter are -½ and 0 %
of GDP, espectively, in the years 2001 and 2002.

6) 1999 outturn for calendar year. Programme data for financial years.
Source: Commission services.

10

3.3 Improve the quality and

sustainability of public finances

the 

fiscal 

enhancing 

growth  and 

The  current  favourable  economic  prospects  provide  the
opportunity  to  introduce  comprehensive  reforms  involving
expenditure  restructuring  and  reductions  in  the  tax
burden,  while 
consolidation.  The
composition  and  quality  of  budgetary  consolidation  is
instrumental in enhancing employment and guaranteeing a
smooth functioning of EMU. Public expenditures need to
be  restructured in  order  to  support  investment  in  tangible
and intangible capital and to enhance the growth potential
of the economy; tax reforms aimed at lowering tax burdens
and removing tax distortions will play an essential role in
increasing 
employment  potential.
Furthermore, tax systems have to cope with the challenges
brought  about  by  economic  integration  and  technical
change.  Welfare 
economic
transformation and need to be adapted to ensure that work
pays,  disincentives  to  work  are  removed  and  quality
services  are  provided in  an  efficient manner. At  the  same
time,  the modernisation  of  the  welfare  state  should  ensure
that  the  emergence  of  the  “new  economy”  does  not
compound  the  existing  social  problems  of  unemployment,
social exclusion and poverty. There is a need to ensure the
sustainability  of  public  finances  in  the  medium  and  long
term while taking account of demographic and  other  long-
run structural developments. Member States should:

systems  must  underpin 

improve  budgetary  positions 
through
expenditure  restraint  rather  than  through
tax increases;

the 
of 

achievement 

introduce or enhance the  mechanisms  and
institutions  that  help  control  spending  so
cut  without
that 
could  be 
taxes 
jeopardising 
or
maintenance 
budgetary
positions;  in  this  context,  set  rigorous
medium-term norms for  annual  growth  of
primary  expenditure,  so  that  expenditure
growth 
is  well  below
terms 
medium-term real output growth;

in  real 

healthy 

i.

ii.

iii.

General government expenditures and receipts, EU-15

% of GDP

54

52

50

48

46

44

42

40

General government
expenditure

General government receipts

Tax burden

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Source: Commission services.

iv.

v.

vi.

vii.

benefit 

systems 

review 
favour
employment,  review  pension  and  health
care systems to increase efficiency and take
account of the ageing of the population;

to 

reduce the overall tax burden, especially on
low-wage  labour,  within  continued  fiscal
consolidation;

improve the efficiency and transparency of
tax  systems,  especially  through  widening
the  tax  base,  reducing  tax  rates  and
ensuring 
enforcement
procedures;

appropriate 

engage  in  reforms  of  the  VAT  system
simplification  and
aiming  at  greater 
modernisation  of  existing  rules,  more
uniform  application  of  existing  provisions
and  the  re-enforcing  of  administrative  co-
ongoing
operation; 
discussions  on  taxation  of  e-commerce,
which  is  instrumental  to  guaranteeing  a
smooth functioning of the internal market;
and

conclude 

the 

investment 

restructure government spending in favour
of 
in  physical  and  human
capital,  R&D,  innovation  and  information
technologies  and  in  favour  of  expenditure
on  active 
in
accordance  with 
the  Employment
Guidelines;

labour  market  policies 

viii.

pursue  tax-co-ordination  further  so  as  to
avoid  harmful  tax  competition;  reach  an
agreement  on  the  tax  package  in  line  with
the  conclusions  of  the  European  Council
held in Helsinki in December 1999.

11

i.

ii.

increases
insist  upon  nominal  wage 
consistent  with  price  stability.  In  the  euro
area,  that  means  insisting  upon  aggregate
increases  consistent  with  price
wage 
increases within the price stability objective
of  the  ECB;  although  there  may  be
differences  among  Member  States,  it  is
essential  that  wage  developments  at  the
national  level  should  be  appropriate  to
national economic conditions;

encourage real wages to increase in relation
to labour productivity growth  while  taking
into account the need to strengthen, where
necessary,  and  subsequently  maintain,  the
profitability  of  capacity-enhancing  and
employment-creating 
investment.  This
implies  that  in  countries  where  overall
is  slowing
labour  productivity  growth 
down,  the  scope  for  real  wage  increases
will  be  reduced.  More  specifically,  a
reduction in working  time  should  not  lead
to an increase in real unit labour costs. For
improved  profitability  to  result  in  higher
investment  in  the  Union,  it  is  essential  to
investment-supportive
forge 
environment 
terms  of  demand
developments,  labour  market  conditions,
taxation and the regulatory framework;

an 

in 

iii.

ensure  that  collective  bargaining  systems
take  account  of  productivity  differences
(whether according to skill, qualification or
geographical area) when  determining  wage
levels; and

iv.

pursue policy aiming to reduce gender  pay
differences due to de facto discrimination.

Just  like  the  Member  States,  the  Community
should  apply  strict  budgetary  discipline.  This
must  be  applied  to  all  categories  of  the  financial
inter-
perspectives,  while 
institutional  agreement  on  budget  discipline  and
the  improvement  of  the  budget  procedure;  a
flexible  allocation  of  Community 
resources
should  be  exploited  in  order  to  enhance  the
economic impact of the EU budget.

respecting 

the 

3.4 Promote appropriate wage

developments

Wage  cost  developments  in  Member  States  should  be
allowed  to  reflect  different  economic  and  employment
situations.    Governments  can  create  the  right  framework
conditions  which  facilitate  the  negotiations  of  the  social
partners.    For  wage  developments  to  contribute  to  an
employment-friendly policy mix, the social partners  should
continue to pursue a responsible course  and  conclude  wage
agreements  in  Member  States  in  line  with  the  general
principles  set  out 
the  Broad  Economic  Policy
Guidelines. It is necessary to:

in 

%

7

6

5
4

3

2
1

0

Wage developments, euro area

%

Nominal compensation per
employee

Nominal unit
labour costs

Real compensation
per employee, GDP
deflator

4
3
2

1
0
-1

Labour productivity

1990

1992

1994

1996

1998

2000

Source: Commission services.

12

3.5 Foster a knowledge-based

society

The  European  Union  needs  to  improve  its  innovative
capacity  as an  essential  element  in  its  strategy  to  increase
growth and employment. But the impact of innovation and
technology diffusion will be modest unless they are part of a
broader reform process in the area of  product,  capital  and
labour  markets.  Competition  and  well-functioning
financial  markets  are  essential  conditions  for  increased
innovation  and  better  diffusion  of  technology.  Member
States should:

i.

ii.

iii.

iv.

v.

provide adequate incentives to increase the
involvement  of  the  private  sector  in  the
financing  of  R&D 
in
particular  by  using  tax  policies  and  by
improving  the  functioning  of  risk  capital
markets;

expenditures, 

raise  the  level  of  competition  in  product
to
and  capital  markets  with  a  view 
strengthening 
to
firms 
incentives 
innovate  and  to  promote  the  diffusion  of
technology and information;

for 

ensure  adequate  public  support  for  the
funding  of  basic  research,  the  creation  of
centres  of  excellence  and  the  provision  of
incentives  for  the  establishment  of  better
links  between 
institutes  and
research 
business;

available 

make 
Internet access;

low-cost,  high-speed

take measures to reduce the fragmentation
and  compartmentalisation  of  the  R&D
effort  and  to  intensify  co-operation  at  the
EU level so as to establish a European area
of  research  and  innovation;  improve  the
networking  of  research  centres  by  2001
and  take  steps  to  remove  obstacles  to  the
mobility of researchers by 2002; ensure, on
the  basis  of  a  Commission  proposal,  the
establishment  of  an  EU  patent  system  by
the end of 2001; and

13

23

33

50

55

74

50

65

65

60

54
0
60

65

61

75

R & D expenditures
(1998)

Private share of
R & D

% of GDP

EL

P

E

I

IRL

A

B

UK

DK

NL

F

D

FIN

0

1

2

3

S

4

5

Note: The data refer to the share of R & D performed by the private sector.
Source: Commission services and OECD.

vi.

strengthen  education  and  training  efforts,
both  private  and  public,  in  order  to  raise
the  adaptability  of  the  labour force  and  to
avoid  the  emergence  of  unemployment
and social exclusion due to a lack of skills;
promote  lifelong  learning  of  Information
Society skills; halve by 2010 the number of
18-24  year  olds  with  only  lower-secondary
education; 
the  number  of
researchers  and  engineers;  guarantee  the
internet  and  multimedia
availability  of 
resources to all schools by the end of 2001
and  the  required  teacher  skills  by  the  end
of  2002;  use  information  technology  on  a
wider scale in schools.

increase 

3.6 Ensure efficient product

(goods and services) markets

to 

countries 

full  advantage  of 

Well-functioning  product  markets  are  essential  to  enable
the
take 
the  EU 
opportunities  provided  by  the  introduction  of  the  euro,
globalisation  and  the  new  technologies  and  play  an
important  role  in  tackling  employment  challenges.  In  this
area,  significant  progress  has  already  been  achieved,  in
particular as a result of structural reforms implemented in
Member  States  and  the  impulse  given  by  the  Cardiff
process. In services, progress has been slowest, however. By

i.

ii.

iii.

iv.

v.

vi.

vii.

the end of 2000,  a  strategy  for the  removal  of barriers  to
trade in services is needed. Member States should:

viii.

implement  the  internal  market  legislation
fully and effectively, especially  in  the  areas
of  public  procurement  and 
technical
standards;

ensure  the  independence  of  competition
authorities; 
competition
empower 
authorities  to  enforce  Articles  81  (cartels)
and  82  (abuse  of  dominant  positions)  of
the EU Treaty;

ix.

to 

improve 

the
develop  measures 
efficiency  of  public  administration  by
promoting  the  use  of  new  management
(e-commerce,
and 
Internet,  public  procurement  on 
line)
techniques  and  by  stimulating  transparent
Public-Private Partnerships; and

communication 

monitor  the  effective  implementation  of
the  many  regulatory  reforms  in  order  to
obtain  concrete 
terms  of
economic efficiency.

results 

in 

reduce  State  aid,  in  particular  ad  hoc  aid,
and  redirect  it  towards  horizontal  goals;
improve  the  monitoring  of  State  aid  and
the assessment of its efficiency;

3.7 Promote capital markets

through further integration
and deepening

improve 

integrated 

financial  markets 

the
Efficient, 
allocation of capital and reduce its cost. They facilitate the
process  of  structural  reform  and  play  an  essential  role  in
supporting  an  entrepreneurial  culture.  Sound  financial
systems  also  contribute  to  macro-economic  stability.  Since
the  introduction  of  the  euro,  encouraging  progress  in  the
integration  of  financial  markets  has  been  made,  not  the
least by the on-going implementation of the action plans for
Financial Services and Risk Capital. This work is a key
political  priority;  the  Lisbon  Special  European  Council
has asked full implementation of the action plans by 2005
and 2003 respectively. It is necessary to:

i.

ii.

facilitate  the  widest  possible  access  to
investment  capital  on  an  EU-wide  basis,
including for SMEs, by means of a “single
passport for issuers”;

facilitate participation of all investors in an
integrated market by eliminating barriers to
investments  in  pension  funds,  by  ensuring
adequate  investor  protection,  by  clarifying
the  distinction  between  sophisticated  and
retail  investors,  by  reviewing  conduct  of
business  rules  and  by 
the
framework  for  the  investment  activities  of
institutional investors;

improving 

of 

the 

liberalisation 

complete 
the
telecommunications  market  by  the  end  of
2001  and,  in  particular,  introduce  greater
local  access  networks
competition 
before the end of 2000;

in 

speed  up  the  liberalisation  of  the  energy
(electricity  and  gas),  postal  services  and
transport  sectors;  as  a  minimum,  fully
implement the  Community  Directives  that
open  markets  for  public  utilities;  make
certain  that  the  benefits  of  lower  prices
and  high  quality  of  services  are  also
transmitted  without  delay  to  consumers
and industrial users via adequate regulation
and  taking  account  of  public  service
obligations;

reinforce  competition  in  services  sectors,
especially  in  the  financial  services,  the
distribution  sector  and  business  services,
enable
and  undertake  measures 
electronic  commerce  to  fully  develop  its
potential;

to 

reduce  regulatory  burdens  on  business,
especially  on  SMEs, and  set  out  a  strategy
for  further  co-ordinated  action  to  simplify
the regulatory environment by 2001;

14

iii.

iv.

v.

vi.

transparency 

promote further integration of government
bond markets through greater consultation
and 
issuing
techniques and instruments, and improved
functioning  of  cross-border  sale  and
repurchase (“repo”) markets;

debt 

on 

improve  the  efficiency  and  integration  of
securities  clearing  and  settlement  systems,
with  the  aim  of  facilitating  and  promoting
sound cross-border activities;

enhance  the  comparability  of  financial
statements  of  companies  which  need
access  to  an  integrated  financial  market
and  allow  the  EU  to  respond  quickly  to
developments 
the
underway 
international accounting field;

in 

speed  up  fiscal  actions  to  promote  the
development of new firms and investment
in  venture  capital,  changes  in  bankruptcy
legislation  to  give  entrepreneurs  a  second
chance,  and  actions  to  promote  employee
ownership schemes;

vii.

intensive 

ensure  more 
co-operation
between  EU  financial  market  regulators
and supervisors; and

viii. make  rapid  progress  on  the  long-standing
proposals  on  takeover  bids  and  on  the
restructuring  and  winding-up  of  credit
institutions and insurance companies.

The  Union  should  contribute  to  international
financial and monetary stability by engaging in an
effective  dialogue  with  its  main  trading  partners.
It should also help ensuring an architecture of the
international  financial  and  monetary  system
adapted to the globalisation of financial markets.

Venture capital investment, EU vs. USA
( in euro million)

USA

EU-15

14000

12000

10000

8000

6000

4000

2000

0

1995

1996

1997

1998

Source: EVCA, Venture One.

3.8 Invigorate labour markets

Labour  market  performance  is  improving  but  differs
widely  among  the  Member  States,  partly  owing  to  the
uneven  progress  made  in  implementing  structural  reforms
and  active  measures  designed  to  improve  employability.
The countries that have made most progress are reaping the
rewards  in  the  form  of  higher  employment  and  reduced
structural unemployment.  However,  considerable  problems
remain:  unemployment  is  still  unacceptably  high  and
concentrated  among  certain  groups  and  regions;  and  the
long-term  unemployed  form  a  high  proportion.  The  low
employment  rate,  particularly  among  women  and  older
working-age  people,  is  constricting  the  EU’s  growth
potential.  Furthermore,  the  demographic  evolution  in  the
EU  will  see  stagnation  in the  growth  of  the  working  age
population.  To  tackle  these  problems  and  fully  grasp  the
benefits  of  the  knowledge  based  economy,  the  integrated
four-pillar strategy set  out in  the Employment  Guidelines
should  be implemented  and  in  a  prompt  and  transparent
manner.  The  emphasis  on  investing  in  people  is  a  key
reinforcement  of  the  European  social  model.  Member
States should:

and 

implement 

promote  the  transition  from  passive  to
active  measures 
a
comprehensive  preventive  strategy  against
long-term  and  youth  unemployment,  in
line  with  the  Employment  Guidelines;  in
particular, 
the  employability  of
individuals  through  a  lowering  of  taxes,
especially  on  low-paid  workers;  facilitate

raise 

i.

15

lifelong 

and 
the  unemployed 

access to labour market training, education
aim 
and 
at
learning, 
reintegrating 
through
well-focussed  active  programmes;  involve
the  public
the  social  partners  with 
authorities 
improve
to 
the  efforts 
in 
education,  training  and  opportunities  for
lifelong learning;

ii.

iii.

reform  tax  and  benefit  systems  to  ensure
appropriate  incentives  and  rewards  for
participation  in  an  active  working  life;
assess  in  particular  duration  and  eligibility
the
criteria 
in  benefit  systems;  avoid 
to
transfer  of  unemployed  people 
expensive, passive systems;

labour  mobility, 

enhance 
inter  alia  by
the  portability  of  pension
improving 
entitlements  in  order  to  sustain  labour
mobility  across  sectors  and  regions  in  the
EU;

Labour effective tax rate on total employment
(1999)
IRL

1)

UK

EL

P

E

NL

I

F

A

D

FIN

B

DK

S

50

0

10

20

30

40

Note:
Labour effective tax rate on total employment is the ratio of social security contributions plus
personal income taxes on labour income to gross wages. Whilst conceptually broadly similar to
the implicit tax rates published by Eurostat, there are some methodological differences.
Largely based on macroeconmic 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.
Source: Commission services.

iv.

v.

in  co-
modernise  work  organisation 
operation  with 
social  partners,
the 
including  flexible  and  annualised  working
hours,  measures  to  facilitate  part-time
work  and  a  review  of  tight  job  protection
legislation  and  high  severance  payments;
accompany  any 
in  overall
working  time,  whether  by  legislation  or
social agreements, by efforts to prevent an
increase  in  unit  labour  costs  and  take
future  labour  supply  needs  into  account;
and

reductions 

strengthen  efforts  on  equal  opportunities
policy  for  women  and  men,  inter  alia,  by
improving  incentives  in  tax  and  benefits
systems  and  by  promoting  policies  to
reconcile work and family life.

3.9 Enhance sustainable

development

The  promotion  of  environmentally-friendly  technologies,
products  and  behaviour  could  contribute  to  a  more
sustainable  development.  A  sound  environmental  policy
that  tries  to  exploit  the  efficiency  gains  embodied  in
market-based  instruments  would  also  bring  benefits  in
terms  of  more  efficient  economic  structures,  by  this
contributing  to  higher  growth  and  employment.  Member
States should:

like 

taxation,  user 

introduce  or  strengthen  market-based
policies 
charges,
insurance/liability  schemes  and  tradable
permits,  which  put  a  price  on  scarce
resources;  help 
the  EU
objectives  under  the  Kyoto  protocol;  and
contribute  to  break  the 
link  between
environmental  pressure  and  economic
growth; and

achieving 

reassess  existing  or  new  policies  which
impact,
have  a  negative  environmental 
such  as  harmful  sectoral  subsidies  and  tax
exemptions.

i.

ii.

16

iii.

iv.

maintain  the  primary  surplus  at  levels
somewhat  above  6    per  cent  of  GDP  in
order  to  ensure  a  continuous  reduction  in
the  general  government  deficit  and  to
allow  a  fast  reduction  in  government  debt
ratio; and

allocate  the  proceeds  of  privatisations  or
other sales of assets owned by the State to
the reduction of government debt.

Product markets

in 

Belgium is very well integrated into the European
economy. The openness  of  the  Belgian  economy
creates  competition,  especially 
in  the  goods
markets.  However,  problems  persist  in  selected
services  sectors.  While  significant  progress  has
been  made 
internal  market
transposing 
legislation, implementation should be speeded up.
The  Belgian  government  has  expressed 
its
commitment to reduce the administrative burden
for  enterprises  by  25    per  cent  by  the  end  of  its
term.  Despite  recent  efforts,  the  ratio  of  R&D
spending to GDP is below EU average, as is ICT
penetration.  In  view  of  the  above,  Belgium
should give high priority to the following:

i.

ii.

iii.

lack  of
the  problem  of  a 
address 
competition  in  services,  which  contributes
to  high  prices  and  poor  productivity
performances  in  sectors  such  as  energy,
telecommunications,  rail 
transport  and
business services;

speed up the liberalisation of the electricity
and gas sectors and strengthen the  powers
of  the  regulatory  authorities  responsible
for energy and telecommunications;

implement  without  delay  and  monitor
closely  the  various  measures  envisaged  to
the  administrative  burden  for
reduce 
businesses; and

II. COUNTRY-SPECIFIC
ECONOMIC POLICY
GUIDELINES

1. BELGIUM

domestic 

in  1999,  acceleration 

in
After  a  slowdown 
economic  activity  is  expected  in 2000,  supported
by 
private
demand, 
consumption  and  investment,  and  a  continuing
positive 
exports.
Employment  creation  is  expected  to  continue  in
2000  and  to  strengthen  further  in  2001  as  the
reduction in labour taxes takes effect.

contribution 

notably 

from 

net 

Budgetary policy

Belgium  has  made  further  progress  towards
budgetary  adjustment  in  1999,  as  the  general
government  budget  deficit fell  to  0.9  per  cent  of
GDP, which is below the target set in the stability
programme,  and  government  debt  to  114.4  per
cent  of  GDP.  According  to  the  updated  stability
programme  2000-2003,  Belgium  will  continue  its
fiscal  consolidation  effort  based  on  high  primary
surpluses,  aiming  at  a  situation  of  budgetary
balance in 2002 and a debt ratio close to 100 per
cent  of  GDP  in  2003.  In  view  of  the  above,
budgetary policy should aim to:

i.

ii.

achieve  better  budgetary  results  in  2000
than the 1  per cent  of  GDP  deficit  target
set  in  the  budget  and  in  the  updated
stability  programme,  in  the  light  of  the
better budgetary results in 1999 and higher
GDP  growth  prospects  for  2000  than
projected in the budget;

contain  the  real  annual  growth  rate  of
primary  expenditure  within  the  1.5    per
cent  limit  set  in  the  updated  stability
programme,  thus  allowing  a  reduction  in
the  tax  burden,  notably  on  labour,  while
preserving  the  achievement  of  a  lower
government deficit target;

17

iv.

of 

the 

transparency 

the
increase 
the  public  and
relationships  between 
private  sectors,  particularly  within 
the
Public-Private  Partnerships  in  order  to
avoid distortions of competition.

Capital markets

investments.  Although 

reforms  have  been  undertaken 

Several 
to
improve  market  efficiency  in  an  increasingly
competitive  environment.  Venture  capital 
is
largely  dominated  by  the  public  sector  and
characterised  by  a  high  percentage  of  early-stage
the
and  high-tech 
concentration of efforts on early-stage operations
is  in  general  positive,  the  absence  of  private
in
venture  capital,  and  of  bridging  finance 
particular,  may  in  the  longer  run  restrict  the
growth  of  the  venture  capital  market.  In view  of
the  above,  Belgium  should  give  high  priority  to
the following:

i.

make  further  efforts  to  encourage  private,
as  opposed  to  public,  venture  capital
through  an  improvement  of  the  fiscal
environment; 
in
particular,  to  reducing  corporate  tax  rates
and making capital losses deductible.

  give  consideration, 

Labour markets

Belgian labour markets have performed relatively
well  in  terms  of  employment  growth.  Starting
from  a  low  overall  employment  rate,  especially
for women and older workers, labour supply rose
steadily.  The  increase  in  employment  therefore
did not translate into much lower unemployment.
The  unemployment  rate  continues  to  be  one  of
the  highest  among  the  smaller  Member  States,
and  regional  differences  are  pronounced.  Shared
federal  government,
responsibilities  between 
regions  and 
require
substantial  co-ordination.  In  view  of  the  above,
the
Belgium  should  give  high  priority 
following:

language  communities 

to 

i.

ii.

reinforce  measures  to  promote 
labour
mobility  between  and  within  regions  and
encourage  social  partners  to  further  allow
wage  negotiations  to  better  reflect  local
the
labour  market  conditions  and/or 
financial situation of  the  enterprises,  given
the  pronounced  regional  differences  in
unemployment.  Social partners and public
authorities  should  also,  in  their  respective
areas  of  responsibility,  pay  more  attention
improving
to  upgrading 
and 
skills 
labour
educational  attainments  of 
force; and

the 

reinforce  active  labour  market  policies  in
order  to  create  incentives  to  participate  in
active  measures  and  to  take  up  new  job
offers;  the  active  policy  measures  should
be  combined  with  a  review  of  potential
disincentive  effects  of  tax  and  benefit
systems,  including  benefit  duration,  on
employment of older workers and women.

18

2. DENMARK

Product markets

Economic  growth  should  recover  in  2000  since
in  particular  private
domestic  demand,  and 
consumption,  should  regain  strength  in  parallel
with  the  brighter  outlook  for  export  markets.
Unemployment,  which  at  4.5  per  cent  of  the
labour force at the end of 1999 reached its lowest
level since the 1970s, is likely to edge up over the
year.

Budgetary policy

in  Denmark 

improved
Government  finances 
strongly  in  1999,  with  the  general  government
surplus  reaching  3  per  cent  of  GDP,  half  a
percentage  point  higher  than  expected  at  the
adoption of the budget bill. For 2000, the general
government surplus is expected to amount to 2.2
per  cent  of  GDP  and,  according  to  the  updated
increase
Danish  convergence  programme,  to 
thereafter  gradually  to  some  3  per  cent  of  GDP
by  2005.  Expenditure  overruns  have  regularly
occurred  at  the  level  of  local  governments.  In
view  of  the  above,  budgetary  policy  should  aim
to:

i.

ii.

adhere to  the  government’s  aim  to  restrict
real growth in government consumption to
1.2 per  cent  in  the  budget  for  2000;  for
this,  exercise vigilance at  the  level  of  local
stronger
governments; 
institutional  arrangements,  respecting  the
autonomy of local governments, if there is
a risk that this target will not be met; and

consider 

in 

pursue  the  decline  of  both  the  tax  and
expenditure  ratios  as  foreseen 
the
updated  convergence  programme,  given
the  healthy 
situation  of  government
finances,  as  this  would  increase  economic
to  a  more
incentives  and  contribute 
for
favourable  medium-term  outlook 
growth and employment.

if 

the  problem  of 

levels  and  productivity 

Denmark  is  among  those  countries  that  have
gone  the  furthest  in  product  market  reform,  in
particular  in  the  area  of  the  network  industries.
However,  there  is  scope  for  improvements  in
price 
in  the  Danish
inadequate
economy 
competition  in  certain  sectors,  such  as  food  and
beverages, 
retail
building  materials, 
distribution,  is  resolved.  The  Danish  commercial
R&D  track  record  compares  unfavourably  with
that of the other Nordic countries. In view of the
above,  Denmark  should  give  high  priority  to  the
following:

and 

i.

ii.

iii.

to 

action 

take  policy 

continue 
to
strengthen  competition  policy  and  make
sure  that  it  is  enforced  in  full;  give  the
Competition  Council  powers  to  enforce
EC Articles 81 and 82;

to 

improve 

the  effort 

continue 
the
efficiency of the public sector, e.g. by using
public  tendering  more  systematically,  in
the light of the observation that the size of
the public sector in Denmark continues to
be among the largest in the Union; and

increase  the  effort  to  raise  technology
transfers 
to
business and to induce entrepreneurship in
high-tech sectors.

institutes 

research 

from 

Capital markets

Major  reforms  have  been  taken  to  increase
market  efficiency  and  to  develop  risk  capital.
However,  the  equity  market  remains  relatively
small, especially compared to the bond market. A
market for high-growth companies was created in
1998,  but  relatively  few  companies  are  listed.
Despite  the  reforms  undertaken,  the  venture
capital  market  also  remains  small.  In  view  of  the
above,  Denmark  should  give  high  priority  to  the
following:

19

implemented  since  the  mid-1990s.  However,
given  a  high  employment  rate  and  a 
low
unemployment  rate,  it  might  prove  very  difficult
to  ensure  an  adequate  labour  force  in  the  longer
term.  Demographic  developments  will  not  help
in  the  coming  years,  nor  will  the  announced
introduction of a sixth holiday week. Despite the
recent changes in tax rules, the taxation of labour
remains  high  and  benefit  schemes  are  large  and
generous. In view of the above, Denmark should
give high priority to the following:

i.

pursue reforms so as to reduce  the  overall
fiscal  pressure  on  labour,  in  particular  the
marginal  tax  rate  on  low  incomes,  and  to
increase incentives to take up or remain in
jobs;  monitor  closely  the  reform  of  early
retirement  and  leave  schemes  in  the  light
of the need to increase labour supply.

i.

ii.

increase  the  sources  of  funds  for  venture
capital investments by further reducing the
quantitative  constraints  on  pension  funds
investment; and

give particular attention to the examples of
good  practice  put  forward  in  the  October
1999  Risk  Capital  Communication  in  the
areas  of  taxation  of  investment  in  venture
legislation  on  bankruptcy,  and
capital, 
employee
promotion 
innovative 
stock-
ownership 
options.

of 
schemes, 

including 

Labour markets

labour  market  situation  has 

The 
improved
substantially in Denmark in recent years, partly as
a result of the comprehensive structural reforms

20

3. GERMANY

in  the
Economic  activity  clearly  accelerated 
the  external
second  half  of  1999,  with 
contribution  turning  positive  again  for  the  first
time  since  mid  1998.  With 
the  external
environment  expected  to  retain  its  vigour  and
domestic  demand  supported  by  the  expected
decline in unemployment, the current year should
see clearly higher GDP growth than in 1999.

Budgetary policy

The  consolidation  of  government  finances  in
Germany  continued  in  1999,  with  the  general
government  deficit  declining  to  1.1  per  cent  of
GDP compared to a target in the original stability
programme  of  2  per  cent.  According  to  the
updated stability programme of 1 February 2000,
the deficit is expected to decrease to 1 per cent of
GDP  in  2000.  This  modest  decline  in  the  deficit
ratio - despite an ambitious savings package at the
federal  level  -  is  due,  inter  alia,  to  a  deterioration
of  finances at  the  regional  level  and in  the  social
security  sector.  In  2001,  the  planned  reforms  of
income  and  corporate  taxes  will 
lead  to  a
deterioration of the general government deficit to
an estimated 1½ per cent of GDP. In view of the
above, budgetary policy should aim to:

i.

ii.

iii.

achieve  a  deficit  outcome  below 
the
targeted level of 1 per cent of GDP, in the
event  of  higher  economic  growth  in  2000
than expected in the budget;

implement  the  reforms  of  income  and
corporate  taxation  in  2001  with  greatest
caution  in  order  to  minimise  the  risk  of  a
the  structural
lasting  deterioration  of 
deficit;

elaborate  structural  reforms  of  the  social
security  system  (especially  pension  and
health)  as  they  are  key  to  sustainable
finances in the medium term; and

iv.

make  sure  that  the  debt  ratio  is  put  on  a
downward  trend  by  fully  respecting  the
envisaged  deficit 
targets  and  pursuing
available  privatisation  opportunities  at  all
levels of government.

Product markets

Germany  is  well  integrated  in  the  European
product  markets.  However,  in  spite  of  recent
individual high-profile cases, German  companies'
international involvement is below what would be
expected  for  a  country  of  its  size  but  with  the
recent  tax  reform  it  may  increase.  German  price
the  EU  average.
levels  remain  also  above 
However,  several  reforms  have  recently  proved
successful 
the  functioning  of
German product markets, in particular in the area
of  competition  policy  and  the  liberalisation  of
the  above,
network 
Germany  should  give  high  priority 
the
to 
following:

industries.  In  view  of 

improving 

in 

i.

ii.

iii.

iv.

ensure  an  increased  opening-up  of  public
procurement;

continue  to  reduce  State  aid,  including  ad
hoc aid and sector-specific aid;

introduce  competition  enhancing  rules  for
to
electricity 
capture 
the
liberalisation of the electricity sector; and

transmission  fees  so  as 
the 

benefits 

full 

of 

efforts 

further 

undertake 
reduce
restrictions  and  administrative  burdens  on
SMEs,  in  particular  for  business  services
and craft firms.

to 

Capital markets

The  German  financial  market  has  developed
dynamically  over  the  last  five  years,  especially  in
1999.  Particularly  successful  has  been 
the
development  of  the  Neuer  Markt,  the  stock
market for high-growth, high-tech companies. As
a  result  of  strong  public  support,  as  well  as  of

21

- 

critically  reassess  its  policy  towards  the
eastern  part  of  the  country,  where  labour
market  problems  are  still  -  10  years  after
severe.  This
especially 
unification 
assessment  should  cover, in  particular,  the
efficiency of transfers, and also how social
partners  could  encourage  job  creation  by
means  of 
labour  market
increased 
flexibility and adequate wage structures;

continue  and  monitor  efforts  to  bring
down  gradually  the  fiscal  pressure  on
labour by reducing taxes and social security
contributions.  In  particular,  labour  costs
should  be  reduced  further  at  the  lowest
end of the wage scale, while respecting the
need for fiscal consolidation; and

all 

reduce  disincentives  within  the  tax  and
benefit  system  which  discourage  labour
market  participation  of 
groups,
especially  of  older  workers;  reassess  in
particular  existing  policies  facilitating  early
retirement and consider  the  policy  choices
most  appropriate 
the  early
withdrawal  of  workers  from  the  labour
market  and  to  promote  employment  of
older workers.

to  avoid 

recent market developments, the German venture
capital  market 
strongly  with,
is  growing 
moreover,  a  substantial  amount  invested  in  early
stage. In view of the above, Germany should give
high priority to the following:

i.

give consideration to the examples of good
practices  given  in  the  October  1999  Risk
Capital  Communication  in  the  field  of
taxation, 
(recently
reformed  but  still  very  stringent)  and
support to stock option schemes.

bankruptcy 

laws 

Labour markets

including 

The  German  labour  market  situation  improved
moderately  in  1999,  but  this  was  exclusively
concentrated on the  western  part  of  the  country.
The ‘Alliance for Jobs’ has set the framework for
recent  wage  moderation, 
increased
opportunities  for  part-time  work  for  elderly
people, to be implemented by the social partners.
A  far-reaching  tax  reform,  shifting  taxation  away
from 
labour  to  eco-taxes,  has  already  been
implemented,  and  there  are  plans  to  bring
forward  further  steps  of  the  reform.  Pension
increases will be slowed down which should help
to  keep  pension  contributions  stable.  In  view  of
the  above,  Germany  should  give  high  priority  to
the following:

i.

ii.

iii.

22

4. GREECE

The  recovery  in  economic  activity  initiated  in
1994  continues  at  a  strong  pace;  in  1999,  real
GDP growth in Greece exceeded the EU average
for  the  fourth  consecutive  year,  despite  a  slight
deceleration  related  to  external  developments.
is
The  consolidation  of 
expected  to  affect  the  labour  market  positively;
the unemployment rate started to fall in 1999 and
is expected to follow a downward path in coming
years.

the  growth  phase 

iii.

iv.

pursue  the  reform  of  the  social  security
sector  with  a  view  to  ensuring  long-term
viability in the system; in addition, improve
the  asset  management  by  social  security
funds  combined  with  the  continuation  of
the 
of
expenditure; and

rationalisation 

control 

and 

implement  the  privatisation  scheduled  for
2000  and  in  subsequent  years  with  a  view
to  securing  a  faster  reduction  in  the  debt
ratio.

Budgetary policy

Product markets

Partly  because  of  its  geographical  location,  the
Greek economy is less integrated in the European
product markets than other Member States. Price
levels  are  high,  considering  Greek 
living
standards,  and  labour  productivity  is  below  the
improving.  Despite
EU  average,  although 
significant  progress  made  in  privatising  public
companies and a few measures taken to promote
entrepreneurship  and  innovation,  the  process  of
reforms  in  product  markets  is  rather  slow.  In
view  of  the  above,  Greece  should  give  high
priority to the following:

i.

ii.

iii.

iv.

improve  the  transposition  record  and  the
implementation 
internal  market
of 
legislation;

speed  up  the  process  of  liberalisation  in
the  telecommunication,  electricity  and  gas
sectors;

take  concrete  measures 
business start-ups; and

to  promote

take  further  measures  to  increase  R&D
and  ICT  diffusion  and  stimulate  private
sector involvement in R&D financing.

in 

the 

in  1999 

target  set 

Greece  made  further  progress 
in
improving  its  budgetary  situation,  as  the  general
government  deficit  fell  to  1.6  per  cent  of  GDP,
below 
the  convergence
programme,  and  the  government  debt  fell  to
104.4  per  cent  of  GDP.  The  faster  reduction  in
the  deficit  was  due  to  much  higher  budget
revenues  than  expected  which  resulted  in  more
than  offsetting  an  overrun  in  expenditure.  The
updated  convergence  programme  provides  for  a
further  reduction  in  the  government  deficit  in
2000  and 2001.  Fiscal  consolidation  is  supported
by  a  high  primary  surplus,  part  of  which  is
generated  by  the  social  security  system  following
the  reforms  of  the  1990s;  mainly  because  of
population ageing, further reform of the sector is
foreseen.  In  view  of  the  above,  budgetary  policy
should aim to:

i.

ii.

consider as an upper limit the target set  in
the  budget  for  the  general  government
deficit  in  2000  at  1.2  per  cent  of  GDP;  a
better outcome on the revenue side should
be reflected in a lower general government
deficit; tighten the budgetary policy further
in 2001 if inflation pressures emerge;

secure  expenditure  control  through  clear
and binding norms with the aim to reduce
the primary current expenditure ratio;

23

Capital markets

is 

open 

increasingly 

On the basis of on-going liberalisation, the Greek
to
capital  market 
competition.  The  stock  market  has  benefited
from reforms introduced in the field of corporate
governance  and  listing  conditions,  and  from  the
dematerialization  of  securities.  Venture  capital
investments,  on  the  other  hand,  remain  the
lowest in the EU, despite the incentives provided
through tax relief and financial support  program.
This  restricts  significantly  the  source  of  finance
available  to  young  high-growth  companies.  In
view  of  the  above,  Greece  should  give  high
priority to the following:

i.

the 

implementation  of 

speed  up 
the
actions  put  forward  in  the  1998  Risk
Capital  Action  Plan,  and  give  particular
consideration  to  the  examples  of  good
practice  provided  in  the  October  1999
Communication.

Labour markets

in 

an 

increase 

Greek 
labour  market  performance  has  not
benefited  by  as  much  as  might  have  been
expected from the prolonged economic recovery.
Despite 
employment,
unemployment  has  also  risen  in  recent  years,
owing to a growing labour force. Unemployment
falling,  but  considerable  structural
is  now 
problems  remain,  including  a  low  employment
rate,  low  part-time  and  female  employment,  and
high  long-term  unemployment.  Steps  have  been
taken  towards  structural  reforms  of  the  labour
market  and  the  implementation  of  a  preventive
approach 
long-term
unemployment, although this has been hindered

tackling  youth  and 

to 

by  the  lack  of  modern  and  efficient  employment
services.  The  tax  burden  on  labour  has  been
reduced.  However,  the  results  of  reforms  to
facilitate  part-time  work  and  more  flexible
working hours have been limited so far, owing to
difficulties  with  implementation.  Similarly,  the
possibility  of  opt-outs  from  centralised  wage
settlements  has,  in  practice,  not  led  to  greater
decentralisation  of  wage  bargaining.  In  view  of
the above, Greece should give high priority to the
following:

take  decisive,  coherent  and  measurable
to  prevent  young  and  adult
action 
into
unemployed  people  from  drifting 
in
unemployment;  make, 
long-term 
particular, 
to
efforts 
strengthened 
reform  of  employment
complete 
services,  to  implement  preventive  policies
in 
Employment
Guidelines  1  and  2;  pursue  efforts  to
reform  training  and  education  systems  in
line  with  the  needs  of  the  productive
system;

compliance 

with 

the 

ensure full and effective implementation of
the labour market reforms  agreed  in 1998,
in  particular  regarding  the  extension  of
part-time  work  and  more  flexible  working
time; and

to 

developments 

review  wage  formation  systems  with  the
social  partners,  with  a  view  to  adapting
wage 
productivity
differentials  at  geographical,  sectoral  and
company  level,  ensuring  in  particular  that
opting  out  of  sectoral  agreements  under
the territorial employment pacts becomes a
practical possibility.

i.

ii.

iii.

24

5.

SPAIN

In  1999  GDP  growth  kept  its  previous  robust
pace along with strong job creation. Prospects for
2000  remain  favourable  based  on  a  more
moderate  development  of  domestic  demand  and
on a recovery of Spanish exports. However price
developments  have  been  worse  than  expected
since  the  second  half  of  1999  but  are  likely  to
decelerate  in  the  course  of  2000  provided  wage
settlements remain moderate.

Budgetary policy

In 1999, fiscal consolidation made clear progress:
the general government deficit was reduced to 1.1
per  cent  of  GDP,  half  a  percentage  point  below
the target set  in  the  original  stability  programme.
According  to  the  updated  stability  programme
the  general  government  deficit  is  expected  to  be
further  reduced  in  2000  and  2001  and  it  would
turn  into  a  surplus  in  2002  and  2003,  which
would  be  achieved  mainly  through  restraint  of
primary  current  expenditure.  This  would  also
permit a reduction in the tax burden. With a view
to  addressing 
the  ageing
population, a Social Security pension fund reserve
has been created. In view of the above, budgetary
policy should aim to:

the  problem  of 

i.

ii.

in 

targets  set 

achieve  and  possibly  improve  upon  the
the  updated
budgetary 
stability programme, given the better-than-
expected  outturn  in  1999;  be  prepared,
already  in  2000,  to  tighten  fiscal  policy
further  to  counterbalance  any  possible
overheating risk;

implement  the  pending  reform  of  the
National Budget Law in the year 2000 with
a view to improving the control of primary
current expenditure, which is central to the
strategy of fiscal consolidation; this should
allow  non-budgeted  expenditures  to  be
limited 
unforeseeable
contingencies;

mainly 

to 

iii.

iv.

gradually increase the pension fund reserve
created  in  the  2000  Budget  Law  to  cope
with  the  long-term  problem  of  the  ageing
population;  take  additional  steps  in  the
new  round  of  talks  about  reform  of  the
pension  system  between  the  Government
and the social partners which  have  to  take
place  in  2000  within  the  1995  Pacto  de
Toledo framework; and

continue  and  respect  fully  the  existing
internal  stability  pact  between  regions  and
the  State,  as  territorial  governments  have
an 
in  many  fields  of
expenditure.

increasing  role 

Product markets

in 

integrated 

is  moderately  well 

legislation,  progress 

Spain 
the
European  product  markets.  Various  measures
have  been  taken  to  improve  competition  on
transposition  of
improved 
product  markets: 
internal  market 
the
telecommunications,
liberalisation 
of 
law  and
reinforcement  of 
creation  of  one-stop  shops  for  SMEs.  The  new
Plan  for  Science  and  Technology  targets  a  major
increase  in  the  ratio  of  R&D  spending  to  GDP.
In  view  of  the  above,  Spain  should  give  high
priority to the following:

the  competition 

the 

in 

the  1999 

reform  of 

the
continue 
competition  law;  within  this  reform,  give
particular  attention 
the
capacity  of  the  independent  competition
authority to investigate cases;

to  reinforcing 

continue 
(railways, coal, shipbuilding) aid;

reduce 

to 

sector-specific

take measures to reinforce the competition
framework  in  sectors  such  as  electricity,
gas and retail distribution and to  bring  the
price of water closer to its real cost; and

i.

ii.

iii.

25

iv.

to 

reduce
the  measures 
continue 
administrative  burdens,  especially 
for
SMEs  given  the  high  share  of  SMEs  in
business  employment,  and  expand  the
geographical  coverage  of  the  one-stop
shops for businesses.

Capital markets

The  capital  market  is  developing  rapidly  as  a
result  of  reforms  introduced  to  support  business
access  and  to  facilitate  investment  in  unlisted
securities,  and  as  a  result  of  the  privatisation
process and growing household share ownership.
However,  the  venture  capital  market  remains
small.  In  view  of  the  above,  Spain  should  give
high priority to the following:

i.

make  further  efforts  to  develop  venture
capital markets and in particular to increase
early-stage  investments;  give  consideration
to  the  examples  of  good  practice  put
forward  in  the  October  1999  Risk  Capital
Communication  in  the  areas  of  legislation
on  bankruptcy,  promotion  of  innovative
employee  ownership  schemes,  promotion
of  stock  markets  for  small  and  medium-
sized businesses.

Labour markets

labour  market  performance  has
Spanish 
improved  markedly 
in  recent  years,  with  a
remarkable  fall  in  unemployment  and  strong
employment  growth,  especially  of  part-time
employment.  Efforts  have  been  made  to  shift
from passive to active labour market policies,

to 

tackling  youth  and 

including  a  reinforcement  of  the  preventive
approach 
long-term
unemployment.  The  tax  burden  on  labour  has
been reduced, particularly at the lower end of the
wage  scale.  However,  unemployment  is  still  the
highest  in  the  EU,  and  considerable  structural
problems  remain,  including  the  duality  of  the
labour market between permanent and temporary
contracts,  low  rates  of  female  participation  and
employment,  and wide regional disparities. There
is also some risk of wage pressures developing. In
view of the above, Spain should give high priority
to the following:

i.

ii.

iii.

review,  together  with  the  social  partners,
the  wage  formation  system  and 
the
regional-local  enforcement  of  the  welfare
system  and  take  action  to  improve  the
functioning of the housing market in order
to  promote  labour  mobility  and  tackle
regional disparities in unemployment;

pursue efforts to improve the efficiency of
active  labour  market  policies  to  reduce
inflows into long-term  unemployment  and
combine  this  with  a  review  of  tax  and
benefit  systems  to  improve  incentives  to
hire, to  take up  work  and  to  participate in
active  labour  market  programmes;  review
the  quality  and  efficiency  of  technical
training in schools; and

review  further,  together  with  the  social
partners, tight job protection legislation for
employees  on  permanent  contracts  and
lower  barriers  to  dismissal  in  order  to
reduce  the  weight  of  temporary  contracts
and  enhance  the  flexibility  of  the  labour
market.

26

6. FRANCE

Economic  activity  strengthened  in  the  middle  of
1999  and  the  expansion  seems  to  be  well
established at present: growth should continue to
be  healthy  in  2000  allowing  strong  job  creation.
Despite  above  potential  growth, 
inflationary
pressures  are  expected  to  remain  subdued  as  a
result  of  increased  competition  and  moderate
wage increases.

Budgetary policy

France made visible progress in the improvement
of  its  budgetary  position  in  1999,  as  the  general
government  deficit  fell  to  1.8  per  cent  of  GDP,
half a percentage point below the target set in the
original  stability  programme.  According  to  the
updated  stability  programme,  further  reductions
of the deficit ratio are to be pursued in 2000 and
beyond.  This  would  be  the  result  of  a  tight
control of expenditure, which would also allow a
reduction in the tax burden. In the medium term,
the  French  public  finance,  specially  the  pension
system  and  the  sickness  insurance,  will  face  an
increasing  burden  resulting  from  the  ageing  of
population.  In  view  of  the  above,  budgetary
policy should aim to:

i.

ii.

reduce the government deficit in 2000 to a
level  clearly  below  the  one  set  in  the
updated  stability  programme,  given  the
the
better-than-planned  outcome 
government deficit in 1999  and  the  strong
growth prospects;

for 

take  prompt  corrective  measures  in  the
event  of  any  significant  slippage  from  the
expenditure  targets 
in  specific  sectors,
the
which  have  been  established  by 
updated  stability  programme;  implement
such  corrective  measures  within  the  same
year or, at the latest, in the following year;

iii.

iv.

give  priority  to  a  faster  deficit  reduction
rather  than  to  additional  tax  cuts  in  2000
and  2001, 
that  wider
budgetary  margins  materialise,  in  order  to
avoid  a  budgetary  stimulus  to  already
vigorous economic activity; and

the  event 

in 

is 

orient  the  reform  of  the  pension  system,
in  2000,
intended  to  begin 
which 
towards 
of
long-term 
government  finances,  taking  into  account
including
considerations  of  equity  – 
between generations.

sustainability 

Product markets

in 

integrated 

is  relatively  well 

France 
the
European  product  markets.  Over  the  recent
period,  the  pace  of  structural  reforms  has
speeded  up,  leading  to  an  improvement  in  the
competitive  environment  and  to  a  reduction  of
for  business.  The  present  more
red 
favourable  macro-economic 
situation  offers
France a “window of opportunity” for additional
reforms. In view of the above, France should give
high priority to the following:

tape 

improve  its  record  in  transposing  internal
market  directives  which  is  poor  and  has
deteriorated  recently;  resolve  problems  in
the  application  of  internal  market  rules;
and  continue  efforts  to  introduce  greater
transparency 
procurement
procedures;

public 

in 

monitor  closely  and  ensure  a  decrease  in
the relatively high level of ad hoc aid;

widen  the  liberalisation,  already  initiated,
of  network  industries,  particularly  in  the
energy sector; and

continue efforts  to  simplify  formalities  for
business and to encourage innovation.

i.

ii.

iii.

iv.

27

the 

as  new, 

remained  subdued,  despite 

the  highest  in  the  Union.  The  fall  in  the  youth
rate  has  been  even  more
unemployment 
pronounced 
substantial  measures
gradually come into effect. Nominal wage growth
has 
recent
improvement  in  demand  for  labour.  The  next
wage  round  will  be  crucial,  as 
it  will  also
incorporate effects of the gradual introduction of
the  35  hours  working  week.  The  effective
taxation  on  labour  and  the  net  replacement  rate
the
are  above  EU-average 
regulatory environment is still relatively heavy. In
view  of  the  above,  France  should  give  high
priority to the following:

in  France  and 

i.

ii.

iii.

pursue  and  evaluate  policy  measures
designed  to  reduce  the  fiscal  pressure  on
labour,  particularly 
addressing
unskilled and low-paid workers;

those 

review  benefit  schemes  and  employment
protection  legislation  in  order  to  increase
incentives  for  employees  to  take  up  jobs
and  participate  in  active  measures  and  for
employers to take on workers; and

monitor  the  introduction  of  the  35  hours
working week reform closely so as to avoid
labour
adverse  effects  on  wage  costs, 
the
in 
supply  and  work  organisation 
medium term.

Capital markets

The French capital market is mature and efficient.
The  stock  market  developed  dynamically  in  the
1990s,  following  modernisation  of  technologies,
the  creation  of  a  market  for  high-growth
companies,  privatisation,  and  the  introduction  of
fiscal  measures  to  support  equity  investments.
Various  measures  have  been  taken  to  stimulate
the  development  of  risk  capital.  However,  the
risk  capital  market,  in  spite  of  its  recent  growth,
remains  underdeveloped.  In  view  of  the  above,
France should give high priority to the following:

i.

ii.

further facilitate investment by institutional
investors  in  stock  markets  and  in  venture
capital; and

give  particular attention  to  the  actions  put
forward  in  the  October  1999  Risk  Capital
Communication,  as  examples  of  good
taxation
improve 
practice 
framework,  reform  bankruptcy  legislation
and  to  promote  the  further  development
of employee ownership schemes.

the 

to 

Labour markets

The  labour  market  situation  has  improved  in
France, even if the unemployment rate of  11  per
cent of the labour force in 1999 remains one of

28

7.

IRELAND

Product markets

GDP  again  grew  exceptionally  well  in  1999  and
strong, albeit lower, growth is expected in 2000 as
final  demand  growth  will  remain  high.  Some  of
the current acceleration in inflation is attributable
to  ‘one-off’  factors  and  underlying  inflation  may
be  contained,  but  there  are  signs  of  over-heating
especially 
labour  market.  Supply
constraints may, therefore, threaten both inflation
and growth in the short term.

the 

in 

Budgetary policy

the  government 

In  1999, 
finances,  again,
recorded  a  strong  surplus  put  at  2  per  cent  of
GDP.  In  the  stability  program,  surpluses  are
foreseen  to  continue  in  the  coming  years.  There
are  now  firm  signs  of  upward  pressure  on
inflation  in  the  economy  and  the  emergence  of
including
supply  constraints  both  physical, 
infrastructure,  and  in  the  labour  market.  In  view
of the above, budgetary policy should aim to:

i.

ii.

iii.

be ready, already in 2000, to use budgetary
policy  to  ensure  economic  stability  given
the extent of over-heating in the economy;
gear the budget for 2001 to this objective;

in 

the  growth 

real  public
restrain 
consumption  from  the  4.3 
  per  cent
estimated in 1999 to  2.7   per  cent  in  2002
as 
stability
in 
shown 
programme; and

the  updated 

ensure  that  the  objectives  of  the  National
Development  Plan  are  accorded  high
priority, given the necessity of meeting the
infrastructural needs of a strongly  growing
economy, while at the same time achieving
the stability objectives of fiscal policy.

Ireland’s economy is very well integrated with the
rest of the EU, with relatively low prices, in spite
of the recently rapid rise in prices of housing and
some  services,  and  high  productivity.  A  number
of product market reforms have been carried out
in  recent  years.  Progress  has  been  made  in
developing competition in the telecommunication
sector,  the  electricity  and  gas  markets  are  to  be
progressively  opened  to  competition  and  the
government  has  begun  to  use  Public-Private
Partnerships  to  improve  the  efficiency  of  public
services.  Government  research  expenditure  is
rather  low,  but  the  budgetary  resources  allocated
to R&D are to be increased substantially. In view
of the above, Ireland should give high priority to
the following:

i.

ii.

give  the  Competition  Authority  the  power
to  enforce  Articles  81  and  82  of  the  EC
Treaty;  permit  a  real  strengthening  of
competition  policy 
the  reform  of
competition  law  to  be  drawn  up  this  year
and do not restrict it to procedural matters;
and

in 

take  measures  to  liberalise  further  the
transport  sector;  in  particular,  introduce
competition  into  urban  bus  transport  and
into the railways, e.g. by franchising.

Capital markets

Capital  markets  are  developing  well  and  stock
market capitalisation as a percentage of GDP has
doubled  over  the  last  five  years.  However,  the
number  of  companies  listed  has  remained  small.
Several  measures  have  been  taken  to  encourage
venture  capital,  and  there  has  been  a  positive
from  government-
move  of 
sponsored  to  private 
investors.  Investments,
which  were  traditionally  focused  on  the  latter
stage (expansion), have increasingly been directed
to  the  early  stages.  However  the  overall  level  of
investments  remains  low.  In  view  of  the  above,
Ireland should give high priority to the following:

funding  away 

29

monitor  wage  developments  so  as  to
ensure  that  they  are  consistent  with  the
wage  moderation 
the
maintenance of employment growth; and

needed 

for 

adopt a comprehensive strategy to increase
the  participation  of  women  in  the  labour
market,  including  the  removal  of  tax-
benefit  disincentives,  and  put  in  place
measures which facilitate the reconciliation
of  work  and  family 
in
particular,  flexible  leave  schemes  and  a
sustained  effort  to  raise  the  standards  of
care for children and other dependants.

life;  pursue, 

i.

ii.

i.

to
make  further  efforts 
develop  start-up  and  early-stage  venture
capital.

in  particular 

Labour markets

Strong  employment  growth  and  unemployment
rates  approaching  historically  low  levels  are  the
main features  of  the  current  Irish labour  market.
The  employment  rate  matches  the  rate  for  the
euro area, female participation in the labour force
is  increasing  and  recent  trends  show  a  major
decline  in  the  long-term  unemployment  rate.
While  demographic  forces  will  continue 
to
increase  the  size  of  the  labour  force,  the  overall
situation  raises  the  concern  that  a  tightening
labour market could restrict economic growth. In
view  of  the  above,  Ireland  should  give  high
priority to the following:

30

8.

ITALY

From  the  second  half  of  last  year,  economic
growth in Italy has shown a marked acceleration,
and  prospects  are  expected  to  remain  robust  in
2000-2001.  Growth 
is  fuelled  by  domestic
demand  and  net  exports  are  improving.  Despite
flexibility,
labour  market 
improvement 
unemployment has begun to rise again.

in 

Budgetary policy

In  1999,  Italy  reduced  the  general  government
deficit  to  1.9  per  cent  of  GDP,  slightly  better
than the original target of 2.0 per cent. However,
the primary surplus was lower than expected (4.9
per cent of GDP instead of 5.5 per cent) and the
debt remained at the high level of 114.9 per cent
of  GDP.  The  updated  stability  programme
foresees a further reduction of the deficit ratio to
0.1 per cent in 2003. The reduction in the deficit
would  be  the  result  of  tight  control  expenditure,
which  will  also  permit  a  reduction  in  the  tax
burden. Over the medium term, the Italian public
finances,  specially  the  pension  system,  will  face
increasing burden as a consequence of population
ageing.  In  view  of  the  above,  budgetary  policy
should aim to:

i.

ii.

iii.

achieve  better  budgetary  outcomes  than
planned 
in  2000  and  2001  and  thus
accelerate  the  reduction  in  the  still  high
debt/GDP  ratio  in  the  light  of  a  cyclical
upswing  that  is  probably  stronger  than
assumed 
stability
programme;

updated 

the 

in 

as  a  minimum,  achieve  a  primary  surplus
of 5.0  per  cent  of  GDP  in 2000  and  2001
stability
projected 
the 
programme,  namely 
tight
control of current primary expenditure;

updated 
through  a 

in 

contain  in  the  medium  term  the  expected
increase 
ratio  of  pension
expenditures to GDP; to this end, begin as
soon  as  possible  a  re-assessment  of  the

the 

in 

pension  system  and  take  further  steps  to
including
reform 
the  pension  system, 
promoting 
funded
pension provisions; and

the  expansion  of 

iv.

the  planned  privatisation
carry  out 
programme, 
respecting  deadlines  and
where possible accelerate it, in particular in
the  energy  and  transport  sectors;  use
privatisation 
reduce
receipts 
government debt further.

to 

Product markets

international 

involvement  of 

Italy  is  relatively  less  integrated  in  the  European
product markets than other large Member States.
The 
Italian
companies  is  below  what  would  be  expected
from  a  country  of  its  size.  However,  price  levels
in  Italy  are  significantly  below  the  EU  average
and productivity performances are similar to that
of  France  and  Germany.  Several  reforms  have
been introduced and have contributed to improve
the  functioning  of 
in
particular  in  the  area  of  the  privatisation  and
liberalisation  of  public  utilities  and  of 
the
reduction  of  administrative  burden  on  SMEs.  In
view of the above, Italy should give high  priority
to the following:

the  product  market, 

i.

ii.

in 

transposing
make  further  progress 
legislation  since  non-
internal  market 
transposition rates for social affairs remain
high relative to other Member States and a
number of indicators point to problems in
the area of public procurement;

increase  efforts  to  reduce  further  the
overall  level  of  non-agricultural  State  aid
and to improve its structure since the level
of  non-agricultural  State  aid  expressed  in
percentage  of  GDP  remains  among  the
highest in the EU and the share of regional
aid  has  increased  at  the  expense  of  other
horizontal objectives;

31

iii.

iv.

pursue  efforts  to  simplify  the  regulatory
environment 
to
develop one-stop shops; and

for  companies 

and 

reinforce  initiatives  to  promote  R&D  and
innovation in the light of the very low ratio
of R&D expenditure to GDP.

Capital markets

Substantial  progress  has  been  made  towards  the
development  of  deeper  and  more 
integrated
financial  markets  and  the  development  of  risk
capital in Italy. Italian equity markets are growing
rapidly  thanks  also  to  the  extensive  on-going
privatisation  programme.  Venture  capital  and
private  equity  have  also  expanded  rapidly  in
recent  years,  and  the  creation  of  the  Nuovo
Mercato  will  contribute 
these
developments.  Nevertheless  the  venture  capital
market  remains  underdeveloped.  In  view  of  the
above,  Italy  should  give  high  priority  to  the
following:

further 

to 

i.

to 

encourage 

capital, 
improving 

the
efforts 
continue 
in
development  of  venture 
particular  by 
the
further 
taxation  framework  for  risk  capital,  by
institutional
investment  of 
facilitating 
investors  in  stock  markets  and  venture
capital,  and  by  reforming  bankruptcy
legislation.

Labour markets

Despite recent modest improvements, the labour
market  situation  remains  difficult,  with  a  low
employment  rate,  high  structural  unemployment
and  large  regional  differences.  Segmented  labour
markets,  atypical  job  contracts,  a  large  informal
economy and unequal unemployment

distribution  across  groups  and  regions  point  to
structural  problems.  Many  underlying  structures
are  unfavourable  for  employment,  including  a
high tax burden on labour, loose  benefit  systems
combined  with  strict  employment  protection
legislation  and  a  complicated  wage  bargaining
system.  While  there  have  been  significant  efforts
to  reduce  taxation  on  labour,  to  modernise
administration  and  to  introduce  new  structures
for  reforms,  none  of  these  measures  has  yet
is  a  clear  need  to
borne  full  fruit.  There 
complement  these  efforts  by  comprehensive
structural  measures.  In  view  of  the  above,  Italy
should give high priority to the following:

the 

and 

the  protection  provided  by
rebalance 
benefit 
employment
systems 
protection  legislation  and  reinforce  active
labour  market  measures;  combine  an
improvement  of 
unemployment
benefit  system  with  an  increase  in  the
employment  protection
flexibility  of 
legislation  and  a  tightening  of  eligibility
for  pension  and  other  benefit
rules 
schemes,  whilst  ensuring  proper 
job
availability  requirements  and  incentives  to
participate 
labour  market
active 
programmes;

in 

promote  labour  market  flexibility  and,  in
particular,  reinforce  efforts  to  promote
wage 
labour
in 
productivity  differences  across  regions;
and

line  with 

flexibility 

continue  efforts  to  reduce  taxation  on
labour, and monitor developments closely,
especially  the  effect  of  temporary  tax  and
social 
contribution  measures
targeted  at  disadvantaged  labour  market
groups and regions.

security 

i.

ii.

iii.

32

9. LUXEMBOURG

Real  GDP  growth  was  particularly  fast  in  1999
despite  unfavourable  external  developments  and
is  expected  to  remain  strong.  Unemployment
remains  very  low  and  there  are  some  upward
pressures on inflation.

Budgetary policy

Due  to  fast  economic  growth  and  the  ensuing
buoyancy  in  fiscal  revenues,  the  Luxembourg
government  repeatedly  registered  comfortable
surpluses  since  several  years.  In  view  of  the
above, budgetary policy should aim to:

i.

ii.

closely 

current 

monitor 
government
in  order  to  facilitate  the
expenditures 
achievement  of  the  budgetary  objectives
while  making  room  for  a  reduction  in  the
tax  burden  as  planned  in  the  updated
stability programme; and

combine  the  implementation  of  sound
reforms,
finance  policies  with 
public 
notably  in  the  field  of  social  security,  that
are  needed  in  order  to  maintain  the  long-
term  viability  of  the  system  and  prepare
for the challenge of an ageing population.

Product markets

above,  Luxembourg  should  give  high  priority  to
the following:

i.

ii.

iii.

speed  up  the  transposition  of  internal
market legislation, particularly in transport,
motor  vehicles,  plant-health  checks  and
social affairs;

adopt  a  new  competition  law  permitting  a
more  active  competition  policy  by  the
authorities,  giving  them  the  power  to
enforce EC Articles 81 and 82; and

create  the  conditions  allowing  a  catching-
up to the most recent developments in the
information society, in particular given  the
late start  of  ICT  penetration  for  a  country
with a high standard of living.

Labour markets

The  labour  market  performance  of  Luxembourg
is good,  with  the  lowest  unemployment  rate  and
the highest domestic employment rate in the EU,
relying  heavily  on  cross  border  workers.  The
national employment rate is not outstanding, with
low  female  and  older  worker  participation  rates.
While  there  are  no  major  problems 
in  the
functioning  of  labour  markets,  some  underlying
tax  and  benefit  structures  are  not  so  favourable
for  encouraging  employment.  In  view  of  the
above,  Luxembourg  should  give  high  priority  to
the following:

the 

examine the tax-benefit system with a view
to  removing  disincentives  which  may
in
discourage 
employment,  and  continue  efforts 
to
increase  the  national  employment  rate,  in
that  of  women  and  older
particular 
workers.

participation 

i.

While  the  Luxembourg  economy  is  very  well-
integrated  in  the  European  product  market  and
is  excellent,
its  macroeconomic  performance 
towards  better
structural  policies 
functioning  product  markets  are 
less  well
advanced. However, progress is being made. The
abolition  of  the  price  regulation  and  regional  aid
systems,  which  should  take  place  in  the  near
future, is particularly welcome. In view of the

targeted 

33

10. NETHERLANDS

Product markets

Economic activity hardly decelerated in 1999 with
respect to the high growth rate achieved in 1998;
as a result, employment kept increasing at a rapid
pace  and  registered  unemployment  fell  to  levels
not seen since the early 1970s. Growth is likely to
accelerate  in  2000  following  the  improvement  in
the external economic situation. Fast growth  and
a  progressively  tightening  labour  market  are
raising  concerns  about  the  evolution  of  prices
and,  even  more,  of  wages,  which  are  now
increasing 
in
neighbouring countries.

significantly 

faster 

than 

Budgetary policy

Strong  economic  growth  boosted  government
revenues in 1999 so that the deficit, which was at
the  beginning  of  the  year  generally  expected  to
rise,  eventually  turned  into  a  surplus  of  0.5  per
cent  of  GDP.    Since  the  mid-1990s,  the  Dutch
budgetary  strategy  has  consisted  in  reducing  the
weight  of  government  expenditure  by  setting
growth ceilings in order to reduce the tax burden
and  simultaneously  the  government  deficit.  A
major  tax  reform  is  planned  for  2001  consisting
of  a  reduction  of  personal  taxes  and  an  increase
in  indirect  taxation.    In  view  of  the  above,
budgetary policy should aim to:

i.

ii.

increase  in  2000  the  government  surplus
achieved in 1999 in the light  of  the  strong
growth  prospects;  remain  ready  to  tighten
budgetary  policy,  already 
if
inflationary  pressures  intensify  beyond  the
acceleration  caused  by  the  rise  in  import
prices and especially if the current trend in
wage increases continues; and

in  2000, 

monitor closely public expenditure in 2001
so as to ensure that the deterioration in the
budgetary position, resulting from  the  loss
of revenues due to the tax reform, remains
limited and temporary.

to 

the 

related 

The  Netherlands  is  very  well  integrated  into  the
European  economy  and  its  product  markets
function  relatively  well.  Structural  reforms  have
been  effective,  even  if  there  are  still  some
problems 
transposition  and
implementation  of  internal  market  legislation  (in
transport  and  public  procurement).  Competition
policy should continue to be reinforced as should
the  liberalisation  of  the  energy  and  transport
sectors.  The  private  share  of  R&D  funding  is
relatively  low  and  technology  transfer  between
public  and  private  research  still  insufficient.  In
view  of  the  above,  the  Netherlands  should  give
high priority to the following:

make  further  progress  in  enforcing  the
public  procurement  directives as  the  share
of  the  value  of  calls  for  tenders  published
in  the  Official  Journal  in  total  public
procurement  is  amongst  the  lowest  in  the
Union;

pursue  further  the  regulatory  reform  and
privatisation  process  at  the  basis  of  the
introduction  of  competition  in  network
industries; 
in  particular,  speed  up  the
transposition  of  internal  market  directives
in the area of transport; adopt a regulation
governing  access  to  the  cable  network  in
order to avoid dominant positions of cable
internet
companies 
services; and

telephony  and 

in 

to 

further  measures 

take 
the
involvement  of  the  private  sector  in  R&D
and 
transfer
between public and private research.

to  encourage 

technology 

raise 

i.

ii.

iii.

34

Capital markets

Labour markets

The  Dutch  stock  market  and  the  venture  capital
market  are  mature  and  competitive.  The  venture
capital  market  has  shown  strong  growth  over
recent  years  as  a  result,  in  part,  of  a  favourable
taxation  environment.  However  early  stage
investments  remain  relatively  limited.  In  view  of
the  above,  the  Netherlands  should  give  high
priority to the following:

i.

its  efforts  on  encouraging
concentrate 
early  stage investments;  give  consideration
to  the  examples  of  good  practices  put
forward  in  the  October  1999  Risk  Capital
Communication,  in  the  area  of  promotion
of 
ownership
schemes, including stock-options.

innovative 

employee 

Dutch  labour  market  performance  has  been
among the best in the EU in recent years, in large
part  thanks  to  the  comprehensive  strategy  of
structural  reforms  pursued.    Tax  and  benefit
reforms  have  reduced  the  tax  burden  on  labour
and  have  improved  work  incentives.    Measures
have been taken to increase labour supply among
specific groups, including older people and those
on  disability  schemes.    Nevertheless,  significant
remain,  with  a  high
structural 
proportion  of  the  working-age  population  in
receipt  of  passive  unemployment  and  disability
benefits.  In  view  of  the  above,  the  Netherlands
should give high priority to the following:

imbalances 

i.

to 

continue efforts to improve the tax-benefit
removing
a  view 
system  with 
disincentives  which  may 
discourage
participation  in  employment,  in  particular
of  women  and  older  workers;  pursue
resolutely  the  efforts  to  reduce  the  high
number  of  persons  who  remain  outside
the  labour  market  supported  by  passive
income support schemes.

35

iii.

implement  the  announced  pension  reform
aimed at raising the average retirement age
from 2001 onwards and pursue reforms in
order  to  put  the  predominantly  pay-as-
you-go  financial  pension  system  on  a
sounder footing.

Product markets

While  Austria  is  rapidly  integrating  into  the
European  trading  system,  its  involvement  in
foreign direct investment and cross-border M&A
activity remains below par. Austria has adopted a
rather  cautious  approach  to  product  market
reform.  Nevertheless,  some  progress  has  been
made in transposing internal market legislation, in
reinforcing  competition  policy  and  in  liberalising
telecommunications.  Some  initiatives  have  also
been  taken  to  simplify  procedures  for  starting
new  businesses  and  the  ambitious  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)  has  been  set.  In  view  of  the  above,
Austria should give high priority to the following:

i.

ii.

iii.

make  further  progress  in  the  transposition
of  the  Community’s  public  procurement
guidelines,  in  particular  at  the  provincial
level which has been delayed;

accelerate the process of regulatory reform
in  the  energy  and  transport  sectors  in
order  to  ensure  effective  competition  in
the market place; and

take  further  measures  aimed  at  increasing
the  involvement  of  the  private  sector  in
R&D  and  at  encouraging 
technology
transfer  between  public  and  private
research.

11. AUSTRIA

Austria 
is  experiencing  an  acceleration  of
economic growth  due  to a well-balanced  pick-up
of  all  demand  components  and  in  particular
robust  private  consumption.    Employment  is
likely  to  continue  rising  and,  with  labour  supply
into  a
remaining  elastic, 
decrease in unemployment.

translating  partly 

Budgetary policy

Austria  made  some  progress  in  consolidating  its
government finances in 1999 as the deficit fell to
2.0 per cent of GDP, the target set in the original
stability programme. Against the background of a
marked tax relief in the framework of the reform
of income taxes, the updated stability programme
targets  a  general  government  deficit  of  1.7  per
cent  of  GDP  in  2000  and  further  reductions
thereafter. However, this will be attained with the
help  of  sizeable  one-off  measures.  To  achieve  a
government
the 
durable 
accounts 
term,
the  medium  and 
significant structural measures, first and foremost
in the pension and health domain, are foreseen in
the  updated  stability  programme.  In  view  of  the
above, budgetary policy should aim to:

improvement 
in 

longer 

in 

i.

ii.

as  a  minimum,  achieve  the  target  of  a
general  government  budget  deficit  of  1.7
per  cent  of  GDP  in  2000,  which  would
help to establish a clear downward trend in
the debt ratio; realise substantial savings on
the  expenditure  side  and  exercise  strict
the  budgetary
expenditure  control 
execution in order  to  meet  the  cost  of  the
reform  of 
family
assistance;

taxes  and 

income 

in 

replace the one-off measures taken in 2000
by measures of a  permanent  nature  with  a
view  to  putting  public  finances  on  a
sustainable path; and

36

Capital markets

Labour markets

The  government  has  undertaken  several  reforms
to  stimulate  the  stock  and  risk  capital  markets.
However,  the  stock  market  remains  small,  and
venture  capital 
low  and
investment 
focused  on  the  later  stage  sector.  In  view  of  the
above,  Austria  should  give  high  priority  to  the
following:

is  also 

i.

ii.

the 

supervisory 

upgrade 
framework,
improve  corporate  governance,  remove
the  constraints  preventing 
institutional
investors  from  investing  in  equity  and
develop fiscal incentives for equity and risk
capital investments; and

implementing  the  actions  put  forward  in
the  1998  Risk  Capital  Action  Plan,
especially concerning taxation of new firms
and 
capital,
legislation  on  insolvency  and  bankruptcy
and promotion of stock options.

in  venture 

investment 

Austrian labour markets are performing relatively
well.  Unemployment  is  low  and  employment
rates are high. However, the employment rate for
older  workers  is  below  the  EU-average,  due  in
part  to  disincentives  arising  from  the  early
the
retirement  system.  Another 
Austrian  labour  market  is  the  smoothly  working
co-operation  of  the  social  partners,  which  might
be  seen  as  a  model  for  many  other  countries.  In
view  of  the  above,  Austria  should  give  high
priority to the following:

feature  of 

i.

ii.

rapidly  implement  the  announced  reforms
on  increasing  the  early  retirement  age  and
making benefit eligibility stricter which are
welcome  in  the  light  of  a  relatively  tight
labour  market;  accompany  the  pension
reform  measures  by  further  measures
targeted at older workers in order to avoid
a  rising  incidence  of  unemployment  for
this age group; and

continue  efforts  to  reduce  the  high  tax
burden on labour, in particular by focusing
on problem groups in the labour market.

37

12. PORTUGAL

in  both  domestic  and
After  the  slowdown 
in  1999,  exports  began  to
external  demand 
recover in the second half of 1999, pointing to an
acceleration  of  economic  activity  in  2000.  Job
creation is expected to remain robust in 2000 but
somewhat  slower  due  to  a  more  balanced
composition  of  growth.  There  is  a  widening
current  account  imbalance  and  the  indebtedness
of the private sector has risen rapidly.

iii.

Budgetary policy

the  projected  1.1  per  cent  of  GDP  in  the
updated  stability  programme  and  front-
load 
the  overall  consolidation  effort
planned in the programme; and

approve,  before  the  end  of  2000,  the  new
basic  law  for  the  budget,  putting  budget
preparations  on  a  multi-annual  basis  in
order  to  identify  better  the  medium-term
effects  of  policy  decisions; 
implement
urgently  a  number  of  reforms  with  a
the
budgetary 
measures  announced  in  the  area  of  health
care and a new  social security  pension law
to strengthen the financial term position of
the  social  security  sector  so  as  to  face  the
ageing problem better.

including  both 

impact, 

In  1999,  the  general  government  deficit  declined
to  2.0  per  cent  of  GDP,  the  target  set  in  the
original  stability  programme.  According  to  the
updated  stability  programme,  a  reduction  of  the
deficit  ratio  to  1.5  per  cent  is  to  be  achieved  in
2000  and  to  continue  thereafter.  The  deficit
reduction  in  2000 would  be  the  result  of  a  steep
rise 
in  tax  revenue,  resulting  from  a  more
efficient  collection  of  taxes,  which  would  more
than  offset  the  planned  rise  in  total  expenditure.
To underpin the process of fiscal consolidation in
the  medium 
stability
programme  foresees  various  reform  plans,  most
notably  the  introduction  of  a  new  basic  law  for
the budget, a new law on social security pensions
and  measures  in  the  sickness  insurance.  In  view
of the above, budgetary policy should aim to:

the  updated 

term, 

i.

ii.

as a minimum, achieve the  1.5  per  cent  of
GDP deficit target for 2000, which implies
a 
strict  control  of  current  primary
expenditure which has risen significantly in
recent years; in this context, do not use the
expenditure  amounts  frozen  in  the  budget
for  2000  if  this  is  required  to  achieve  the
deficit  target,  thus  creating  a  cushion  to
absorb a possible shortfall in tax revenue;

ensure that budgetary policy contributes to
a  more  balanced  policy  mix  to  correct  the
major 
the  Portuguese
economy;  to  this  end,  aim  for  a  more
ambitious  deficit  ratio  target  in  2001  than

imbalances 

in 

Product markets

of 

involvement 

The  Portuguese  economy  is  moderately  well
integrated  in  European  product  markets.  The
international 
Portuguese
companies  is  relatively  weak.  Progress  has  been
made  in  transposing  internal  market  legislation
and  in  liberalising  the  telecommunications  and
energy  sectors.  However,  productivity  and  R&D
levels  remain  amongst  the  lowest  in  the  EU.  In
view  of  the  above,  Portugal  should  give  high
priority to the following:

continue  efforts  to  improve  the  record  in
transposing 
legislation,
internal  market 
especially  in  transport,  because,  despite
progress  made,  the  transposition  record
remains poor;

take  action 
in 

reduce  State  aid  which  has  substantially
to  bring
increased  and 
line  with
competition 
to
legislation 
European  Union 
and 
reinforce 
the
independence  of 
Competition authority;

law  more 

the 

i.

ii.

38

iii.

iv.

monitor  closely  the  effectiveness  of  the
various  measures 
simplify
administrative  procedures  and  to  reduce
further their costs in light of the high share
of SMEs in business employment; and

taken 

to 

undertake further efforts to promote R&D
and  ICT  diffusion,  in  particular  create
incentives 
sector
involvement in R&D.

increase  private 

to 

Capital markets

The  combination  of  an  extensive  privatisation
process,  the  introduction  of  the  euro,  and  the
shift  to  all-electronic  trading  have  increased  the
maturity,  depth  and  efficiency  of  the  Portuguese
stock market. Progress has also been made in the
implementation  of  EC 
services
directives. Despite the initiative taken to improve
the  legal  framework  for  venture  capital,  venture
low  and  highly
capital 
dependent  on  the  support  of  public  funds.  In
view  of  the  above,  Portugal  should  give  high
priority to the following:

investment  remains 

financial 

i.

make  further  efforts  to  develop  venture
capital and in  particular give  consideration
to a revision of the tax framework in order
to reduce the relative cost of risk capital as
compared to other financial instruments.

Labour markets

the 

low 

attainment  of 

Portuguese labour  markets  are  performing  better
than in many other Member States. The full-time
equivalent  of  the  employment  rate  is  among
highest  in  the  EU.  One  of  the  most  serious
problems related to the further catching up of the
level  of
is 
Portuguese  economy 
educational 
the  workforce.
Although  younger  workers’  educational  level  has
improved  substantially  compared  to  previous
generations, it still  lags  far  behind  other  Member
States.  Employment  protection 
is
considered to be relatively strict in Portugal, such
in
that 
importance.  In  view  of  the  above,  Portugal
should give high priority to the following:

term  contracts  are  gaining 

legislation 

fixed 

i.

ii.

improve education and training in order to
increase  the  employability  and  adaptability
of the labour force, and accompany this by
an adequate benefit system so as to ensure
appropriate  incentives  to  participate  in
active labour market  measures  and  to  take
up job offers; and

pursue  the  policy  further  of  implementing
a  number  of  laws  aimed  at  improving  the
performance  of 
labour  market,
the 
including  the  easing  of  dismissal  and  job
assignment  rules  and  the  introduction  of
higher working time flexibility, with a view
to enhancing labour market flexibility.

39

13. FINLAND

Product markets

is 

from 

Rapid economic growth  in  recent  years  has  been
led  by  buoyant  exports  centred  on  high-
technology  products;  domestic  demand  has
recession  and
recovered 
the  earlier 
employment 
though
unemployment,  mainly  structural,  remains  high.
Strong  growth  together  with  firm  budgetary
expenditure  control  has 
in  highly
successful  budgetary  consolidation.  Given  an
outlook  of  continuing  strong  growth,  however,
overheating has emerged as a significant risk.

expanding, 

resulted 

Budgetary policy

The  general  government  surplus  rose  to  2.3  per
cent of GDP in  1999 from  1.3  per  cent  in  1998.
According  to  the  updated  stability  programme,
the  surplus  should  remain  above  4  per  cent  of
GDP  throughout  the  period  2000  to  2003,  with
the main contribution to change being the central
government  surplus.  The  actual  surplus  profile
will  depend  on  the  timing  of  reductions  in  taxes
and  charges  on  labour  which  the  government
aims  to  cut  by  1½  per  cent  of  GDP  by  2003.
Surpluses are justified by the need to prepare  for
a rapidly ageing population. In view of the above,
budgetary policy should aim to:

i.

ii.

iii.

maintain the tight fiscal stance represented
in  the  2000  budget,  given  the  increasing
overheating  risks, and  stand  ready,  already
in  2000,  to  tighten  further  if  the  risks
materialise more clearly;

to 

increase 

continue 
the  government
surplus through a reduction in government
expenditure  relative  to  GDP;  to  this  end,
respect  firmly  the  central  government
expenditure  guidelines  for  the  years  2001
to 2004 announced in March 2000; and

continue the reductions in the high burden
of taxation on labour as  in 1999  and  2000
and  as  part  of  a  restructuring  of  the  tax
system  with  the  aim  of  supporting  job
creation.

Integration of the Finnish  economy  in  European
product  markets  has improved  since  the  country
joined  the  EU.  Significant  and  fast  progress  has
been  achieved  in  the  transposition  of  internal
market  legislation  and  in  the  liberalisation  of
telecommunications  and  electricity  sectors.  The
already  important  R&D  effort  has  been  further
increased since the mid-1990s.  However,  there  is
scope  for  improvements  in  price  levels  and
productivity 
if  the
problem  of  inadequate  competition  in  certain
sectors is resolved. In view of the above, Finland
should give high priority to the following:

in  the  Finnish  economy 

i.

ii.

take  further  measures 
to  strengthen
competition  in  a  range  of  sectors,  most
retail  and  banking;  consider
notably 
reforming  the  competition  law  so  that  the
competition  authority  has  the  power  to
implement  Articles  81  and  82  of  the  EC
Treaty; and

further  open  up  markets 
for  public
procurement  and  public  services,  which
should  lead  to  lower  costs  and  higher
quality.

Capital markets

The  Finnish  stock  market  has  grown  strongly  in
recent  years,  both  in  terms  of  capitalisation  and
of  number  of  companies  listed.  The  venture
capital market is active and the recent creation of
a  market  for  high-growth  companies  will  further
favour the development of risk capital. However,
further  efforts  should  be  made  to  support  the
development of risk capital. In view of the above,
Finland should give high priority to the following:

give particular attention to the examples of
good  practice  put  forward  in  the  October
1999  Risk  Capital  Communication  in  the
areas  of  legislation  on  bankruptcy  and
employee
promotion 
stock-
ownership 
options; and

of 
schemes, 

innovative 

including 

i.

40

 
ii.

to  encourage
continue  with  measures 
investment  by  institutional  investors  in
equity markets.

Labour markets

in 

is,  more 

labour  market 

situation 
1999.  However, 

improved
The 
the
considerably 
unemployment  rate  still  remains  above  the  EU
average,  and 
importantly,  almost
completely  structural.  Other  main  problems
include  a  high  benefit  dependency  among
working-age  population,  high  taxation  on  labour
and  a  compressed  wage  distribution.  There  have
been  significant  efforts  to  reduce  the  tax  burden
on  labour  and  to  improve  the  quality  of  and
intensify active labour market measures. These

efforts  need  to  be  balanced  by  reforms  of  the
benefit system so that the latter actively supports
the  activation  programmes  and  makes 
the
supportive  of
structures  more 
underlying 
employment.  In  view  of  the  above,  Finland
should give high priority to the following:

i.

ii.

review  the  overall  benefit  system  with  the
aim  of  increasing  job  availability,  making
job  search  more  effective,  and  ensuring
sufficient  incentives  to  take  up a job  offer
and to stay in the labour force; and

pursue recent policy orientations to reduce
the tax burden on labour, and in particular,
reduce  the  marginal  effective  tax  rates  on
low wages.

41

14. SWEDEN

The Swedish economy is expected to continue to
grow  strongly  above  trend  in  2000,  driven  both
by  continued  strong  domestic  demand  growth
and  strong  exports.  With  buoyant  demand,  in
inflationary  pressure,
combination  with 
lower
and 
growth 
further 
unemployment  can  be  expected  over  the  year.
However,  supply  constraints  could  emerge  that
will put upward pressure on prices, not least with
respect to the tightening of the labour market.

employment 

low 

Budgetary policy

the  general  government 

In  1999, 
surplus
remained at 1.9 per cent of GDP, the same as in
1998.  According  to  the  updated  convergence
programme, continued surpluses of at least 2 per
cent  of  GDP  are  to  be  aimed  for  in  2000  and
beyond.  This  would  be  the  result  of  continued
tight expenditure control, which would also allow
a reduction in the revenue-to-GDP ratio. In view
of the above, budgetary policy should aim to:

i.

ii.

light  of 

the  buoyant 

tighten  the  stance  of  budgetary  policy,  in
the 
growth
environment,  so  as  to  support  monetary
policy in the achievement of price stability,
given the increased risk of emerging supply
constraints in the near future;

maintain tight expenditure control this year
and  next,  on  which  the  budgetary  outlook
is  heavily  reliant,  thereby  leading  to  a
steady  decline  in  the  ratio  of  government
expenditure to GDP; and

iii.

reduce  further  the  tax  burden  which
remains  high  despite  the  tax  reductions  in
2000.

Product markets

Sweden  is  increasingly  integrated  in  Community
in
markets  and  has  an  excellent 
transposing internal market legislation. State aid is

record 

42

the  network 

to  deregulate 

low;  R&D  spending  is  the  highest  amongst  the
EU15 Member States; and a great effort has been
made 
industries.
However,  there  is  scope  for  improvements  in
price  levels  and  productivity  in  the  Swedish
economy 
inadequate
competition in certain sectors is resolved. In view
of the above, Sweden should give high priority to
the following:

the  problem  of 

if 

i.

ii.

iii.

continue  efforts  to  remove  regulation  that
in  retail
hinders  or  limits  competition 
distribution, 
and
construction 
pharmaceuticals  while  taking  into  account
that it is inherently difficult to achieve full-
scale competition in a country with a large
number  of  sparsely  populated  regions;
give,  as  currently  envisaged  by 
the
government, the Competition authority the
power to enforce Articles 81 and 82 of the
EC Treaty;

pursue  initiatives  to  improve  competition
in railways, air and bus transport; and

pursue vigorously initiatives that have been
launched  to  enhance  efficiency  in  public
procurement  and  the  provision  of  public
services.

Capital markets

in 

has 

and 

growth 

venture 

Swedish 

capital  market 

been
The 
characterised by rapid globalisation, technological
change 
capital
investments. The venture capital market is active.
It  has  evolved  from  having  a  handful  of  mostly
government  players 
to  having  a  substantial
number  of  private  players.  However,  enterprises
in  their  very  early  stages  and  enterprises  outside
the  "growth-sectors"  still  have  difficulties 
in
raising  capital.  In  view  of  the  above,  Sweden
should give high priority to the following:

i.

make  further  efforts  to  facilitate  access  to
risk  capital 
small
in  particular 
companies  outside  the  high-tech  industry;

for 

give consideration to the examples of good
practice  put  forward  in  the  October  1999
Risk  Capital  Communication  in  the  areas
of  taxation,  and  promotion  of  innovative
employee  ownership  schemes,  including
stock-options.

to 

improve 

is  expected 

their
of  ALMPs 
efficiency,  while  it  is  important  to  continue  to
target  the  programmes  closely  to  actual  and
potential long-term unemployed as well as  to  the
demands  of  the  labour  market.  In  view  of  the
above,  Sweden  should  give  high  priority  to  the
following:

take  additional  measures  to  reduce  the
high  tax  burden  on  labour  income,  in
particular  for  those  with  a  low  take-home
pay from work; and

further  adapt  the  benefit  and  assistance
to  clarify  eligibility
schemes 
in  order 
limit  the  benefit  duration  by
criteria, 
activation 
the
administration 
efficient
incentives to take up a job.

strengthen 
ensure 

policy, 
and 

Labour markets

The  labour  market  situation  started  to  improve
more markedly in 1999 and the employment rate,
in  particular  the  female  employment  rate,  is  one
of  the  highest  within  the  Union.  Despite  the
labour
taken, 
measures  already 
remains  very  high  and  the  benefit  schemes
generous. The Swedish government appropriately
focuses  its  labour  market  policy  on  improving
human capital. The current streamlining

taxation  of 

i.

ii.

43

15. UNITED KINGDOM

is  expected 

Growth in the United Kingdom in 1999 exceeded
expectations  and  even  stronger,  above-trend
growth 
in  2000  but  no  major
resurgence  of  inflation  is  expected.  The  labour
market  is  expected  to  remain  strong  and  while
wage  earnings  are  showing  some  sign  of
acceleration,  government  measures  already  taken
to  promote 
and
improve  the  attractiveness  of  work  should  limit
the  risks  of  growth  translating 
into  greater
pressures on the labour market.

employment  opportunity 

Budgetary policy

in 

Government  finances  registered  a  surplus  of  1.2
per  cent  of  GDP  in  1999.  The  authorities  now
expect the  surplus  to  be 1.3  per  cent  of  GDP  in
financial  year  1999-00  compared  to  the  0.3  per
the  update
cent  of  GDP  projected 
convergence programme. The budget  announced
in March raised expenditure in certain areas; there
are also  plans  for  raising,  further  than  previously
announced,  the  share  of  government  investment
in GDP, from its current low levels. Nevertheless
the 
in
comfortable  surplus  in  2000-01.  In  view  of  the
above, budgetary policy should aim to:

finances  are  expected 

remain 

to 

i.

ii.

keep 
the
the  underlying  position  of 
government  finances  broadly  unchanged,
taking account of cyclical  developments  in
the  economy;  make  sure  that  any  new
expenditure or tax initiatives are consistent
with this goal; and

pursue  the  policy  of  substantially  raising
the  ratio  of  government  fixed  investment
to GDP within the context of firm control
of total government expenditure.

Product markets

The  economy  of  the  United  Kingdom  is  very
much  exposed  to  international  competition.  The
liberalisation of goods and services markets in the

44

United  Kingdom  is  in  many  respects  further
advanced  than  in  the  other  Member  States.
However,  problems  still  remain,  most  notably  in
transport. Despite significant reforms to improve
the  functioning  of  product  markets,  the  United
Kingdom  faces  a  serious  problem  of 
low
productivity.  Declining  R&D  expenditure  and
innovation  intensity  may  play  a  part  in  this.  The
high failure rate of  businesses and  skill  shortages
also give cause for concern. In view of the above,
the United Kingdom should give high priority  to
the following:

i.

ii.

monitor  and,  if  necessary,  reinforce  the
effectiveness  of  measures  been  taken  or
announced  to  tackle  the  problems  of
declining  R&D  efforts,  low  innovation
intensity,  skill  shortages  and  the  high
failure rate of SMEs; and

develop  a  coherent  strategy  for  transport
in  order  to  tackle  the  problems  of  road
congestion,  inadequate  investment  in  the
railways  and  poor  service  quality  in  public
transport.

Capital markets

is  mature 

and
The  UK  capital  market 
competitive,  and  a  range  of 
initiatives  are
underway  to  develop  venture  capital  markets.
Nevertheless, venture capital investment in early-
to
stage  businesses  remains 
investment 
in  management  buy-outs/buy-ins.
Furthermore,  although  pension  funds  are  not
prevented  from  investing  in  venture  capital  by
quantitative 
their
investment  in  this  field  remains  low.  In  view  of
the above, the United Kingdom should give high
priority to the following:

low  compared 

regulations, 

prudential 

i.

analyse the reasons which, notwithstanding
the  absence  of  quantitative  prudential
restrictions,  prevent  pension  funds  from
investing 
in  venture  capital,  and  take
actions to stimulate this investment.

Labour markets

intensified  and  extended 

UK labour  market  performance  has  been  among
the  best  in  the  EU  in  recent  years.  Recent
reforms  have 
the
‘welfare  to  work’  approach.  Tax  and  benefit
reforms have lowered marginal tax rates for low-
paid workers while providing in-work benefits  to
families  and  disabled  persons.  A  strategy  for
improving  child  care  provision  has  been
established. Various measures have been taken to
target 
high
unemployment.  However,  in  the  context  of  a
good overall performance, the problem of

regions  with 

localities 

and 

concentrated areas of unemployment, much  of  it
long-term,  stands  out.  In  view  of  the  above,  the
United Kingdom should give high priority to  the
following:

i.

pursue  efforts  to  address  the  problem  of
concentrated  unemployment  in  deprived
areas  and  communities,  aiming  to  reduce
the proportion of households with  no-one
at  work;  and  reinforce  the  preventive
strategy  against  long-term  unemployment,
with  the  aim  of  providing  a  fresh  start
within  12  months  for  unemployed  adults
in line with the Employment Guidelines.

45