2000/517/EC: Council recommendation of 19 June 2000 on the broad guidelines of the economic policies of the Member States and the Community
Date: 2000-06-19
Institutions: Council of the European Union
Subjects: EU Member State, European Communities, economic policy

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II

(Acts whose publication is not obligatory)

COUNCIL

COUNCIL RECOMMENDATION

of 19 June 2000

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

(2000/517/EC)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community, and in particular Article 99(2) thereof,

Having regard to the recommendation from the Commission,

Having regard to the discussion by the European Council on 19 June in Santa Maria da Feira;

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

RECOMMENDS:

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I. GENERAL ECONOMIC POLICY GUIDELINES

1. INTRODUCTION

Globalisation and the prospect of a new knowledge-driven economy present major opportunities for the
European Union and its citizens. To take advantage of these opportunities, there is a need to accelerate
these broad economic policy
the European economy. To this end,
the ongoing transformation of
guidelines (BEPGs) build on and extend the existing strategy and give operational content
to the
conclusions of the Lisbon Summit. In particular, they focus on the medium and long-term implications of
structural policies and on reforms aimed at promoting economic growth potential, employment and social
cohesion, as well as on the transition towards a knowledge-driven economy. The Cardiff and Luxembourg
processes will deal with their respective subjects matters in more detail.

The broad economic policy guidelines

The Treaty requires Member States to conduct their economic policies with a view to
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 coordinate them
within the Council (Article 99). To this end, since the start of Stage 2 of economic and
monetary union, the Council, on a recommendation of the Commission, has adopted each
year the BEPGs. At the centre of the economic policy coordination 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 entitled (cid:145)Economic policy coordination(cid:146) 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.

In order to allow the European Council to give effective political guidance in a timely
manner at its annual spring meeting and to ensure that the Ecofin Council is able to draw
on the work of other Council formations, the organisation of the preparation of the BEPGs
will be modified.

From this year on, the BEPGs will be forwarded to other relevant Council formations for
them to assume responsibility for implementation in their respective areas. At the same
time,
formations will be invited to pursue work with a view to the
formulation of the BEPGs for the coming year, and to make their contributions available by
the end of January of the following year.

these Council

in the light of this work and drawing,

The Commission,
inter alia, on the stability and
convergence programmes, the joint employment report and the Cardiff reports, as well as its
own assessment of the implementation of the BEPGs, will prepare the orientation debate at
the Ecofin Council meeting which precedes the annual spring meeting of the European
Council.

The Ecofin Council will draw up, on this basis, a paper setting out the key issues on which
the European Council will be invited to focus its discussion in the part of the annual spring
meeting which has a direct bearing on the BEPGs.

The Ecofin Council, acting on a recommendation by the Commission, and in the light of the
priorities established by the European Council
in the annual spring meeting as well as
possible comments by other Council formations on the Commission’s recommendation, will
draw up a draft for the BEPGs on the basis of which the June meeting of the European
Council will discuss its conclusion. The Ecofin Council will subsequently adopt the BEPGs as
provided for in the Treaty.

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Member States face broadly the same challenges and policy needs. Hence the general recommendations set
out in Section 3 apply to all of them. At the same time, Member States differ 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 should be noted that the country-specific guidelines, in
so far as labour market issues are concerned, complement the 2000 employment guidelines and underpin
the implementation of the revised national action plans. The latter have just been submitted by the
Member States and will be further assessed in the joint employment report in the context of the next
employment package.

Participation in the euro area implies the need for enhanced policy coordination. To this end, the
Ministers of the euro-area Member States will continue to meet informally in the Euro-11 Group, without
prejudice to the role of the Ecofin Council at the centre of the economic policy coordination and
decision-making process. The Euro-11 Group is deepening its discussion of issues of common concern, in
line with the conclusions of the Luxembourg European Council. In doing so, they pay attention, inter alia,
to issues
capital market
developments, and cyclical positions and budgetary stances of participating Member States.

euro exchange-rate developments,

current account positions,

such as

The Euro-11 Group will continue, and where appropriate strengthen, the continuous surveillance of
budgetary developments and policies of the Member States participating in the euro area. This continuous
surveillance will foster debates aimed at keeping fiscal policies in line with the BEPGs or with the criteria
mentioned in the Treaty. On external issues relevant to its competence, the Euro-11 Group will continue
to formulate common euro-area positions in international forums. It also attaches particular importance
to the productive dialogue with the European Central Bank, which is regularly represented at meetings.
Building on the experience gained over the past
the Group continues to develop and
strengthen a common language, where appropriate, prepared by the Econcomic and Financial Committee,
and agreed positions among themselves, so as to ensure coherent expressions of views on subjects of
common concern.

two years,

2. MAIN PRIORITIES AND POLICY REQUIREMENTS

2.1. The EU economy at the start of the new millennium

The background for the 2000 BEPGs is the economic situation and outlook as outlined in the
Commission services’ spring 2000 economic forecasts. Moreover, the Council has drawn on the findings
and conclusions of the Commission’s implementation report on the 1999 BEPGs. The report concluded
that the overall implementation of the 1999 BEPGs is encouraging. Taken as a whole, macroeconomic
policies were appropriate. But progress with the reform of labour markets is mixed: while policies towards
activation and prevention where implemented in many Member States, employment disincentives in tax
and benefit systems have been tackled in only a few. Moreover, excessively rigid employment protection
legislation should be reassessed more actively in order to identify means to foster job creation. With
respect to economic reforms, progress has been most visible in the implementation of internal market
the
legislation and the liberalisation of
structural performance indicators agreed in the Lisbon summit, that will be ready by the end of this year,
will contribute to accelerate the economic reforms for a more competitive European economy. 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.

telecommunications and electricity markets.

In this respect,

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The heritage of the 1990s (cid:151) 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
functioning of
the internal market has been further improved and some previously over-regulated
industries are being liberalised and exposed to the forces of competition. A stability-oriented monetary
policy, supported by improving budgetary policies and appropriate wage developments, has been put in
place. The euro has been successfully introduced. A comprehensive framework for the coordination of
economic policies has been established, to which the European Employment Pact was added last year
which includes a macroeconomic dialogue.

In spite of
disappointing, both in comparison with the past and with the United States of America.

the European Union’s economic performance in the 1990s was

these achievements,

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 the start of the decade. Living standards in the EU are on average
about 35 % 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 severity of

The fact that the improvements in the framework conditions are not reflected in a stronger economic
performance is indicative 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 some Member States experienced an impressive economic performance
they
over the last decade. Although they were also affected by the recession in the early 1990s,
subsequently enjoyed strong recoveries that reduced unemployment significantly, in some cases to levels
not seen since the early 1970s. While country-specific factors placed a role, these countries have in
common that a swift macroeconomic adjustment went hand in hand with a comprehensive structural
reform package and that this mutually-reinforcing strategy was implemented with resolve.

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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.

Favourable growth prospects (cid:151) Since early summer 1999, when the latest BEPGs were adopted, an
increasingly robust and broadly-based economic recovery has taken hold in the Union. It reflects in part
the influence of a favourable environment. More importantly,
is the result of sound
macroeconomic policies, increasingly underpinned by the structural measures taken by Member States.
This process has to be continued forcefully. Under
these conditions, and if, as expected, wage
developments continue to be appropriate, an annual rate of non-inflationary growth of around 3 % for the
EU as a whole should be a realistic prospect for the coming years. However, risks to price stability need
to be closely monitored.

though,

it

Growth has become richer in employment
largely because of shifts in demand towards the more
labour-intensive services sectors and efforts to enhance effective labour supply. Thanks to favourable
macroeconomic conditions and structural measures taken in the labour markets, employment growth is
expected to continue at a strong pace, leading to a further reduction in unemployment.

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.

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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-driven 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.

Restoring full employment (cid:151) Unemployment remains too high. Although it has edged down gradually,
it is still around 9 % of the Union labour force 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. Addressing these problems 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
the overall aim is to raise the
workers. As emphasised by the Lisbon Special European Council,
employment rate from an average of 61 % today to as close as possible to 70 % by 2010 and to increase
the number of women in employment from an average of 51 % today to more than 60 % by 2010, for
the EU as a whole.
In addition, the Lisbon Special European Council encouraged Member States to
consider setting national targets for an increased employment rate. 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.

Employment in EU-15

Total employment rate

Female employment rate

%

75

70

65

60

55

50

45

40

35

30

1970 

1975 

1980 

1985 

1990 

1995

Source: Commission services.

Promoting a knowledge-driven economy (cid:151) Innovation and accumulation of knowledge are
increasingly becoming key drivers for competitiveness, productivity, economic growth, employment and
standards of living. Yet, the Union needs to catch up with the United States both in terms of innovation
capacity, and in the production and diffusion of information and communication technologies (ICT).
Furthermore, there are serious skill shortages, in particular within the sciences and engineering, and there
is a lack of basic ICT literacy for many workers and of expert skills needed in the information society.
Meeting these challenges will therefore require more public and private investment in human resources, a
modernisation of the capital stock, further liberalisation and structural reforms that will
lead to the
adaptation of economic structures, more competitive markets, the increased flexibility in allocation of
resources among sectors, firms and occupations as well as an improvement in the match between skills
and jobs.

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Preparing for population ageing (cid:151) On the basis of current demographic trends, 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, other things equal, a rising dependency ratio will have considerable consequences for
the contribution of labour to economic growth and for the sustainability of public finances. A rising
dependency ratio will result in lower economic growth unless it is offset by an increased employment rate
and sustained improvements in factor productivity growth. Regarding the budgetary 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 to stimulate higher labour force participation, especially for older workers.
Recognising this challenge, the Lisbon European Council has called for stronger cooperation between
Member States, notably on the future evolution of social protection giving particular attention to the
sustainability of pension systems from a longer-term perspective.

Dependency ratios in EU-15

Total

Old age

%

80

70

60

50

40

30

20

10

0

1980  1990  2000  2010  2020  2030  2040  2050

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
group 15-64 years old.
Old age dependency ratio = the ratio of the number of people in
age group 65+ divided by the population in the working age group
15-64 years old.

Source: Commission services.

Improving social cohesion (cid:151) 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 (cid:151) in particular regions of 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.

Pursuing reforms within the international context (cid:151) In an increasingly integrated world economy it
is not enough for the European Union to consider its own economic reforms in isolation (cid:151) they should
be benchmarked not just within the EU, but held up against the world’s best performing economies. If
Member States are to reap the benefits from an improved framework for economic policy-making,
appropriate external policies must be pursued. The Union should therefore continue to adopt a common

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commercial policy which favours open, competitive markets to maximise growth, prosperity and stability.
There is a very strong correlation between openness to international trade and investment, and growth. As
one of the largest single markets in the world, the Union stands to gain greatly from further liberalisation
and is willing to contribute itself to this process in the framework of the WTO negotiations.

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

The challenges of restoring full employment, creating a knowledge-driven economy, preparing for
population ageing and safeguarding social cohesion are interlinked, also internationally, and will need to
be addressed by a coherent and comprehensive economic policy strategy for the medium to long term.
Although important progress in meeting the key challenges can be expected in the context of the current
cyclical upturn, a rise in the potential output of the Union’s economy would be an important ingredient
for maintaining the pace of non-inflationary growth over the medium term. This requires, together with
macroeconomic stability and sound, sustainable public finances, the building of efficient, integrated and
competitive markets. Efficient markets greatly reinforce the ability to invest in the human and physical
capital needed for growth and they are the fundamental source of innovation and dynamism.

Investment performance in EU-15

% of GDP

Total investment

Private investment

30

25

20

15

10

5

Public investment

0
1970 

1975 

1980 

1985 

1990 

1995 

2000

Source: Commission services.

This policy strategy should be pursued with resolve by all policy actors, to achieve a balanced and
comprehensive mix of policies which mutually reinforce conditions for investment, growth and job
creation, for the capacity to innovate and accumulate knowledge and for greater social inclusion: The
main planks, as described in the next section, are:

(i)

ensure growth- and stability-oriented macroeconomic policies;

(ii)

speed up the ongoing process of fiscal consolidation;

(iii)

improve the quality and sustainability of public finances;

(iv) promote appropriate wage developments;

(v)

foster a knowledge-driven economy;

(vi) ensure efficient product (goods and services) markets;

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(vii) promote capital markets through further integration and deepening;

(viii) invigorate labour markets;

(ix) enhance sustainable development.

3. POLICY RECOMMENDATIONS

3.1. Ensure growth- and stability-oriented macroeconomic policies

The overall approach to macroeconomic policy plays a key role in promoting growth and employment and in
preserving price stability. Over the short term, it should ensure the continuation of the ongoing recovery and the full
realisation of the current growth potential. Over the medium-term, it should contribute to the establishment of the
framework conditions ensuring adequate levels of saving and investment so as to position the economy on a
sustained, higher, non-inflationary, growth and employment path.

In the euro area, economic conditions and prospects have improved considerably as the recovery has broadened and
strengthened. Now, the key policy challenge is to ensure that the ongoing recovery develops into a long-lasting period
of vigorous economic growth and rising employment. An appropriate and tension-free economic policy approach
consists of:

(i) monetary policy committed to maintain price stability in accordance with the Treaty;

(ii) sustained efforts by Member States to speed up the ongoing fiscal consolidation, to achieve, as rapidly
as possible, and maintain, over the medium-term, budgetary positions close to balance or in surplus
and to lower public debt;

(iii) a continuation of responsible behaviour on the part of

the social partners that supports wage

developments that are consistent with price stability and job creation.

Interest rates, euro area

Long term

Short term

Main refinancing rate

%

6

5

4

3

2

1

0

Jan-99 

Jul-99 

Jan-00

Source: Commission services.

The Member States outside the euro area should also maintain sound monetary and budgetary policies in
order to respect the exchange-rate commitments, for the two Member States participating in ERM 2
(Denmark and Greece), or to achieve the inflation target, thus creating the conditions for exchange-rate
stability, for the other two Member States (Sweden and the United Kingdom).

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Actual and cyclically-adjusted budget balances,
euro area

% of GDP

Cyclically-adjusted budget balance

Actual deficit

1

0,5

0

–0,5

–1

–1,5

–2

–2,5

1998 

1999 

2000 

2001

Source: Commission services.

3.2. Speed up the ongoing process of fiscal consolidation

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 % of GDP. It will
also have a favourable effect on interest rates and contribute to the crowding-in of private investment, to the further
reduction in the government debt to GDP ratio and, by increasing the credibility of the budgetary framework of
investors’ confidence. Given expected output growth above the potential rate, a
EMU,
pro-cyclical stance of budgetary policy should be avoided. With budgetary prospects indicating no improvement in
underlying positions for the EU as a whole, there is an agreement for speeding up fiscal consolidation. 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 shall:

to a strengthening of

(i)

take advantage of fiscal improvements due to the better than expected economic growth to achieve
budgetary positions in 2000 better than the objectives set in the updated stability and convergence
programmes;
this is in conformity with last year’s recommendation to front-load the budgetary
adjustment as of the year 2000 and should be possible in most Member States given the better than
planned outcomes in 1999;

(ii) as growth remains strong, meet a budgetary position of close to balance or in surplus earlier than
envisaged in the updated stability and convergence programmes and, as a rule, in the year 2001 so as
to achieve a sufficient margin to cope with the impact of adverse cyclical fluctuations;

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

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General government net lending (+)/borrowing (−) in the updated stability and convergence
programmes

Date (1)

1999 (2)

2000 (*)

2001

2002

2003

Stability programmes

(% of GDP)

B

D

E

F (4)

IRL

I

L

NL (5)

A

P

FIN

Euro-11

DK

EL

S

UK (6)

EU-15

12/99

12/99 (3)

01/00

01/00

12/99

01/00

02/00

11/99

03/00

02/00

09/99

12/99

12/99

11/99

12/99

− 0,9

− 1,1

− 1,1

− 1,8

2,0

− 1,9

2,4

0,5

− 2,0

− 2,0

2,3

− 1,2

− 0,7

− 1,1

− 0,8

− 1,5

1,6

− 1,5

2,5

0,4

− 1,7

− 1,5

3,7

− 1,1

− 0,5

− 1,5

− 0,4

− 1,2

2,5

− 1,0

2,6

0,0

− 1,0

0,1

− 0,7

2,6

− 0,6

2,9

− 1,3/− 0,5

− 1,1/0,0

− 1,5

− 1,1

4,2

− 1,0

Convergence programmes

3,0

− 1,6

1,9

1,2

2,2

− 1,2

2,2

0,2

2,2

− 0,2

2,0

0,2

− 0,6

− 0,7

− 0,6

− 1,4

− 0,7

4,6

− 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

(*) March 2000 EDP notifications from Member States.
(1) Date of adoption.
(2) Out-turn.
(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) Figures for 2001 and 2002 based on a cautious scenario and favourable scenario respectively; both scenarios are
based on the Budget Memorandum 2000, published in September 1999, since which actual developments have been
more favourable.

(6) 1999 Out-turn for calendar year. Programme data for financial years.

Source: Commission services.

3.3. Improve the quality and sustainability of public finances

The current favourable economic prospects provide the opportunity to introduce comprehensive reforms involving
expenditure restructuring and reductions in the tax burden, while enhancing fiscal consolidation. The composition and
quality of budgetary, consolidation is instrumental in enhancing employment and guaranteeing a smooth functioning
of EMU. Public expenditure needs be restructured in order to support investment in tangible and intangible capital
and so 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 the growth and employment potential. Furthermore, tax

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systems have to cope with the challenges brought about by economic integration and technical change, including the
need to fight harmful tax competition. Welfare systems must underpin 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 must ensure that structural change does not
compound the existing social problems, such as 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:

(i)

improve the sustainability of their public finances principally through expenditure restraint rather
than through tax increases;

(ii)

introduce or enhance the mechanisms and institutions that help control spending, in this context, the
introduction of ceilings for expenditure could be considered;

(iii)

redirect government spending to give greater relative importance to investment in physical and
human capital, R & D, innovation and information technologies so as to ensure a substantial annual
increase in per capita investment in human resources;

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)

review benefit systems, in order to make work pay;

(v)

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

(vi) promptly review pension and health-care systems in view of the budgetary challenges of an ageing

population;

(vii)

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

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

(ix) pursue tax coordination 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.

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Just like the Member States, the Community should respect the principle of budgetary discipline. This
must be applied to all categories of the financial perspectives, as agreed at the 1999 Berlin European
Council, while respecting the Interinstitutional Agreement on budget discipline and the improvement of
the budget procedure; within the financial perspectives and respecting the Interinstitutional Agreement, a
better allocation of Community resources should be exploited in order to enhance the economic impact
of the EU budget.

3.4. Promote appropriate wage developments

Wage 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 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 in the
broad economic policy guidelines. It is necessary to:

Wage developments, euro area

Nominal compensation per
employee

%

Nominal unit
labour costs

Real compensation per
employee, GDP deflator

Labour productivity

%

7
6
5
4
3
2
1
0

4
3
2
1
0
–1

1990 

1992 

1994 

1996 

1998 

2000 

Source: Commission services.

(i)

insist that nominal wage increases be consistent with price stability. This implies, that in the euro
area, aggregate wage increases will be consistent with keeping price increases within the price stability
objective of the ECB;

(ii) stress the importance of real wage developments for strong employment growth; 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
labour productivity
growth is slowing down, the scope for real wage increases will be reduced. More specifically, a
reduction in working time should not lead to an increase in real unit labour costs. For improved
an
in higher
to result
profitability
investment-supportive environment
labour-market conditions,
taxation and the regulatory framework;

is
investment
in terms of demand developments,

in the Union,

to forge

essential

it

(iii) ensure that collective bargaining systems take account of productivity differences (whether according

to skill, qualification or geographical area) when determining wage levels;

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

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3.5. Foster a knowledge-driven economy

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. Higher levels of competition in
product and capital markets and well-functioning financial markets are essential conditions for increased innovation
and better diffusion of technology. Member States should:

(i) provide adequate framework conditions to increase the involvement of the private sector in the
financing of R & D expenditures, R & D partnerships and high technology start-ups, for example by
using tax policies and by improving the functioning of risk capital markets;

(ii) stimulate competition in product and capital markets,

in particular, by removing entry and exit
barriers, with a view to strengthening incentives for firms to innovate and to promote the diffusion of
technology and information;

(iii) ensure efficient and 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 research
institutes and business and ensure the dissemination of information; EC State aid rules must be strictly
applied;

(iv) ensure availability of low-cost, high-speed Internet access

(v) take measures to reduce the fragmentation and compartmentalisation of the R & D effort and to
intensify cooperation 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;

% of GDP

EL
P

E
I

R & D expenditure (1998)

Private share
of R & D

IRL
A
B

UK
DK

NL
F

D

FIN

S

USA

JAPAN

23
33
50
55
74
50
65
65
60
64
60
65
61
75

65
70

0 

1 

2 

3 

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; encourage companies, workers and
educational institutions to participate in lifelong learning; halve by 2010 the number of 18 to 24 year

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olds with only lower-secondary education who are not in further education and training; increase the
number of researchers and engineers; guarantee the availability of Internet and multimedia 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.

3.6. Ensure efficient product (goods and services) markets

Well-functioning product markets are essential to enable the EU countries to take full advantage of the 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 the end of 2000, a strategy for the removal of barriers to trade in services is
needed. Member States should:

(i)

implement the international market legislation fully and effectively, especially in the area of public
procurement and technical standards;
take measures to ensure availability of both government
procurement and basic public services on-line by 2003; reduce the volume of national technical
regulation to the strict minimum necessary;
improve the functioning of the mutual recognition
principle;

(ii)

ensure the independence of competition authorities; empower competition authorities to enforce
Articles 81 (cartels) and 82 (abuse of dominant positions) of the EC Treaty with transparent and
effective instruments;

(iii)

reduce State aid,
monitoring of State aid and the assessment of its efficiency;

in particular ad hoc aid, and redirect it towards horizontal goals;

improve the

(iv) complete the liberalisation of the telecommunications market by the end of 2001 and, in particular,

work towards strengthening competition in local access networks before the end of 2000;

(v)

speed up the liberalisation of the energy (electricity and gas), postal services and transport sectors
aiming at a truly internal market in these areas; 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; systematic assessment of reforms in network industries
is needed after they have been implemented;

(vi)

reinforce competition in services sectors, especially in the financial services, the distribution sector
and business services; on the basis of a Commission proposal, agree on a strategy for the removal of
barriers to services by the end of 2000 and undertake measures to enable electronic commerce to
develop fully its potential;

(vii) reduce regulatory burdens on business, in order to create a more friendly environment for innovative
business, especially the set up and the running of SMEs, and set out a strategy for further
coordinated action to simplify the regulatory environment by 2001;

(viii) develop a systematic approach to the regulatory framework for services which could aim at
identifying areas where market elements could be used in the provision of public services; develop
measures to improve the efficiency of public administration by promoting the use of new
management and communication (e-commerce, Internet, public procurement on line) techniques and
by stimulating transparent public-private partnerships;

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(ix) monitor the effective implementation of the many regulatory reforms in order to obtain concrete

results in terms of economic efficiency and consumer benefits.

3.7. Promote capital markets through further integration and deepening

Efficient, integrated financial markets improve the allocation of capital and reduce its cost. They facilitate the process
of structural reform and play an essential role in supporting an entrepreneurial culture. This could assist in raising
the profitability and investment ratio. Sound financial systems also contribute to macroeconomic 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, where action should be taken as quickly as possible; the Lisbon Special European Council has asked full
implementation of the action plans by 2005 and 2003 respectively. In addition, the plans and their implementation
should take into consideration actual market developments, so that integration is as much as possible market driven.
It is necessary:

(i)

to facilitate the widest possible access to investment capital on an EU-wide basis, including for SMEs,
by means of a (cid:145)single passport for issuers(cid:146);

(ii)

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

(iii)

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

(iv)

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

(v)

to enhance the efficiency of cross-border retail payment services through improving the procedures
for processing cross-border payments and communications with customers;

(vi)

to 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 under way in the
international accounting field;

(vii) to 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;

(viii) to ensure more intensive cooperation between EU financial market regulators and supervisors;

(ix)

to follow-up on the EU provisions on takeover bids and on the restructuring and winding-up of
credit institutions and insurance companies.

The Union should contribute to international financial stability by engaging in an effective dialogue with
its main trading partners, and by helping to ensure the strengthening of the international
financial
architecture. It should continue to work for the conclusion of a multilateral framework of investment
rules in the next WTO trade round, to improve the predictability and stability of the international
investment environment.

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Venture capital investment, EU/USA
(in million EUR)

USA

EU-15

14 000

12 000

10 000

8 000

6 000

4 000

2 000

0

1995 

1996 

1997 

1998

Source: EVCA, Venture one.

3.8. Invigorate labour markets

The Lisbon European Council set out Europe’s strategy for full employment through stepping up the process of
structural reform and preparing the transition to a knowledge-based economy; modernising the European social
model,
investing in people and combating social exclusion; and applying an appropriate macroeconomic mix.
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 and
adaptability. The countries that have most progress, while pursuing sound macroeconomic policies, 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:

(i) promote the transition from passive to active measures and implement a comprehensive preventive
in
strategy against long-term and youth unemployment,
particular, raise the employability of
individuals through a lowering of taxes and social security
contributions, especially on low-paid workers; facilitate access to labour-market training, education
and lifelong learning, and aim at
reintegrating the unemployed through well-focused active
programmes;
involve the social partners with the public authorities in the efforts to improve
education, training and opportunities for lifelong learning;

in line with the employment guidelines;

(ii) review and reform, where appropriate, tax and benefit systems to ensure effective incentives and
rewards for participation in an active working life; assess passive income support and compliance with
eligibility criteria in benefit systems and reform where appropriate; avoid the transfer of people from
unemployment benefit schemes to other expensive, passive systems outside the labour market and
develop active labour-market measures to avoid long-term unemployment support by purely passive
systems;

(iii) enhance labour mobility, inter alia, through mutual recognition of qualifications and by improving the
portability of pension entitlements in order to sustain labour mobility across sectors and regions in
the EU;

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Labour effective tax rate on total employment
(1999)

IRL

UK

EL
P

E

USA

JAPAN

NL
I

F
A

D
FIN
B
DK

S

0 

10 

20 

30 

40 

50

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. While conceptually broady similar to the
implicit tax rates published by Eurostat, there are some method-
ological differences. Largely based on macroeconomic data, they
allow,  however,  to  be  updated  in  line  with  the  Commission
services’  economic  forecasts,  thus  enabling  an  assessment  on
the basis of the most recent information.

Source: Commission services.

(iv) modernise work organisation in cooperation with the social partners, including flexible working time
arrangements, measures to facilitate part-time work and an assessment of
job protection
legislation and high severance payments; accompany any reductions in overall working time, whether
by legislation or social agreements, by efforts to prevent increases in unit labour costs and take future
labour supply needs into account;

tight

(v) 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;

(vi) strengthen efforts to agree on steps to secure a more inclusive labour market by the end of 2000.

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
the efficiency gains embodied in
market-based instruments would also bring benefits in terms of more efficient economic structures, hence contributing
to higher growth and employment. Member States should:

tries to exploit

(i)

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

(ii) reassess sectoral subsidies and tax exemptions and other existing measures which have a negative

environmental impact while taking full account of other relevant economic and social factors;

(iii) work to agree on an appropriate framework for energy taxation at the European level.

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II. COUNTRY-SPECIFIC ECONOMIC POLICY GUIDELINES

1. BELGIUM

After a slowdown in 1999, acceleration in economic activity is expected in 2000, supported by domestic
demand, notably private consumption and investment, and a continuing positive contribution from net
exports. Employment creation is expected to continue in 2000 and to strengthen further in 2001 as the
reduction in labour taxes takes effect.

B u d g e t a r y p o l i c y

Belgium has made further progress towards budgetary adjustment in 1999, as the general government
budget deficit fell to 0,9 % of GDP, which is blow the target set in the stability programme, and
government debt to 114,4 % of GDP. According to the updated stability programme 2000 to 2003,
Belgium will continue its fiscal consolidation effort based on high primary surpluses, aiming at a situation
of budgetary balance in 2002 and a dept ratio close to 100 % of GDP in 2003. In view of the above,
budgetary policy should aim:

(i)

to achieve better budgetary results in 2000 than the 1 % 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;

(ii) to contain the real annual growth rate of primary expenditure within the 1,5 % figure implicitly
derived from the commitments under 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;

(iii) to maintain the primary surplus at

levels somewhat above 6 % of GDP in order to ensure a
continuous reduction in the general government deficit and to allow a fast reduction in government
debt ratio;

(iv) to allocate the proceeds of privatisations or other sales of assets owned by the State to the reduction

of government debt.

P r o d u c t m a r k e t s

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 in transposing internal market legislation, implementation should be
speeded up. The Belgian Government has expressed its commitment to reduce the administrative burden
for enterprises by 25 % by the end of its term. Despite recent efforts, the ratio of R & D spending to GDP
is below EU average. Efforts to stimulate the growth of the below average ICT penetration rate have to be
pursued. In view of the above, Belgium should give high priority to the following:

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

(ii) speeding up the liberalisation of the electricity and gas sectors and strengthening the powers of the

regulatory authorities responsible for energy and telecommunications;

(iii) implementing without delay and monitoring closely the various measures envisaged to reduce the

administrative burden for business;

(iv) increasing the transparency of the relationships between the public and private sectors, particularly

within the public-private partnerships in order to avoid distortions of competition.

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C a p i t a l m a r k e t s

Several reforms have been undertaken 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 and high-tech investments. Although the concentration of efforts on early-stage
operations is in general positive, the shortage of private venture capital, and of bridging finance in
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) making further efforts to encourage private, as opposed to public, venture capital
the fiscal environment; giving consideration,

improvement of
in particular,
corporate tax system, through reducing the tax rates and widening the tax base.

through an
to restructuring the

L a b o u r m a r k e t s

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 responsibilities between federal government, regions and language communities
require substantial coordination. In view of the above, Belgium should give high priority to the following:

(i)

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

(ii) reinforcing 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 availability and benefit conditions,
on employment, in particular of low skilled, older workers and women.

2. DENMARK

Economic growth should recover in 2000 since domestic demand, and in particular private consumption,
should regain strength in parallel with the brighter outlook for export markets. Unemployment, which at
4,5 % of the labour force at the end of 1999 reached its lowest level since the 1970s, is likely to edge up
over the year.

B u d g e t a r y p o l i c y

Government finances in Denmark improved strongly in 1999, with the general government surplus
reaching 3 % 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 % of GDP and, according to the
updated Danish convergence programme, to increase thereafter gradually to some 3 % of GDP by 2005.
Expenditure overruns have regularly occurred at the level of local governments. In view of the above,
budgetary policy should aim:

(i)

to adhere to the government’s aim to restrict real growth in government consumption to 1,2 % in the
budget for 2000; for this, exercise vigilance at the level of local governments; consider stronger
institutional arrangements, respecting the autonomy of local governments, if there is a risk that this
target will not be met;

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

P r o d u c t m a r k e t s

the network industries. However,

Denmark is among those countries that have gone the furthest in product market reform, in particular in
the area of
there is scope for improvements in price levels and
productivity in the Danish economy if the problem of inadequate competition in certain sectors, such as
food and beverages, building materials, and retail 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:

(i) continue to take policy action to strengthen competition policy and make sure that it is enforced in

full; given the Competition Council powers to enforce Articles 81 and 82 EC;

(ii) continue the effort to improve the efficiency of the comparatively large public sector, for example by

using public tendering more systematically;

(iii) increase the effort to raise technology transfers from research institutes to business and to induce

entrepreneurship in high-tech sectors.

C a p i t a l m a r k e t s

remains

Major reforms have been taken to increase market efficiency and to develop risk capital. However, the
equity 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:

relatively small, especially compared to the bond market. A market

(i)

increase the sources of funds for venture capital
investments by further reducing the quantitative
constraints on pension funds investment; this process should take into account the need for risk
diversification;

(ii) give particular attention to the examples of good practice but forward in the October 1999 Risk
legislation on

Capital Communication in the areas of taxation of investments in venture capital,
bankruptcy, and promotion of innovative employee ownership schemes, including stock-options.

L a b o u r m a r k e t s

reforms

The labour market situation has improved substantially in Denmark in recent years, partly as a result of
implemented since the mid-1990s. However, given a high
the comprehensive structural
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:

(i)

implement the 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.

3. GERMANY

Economic activity clearly accelerated in the second half of 1999, with the external 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.

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B u d g e t a r y p o l i c y

The consolidation of government finances in Germany continued in 1999, with the general government
deficit declining to 1,1 % of GDP compared to a target in the original stability programme of 2 %.
According to the updated stability programme of 1 February 2000, the deficit is expected to decrease to
1 % 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 slight deterioration of finances at the regional level and a replenishment
of reserves 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 1,5 % of GDP. In view of the
above budgetary policy should aim:

(i)

to use the fiscal gains in the event of higher growth than expected to reduce the deficit in 2000
below the targeted level;

(ii) to implement the reforms of income and corporate taxation in 2001 with greatest caution in order to
the renewed increase in the government deficit and to minimise the risk of a lasting

limit
deterioration of the structural deficit;

(iii) to elaborate structural reforms of the social security system (especially pension and health) as they are

key to sustainable finances in the medium term;

(iv) to 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. Furthermore, one
off revenues should be used fully for debt reduction.

P r o d u c t m a r k e t s

Germany is well
integrated in the European product markets. However, German price levels remain
relatively high mostly due to higher per-capita income levels. Several reforms have recently proved
successful
in particular in the area of
competition policy and the liberalisation of network industries. Nevertheless, there is scope for further
improvement. In view of the above, Germany should give high priority to:

in improving the functioning of German product markets,

(i) ensure an increased opening-up of public procurement; promote electronic access to public tenders;

(ii)

liberalise the advertising regulations according to European standards (i.e. eliminate the restrictions on
discounts and free gifts), taking into account the requirements of the new e-commerce Directive;

(iii) improve competitive structures and efficiency by exploiting the possibilities of privatisation;

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

(v) review the new agreement on electricity payments, which lasts until the end of 2001, in the light of

experience gained, so as to capture the full benefits of the liberalisation of the electricity sector;

(vi) undertake further efforts to reduce restrictions and administrative burdens on SMEs, in particular for

business services and craft firms.

C a p i t a l m a r k e t s

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

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(i) giving consideration to the examples of good practices given in the October 1999 Risk Capital

Communication in the field of taxation, bankruptcy laws and support to stock option schemes.

L a b o u r m a r k e t s

The German labour-market situation improved moderately in 1999, but this was mainly concentrated on
the western part of the country. The (cid:145)Alliance for jobs(cid:146) has set the framework for recent wage moderation,
including 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 which should help to keep pension contributions stable. In view of the above, Germany should
give high priority to:

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

(ii) continue and monitor efforts to bring down gradually the fiscal pressure on labour by reducing taxes
and social security contributions. Labour costs should be reduced further over the whole wage scale
and in particular at the lowest end, while respecting the need for fiscal consolidation. The policy
strategy of shifting taxation from labour to eco-taxes, which has already contributed to a decline of
pension contribution rates of about 5 %, should be continued in line with the envisaged further steps
of the reform;

(iii) reducing disincentives within the tax and benefit system which discourage labour-market participation
of all groups, especially of older workers, considering the policy choice most appropriate to avoid the
early withdrawal of workers form the labour market and to promote employment of older workers.

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. The consolidation of the growth phase is expected to affect the labour market
positively in coming years.

B u d g e t a r y p o l i c y

Greece made further progress in 1999 in improving its budgetary situation, as the general government
deficit fell to 1,6 % of GDP, below the target set in the convergence programme, and the government debt
fell to 104,4 % of GDP. The faster reduction in the deficit was due to much higher budget revenues than
expected which resulted in more than offsetting a slight 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:

(i)

to consider as an upper limit the target set in the budget for the general government deficit in 2000
at 1,2 % of GDP; a better outcome on the revenue side should be reflected in a lower general
government deficit; to tighten the budgetary policy further in 2001 if inflation pressures emerge;

(ii) to secure expenditure control through clear and binding norms with the aim of reducing the primary

current expenditure ratio;

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

(iv) to implement the privatisations schedule for 2000 and in subsequent years with a view to securing a

faster reduction in the debt ratio.

P r o d u c t m a r k e t s

Partly because of its geographical location, the Greek economy is less integrated in the European product
markets than other Member States. Price levels are relatively high for several categories of prices. Greek
labour productivity growth rates have improved, the levels of productivity, however, are lower than those
in other Member States. Despite 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:

(i)

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

(ii) speed up the process of liberalisation in the telecommunications, electricity and gas sectors;

(iii) take concrete measures to promote business start-ups;

(iv) take further measures to increase R & D and ICT diffusion and stimulate private sector involvement in

R & D financing.

C a p i t a l m a r k e t s

On the basis of on-going liberalisation, the Greek capital market is increasingly open to competition. The
stock market has benefited from reforms introduced in the field of corporate governance and listing
conditions, and from the dematerialisation of
small and
medium-sized dynamic companies are expected to be listed shortly in the newly formed stock market for
these companies modelled after the European New Market. Venture capital investments, however, remain
the lowest in the EU. This restricts significantly the source of finance available to young high-growth
companies. Incentives provided through tax relief and a financial support programme were introduced
only recently, therefore their results cannot yet be evaluated. In view of the above, Greece should give
high priority to:

securities. Furthermore,

the shares of

(i)

speed up the implementation of 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.

L a b o u r m a r k e t s

Greek labour market performance in the 1990s was characterised, on the one hand, by an increase in the
participation rate and employment while, on the other hand, unemployment increased. Although the
full-time equivalent employment rate is now close to the EU-average, considerable structural 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 to tackling youth and long-term unemployment. The tax burden
on labour has been reduced. Efforts to increase part-time employment which in Greece is lower than the
EU average, have started producing results in 1999. In view of the above, Greece should give high priority
to:

(i)

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

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(ii) 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;

(iii) review wage formation systems with the social partners, with a view to adapting wage developments
to productivity differentials at geographical, sectoral and company level, ensuring in particular that
the minimum level set by the general
opting out of sectoral agreements (respecting, however,
collective bargaining agreement) under
the territorial employment pacts becomes a practical
possibility.

5. SPAIN

In 1999 GDP growth kept its previous robust pace along with 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.

B u d g e t a r y p o l i c y

In 1999, fiscal consolidation made clear progress: the general government deficit was reduced to 1,1 % 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 problem of the ageing population, a pension reserve fund has been created. In
view of the above, budgetary policy should aim to:

(i) achieve and possibly improve upon the budgetary targets set in the updated 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;

(ii)

the pending reform of

implement
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 mainly to unforeseeable
contingencies;

(iii) 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

(iv) continue and respect fully the existing internal stability pact between regions and the State, as

territorial governments have an increasing role in many fields of expenditure.

P r o d u c t m a r k e t s

Spain is moderately well integrated in the European product markets. Various measures have been taken
to improve competition on product markets:
legislation;
progress in the liberalisation of telecommunications; reinforcement of the competition law and 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:

improved transposition of

internal market

(i) continue the implementation of the 1999 reform of the competition law; within this reform, give
particular attention to reinforcing the capacity and the resources of the independent competition
authority to investigate cases;

(ii) continue to reduce sector-specific (railways, coal, shipbuilding) aid;

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(iii) take measures to reinforce the competition framework in sectors such as electricity, gas and retail
distribution, to remove restrictions on land supply and to bring the price of water closer to its real
cost; and

(iv) continue the measures to reduce 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.

C a p i t a l m a r k e t s

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 and promotion of stock markets for small and medium-sized businesses.

L a b o u r m a r k e t s

Spanish labour market performance has improved markedly in recent years, with a remarkable fall in
unemployment and strong employment growth. Efforts have been made to shift from passive to active
labour market policies,
including a reinforcement of the preventive approach to tackling youth and
long-term unemployment. The tax burden on labour has been reduced, particularly at the lower end of
the wage scale. However, unemployment
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:

the highest

is still

(i)

together with the social partners,

review,
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;

(ii) pursue efforts to improve the efficiency of active labour-market policies and to enhance their
coordination with passive 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

(iii) review further, together with the social partners, tight job-protection legislation for employees on
in order to reduce the weight of temporary

permanent contracts and lower barriers to dismissal
contracts and enhance the flexibility of the labour market.

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, all the more so as
the employment content of growth has increased in recent years. Despite above potential growth,
inflationary pressures are excepted to remain subdued as a result of increased competition and moderate
wage increases.

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B u d g e t a r y p o l i c y

France made visible progress in the improvement of its budgetary position in 1999, as the general
government deficit fell to 1,8 % 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 sickness insurance, will face an increasing burden resulting from the ageing of
population. As a first answer to this problem, a pension reserve fund has been created in 1999. In view of
the above, budgetary policy should aim to:

(i)

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

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

(iii) take the opportunity to reduce the deficit more quickly in case of a wider budgetary room for
manoeuvre so as to fulfil the Stability and Growth Pact objectives even in 2000 or in 2001 with a
more comfortable margin; and

(iv) orient the reform of the pension system, which is intended to begin in 2000, towards long-term
taking into account considerations of equity (cid:151) including

finances,

sustainability of government
between generations.

P r o d u c t m a r k e t s

France is relatively well integrated in 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 red tape for business. The present more favourable macroeconomic situation offers France a
window of opportunity for additional reforms. In view of the above, France should give high priority to
the following:

(i)

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

(ii) avoid granting large ad hoc aid such as those that were granted in the recent past;

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

(iv) continue efforts to simplify formalities for business and to encourage innovation.

C a p i t a l m a r k e t s

The French capital market is mature and efficient. The stock market developed dynamically in the 1990s
following modernisation of
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, needs further development. In view of the above, France should give high priority to
the following:

the creation of a market

technologies,

(i)

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

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

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L a b o u r m a r k e t s

The labour market situation has improved markedly in France, even if the unemployment rate of 10,6 %
of the labour force at the end of 1999 remains one of the highest in the Union. The fall in the youth
unemployment rate has been even more pronounced as new, substantial measures gradually come into
effect. Nominal wage growth has remained subdued, despite the recent improvement in demand for
labour. The forthcoming wage developments must be watched closely, as they will continue to
incorporate effects of the gradual introduction of the 35-hour working week. The effective taxation on
labour is relatively high, the net replacement rate relatively generous and the regulatory environment
could be made lighter. In view of the above, France should give high priority to the following:

(i) pursue and evaluate policy measures designed to reduce the fiscal pressure on labour, particularly
those addressing unskilled and low-paid workers, and, in this context, review benefit schemes in order
to avoid poverty traps;

(ii) review employment protection legislation in order to assess its impact on employment; and

(iii) monitor the negotiation of the 35-hour working week reform closely so as to avoid adverse effects on

wage costs, labour supply and work organisation in the medium term.

7. IRELAND

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 in the
labour market. Supply constraints may, therefore, threaten both inflation and growth in the short term.

B u d g e t a r y p o l i c y

In 1999, the government finances, again, recorded a strong surplus put at 2 % of GDP. In the stability
programme, 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 supply constraints both physical, including
infrastructure, and in the labour market. In view of the above, budgetary policy should aim to:

(i) be ready, already in 2000, to use budgetary policy to ensure economic stability given the extent of

overheating in the economy; gear the budget for 2001 to this objective;

(ii) restrain the growth in real public consumption from the 4,3 % estimated in 1999 to 2,7 % in 2002 as

shown in the updated stability programme; and

(iii) 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.

P r o d u c t m a r k e t s

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:

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

(ii) take measures to liberalise further the transport sector; in particular, introduce competition into urban

bus transport and into the railways, e.g. by franchising.

C a p i t a l m a r k e t s

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 move of funding away from
government-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:

(i) make further efforts in particular to develop start-up and early-stage venture capital.

L a b o u r m a r k e t s

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:

(i) monitor wage developments so as to ensure that they are at most consistent with the recently
concluded national pay and partnership agreement, the programme for prosperity and fairness, as the
minimum necessary basis for the maintenance of employment growth; and

(ii) 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 life; pursue, in particular, flexible leave schemes and a sustained
effort to increase the supply of care for children and other dependants.

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 improvement in labour market flexibility, unemployment remains high.

B u d g e t a r y p o l i c y

In 1999, Italy reduced the general government deficit to 1,9 % of GDP, slightly better than the original
target of 2,0 %. However, the primary surplus was lower than expected (4,9 % of GDP instead of 5,5 %)
and the debt remained at the high level of 114,9 % of GDP. The updated stability programme foresees a
further reduction of the deficit ratio to 0,1 % in 2003. The reduction in the deficit would be the result of
tight control of 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 an increasing burden as a consequence
of population ageing. In view of the above, budgetary policy should aim to:

(i) achieve better budgetary outcomes than planned should growth turn out stronger than projected in
the programme and thus accelerate the reduction in the still high debt/GDP ratio towards the 60 %
reference value;

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(ii) as a minimum, achieve a primary surplus of 5,0 % of GDP in 2000 and 2001 projected in the

updated stability programme, namely through tight control of current primary expenditure;

(iii) contain in the medium term the expected increase in the ratio of pension expenditure to GDP; to this
end, begin as soon as possible a reassessment of the pension system and take further steps to reform
the pension system, including promoting the expansion of funded pension provisions; and

(iv) carry out the planned privatisation programme with vigour and continue to use privatisation receipts

to reduce government debt further.

P r o d u c t m a r k e t s

Italy is relatively less integrated in the European product markets than other large Member States. The
international involvement of 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 those of France and Germany. Several reforms have been introduced and have contributed
in particular in the area of the privatisation and
to improve the functioning of the product market,
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:

(i) continue current progress in transposing internal market legislation and strengthen efforts to reduce

remaining problems in the area of public procurement;

(ii)

increase efforts to reduce further the overall level of non-agricultural State aid and to further improve
its structure since the level of non-agricultural State aid expressed in percentage of GDP remains
among the highest in the EU;

(iii) reinforce efforts to simplify the regulatory environment for companies and to develop one-stop shops;

and

(iv) reinforce initiatives to promote R & D and innovation in the light of the very low ratio of R & D

expenditure to GDP.

C a p i t a l m a r k e t s

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 ongoing privatisation programme. Venture capital and private equity have also
expanded rapidly in recent years, and the creation of the Nuovo Mercato will contribute further to these
developments. Nevertheless the venture capital market remains underdeveloped. In view of the above, Italy
should give high priority to the following:

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

L a b o u r m a r k e t s

Despite some recent improvements, the labour market situation remains difficult, with a low employment
rate, high structural unemployment and large regional differences. Segmented labour markets, 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 and loose benefit systems combined with strict employment protection legislation. While there
have been significant efforts to reduce taxation on labour, to modernise administration and to introduce
new forms of job contracts, these measures have not yet borne full fruit. There is a clear need to
complement these efforts by comprehensive structural measures. In view of the above, Italy should give
high priority to the following:

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

(ii) continue to enhance labour market

flexibility and,

in particular, reinforce efforts towards wage

flexibility in line with labour productivity differences in particular across regions, and

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

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.

B u d g e t a r y p o l i c y

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

(i) monitor closely current government expenditures in order to facilitate the achievement of

the
budgetary objectives while making room for a reduction in the tax burden as planned in the updated
stability programme; and

(ii) combine the implementation of sound public finance policies with reforms, 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.

P r o d u c t m a r k e t s

While the Luxembourg economy is very well
integrated in the European product market and its
macroeconomic performance is excellent, structural policies targeted towards better functioning product
markets are less well advanced. However, progress is being made. The abolition of most of the price
regulation system and the reduction of the coverage of the regional aid systems which should take place
in the near future, is particularly welcome. In view of the above, Luxembourg should give high priority to
the following:

(i)

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

(ii) adopt a new competition law permitting a more efficient competition policy by the authorities, giving

them the power to enforce Articles 81 and 82 EC; and

(iii) create the conditions allowing a continuation of the 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.

L a b o u r m a r k e t s

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

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

10. NETHERLANDS

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 call for vigilance about the
evolution of prices and, even more, of wages, which are now increasing faster than in neighbouring
countries.

B u d g e t a r y p o l i c y

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 % of GDP. Since
the mid-1990s, the Dutch budgetary strategy has consisted of setting growth ceilings for government
expenditures 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)

strengthen the envisaged budgetary position in 2000 and the following years, taking into account the
government surplus already achieved in 1999 and current strong economic growth and possible
inflationary pressures; and

(ii) 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.

P r o d u c t m a r k e t s

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 related to the
transposition and implementation of internal market legislation (in transport). Competition policy should
continue to be reinforced as should the liberalisation of postal services, 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:

(i) 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
EU;

(ii) pursue further the regulatory reform and privatisation process at the basis of the introduction of
competition in network industries; in particular safeguard access to the cable network with a view to
avoiding abuse of dominant positions of cable companies in broadcasting, telephony and internet
services; speed up the transposition of internal market directives in the area of transport; and

(iii) take further measures to raise the involvement of the private sector in R & D and to encourage

technology transfer between public and private research.

C a p i t a l m a r k e t s

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

In view of

the above,

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(i) concentrate its efforts on encouraging early stage investments; give consideration to the examples of
in the area of

forward in the October 1999 Risk Capital Communication,

good practices put
promotion of innovative employee ownership schemes, including stock options.

L a b o u r m a r k e t

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 structural imbalances remain, with a high 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:

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

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 remaining elastic, translating partly into a decrease in unemployment.

B u d g e t a r y p o l i c y

Austria made some progress in consolidating its government finances in 1999 as the deficit fell to 2,0 %
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 % of GDP in 2000 and further reductions thereafter. However, this will be
attained with the help of sizeable one-off measures. To achieve a durable improvement in the government
accounts in the medium and longer term, 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:

(i) as a minimum, achieve a better deficit outcome than projected for 2000, especially if growth should
turn higher than expected; this would help to establish a clear downward trend in the debt ratio;
realise substantial savings on the expenditure side and exercise strict expenditure control
in the
budgetary execution in order to meet the cost of the reform of income taxes and family assistance;

(ii) 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

(iii) implement the announced pension reform aimed at raising the average retirement age from the end of
2000 onwards and pursue reforms in order to put the predominantly pay-as-you-go pension system
on a sounder footing.

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P r o d u c t m a r k e t s

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
in reinforcing competition policy and in liberalising telecommunications. Some
initiatives have also been taken to simplify procedures for starting new and handing over businesses and
the ambitious target of raising R & D spending to 2,5 % of GDP by the year 2005 (up from 1,6 % of GDP
in 1998) has been set. In view of the above, Austria should give high priority to the following:

legislation,

(i) make further progress in the transposition of the Community’s public procurement guidelines,

in

particular at the provincial level which has been delayed;

(ii) accelerate the process of regulatory reform in the energy and transport sectors in order to ensure

effective competition in the market place; and

(iii) 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.

C a p i t a l m a r k e t s

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

(i) upgrade

the supervisory framework,

improve

corporate governance by,

inter alia, pursuing

privatisation, and develop fiscal incentives for equity and risk capital investments; and

(ii)

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

L a b o u r m a r k e t s

Austrian labour markets are performing relatively well. Unemployment is low and employment rates are
high. However,
to
disincentives arising from the early retirement system. Another feature of the Austrian labour market is
the smoothly working cooperation 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:

the employment rate for older workers is below the EU average, due in part

(i)

rapidly implement the announced reforms on increasing the early retirement age and review benefit
systems; 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

(ii) continue efforts to reduce the high tax burden on labour, in particular by focusing on problem groups

in the labour market.

12. PORTUGAL

After the slowdown in both domestic and external demand in 1999, exports began to 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 as the indebtedness of the private sector has risen rapidly.

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B u d g e t a r y p o l i c y

In 1999, the general government deficit declined to 2,0 % 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 % 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 term,
the updated 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:

(i) as a minimum, achieve the 1,5 % 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, 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;

(ii) ensure that budgetary policy contributes to a more balanced policy mix to correct

the major
imbalances in the Portuguese economy; achieve a faster decline in the deficit ratio than planned with a
view to increasing the safety margin allowing Portugal to let the automatic stabilisers work in the
event of a cyclical downturn; and

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

P r o d u c t m a r k e t s

The Portuguese economy is moderately well integrated in European product markets. The international
involvement of 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:

(i) continue efforts to improve the record in transposing internal market

legislation, especially in

transport, because, despite progress made, the transposition record remains poor;

(ii) reduce State aid and take action to bring competition law more in line with European Union

legislation and to reinforce the independence of the competition authority;

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

(iv) undertake further efforts to promote R & D and ICT diffusion,

in particular create incentives to

increase private sector involvement in R & D.

C a p i t a l m a r k e t s

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 financial services directives. Despite the
initiative taken to improve the legal framework for venture capital, venture capital investment remains
low and highly dependent on the support of public funds. In view of the above, Portugal should give high
priority to the following:

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(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.

L a b o u r m a r k e t s

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

(i)

improve education and training, including technological courses and greater coverage of pre-primary
schooling, 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

(ii) pursue the policy further of implementing a number of laws aimed at improving the performance of
the labour market, 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;

(iii) encourage partnership among social partners in order to modernise the labour market.

13. FINLAND

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

B u d g e t a r y p o l i c y

The general government surplus rose to 2,3 % of GDP in 1999 from 1,3 % in 1998. According to the
updated stability programme, the surplus should remain above 4 % 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 1,5 % 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) 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;

(ii) continue to increase 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

(iii) 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.

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P r o d u c t m a r k e t s

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 in the Finnish economy if the problem of inadequate competition in certain sectors is
resolved. In view of the above, Finland should give high priority to the following:

(i)

take further measures to strengthen competition in a range of sectors, most notably the distribution
sector; consider reforming the competition law to give national competition authorities more powers
in line with the Commission White Paper on modernising competition policy, and

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

C a p i t a l m a r k e t s

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:

(i) give particular attention to the examples of good practice put forward in the October 1999 Risk
innovative

legislation on bankruptcy and promotion of

Capital Communication in the areas of
employee ownership schemes; and

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

L a b o u r m a r k e t s

The labour-market situation improved considerably in 1999, including a relative substantive reduction in
long-term unemployment. However, the unemployment rate still remains above the EU average, and is,
more importantly, almost completely structural. Other main problems include a high benefit dependency
among the 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 underlying structures
more supportive of employment. In view of the above, Finland should give high priority to the following:

(i)

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

(ii) pursue recent policy orientations to reduce the tax burden on labour, and in particular, reduce the

marginal effective tax rates on low wages.

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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 combination
with low inflationary pressure, further employment growth and lower unemployment can be expected
over the year. However, in some sectors, supply constraints could emerge that will put upward pressure
on prices, not least with respect to the tightening of the labour market.

B u d g e t a r y p o l i c y

In 1999, the general government surplus remained at 1,9 % of GDP, the same as in 1998. According to
the updated convergence programme, continued surpluses of at least 2 % of GDP are to be aimed for in
2000 it 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)

tighten the stance of budgetary policy, since the stance followed since 1999 could become too
expansionary in the current high-growth environment;

(ii) maintain tight expenditure control this year and next, on which the budgetary outlook is heavily

reliant, thereby leading to a further 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. The scope and
pace of further tax reductions should be governed by the overall aim to maintain sustainability in the
public finances and a well-balanced macroeconomic policy mix.

P r o d u c t m a r k e t s

Sweden is increasingly integrated in Community markets and has an excellent record in transposing
internal market legislation. State aid is low; R & D spending is the highest amongst the EU-15 Member
States; and a great effort has been made to deregulate the network industries. However, there is scope for
improvements in price levels and productivity in the Swedish economy if the problem of inadequate
competition in certain sectors is resolved. In view of the above, Sweden should give high priority to the
following:

(i) continue efforts to remove regulation that hinders or limits competition in retail distribution,
construction and 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;

(ii) continue efforts to improve competition in railways and air transport; and

(iii) pursue vigorously initiatives that have been launched to enhance efficiency in public procurement and

the provision of public services.

C a p i t a l m a r k e t s

The Swedish capital market has been characterised by rapid globalisation, technological change and
growth in venture 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 (cid:145)growth-sectors(cid:146) still have difficulties in
raising capital. In view of the above, Sweden should give high priority to the following:

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(i) make further efforts to facilitate access to risk capital in particular for small companies outside the
high-tech industry; 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.

L a b o u r m a r k e t s

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 measures
already taken, taxation of labour remains very high and the benefit schemes generous. The Swedish
government appropriately focuses its labour-market policy on improving human capital. The current
streamlining of ALMPs is expected to improve their 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:

(i)

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

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

15. UNITED KINGDOM

Growth in the United Kingdom in 1999 exceeded expectations and even stronger, above-trend growth is
expected 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 employment opportunity and improve the attractiveness of work should limit
the risks of growth translating into greater pressures on the labour market.

B u d g e t a r y p o l i c y

Government finances registered a surplus of 1,2 % of GDP in 1999. The authorities now expect the
surplus to be 1,3 per cent of GDP in financial year 1999/2000 compared to the 0,3 % of GDP projected
in the updated 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 finances are expected to remain in
comfortable surplus in 2000/2001. In view of the above, budgetary policy should aim to:

(i) keep the underlying position of

finances broadly unchanged as shown in the
convergence programme, taking account of cyclical developments in the economy; make sure that any
new expenditure or tax initiatives are consistent with this goal; and

the government

(ii) pursue the policy of substantially raising the ratio of government fixed investment to GDP within the

context of firm control of total government expenditure.

P r o d u c t m a r k e t s

The economy of
the United Kingdom is very much exposed to international competition. The
liberalisation of goods and services markets in the 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 ability of SMEs to sustain growth and skill shortages also gives cause for concern. In view of the
above, the United Kingdom should give high priority to the following:

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(i) monitor and,

if necessary, reinforce the effectiveness of measures which have 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

(ii) develop a long-term plan for transport in order to tackle the problems of road congestion, inadequate

investment in the railways and poor service quality in public transport.

C a p i t a l m a r k e t s

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

(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. This
will be one of the areas that the Myners review of institutional investors will examine.

L a b o u r m a r k e t s

British labour-market performance has been among the best in the EU in recent years. Recent reforms
have intensified and extended the (cid:145)welfare to work(cid:146) 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 childcare provision has been established. Various measures have been taken to
target
in the context of a good overall
performance, the problem of 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:

localities and regions with high unemployment. However,

(i) pursue efforts to address the problem of concentrated unemployment

in deprived areas and
communities, aiming at reducing 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.

Done at Santa Maria da Feira, 19 June 2000.

For the Council

The President

J. PINA MOURA