Commission recommendation for the 2001 Broad Guidelines of the Economic Policies of the Member States and the Community - drawn up in conformity with Article 99(2) of the Treaty establishing the European Community
Date: 2001-04-25
Institutions: European Commission
Subjects: business start-up, competition, economic growth, economic policy, economic priority, financial market, information society, labour market, public finance, sustainable development

COMMISSION OF THE EUROPEAN COMMUNITIES

Brussels, 25.4.2001
COM(2001)224 final

COMMISSION RECOMMENDATION

for the 2001 Broad Guidelines of the Economic Policies
of the Member States and the Community

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

TABLE OF CONTENTS

I. GENERAL ECONOMIC POLICY GUIDELINES..........................................................................3
Introduction...........................................................................................................................................................3
1.

2. Main priorities and policy requirements............................................................................................................3

2.1

Recent and prospective economic developments................................................................................3

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

3.

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

3.1

3.2

3.3

3.4

3.5

3.6

3.7

3.8

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

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

Invigorate labour markets..................................................................................................................... 12

Ensure efficient product (goods and services) markets................................................................... 14

Promote the efficiency and integration of the EU financial services market............................... 15

Encourage entrepreneurship. ............................................................................................................... 15

Foster the knowledge-based economy ............................................................................................... 16

Enhance environmental sustainability  ............................................................................................... 17

II. COUNTRY-SPECIFIC ECONOMIC POLICY GUIDELINES.........................................................19
Belgium ............................................................................................................................................................... 19
1.

2. Denmark  ............................................................................................................................................................ 22

3. Germany ............................................................................................................................................................. 25

4. Greece ................................................................................................................................................................. 29

5.

6.

7.

8.

9.

Spain  ................................................................................................................................................................... 32

France  ................................................................................................................................................................. 35

Ireland ................................................................................................................................................................. 38

Italy....................................................................................................................................................................... 41

Luxembourg  ...................................................................................................................................................... 45

10. Netherlands  ....................................................................................................................................................... 47

11. Austria  ................................................................................................................................................................ 50

12. Portugal  .............................................................................................................................................................. 53

13. Finland ................................................................................................................................................................ 56

14. Sweden ................................................................................................................................................................ 59

15. United Kingdom  ............................................................................................................................................... 62

2

I. GENERAL ECONOMIC
POLICY GUIDELINES

1.

INTRODUCTION

social 

the  most 

cohesion". 

A year ago, in Lisbon, the European Union set
itself  a  new  strategic goal  for  the  next  decade:
competitive  and  dynamic
"to  become 
knowledge-based  economy  in  the  world  capable  of
sustainable  growth  with  more  and  better  jobs  and
  The  2000  Broad
greater 
Economic  Policy  Guidelines  (BEPGs)  set  out
a  comprehensive  policy  strategy  to  fulfil  this
ambition.    This  strategy  consists  of  sound
macroeconomic  policies  and  comprehensive
economic  reforms  on  labour,  product  and
capital  markets.   These  policies  should  sustain
robust  economic  growth  in  the  short  term,
strengthen  the  basis  for  future  growth  in  the
medium  term  and  enhance  the  capacity  to
cope  effectively  with  longer-term  structural
changes,  including  the  impact  of  population
ageing.

  These 

The  2001  BEPGs  confirm  the  existing  policy
strategy and extend it further in the light of the
results  of  the  Stockholm  European  Council
(23-24  March  2001). 
include  the
integration  of  the  promotion  of  sustainable
is  done  through  the
development,  which 
various  relevant  parts  of  the  document.    They
have been drawn up against the background of
the  examination  of  the  implementation  of  the
2000  BEPGs  and  the  assessment  of  the
economic  situation  and  outlook  as  presented
in  the  Commission’s  Spring  2001  Economic
Forecasts.

Section 2  starts  with  a  discussion  of  the
economic  background  to  these  guidelines  and
identifying  the  main  policy
concludes  by 
challenges  in  the  short,  medium  and  longer

term.    Section 3  then  describes  the  general
policy  recommendations  which  are  applicable
to  all  Member  States  and  the  Community.
Within  the  overall  strategy,  policy  priorities
differ  somewhat across  Member  States  due  to
performance,
differences 
prospects,  structures  and  institutions.    Taking
due  account  of  them,  Part II  presents  the
country-specific economic policy guidelines.

economic 

in 

2. MAIN PRIORITIES AND
POLICY REQUIREMENTS

2.1. Recent and prospective
economic developments

less 

A  markedly 
favourable  external
economic  environment    ─    Since  early
summer  2000,  when  the  previous  guidelines
were  adopted  by  the  Council,  the  global
economic 
become
distinctively  less  supportive  on  the  back  of  a
number  of  inter-related  forces.    While  the
global  slowdown  is  generally  expected  to  be
relatively  short 
less
favourable outcome are considerable.

lived,  the  risks  of  a 

environment 

has 

Firstly,  throughout  the  summer  oil  prices
in  the
increased  and  reached  new  highs 
autumn.    Although  they  have  retreated  from
their 
late  2000  peak  and  slowing  global
demand  reduces  the  risk  of  a  renewed  price
hike,  oil  prices  remain  relatively  high  and
continue  to  exhibit  a  high  degree  of  volatility.
Secondly,  and  more  importantly,  economic
activity  in  the  United  States  and  Japan  have
experienced an unexpectedly steep fall-off over
recent  months.    In  the  United  States,  some
adjustment towards a more sustainable growth
path  was  both  expected  and  desirable,  as  it
could  effectively 
lead  to  a  correction  of
important imbalances  that  had  built up  during

3

room 

the expansion.  Expectations centre on a quick
(V-shaped) recovery in the second half of 2001
based  inter  alia  on  a  judicious  use  of  the
available 
for  policy  manoeuvre.
However,  the  outlook  remains  subject  to
considerable  uncertainties  and  a  more  severe
and  protracted  downturn  cannot  be  excluded.
In  Japan,  the  fragile  recovery  is  faltering  and
the  economy  remains  vulnerable  to  shocks.
The  deteriorating  external  environment 
is
already  affecting  growth 
in  a  number  of
emerging market economies, mainly  through  a
deceleration of exports.  Thirdly, a pronounced
correction  has  taken  place  on  global  equity
markets, 
stocks,
especially 
reflecting  a  downward  shift 
investors’
perception of long-term profit growth.

technology 
in 

Growth  in  the  euro  area  is  holding  up
rather well ─  On balance, the second year of
Economic  and  Monetary  Union  was  a
successful  one.    In  the  euro  area,  economic
growth  was  the  strongest  and  unemployment
fell to the lowest level for a  decade.   Headline
inflation  accelerated  but  underlying  inflation
stayed well below 2 per cent.  Nevertheless, the
growth momentum has been dented, firstly  by
the negative shock imparted by rising oil prices
and,  subsequently,  by  the  downturn  in  global

demand.    In  addition,  the  oil  price  hike  in
combination  with  a  weakening  euro  entailed  a
pick-up  in  headline  inflation  that  reached  its
peak in November 2000.

including 

improved 

Looking  forward,  despite  the  global  cyclical
downturn  which  mitigates  prospects,  the  euro
area  looks  set  to  continue  to  enjoy  in  2001-
2002 relatively solid economic growth of about
2¾  per  cent  and  continued  job  creation  in  a
inflationary  pressures.
context  of  receding 
macroeconomic
Strongly 
sustained  wage
fundamentals, 
moderation,  and  supportive  policies  have
fostered  a  favourable  investment  climate  and
steady  employment  creation. 
  They  have
engendered  a  virtuous  growth  circle  that  is
firmly  rooted  in  domestic  demand.    While
having  come  down,  business  and  consumer
confidence  remain  close  to  their  historically
high levels as they continue to be supported by
the 
increased  dynamism  of  the  economy.
High  capacity  utilisation,  favourable  financing
conditions  and  strong  profitability  support
investment  demand,  while  rising  disposable
income,  fostered  by  productivity  gains,  higher
to
employment  and 
underpin consumer demand.

tax  relief,  continues 

Contribution to real GDP growth
in the euro area

Domestic demand
(incl. stocks)

Real GDP growth

Net exports

%

1,5

1,0

0,5

0,0

-0,5

-1,0

%

12

11

10

9

8

7

Employment trends
in the euro area

% p.a.

Employment
growth (rhs)

Unemployment rate (lhs)

2,5

2

1,5

1

0,5

0

-0,5

-1

-1,5

-2

Q1-97

Q1-98

Q1-99

Q1-00

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Source: Commission services.

Source: Commission services.

4

Furthermore, the large internal market coupled
with the single currency provides a strong  and
stable  base  for  domestic  growth  with  less
exposure  to  exchange-rate  fluctuations.    The
coming  introduction  of  euro  notes  and  coins
on 1 January 2002 will give  further  impetus  to
economic  integration  and  will  turn  the  euro
into  a  reality  in  daily  life  and  make  monetary
union  more  visible.    Moreover,  thanks  to
progress  with  economic  reforms,  the  euro
area’s  resilience  to  external  disturbances  has
been  fortified.    As  a  consequence,  even  if
external  downside  risks  were  to  materialise    –
in  particular  if  the  US  economy  would  not
quickly  return  to  solid  growth  –    the  above
factors will  help  to  mitigate  the  impact  on  the
euro area.

The  non-euro-area  Member  States  –  After
robust  economic  growth  and  job  creation  in
2000,  Denmark,  Sweden,  and  the  United
Kingdom  are  being  affected  by  the  adverse
developments  in  the  world  economy.    As  a
result, economic growth is expected to slow to
a  more  moderate  pace.    The  close  trade  links
with  the  euro  area  and  continuing  healthy
to
domestic  demand  position 
weather 
external
the 
environment.    Inflation  in  these  countries
remains  subdued  at  or  below 
level
recorded in the euro area.

deteriorating 

them  well 

the 

2.2. Key challenges ahead

Looking ahead, the EU and the euro area face a
the  short-,
number  of  key  challenges 
in 
medium-,  and 
  A  successful
longer-term. 
response  to  these  challenges  will  depend  on
appropriate policy action being taken now.

The  short-term  challenge:  preserving  the
expansion  in  growth  and  jobs  —  The

immediate  task  ahead  is  to  maintain  strong
economic  performance  in  a  context  of  less
supportive  global  economic  conditions.    The
euro  area  will  have  to  rely  increasingly  on  its
own strengths.

Policies must  therefore  aim  at  maintaining  and
further enhancing internal growth dynamics  by
pursuing 
stability-oriented  macro-economic
policies and  comprehensive  structural  reforms.
This  will  underpin  business  and  consumer
confidence  whilst  increasing  the  scope  for  a
monetary policy stance supportive of domestic-
led  growth  in  the  euro  area.    A  stronger  euro
coupled  with  more  expansionary  domestic
monetary  conditions  would  contribute  to  a
smooth  adjustment  of  world  imbalances  while
supporting  domestic  demand  and  reducing
external price pressures.

In  particular,  budgetary  policies 
should
continue  to  be  geared  to  the  achievement  of
public  finances  close  to  balance  or  in  surplus
and  wage  moderation  needs  to  be  sustained.
Preserving 
the  hard-won  macroeconomic
stability  and  extending  it  into  the  future  is
essential.    Pressures  to  increase  government
expenditure and reduce taxes are on the rise as
budgetary  positions  have  improved  to  their
best  levels  for  many  years  and  in  some  cases
for decades.   Some  wage  pressures  have  arisen
sparked by emerging labour market bottlenecks
and  demands  for  compensation  for  the  recent
inflation  and  past
increase 
moderation.

in  headline 

Yet, Economic and Monetary Union implies an
important regime change that entails additional
responsibilities  for  all  major  policy  actors  in
making  it  a  success.    The  single  monetary
policy  can  not  be  tailored  to  the  needs  of
individual Member States and the exchange rate
lost
can  no 

longer  be  used 

to  restore 

5

competitiveness,  resulting  from  a  delay 
structural 
macroeconomic policy mix.

in
inappropriate

change 

an 

or 

Governments  and  Social  Partners  therefore
bear responsibility in contributing to a balanced
macroeconomic  policy  mix  both  at  Member
State and euro-area level.

More  generally,  there  is  a  need  to  further
increase the resilience of the  economy  through
a  judicious  combination  of  structural  reforms.
More  flexible  and  open  markets  will  enhance
the  capacity  to  deal  with  change  and  help
minimise  any  lasting  impact  of  shocks.    They
will  also  foster  a  positive  interaction  between
structural  improvements  in  the  economy  and
entail  benefits  in  terms  of  macroeconomic
performance.    In  addition,  structural  reforms
can  have  a  positive  impact  in  the  short  term
through downward pressure on prices.

—

for 

future  growth 

The  medium-term  challenge:  improving
and
the  basis 
  The  growth  performance
employment
since  1997  has  to  be  seen  in  a  context  of  a
cyclical recovery where slack could be used up.
While  potential  output  growth  may  well  have
improved  over  recent  years  as  a  result  of
productivity  gains 
improved
market  functioning  and  new  information  and
communication 
still
considered to be insufficient to sustain growth
rates  of  around  3  per  cent  over  an  extended
period  of  time.    Sustaining  the  expansion  will
therefore hinge on a permanent increase in the
speed limit of economic growth.

technologies, 

fostered  by 

is 

it 

Policies  should  concentrate  on  creating  the
right  conditions  for  the  efficient  use  of
productive  and  natural  resources  and  for  their
enhancement  over  time,  including  investment
in  education  and  training.    In  particular,  they
improved  market
to 
should 

contribute 

by 

addressing 

functioning 
market
imperfections or failure due to the existence of
externalities,  market 
imperfect
information or the regulatory environment.

power, 

and 

in 
high 

the  euro  area 
labour 

to  making
importance  attaches 
Particular 
substantial  inroads  into  the  present  under-
utilisation  of  human  resources.    Registered
unemployment 
is  still
force
unacceptably 
participation  and  employment  rates  are  low,
especially  for  older  workers  and  women,  and
far  from  the  targets  agreed  in  Lisbon  and
Stockholm.    An 
level  of
participation  in  the  labour  market,  especially
for  groups 
that  are  underrepresented  or
disadvantaged  is  also  key  to  social  inclusion.
The  mutual  reinforcement  of  economic  and
social policies is a fundamental strategy leading
to the mobilisation of the full potential of jobs
available.

increase  in  the 

To promote an increase in the labour supply, it
is  necessary  to  make  sure  that  the  regulatory
framework  encourages  people  to  enter  into  or
remain in the labour market.  In particular, tax
and  benefit  schemes  should  be 
further
reformed to strengthen financial incentives for
people to take up or stay in a job.  A switch to
focused  active  policies  is  needed  to  enhance
the  opportunities  of  unemployed  and  inactive
persons. 
labour  market  policies
promote  also  social  inclusion.    The  more
efficient use of the European labour force as a
through
whole  should  also  be  achieved 
measures  to  support  labour  mobility  between
Member  States,  particularly  with  a  view  to
tackling skills bottlenecks.  Moreover, life-long
learning  should  be  fostered  with  a  view  to
encouraging participation in the labour market.

  Active 

An  increase  in  labour  supply  will  have  to  be
accompanied 
capacity-enhancing
investment.    This  implies  creating  a  business

by 

6

to 

efficient 

conducive 

a  modern 

environment 
investment,
supported  by  adequate  public  infrastructure
and 
public
and 
administration.    Well-functioning,  competitive
and integrated product and capital markets will
contribute  by  making  sure  that  resources  are
put to their best possible use.  In this  context,
there  is  a  need  to  enhance  competition  in
goods  and  services  markets  and,  in  particular,
in  utilities and  financial  services.    To  this  end,
action  at  Community  level  should  focus  on
completing  the  internal  market,  especially  in
the  service  sector.    Member  States,  for  their
part, should see to an effective implementation
of 
and
encourage greater competition.

internal  market 

legislation 

the 

to 

the  necessity 

A central element in the Lisbon strategy is  the
recognition  of 
foster
entrepreneurship  and  innovation  in  the  EU,
both  of  which  are  fundamental  pre-conditions
for  increasing  Europe’s  potential  for  growth
and,  subsequently,  its  competitiveness,  wealth
and job creation.    Strengthening  entrepreneur-
ship and innovation constitutes a key challenge
for all Member States.

The  promotion  of  competition  within  the
internal market finds its logical complement in
increased competition at world level.  The

Employment and productivity levels
in the EU Member States (2000)

110

100

90

80

70

60

50

40

)
0
0
0
2
(
0
0
1
=
A
S
U
y
t
i
v
i
t
c
u
d
o
r
P
*

I

E

EL

L

B

F

IRL

FIN

USA

NL

EU-15

D

A

S

DK

JAP

UK

P

EU target 2005

EU target 2010

50

55

60

65

70

75

80

Employment rate as % of working age population

Source: Commission services. * Productivity is GDP per person employed.
Note: Employment rates for L, USA & JAP are for 1999. NL is provisional data.

European  Union  should  therefore  continue  to
adopt  a  common  commercial  policy  that
favours  open  world  trade and  press for  a  new
multilateral  trade  round  within  the  context  of
the WTO.

progressing 

economy 

The  maintenance  of  productivity  growth  and
competitiveness  over  time  and  in  a  global
context will require constant structural change.
Europe’s  transition  towards  a  knowledge-
but
based 
is 
shortcomings 
relationship
between  industry  and  science  and  the  level  of
private 
that
such 
commercialisation  of 
research  effort
remains  weak.    In  addition,  the  supply  of
trained
qualified 
ICT 
researchers is insufficient.

investment 

in  R&D, 

personnel 

remain 

and 

the 

the 

in 

The  longer-term  challenge:  preparing  for
the  impact  of  ageing  populations  —  The
need  for  sound  macroeconomic  policies  and
comprehensive  economic  reforms  is  amplified
by  the  challenge  posed  by  ageing  populations
that  is  visible  on  the  horizon.    On  present
trends,  the  EU’s  working  age  population  will
fall by approximately 40 million people and the
old  age  dependency  ratio  will  about  double
between 2015 and 2050.

%

Old age dependency ratio (Baseline scenario)

Year 2000

Year 2025

Year 2050

75

65

55

45

35

25

15

B DK D EL

E

F

IRL

I

L NL

A

P FIN S UK EU

Source: Commission services.
Note: Old age dependency ratio is defined as persons aged over 65 as a percentage of the
population aged 20-64.

7

to 

  The 

Tentative  calculations  point 
increased
expenditures  on  public  pensions  of  the  order
of 3-5  per  cent  of  GDP  over  the  period  from
2010  to  2050.    In  addition,  expenditure  on
health care and care for the elderly is expected
ageing
substantially. 
increase 
to 
population  will 
thus  have  considerable
consequences for  the long-term  sustainability
of public finances taking into account the need
for universal adequate pensions.  Even though
it  will  still  take  a  number  of  years  before  the
impact will be clearly felt,  governments should
act  already  now  and  make  full  use  of  the
current  favourable  overall  economic  situation
to  ensure  the  quality,  adequacy  and  fiscal
sustainability  of  pensions,  health  care  and
long-term care for the elderly.  To this end, the
current  arrangements  should  be  reviewed and,
where  appropriate,  be  reformed.    Structural
improvements  in  public  finances  should  be
achieved  to  prepare  for  the  coming  financial
burdens  imposed  by  ageing  populations  on
public finances.

Beyond  the  immediate  financial  impact,  the
ageing  of  populations  has  wider  implications
for  economic  growth,  as  a  result  of  the
shrinking  of  the  potential  workforce  and  of
potentially  important  effects  on  the  level  of
aggregate  savings.    High  standards  of  living
will have increasingly to be supported through
increases in  labour  productivity and  by  raising
the  employment  rate.    In  addition,  a  reduced
inflow  of  young,  newly-educated  persons  into
the  labour  force  is  likely  to  hamper  skill
renewal  and 
take-up  of  new
the 
technology. 
Increasing  new-technology
proficiency among young people and fostering
adult  learning  could  help  to  counteract  the
effects of ageing on skill levels.

thus 

Member States should develop comprehensive
strategies 
economic
addressing 
challenge  posed  by  ageing  populations.    They

the 

for 

should  be  presented  in  conjunction  with  the
stability  and  convergence  programmes  and  be
examined 
the  context  of  multilateral
surveillance.

in 

Ensuring  close  policy-co-ordination  –
Close  co-ordination  among  policy  actors,
including  beforehand  information  exchange,
in 
will  be 
and
instrumental 
framing 
supportive  policy
implementing  mutually 
responses 
  The
to 
effectiveness  and  efficiency  of  their  policy
actions  will  be  enhanced  by  taking  proper
account of spill-over effects that become more
important as integration intensifies.

challenges. 

these 

is  particular  true  for  the  euro-area
This 
Member States.  To deal with these  challenges
and  to  exploit  the  full  potential  of  EMU,  the
authorities of the euro-area Member States are
urged  to  closely  co-ordinate  their  economic
policies in the Eurogroup.

*
*     *
The  policy  strategy  both  at  macro  and
microeconomic  level  to  deal  effectively  with
these key challenges is set out in more detail in
the next section.  Its main components are to:

(i)

(ii)

ensure  growth-  and  stability-oriented
macroeconomic policies;

improve  the  quality  and  sustainability  of
public finances;

(iii)

invigorate labour markets;

(iv) ensure  efficient  product 

(goods  and

services) markets;

(v) promote the  efficiency  and  integration  of

the EU financial services market;

(vi) encourage entrepreneurship;

(vii) foster the knowledge-based economy; and

(viii) enhance environmental sustainability.

8

 
3. POLICY RECOMMENDATIONS

3.1. Ensure growth and stability-
oriented macroeconomic
policies

The  conduct  of  macro-economic  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  economic  expansion  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, following buoyant economic activity
in  2000,  growth  is  expected  to  slow  down  somewhat
but to remain fairly robust and above the potential rate
in  2001-2002  whilst  inflation  should  ease.    An
appropriate  and 
tension-free  macroeconomic  policy
approach consists of the following ingredients.

The  single  monetary  policy  is  committed  to  maintain
price stability in the euro area as a whole, and without
prejudice  to  this  objective,  to  support  the  general
economic policies in the Community.

Monetary conditions index, euro area
(Index 1994= 0, inverted scale)

MCI

looser monetary conditions

Real short-term
interest rates

REER

tighter monetary
conditions

-5

-4

-3

-2

-1

0

1

Sound  budgetary  positions,  in  line  with  the  Stability
and  Growth  Pact,  provide  the  necessary  scope  for  the
full  working  of  the  automatic  stabilisers  without  the
risk  of breaching the  3  per  cent  of GDP  limit  for  the
general  government  budget  deficit.    They  also  have
favourable effects 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
EMU, to a strengthening of investors' confidence.

As  a  general  principle,  it  is  important  that  budgetary
policies  be  guided  by  the  need  to  avoid  pro-cyclical
stances,  which  lead  to  exacerbated  swings  in  economic
activity,  unsustainable  structural  balances  and  burden
the  single  monetary  policy.    To  this  end,  cyclically-
adjusted budget balances are used as an additional tool
when  assessing  budgetary  positions.    A  ‘minimum’
budgetary position of close to balance or in surplus has
been  reached  in  several  Member  States  and  is  within
reach  in  the  others.    It  is  now  time  to  anchor  these
results  by  ensuring  that  cyclically-adjusted  budgetary
positions  move  towards,  or  remain  in,  balance  or
surplus  in  the  coming  years.    Where  appropriate,
further fiscal consolidation would create additional room
for  manoeuvre  for  cyclical  stabilisation,  to  cope  with
unexpected  budgetary  developments,  to  put  government
debt  on  a  more  rapidly  descending  trajectory  and  to
prepare  for  the  budgetary  challenges  associated  with
population  ageing.    Based  on  the  latest  2000/01

Budgetary trends in the euro area (excluding UMTS)

% of GDP

4

3

2

1

0

-1

-2

-3

-4

-5

-6

Cyclically-adjusted
primary balance

Actual balance

2
1994

1995

1996

1997

1998

1999

2000

2001

1991

1993

1995

1997

1999

2001

2003

Source: Commission services. The MCI is based on Unit labour costs. REER is the real
effective exchange rate.

Source: Commission services.

9

updates  of  the  stability  programmes,  following  a  slight
the  underlying  budgetary
deterioration 
position in  the  euro  area  as  a  whole  is  set  to  improve
gradually to a balanced position in 2003.

in  2001, 

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

The euro area Member States should ensure that their
budgetary policies support the price-stability orientation
of  the  single  monetary  policy.    In  this  context,  they
should  stand  ready  to  use  budgetary  policies 
to
contribute  to  domestic  price  stability  and  to  take  into
account both the euro-area dimension and the  national
implications of the single monetary policy in conducting
their budgetary policies.

Date1)

2000

2001

2002

2003

2004

In general, Member States should:

Stability programmes

B

D

EL

E

F

IRL

I

L

NL

A

P

FIN

12/00

10/00

12/00

01/01

12/00

12/00

12/00

12/00

09/00

12/00

01/01

09/00

Euro area

-0.1

-1.0

-0.8

-0.3

-1.4

4.7

-1.3

3.0

1.0

-1.8

-1.9

4.5

-0.7

0.2
-1½

0.5

0.0

-1.0

4.3

-0.8

2.6

0.7

-0.75

-1.1

4.7

-0.6

0.3

-1.0

1.5

0.2

-0.6

3.8

-0.5

2.5

0.5
-½

2.0

0.3

-0.4

4.6

0.0

2.5

0.62)

0.0

2.0

0.3

0.23)

:

0.3

:

0.64)

1.14)

1.94)

0.0

-0.7

4.4

-0.3

0.0

-0.3

4.5

0.1

Convergence programmes

DK

S

UK6)

EU-15

12/00

11/00

12/00

2.7

3.4

1.1

2.8

3.5

0.6

-0.2

-0.2

2.6

2.0

-0.1

-0.1

2.6

2.0

-0.9

0.0

 1) Date of adoption.
2) Government surplus of 0.7% of GDP projected for 2005.
3) Government deficit 0.5% of GDP in 2004 projected in more prudent

growth scenario.

4) Favourable scenario, with margin available used for debt reduction;
in the cautious scenario, with margin available used for debt reduct-
ion, the government surplus is projected to be 0.3% of GDP in 2002
and in 2003 and 0.6% in 2004.

5) Government surplus of 2.9% of GDP projected for 2005.
6) Financial years.
7) A government deficit of 1.1% of GDP is projected for 2005-06.
Source: National programmes and Commission services.

0.0

0.0

4.9

0.4

2.75)

:

-1.07)

0.2

i. meet,  as  a  rule,  and  in  keeping  with  last
year's  commitment,  budgetary  positions
of  close  to  balance  or  in  surplus  in  2001
so  as  to  achieve  a  sufficient  margin  to
cope  with  the  impact  of  adverse  cyclical
fluctuations;  ensure  a  rigorous  execution
of their budgets so as to prevent slippage
from the stability programme targets;

ii.

prepare budgets for 2002 in  keeping  with
the  need  to  preserve  budgetary  positions
close to balance or in surplus and to avoid
pro-cyclical 
policies;  where
appropriate,  further  strengthen  public
finances,  especially  with  a  view 
to
securing  their 
long-term  sustainability;
and

fiscal 

and 

iii. be  ready,  in  those  Member  States  were
overheating 
inflationary
risks 
pressures  prevail,  to  tighten  budgetary
policy  with  a  view  to  contributing  to  an
appropriate macroeconomic policy mix at
national level.

Wage developments in euro-area Member States should
reflect  different  economic  and  employment  situations.
Governments can create the right framework conditions
that facilitate the wage negotiations by Social Partners.
From a macroeconomic perspective, it is necessary to set
nominal  wage  increases  consistent  with  price  stability
and job creation; this implies taking due account of the
ECB's price stability objective whilst ensuring that real
wage increases do not exceed productivity growth.

10

In the non-euro-area Member States, monetary
policies aim at price stability.  In Denmark, monetary
policy pursues this objective through supporting a fixed-
exchange rate policy toward the euro in the  framework
of  ERM2.    In  Sweden  and  the  United  Kingdom
monetary  policies  directly  target  inflation.    Their
successful achievement will help create the conditions for
exchange rate stability.

The non-euro area Member States shall also maintain
sound  budgetary  positions  in  accordance  with  the
Stability and Growth Pact.  In general, they should:

i. maintain budgetary positions in surplus in
2001  and  thereby  a  sufficient  margin  to
cope  with  the  impact  of  adverse  cyclical
fluctuations;  ensure  a  rigorous  execution
of their budgets so as to prevent slippage
from the convergence programme targets;
and

ii.

prepare budgets for 2002 in  keeping  with
the  need  to  preserve  budgetary  positions
in  balance  or  surplus  and  to  avoid  pro-
cyclical  fiscal  policies;  where  appropriate,
further 
finances,
especially with a view to secure their long-
term sustainability.

strengthen 

public 

Wage  developments  in  non-euro  area  Member  States
should  also  reflect  different  economic  and  employment
situations.    From  a  macroeconomic  perspective,  it  is
necessary  to  set  nominal  wage increases  consistent  with
price stability and job creation; this implies taking due
account  of  the  price  stability  objective  of  the  national
central bank whilst ensuring that real wage increases do
not exceed productivity growth.

3.2. Improve the quality and

sustainability of public
finances

that  public 

finances  maximise 

Member States must sustain sound budgetary positions
while  at  the  same  time  improving  the  quality  and
sustainability  of public  finances  in  line  with the  report
endorsed  by  the  Stockholm  European  Council.    This
their
will  ensure 
contribution  to  growth  and  employment  and  the
achievement  of  the  objectives  agreed  in  Lisbon  and
Stockholm,  including  social  cohesion.   An  appropriate
balance  and  sequencing  have  to  be  drawn  between
running  down  public  debt,  cutting  taxes  and  financing
public  investment  in  key  areas.    To  this  end  Member
States should:

employment 

pursue  efforts  to  make  tax  and  benefit
systems  more 
friendly,
including  by  reducing  the  tax  burden,
especially  on 
labour,  within
low-wage 
continued  fiscal  consolidation,  and  by
improving  the  efficiency  of  tax  systems
(see also Section 3.3);

redirect  public  expenditures 
towards
physical and human capital accumulation;

enhance the efficiency of public spending
by  institutional  and  structural  reforms;  in
particular 
the
mechanisms that help control spending;

introduce  or  enhance 

improve  the  long-term  sustainability  of
public  finances  by  pursuing  a  three-
pronged strategy. Over and above actions
to  raise  employment  rates, 
this  will
require  a  fast  reduction  in  government
debt  and  further  reforms  of  the  pension
system.  Measures  to  put  pensions  on  a
sounder  footing  should  include  moves
towards  a  greater  reliance  on  funding  so
as to achieve a better balance between the
the  pension
different  pillars  within 

i.

ii.

iii.

iv.

11

systems in those countries which have not
yet achieved that; and

v.

pursue  tax  co-ordination  further  so  as  to
tax  competition  and
avoid  harmful 
the  Council
implement 
agreement  of  November  2000  on  the  tax
package.

effectively 

3.3. Invigorate labour markets

The  strong  employment  performance  of  recent  years
continued  during  2000.    This  has  been  due  in  large
part  to  the  favourable  macroeconomic  conditions,  but
labour  market  developments  also  strongly  suggest  a
reduction in structural unemployment thanks to reforms
and  policies  to  improve  the  functioning  of  labour
markets implemented over the past decade, in particular
in the  context  of  the European  Employment  Strategy.
The pick-up in wage growth has been limited given the
sharp 
long-term
unemployment has fallen by even more than the overall
rate.    Nevertheless,  there  remains  ample  scope  for
further progress.    In particular, the  EU  is  facing  four
challenges.  Firstly, signs of recruitment difficulties and
skill  shortages  have  emerged  in  a  number  of  Member
States,  which  suggests  that  the  EU  may  now  be
approaching  the  limits  of  rapid  cyclical  employment
growth.    Secondly,  unemployment  is  still  unacceptably

in  unemployment,  while 

fall 

Total and female employment rates

DK

NL

UK

S

P

FIN

EU target 2010

A

D

F

IRL

EU-15

L

B

EL

E

I

EU target 2005

EU target 2010

80

75

70

65

60

55

50

45

40

*
0
0
0
2
,
4
6
-
5
1
s
e
g
a
,
e
t
a
r

l

t
n
e
m
y
o
p
m
e
l
a
t
o
T

30

35

45

40
Female employment rate, ages 15-64, 2000 *

50

65

60

55

70

75

80

Source: Commission services.
* L is 1999, NL is provisonal data.

large 

reductions 

  Thirdly, 

high  with  large  differences  across  Member  States  and
in
further 
regions. 
unemployment  and  a  substantial  increase  in  labour
supply  will  be  needed  to  hit  the  employment  targets  of
70 per cent overall employment rate and of 60 per cent
for women by 2010 as agreed by the Lisbon European
Council,  including  the  intermediate  targets  of  67  per
cent and 57 per  cent respectively  by January  2005, as
well as 50 per cent for  older  workers  by  2010, agreed
at  the  Stockholm  European  Council.    Fourthly,  as
reaffirmed  at  the  Stockholm  European  Council,  the
aim should be to create better jobs as well as more jobs,
notably via improved education, life-long learning and a
better reconciliation of working and personal life.

To  meet  these  challenges,  Member  States
the  favourable
take  advantage  of 
should 
macroeconomic  conditions 
the
to  make 
necessary  structural  improvements  in  labour
markets  and  move  towards  the  goal  of  full
employment.    Member  States  should  by  the
end  of  2002  meet  the  targets  set  in  the
Employment  Guidelines.  They  should, 
in
particular, take the following measures:

promote  increased  participation  in  the
labour  market,  especially  among  women
and  older  workers,  notably  by  pursuing
equal  opportunities,  ensure  provision  of
care  facilities  for  children  and  other
dependants,  reforming  early  retirement
schemes  and  through  life-long  learning.
Similarly,  the  participation  of  disabled
people,  ethnic  minorities  and  migrants
should  be  promoted.  Other  relevant
measures,  including  pension  reforms,  are
mentioned under public finances;

on  the  basis  of  past  reviews,  reform  tax
and  benefit  systems  to  make  work  pay.
Reforms  should  reduce  labour  taxes  for
low-paid  workers,  reduce  high  marginal
effective  tax  rates  and  address  incentive

i.

ii.

12

effects, 
duration, 
enforcement of benefit schemes;

eligibility 

and

iii.

encourage  wage  formation  processes  that
better  take  into  account  productivity  and
local labour market conditions;

iv. bring  down  obstacles  to  labour  mobility
within  and  between  Member  States,  inter
alia  through  the  mutual  recognition  of
qualifications, 
improving  portability  of
pensions  by  promptly  adopting  and
on
the 
implementing 
occupational  pension  funds,  improving
access  to  European-wide  information  on
job  vacancies  and  learning  opportunities
in  the  context  of
in  Member  States 
developing  the  new  European 
labour
markets;

directive 

v.

vi.

facilitate  occupational  labour  mobility  by
improving, 
the  Social
together  with 
Partners,  education,  training  and life-long
learning  in  order  to  reduce  early  school
leaving  and  preparing  for  a  successful
transition 
knowledge-based
the 
economy;

to 

ensure  the  efficiency  of  active  labour
market  policies  and  target  these  towards
those  individuals  most  prone  to  the  risk
of  long-term  unemployment;  ensure  that
benefit  systems  are  complemented  by
effective  assistance  for 
job-seekers  to
enhance  their  employability  and  their  job
opportunities;

vii. promote, 

the  Social
together  with 
Partners, more flexible work organisation,
including working-time arrangements, and
reform the existing regulatory, contractual
and  legal  framework,  inter  alia,  on  hiring
and  firing  restrictions  and  on  part-time
work, with a view to combining greater

flexibility  with  security;  ensure  that  any
reductions in overall working time do not
lead to increases in unit labour costs,  and
that  future  labour  supply  needs are  taken
fully into account; and

viii. pursue policy aiming to reduce gender pay

differences due to de facto discrimination.

Employment situation: older workers and long-term unemployment
in EU Member States

Employment rate of older workers
in 2000 (%)

Long-term unemployment rate
in 2000 (%)

B

L

I

A

F

E

D

EU

NL*

EL

FIN

IRL

UK

P

DK

S

EU target
2010

EL*

L

DK

NL

A

UK

S

P

IRL

FIN

EU-15

F

B

D

E

I

0

10

20

30

40

50

60

70

0

1

2

3

4

5

6

7

Source: Commission services. * For older workers, NL is provisional data. For Long-term unemployment rate,
no data available for EL .

On 19th January 2001, the Council adopted, in
accordance  with  Treaty  Article  128,  detailed
guidelines for employment policies for the year
2001,  consistent  with  the  above-mentioned
priorities,  as  well  as  Member  State  specific
recommendations.    In  pursuing labour  market
reforms,  Member  States  should  vigorously
implement  the  Employment  Guidelines  and
recommendations addressed to them.

13

3.4. Ensure efficient product

(goods and services) markets

i.

fully implement the Internal Market:

led 

the 

competitive 

The creation of the Internal Market and the launch of
the  euro  have  fostered  competition  in  EU  product
markets.  This has had a moderating effect on inflation
levels  and  has  been  a  factor in  the  convergence  of  price
levels  between  Member  States  with  clear  benefits  for
to  a
  Competition  has  also 
consumers. 
rationalisation  of  production,  which  has  contributed  to
improving 
strength  of  European
companies.  However, the internal market for services is
still hampered by existing barriers, creating obstacles to
cross-border  activities. 
liberalisation  of  the
  The 
telecommunications and to a lesser  extent  of the  energy
sector  has  started  to  give  positive  results.    The
Commission  has  proposed 
liberalisation  of
electricity  and  gas  for  all  consumers  by  1st  January
2005.    Similarly,  the  opening  up  of  the  European
trade  has  exposed  European
economy 
companies  to  international  competition,  which  has
contributed  to  increasing  the  efficiency  of  European
product  markets.    The  European  Union  continues  to
be  committed  to  trade  liberalisation,  and  to  opening  a
new  trade  round  within  the  WTO.  While  significant
progress has been made in the functioning of European
product  markets,  a  number  of  areas  remain  where
further efforts are needed.  Member States should:

to  world 

full 

Degree of opening up of the EU energy market, 2000
(As a percentage of final consumption that is open to competition, see
Directives 96/92/EC and 98/30/EC)

Gas

Electricity

100

80

60

40

20

0

D

UK FIN

S

DK EU

E

L

I

B

NL

A

IRL

F

EL

P

Source: Commission services.

-

-

-

-

cut  the 
legislation
internal  market 
transposition  deficits  to  less  than  1.5
per  cent  before 
the  2002  Spring
European Council;

eliminate technical barriers to trade;

effectively 

functioning
an 
create 
services  by
in 
internal  market 
removing 
other
and 
regulatory 
constraints  on  cross-border  activities
between  Member  States  and  market
entry; and

up 

open 

public
further 
procurement  market  and  bring  it  on-
line by 2003.

the 

ii.

reinforce  competition  while  ensuring  the
delivery of real benefits to consumers:

accelerate  the 
liberalisation  of  the
network industries (energy, railway, air
transport  and  postal  services  sectors)
while 
taking  account  of  universal
service  obligations,  and  security  of
supply requirements;

adequate 

ensure 
and
effectiveness  of  the  competition  and
regulatory authorities; and

capacity 

reduce the  overall level  of  State  aid in
relation  to  GDP  by  2003  and  redirect
it away from  ad hoc and  sectoral aids;
increase  the  transparency  of  State  aid
policies.

-

-

-

14

3.5. Promote the efficiency and
integration of the EU
financial services market

the report of the Committee of Wise Men
on the Regulation of  European  Securities
Markets;

effects  on 

The  EU  financial  system  is  integrating  progressively
under  the  influence  of  globalisation,  deregulation,
technological advances and the introduction of the euro.
The  efficiency  gains  from  financial  integration  will  be
reflected  in  an  improved  allocation  and  lower  cost  of
capital,  with  beneficial 
growth  and
employment  creation  in  the  EU  economy.    However,
the  remaining  obstacles  to  financial  integration  prevent
potential  benefits  from  being  fully  reaped.   Among the
more  important  of  these  obstacles  is  the  absence  of  a
harmonised regulatory framework for the Union, which
prevents  effective  cross-border  competition.    Progress  in
harmonising  EU  financial  regulation  has  been  made
through  a  range  of  actions  taken  under  the  Financial
Services Action Plan (FSAP).  Implementation of the
Risk  Capital  Action  Plan  (RCAP)  should  enhance
the  availability  of  adequate  financing  opportunities  for
innovative  SMEs,  whose 
flexibility  and  growth
potential  make  them  important  sources  of  economic
growth and employment.  However, progress towards  a
truly  single market  for  financial  services  is, at  present,
too slow.  In this respect, it is necessary to:

i.

ii.

ensure  that  the  approach  in  respect  of
the
securities  markets  proposed  by 
Committee  of  Wise  Men  on 
the
Securities
of  European 
Regulation 
Markets  as  endorsed  in  the  Stockholm
European 
is
operational from the beginning of 2002;

Resolution 

Council 

- 

to 

and 
ensure 

step up efforts by all relevant parties - the
the
Council, 
the  Parliament 
full
Commission 
implementation  of  the  FSAP  by  2005  at
the  latest,  and  in  particular  to  implement
key  steps  for  achieving  an  integrated
securities  market  by  the  end  of  2003,
including  notably  the  priorities  set  out  in

iii.

increase,  in  addition  to  implementing  the
FSAP  and  particularly  in  respect  of  risk
capital  markets,  efforts  towards  a  well-
functioning  risk  capital  market  by  2003
through implementation  of  the  RCAP,  in
easing
particular  with 
quantitative  constraints  on  institutional
investment 
in  equity  capital,  easing
bankruptcy  law  and  developing  a  fiscal
framework more conducive to investment
and entrepreneurship; and

regard 

to 

iv. deal effectively with the challenges arising
in the  field  of  prudential  supervision  as a
result  of 
increasing  cross-border  and
cross-sector  linkages  between  financial
markets  and 
this
respect,  Member  States  should  take  the
necessary  measures  to  further  improve
co-
cross-sector 
operation  among  supervisory  and  other
relevant authorities.

intermediaries; 

cross-border 

and 

in 

3.6. Encourage entrepreneurship

for 

potential 

the  EU’s 

Entrepreneurship  is  a  fundamental  precondition  for
increasing 
growth,
competitiveness  and  job  creation.  A  more  favourable
environment for business needs to be created in Europe.
Businesses  and  citizens  need  a  regulatory  and  fiscal
environment  which  is  clear,  simple,  effective  and
workable  in  a  rapidly  changing  global  market  place.
Measures  to  improve  the  efficiency  of  the  public  sector
and  to  limit  red  tape  have  been  introduced  in  order  to
reduce 
enterprises.
Nevertheless, there is scope for significant further action.
European SMEs still consider lack of access to finance

the  administrative  burden  on 

15

an  obstacle  to  start-ups  as  well  as  a  problem  limiting
companies’ growth potential. Member States should:

i.

create a business-friendly environment:

-

-

reduce 

the  administrative
further 
burden  and  barriers  for  business  by
and  more
simpler 
introducing 
transparent 
one-stop
procedures, 
shops  for  company  start-ups  and  by
simplifying business tax systems;

inter 

increase 
the  efficiency  of  public
through
services, 
alia 
benchmarking  and  the  increased  use
of  public  tendering,  while  ensuring
entities
that  public 
compete on  a  level  playing  field  when
public  sector  bodies  or  public–private
partnerships  are  supplying  market
goods or services; and

and  private 

simplify  and  ensure  a  more  uniform
application of VAT systems.

-

ii.

encourage  risk-taking  through  improving
access to finance especially for SMEs (see
also Section 3.5).

3.7. Foster the knowledge-
based economy

The  European  Union’s  transition  to  the  knowledge-
based economy is advancing, but it should be speeded up
if the Lisbon strategic goal is to be achieved.  Business
and  citizens  need  to  be  encouraged  to  seize  the
opportunities  offered  by  the  knowledge-based  economy.
In  spite  of  recent  progress  in  ICT  diffusion,  the  EU
continues to lag behind the United States in areas such
as  research  and  development,  investment 
in  new
technology,  and  internet  penetration.    It  is  of  high
the
importance 
Stockholm  European  Council  to  accelerate  economic

the  guidance  provided  by 

that 

R & D expenditure

% of GDP

1995

1998

Public R&D

Business R&D

B *

DK

D

EL*

E

F

IRL*

I

NL

A**

P*

FIN

S

UK

EU

USA

Japan

0

1

2

3

4

Source: Commission services.
Note: * Data for 1997, ** no breakdown available for Austria.

reforms  is  brought  into  life  within  the  agreed  period.
Increased  investments  in  human  capital,  R&D  and
ICT  are  required  in  order  to  strengthen  European
competitiveness.    The  establishment  of  competitive
product  markets  (see  Section 3.4)  and  well-functioning
capital  markets  (see  Section 3.5)  contribute  to  a
business  climate  supportive  of  innovation  and  risk-
taking  that  will  encourage  investment.    In  the  area  of
R&D,  the  main  challenge  is    to  raise  private  sector
involvement  contributing  to  a  better  commercialisation
of  R&D  results  and  to  the  establishment  of  the
European Research Area.  To  facilitate  the transition
to the knowledge-based economy, it is necessary to:

i.

stimulate R&D and innovation:

adequate 

incentives 

for
provide 
business  to  engage  in  R&D,  inter  alia
by  strengthening  intellectual  property
rights and establishing a legal basis for
a Community patent before the end of
2001;

-

16

-

-

-

improve  ties  between  university  and
business leading to knowledge transfer
and  a  better  commercialisation  of
R&D results;

enhance collaboration on research and
innovation  across  Europe  inter  alia  by
stimulating  networks  of  centres  of
excellence  combining  business  and
academic  partners  and  by  promoting
mobility  of  researchers,  and  through
reinforced  co-ordination  of  national
research  and  innovation  policies  and
programmes; and

and 

ensure  sufficient  public  funding  for
and
establish 
R&D 
consistent 
public
research.

priorities 

clear 

for 

ii.

promote access and use of ICT:

implement  the  unbundling  of 
the
‘local  loop’  in  order  to  help  bring
about  a  substantial  reduction  in  the
costs of using the internet;

ensure  a  better  and  more  widespread
use  of 
schools  and
complete  the  necessary  training  of  all
teachers by the end of 2002;

internet 

in 

strengthen  the  regulatory  framework
for  e-commerce  (by  implementing  the
electronic  signature  directive  and  by
adopting  in  2001  the  proposals  on
copyright,  distance  marketing,  VAT
and electronic invoicing); and

stimulate 
administrations.

internet  use 

in  public

-

-

-

-

iii.

strengthen  education  and  training  efforts,
both  private  and  public,  in  order  to
increase the supply of trained researchers,

to increase the number of highly qualified
ICT  personnel,  and  to  improve  the  basic
ICT skills of the population.

Penetration of ICT at home
(per 100 inhabitants, May 2000)

Internet users

Number of PCs

70

60

50

40

30

20

10

0

NL DK

S

FIN

L

B

UK

I

EU

E

A

D

F

IRL

P

EL

Source: EITO, Commission services.

3.8. Enhance environmental

sustainability

The  Stockholm  European  Council  has  asked  to
integrate the promotion of sustainable development into
the  Broad  Economic  Policy  Guidelines.    Sustainable
Development  is  a  concept  that  goes  beyond  a  purely
economic assessment and strives for improvements in the
quality of life by promoting coherent policy actions based
on  an  overarching  assessment  of  their  economic,  social
and environmental dimensions.  In doing so, it takes a
long-term  view,  looking  at  the  welfare  of  both  present
and  future  generations.    This  section  focuses  on  the
integration  of  environmental  aspects  into  economic
policy, 
the  use  of  market-based
instruments,  as  a  means  of  promoting  sustainable
development.

in  particular 

instruments 

in  pursuit  of 

Member  States  should  make  increased  use  of  market-
based 
environmental
objectives,  as they  are  often the  most  efficient means  to
curb  pollution  since  they  lead  to  the  internalisation  of
external  costs  in  prices.    They  are  therefore  a  way  to
implement  the  polluter-pays-principle.    Furthermore,
to industry to reduce pollution in
they provide flexibility

17

 
a cost effective way, as well as encouraging
technological
innovation.    Gradual  but  steady  and  credible  changes
in  the  level  and  structure  of  tax  rates  until  external
costs  are  fully  reflected  in  prices  would  minimize
structural adjustment problems and support adaptation
and  innovative  solutions  by  firms.    This  approach
would  also  minimise  the need  for  exemptions  for  those
firms  or  sectors 
  Such
exemptions  often  reduce  the  environmental  effectiveness
of  the  measure,  distort  the  tax  structure  and  are
difficult  to  remove  at  a  later  date.    Establishing  a
framework  for the  use  of market-based  instruments  at
Community level could help avoid such  distortions  and
underpin the internal market.

that  are  most  affected. 

Therefore, it is necessary to:

i.

ii.

iii.

introduce  and  strengthen  market-based
policies  like  taxation,  user  and  polluter
charges,  insurance/liability  schemes  and
tradable emission rights;

sectoral 

reduce 
tax
exemptions  and  other  measures  which
have a negative environmental impact;

subsidies 

and 

intensify the use of economic instruments
to  curb  greenhouse  gas  emissions  and
fulfil  the  requirements  of  the  Kyoto
Protocol; and

iv.

agree  on  an  appropriate  framework  for
energy taxation at the European level.

18

 
II. COUNTRY-SPECIFIC
ECONOMIC POLICY
GUIDELINES

1. BELGIUM

The economy expanded by about 4 per cent in
2000  and  real  GDP  is  expected  to  increase  at
around  3 per  cent  in  2001  and  2002.    Private
consumption, which increased rapidly in 2000,
will  remain  sustained  in  both  years  supported
by  higher  household  disposable  income  and
  Rather  dynamic
increasing  employment. 
investment  should  also  continue  to  boost
domestic  demand. 
  The  external  sector,
however, is expected to turn less supportive of
activity  in  2001  and  2002.    Consumer  price
inflation, measured by the harmonised index is
projected  to  decelerate  from  2.7 per  cent  in
2000  to  just  below  2  per  cent  in  2001  and
further  down  in  2002.    Employment  should
continue  to  increase  in  both  years  supported
by  still  robust  activity  and  the  effect  of  active
employment  measures  implemented  in  recent
years.

into  account 

the  still  very  high
Taking 
government  debt  ratio,  and  the  need  to
prepare  for  future  challenges  resulting  from
the ageing population, budgetary consolidation
remains  a  priority.    The  labour  market  is  still
characterised  by  a  low  employment  rate,  in
particular  among  the  older  workers,  while
labour  market
regional  divergences 
performance  are  still  too  marked.    Lack  of
competition  in  specific  sectors,  the  excessive
regulatory burden on enterprises, and the need
to  raise  the  efficiency  of  the  public  sector  are
also important policy challenges.

in 

Budgetary policy

Acceleration  in  activity  in  2000  resulted  in
more positive budgetary results than  expected:
instead  of a  government  deficit  projected  at  1
per cent of GDP, a zero balance in the general
government  accounts  was  achieved. 
  The
2000 updated  stability  programme  projects  a
0.2  per  cent  of  GDP  government  surplus  in
2001 increasing slightly to 0.3 per cent of GDP
in 2002.  The budgetary strategy planned in the
2000 update  for  the  period  to  2005  relies  on
the  achievement  of  large  government  primary
surpluses,  reaching  more  than  6  per  cent  of
GDP  per  year.    Control  on  real  primary
expenditure  is  expected  to  be  the  main  factor
of  adjustment,  following  a  non-explicit  norm
of  increase  at  1.5  per  cent  per  year  in  real
terms  for  Entity I  (federal  government  and
social  security).    The  government  debt  ratio  is
projected to be reduced from 110.6 per cent of
GDP  in  2000  to  101.4  per  cent  of  GDP  in
2002.    In  view  of  the  above,  and  considering
that  Belgium  is  a  member  of  the  euro  area,
budgetary policy should aim to:

i.

ii.

achieve  a  budgetary  surplus  of  0.2  per
cent of GDP as projected for 2001 in the
2000 update  of  the  stability  programme,
even  in  the  event  of  slower  real  GDP
growth than projected;

in the framework of the budget for 2002,
contain  firmly  the  annual  increase  in
primary  expenditure  within  the  1.5  per
cent  limit,  in  real  terms,  in  Entity I,  thus
the
allowing 
in
government 
particular  a  primary  surplus  above  6  per
cent of GDP.

of 
objectives, 

achievement 

balance 

the 

iii.

the
in  2002  and  beyond 
budgetary margins, as defined in the 2000
update  of  the  stability  programme,  in  a

  allocate 

19

way  consistent  with  the  limit  of  1.5 per
cent  growth  of  real  expenditure;  allocate
all  additional  budgetary  revenues  which
might  result  from  better  than  expected
real GDP growth to debt reduction; and

Reform Plan, are  expected  to  gradually  reduce
taxation  on  labour in  the  years ahead.  In view
of  the  above,  while  vigorously  implementing
all  the  Employment  Recommendations,  the
main priorities for Belgium should be to:

iv. prepare  for  the  budgetary  implications  of
population ageing by timely reforming the
pension  system  and  by  identifying,  in  the
next  update  of  the  stability  programme,
budgetary 
to  be  allocated
annually to the “Ageing Fund”.

resources 

Labour markets

to 

toward 

improve 

conditions 

in  Belgium
Labour  market 
continued 
in  2000  bringing
unemployment  down  to  7  per  cent.    The
the
is  moving 
government 
implementation  of  an  “active  welfare  state”
characterised, among other things, by a gradual
shift from passive policies  to  a  preventive and
more  active  approach  to  labour  market issues.
Initiatives  have  been  undertaken  to  combat
unemployment traps.  Yet, benefit dependency
remains  relatively  high  for  some  segments  of
the labour market.  The ageing population and
the  emerging  signs  of  bottlenecks  in  hiring
workers  point  to  a  need  for  further  measures
aimed at mobilising the non-occupied potential
labour  force,  thereby  increasing  employment
and participation rates.  This is one of the main
challenges  facing  the  Belgian  labour  market,
which  is  characterised  by  a  relatively  low
overall employment rate (60.9 per cent), and in
particular  for  older  workers  (only  24  per  cent
for  those  aged  55-64).    The  persistence  of
considerable 
in
geographical 
inadequate
unemployment  rates  points 
labour  mobility 
insufficient  wage
and 
flexibility.  Although the tax burden on labour
in  Belgium  remains  among  the  highest  in  the
EU,  tax  cuts,  as  envisaged  by  the  new  Fiscal

disparities 
to 

i.

ii.

iii.

on  the  basis  of  past  reviews,  reform
further  tax  and  benefit  systems  to  make
work pay, in particular, to create adequate
incentives for older people to continue to
work or re-enter the labour market and to
revise  the  higher  benefits  and  the  special
exempting  older  unemployed
status 
people  (aged  over  50)  from  active  job
search;

address  the  main  obstacles  to  labour
mobility and encourage Social Partners to
allow  wage-setting  mechanisms  to  better
take  into  account  productivity  and  local
labour  market 
while
conditions, 
preserving wage moderation; and

continue  to  enhance,  together  with  the
Social  Partners,  labour  market  flexibility
by  further  relaxing  conditions  for  fixed
term  and 
temporary  contracts  and
increasing  working-time  flexibility,  while
ensuring  that  any  reduction  in  working
time has no adverse impact on unit labour
costs and labour supply.

Product markets and the
knowledge-based economy

to  a 

relatively  high 

Belgium is a small open economy,  with  strong
competition  on  goods  markets,  which  has
contributed 
labour
productivity  in  the  manufacturing  sector  and
relatively  low  prices  for  a  country  with  its
standard  of  living.    The  liberalisation  process
in 
is
telecommunications 
progressing  well  and  several  measures  have

sector 

the 

20

taken 

to  stimulate 

been 
the  knowledge
economy.  However, problems of  competition
  The
in  some  services  sectors. 
persist 
liberalisation 
less
is 
in  the  energy  sector 
advanced.    Efforts  to  reduce  the  regulatory
burden  on  business  and  to  reform  the  public
administration  have  been  announced  but  only
few measures have been taken.  In view of the
above,  the  main  priorities  for  Belgium  should
be to:

i.

ii.

increase  competition  in  transport  and
distribution  of  gas  and  electricity  and  set
up  independent  transportation  network
managers  in  these  sectors  in  order  to
ensure  non-discriminatory  access;  ensure
that  the  planned  reform  of  the  railways
will  increase  efficiency  and  quality  of
service and reduce the need for operating
subsidies;

increase  the  transparency  of  the  links
between  the  public  and  private  sectors  at
the  local  and  provincial  level,  especially
their
the  role  of  municipalities  and 
associations 
/
("intercommunale 
intercommunaal") 
in  different  sectors
such  as  energy  or  banking,  in  order  to
avoid  distortions  of  competition  and
conflicts of interest; and

iii.

take  measures  to  reduce  and  simplify  the
administrative burden on business.

Capital markets

in  Belgium  continue 

Capital  markets 
to
develop.  The equity market has become more
integrated  internationally  with  the  merger  of
the  Brussels,  Paris  and  Amsterdam  stock
exchanges  in  2000.    Similarly,  the  banking
system  has  been  transformed  by  a  series  of
cross-border  as  well  as  domestic  mergers  and
acquisitions  in  recent  years.    The  risk  capital
market  has  experienced 
strong  growth,
characterised by a high level of venture capital
to  GDP  but  also  a
investment  relative 
public-sector
substantial 
intervention. 
further
development  of  the  risk  capital  market  would
be  desirable,  in  particular  of  the  private  as
opposed  to  the  public  venture  capital  market.
Efficiency 
in  the  financial  system  should
benefit  from  a  proposed  set  of  legislative
actions  to  improve  corporate  governance.  In
view  of  the  above,  the  main  priorities  for
Belgium should be to:

of 
Nevertheless, 

degree 

constraints 

quantitative 

develop further the risk capital market by
easing 
on
institutional  investment  in  equity  capital,
by  establishing  a  fiscal  framework  more
conducive 
and
entrepreneurship,  the  latter  to  be  also
encouraged by adjusting bankruptcy  laws;
and

investment 

to 

ensure 
that  supervisory  arrangements
across  sectors  and  across  borders  are
keeping  pace  with  developments  in  the
financial system.

i.

ii.

21

 
2. DENMARK

Budgetary policy

is  expected 

in  both  private 

Following  economic  growth  of  close  to  3  per
cent  in  2000,  mainly  boosted  by  dynamic
investment  and  strong  external  demand,  the
economic  expansion 
is  expected  to  slow
somewhat to slightly above 2 per cent in 2001.
and
Whereas  growth 
to
government  consumption 
recover  after  the  weak  performance  last  year,
this  development  is  likely  to  be  more  than
counterbalanced  by  a  much  lower  rise  in
in  export
  Although  growth 
investment. 
markets  is  assumed  to  slow  in  2001,  the
unusually  strong  rise  in  imports  in  2000  –
partly  linked  to  the  high  import  intensity  of
equipment  investment  and  exports  –  is  likely
to  fade  away.    Thus,  the  growth  contribution
of  net  exports  is  expected  to  strengthen  in
2001.    In  2002  economic  activity  is  projected
to accelerate to close to 2½ per cent, primarily
as  a  result  of  a  sustained  revival  of  private
consumption.

In  2000,  the  general  government  surplus  was
2.4  per  cent  of  GDP,  higher  than  expected  at
the  time  of  the  adoption  of  the  budget  bill.
According  to  the  government’s  estimates,  the
budget surplus should increase  to  2.9  per  cent
of  GDP  in 2001  and  decline somewhat  to  2.6
per cent of GDP in 2002.  The 2000 update of
the  Danish  convergence  programme  by  and
large  maintains  the  strategy  of  moderately
declining  ratios  of  primary  expenditure  and
taxes to GDP.    However, in  2001,  both  ratios
are  expected  to  increase  slightly  as  a  result  of
government  consumption  rising  noticeably
above the target of a real increase of 1 per cent
annually  and  a  tax  rise  by  local  and  regional
governments,  clearly  going  beyond  the  non-
binding  agreements  with  central  government.
In  the  longer  term,  projections  indicate  that
Danish  general  government  finances  have  a
capacity  to  cope  with  the  financial  burden  of
the  ageing  population.  In  view  of  the  above,
budgetary policy should aim to:

labour 

renewed  pick-up 
in  several 

The  growth  potential  of  the  Danish  economy
could  be improved  by  properly  addressing  the
supply
following  key  challenges: 
constraints  which,  if  eased,  would  also  help
avoiding  that  bottlenecks  in  some  sectors
rises.
spark  a 
Competition 
important  sectors
remains  inadequate  and,  given  the  size  of  the
public  sector,  it  is  important  to  attain  a  high
level of efficiency in this sector.  Also, effective
restraint  of 
in  government
consumption is necessary, in particular in view
of 
the  ageing
population.

the  budgetary 

real  growth 

impact  of 

in  pay 

i.

ii.

the 

limit 

strictly 
in
government  consumption  in  2001  to  the
budgeted rise of 1.9 per cent;

increase 

real 

ensure,  in  the  framework  of  the  budget
for 2002, that primary expenditure falls to
a  level  that  is  no  more  than  the  49.5  per
cent  of  GDP  as  specified  in  the  2000
update  of  the  convergence  programme,
allowing  a  reduction  in  the  tax  burden
while  maintaining  a  budget  surplus  of
around 2.5 per cent of GDP; and

iii. hold  back  real  growth  in  government
consumption also in the medium term  so
that  the  tax  burden  can  decline  up  to
the  government’s
2005 
projections  in  the  updated  convergence
the
programme,  without 

jeopardising 

line  with 

in 

22

for 

the 

adequately 

capacity  of  Danish  public  finances  to
ageing
cater 
population.    In  particular,  more  binding
commitments 
levels  of
government  should  be  sought,  while
local
respecting 
governments, in order to achieve this.

autonomy  of 

lower 

from 

the 

Labour markets

The Danish labour market performance is one
of the best in the Union, including the highest
employment  rate  of  over  76  per  cent,  a
relatively  low  unemployment  rate  of  4.7  per
cent and a good record in active labour market
policies.   In  addition,  the  eligibility  criteria  for
benefits  have  been  tightened 
in  order  to
increase  effective  labour  supply,  inter  alia,
recently  through  the  reform  of  the  early
retirement schemes in 1996 and  1999, and  the
reform  of  disability  pension  scheme,  to  be
implemented in 2003.  However, labour supply
has  stagnated  in  recent  years,  and  it  will  be
curtailed by some recent measures, notably, the
one-week  increase  in  annual  holidays  for  the
private  sector,  agreed in 2000.    Labour  supply
constraints are expected to persist, both in the
short  and  longer  term,  despite  efforts  to
increase  the  labour  supply  of  immigrants.    A
further  expansion  in  labour  supply  could  be
encouraged  via  tax  and  benefit  reforms,  to
make the underlying tax-benefit structure more
favourable  for  employment.    In  view  of  the
above,  while  vigorously  implementing  all  the
Employment  Recommendations, 
the  main
priority for Denmark should be to:

i.

labour  over 

reduce  further  the  overall  fiscal  pressure
on 
the  coming  years,
especially through lowering high marginal
effective  tax  rates  on  low  and  medium
wage earners, and reform  benefit  systems
to make work pay.

Product markets and the
knowledge-based economy

is 

in 

up 

seen 

opening 

The  Danish  economy 
less  exposed  to
international  competition  than  other  small
Member  States.    This  may  be  one  reason  why
competition  is  insufficient  in  a  number  of
product  markets  and  why  consumer  price
levels  are  relatively  high.    Over  the  recent
noticeable
period,  Denmark  has 
improvements 
public
procurement  and  in  raising  the  efficiency  of
public  services  provision.    Competition  policy
has  also  been 
introducing
merger  control  and 
the  enforcement  of
Articles  81  and  82  of  the  Treaty.    Despite
R&D  expenditures  that  are  above  the  EU
average, Denmark does not measure up to the
other Nordic Member States, in  part  owing  to
lower  business  R&D  spending  and  a  poorer
commercialisation  record.    A  new  business
policy  strategy  has  been  designed  to  better
R&D  performance  in  Denmark.    In  view  of
the  above,  the  main  priorities  for  Denmark
should be to:

strengthened, 

in 

strengthen  enforcement  of  competition
industries  where
rules 
competition  has  been 
to  be
inadequate; and

found 

those 

and 

procurement, 

enhance  conditions  for  competition  in
public 
heighten
competitive  pressures  in  public  services
through
provision  at 
benchmarking and increased use of public
tendering.

local 

level 

the 

i.

ii.

23

Capital markets

Capital  markets 
in  Denmark  have  been
developing under the influence of government
policies  focused  on  strengthening  financial
supervision,  improving  competitive  conditions
for  financial  companies  and  increasing  market
transparency.  To promote the development of
the  equity  market,  Denmark  has  eased  the
quantitative 
restrictions  placed  on  equity
holdings  of  pension  funds,  thus  allowing  for
investments up to 70 per cent in equity under a
  Denmark  has
“prudent  man”  principle. 
improved  the  tax  treatment  of  employee
ownership  schemes  and  reformed  investment
fund  regulations  by  introducing  “small  cap”
investment  funds  (special  innovation  funds
which  specialise 
innovative
companies).    Investment  in  risk  capital  has
doubled since 1998 but remains small when

in  small  and 

and 

framework 

compared 
  Therefore,
to  other  markets. 
continued  efforts  to  develop  the  risk  capital
market  would  be  desirable.    Financial-sector
regulations  are  to  be  gathered  in  a  single
supervisory
legislative 
arrangements  are  to  be  streamlined.    With
increased  merger  activity  of  large  financial
in  the  Nordic  region,  Danish
institutions 
co-operation
supervisors  have 
agreement with their Finnish and Swedish (and
Norwegian)  counterparts  to  ensure  efficient
financial  supervision  of  such  cross-border
institutions.    In  view  of  the  above,  the  main
priority for Denmark should be to:

signed 

a 

develop further the risk capital market by
establishing  a  fiscal  framework  that  is
conducive 
and
entrepreneurship,  the  latter  to  be  also
encouraged by adjusting bankruptcy laws.

investment 

to 

i.

24

3. GERMANY

force. 

from  a 

Following  an  extraordinary  export  boom  in
2000,  economic  growth  in  Germany  looks  set
to  decelerate  somewhat  in  the  near  term,
mainly  because  slower  growth  in  the  world
economy  will 
reduce  export  expansion.
Stronger  domestic  demand  is  projected  to
compensate  partly  for  the  falling  external
contribution  to  growth  and  will  become  the
main  economic  driving 
  Private
consumption,  after  being  restraint  last  year  by
rising  import  prices  and  the  surge  in  oil  bills,
will  benefit 
these
developments.    An  additional  boost  should
the
come  from  employment  growth  and 
implementation of the third step of the income
tax  reform  on  1  January  2001.    At  the  same
time  equipment  investment  is  expected  to
remain  robust  as  a  result  of  a  high  rate  of
capacity  utilisation. 
the
projections  of  the  Commission  services,  GDP
growth  is  therefore  likely  to  decline  to  some
2¼  per  cent  in  2001,  while  2002  should  see  a
slight pick-up to just over 2½ per cent.  These
growth  rates  should  continue  to  result  in
higher employment.

  According 

reversal  of 

to 

Although  the  economic  situation  in  Germany
has  substantially  improved  compared  to  the
1990s, Germany has not yet generated a strong
endogenous  growth  process  and,  as  a  result,
the  economy  remains  vulnerable  to  external
shocks.    The  positive  effects  of  the  recent
reforms  of  income  and  corporate  taxation
notwithstanding,  economic  dynamism  appears
to be held back by rigidities, in particular in the
labour market.  While overall wage moderation
has  improved  Germany’s  competitiveness  in
recent years, unit labour costs remain relatively
the
high 
unemployment  rate  attains  twice  the  national
average  and  which  are,  as  a  consequence,

the  “New  Länder”,  where 

in 

taxes 

dependent  on  large  transfers  from  the  West.
Tax  and  benefit  systems  contribute  to  the
general  unemployment  problem,  as  relatively
high  marginal 
the
income 
simultaneous loss of social assistance payments
an
can 
unemployment  trap.    There  is  a  risk  that
without  reforms  in  the  labour  market  and  of
in
the  transfer  mechanisms  growth  rates 
Germany will remain subdued.

low-income 

earners 

leave 

and 

in 

Budgetary policy

the  German 

the  adjustment  burden 

Last  year,  Germany  achieved  its  consolidation
target, as the deficit net of UMTS proceeds fell
to  1.0  per  cent  of  GDP  (1.5  per  cent  surplus
with  UMTS).    In  addition,  due  to  the  UMTS
proceeds  significant  progress  was  made  in
accelerating  debt  reduction.  According  to  the
2000  update  of 
stability
programme, the government deficit should fall
gradually to zero by the year 2004.  About half
is  based  on
of 
improvements 
budgetary 
in  Länder  and
communes. 
  Deficit  reduction  should  be
achieved  mainly  by  reducing  expenditures,
while the tax burden should fall.  The updated
stability  programme  foresees,  however,  a
temporary  increase  in  the  deficit  to  1½  per
cent  of  GDP  in  2001  as  a  result  of  the  tax
reform.  The long-term sustainability of public
finances  will  be  improved  by  the  pension
  Long-term
reform  which 
budgetary  risks  remain,  however,  because
health  care  and  dependency  payment  schemes
are  not  yet  appropriately  dealing  with  the
consequences of population ageing.  In view of
the  above,  and  considering  that  Germany  is  a
member  of  the  euro  area,  budgetary  policy
should aim to:

is  under  way. 

i.

attain a general government deficit of 1½
per  cent  of  GDP  in  2001;  to  this  end,

25

growth  of  government  expenditure  in
2001 should respect the projections set in
the  framework  of  the  November  2000
"Finanzplanungsrat";

ii. when  preparing  the  budget  for  2002,
maintain  the  planned  reduction  in  the
general  government  deficit  to  1  per  cent
of  GDP,  even  if  economic  growth  in
lower  than
2001-02  should  turn  out 
projected 
stability
in 
programme  of  October  2000,  so  as  to
ensure  that  the  medium-term  target  of  a
balanced  budget  by  2004  can  be  met;  in
the  event  of  higher  than  projected  tax
revenues  these  should  be  used  to  reduce
the deficit below the targeted level;

the  updated 

iii.

iv.

levels 

reinforce  from  2001  onwards  the  co-
ordination of budgetary policy among the
by
of 
various 
strengthening 
the
the 
“Finanzplanungsrat”  and,  eventually,  in
the framework of a national stability pact;
and

government 
role 

of 

the 

the 

to  secure 

implementation  of 

longer-term
in  order 
finances
sustainability  of  government 
continue 
the
pension  reform  and  start  in  2001  the
elaboration  of  reforms  of  the  health  care
sector  and  of  dependency 
insurance,
particularly  of  long-term  care  for  the
elderly.

Labour markets

labour  market  situation 

The 
in  Germany
continued  to  improve  in  2000.    Employment
growth 
creation
increasing  at  a  pace  not  witnessed  in  the  last
decade, and unemployment fell to 8.1 per cent.
However, the overall improvement has still not

accelerated,  with 

job 

result 

reached the eastern part of the  country,  where
further  and
employment  decreased  even 
unemployment  remained  fairly  stable  at  16.7
per  cent.    Significant  measures  were  taken  to
reduce  the  tax  burden  on  labour  in  the  recent
tax reform.  While the pension reform package
has  not  yet  passed  the  second  chamber,
pension contributions were marginally reduced
in 2000.  However, the combined effects of tax
and  benefit  systems  can  still 
in
disincentives  to  work.    The  German  labour
market  is  characterised  by  a  relatively  high
degree  of  regulation.    Active  labour  market
programmes (ALMPs), especially in the eastern
part of the country, appear to be  inefficient  in
terms  of  reintegration  into  the  labour  market
incorrectly  used  as  an
to  be 
and 
  The  strong
instrument  of  social  policy. 
regional 
unemployment
demonstrates  the  need  for  further  action  to
enhance mobility and the adaptability of wages.
the  above,  while  vigorously
In  view  of 
implementing 
Employment
Recommendations,  the  main  priorities  for
Germany should be to:

dimension 

tend 

the 

all 

of 

towards 

labour  market. 

those
target  ALMPs  better 
groups  most  prone  to  the  risk  of  long-
term  unemployment  and  ensure 
that
training  better  matches  the  demands  of
the
the 
efficiency  of  ALMPs,  in  particular  in  the
New  Länder.  Continue  to  encourage  the
wage  formation  process  to  better  take
into account productivity and local labour
market conditions;

Improve 

complement  the  income  tax  reform  with
further  reforms  of  the  tax  and  benefit
system  to  make  work  pay.    Further  steps
should  be  taken  to  reduce  the  still-high
in
level  of  non-wage 
particular for low wage labour; and

labour  costs, 

i.

ii.

26

 
iii.

take  measures,  where  appropriate  in  the
framework  of  the  “Alliance  for  Jobs”,  to
make  work 
and  work
contracts 
organisation more flexible and to improve
the conditions for life-long learning.

Product markets and the
knowledge-based economy

of 

the 

German  product  markets  are  open 
to
international  competition.    Productivity  levels
are  around  the  EU  average  but  relative  price
levels  are  somewhat  above  what  one  would
expect for a country with its standard of living.
taken  several  measures 
to
Germany  has 
improve 
its  product
functioning  of 
the 
markets,  resulting  in  a  better  environment  for
business.    In  particular,  some  progress  has
been  made  in  improving  the  framework  for
competition in the professions and handicrafts
trade. 
  Furthermore,  the  tax  reform,  the
streamlining  of  business  support  mechanisms
the
liberalisation 
and 
telecommunications  sector  have  started  to
have a positive impact.    The  electricity  market
has  also  been  liberalised  and  a  system  of
negotiated  third  party  access  to  the  electricity
grid  has  been  put  into  place.    However,  there
are still large regional differences in access fees.
The  gas  Directive  has  not  yet  been  fully
implemented  into  German  legislation,  thus
hampering  the  introduction  of  competition.
State  aids  are  declining  gradually,  but  levels
remain  above 
  Public
procurement  rules  are  still  not  sufficiently
applied by some public authorities.  Economic
growth in the  new  Länder  has  been  held  back
by an  underdeveloped  business  services sector
and  a  lack  of  innovative  capacity,  amongst
other factors.  ICT penetration is rising rapidly
and  measures  have  been  taken  to  prevent  a
digital  divide  from  appearing.    A  serious

the  EU  average. 

shortage  of  IT  personnel  has  emerged.    In
view  of  the  above,  the  main  priorities  for
Germany should be to:

i.

ii.

reform  the  higher  education  system  and
reduce shortages of IT personnel through
education and training;

reinforce  competition  in  product  markets
by  ensuring  an  increased  opening-up  of
public procurement, continuing the policy
of  gradual  reductions  in  State  aid,  and
continuing to decrease the regulations for
the professions and handicrafts trade; and

iii.

reduce  the  large  regional  differences  in
the  fees  for  the  use  of  local  electricity
distribution  networks;  create  a  sector-
specific regulatory authority for energy.

Capital markets

In  Germany,  several  actions  have  been  taken
to  improve  the  functioning  of  the  regulatory
framework  for  capital  markets.    In  particular,
the  Fourth  Financial  Market  Promotion  Act
(Finanzmarktförderungsgesetz)  will  be  tabled
as  a  draft  in  June  2001  and  implemented  in
2002.    It  proposes  measures  to  deregulate
stock  market  law,  improve  rules  on  stock
market  manipulation,  and  to  provide  greater
  Furthermore,
legal  certainty  for  futures. 
Germany  has  announced  a  reform  of 
its
financial services regulation by creating a single
federal  agency  for  the  supervision  of  the
banking,  insurance  and  securities  sector  in
order  to  meet  the  challenges  of  the  ongoing
integration of financial markets.   Actions  have
been 
simplify
programmes  which  aim  to  make  risk  capital
  More
available  to  SMEs  and  start-ups. 
generally,  the  reform  of  the  corporate  tax
system  as  well  as  the  proposed  reform  of  the

rationalise  and 

taken 

to 

27

pension system should further promote capital
markets,  and  a  law  has  been  tabled  on  take
over  bids.    An  expert  commission  has  been
created to draw up  a  code  of good  practice  in
the  field  of  corporate  governance,  and  a  law
was    introduced  to  facilitate  the  introduction
of  registered  shares  (Namensaktien).    In  view
of  the  above,  the  main  priority  for  Germany
should be to:

i.

further develop the risk capital market by
continuing efforts to establish a fiscal and
regulatory  framework  more  conducive  to
investment and entrepreneurship.

28

4. GREECE

Budgetary policy

is  expected 

in  particular, 

Economic  activity  was  buoyant  in  Greece  in
2000 and is expected to accelerate in 2001 and
2002,  real  GDP  rising  by  around  4.8  per  cent
in  2002.    Strong  domestic  demand  will  be
supported mainly by investment; investment in
construction 
to
accelerate  in  view  of  the  preparation  for  the
Olympic  Games  in  2004.    Moreover,  lower
interest  rates,  brought  by  participation  in  the
euro  area, should  boost  activity.   The  external
is  expected  to  deteriorate
current  balance 
further  under  the  impact  of  fast  increasing
imports  induced  by  strong  domestic  demand
and  of  slowing  export  markets  for  goods.
Consumer  prices  accelerated 
in  2000  and
reached 4.2 per cent in December.  In line with
moderating import prices, inflation is expected
to decelerate in 2001 and 2002; however, there
are serious risks of overheating in a context of
buoyant 
easing  monetary
and 
conditions.    The  acceleration  in  economic
activity  will  contribute  to  improve  gradually
the  labour  market  situation;  still,  the  rate  of
unemployment is expected to remain high.

activity 

Inflation  risks  might  persist  in  2001,  requiring
appropriate  stabilizing  policy  measures.    In
such  a  context,  budgetary  policy  will  be  an
important  available  economic  instrument  in
order  to  contain  inflationary  pressures.    Wage
developments  will  also  be  crucial 
in  this
respect.    Continuing  budgetary  consolidation
efforts are  also  needed  to  lower  the  high level
of  the  government  debt  ratio  and  to  prepare
for  long  term  challenges  resulting  from  the
ageing  population.    Structural  reform  in  the
labour,  product  and  capital  markets  remain
increasing
priority  areas  with  a  view 
job  creation  and
productivity,  facilitating 
improving  the  external  competitiveness  of  the
economy.

to 

In  2000,  the  general  government  deficit  was
reduced  to  0.9  per  cent  of  GDP  from  1.8  per
cent  of  GDP  in  1999.    The  2000  stability
programme  projects  the  general  government
balance to turn  into  a  surplus  equal  to  0.5  per
cent  of  GDP  in  2001  and  to  1.5  per  cent  of
GDP  in  the  following  year;  the  budgetary
projections  included  in  the  programme  are
based  on  high  real  GDP  growth  assumptions
of  around  5  per  cent  in  both  years.    The
budgetary strategy is centred on achieving high
government  primary  surpluses  reaching  about
7  per  cent  of  GDP  in  2001  and  2002,  while
fully  benefiting  from  lower  interest  payments
following  the  decline  in  interest  rates  and  in
the  debt  ratio.    However,  the  programme
provides  for  a  significant  reduction  in  general
government  current  primary  expenditure  only
in 2002.  In view of the above, and considering
that  Greece  is  a  member  of  the  euro  area,
budgetary policy should aim to:

i.

ensure  that  the  budgetary  target  of  a
surplus  of  0.5  per  cent  of  GDP  set  for
2001  is  met  and  be  ready  to  tighten  the
budgetary implementation in 2001 should
inflationary pressures persist;

ii. maintain 

in 

the  budget  for  2002  a
budgetary  stance  clearly  oriented  towards
price  stability;  to  this  end,  respect  the
government  primary  surplus  objective  of
7  per  cent  of  GDP  mainly  through  fast
retrenchment 
in  government  current
primary  expenditure  applying  clear  and
binding norms;

iii. pursue the  reform  of  the  public  sector  in
order  to  reduce  its  size  in  the  medium-
improving  the
term  with  a  view  to 
competitiveness  of  the  economy  and  to

29

alleviating  the  burden  on  public  finances;
and

iv.

the 

implementation  of 

accelerate 
the
reform  of  the  social  security  sector  in
order to ensure the viability of the system;
in particular, initiate in 2001 the reform of
the pension system needed to  address the
challenges  resulting  from 
the  ageing
population.

Labour markets

After  a  fall  in  employment  in  1999  despite
rapid  economic  activity,  employment  grew  by
1.2  per  cent  in  2000  allowing  a  fall  in  the
unemployment  rate.    Despite  this  positive
development,  the  labour  market  in  Greece  is
still  characterised  by  a  low  employment  rate
(55.4  per  cent  in  2000),  a  high  unemployment
rate,  and  a  strong  degree  of  labour  market
segmentation  evidenced  by  high  female  and
youth  unemployment.    A  number  of  recent
measures  have  aimed  at  improving  the  labour
market  situation,  including  changes  to  some
taxes  and  benefits,  and  the  adoption  of  a
second wide-ranging package of labour market
measures.  Moreover, implementation of active
labour  market 
the
modernisation  of  the  Public  Employment
Service 
recent
measures,  the  labour  market  still  displays  a
number  of  rigidities  including:  complex  and
heavy  regulation;  insufficient  decentralisation
of  wage  bargaining;  and  important  distortions
to labour market incentives emerging from the
the
tax  and  benefit  system. 
educational  system  seems  to  equip  people
inadequately  for  the  labour  force.    In  view  of
the  above,  while  vigorously  implementing  all
the  Employment  Recommendations,  the  main
priorities for Greece should be to:

is  continuing. 

programmes 

  Moreover 

  Despite 

and 

i.

ii.

iii.

iv.

ensure  the  full  implementation  of  recent
labour  market  reform  packages,  and
these  efforts  by
further  build  upon 
loosening 
employment
protection legislation in particular;

restrictive 

eliminate  major  distortions  arising  from
labour  taxes  and  pension  entitlements,
thus  improving  incentives  to  work,  in
particular in the formal sector;

local 

ensure that wages better take into account
labour  market
productivity  and 
conditions,  in  particular  by  making  opt-
outs 
territorial
in 
employment  pacts  a  practical  possibility;
and

included 

the 

investment 

increase 
improve
educational  and  training  systems  in  order
to enhance the skills of the labour force.

in  and 

Product markets and the
knowledge-based economy

to 

least  due 

Greece  is  relatively  little  integrated  in  EU
its
product  markets,  not 
geographical  position.    Labour  productivity  is
improving but remains below the  EU average.
Price  levels  are  below  the  EU  average,  but
somewhat higher than  what  one  would  expect
for  a  country  with  its  standard  of  living.
Reforms  in  the  product  markets  continue  but
remain relatively slow. Progress has been made
in  completing  the  regulatory  and  institutional
framework  for  the  opening  up  of  network
liberalisation
industries,  but 
remains  slow,  in  particular  in  gas  and  sea
transport.  During 2000,  privatisation  of  state-
owned 
continued,  but  with
somehow  less  vigour  than  in  previous  years,
and some measures were  taken  to  foster  start-
ups.    The  transposition  record  of  internal

the  pace  of 

companies 

30

rapid 

increase 

market  legislation  remained  the  poorest  in  the
EU  and  only  modest  progress  was  made  in
improving the business  environment.    Despite
a 
in  ICT  spending  and
penetration  in  recent  years,  Greece  is  still  a
relative  latecomer  in  the  development  of  the
knowledge-based  society.    In  view  of  the
above,  the  main  priorities  for  Greece  should
be to:

i.

ii.

iii.

iv.

v.

continue  to  reduce  the  regulatory  and
administrative  burden  on  business,
enhance  the  performance  of  the  public
the
administration 
and 
coherence  of 
taxation
system;

the  corporate 

improve 

take additional measures to increase R&D
spending;

continue  to  promote  the  wider  diffusion
of ICT and the use of e-commerce;

the 

transposition  record  of
improve 
internal  market  legislation,  particularly  in
the area of public procurement; and

speed  up  the  announced  liberalisation  of
the  gas  and  sea  transport  sectors  and
reinforce 
already
liberalised utilities.

competition 

in 

Capital markets

framework 

improvements 
and 

Capital markets in Greece continue to develop
in 
rapidly,  assisted  by 
the
regulatory 
in  market
infrastructure.    More  specifically,  development
of  the  risk  capital  market  has  been  facilitated
by  the  creation  of  a  new  equity  market  for
SMEs,  by  the  creation  of  a  Fund  to  foster
early-stage investment in SMEs and by further
tax  relief  on  capital  gains. 
  Nevertheless,
further development of the risk  capital  market
would be desirable.   Privatisation  is  enhancing
competition  in  the  domestic  banking  sector.
Changes in the structure of the banking system
and  the  process  of  financial  integration  with
the  rest  of  the  EU  means  that  co-operation
between  supervisors  across  sectors  and  across
borders  is  increasingly  important.    In  view  of
the  above,  the  main  priorities  for  Greece
should be to:

constraints 

quantitative 

develop further the risk capital market by
on
easing 
institutional  investment  in  equity  capital,
by  establishing  a  fiscal  framework  that  is
and
conducive 
entrepreneurship,  the  latter  to  be  also
encouraged by adjusting bankruptcy  laws;
and

investment 

to 

ensure 
that  supervisory  arrangements
across  sectors  and  across  borders  are
keeping  pace  with  developments  in  the
financial system.

i.

ii.

31

5.

SPAIN

GDP  growth  maintained  a  robust  pace  in
2000, but with a clearly decelerating path in the
second half of the year due to the slowdown of
domestic  demand  partially  offset  by  a  positive
external contribution.  Prospects  for  2001 and
2002  point  to  weaker  but  more  balanced
growth.  In 2001 domestic demand is expected
to  decelerate  further  with  a  modest  narrowing
of the  external  deficit,  and lower  inflation.   In
2002,  GDP  growth  is  forecast  to  recover
slightly,  mainly  due  to  private  consumption
benefiting  from  an  increase  in  real  disposable
income,  caused  by  more  favourable  price
developments, and steady job creation.

to 

in  unemployment  persist. 

Although  unemployment  continued  to  decline
in 2000, labour market problems remain.   The
share of fixed-term contracts represents almost
one third of total employment.   Wide  regional
disparities 
  In
addition,  price  developments  in  2000  were
worse 
the
than  expected,  due  both 
behaviour  of  more  volatile  items  (energy  and
unprocessed  food)  and  to  an  acceleration  in
underlying  inflation.    Fiscal  consolidation  is
expected to continue over the medium term as
projected 
the  2001  updated  stability
programme,  but  more  decisive  steps  are
needed  in  order  to  cope  with  the  budgetary
consequences  of  ageing.    Finally,  economic
policy  must  take  into  account  the  need  to
foster  the  knowledge-based  society  so  as  to
improve  the  medium-term  prospects  of  the
Spanish economy.

in 

Budgetary policy

In  2000  the  general  government  accounts
registered a deficit of 0.3 per cent of GDP, 0.9
in  1999.
percentage  points 

lower 

than 

to 

According 
the  2001  updated  stability
programme,  the  general  government  sector  is
expected to be in balance in 2001 and to reach
a  surplus  of  0.3  per  cent  of  GDP  by  2004.
The  fiscal  strategy  outlined  in  the  update  is
similar  to  the  two  previous  programmes.    It
relies  on  restrained  growth  of  primary  current
expenditure, enabling higher public investment
and, after 2002, a reduction  in  the  tax  burden.
Given 
exposed
demographic  profile  and  the  implied  adverse
budgetary 
the
consequences  of 
sustainability  of  public  finances  is  a  matter  of
concern.    As  a  result,  and  considering  that
Spain is a member of the euro area,  budgetary
policy should aim to:

particularly 

Spain’s 

ageing, 

achieve  a  budgetary  position  of  balance
for  2001  as  set  in  the  updated  stability
programme,  especially  through  primary
current  expenditure  restraint.    Moreover,
there  should  be  a  readiness  to  tighten
fiscal  policy  further  to  counterbalance
additional inflationary pressures;

into 

prepare  the  2002  budget  considering  the
2001  updated  stability  programme  target
as  a  minimum,  carrying  forward  any
better  than  expected  results  in  2001  and
account 
taking 
to
pressures.
inflationary 
counteract 
Additionally, ensure that the fiscal reform
envisaged for 2002 is supply-side-oriented
and  does  not 
jeopardise  the  stability
programme budgetary objectives; and

the  need 

increase  the  public  pension  fund  reserve
created in the 2000 Budget Law to at least
1 per cent of GDP by 2004, as envisaged
in the latest updated  stability  programme.
Additionally,  legislate  already  in  2001  for
a  comprehensive  overhaul  of  the  public
pension  system 
its  future
viability.

to  ensure 

i.

ii.

iii.

32

Labour markets

suffers 

from  very  high 

Labour  market  performance  has  improved
markedly  in  Spain  over  recent  years,  with
strong  employment  growth  and  a  sharp  drop
in unemployment, from 24 per cent in 1994 to
14 per cent in 2000.  Nevertheless, the country
still 
structural
unemployment with severe regional disparities,
and  a  low  employment  rate,  especially  among
women (40.3 per cent in 2000).  Key structural
problems include the failure of labour costs to
adjust  to  productivity  and  local  labour  market
conditions,  and  low  labour  mobility,  partly
owing  to  housing  market  rigidities  and  the
operation  of  certain  regional  benefit  schemes.
Recent  proposals  for  reforms  of  employment
contracts would seem to go some way towards
addressing  rigidities  in  this  area,  although  the
experience  of  previous  reforms  suggests  that
much  will  depend  on  implementation.    While
expenditure  on  active  labour  market  policies
has  grown  substantially  in  recent  years,  less
attention  seems  to  be  devoted  to  ensuring  the
efficiency of such measures, which can play an
important  role  in  further  reducing  long-term
unemployment.    In  view  of  the  above,  while
vigorously  implementing  all  the  Employment
Recommendations,  the  main  priorities  for
Spain should be to:

i.

ii.

take 
local 

encourage  reform  of  wage  formation  in
into  account
order 
to  better 
productivity  and 
labour  market
conditions,  and  diminish  obstacles  to
labour  mobility, 
through
improvements  to  the  functioning  of  the
housing  market  and  regional  benefit
schemes;

inter 

alia 

in  and 

investment 

increase 
improve
education  and  training,  and  ensure  that
active 
are
efficient  and  tailored  to  the  needs  of

labour  market  measures 

those most prone to the risk of long-term
unemployment and to the demands of the
labour market; and

iii.

take  steps  to  ensure,  with  the  Social
Partners,  an  appropriate  balance  between
flexibility  and  security,  by  means  of  the
effective 
recently
implementation  of 
approved  employment  contract  reforms,
with a view to early progress in terms of a
reduced  share  of  fixed-term  contracts,
greater use of the part-time contract and a
higher share of female employment.

Product markets and the
knowledge-based economy

into 

Spain’s 

integration 

  Similarly, 

Although 
the
European  goods  markets  has  constantly
increased  in  the  1990s,  the  openness  of  the
Spanish economy is still less than that of other
large  Member  States. 
labour
productivity  is  relatively  low.    In  2000,  Spain
has  taken  several  measures  to  improve  the
functioning  of  its  product  markets.    The
transposition of internal market legislation and
the  liberalisation  of  the  telecommunications
and energy markets have been speeded up; the
Community rules on  public  procurement  have
been  implemented  more  effectively  and  the
level  of  State  aid  has  been  reduced.    Further
measures  have  been  taken  to  reduce  the
relatively  high  administrative  burden  on
businesses,  especially  SMEs.    To  tackle  the
problem of the low level of R&D expenditure,
a  three-year  National  R&D  and  Innovation
Plan  has  been  launched.    However,  public
expenditure on education  is  also  relatively low
compared  to  other  EU  countries  and  internet
penetration is the second lowest in the EU. In
view of the above, the main priorities for Spain
should be to:

33

i.

ii.

take  measures  to  increase  the  basic  ICT
skills  of  the  population  and  to  increase
the supply of highly qualified research and
ICT personnel; and

continue  the  implementation  of  the  plan
to  simplify  the  regulatory  framework  for
SMEs.

Capital markets

national  securities  clearing  and  settlement
systems.  Consolidation is also underway in the
banking sector, which has resulted in increased
profitability  and  has  fostered  the  use  of  more
advanced  technology.    The  risk  capital  market
is  expanding  due  to  favourable  tax  measures
and  the  creation  of  the  Nuevo  Mercado  but
remains  underdeveloped,  particularly  with
regard  to  early  stage  investment.    Therefore,
measures to further develop this market would
be  desirable.    In  view  of  the  above,  the  main
priority for Spain should be to:

limit 

develop further the risk capital market by
further  easing  constraints  on  institutional
investors  which  may 
their
in  equity  capital,  and  by
investment 
establishing  a  fiscal  framework  more
conducive 
and
entrepreneurship,  the  latter  to  be  also
encouraged by adjusting bankruptcy laws.

investment 

to 

in 

Spain  have  been
Capital  markets 
characterised  by  a  significant  privatisation
programme  and 
to
enhance  transparency.    Market  efficiency  is
being improved by the consolidation of several

regulatory  measures 

i.

34

6. FRANCE

Despite  some  deceleration  resulting  from
weaker  external  demand,  economic  activity  in
France  is  expected  to  remain  sustained:  real
GDP  growth  is  currently  projected  to  reach
slightly  less  than  3  per  cent  in  both  2001  and
2002.  In both  years,  strong  domestic  demand
the  main  factor
to  be 
should  continue 
underpinning the robust trend in activity which
started three years ago; the negative effects  on
household  purchasing  power  which  stemmed
in  oil  prices  will
from 
progressively  fade  away;  at  the  same  time,  the
tax reductions planned  for 2001  and  2002 will
in  private
to  an  acceleration 
contribute 
consumption.  In such a context of favourable
demand  prospects,  productive  investment  is
expected  to  remain  dynamic. 
  Expanding
economic activity  will  continue  to  have  a  high
job  content  thus  enabling  the  unemployment
rate to pursue its rapid decline.

the  past  surge 

in  the 

  Whilst 

Although  unemployment  has  sharply  declined
in the course of 2000, it remains high and wage
and  price  developments  have 
remained
moderate  until  now.    However  shortages  are
gradually  emerging 
labour  market.
Moreover, the rate of capacity utilisation in the
manufacturing  sector  has  reached  a  high  level
by  historical 
these
standards. 
developments  do  not  seem 
to  constrain
production  as  yet,  they  represent  a  potential
risk  calling  for  appropriate  policy  measures;
the  sustainability  of  the  current  economic
expansion  relies  on  improved  supply  side
conditions,  including  higher  labour  market
participation,  a  more  favourable  environment
increased  competition.
for 
Furthermore, 
the  current  macroeconomic
situation  provides  an  opportunity  to  eliminate
the general government deficit at a faster pace:
this  would  be  particularly appropriate  in  order

investment  and 

to  prepare  for  future  budgetary  challenges
stemming notably from the ageing population.

Budgetary policy

In  2000,  the  general  government  deficit  was
reduced by 0.3 percentage point to 1.3 per cent
of  GDP,  below  the  targeted  deficit  for  that
year.    According  to  the  2000  updated  stability
programme,  further  reductions  in  the  deficit
ratio  are  to  be  pursued  in  2001  and  beyond.
The  public  finances  are  expected  to  come  to
balance or a surplus in 2004 at the latest.  The
French  budgetary  strategy  is  based  on  a  tight
control of government  spending  in  real  terms;
about  half  of  the  margins  created  by  such
restraint  are  projected  to  be  allocated  to
reducing  the  government  deficit  and 
the
remaining  to  tax  relief.    In  a  longer  term
perspective,  government  finances  will  face  an
increasing  burden  stemming  from  ageing  of
population.  A public pension reserve fund was
created  in  1999  in  order  to  partly  cushion  the
budgetary  impact  of  ageing  population.    In
view of the above, and considering that France
is a member of the euro area, budgetary policy
should aim to:

achieve  in  2001  a  general  government
deficit  of  1  per  cent  of  GDP  (excluding
UMTS  receipts)  as  targeted  in  the  2000
updated  stability  programme;  to  this  aim,
ensure 
real
government  expenditure  will  not  exceed
the projected 1.8 per cent in 2001;

increase 

that 

the 

in 

in the framework of the budget for 2002,
contain  government  expenditures  in  real
terms  within  the  1.6  limit  in  order  to
secure  the  achievement  of  the  0.6  per
cent  government  deficit  target  set  in  the
2000 updated stability programme; and

i.

ii.

35

iii.

allocate  in  2002  and  beyond,  as  a  matter
of priority any additional available margin
to  strengthen  the  budgetary  position  in
order to prepare for long term challenges,
notably  the  burden  for  public  finances
from  ageing  of
which  will 
population; also in view to secure the long
government
term 
the
delay, 
finances 
undertaking  of  a  comprehensive  reform
of the pension system.

of 
start  without 

sustainability 

result 

Labour markets

Recent  developments  in  the  French  labour
market  continue  to  be  impressive:  in  2000
employment  grew  strongly  by  2  per  cent
contributing  to  a  marked  reduction  in  the
unemployment  rate  to  9.5  per  cent.    Wage
developments  have  also  been  moderate,
despite  concerns  about  emerging 
labour
shortages  in  some  sectors  and  professions,
which  are  likely  to  be  exacerbated  by  the
reduction  of  working  time.    Despite  good
recent performance, the  unemployment  rate  is
still high and the  employment  rate  is  relatively
low,  especially  for  older  workers  (29  per  cent
in  2000).    There  is  also  a  need  to  increase
labour  supply, 
in  particular  of  unskilled
workers  and  older  workers.    High  levels  of
structural  unemployment  are  due  in  part  to
remaining disincentives to work resulting from
the  tax  and  benefit  system  despite  recent
measures 
traps,  and
relatively  strict  labour  market  regulation.    In
vigorously
view  of 
Employment
implementing 
Recommendations,  the  main  priorities  for
France should be to:

above,  while 
the 
all 

to  reduce 

inactivity 

the 

i.

consolidate recent reforms of the tax  and
benefit 
the
incentives  for  older workers  to  remain  in

system  by 

improving 

work,  and  by  removing  the  remaining
disincentives  to  take  up  part-time  and
full-time work.  In this context, particular
attention 
to  early
should  be  paid 
retirement schemes and income guarantee
schemes,  in  particular  for  unskilled  and
low-paid workers;

ii. monitor  closely  the  positive  and  negative
effects  of  the  implementation  of  the  35-
hours  working  week 
to
continue  to  ensure  that 
it  does  not
generate any adverse medium-term effects
on  wage  costs,  labour  supply  and  work
organisation; and

legislation 

iii.

reform employment protection legislation
to promote job creation.

Product markets and the
knowledge-based economy

in  transposing  the 

The  French  economy  is  open  to  international
competition.    Labour  productivity  is  relatively
high.    Relative  price  levels  remain  somewhat
above  what  one  would  expect  for  a  country
with  its  standard  of  living.    Progress  has  been
made in promoting entrepreneurship and State
aids  have  been  reduced.    However,  France’s
internal  market
record 
directives  is  the  second  worst  in  the  EU  and
network industries are being liberalised slowly.
Moreover,  despite 
the
administrative  burden  on  business  remains
relatively high.  Recently, France has adopted a
decree  which  should  open  further  public
procurement  and  increase  its  transparency.
Finally,    ICT  penetration  is  rising  rapidly  and
measures  have  been  taken  to  prevent  digital
divide  from  appearing.    In  view  of  the  above,
the main priorities for France should be to:

recent  progress, 

36

i.

ii.

iii.

iv.

accelerate the liberalisation process  in  the
network  industries,  especially  in  the  gas
and electricity sectors;

up 

speed 
implementation 
directives;

transposition 
of 

and
internal  market

continue  the  reduction  of  ad  hoc  State
aids; and

to 

efforts 

reduce 

continue 
the
administrative  burden  on  business  by
simplifying  procedures  and  developing
new  means  of  electronic  communication
with the public authorities.

investment  has  benefited  from  a  series  of
measures  taken  in  recent  years  but  venture
capital investments remained slightly below the
EU  average  in  1999.    Nevertheless,  further
development  of  the  risk  capital  market  would
be  desirable.    Privatisation  of  the  banking
sector is continuing, with the State divesting its
share  in  the  last  publicly  owned  bank,  the
Hervet  Bank.    Changes  are  also  underway  in
the  supervisory  framework,  as  reflected  in  the
the 
forthcoming  merger 
securities
of 
increased  co-
regulatory  authorities  and 
insurance
operation  between  banking  and 
supervisors.    In  view  of  the  above,  the  main
priorities for France should be to:

constraints 

quantitative 

develop further the risk capital market by
easing 
on
institutional  investment  in  equity  capital,
by  establishing  a  fiscal  framework  more
conducive 
and
entrepreneurship,  the  latter  to  be  also
encouraged by adjusting bankruptcy  laws;
and

investment 

to 

to 

streamline 

continue 
supervisory
arrangements  across  sectors  and  across
borders  to  ensure  that  they  keep  pace
with  developments 
financial
system.

the 

in 

Capital markets

Capital markets in France continue  to  develop
with the equity market, in particular, expanding
both  in  terms  of  companies  listed  and  market
capitalisation.    The  equity  market  is  further
benefiting  from  the  creation  of  long-term
savings  plans,  while  market  efficiency  is  being
enhanced  by 
and
protection.
improvements 
Moreover, the equity market has become more
integrated  internationally  due  to  the  merger
between  Paris,  Amsterdam  and  Brussels  stock
  More  specifically,  risk  capital
exchanges. 

greater 
in 

transparency 

investor 

i.

ii.

37

7.

IRELAND

Budgetary policy

disease 

additional 

After very high growth  in 2000,  with  the  level
of  output  considerably  above  potential,  a
slowing  in  growth  is  expected  in  2001-2002
with  labour  and  other  capacity  constraints
becoming more evident. The  slowdown in  the
US  economy  and  the  effects  of  foot  and
factors
are 
mouth 
contributing to  the  slowing  in growth.    Lower
export  market  growth  and  a  higher  real
exchange  rate,  coupled  with  an  expansionary
budget  for  2001  are  expected  to  increase  the
relative  contribution  of  domestic  demand  to
growth.    After  a  sharp  increase  in  inflation  in
the course of 2000, the inflation outlook is for
a  moderate  decline  in  2001-2002:  while  some
factors  that  impacted  significantly  on  inflation
in  2000 are  expected  to  unwind,  domestically-
is  expected  to  remain
generated 
relatively high.

inflation 

good, 

sustainable 

infrastructure  constraints. 

High growth  since  the  mid-1990s  has  virtually
brought  full  employment.    The  task  now  is  to
maintain 
growth  by
containing  inflationary  pressures  and  tackling
  In
labour  and 
particular,  the  contribution  of  fiscal  policy  to
achieving 
threatening
these  goals  without 
economic stability is a major challenge.  Given
that  the  basic  pay  rises  for  2001-2002  in  the
recently re-negotiated national agreement  have
been  revised  upwards  in  response  to  higher
than expected inflation and that drift over and
above  these  provisions  is  likely  in  a  tight
labour  market,  avoiding  a  wage-price  spiral
constitutes 
  The
contribution  of  further  measures  to  increase
competition 
in  some  sectors  and  more
business  R&D  expenditure  to  strengthening
the supply-side are also key policy issues.

challenge. 

another 

In  2000,  due  to  a  strongly  growing  economy
the  surplus  is  estimated  to  have  been  4.5  per
cent  of  GDP,  1.2  percentage  points  higher
than  originally  expected.    The  2000  update  of
the  stability  programme  for  the  period  2001-
2003 projects high surpluses of 4.2 per cent of
GDP  on  average  and  a  further  decline  in  the
debt ratio to less than one quarter of GDP  by
2003.    The  public  finances  are  sound  and  the
recent decision to make an annual contribution
of 1 per cent of GNP to the National Pensions
Reserve Fund until 2055 further enhances their
long-term  sustainability. 
its
meeting of 12 February, the ECOFIN Council
2001
considered 
inappropriately 
thus
inconsistent with the 2000 BEPGs, and issued
a  recommendation  to  Ireland  to  end  this
inconsistency.    In  view  of  the  above,  and
considering  that  Ireland  is  a  member  of  the
euro area, budgetary policy should aim to:

plans 
expansionary 

  However, 

budgetary 

for 
and 

in 

remove  the  inconsistency  with  the  2000
BEPGs,  engendered  by  the  budget  plans
for  2001,  with  countervailing  budgetary
measures during the current fiscal year;

a  budget 

prepare 
that
contributes  to  an  orderly  easing  of  the
pace of demand;

for  2002 

expenditure 

improve 
re-
introducing  from  2002  clear  norms  on
spending aggregates; and

control, 

continue  to  accord  high  priority  to  the
for
National  Development 
infrastructure 
capital
investment,  but  subject  to  achieving  and
maintaining  the  stability  objectives  of
fiscal policy.

human 

Plan 

and 

i.

ii.

iii.

iv.

38

Labour markets

further  gains 

The  Irish  labour  market  has  continued  to
perform  strongly  with 
in
employment  exceeding  the  growth  of  the
labour  force,  leading  to  a  persistent  fall  in  the
unemployment rate which is now 4.2 per cent.
The  employment  rate  of  64  per  cent  in  2000
exceeds  the  EU  average.  While  the  female
employment  rate,  53  per  cent  in  2000,  has
increased to around the EU average, it remains
the  6th  lowest  in  the  Union.    Against  the
background  of  an  increasingly  tight  labour
market,  labour  shortages  are  becoming  more
widespread  and  wage  inflation  is  accelerating,
constituting  a  significant  risk  of  wage  drift.
Recent  growth  in  the  labour  force,  which  is
beginning to slow down, has been significantly
due to continued robust growth in the working
  The  previously  recorded
age  population. 
strong  growth 
is
in  participation 
diminishing  and  there  remains  scope  for
considerable  further  gains.    In  view  of  the
above,  while  vigorously  implementing  all  the
Employment  Recommendations, 
the  main
priorities for Ireland should be to:

rates 

i.

ii.

promote  wage  developments  that  are
consistent  with  the  maintenance  of  price
stability; and

continue to focus measures  on  increasing
the  participation  of  women  in  the  labour
market.

Product markets and the
knowledge-based economy

to 

is  well  exposed 

  Labour  productivity 

international
Ireland 
competition. 
is  well
above the EU average and consumer prices are
around  the  EU  average. 
  The  regulatory
burden  on  business  is  relatively  low  and  the

large 

to  privatise 

liberalisation process is advancing, in particular
in  the  electricity  and  gas  sectors.    However,
there  is  still  insufficient  competition  in  some
product market sectors.  More progress is also
needed 
state-owned
incumbents  and  to  transpose  internal  market
legislation.    Whilst  Ireland  is  well  advanced  in
internet
terms  of 
is
penetration,  public  R&D  expenditure 
relatively  low  and  business  R&D  spending  is
concentrated in foreign-owned firms.   In  view
of  the  above,  the  main  priorities  for  Ireland
should be to:

ICT  production  and 

i.

ii.

iii.

to 

introduce  more
take  measures 
competition 
specific  market
segments;  strengthen  the  application  of
competition policy economy-wide;

into 

to  continue 

the
introduce  measures 
liberalisation  of  transport,  electricity  and
gas  sectors,  and  to  reduce  the  market
power of large state-owned incumbents in
the network industries; and

implement  the  government’s  plans  for  a
substantial  increase  in  R&D  expenditure
through  programmes  to  support  R&D  in
SMEs, to promote co-operative  networks
the
within 
research
national 
infrastructure.

industry  and 
and 

to  develop 

regional 

Capital markets

Evidence  of  on-going  structural  change  in
Ireland's  capital  markets  has  been  seen  in  the
decision  of  the  Irish  Stock  Exchange  to  buy
electronic 
the
Deutsche Börse and in the  creation  of a  stock
market  for  high  technology  shares  (ITEQ).
Privatisation  of  the  banking  sector  is  also
taken
proceeding. 

  The  government  has 

technology 

trading 

from 

39

various  measures  to  support  the  risk  capital
market, notably through the Seed and Venture
Capital  Measure  of 
the  EU  Operational
Programme  for  Industry.  Nevertheless,  there
are  still  notable  gaps  in  the  provision  of  seed
and  early  stage  financing.    There  have  been
important changes made to the framework for
supervision  of 
regulation 
financial
Irish  Financial  Services
markets. 
Regulatory  Authority 
to  be
established  which  will  be  responsible  for
prudential  regulation  of  both  the  banking  and
insurance sectors and for consumer protection.
the
A 

and 
  An 

(IFSRA) 

strategic 

review 

of 

is 

banking  system  has  suggested 
that  while
concentration  of  the  banking  sector  is  not  a
problem, there should be a revision of the way
of  assessing  proposed  mergers  to  ensure  that
they  are  in  the  interests  of  customers  and  the
economy  generally.    Finally,  an  Office  of  the
Director  of  Corporate  Enforcement  has  been
established  with 
improving
standards  of  adherence  to  company  law  by
active enforcement.  In view of the above, the
main priority for Ireland should be to:

the  aim  of 

develop  further  the  risk  capital  market,
particularly  with  a  view  to  improving
access 
early-stage
financing.

start-up 

and 

to 

i.

40

8.

ITALY

The  marked  upswing  recorded  in  2000,  with
real GDP growth almost doubling on the year,
is  expected  to  slow  in  2001,  though  with
growth still well above the sluggish rates of the
1990s.    The loss  of  momentum  results  mainly
from  a  weakening  external  environment,
especially in non-EU markets where Italy has a
relatively  large  exposure.    Domestic  demand
growth, particularly of private  consumption,  is
also  expected  to  weaken  despite  significant
stimulus  from  tax  cuts  as  the  latter  will  be
counterbalanced 
buoyant
performance of the labour market and a  slow-
in  expenditure  on  durable  goods.
down 
Employment creation is forecast to continue at
a  somewhat  slower  rate.    The  unemployment
rate  should  continue  to  fall.    Lower  oil  prices
and  an  assumed  appreciation  of  the  exchange
rate will gradually reduce inflationary pressures
in  the  course  of  the  year  2001.    The  pace  of
economic  expansion  is  expected  to  accelerate
again 
to  a  forecast
recovery of the world economy.

in  2002,  responding 

less 

by 

a 

The  recent  buoyancy  of  employment  growth
continues  to  conceal  a wide  regional  disparity,
with  signs  of  labour  shortage  emerging  in  the
  In  the  South,  despite  sustained
North. 
employment  growth,  the  unemployment  rate
decreased  only  from  22 per  cent  in  1999  to
21 per  cent  in  2000.    In  addition,  labour
market  regulation  remains  somewhat  skewed
towards  employment  protection  of  workers  in
permanent  jobs  in  medium-  and  large-sized
firms and the unemployment benefit system is
the  least  generous  and  one  of  the  most
fragmented  in  the  EU.    The  late  development
of  the  knowledge-based  society  and,  linked  to
that, the relatively low involvement of business
in  R&D,  may  weaken  or  retard  the  medium-
the
long-term  growth  potential  of 
and 

economy. 
  Liberalisation  of  utilities  has
continued  but  a  lack  of  competition  in  local
public utilities might be a risk to the efficiency
of the general  economy.    Finally,  the  still  high
public  debt  to  GDP  ratio  tends  to  limit  the
share of growth-enhancing public expenditure,
such  as  for  education,  R&D  or  investment  in
infrastructure.

Budgetary policy

The  general  government  deficit  in  2000  was
0.3  per  cent  of  GDP,  while  the  debt-to-GDP
ratio  fell  to  110.2  per  cent,  well  below  the
projected  112.1  per  cent.    Excluding  receipts
from  UMTS  licences,  the  deficit  ratio  was  1.5
per  cent  of  GDP,  lower  than  the  previous
year’s  outcome,  but  slightly  higher  than  the
revised  target  of  1.3  per  cent.    According  to
the  December  2000  update  of  the  stability
programme,  the  budget  balance  to  GDP  ratio
is  projected  to  continue  to  improve  in  2001
and 2002, to reach a balance in 2003. The debt
ratio  is  expected  to  fall  below  100  per  cent  of
GDP  by  2003.    Within  this  framework,  and
considering the budgetary strategy of achieving
a  gradual  reduction 
tax  burden,
controlling  current  primary  expenditure  will
remain  a  key  issue.    As  regards  the  future
budgetary impact of an ageing population, Italy
has taken a number of steps in recent years to
reform the pension system, and a reassessment
of the parameters of the system is scheduled to
take place in 2001.  In  view  of  the  above, and
considering that Italy is  a  member  of  the  euro
area, budgetary policy should aim to:

the 

in 

i.

achieve in  2001  a  general  government
deficit  of  0.8  per  cent  of  GDP  as
targeted  in  the  2000  updated  stability
programme;  ensure  when  preparing
the budget for 2002 the respect of the
steady  path  of  deficit  reduction  in

41

ii.

iii.

iv.

order  to  achieve the  medium-term
objective  of  a  balanced  budget  in
2003, by securing primary surpluses at
the  high 
the
programme;

levels  projected 

in 

match  any  loss  of  revenue  stemming
from  additional  reductions  of  taxes
and  social  security  contributions  with
offsetting  expenditure  cuts;  ensure  in
the formulation of the budget for 2002
a  more  comprehensive  rationalisation
of  public  spending,  with  a  view  to
improving  the  supply-side  conditions
of the economy;

for 

strengthen  the  domestic  stability  pact,
translating  in  a  more  rigorous  way  its
provisions 
the  decentralised
administrations,  in  order  to  ensure
already in 2001 more  effective  control
of  current  primary  expenditure, 
in
particular on healthcare; and

take  every  opportunity  to  improve
budgetary  targets  and accelerate  the
reduction  of  the  high  government
debt ratio, also in order to prepare for
long-term  budgetary  challenges  from
population ageing; also with a view  to
securing the long-term sustainability of
government 
finances,  proceed  as
scheduled  to  the  reassessment  of  the
parameters  of  the  pension  system  in
to
2001 
expansion 
promote 
of
supplementary 
privately-funded
pension schemes.

including 
the 

further 

steps 

Labour markets

(fixed-term, 

differentiation 

restrictions  on 

and  productivity. 

The  Italian  labour  market  situation  improved
substantially  in  2000.    Employment  grew  by
almost  2  per  cent  (Italian labour  force  survey)
and unemployment fell from 11.3 per cent to a
still  high  10.5  per  cent.    This  is  a  result  of
higher  economic  growth  and  increased  hiring
flexibility, thanks to the progressive removal of
the  application  of
many 
“atypical  contracts” 
temporary
and part-time contracts).  However, the Italian
labour  market  is  still  characterised  by  a  low
employment  rate,  especially  for  women  and
older workers, and  wide regional disparities in
unemployment 
  The
unemployment  rate  in  the  North  is  only  4.6
per  cent  compared  to  8.2  per  cent  in  the
Centre  and  21  per  cent  in  the  South.    Higher
compensate
wage 
productivity gaps across geographical areas.  A
higher  degree  of  wage  differentiation  should
be  encouraged. 
recent
measures,  the  unemployment  benefit  system
remains fragmented and limited in scope, with
different  schemes  and  disparities  in  benefit
conditions  (level  and  duration).    The  still
relatively  low  degree  of  protection  of  non-
employed  and  “atypical  workers”  combines
with 
in
permanent  jobs  in  medium  and large  firms,  in
maintaining  the  duality  of  the  labour  market.
The  tax  wedge  on  labour  costs  has  been
reduced,  especially  that  on  low-paid  workers
but  the  overall  tax  burden  remain  high.    In
vigorously
view  of 
implementing 
Employment
Recommendations, the main priorities for Italy
should be to:

stricter  protection  of  workers 

above,  while 
the 
all 

  Despite 

some 

can 

the 

to 

efforts 

reinforce 
wage
developments  better  take  into  account
productivity  and 
labour  market
conditions;

local 

let 

i.

42

ii.

iii.

to 

labour  market
continue 
increase 
to
flexibility  by  combining  measures 
the
improve 
social  protection  of 
unemployed  with  an  easing  of 
job
protection  for  employees  on  permanent
contracts; and

security 

contributions. 

continue to bring down the tax burden on
labour  by  gradually  reducing  tax  and
In
social 
particular, the reduction of the tax  wedge
on  labour  costs  should  be  particularly
targeted  at  the  lowest  end  of  the  wage
scale,  thereby  increasing  the  employment
opportunities  for 
low-skilled  workers,
while  reducing  the  budgetary  impact  of
the tax cuts and  complying with the need
for  continued  progress  in  public  debt
reduction.

Product markets and the
knowledge-based economy

is 

less 

integrated 

Italy 
in  European  and
international  product  markets  than  other  large
Member States.  Price levels are below the EU
average,  except  for  energy  products.    Italy  has
made  good  progress  in  implementing  internal
market  legislation,  improving  the  businesses
regulation  and
streamlining 
environment, 
reducing  State  aids.    Liberalisation  of  utilities
has  continued,  but  competition  in  the  local
limited.
provision 
Competition  in  some  service  sectors  is  also
insufficient.  While labour productivity in Italy
is  higher  than  the  EU average  and  despite  the
rapid  increase  in  ICT  penetration,  low  R&D
in
expenditures,  by 
particular,  can  contribute 
the
relatively  poor 
innovative  performance,  as
reflected by the large share of low-tech sectors
export
production 
in 

the  business  sector 
to  explain 

industrial 

remains 

utilities 

and 

of 

specialisation.  These latter problems also have
a  strong  regional  dimension.    In  view  of  the
above,  the  main  priorities  for  Italy  should  be
to:

i.

ii.

iii.

iv.

promote  business  sector  involvement  in
R&D  and  further  encourage  the  wider
diffusion  of  ICT  and  the  use  of  e-
commerce;

ensure  that  the  liberalisation  process  in
the  energy  sector  will  lower  prices  for
households and small  business  users who
are  still  unable  to  choose  their  provider;
ensure 
the  competitive  provision  of
utilities at the local level in the framework
of the reform of local public services;

reduce  further  the  administrative  burden
for  businesses  and  continue  efforts  to
streamline  regulations  and  administrative
procedures; and

increase  competition  and  remove  access
restrictions  in  the  area  of  professional
services.

Capital markets

Capital  markets  in  Italy  are  continuing  to
benefit  from  legal  and  regulatory  reforms,  the
continuation  of  the  privatisation  process,  and
the  restructuring  and  consolidation  of  the
banking  sector.    New  rules  on  mutual  funds
allow for the introduction of new products and
facilitate  new  investment  opportunities.    The
risk  capital  market  has  grown  and  should
law  on
from  a  proposed  new 
benefit 
bankruptcy  and  insolvency  that  encourages
entrepreneurship.    Plans  to  review  the  current
tax  regime  for  stock  options  and  a  more
consistent  application  of  the  tax  regime  to
different securities and to collective investment

43

 
constraints 

quantitative 

develop further the risk capital market by
on
easing 
institutional  investment  in  equity  capital,
and  promoting  a  fiscal  framework  more
conducive 
and
entrepreneurship,  the  latter  to  be  also
encouraged by adjusting bankruptcy laws.

investment 

to 

i.

schemes  of  different  nationality  should  also
favour the  risk  capital  market.    There  has  also
been  a  broadening  of  the  range  of  companies
which  can  benefit  from  provisions  which
favour  the  equity  financing  of  corporations.
Nevertheless,  the  risk  capital  market  remains
one of the less developed in  the  EU.   In  view
of the above, the main priority for Italy should
be to:

44

9. LUXEMBOURG

in  1999  and  2000. 

Economic  activity  was  particularly  buoyant  in
Luxembourg 
  Some
deceleration  in  real  GDP  growth  is  to  be
expected  in  2001  and  2002  to  around  5  per
cent per year. Still very dynamic activity will be
sustained  by 
strong  domestic  demand,
particularly  private  and  public  consumption.
As  employment  is  projected  to  keep  rising  at
rates  around  4  per  cent  a  year,  the  economy
will  continue  to  draw  large  numbers  of  cross-
boarder  workers.    Wage  increases  accelerated
in  2000  reaching  5  per  cent  as  a  result  of  the
tightening  of  the  labour  market,  the  direct
impact  of  acceleration  in  inflation  on  wages
through  the  automatic  indexation  mechanism
and  a  relatively  high  wage  agreement  in  the
public  sector. 
to
  Inflation 
decelerate from a peak of 3.8 per cent reached
in  2000,  in  line  with  moderation  in  oil  prices;
inflation,  which  had
however  underlying 
to  remain
is 
in  2000, 
accelerated 
relatively high.

is  expected 

likely 

large reduction in the income tax which will be
implemented in these two years.   Government
expenditure is expected to continue to increase
at a fast pace, although declining moderately in
share  of  GDP;  expenditure  will  be  mainly
devoted to investment in infrastructure  and  to
supporting specific policy objectives, especially
the  development  of  the  information  society
and  research.    In  view  of  the  above,  and
considering  that  Luxembourg  is  a  member  of
the euro area, budgetary policy should aim to:

i.

conditions  when
tighten  budgetary 
executing  the  budget  in  2001  and  when
preparing the budget for 2002 in order to
counter inflationary pressures should they
persist; and

ii. monitor 

the 

closely 

increase 
in
in  order  to
government  expenditures 
safeguard  the  balance  of  public  finances
should  real  GDP growth  falter  as  well  as
their sustainability in the long term taking
account of the ageing population.

finances  particularly 

Economic  performance  was  strong  recently
sound.
and  public 
However,  acceleration  in  wages  and  prices
represents  an 
important  economic  policy
challenge;  moreover,  tensions  which  have
recently emerged on the labour market also call
for appropriate policies aimed at increasing the
relatively 
low  national  participation  and
employment rates.

Budgetary policy

As  a  result  of  fast  growing  activity  and
employment, 
the  general
the  surplus  of 
government  rose  to  5.3  per  cent  of  GDP  in
2000; a decline  to  about  3-4  per  cent  of  GDP
is  to  be  expected  in  2001  and  2002  due  to  a

Labour markets

to 

in 
increases  and 

The  overall  performance  of  the  Luxembourg
labour market was good in 2000, due to a large
the  availability  of  cross-border
extent 
workers.    The  unemployment  rate  was  very
low  at  2.2  per  cent.  Nevertheless,  the  labour
market  has  been  tightening 
terms  of
inflation
accelerated  wage 
pressures,  and  this  underlines  the  need  to
exploit  better 
labour
potential.    Low  national  employment  rates,  in
particular  for  women  (48  per  cent)  and  older
workers  (26  per  cent),  reveal  the  significant
reserve  of  own 
  Early
withdrawal  from  the  labour  market  has  been
encouraged  by  early  retirement,  pre-retirement
and disability pension schemes.  In view of the

the  country’s  own 

labour  resources. 

45

above,  while  vigorously  implementing  all  the
the  main
Employment  Recommendations, 
priority for Luxembourg should be to:

Product markets and the
knowledge-based economy

i. make  further  efforts  to 

increase  the
national  employment  rate,  especially  for
older workers by increasing the incentives
in  early  retirement,  pre-retirement  and
disability  pension  schemes  to  remain  in
for  women  by
employment, 
removing  obstacles  to  their  remaining  in
employment  or  re-entering  the  labour
market.

and 

Luxembourg  is  a  small  open  economy,  very
international  competition.
well  exposed  to 

Productivity  is  high  and,  despite  a  recent
increase, prices are not unduly high, except for
electricity.  Significant progress has been made
to improve the transposition of internal market
legislation, to reduce regional aids, to speed up
the liberalisation  of  network industries,  and  to
catch  up  to  the  most  recent  developments  in
ICT.    However,  different  elements,  including
price regulation, continue to limit the degree of
competition  in  product  markets.    In  view  of
the  above,  the  main  priority  for  Luxembourg
should be to:

i.

implement  the  announced  abolition  of
fixed and monitored prices.

46

10. NETHERLANDS

Strong  macroeconomic  performance  was
achieved  in  the  Netherlands  in  recent  years,
culminating  in  a  particularly  buoyant  2000;
economic  activity  is  expected  to  decelerate
somewhat in 2001 and 2002 mainly  as  a  result
of external developments, real GDP being still
projected  to  grow  by  more  then  3  per  cent  in
both  years.    Strong  domestic  demand  will
continue to be the main factor of expansion, in
particular,  private  consumption  is  expected  to
accelerate,  boosted  by  a  substantial  rise  in
wages  and  employment,  as  well  as 
the
reduction in the tax burden  resulting  from  the
in  2001.
tax  reform  being 
Employment  is  expected  continue  to  increase,
resulting essentially from a higher activity  rate.
Inflation  has  significantly  accelerated  in  2000
as  a  result  of  a  surge  in  import  prices;  under
the mechanical effect of the increase in indirect
taxes  from  the  beginning  of  the  year,  but  also
as a result of endogenous pressures, inflation is
expected to reach more than 4 per cent in 2001
and to remain around 3 per cent in 2002.

implemented 

in 

worsening 

to  an  end; 

this  resulted, 

The  substantial  acceleration  in  wages  since
1997  has  brought  fifteen  years  of  wage
in
moderation 
external
particular, 
competitiveness  following  the  very  significant
gains  achieved  during  more  than  a  decade.
Taking  into  account  the  substantial  tax  cuts
the  households
which  have  benefited 
disposable  income  especially  in  2001,  a  key
challenge 
renewed  wage
moderation.  Increasing tensions, emerging  on
the labour market raise the issue of new policy
measures  aimed  at  further  fostering  labour
supply;  this  would  imply  more  reform  of
passive  benefits  schemes  aimed  at  increasing
the  activity  rate.    Moreover,  improvement  in
labour  productivity  will  be  needed  in  order  to

ensure 

to 

is 

restore the competitiveness of the economy as
well  as  to  prepare  to  face  the  challenge  of  the
ageing population.

Budgetary policy

The general government balance turned  into  a
surplus of 1 per cent of GDP in 1999 and of 2
per  cent  of  GDP  in  2000,  including  UMTS
licences  receipts  equivalent  to  0.7  per  cent  of
GDP.    The  wide-ranging  tax  reform,  which
entered  into  force  from  1 January 2001,  will
lead  to  a  significant  reduction  in  budgetary
revenues  from  income  tax  and  social  security
contributions  which  will  be  only  partly
compensated by an increase  in several indirect
taxes,  among  which  the  standard  VAT  rate
from 17.5 per cent to 19  per  cent.    Therefore,
the  2000 updated
in  2001,  according 
stability programme, the government surplus is
expected  to  be  lowered  to  0.7  per  cent  of
GDP.  The shift from direct taxation of labour
income to  indirect  taxation  is  especially  meant
to  reduce  the  tax  wedge  on  income  from
labour  and  thus  provide  incentive  to  work.
However,  from  a  stabilisation  point  of  view,
the 
the
Netherlands  is  raising  concern,  as  inflationary
pressures are mounting.  In view of the above,
and  considering  that  the  Netherlands  is  a
member  of  the  euro  area,  budgetary  policy
should aim to:

current  budgetary 

stance 

to 

in 

lower 

i. maintain  strict  control  of  government
expenditure  despite 
expected
economic  growth,  in  order  to  limit  the
reduction  in  the  government  surplus  in
2001 (projected at 0.7 per cent of GDP in
the  2000  update  of 
stability
programme)  and  to  contain  inflationary
pressures;

the 

47

i.

ii.

prepare  a  budget  for  2002  the  stance  of
limiting
is  firmly  oriented  at 
which 
inflationary pressures, thus improving the
budgetary  outcome  as  against  2001.    To
this end, the budgetary margins as defined
the  stability
in  the  2000  update  of 
programme  should  be  allocated  taking
into consideration cyclical conditions as a
matter  of  priority  and  ensure  a  clear
improvement  in  the  budgetary  position;
and

continue  reforms  of  the  tax  and  benefit
system  to  make  work  pay.    Reforms
should  focus  on  the  still  high  marginal
effective  tax  rates,  especially  at  the  lower
end,  and  relatively  lax  eligibility  rules,  in
force
foster 
particular 
participation among older workers and to
facilitate  the  labour  market  re-integration
of  people  receiving  passive  benefits,
including 
disability
benefits.

receiving 

labour 

those 

to 

iii. with 

to 

secure 

a  view 

long-term
sustainability  of  public  finances  taking
into  account  the  ageing  population,  use
available 
for
accelerated  debt  reduction  as  a  matter  of
priority from 2002.

budgetary  margins 

Labour markets

Dutch  labour  market  performance  remained
among the strongest  in  the  EU.   Employment
growth  registered  2.5  per  cent  in  2000.  While
unemployment  fell  further  to  2.8  per  cent,
robust  labour  force  participation  growth  has
contributed  to  limiting  the  strains  that  arise
from  labour  market  tightness.    A  range  of
measures  has  been  taken  to  improve  work
incentives,  e.g.  the  tax  reform  2001  and
measures  to  promote  the  participation  of
women and older workers in  the  labour  force.
However,  while  official  unemployment  is  very
low,  the  proportion  of  inactive  recipients  of
passive  benefits  –  in  disability,  sickness,  and
unemployment  schemes  -  is  still  high.    Also
employment in terms of full-time equivalents is
relatively  low.    This  points  to  an  unexploited
potential for further labour supply growth.  In
view  of 
vigorously
Employment
implementing 
Recommendations,  the  main  priority  for  the
Netherlands should be to:

above,  while 
the 
all 

the 

Product markets and the
knowledge-based economy

policy 

low  price 

taken 
and 

The  openness  of  the  Dutch  economy  and  the
now  well  established  process  of  structural and
regulatory  reforms  have  created  generally  well
is
functioning  product  markets,  which 
reflected 
levels.
relatively 
in 
to  strengthen
Measures  have  been 
competition 
encourage
to 
  The  telecommunications
entrepreneurship. 
sector 
liberalised,  which  has
fully 
is 
contributed  to  low  prices  and  a  high  ICT
penetration.  The reform process is continuing,
but  a  certain  ‘fatigue’  is  emerging,  which  may
delay  further  liberalisation  in  areas  such  as
energy,  public  transport  and  health  care.
There is a concern that the  liberalised  markets
will  still  be  dominated  by 
former
monopolists.    Moreover,  the  value  of  tenders
Journal  as  a
the  Official 
published 
percentage of GDP remains the second lowest
in  the  EU.    The  development  of  the  ICT
producing  sector  and  the  knowledge  economy
in  general  is  held  back  by  a  shortage  of
qualified  personnel  and  associated  with  that  a
very  low  volume  of local  ICT  research,  which
rather
might 
labour  productivity
disappointing  overall 

also  be 

reflected 

the 

in 

in 

a 

48

growth  rate.    In  view  of  the  above,  the  main
priorities for the Netherlands should be to:

i.

ii.

take  measures  to improve  the  climate  for
innovation  and  to  stimulate  further  ICT
penetration,  and,  in  particular,  increase
the supply of qualified ICT personnel and
trained researchers; and

reinforce  the  level  of  competition  by
further  opening  up  public  procurement
and  by 
in
electricity, gas,  cable  networks and  public
transport.

facilitating  market  entry 

Capital markets

Capital markets in the Netherlands continue to
develop.  The equity market has become more
integrated  internationally  through  the  merger
of  the  Amsterdam,  Paris  and  Brussels  stock
exchanges.    More  specifically,  the  risk  capital

market  has  developed  rapidly  with  substantial
investment  at  all  stages
venture  capital 
including  the  earliest  stages.    Although  the
banking  sector  is  relatively  concentrated,  the
degree  of  competition  in  the  sector  seems
adequate.    By  the  creation  of  the  Council  of
Financial  Supervisors,  the  three  supervisors
strengthen  the  existing  co-operation  on  cross-
sector  aspects  of  supervision.    In  view  of  the
above,  the  main  priorities  for  the  Netherlands
should be to:

develop further the risk capital market by
establishing  a  fiscal  framework  more
conducive 
and
entrepreneurship; and

investment 

to 

ensure 
that  supervisory  arrangements
across  sectors  and  across  borders  are
keeping  pace  with  developments  in  the
financial system.

i.

ii.

49

11. AUSTRIA

  Consequently, 

Following  output  growth  of  more  than  3  per
cent 
in  2000,  budgetary  restraint  and  a
slowdown in  external  demand are  expected  to
dampen economic activity in 2001.   Budgetary
consolidation  will  not  only  affect  private
households and enterprises through mainly tax
related  measures  but  also  curb  public
consumption. 
domestic
demand  is  expected  to  decelerate  in  2001.  In
addition,  exports  are  likely  to  see  a  downturn,
particularly in 2001, in step with the economic
development  of  Austria’s  main 
trading
partners.  As a result, output growth in 2001 is
estimated to slow down to  some  2½  per  cent.
In  2002,  domestic  demand  is  expected  to
recover  somewhat,  since  the  negative  effects
on  household  purchasing  power  stemming
from tax increases should fade away, while the
planned 
introduction  of  a  new  childcare
allowance should provide some fiscal stimulus.
In  addition,  private  consumption  should  be
by 
employment
underpinned 
in
decline 
a 
growth 
and 
unemployment, 
the
offsetting 
thereby 
projected  further  small  slowdown  in  export
growth. GDP growth in 2002 is thus projected
to remain steady.

continued 
further 

A  favourable  medium  and  long-term  growth
outlook  for  the  Austrian  economy  hinges  on
increased
improved  supply-side  conditions: 
less  regulation  to
competition  as  well  as 
strengthen 
liberalisation
entrepreneurship; 
concerning  public  utilities  and  the  retail  and
transport  sectors;  and  higher  labour  market
participation,  in  particular  of  older  workers.
Moreover,  to  secure  a  rapid  transition  into  a
knowledge  based  economy  several issues  need
to  be  addressed,  in  particular  spending  on
research  and  development,  deficiencies  in  the
university  education  system,  and  problems  in

technology  diffusion.    In  addition,  a  high  tax
burden  is likely  to  affect  adversely  the  growth
potential of the economy.

Budgetary policy

In  2000, 
the  general  government  deficit
dropped  significantly  to  1.1  per  cent  of  GDP
from  2.1  per  cent  in  1999.    However,  taking
into  account  higher-than-expected  output
growth  as  well  as  one-off  revenues  (UMTS
proceeds,  real  estate  sales)  the  underlying
budgetary  position  was  little  changed.    By
contrast,  the  budget  plan  for  2001  and  the
budget  proposal  of  the  government  for  2002
imply significant budgetary restraint.  By 2002,
the  general  government  position  is  planned  to
be  in  balance,  although  at  the  expense  of  a
sharp rise in the already high tax burden.   Tax
increases are estimated to raise revenues by 0.9
per  cent  of  GDP  in  2001.    Some  spending
increases  are  planned  in  2002,  most  notably
generous  childcare  allowances.    In  net  terms,
the  overall  reallocation  of  resources  amounts
to a cumulative € 3.6 billion or 1.6 per cent of
GDP over the period 2001-02.  More than half
of  the  overall  consolidation  until  2002  stems
from  the  revenue  side.    Despite  the  ongoing
budgetary  consolidation  programme,  public
finances are not yet on a sustainable footing in
the  longer  term.    Spending  pressure  in  the
public  pension  system  is  bound  to  increase  in
spite  of  its  recent  reform.    In  addition,  the
health  care  system  is  in  need  of  reform  to
contain 
related
expenditure.    In  view  of  the  above,  and  given
that  Austria  is  a  member  of  the  euro  area,
budgetary policy should aim to:

rise  of  health 

fast 

the 

i.

ensure  tight  budgetary  execution  at  all
levels  of  government  in  both  2001  and
2002  in  order  to  meet  the  targets  of  the
December  2000  update  of  the  stability

50

programme of respectively, 0.75 and 0 per
cent  of  GDP;  realise  expenditure  savings
as  planned  in  the  stability  programme,  in
particular  in  the  area  of  administrative
reform and the social security sector;

i.

further reform tax and benefit systems  to
increase  incentives  for  older  workers  to
remain  active 
labour  market,
including measures to facilitate the labour
market  re-integration  of  people  receiving
invalidity pensions.

the 

in 

ii.

iii.

in the following years reduce the high tax
burden,  in  particular  on  labour,  without
however 
the  budgetary
consolidation  objectives;  this  will  call  for
additional  and  permanent  expenditure
savings; and

jeopardising 

from  population  ageing 

in  view  of  long  term  challenges  -  notably
resulting 
-
continue  reforms  in  the  pension  system:
in  2001
in  particular  review  already 
benefit  levels  and  reconsider  access  to
invalidity  pensions  in  order  to  increase
the  average  retirement  age;  in  the  health
care  sector:  take  measures  to  counter  the
rising spending pressures.

Labour markets

in  2000. 

The good  performance  of  the  Austrian  labour
  Employment
market  continued 
growth  continued,  although  somewhat  weaker
than  in  1999,  and  the  unemployment  rate  fell
further  to  3.7  per  cent.    However,  at  29  per
cent  the  employment  rate  of  older  workers  is
very  low.    This  is  particularly  problematic  in
view  of  the  tightening  labour  market  and,  in
particular,  the  challenge  of  population  ageing.
In  2000,  a  gradual 
in  the  early
retirement  age  (by  18  months  by  2002)  was
introduced, along with other measures to make
early retirement less attractive.  An income tax
reform  reduced  the  general  tax  burden  on
labour.  In view of the above, while vigorously
Employment
implementing 
Recommendations, 
for
Austria should be to:

the  main  priority 

increase 

the 

all 

Product markets and the
knowledge-based economy

is 

to 

less  exposed 

  Progress  has  been  made 

Austria 
international
competition  than  other  small  Member  States.
Labour  productivity  is  just  below  the  EU
average. 
in
internal  market  legislation  and
transposing 
measures  to  enhance  entrepreneurship  are  in
the  pipeline.  However,  the  share  of  public
procurement  open  to  competition  is  low  and,
despite  encouraging  plans  to  speed  up  their
liberalisation, the telecommunications, gas, and
electricity  sectors  are  still  characterised  by
relatively  high  prices  and  rigidities.    However,
the  most  recent  legislation  provides  for  full
liberalisation  of 
the  electricity  sector  by
October  2001,  and  of  the  gas  sector  by
October  2002.    Finally,  the  conditions  for  a
rapid development of the knowledge economy
are  not  yet  fully  in  place,  and  Austria  still
exhibits 
ICT
expenditure, and  a  significant  shortage  of  ICT
skills. 
  However,  Austria  has  announced
reforms in these  fields.   In  view  of  the  above,
the main priorities for Austria should be to:

level  of  R&D  and 

low 

the  Community's 

transpose 
public
procurement  directives  and  further  open
up public procurement to competition, in
particular at the provincial level; and

implement  fully  the  announced  reforms
to  promote  the  development  of  the
knowledge economy and take measures to

i.

ii.

51

increase 
personnel.

the 

supply  of 

ICT-skilled

Capital markets

the 

the  Deutsche  Börse,  and 

Capital  market  development  in  Austria  been
evident  in  a  consolidation  of  the  banking
sector, with an increase in concentration and a
significant  further  reduction  in  state  holdings.
The  stock  exchange  has  formed  an  alliance
two
with 
in  co-
exchanges  have  created  NEWEX 
operation  with  the  relevant  exchanges  for  the
trading  of  Central  and  East  European
securities.    A  number  of  reforms  have  been
regulatory
improve 
carried  out 
framework,  including  implementation  of  EU
directives,  and  actions  to  combat  money
laundering.  Related measures include allowing
prospectuses  in  English  for  security  issues,
with  prospectuses  available  on  the  Internet,
and  an  extension  of 
the
to  publish
exemption 
prospectuses  for  euro  securities.    A  series  of

the  scope  of 

the  duty 

from 

the 

to 

to 

turnover 

tax,  changes 

fiscal measures have been implemented, or are
planned,  including  the  abolition  of  the  stock
exchange 
the
inheritance  tax  on  shares,  tax  benefits  under
certain  conditions  for  stock  options,  and  a
doubling  of  the  allowance  for  the  issue  of
employee  shares.    Despite  benefiting  from
some of  these  reforms,  the  risk  capital  market
remains  relatively  underdeveloped,  particularly
in relation to early stage financing.  A draft law
on  the  creation  of  a  unified  financial  market
supervisory authority  was  presented  mid-April
2001,  aiming  at  upgrading  of  supervision  and
coping  with  developments  in  the  markets.    In
view  of  the  above,  the  main  priority  for
Austria should be to:

constraints 

quantitative 

develop further the risk capital market by
easing 
on
institutional  investment  in  equity  capital,
by  establishing  a  fiscal  framework  more
conducive 
and
to 
entrepreneurship.

investment 

i.

52

12. PORTUGAL

roughly  offset  by 

Economic  growth  in  2000  is  estimated  at  3.3
per cent, close to the rate registered in the year
before.    However,  the  composition  of  growth
lower  domestic
changed  markedly,  with 
demand  being 
an
acceleration  in  export  growth.    Economic
activity is likely to slow in 2001-02 to a growth
rate of slightly above 2½  per cent.  A number
of  factors  are  behind  this  slowdown,  notably
efforts of private sector agents to redress their
balance  sheets  following  the  recent  sharp  rise
in  indebtedness,  supply  constraints  in  various
service sectors  and  in  construction,  and  lower
external  demand.    Employment  grew  by  1.7
per  cent  in  2000  and  the  unemployment  rate
fell to 4.2  per cent.   Consumer  price  inflation
rose considerably in 2000 and into 2001 under
the  impact  of  a  significant  increase  in  import
prices,  high  pay  rises  associated  with  a  tight
labour  market,  and  some  temporary  country-
specific factors such as an upsurge in prices for
unprocessed  food.    Although  price  pressures
are expected to ease in the course of this year,
average inflation in 2001 is expected  to  rise  to
more than 3 per cent but to come down again
below this level in 2002 .

The buoyancy of domestic demand in Portugal
over  recent  years  has  led  to  the  accumulation
of a large external imbalance.  Its correction is
a  prerequisite  for  Portugal  to  return  to  higher
levels  of  growth  on  a  sound  footing.    The
necessary  adjustment  process  towards  more
balanced  growth  needs  to  be  supported  by
budgetary  policy,  through  tight  expenditure
restraint.  In addition, external competitiveness
has  suffered  from  high  wage  growth 
in
combination  with  relatively  low  productivity
gains.  As a  consequence,  wage  moderation  as
well  as  policies  enhancing  the  productivity
the
growth 

improve 

required 

are 

to 

performance  of  the  economy  in  the  medium
term.

Budgetary policy

In 2000, the general government  deficit  fell  to
1.4  per  cent  of  GDP  (1.7  per  cent  of  GDP
excluding UMTS proceeds).  According  to  the
2001  update  of  the  stability  programme,  the
deficit ratio is to be reduced to 1.1 per cent in
2001 and to 0.7 per cent in  2002.   A  balanced
government  position  is  envisaged  in  2004.
The tightening of the budgetary stance in 2001
is appropriate  in  view  of  the  current  excessive
demand  situation  in  the  economy  and  is  also
in
necessary  because  government  finances 
Portugal  have  not  yet  reached  a  medium-term
position  close  to  balance.    The  government
deficit  reduction  in  2001  is  the  result  of  a
projected  steep  decline  in  the  growth  rate  of
primary  current  expenditure,  which  is  only
partly  offset  by  the  planned 
in
government  investment.    Tax  revenues  are
projected  to  rise  as  a  result  of  the  combined
effect  of  additional  gains  in  the  efficiency  of
tax collection, a broadening of the tax base and
a  reduction  of  tax  rates  for  lower  income
brackets.    In  order  to  meet  expenditure  plans,
the  updated  stability  programme  foresees  the
strengthening  of  budgetary  procedures,  such
as,  inter  alia,  expenditure  control  mechanisms,
in  the  framework  of  the  envisaged  Public
Finance Consolidation Programme.  In view of
the  above,  and  considering  that  Portugal  is  a
member  of  the  euro  area,  budgetary  policy
should aim to:

increase 

i. meet  the  1.1  per  cent  of  GDP  deficit
target  for  2001,  which  calls  for  a  strict
adherence 
current  primary
the 
expenditure  plans;  if  needed,  do  not  use
the  current  expenditure  amounts  frozen

to 

53

ii.

iii.

in  the  budget  for  2001  to  avoid  cutting
back government investment plans;

that 

given 

prepare a budget for 2002 which aims at a
faster  decline  in  the  deficit  ratio  than
planned  in  the  2001  updated  stability
programme 
government
finances in Portugal have not  yet  reached
a medium-term position  close  to  balance;
acceleration  of  budgetary
such 
consolidation 
should  be  based  on
expenditure  restraint  rather  than  on  tax
increases; and

an 

to 

and 

underpin 
the  process  of  budgetary
consolidation  by  introducing  already  in
2001  additional  measures  in  the  area  of
improve  expenditure
health  care 
control 
by
efficiency 
implementing  expeditiously  the  enabling
legislation 
recently
adopted  social  security  law  to  strengthen
the financial position of the social security
light  of  the  budgetary
sector 
challenges of an ageing population.

required  by 

in  the 

and 

the 

attainment and vocational training.  Two-thirds
of  the  population  aged  25  to  64  have  only
completed 
the  primary  education  cycle.
However,  Portugal  has  increased  spending  on
education substantially in recent years, and the
shortfall  in  the  education  level  is  partly  the
result of a lack of schooling over past decades.
Employment 
for
permanent  contracts  remained  relatively  strict.
This  is  probably  one  of  the  most  important
causes  of  the  rapid  increase  in  fixed-term
contracts  in  recent  years.    In  view  of  the
above,  while  vigorously  implementing  all  the
Employment  Recommendations, 
the  main
priorities for Portugal should be to:

protection 

legislation 

i.

ii.

in  and 

investments 

improve
increase 
education and training systems in order to
raise  the  employability,  adaptability  and
productivity of the labour force; and

enhance,  together  with  Social  Partners,
in  order  to
labour  market  flexibility, 
segmentation
risk  of 
the 
minimise 
between regular and atypical contracts.

Labour markets

Product markets and the
knowledge-based economy

situation 

labour  market 

The 
remained
favourable  in  Portugal  with  unemployment
declining  to  around  4  per  cent  of  the  labour
force  in  2000.    The  employment  rate  rose
slightly  to  68  per  cent  and  the  employment
rates  of  both  women  and  older  workers  were
well  above  the  EU-average.    In  some  regions
and sectors there are now clear signs of labour
shortages  and  the  tightening  labour  market
situation  has  also  boosted  nominal  wage
growth,  reaching  about  5½  per  cent  in  2000.
These  wage  increases  were  only  partly  offset
by  productivity  growth.  In  addition,  the  level
of  labour  productivity is very  low  in  Portugal,
partly  due  to  the  low  levels  of  educational

is 

to 

less  exposed 

international
Portugal 
competition  than  other  small  Member  States.
Relatively  low  levels  of  labour  productivity
limit 
the
the  overall  competitiveness  of 
Portuguese  economy.    Price  levels  are  well
below the EU average.  Several measures have
been  taken  to 
improve  access  to  public
procurement, reduce the administrative burden
on 
public
administration.  Numerous initiatives have also
been  launched  to  promote  ICT  diffusion.
the
Nevertheless,  Portugal’s 
knowledge-based economy is still hampered by
its  weak  research  and  innovation  capacity,

transition 

business 

reform 

and 

the 

to 

54

partly related to deficiencies in the educational
qualification  of  the  workforce.    Liberalisation
in energy utilities is proceeding relatively slowly
and State aids remain high.  Finally, the rate of
non-transposition of internal market legislation
is still among  the  highest  in  the  EU.    In  view
of  the  above,  the  main  priorities  for  Portugal
should be to:

i.

ii.

iii.

iv.

enhance efforts to raise the level of R&D
investments,  particularly  by  the  business
sector;

further  promote  the  diffusion  of  ICT,  in
particular  by  taking  measures  to  increase
the supply of skilled ICT personnel;

sustain  the  progress  made  in  containing
State  aids 
(particularly  sector-specific
ones);

speed  up  and  widen  the  liberalisation  of
energy  sectors,  particularly  to  the  benefit
of  small  business  users  and  households;
and

Capital markets

Capital  markets  in  Portugal  are  undergoing
rapid  change,  with  the  consolidation  and
conglomeration  of  financial  institutions  and
the  development  of  new  financial  products.
The risk capital market  has grown,  although  it
remains among the least developed among the
EU Member States.    Initiatives  -  mainly  based
on  public  funding  -  have  been  undertaken  to
facilitate  SMEs'  access  to  finance  but  further
measures  to  develop  the  risk  capital  market
would be desirable.  The regulatory framework
has been reinforced by a tightening of the rules
governing  general  provisions,  capital  adequacy
and  large  exposures.    The  Bank  of Portugal  is
the
taking  measures 
also 
risk  management
monitoring  of  banks' 
processes  and  practices,  and 
to  enhance
through  more  public
market  discipline 
disclosure.    The  creation  of  the  National
Council  of  Financial  Supervisors  should
further  reinforce  the  supervision  process.    In
view  of  the  above,  the  main  priorities  for
Portugal should be to:

to  strengthen 

v.

accelerate  progress  made  in  transposing
internal market directives.

i.

constraints 

quantitative 

develop further the risk capital market by
easing 
on
institutional  investment  in  equity  capital,
by  establishing  a  fiscal  framework  more
and
conducive 
entrepreneurship,  the  latter  to  be  also
encouraged by adjusting bankruptcy  laws;
and

investment 

to 

ii.

ensure 
that  supervisory  arrangements
across  sectors  and  across  borders  are
keeping  pace  with  developments  in  the
financial system.

55

13. FINLAND

  Equipment 

Under  the  impact  of  a  burgeoning  export
sector, output growth in 2000 amounted to 5.7
per  cent.    A  normalisation  of  the  external
contribution  to  growth  in  2001-02  is  likely  to
result in a slowdown of economic activity to a
more  sustainable  growth  rate  of  around  4  per
cent.    Domestic  demand  is  expected  to  hold
steady  bolstered  by  a  pick-up 
in  private
consumption  thanks  to  sizeable  income  tax
cuts. 
investment  should  also
perform  well  owing  to  still  very  high  rates  of
capacity 
construction
investment should be stimulated by high levels
centres.
towards 
of  migration 
Although  continued  job  creation  will  ensure
that  unemployment  remains  on  a  downward
trend, the number of unemployed remains at a
fairly high level, suggesting persistent structural
problems  in  the  labour  market.    Consumer
prices  surged  last  year,  with  an  economic
being
situation 
compounded  by  the  oil  price  hike,  but  are
expected to come down to a rate of just above
2 per cent in 2001 and to slow further in 2002.

utilisation,  while 

overheating 

growth 

close 

to 

short 

thriving 

slowdown 

term  any 

A 
telecommunications  equipment
industry  is  the  prime  factor  behind  the  strong
performance of the Finnish economy in recent
years.    However,  the  very  strong  reliance  on
this  industry  for  the  overall  evolution  of  the
economy  is  not  without  risks.    Evidently,  in
the
the 
telecommunications  sector  would  have  an
immediate impact on overall economic growth.
In the medium term, the strong wage dynamics
in  this  sector,  which  may  be  justified  on
grounds of rapid productivity growth, carry the
risk  of  inappropriately  high  wage  increases  in
other parts of the economy where productivity
gains  are  much  smaller.    This  could  lead  to
competitiveness problems in these sectors and,

in 

eventually,  to  lower  employment.    In  view  of
already strong geographical and skill mismatch
this may further slow the pace of the decline in
unemployment.    The  recent  moderate  wage
agreements  for  2001  and  2002  are  therefore
reflect
to 
welcome,  but  wages  continue 
insufficiently  differences 
in  productivity
developments.

Budgetary policy

taxes) 

reducing 

in  combination  with 

time  alleviating  somewhat 

Much stronger than expected tax intake related
to  high  output  growth  but  also  to  some
specific  factors  (e.g.  exceptionally  high  capital
gains 
tight
in  a  general
expenditure  control  resulted 
government  surplus  of  an  estimated  6.7  per
cent  of  GDP  in  2000.    According  to  the
updated stability  programme,  substantial  albeit
somewhat  lower  surpluses  are  also  projected
during  the  programme  period  covering  the
years  2001-04.    The  budgetary  strategy  is
government
mainly  built  on 
expenditure  in  relation  to  GDP  while  at  the
same 
tax
burden.    The  process  of  lowering  income
taxes, which is under way, is  likely  to  improve
work  incentives  but  would  have  to  be  looked
at 
in  combination  with  benefit  systems.
Medium-term  government  surpluses  of  above
4  per  cent  of  GDP  appear  feasible  given  the
favourable  economic  conditions  and  justified
by  long-term  concerns  over  the  sustainability
of  public  finances  in view  of  a  marked  ageing
of  the  population.    Against  a  background  of
mounting  spending  pressures  a  tight  grip  on
expenditure  will  be  needed  to  achieve  the
envisaged surpluses.  In view of the above, and
considering  that  Finland  is  a  member  of  the
euro area, budgetary policy should aim to:

the 

i.

adhere  to  the  expenditure  targets  set  in
the budget for 2001;

56

ii. maintain  high  government  surpluses  in
2001  and  the  following  years  through  a
reduction 
in  government  expenditure
relative to GDP; and

iii.

long-term  sustainability  of
ensure  the 
public  finances  in  view  of  the  future
effects  of  population  ageing  on  pensions
and health care costs, to which Finland is
particularly  exposed;  this  requires  the
continuation  of 
the  policy  of  debt
reduction  but  needs  to  be  complemented
by  measures,  to  be  adopted  during  the
programme  period, 
low
effective retirement age.

raising 

the 

the  Employment  Recommendations,  the  main
priorities for Finland should be to:

i.

ii.

strengthen efforts to reduce high marginal
effective  tax  rates  on  low  wage  earners
and  to  improve  incentives  in  benefit,
especially  pension,  schemes  to  take  up  a
job  offer  and  to  stay  in  the  labour  force;
and

increase  the  efficiency  of  active  labour
market  programmes  and  refocus  them  to
the needs of those most prone to the risk
of long-term unemployment.

Labour markets

Product markets and the
knowledge-based economy

and 

  On 

declined 

the  other  hand, 

Finnish  labour  market  performance  in  2000
was  mixed.   In  contrast  with  the  brisk  growth
in  GDP  and  employment,  the  unemployment
rate 
remains
slowly 
disappointingly high at  9.8  per  cent.  Structural
problems  in  the  labour  market  are  manifested
in disproportionately high unemployment rates
among low-skilled, older  workers  and in  some
regions. 
labour
bottlenecks have emerged in other regions and
in some sectors, notwithstanding ample labour
mobility.    The  government’s  responses  to
labour market problems have focused strongly
on  the  reduction  of  overall  taxes  on  labour,
including the announced further tax reductions
in 2001 and 2002, and on the increase of active
labour  market  programmes. 
  However,
progress has been sluggish so far regarding the
objective of increasing the  effective  retirement
age  and  addressing  the  incentive  effects  for
low-wage  earners. 
large  early
activation programmes of the unemployed, the
success rate in terms of reducing the flow into
long-term  unemployment  is  low.    In  view  of
the  above,  while  vigorously  implementing  all

  Despite 

its 
of 
standard 
telecommunication 

Despite  Finland’s  peripheral  location  in  the
EU  and  its  low  population  density,  which
creates  natural  barriers  to  competition,  the
openness  of  the  Finnish  economy  has  been
increasing  in  recent  years.    Consumer  price
levels  are  above  what  one  would  expect  for  a
living.
country  with 
and
Nevertheless, 
electricity prices are low, which may be due to
the substantial progress that Finland has made
in liberalising and deregulating these industries.
In  the  retail  distribution,  construction,  and
media 
is
insufficient.  In addition, the share in  GDP  of
public  procurement  that  is  published  in  the
Official  Journal  is  relatively  low  in  spite  of
stricter 
  The
transition  to  the  knowledge  based-economy  is
well  advanced  in  Finland,  as  indicated  by
relatively high expenditures on  R&D  and  high
ICT  penetration.    In  view  of  the  above,  the
main priorities for Finland should be to:

sectors,  however,  competition 

regulations. 

required 

than 

i.

enhance  compliance  with  regulations  in
public procurement, especially at the local

57

level,  and  increase  transparency  in  the
provision  of  public  services  in  order  to
heighten private firms participation; and

ii.

enhance competition in industries such as
distribution,  construction,  and  the  media
sector.

Capital markets

The  capital  markets  in  Finland  are  developing
rapidly,  with  investment  opportunities  set  to
increase further due to new legislation allowing
the  establishment  of  mortgage  banks  and  the
issuance  of  mortgage  bonds. 
  Market
is  benefiting  from  a  more
development 
consistent 
investment
earnings  and  from  improvements  in  market

treatment  of 

tax 

infrastructure.    The  risk  capital  market  is  also
the  emergence  of  new
developing,  with 
growth, 
technology  and  SME  funds  but
further efforts to develop the market would be
desirable.   Restructuring in  the  banking  sector
is  continuing,  notably  with  the  merger  of  the
the  Danish
Swedish-Finnish  Nordea  and 
Unibank 
financial
to  create 
institution  in  the  Nordic  region.    To  ensure
efficient  financial  supervision  of  such  cross-
border  institutions,  Finnish  supervisors  have
signed  a  co-operation  agreement  with  their
Danish  and  Swedish  counterparts.    In  view  of
the above, the main priority for Finland should
be to:

largest 

the 

i.

develop further the risk capital market by
establishing  a  fiscal  framework  more
conducive 
and
to 
entrepreneurship.

investment 

58

14. SWEDEN

Budgetary policy

Sweden  has  experienced  a  period  of  strong
growth  since  1998,  with  GDP  increasing  by
more  than  3.5  per  cent  each  year.    However,
the deceleration in the world economy in 2001
results  in  weaker  external  demand  and  this
coincides  with  an  expected  cyclical  downturn
in  domestic  demand,  in  particular  private
consumption.    The  sluggish  developments  in
the stock market contribute  to  this  slowdown.
On  the  other  hand,  a  rise  in  households’
disposable  income  is  expected,  resulting  from
some  further  employment  growth  and  also
from  the  tax  cuts 
in  2001.
Further,  the  build-up  of  the  third  generation
telecommunications  network  should  stimulate
investment this year and next.  All in all, this is
expected  to  result  in  lower  economic  growth,
of  2.7  per  cent  in 2001  and  of  3.0  per  cent  in
2002.

implemented 

Employment growth has been robust in recent
years,  which  has  contributed  to  a  substantial
fall in the unemployment rate.  Wage and price
developments  have  remained  subdued  and
that  wage
new  wage  agreements  suggest 
moderation  will  continue. 
  This  should
contribute  to  keeping  domestically  generated
inflationary  pressures  subdued  in  2001  and
2002.  Sweden’s target of an employment ratio
of  80  per  cent  by  2004  is  most  welcome.  In
order  to  achieve  this  target,  a  continuation  of
taxes  and  of
the  strategy  of 
diminishing  the  distortionary  marginal  effects
arising from income-dependent benefits seems
appropriate,  as  this  provides  better  financial
incentives  for  people  to  work.    Furthermore,
the  scope  and  design  of  active  labour  market
programmes  would  benefit  from  a  review  to
ensure  the  provision  of  an  adequate  labour
supply.

lowering 

updated 

convergence 

In  2000,  the  general  government  surplus  rose
markedly,  by  2.2  percentage  points,  to  4  per
cent  of  GDP,  well  above  Sweden’s  projection
of  3.4  per  cent  of  GDP.    According  to  the
2000 
programme,
continued large surpluses in 2001 and 2002, of
3.5 per cent of GDP and 3.3 per cent of GDP,
respectively,  are  expected  on  current  policy.
Swedish medium-term budgetary policy is two-
fold  and  consists  of;  (i)  nominal  ceilings  on
central  government  expenditure  set  annually
for  three  years  ahead  and  (ii)  a  2  per  cent  of
GDP surplus target for general government on
average  over  the  business-cycle.    The  margin
created  by  achieving  higher  surpluses  than
targeted has been used partly for tax relief and
partly  for  debt  reduction.    The  latter  form  an
important part of Sweden’s strategy for coping
with the ageing of  the  population.    In view  of
the above, budgetary policy should aim to:

i.

ii.

achieve  in  2001  a  general  government
surplus  consistent  with  the  2000  updated
convergence programme projection of 3.5
per cent of GDP;

continue  with  the  strategy  of  lowering
taxes for low and medium wage earners in
2002  while  still  attaining  the  medium-
term surplus target of 2 per cent of GDP,
taking  into  account  the  position  in  the
business-cycle,  and  at  the  same  time
central
ensure 
government expenditure ceiling; and

adherence 

the 

to 

iii. pursue  the  strategy  of  reducing  public
debt in the medium-term,  as  described  in
convergence
updated 
the 
2000 
programme, 
the
by  maintaining 
government  surplus  target  of  2  per  cent
of  GDP 
cycle  while
implementing  the  strategy  of  further  tax

over 

the 

59

cuts  and  tight  expenditure  control.    This
should  place  Sweden  in  a  better  position
to  cope  with  the  burden  on  public
finances stemming from the ageing of the
population.

as  to  meet  the  demands  of  the  labour
market.

Product markets and the
knowledge-based economy

Labour markets

(in 

Swedish 
to 

labour  market 
improve  strongly 

situation
The 
continued 
in  2000,
bringing  unemployment  down  to  5.9  per  cent
of  the  labour  force.    The  overall  employment
rate and, in particular, the employment rates of
women  and  of  older  workers,  are  among  the
highest  in  the  Union.    So  far,  there  is  no
general  shortage  of  labour,  even  if  it  has
become increasingly difficult to recruit in some
sectors  or  regions.    Improved  job  placement,
tightened  eligibility  criteria  for  unemployment
insurance 
terms  of  occupational  and
geographical mobility), and a focus on life-long
learning have facilitated matching in the recent
  However,  various  evaluations
upswing. 
indicate 
inefficiencies,  such  as  substantial
displacement  effects,  in  some  of  the  active
labour market programmes (ALMPs).  Despite
recent  measures,  the  tax  burden  on  labour
remains  high  and  benefit  schemes  contribute
to high net replacement rates.  In fact, Sweden
has the highest tax burden in the Union on low
wage  earners.    In  view  of  the  above,  while
vigorously  implementing  all  the  Employment
Recommendations,  the  main  priorities  for
Sweden should be to:

i.

ii.

pursue reforms of tax and benefit systems
to  make  work  pay  and,  in  particular,
reduce  the  high  tax  burden  on  low-wage
earners; and

ensure  the  efficiency  of  the  ALMPs  and
target  them  at  those  most  prone  to  the
risk  of  long-term  unemployment,  as  well

the 

telecommunication 

In spite of Sweden’s peripheral  location in  the
EU  and  its  low  population  density,  which
create  natural  barriers  to  competition,  the
openness  of  the  Swedish  economy  has  been
increasing  in  recent  years.    Consumer  price
  However,
levels  remain  relatively  high. 
considerable  progress  has  been  made 
in
liberalising 
and
electricity  sectors,  which  has  resulted  in  lower
price  levels in  these  sectors.    Sweden  also  has
an  excellent  record  in  transposing  internal
market  directives  and  State  aid  is  very  low.
introduce
Measures  have  been 
competition  in  public  service  provision  and
public  procurement,  but  there  is  scope  for
further  competition. 
is  also
distribution,
insufficient 
pharmaceuticals,  construction,  and  transport,
and  the  high  degree  of  State  ownership  is  a
perceived  problem.    Sweden  has  the  highest
total  expenditure  on  R&D  in  the  EU,  but
much  of  the  R&D  are  carried  out  by  large
companies in a few  industries.   In  view  of  the
above,  the  main  priorities  for  Sweden  should
be to:

  Competition 
retail 

taken 

to 

in 

procurement 

enhance compliance with regulations on
public 
enhance
competition in public services provision
at local levels; and

and 

increase competition in areas such as air
transport and pharmaceuticals.

i.

ii.

60

Capital markets

investment. 

In  particular, 

Capital-market  development  in  Sweden  has
been characterised by  consolidation,  legislative
and  regulatory  reform  and  growth  in  risk-
the
capital 
introduction  of  a  funded  element 
in  the
pension  system,  where  the  individual  himself
can choose a fund manager, have increased the
demand  for  investment  services  and  increased
the  presence  of 
fund
companies  on  the  Swedish  market.    The  risk
capital  market  has  grown in  recent  years,  with
a  diversification  of  investment  beyond  the
high-tech sector.  Measures have been taken to
improve  the  climate  for  risk  capital  providers
but  further  efforts  to  develop  the  market
  The  Financial
would 
Supervisory  Authority  has  reorganised 
its
activities  to  adapt  to  the  growth  of  financial

seem  desirable. 

foreign  mutual 

conglomerates  and  to  develop  an  overall  view
of  the  risks  in  the  financial  sector.    The
Authority has signed a co-operation agreement
with its counterparts in Denmark, Finland and
Norway 
financial
supervision  of  cross-border  institutions.    In
view  of  the  above,  the  main  priority  for
Sweden should be to:

efficient 

ensure 

to 

i.

develop further the risk capital market by
establishing  a  fiscal  framework  that  is
more  conducive 
investment  and
to 
entrepreneurship,  the  latter  to  be  also
encouraged by adjusting bankruptcy laws.

61

 
15. UNITED KINGDOM

United  Kingdom  GDP  rose  by  3  per  cent  in
2000.    The  development  of  the  economy  is
expected  to  remain  favourable  in  2001  and
2002  with  growth  at  2.7  per  cent  in  2001,
returning  to  3  per  cent  in  2002.    Domestic
demand is expected to  remain  strong,  boosted
by  recent  fiscal  measures  and  plans  for  strong
growth 
in  public  consumption  and  fixed
investment.    This  is  expected  to  offset  a
weakening  of  net  exports  resulting  from  the
slow  down  in  US  growth.    Inflation,  current
and  expected,  is  benign  with  HICP  inflation
among  the  lowest  in  the  EU.  Despite  a  tight
labour  market  with  unemployment,  at  5.2  per
cent, at a twenty-five year low, wage  pressures
remain  subdued.    Unemployment  could  fall  a
little  further  as  measures  aimed  at  increasing
the attractiveness of work take effect.

associated 

with 
inactivity. 

Unemployment  is  low  but  characterised  by
higher  than  average  rates  in  particular  groups
and  communities.    The  key  issue  is  whether
the  active labour  market  policies  implemented
are  sufficient  to  tackle  the  problems  of  social
remaining
exclusion 
unemployment  and 
  Another
structural problem  is  the  low,  relative, level  of
UK  productivity.    While  productivity  growth
has  risen  in  recent  quarters,  it  is  too  soon  to
establish  that  there  has  been  a  permanent  rise
in the rate.  Again, government measures have
been introduced to address this weakness.  The
challenge 
these  measures  actually
that 
translate into higher productivity.

is 

Budgetary policy

The  government  surplus  was  4.3  per  cent  of
GDP  in  2000  (1.9  per  cent  excluding  UMTS
receipts).    The  budget  projections  show  a

in 

the 

same  as 

programme 

surplus  of  1.7  per  cent  of  GDP  (excluding
UMTS  receipts)  in  financial  year  2000-01;
higher  than  the  1.1  per  cent  expected  in  the
convergence 
update.
Subsequently,  a  surplus  of  0.5  per  cent  is
projected in 2001-02 before the balance falls to
a  small  deficit  of  0.1  per  cent  in  2002-03  and
deficits of around 1 per cent of GDP in 2003-
04  and  the  following  years.    These  figures  are
broadly 
the  updated
convergence  programme.    The  projections  are
based on a cautious assumption of trend GDP
growth  of  2¼  per  cent.    Nevertheless  the
projected deficit, on current policies, of around
1 per cent of GDP over the period 2003-04 to
2005-06  is  not  close  to  balance.    The  extra
loosening  between  2000-01  and  2001-02,
compared  to  the  convergence  programme
update,  is  unlikely  to  compromise  economic
the
stability  since 
fundamentals  of 
the  economic  outlook,
incorporating budget measures, do not suggest
demand pressures that are a cause for concern.
Expenditure  plans  have  allocated  increased
resources  to  public  sector  investment  which
has  been  low  in  recent  years.   It  is  planned  to
rise,  net  of  depreciation  and  asset  sales,  from
0.8 per cent of GDP in 2000-01 to 1.7 per cent
by  2003-04.  The  provision  of 
long  term
forecasts of public finances in the convergence
to  be
programme  update 
sustainable  on  current  policies.    In  view  of
these  developments,  budgetary  policy  should
aim to:

low  and 

inflation 

shows 

them 

is 

ensure  that  a general government  surplus
of  at  least  0.5  per  cent  of  GDP    is
achieved  in  2001-02  as  projected  in  the
2001 budget;

for 
the  general  government  balance,
ensure,  in  preparing  the  budget,  that  an
outturn  in  2002-03  is  achieved  that,  as
planned, is close to balance. In particular,

i.

ii.

62

the expected ratio of public sector current
expenditure  to  GDP  should  not  exceed,
in  2002-03,  the  37.3  per  cent  of  the
Budget 2001 projections; and

i.

iii.

net 

public 

investment, 

of
allow 
depreciation,  to  double,  as  planned,  as  a
share  of  GDP,  between  2000-01  and
2003-04 while, at the same time, ensuring
that the terms of the Stability and Growth
Pact continue to be respected.

Labour markets

in 

Labour  market  performance 
the  UK
remains  among  the  strongest  in  the  EU,  with
robust employment growth in recent years and
unemployment  at  around  a  20-year  low  (5.5
per  cent  in  2000).    Long-term  unemployment
as  a  proportion  of  the  total  is  among  the
lowest  in  the  EU.    The  UK  has  continued  to
make  further  refinements  to  the  tax  and
benefit  system  with  a  view  to  making  work
pay.    The  range  of  active  labour  market
policies  centred  on  the  New  Deal  has  been
extended,  notably  with  reinforced  measures
aimed  at  tackling  problems  of  social  exclusion
associated  with  concentrated  non-employment
in deprived areas and the high share of jobless
households.   While  overall unemployment  has
fallen,  there  has  been 
in
economic inactivity, and the number of people
claiming  sickness  and  disability  benefits  has
risen  substantially  in  the  past  few  years.    In
vigorously
view  of 
implementing 
Employment
Recommendations,  the  main  priority  for  the
United Kingdom should be to:

above,  while 
the 
all 

little  reduction 

the 

reinforce  active  measures 
targeted  at
those  communities  and  individuals  most
prone to the risk of concentrated or long-
term  unemployment  and  inactivity,  and
to
reform  passive  benefit 
provide people who are able to work with
the opportunities and incentives to do so.

schemes 

Product markets and the
knowledge-based economy

industries. 

The  United  Kingdom  is  well  advanced  in
terms of regulatory reform and liberalisation of
the  network 
  The  economic
environment  is  favourable  to  business  and
entrepreneurship with low levels of regulation.
However,  the  UK’s  relatively  low  level  of
labour productivity remains a problem, despite
some  signs  of  stronger  growth  in  2000.    This
may reflect weak competition in certain sectors
of  the  economy,  declining  business  R&D  as  a
to  1999)  and
percentage  of  GDP 
insufficient  investment  in  the  past,  especially
public  investment.    A  number  of  measures
have  been  taken  to  stimulate  R&D  and
innovation.    In  view  of  the  above,  the  main
priorities  for  the  United  Kingdom  should  be
to:

(up 

i.

take  measures  to  address  the  relatively
low level  of  productivity,  in  particular  by
increasing  competition  in  sectors  such  as
retail  banking  services,  car  retailing  and
postal  services  and  by 
increasing  the
supply of skilled ICT personnel; and

63

ii.

ensure  that  the  announced  investment  to
improve  the  transport  infrastructure  and
to improve the quality of public transport
is  delivered  in  practice  and  ensure  that
there  is  adequate  co-ordination  between
different  public  bodies,  regulators  and
private firms.

Capital markets

in 

Financial  markets  in  the  UK  remain  the  most
  Nevertheless,
the  EU. 
developed 
development of the risk capital market is being
fostered  by  efforts  to  increase  equity  flows  to
early-stage  investment  and  by  a  number  of
fiscal  and  financial  regulatory  reforms.    The
replacement  of 
the  Minimum  Funding
Requirement with a long term scheme-specific
funding  standard  will  remove  a  potential
obstacle  to 
in  risk  capital.  In
addition, the government is promoting  public-

investment 

private  partnerships  to  improve  the  supply  of
small  scale  and  early-stage  risk  capital  across
  The  creation  of  a  single
the  country. 
the  Financial  Services
regulatory  body  – 
Authority  –  will  further  promote  a 
level
playing  field  among  financial  institutions,  and
actions  to  benefit  consumers  are  underway.
Measures are  also  planned  or  underway  in  the
banking sector to improve  competition  and  to
benefit  consumers, 
legislation  to
open  up  access  to  payment  systems  and  to
oversee  access  charges,  a  review  of  self-
the
regulatory  codes,  and  a 
Treasury's 
promoting
competition  in  financial  services.    In  view  of
the  above,  the  main  priority  for  the  United
Kingdom should be to:

reform  of 
on 

objectives 

including 

i.

further ease constraints on pension funds
which  may  limit  their  investment  in  risk
capital.

64