Report from the Commission on the implementation of the 2001 Broad Economic Policy Guidelines
Date: 2002-02-21
Institutions: European Commission
Subjects: EU Member State, action programme, economic analysis, economic planning, economic policy

COMMISSION OF THE EUROPEAN COMMUNITIES

Brussels, 21.2.2002
COM(2002) 93 final

REPORT FROM THE COMMISSION

on the implementation of the 2001 Broad Economic Policy Guidelines

REPORT FROM THE COMMISSION

on the implementation of the 2001 Broad Economic Policy Guidelines

TABLE OF CONTENTS

Executive Summary ...................................................................................................3

1.

2.

2.1.

2.2.

2.3.

2.4.

2.5.

2.6.

2.7.

2.8.

3.

3.1.

3.2.

3.3.

3.4.

3.5.

3.6.

3.7.

3.8.

3.9.

3.10.

3.11.

3.12.

3.13.

3.14.

3.15.

Introduction............................................................................................................ 7

Overview of key policy areas.................................................................................. 8

Ensure growth and stability-oriented macroeconomic policies .................................. 8

Improve the quality and sustainability of public finances ........................................ 17

Invigorate labour markets ....................................................................................... 19

Ensure efficient product (goods and services) markets............................................ 23

Promote the efficiency and integration of the EU financial services market ............ 25

Encourage entrepreneurship.................................................................................... 27

Foster the knowledge-based economy..................................................................... 29

Enhance environmental sustainability..................................................................... 32

Summary assessments of implementation by the Member States ...................... 34

Belgium.................................................................................................................. 34

Denmark................................................................................................................. 34

Germany................................................................................................................. 35

Greece.................................................................................................................... 36

Spain ...................................................................................................................... 37

France .................................................................................................................... 38

Ireland .................................................................................................................... 39

Italy........................................................................................................................ 39

Luxembourg ........................................................................................................... 40

The Netherlands ..................................................................................................... 41

Austria.................................................................................................................... 41

Portugal.................................................................................................................. 42

Finland ................................................................................................................... 43

Sweden................................................................................................................... 44

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

2

The 2001 BEPGs
confirmed and
extended the
comprehensive
economic policy
strategy

Macroeconomic
performance worsened
under the impact of
adverse economic
shocks

Macroeconomic
policies passed the
stress test

EXECUTIVE SUMMARY

be

should

the promotion of

The 2001 Broad Economic Policy Guidelines (BEPGs) confirmed
the policy strategy aimed at fulfilling the Lisbon agenda, while
extending it in the light of the March 2001 Stockholm European
Council, which stressed that
sustainable
development
integrated in the BEPGs. Sound
macroeconomic policies and comprehensive economic reforms on
labour, product and capital markets should help maintain growth in
the short term and strengthen the basis for future growth in the
medium term and for coping with longer-term structural and
sustainability challenges. This report offers an overall assessment of
the implementation of the policy recommendations set in the 2001
BEPGs. It is accompanied by a report of the Commission services
that evaluates the implementation of the recommendations on a
country-by-country basis.

The following key messages emerge from the report.

The macroeconomic environment deteriorated considerably in
2001. Already suffering under the continuing effects of adverse
economic shocks, the economic outlook further darkened by the
terrorist attacks of 11th September. Growth decelerated throughout
the year and came to a standstill towards the end of the year. Job
creation slowed down but still exceeded the number of job losses
thereby allowing for a further small drop in the unemployment rate.
Having been temporarily higher in the early months of 2001,
inflation has subsequently engaged on a clear downward path.

Monetary authorities took advantage of
leeway provided by
diminishing risks to price stability by cutting official interest rates
on several occasions. Budgetary authorities maintained a broadly
neutral fiscal stance by making use of regained budgetary margins
to allow for some deterioration in budget balances as a result of the
stabilisers. Wage developments
operation of
remained broadly compatible with price stability and job creation.

automatic

the

Budgetary policies -
actual budget balances
worsened as a result of
the slowdown

As actual budget positions in the EU generally deteriorated under
the impact of the economic slowdown (through the play of
automatic stabilisers) and tax reforms, structural budget positions
did generally not worsen. Several Member States are not yet
fulfilling the “close to balance or in surplus” requirement of the
Stability and Growth Pact.

Quality and

A growing number of Member States have introduced institutional

3

sustainability of public
finances - progress
underway

Labour markets -
efforts are being
undertaken but need to
be stepped up

Product markets -
goods market
integration further
increased, but slow
progress on the
Internal Market for
services

reforms to budgetary rules and procedures to improve efficiency
and spending controls. Several made progress in improving the
long-term sustainability of public finances through reform of
pension systems and the creation of reserve funds. However, in
several cases, long-term sustainability seems not yet ensured and
would require additional measures. Following the November 2000
Council agreement on the tax package,
the Commission has
presented an amended proposal for a Directive to ensure effective
taxation of cross-border interest payments.

Overall, there has been progress in invigorating labour markets,
through the implementation of the kind of reforms recommended in
last year’s Broad Economic Policy Guidelines and in the
Employment Guidelines and as recently reported in the Joint
Employment Report 2001. While the progress achieved in former
years has become visible in more employment-intensive growth,
inter alia, due to wage moderation, more flexible contracts and tax
reductions targeted to the low end of the wage distribution, the pace
of labour market reforms seems to have slowed down in 2001.
Progress in reforming tax and benefit systems to make them more
employment friendly has been limited in 2001, especially when it
comes to undertaking comprehensive reforms on the benefit side
and taking account of the interactions between tax and benefit
systems. Also in line with the Employment Guidelines, most
Member States are pursuing comprehensive strategies for lifelong
learning to enhance employability and promote the adaptability of
the labour force to structural change and thus fostering occupational
mobility. Barriers to geographical mobility have, however, hardly
been addressed. In the past year, only some Member States have
taken measures to better target and improve the efficiency of active
labour market policies.

should

attention

European product market functioning improved in 2001 thanks to
progress in transposing Internal Market Directives, in opening up
public procurement and in reducing State aid but problems remain.
Following transposition of Internal Market Directives into national
legislation,
effective
implementation. Barriers to cross-border trade in services are
particularly persistent. Notwithstanding progress made in opening
up public procurement markets, a large share of public procurement
markets is still not yet open to competition across the Union.
Competition was enhanced by ongoing reforms and liberalisation in
some network industries, but market shares of incumbents remain
very high. Similarly, effective competition is likely to benefit from

ensuring

focus

on

4

steps taken by several Member States to increase powers and the
operating capacity of their competition authorities and a more
intense
regulatory
authorities. Overall State aid as a share of GDP has continued to
decrease in the vast majority of Member States, but it remains
relatively high in some Member States.

co-operation

competition

between

and

Capital markets -
progress in various
areas underway, but
the implementation of
the FSAP needs new
impetus

Entrepreneurship -
reduction in the
regulatory burden and
facilitation of access to
finance for SMEs, but
fiscal barriers
continue to create
distortions within the
Internal Market

The recommendations of the Committee of Wise Men have been
widely endorsed and are progressively carried out. While
encouraging progress has been made in 2001 on a number of
individual dossiers,
the overall progress in implementing the
Financial Services Action Plan (FSAP) has been rather slow. A new
impetus and mobilisation of all EU institutions is needed to
implement
the FSAP by the deadlines of 2003 for securities
markets and 2005 for the financial markets in general. Member
States have undertaken a number of reforms to promote the risk
capital market, notably by easing some of the legal/regulatory
constraints on institutional investment and by intruding tax changes
that foster, among other things, the risk capital market. On the other
hand, little has been done to address the disincentive effects of
bankruptcy and insolvency procedures. While several Member
States have undertaken a reform of their supervisory arrangements,
different models are being followed. Enhanced cross-border and
cross-sector co-operation will be necessary.

Many Member States introduced measures aimed at reducing the
regulatory burden and at promoting start-ups and small and
medium-sized enterprises, but there are still big differences between
Member States in the time and cost needed to establish new
businesses. Similarly, measures have been taken to increase the
efficiency of public administration and initiatives were launched to
decrease corporate tax complexity and reduce the tax burden on
business. However, taxation of cross-border activities and the still
large differences in effective rates of company taxation continue to
create distortions within the Internal Market. Measures have also
been taken to ease access to finance for small and medium-sized
enterprises.

5

The knowledge-based
economy - progress
continued on several
accounts, but setbacks
occurred in delivering
the Community patent
and the unbundling of
the local loop remains
slow

Several Member States took steps to strengthen incentives and
funding for R&D, and to improve science-industry co-operation.
The deadline for agreeing by the end of 2001 on how to deliver the
Community patent was, however, missed. The access to ICT has
continued to improve over 2001. Internet access prices dropped,
and governments took measures to promote internet access at
schools. Despite progress in unbundling the 'local loop', it is still
slow. Partly as a result of the global downturn in ICT markets, the
rate of increase in ICT take-up has slowed down and the e-
commerce is developing more slowly than earlier expected. Most
Member States have taken measures to enhance human resources in
R&D and to promote ICT skills.

Environmental
sustainability - various
market-based
instruments introduced

Member States have implemented a variety of measures that
contribute to environmental sustainability, notably by leading to a
better reflection of environmental costs in prices. Limited progress
has been made in agreeing upon a framework for energy taxation at
Community level in 2001.

6

1.

INTRODUCTION

The European Union has a well-defined economic policy strategy consisting of the pursuit of
sound macroeconomic policies and comprehensive structural reforms, as articulated in the
Broad Economic Policy Guidelines (BEPGs). This strategy allows policies to respond flexibly
to changing economic conditions in the short run whilst strengthening the productive capacity of
the economy over the medium run.

The economic policy strategy has gradually evolved. The Lisbon European Council provided a
key impulse two years ago. As part of a comprehensive strategy aimed at improving Europe’s
dynamism and competitiveness, an ambitious economic reform programme was set in motion.
The Lisbon strategy was confirmed by the Stockholm European Council last year and extended
by the Gothenburg European Council to integrate sustainable development in the economic
policy strategy.

The 2001 BEPGs reiterate and update the existing policy strategy. Emphasis is placed on
structural reform to strengthen the EU’s growth potential, integrating the Lisbon and Stockholm
strategy and giving operational content to its ambitious targets. In addition, the 2001 BEPGs
identify the broad policy priorities for growth- and stability-oriented macroeconomic policies
and sound public finances. These should not only assist weathering the current economic
downturn but also help preparing for the longer-term challenge of an ageing population.

This report evaluates the progress made in implementing the policy recommendations
formulated in the 2001 BEPGs. In so doing it contributes to the multilateral surveillance of the
economic policies of the Member States and the Union as envisaged by Article 99(3) of the
Treaty. Moreover, its assessment provides valuable input to the elaboration of the forthcoming
BEPGs.

Mirroring the structure of the BEPGs, this report is complemented by a working document of
the Commission services that examines in-depth the implementation of the recommendations on
a country-by-country basis. The evaluation integrates the findings of other co-ordination
processes and makes use of the structural indicators developed to monitor progress on the
Lisbon strategy.

Nevertheless, the conclusions presented should be interpreted with caution. Most of the data
employed is of a provisional nature.1 Moreover, the BEPGs include recommendations of a
medium- and long-term nature, which cannot be assessed in a conclusive way at this stage. This
is particularly true for structural reforms, where the outcome of policy action takes a relatively
long time to materialise.

1

The report is based on data available on 8 February 2002.

7

The BEPGs policy strategy

1. Ensure growth and stability-oriented macroeconomic policies.

2. Improve the quality and sustainability of public finances.

3. Invigorate labour markets.

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

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

6. Encourage entrepreneurship.

7. Foster the knowledge-based economy.

8. Enhance environmental sustainability.

2.

OVERVIEW OF KEY POLICY AREAS

2.1.

Ensure growth and stability-oriented macroeconomic policies

2.1.1.

Economic situation

In a context of slowing growth …

While following the very good growth performance in 2000,
the 2001 BEPGs
reckoned with a mild downturn, the slowdown in growth turned out to be much
stronger with economic activity reaching a standstill in the second half of the year.
Growth in 2001 came out just above 1½%, i.e. more than a percentage point lower
than expected. The unexpectedly sharp slowdown was caused by a number of adverse
economic shocks in combination with a less than expected resilience in domestic
demand. The slowdown in the economy was compounded by the dramatic events of
11 September, which dealt a further blow to the economy and the chances of an early
recovery.

Labour market developments typically reflect the economic situation with a lag and
the impact has come to be felt more clearly only during the year. Employment growth,
although decelerating, continued well into the year while job losses as a result of
company downsizing and closures have only gradually increased, as companies have
been hesitant to lay off workers especially where labour markets were still relatively
tight. While unemployment rates have started to rise in some countries towards the
end of the year, the unemployment rate in the EU and the euro area is expected to
show a further decline in 2001. The main labour market impact of the slowdown is
expected to show up with some delay in 2002, when unemployment in the EU is
expected to increase for the first time since 1994.

Consumer price inflation showed a 'hiccup' pattern in 2001, caused by hikes in oil
prices and food prices, and the subsequent reversal in oil prices. Headline HICP

8

inflation peaked at 3.4% in May 2001, and subsequently declined to 2% by the end of
the year. Core inflation, defined as HICP excluding energy and unprocessed food,
increased throughout most of 2001 as a result of the pass-trough of indirect and
second-round effects of the energy and food price hikes, but may have peaked in
October 2001.

… macro-economic policies have supported growth by making judicious use of the
room for manoeuvre

The 2001 BEPGs noted that an appropriate and tension-free economic policy approach
consists of: monetary policy in pursuit of maintaining price stability and, without
prejudice to its primary objective, in support of general economic policies; fiscal
policies that are geared to sound budgetary positions and avoid pro-cyclical stances.
They also underscored the importance of wage developments being consistent with
price stability and job creation.

Making judicious use of possible margins of manoeuvre without compromising the
stability-oriented framework, macroeconomic policies have adapted appropriately to
the largely symmetric nature of the shocks and the generalised deceleration in growth.

On the back of growing evidence on the extent of deceleration in economic activity
and of a gradually improving balance of risks to price stability, the ECB has made use
of the emerging leeway by cutting its key interest rate in four steps from 4.75% to
3.25%. Central banks of Denmark, Sweden and the UK also cut rates. These moves
were reflected in short and longer-term market interest rates and, particularly towards
the end of the year, in an easing of monetary conditions. During 2001 the euro
exchange rate strengthened in nominal effective terms, mainly as a result of
strengthening against the Japanese yen. Against the dollar, having lost ground over
much of 1999 and 2000, the euro stabilised around 0.90 USD in the second half of
2001.

The fiscal stance was broadly neutral while the operation of automatic stabilisers
implied some worsening in budget balances. By and large, wage developments
continued to be moderate and consistent with price stability and job creation.

9

Graph 1: Economic developments in the EU

%

Real GDP growth

Contribution to real GDP growth

% of GDP

2.0

Year /year

Quarter/quarter

Domestic demand
(incl. Stock)

Real GDP growth

Net exports

1.5

1.0

0.5

0.0

-0.5

-1.0

97Q1

98Q1

99Q1

00Q1

01Q1

97Q1

98Q1

99Q1

00Q1

01Q1

5.0

4.0

3.0

2.0

1.0

0.0

%

12

11

10

9

8

7

6
1997

Unemployment rate

Headline- , core inflation and energy
Annual percentage changes; monthly data

Energy (rhs)

HICP (lhs)

* Core HICP is HICP excluding
unprocessed food and energy

Core HICP (lhs)

4

3.5

3

2.5

2

1.5

1

0.5

1998

1999

2000

2001

0
Jan-97

Jan-98

Jan-99

Jan-00

Jan-01

20

15

10

5

0

-5

-10

Source: Commission services.

10

%

10

8

6

4

2

0

120

110

100

90

80

70

Graph 2: Policy mix in the euro area

Short-term interest rates

Long-term interest rates

UK

DK

S

euro area

DK

S

UK

euro area

%

7

6

5

4

3

1999

2000

2001

2002

1999

2000

2001

2002

Nominal effective exchange rate
(Index Jan-99 = 100)

UK

S

DK

euro area

1999

2000

2001

Actual net lending-/borrowing
(excl. UMTS)

As % of GDP
6

4

2

0

-2

-4

-6

-8

-10

DK

S

UK

euro area

Nominal unit labour costs
Annual percentage change

S

UK

DK

euro area

1995

1996

1997

1998

1999

2000

2001

Cyclically-adjusted net lending-/borrowing
As % of GDP

UK

euro area

DK

S

12

9

6

3

0

-3

6

4

2

0

-2

-4

-6

-8

-10

1995

1996

1997

1998

1999

2000

2001

1995

1996

1997

1998

1999

2000

2001

Source: Commission services.

11

2.1.2.

Budgetary policies and the respect of the Stability and Growth Pact

The 2001 BEPGs recommended Member States to: (i) meet, as a rule, budgetary
positions of close to balance or in surplus in 2001; (ii) prepare budgets for 2002 in
keeping with the need to achieve or preserve budgetary positions close to balance or
in surplus and avoid pro-cyclical fiscal policies; and (iii) tighten policy in case of
overheating risks.

Budgetary developments in 2001

As indicated in the 2001 BEPGs, the budgetary recommendations were based on the
national stability or convergence programmes, their underlying economic assumptions
and the Council Opinions thereon. In the event, growth in 2001 came out considerably
lower than assumed in the 2001 BEPGs. The working of the automatic stabilisers
implied a considerable deterioration in budget positions in addition to the impact of
tax reforms in some countries. As a result, actual budget balances in the EU
deteriorated in 2001 as compared to 2000. The EU-wide budget deficit increased to
0.5% of GDP from 0.1% of GDP in 2000 (net of UMTS receipts). This was the first
deterioration in the deficit since 1993. Likewise, the euro-area budget deficit increased
to 1.1.% of GDP from 0.8% of GDP in 2000. Structural budget positions did generally
not worsen.

On a country basis and compared to 2000, budget balances deteriorated sharply in
2001 in Germany, Ireland, Luxembourg, Finland and to a lesser extent in Denmark,
Belgium, France, Netherlands, Sweden and the UK. However, in Greece, Spain, Italy
and particularly in Austria, outcomes were better than in 2000. Compared to the
nominal budget targets for 2001 set in the Autumn 2000 updates on stability and
convergence programmes, shortfalls occurred in particular in Denmark, Germany,
Greece, France, Ireland and Portugal and to a lesser extent Belgium and Italy.
However, targets were met or overachieved in Spain, Luxembourg, the Netherlands,
Austria, Finland and Sweden. Deficits are still relatively large in actual and structural
terms in Germany, France, Italy and Portugal and consequently these countries are not
yet fulfilling the “close to balance or in surplus" requirement of the Stability and
Growth Pact (SGP).

Budgets for 2002

In framing their budgets for 2002, Member States, and in particular those with still
large deficits, had to strike a balance between the need for further consolidation efforts
and the need to avoid a pro-cyclical tightening. Budget plans for 2002 reflect the
subdued growth outlook. According to the new set of stability and convergence
programmes most countries plan to keep or improve actual budget positions compared
to 2001. This would imply a small tightening of the fiscal stance in some countries
while for most countries the fiscal stance would be broadly neutral.

12

Table 1: Evolution in estimates of government budgets for 2001*

Stability/
Convergence
Programme* 1)

Estimated outturn 2)

Difference

Real GDP
growth
(% change)

Budget
balance
(% GDP)

Real GDP
growth
(% change)

Budget
balance
(% GDP)

Real GDP
growth
(% change)

Budget
balance
(% GDP)

B

D

EL

E

F

IRL

I

L

NL

A

P

FIN

Euro area

DK

S

UK

EU-15

2.5
2.75

5.0
3.6

3.3
8.8

2.9
5.2
4.0
2.8
3.3
4.2

3.2

1.8
3.5
2.253)

3.0

0.2
-1.5

0.5
0.0

-1.0
4.3

-0.8
2.6
0.7
-0.75
-1.1
4.7

-0.6

2.8
3.5
0.63)

-0.2

1.1*
0.6

4.1
2.7

2.0
6.5

1.8
5.1*
1.5
1.1
1.7
0.5

(1.6)

1.3

1.4

2.3

(1.7)

0.0*
-2.6*

-0.4
0.1

-1.6
1.7*

-1.2
4.1*
0.7*
-0.2
-2.2*
4.8

(-1.1)

2.0

3.9*

1.2

(-0.5)

-1.4
-2.2

-0.9
-0.9

-1.3
-2.3

-1.1
-0.1
-2.5
-1.7
-1.6
-3.7

(-1.6)

-0.5
-2.1
0.054)

(-1.3)

-0.2
-1.1

-0.9
0.1

-0.6
-2.6

-0.4
1.5
0.0
0.6
-1.1
0.1

(-0.5)

-0.8

0.4
0.64)

(-0.3)

* Excluding UMTS proceeds.
1) Second round of updates of late 2000.
2) Commission services Autumn 2001 Economic Forecasts and where available provisional outturn data are
indicated with an asterisk.
3) Financial year.
4) Indicative, since comparison between financial year and calendar year figures.
Source: Commission services.

13

Table 2: Change in actual and cyclically-adjusted budget balances in 2001 *
(% of GDP)

Actual
balance
2001

Change in
balance
00/01

1
**

2
= 3 - 4 – 5
= 6 + 7

B

D

EL

E

F

-0.2 (0.0)

-2.5 (-2.6)

-0.4

0.1

-1.6

IRL

2.4 (1.7)

I

L

NL

A

P

FIN

Euro
Area

DK

S

UK

EU-15

-1.2

4.4 (4.1)

1.3 (0.7)

-0.2

-2.0 (-2.2)

4.8

-1.1

2.0

3.8 (3.9)

1.2

-0.5

-0.3

-1.2

0.7

0.5

-0.2

-2.1

0.3

-1.7

-0.2

1.3

-0.2

-2.1

-0.3

-0.5

-0.2

-0.6

-0.4

Change in balance due to:

Change in balance due
to:

Change in CAB due
to:

Change
revenues

3

-0.4

-1.0

0.1

0.1

-0.3

-2.0

0.2

-1.5

-1.6

1.6

0.0

-2.3

-0.5

-0.8

-0.9

0.1

-0.5

Change
primary
exp.
4

Change
interest
exp.
5

Change
cyclical
comp.
6

Change
CAB

7
= 9-5

Change
interest
exp.
5

Change
primary
CAB
9

0.2

0.3

0.1

-0.3

0.0

0.4

0.1

0.2

-0.9

0.4

0.2

0.4

0.0

0.1

0.1

1.1

0.2

-0.3

-0.1

-0.6

-0.1

-0.1

-0.3

-0.2

0.0

-0.6

-0.1

0.0

-0.6

-0.2

-0.4

-0.8

-0.3

-0.2

-0.6

-0.5

0.3

-0.2

-0.1

-0.3

-0.1

-0.7

-0.9

-0.3

-0.3

-1.8

-0.3

-0.8

-0.8

-0.1

-0.3

0.3

-0.7

0.4

0.7

-0.1

-1.8

0.4

-0.9

0.7

1.6

0.1

-0.3

0.0

0.3

0.6

-0.5

-0.1

-0.3

-0.1

-0.6

-0.1

-0.1

-0.3

-0.2

0.0

-0.6

-0.1

0.0

-0.6

-0.2

-0.4

-0.8

-0.4

-0.2

0.0

-0.8

-0.2

0.6

-0.2

-2.1

0.2

-1.0

0.1

1.5

0.1

-0.9

-0.2

-0.1

-0.2

-0.9

-0.3

* Excluding UMTS. ** Commission services Autumn 2001 Economic Forecasts and where available provisional outturn data are
given within brackets.
1) Estimated outturn: Commission services Autumn 2001 Economic Forecasts.
Source: Commission services.

14

Table 3: Projections for general government surplus(+)/deficit(-)
(% of GDP)

Date 1)

2000 2)

2001 2)

2002

2003

2004

2005

Stability programmes

B

D

EL

E

F

IRL

I

L

NL

A

P

FIN

Euro
area

DK

S

UK

EU-15

SP 12/-00
UD 12/-01

SP 10/-00
UD 12/-01

CP 12/-00
SP 12/-01

SP 01/-01
UD 12/-01

SP 12/-00
UD 12/-01

SP 12/-00
UD 12/-01

SP 12/-00
UD 11/-01

SP 12/-00
UD 11/-01

SP 09/-00
UD 10/-01

SP 12/-00
UD 11/-01

SP 01/-01
UD 12/-01

SP 09/-00
UD 11/-01

SP -00
UD -01

CP 12/-00
UD 01/-02

CP 11/-00
UD 11/-01
CP 12/-00 5)
UD 12/-01 5)
C/SP -00
UD -01

-0.1
0.1

1½ (-1)
1.2(-1.3)

-0.8
-1.1

-0.3
-0.3

-1.4
-1.4

4.7
4.5

-1.3
(-1.5)

3.0
6.2

1.7(1.0)
2.2(1.5)

-1.4
-1.1

-1.5
-1.5

4.5
6.9

-0.7
-0.8

2.7
2.5

3.4
4.1

1.1
2.0

-0.2
-0.1

0.2
0.0

-1½
-2½

0.5
0.1

0.0
0.0

0.1(-1.0)
-1.4

4.3
1.4

-0.8
-1.1

2.6
4.1

0.7
0.7

-0.75
0.0

-1.1
-2.2

4.7
4.7

-0.6
-1.1

2.8
1.9

3.5
4.6

0.6
-0.2

-0.2
-0.8

0.3
0.0

-1
-2

1.5
0.8

0.2
0.0

-0.6
-1.4

3.8
0.7

-0.5
-0.5

2.5
2.8
0.64)
0.4

0.0
0.0

-0.7
-1.8

4.4
2.6

-0.3
-0.9

0.5
0.5

-½
-1

2.0
1.0

0.3
0.0

-0.4
-1.3/-1.0

4.6
-0.5

0.0
0.0

2.5
3.1
1.14)
0.2

0.0
0.0

-0.3
-1.0

4.5
2.1

0.1
-0.5

2.6
1.9

2.0
2.1

-0.1
-1.1

-0.1
-0.9

2.6
2.1

2.0
2.2

-0.9
-1.3

0.1
-0.6

0.6
0.6

0
-0

2.0
1.2

0.3
0.1
0.3(0.2)3)
-0.5/0.0

-0.6

0.3
0.0

3.4
1.94)
0.5

0.0
0.2

0.0
0.0

4.9
2.6

0.5
0.0

2.7
2.1

2.3

-1.0
-1.1

0.3
-0.1

Convergence programmes

0.7
0.7

-0

0.2

0.0/0.3

0.2

0.5

0.4

0.1

2.9
2.1

-1.1
-1.06)

-0.1

CP = convergence programme; SP = stability programme; UD = updated stability/convergence programme; 1) Dates of
adoption by Member States government of updated stability or convergence programme and date of most recent
Commission forecasts. 2) Government balances in 2000 or 2001 are affected by receipts from the sale of UMTS
licences in several countries. Where relevant and where information is available, two figures are shown: the first
includes the proceeds from UMTS licences and the second (in brackets) excludes these proceeds. 3)Government deficit
of 0.5% of GDP in 2004 projected I more prudent growth scenario. 4) Favourable scenario, with margin available used
for debt reduction; in the cautious scenario, with margin available used for debt reduction, the government surplus is
projected to be 0.3% of GDP in 2002 and in 2003 and 0.6% in 2004. 5) Financial years. 6) Government deficit of 1.0%
of GDP also projected for 2006-07.
Source: Commission services.

15

2.1.3. Wage developments

The 2001 BEPGs recommended: (i) that the increase in nominal wages be consistent
with price stability; (ii) that the increase in real wages not exceed labour productivity
take account of
growth; and (iii) to encourage wage formation processes that
productivity differences.

Aggregate wage developments

Overall, wage trends remained moderate in 2001, even though the rise in
compensation per employee in the euro area is estimated to have accelerated by half a
percentage point to about 3 per cent. While labour market conditions tightened until
early 2001, the response in wage settlements to the temporary rise in headline inflation
remained muted. Wage increases were relatively strong in Spain,
Ireland,
Luxembourg,
the Netherlands, Portugal and Finland, chiefly countries with
comparatively tight labour markets. In France, the rise in hourly costs has been
gradually declining as the mechanical effect of the shift to the 35-hour working week
is fading.

Whilst the trend in nominal compensation remained overall moderate in 2001, the
slowing of the euro-area economy and the implied cyclical set back to labour
productivity growth resulted in a clear acceleration in nominal unit labour costs to 2½
per cent. Also real unit labour costs accelerated and the increase in real wages slightly
exceeded labour productivity growth. Nevertheless, real unit labour costs remained
relatively contained and continued to be broadly compatible with job creation.

Wage differentiation

Moves to achieve wage structures that better reflect productivity differences were
limited in 2001. In some countries (Belgium, Germany, Austria) steps were taken that
allow, under certain conditions, for deviations from the wage norms fixed in collective
agreements at sectoral level.

16

Table 4: Wage developments in 2001
(Annual percentage change)

Nominal
compensation
per employee

Real wages 1)

Labour
productivity

NULC 2)

RULC 3)

B

D

EL

E

F

IRL

I

L

NL

A

P

FIN

Euro area

DK

S

UK

EU-15

3.2
1.6
5.5

3.9
2.2

9.5
3.2

4.4
5.0

2.4
6.4

4.4

2.8

3.8

3.8

4.3

3.1

1.1
0.3
2.2

0.2
0.7

4.5
0.6

1.4
-0.7

1.0
2.4

2.0

0.5

0.8

1.9

1.9

0.8

0.1
0.4
3.0

0.4
-0.2

4.1
0.3

-1.4
-0.4

1.1
0.2

-0.8

0.3

0.9

-0.4

1.6

0.5

3.1
1.2
2.5

3.5
2.4

5.2
2.9

5.9
5.5

1.3
6.2

5.3

2.5

2.9

4.2

2.6

2.6

1.0
-0.1
-0.8

-0.3
0.9

0.4
0.3

2.8
-0.3

-0.1
2.2

2.8

0.2

-0.1

2.3

0.2

0.3

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

2.2.

Improve the quality and sustainability of public finances

friendly;

employment

The 2001 BEPGs recommended Member States to: (i) make tax and benefit systems
more
expenditure;
(iii) enhance the efficiency of public spending by institutional and structural reforms,
in particular to control spending; (iv) improve the long-term sustainability of public
finances; and (v) pursue tax-co-ordination further and implement
the Council
agreement of November 2000 on the tax package.

the quality of public

(ii) promote

Tax and benefit systems

Some progress has been made in making tax and benefit systems more employment
friendly (see under section 2.3).

17

Quality and redirection of public expenditure

i.e.

Besides the contribution given by a non distortionary benefits system, public
expenditures can also enhance growth and employment by reducing the interest
burden and in general non-productive expenditures; and through the accumulation of
in
productive factors,
infrastructures), human capital (education but to a certain extent also health) and
knowledge (R&D and innovation). In this direction, some progress has been made in
2001 with a reduction in interest payments, and, to a lesser extent, in social transfers,
which resulted in a decrease in the share of total government expenditure in GDP in
many Member States, while public investment remained stable as a proportion of
GDP.

(public investments

in physical capital

investment

Public expenditure

A growing number of Member States have introduced institutional reforms to the
budgetary rules and procedures to improve efficiency and controls. These take various
forms, and include mechanisms to set and control expenditures, multi-annual
budgetary programmes and agreements between different levels of government. The
strengthening of budgetary procedures and control is welcomed. However, the degree
to which various budgetary procedures, and particular expenditure guidelines, are
binding is variable. In particular, the mechanisms to control expenditures on health
care need to be strengthened.

Long-term sustainability

The need to improve the sustainability of public finances in light of ageing
populations was underlined in a report by the Economic Policy Committee which
projected increased public spending of between 4% and 8% of GDP by 2040 in most
Member States on pensions, health care and care for the elderly. Progress towards
safeguarding the effectiveness and financial sustainability of pension systems, so as to
meet their social aims, has been mixed. Several Member States have achieved or
sustained sound budgetary position with large primary surpluses, thus leading to a fast
reduction in public debt levels. However, the delay in reaching the “close to balance or
in surplus” requirement of the Stability and Growth Pact in several Member States
(Germany, France, Italy and Portugal) could have long-term consequences as there is
only a limited window of opportunity to prepare prior to the impact of demographic
changes taking hold.

Some progress was recorded in several Member States as regards reform of pension
systems, although in some cases (Germany, Austria, Portugal) additional measures
may be required in the future to secure their financial sustainability. Reforms planned
by several Member States (Belgium, Spain, France, Italy) needs to proceed as a matter
of urgency, especially in those countries where reforms have been subject to delays
and deferrals. Reserve funds have been created in a number of Member States
(Belgium, Spain, Ireland and France), although their limited size means that they will
only make a limited contribution to meeting the additional spending on pensions in
some countries.

18

Tax package

Following the conclusions reached at the Ecofin meeting in November 2000, the
Commission has presented an amended proposal for a Directive2 to ensure effective
taxation of cross-border interest payments to individuals within the European Union.
In the meantime, Member States pursue their peer-review on the standstill and the
rollback of the 66 business tax measures that have been identified as harmful in the
November 1999 report of the Code of Conduct Group. Finally, the proposal for a
Directive to eliminate withholding taxes on interest and royalty payments between
associated companies has been discussed in the Council since 1998. The Commission
and the Member States are working intensively to meet the December 2002 deadline
for agreement on these three elements constituting the "tax package".

2.3.

Invigorate labour markets

The 2001 Broad Economic Policy Guidelines recommended to: (i) promote increased
participation in the labour market; (ii) ensure that tax and benefit systems make work
pay; (iii) bring down obstacles to labour mobility within and between Member States;
(iv) facilitate occupational labour mobility; (v) further improve the efficiency of active
labour market policies; (vi) promote more flexible work organisation; and (vii) pursue
policy aiming to reduce gender pay differences due to de facto discrimination.

In 2001, the labour market suffered from the cyclical slowdown, and the very positive
developments of the preceding year could not be repeated. Employment growth
decelerated to 1.1%; and the unemployment rate decreased only slightly, to 7.8% at
the end of the year. Still, the average unemployment rate of 7.7% was 0.5 percentage
points below the 2000 average. Progress towards the Lisbon employment goals was
also more moderate than in 2000. The overall employment rate increased by 0.7
percentage points to 63.9%, those for women reached 54.7%, 0.7 percentage points
in 2000. The employment rate of older workers (55-64 years)
above the level
increased in 2001 by 0.5 percentage points to 38.3%. The labour market performance
of Member States remained, however, quite diverse, both in terms of employment and
unemployment levels and in terms of improvements. The decline in the momentum of
structural reform is especially worrying in the context of the current cyclical
slowdown and the still insufficient growth potential.

Tax and benefit systems

Unemployment and poverty traps, under which individuals face disincentives to take
up and stay in employment or to increase their number of hours worked, remain a
serious problem for labour market participation in most Member States. These traps
may affect, essentially, those at the lower end of the wage scale or those with low
working skills. Many Member States have started or pursued tax reforms which

2

Com (2001) 400. The final adoption of the Directive is subject to the adoption of equivalent
measures to those applying in the Member States by a number of third countries and the
adoption of the same measures as those applying in the Member States by associated and
dependent territories of Member States.

19

reduce the tax burden on labour, in particular for low wage earners. In 2001, the
average tax burden on low wage earners in the EU has, according to preliminary data,
decreased by more than ¾ of a percentage point, to under 39 percent.

Where work incentives are concerned, although some Member States (Spain, France,
Ireland, the Netherlands and Finland) achieved significant progress in strengthening
the incentives associated with both taxes and benefits in former years, overall efforts
in 2001 were rather scattered. There seems to be some reluctance to complement tax
reforms with comprehensive reforms of benefit systems in order to make sure that
work pays. In 2001, most Member States have opted only for a partial approach, e.g.
by addressing benefit schemes for specific target groups. Current reforms are not
targeted sufficiently towards enhancing work incentives and activation.

Table 5: Tax wedge on low wage earners
(single person on 67% of average production worker wage level)

1997
49.5
41.7
47.7
35.0
34.8
41.6
24.9
48.8
29.7
38.8
41.1
30.8
44.2
49.2
28.4
40.8

B
DK
D
EL
E
F
IRL
I
L
NL
A
P
FIN
S
UK
EU-15
* 2001 figures are preliminary.
Source: OECD/Commission services, DG TAXUD.

2000
49.9
41.2
46.5
34.3
32.8
39.6
18.1
43.3
30.4
40.6
40.1
30.4
42.4
47.9
25.3
38.6

2001*
49.1
41.1
45.4
34.3
33.3
38.4
17.3
42.9
28.8
36.8
39.9
29.6
40.9
47.0
24.8
37.8

Change 2000-01
-0.8
-0.1
-1.1
0.0
0.5
-1.2
-0.8
-0.4
-1.6
-3.8
-0.2
-0.8
-1.5
-0.9
-0.5
-0.8

Geographical and occupational mobility

In many Member States, the mismatch between skills offered and demanded is a major
obstacle to more employment. Mismatch problems and bottlenecks are present in a
number of Member States for different
labour markets
(Denmark, Ireland, Luxembourg, the Netherlands, Austria, Portugal), strong regional
unemployment disparities (Belgium, Germany, Spain, Italy and the United Kingdom)
and high structural unemployment (Greece, Spain, France, Italy and Finland). Most
Member States are pursuing comprehensive strategies for life long learning in order to
enhance the adaptability of the labour force to structural change. Some have taken
measures to reform the educational system in general (e.g. Spain, Greece and
Portugal). Barriers to geographical mobility, be they within Member States or between

reasons, namely tight

20

them, have hardly been addressed, with insufficient attention paid to the potential of
the European labour market as a whole.

Active labour market policies

While good progress was made in recent years in the field of early activation of the
unemployed, it appears that some programmes seem to work better than others and for
some groups of the labour force more than others. However, in most Member States
targeting the programmes and monitoring their efficiency remain problematic, as
assessed in the Joint Employment Report 2001. Only some Member States have
recently undertaken (Finland, Sweden, United Kingdom) or announced (Germany)
evaluation-based measures to enhance the efficiency of active labour market policies
(ALMPs).

Flexibility and modernisation

The organisation of working time has become more flexible in some Member States
and flexible forms of work – e.g. part-time work, fixed-term contracts, temporary
agency work and, to a lesser extent, teleworking – are among Member States’ and
social partners’ priorities for the modernisation of work organisation. Meeting the
implications of demographic changes and shortage of skilled labour is expected to
become important over the next few years. Several Member States (Germany, Spain,
France, Italy, Portugal) need to go further in reforming the existing regulatory
framework with a view to combining greater flexibility with security in order to
reduce structural unemployment and labour market segmentation. Only Spain has
taken significant steps to increase flexibility during the past year.

Discriminatory gender pay differences

On average, women earn less than men. According to the results of the European
Community Household Panel for 1997, women’s average net hourly earnings
(employees at work for 15 hours or more) were around 86% of men’s (no data
available for Sweden). This fact
is due to both differences in labour market
characteristics (the age structure of the labour force, occupation, work experience and
educational attainment) and pay differences. The goal of greater gender equality in the
labour market is on the policy agenda of most Member States. The Commission will
launch an overall assessment in 2002 on the reasons why differences leading to a
gender gap, including in pay levels, exist.

21

Graph 3: Labour market situation in the EU

%

* EL is 1995 and 2000.

Unemployment rate

1995

2001

B

DK

D

EL*

E

F

IRL

I

L

NL

A

P

FIN

S

UK EU-15

%

* *D and L are estimates for 2000.

Employment rate

EU target for 2010

1995

2000

B

DK

D*

EL

E

F

IRL

I

L*

NL

A

P

FIN

S

UK EU-15

Long-term unemployment rate

*D and L are estimates for 2000.

1995

2000

B

DK

D*

EL

E

F

IRL

I

L*

NL

A

P

FIN

S

UK EU-15

*D and L are estimates for 2000.

Employment rate of older workers

1995

2000

B

DK

D*

EL

E

F

IRL

I

L*

NL

A

P

FIN

S

UK EU-15

*D and L are estimates for 2000.

EU target for 2010

Female employment rate

1995

2000

24

20

16

12

8

4

0

100
90
80
70
60
50
40
30
20
10
0

16

12

8

4

0

100

80

60

40

20

0

100

80

60

40

20

0

B

DK

D*

EL

E

F

IRL

I

L*

NL

A

P

FIN

S

UK EU-15

Source: Commission services

22

2.4.

Ensure efficient product (goods and services) markets

The 2001 BEPGs recommended Member States to: (i) fully implement the Internal
Market (cut internal market legislation transposition deficits, eliminate technical
barriers to trade, create an effectively functioning internal market in services and
further open up the public procurement market); and (ii) reinforce competition
(liberalisation of
the network industries, effective competition and regulatory
authorities, State aid).

Progress towards creating a fully integrated and efficient internal market has been
mixed. EU markets for goods are becoming increasingly integrated, even if
differences in standards and regulations continue to hinder cross-border activities. The
creation of an internal market for services, however, has advanced only slowly. On the
other hand, progress has been made in transposing Internal Market directives into
national legislation, in opening up public procurement, in reinforcing the powers of
the competition authorities, and in reducing State aid. The liberalisation of the
telecommunication and electricity markets has started to result in price reductions, but
prospects for further price reductions are likely to be affected by physical bottlenecks
and inadequate domestic de-regulation and the high market shares of incumbents in
these sectors. Market opening in rail transport and postal services is less advanced.

Completion of the Internal Market

The growth of trade and investment flows between Member States is indicative of a
continuing process of economic integration in the EU, even if the convergence of price
levels between Member States appears to have slowed down. The percentage of
Internal Market directives not yet transposed into national legislation was reduced to
2% on average in October 2001, a 1 percentage point decline compared with the year
before. But in Greece, France, Austria, the United Kingdom and Germany, it remained
more than 1 percentage point above the target of 1.5% set for the 2002 spring
European Council. Attention is
shifting now from transposition to effective
implementation of the directives: France and Italy account for nearly 30% of alleged
breaches of Internal Market law.

Surveys suggest that businesses are increasingly satisfied with the operation of the
Internal Market. However, technical barriers to cross-border trade still cause concern.
The situation is worst for technically complex products or products where risks to
health are a major concern (e.g. food products). While agreement on standards have
been achieved in some areas (e.g. construction products), problems remain and the use
of the mutual recognition principle is still considered as being too risky and time-
consuming.

In a survey on business service providers, 40% of
respondents believed that
eliminating barriers to cross-border trade would increase their sales by up to 20%, a
clear illustration of the importance of creating an effectively functioning internal
market in services. However, little progress has been made on this issue and in 2002,
the Commission will set a precise timetable for Member States to dismantle specific
barriers, present non-legislative supporting measures and may propose harmonised

23

rules for some services. A mechanism to ensure that Member States apply the
principle of mutual recognition on service provision will also be proposed.

Graph 4: Public procurement openly advertised

As a percentage of total public procurement

1995
2000

EU-15: As a percentage of total public
procurement

16
14
12
10
8
6
4

1995

1996

1997

1998

1999

2000

40

35

30

25

20

15

10

5

0

EL

E

UK

DK IRL

S

I

B

F

P

A

FIN

L

NL

D

EU15

Source: Commission Services.

Progress has been made in opening up public procurement markets: public
procurement advertised in the Official Journal as a share of the total value of public
procurement almost doubled in the second half of the 1990s (see Graph 4). Between
1999 and 2000, this ratio increased by more than one third in Austria, the Netherlands,
Denmark, Spain, the UK, Sweden and Italy. However, only 15% of total public
procurement was actually published in the Official Journal. Only Portugal, Finland,
Sweden and the UK have two-way interactive on-line procurement systems at present,
but several more Member States are developing them.

Reinforcement of competition

Reforms have continued in the network industries and have started to pay off in terms
of price reductions. Even if price declines for local calls have been smaller in size,
telecommunications services have become more affordable to Europeans of all income
levels. Electricity prices fell
in most EU Member States for both industry and
household users between 1997 and 2001. However, prices remain relatively high in
Belgium, Germany, Italy and Portugal. Moreover, conditions for effective competition
are not met in certain Member States, because the degree of market opening reaches
only the legally required level (Greece, France, Ireland and Portugal) or because of the
continued high market share of the incumbents (Greece, France and Ireland). Finally,
even in the liberalised section of the market, the switching between producers remains
below 5% amongst large industrial users in Spain, Italy and Portugal and amongst
small users in Germany. In other network industries such as railways and postal
services, the liberalization process is less advanced.

A number of Member States, including Greece, France, Ireland and the UK, took steps
to increase the powers and the operating capacity of their competition authorities.
Cooperation between competition and regulatory authorities is more and more
frequent. Less progress was achieved in improving the institutional framework so as to

24

give more effective independence to competition authorities, in order to avoid the risk
that decisions may be based on criteria other than competition criteria. In Ireland,
Luxembourg, Austria, Finland and the UK, the competition authorities are not yet
empowered to apply EC competition law.

Graph 5: Sectoral and ad hoc State aid as a percentage of GDP

As a percentage of GDP

1995-1997
1997-1999

2.0

1.8

1.6

1.4

1.2

1.0

0.8

0.6

0.4

0.2

0.0

UK

DK

IRL

S

EL

I

NL

A

D

L

B

E

F

P

FIN

EU15

Source: Commission Services.

While data on State aid is available only with a certain time lag, figures for 1997-1999
indicate that overall State aid as a share of GDP has continued to decrease in the vast
majority of Member States. The EU average declined from 1.4% of GDP in 1995-97
to 1.2% in 1997-99. During that same period, sectoral and ad hoc State aid declined
from 1.1% to 0.9% of GDP. However, such aid remains relatively high in Belgium,
Germany, France, Finland, Spain, Luxembourg and Portugal3 (see Graph 5). The
transparency of Member States' State aid policies has improved thanks to, on the one
hand, the publication of State aid data by some Member States and, on the other, the
creation of a public State aid Register on the internet and the publication of the State
aid Scoreboard by the European Commission. The Scoreboard also offers a forum for
Member States to exchange information on their support policies and their assessment
of aid granted.

2.5.

Promote the efficiency and integration of the EU financial services market

The 2001 BEPGs recommended to: (i) ensure bringing into play the recommendations
of the Committee of Wise Men on the Regulation of European Securities Markets;
(ii) ensure full implementation of the FSAP by 2005 at the latest and by 2003 for the
priorities set out in the report of the Committee of Wise Men; (iii) speed up the

3

The high amount of such aid in Portugal is largely due to a single regional aid scheme for
Madeira, which has many characteristics of a sectoral scheme. Since January 2001, this aid
scheme is closed for new applications and its possible renewal is examined by the Commission.
The Portuguese authorities have also commissioned a study to evaluate the cost-effectiveness of
the scheme.

25

implementation of the RCAP, in particular with regard to quantitative constraints on
institutional investment, bankruptcy laws and taxation; (iv) further improve cross-
border and cross-sector co-operation among supervisory and other
relevant
authorities.

Regulation of European Securities Markets

As the structure of the EU financial system changes rapidly, the procedures for its
regulation need to keep pace and be in tune with market developments. In the middle
of 2000, the Committee of Wise Men, chaired by Mr Lamfalussy, was asked to assess
the EU mechanism for regulation of the securities markets and make some proposals
for improvement. In early 2001,
the Committee proposed a four-level approach
distinguishing between (i) framework legislation embodying main principles, (ii)
implementing legislation embodying more detailed measures, (iii) transposition of EU
legislation into national law, and (iv) enforcement. The Stockholm European Council
(23-24 March 2001) welcomed the report and called for implementation of the
proposed four-level approach. The two committees proposed by the Wise Men to
assist the European Commission in formulating and implementing legislation (the EU
Securities Committee (ESC) and the Committee of EU regulators (CESR)) have now
been established, in an advisory capacity only. Regulatory powers will be granted to
the two Committees when two directives (on prospectuses and on market abuse) are
adopted. The European Parliament's agreement on the four-level approach in early
February 2002 has removed the last obstacle to the full implementation of the Wise
Men's recommendations.

Implementation of the Financial Services Action Plan (FSAP)

in financial services and to ensure that

The 42 measures contained in the FSAP are designed both to complete the legislative
framework for the single market
is
appropriate to markets, which are constantly changing. Significant progress in
implementing the FSAP has been made in 2001, and 25 of the 42 original measures
have now been finalised. However, as was stressed by the 5th progress report4 on the
FSAP, serious concerns remain about the pace of implementation. Several important
Directives or Regulations (in particular on pension funds, on prospectuses, on
financial conglomerates, on International Accounting Standards) are now on the table
for adoption in the Council and the European Parliament and will need to be adopted
soon if the deadline of 2005 for full implementation of the FSAP is to be respected.

it

Implementation of the Risk Capital Action Plan (RCAP)

Progress in setting up a proper regulatory framework for the development of the risk
capital market has continued. In addition to those actions under the FSAP that are
relevant to the implementation of the Risk Capital Action Plan (RCAP - measures
taken at Community level), Member States have undertaken a number of reforms at
legal/regulatory constraints on
the national

level. Regarding the key area of

4

“Financial Services; Europe Must Deliver on Time”, COM (2001) 712.

26

institutional investment, some constraints have been (or are to be) eased in Belgium,
Italy and Denmark. However, quantitative constraints remain in most
Austria,
Member States (except in Ireland, the Netherlands, Finland and the United Kingdom
which have no such constraint beyond a general requirement for prudence). With
respect to the fiscal framework, several Member States have introduced specific or
general tax measures that foster, among other things, the risk capital market. In so
doing, Member States should fully respect Treaty obligations, notably those
concerning State Aid, as well as other commitments taken in the EU tax area. For
instance Portugal introduced several reforms aimed at avoiding double taxation of
venture capital investors, fostering savings and stimulating R&D investments. Italy
and Spain have increased tax incentives to private retirement savings, while the UK
launched stakeholder pensions. Spain has also granted favourable tax treatment to risk
capital companies and funds and has even increased tax benefits. Belgium is planning
a partial tax exemption on reinvested profits. On the other hand, little has been done to
address the disincentive effects of bankruptcy and insolvency procedures, with
proposed reforms postponed (e.g. Italy), or still in a preliminary elaboration/discussion
stage (e.g. Belgium, Sweden, UK).

Safeguarding financial stability

their

that further enhancement of

In order to assess the adequacy of institutional arrangements in the EU in the context
of likely developments in financial markets, the Economic and Financial Committee
prepared reports on financial stability (April 2000) and financial crisis management
(April 2001). The reports concluded that the existing institutional arrangements are
appropriate, but
in
particular through closer cross-sector as well as cross-border co-operation among the
authorities (supervisors, central banks and Ministries). Several Member States have
been reforming (or are to reform) their supervisory arrangements (Portugal, Belgium,
France, Germany, Ireland, Austria). The Member States are following different
models of consolidated financial supervision, with the choice of different models
explained by specific national characteristics. This choice of different models is likely
to increase the need for enhanced cross-border co-operation. However, progress is also
being made in this area; e.g.: further to the integration of the Brussels, Paris and
supervisory
into Euronext,
Amsterdam’s
authorities agreed to co-ordinate their respective competencies.

functioning was needed,

the three financial

stock exchanges

2.6.

Encourage entrepreneurship

The 2001 BEPGs recommended Member States to: (i) create a business-friendly
environment (reduce administrative burdens and barriers,
increase efficiency of
public services, simplify VAT systems); and (ii) encourage risk-taking through
improving access to finance especially for SMEs in their early stages.

A great variety of measures has been taken to reduce the regulatory burden on
business, to stimulate business creation, and to ease access to finance for SMEs. In
spite of an increased use of the benchmarking tool, differences in business conditions
between Member States remain important. This is true in particular in the area of
taxation.

27

Business environment

Reducing the regulatory burden on business is increasingly recognised as an important
economic policy objective. A recent survey suggests that better-designed legislation
would save EU companies up to 15% on compliance costs. Almost all Member States
introduced measures aimed at reducing the regulatory burden but, in spite of this,
business
in
Germany, France and Greece.

remains particularly dissatisfied with the regulatory environment

Belgium, Denmark, Greece, Spain, France, Italy, the Netherlands, Austria, Sweden,
Finland and the UK took new measures in 2001 to promote start-ups and small and
medium size companies. In spite of significant progress made, the registration of a
new private limited company is still very time-consuming in Belgium,
Italy,
Luxembourg, the Netherlands and Finland, and very costly in Greece, Spain, Italy and
Austria (see Graph 6).

Graph 6: The typical Time and Cost of Setting Up a Private Limited Company

AU

BE

DA

FI
FR
DE

GR

IE
IT
LU
NL

PT
SP
SE

UK

2500

2000

1500

1000

500

0

5

10

15

20

25

30

35

Cost (Euro)

Time (elapsed business days)

Pre-registration

Registration

Benchmark

Source: Ongoing Best Procedure Benchmarking Exercise on the Administration of Start-ups. Note: Benchmark refers
to the lower quartile.

The larger the size of the public sector, the greater the gains for the economy from
spending public resources efficiently. The Nordic economies are making significant
advances in this respect as they progressively expose the public services to
competition. Belgium, Italy, and Portugal have also focused their attention on
improving the efficiency of their public administration.

Ireland, Luxembourg,

Belgium, France, Greece,
the Netherlands and Portugal
launched initiatives to simplify corporate taxes and reduce the business tax burden.
However, taxation of cross-border activities continues to be a source of distortions
within the Internal Market, as exemplified by the still large differences in effective
rates of company taxation between Member States and the existence of a large number
of tax obstacles to such activities. The Commission's recent Communication on

28

company taxation5 proposed a number of possible solutions to these obstacles. In the
VAT area, the Commission has proposed a strategy aimed at reducing fiscal barriers to
cross-border activities through simplifying and modernising the VAT system.

Access to finance

In many Member States, measures have been taken to ease access to finance for
SMEs, which complement the structural reforms on the financial services markets
treated in section 2.5. Such measures generally concentrate on sharing the investment
risks between public sponsors and private investors and on providing additional
funding to small companies. Denmark, Germany, Greece, Spain, France, Ireland, the
Netherlands and Portugal have set up or further developed existing publicly-sponsored
venture capital schemes with the view to improve access to finance, especially for
SMEs in their early stage. However, the availability of early stage venture capital
varies significantly across Member States (with Greece, Spain, Austria and Portugal
lagging behind) and it is targeted mainly at high-tech and innovative enterprises.
Finally,
information and support systems to help future entrepreneurs obtain
information on access to finance have been set up in several countries, including Italy
and the Netherlands.

2.7.

Foster the knowledge-based economy

The 2001 BEPGs recommended to: (i) stimulate R&D and innovation (adequate
framework conditions, better ties between university and business, enhanced
collaboration on research and innovation across Europe, sufficient funding for R&D
and clear priorities for public research); (ii) promote access to and use of ICT
(unbundling of the “local loop”, use of internet in schools, regulatory framework for
e-commerce, internet use in public administrations, ICT security); and (iii) strengthen
education and training (ICT skills, education systems capable of responding to
changes in skill requirements).

further

incentives for business R&D. However,

The European Union’s transition to the knowledge-based economy is advancing with
the introduction of
the large
differences between Member States, for instance in terms of R&D expenditures or in
terms of the number of patent applications submitted to the European Patent Office
(see Graph 7), continue to be a source of concern. Moreover, the EU continues to lag
behind the United States in areas such as business spending on R&D, Internet usage
and education.

5

"Towards an Internal Market without Tax Obstacles: A strategy for providing companies with a
consolidated corporate tax base for their EU-wide activities (Com (2001) 582)".

29

Graph 7: R&D expenditures and patents

S

FIN

D

A

NL

DK

B
UK

F

I

IRL

EL

P E

n
o
i
l
l
i

m
r
e
p
O
P
E
e
h
t

t
a
s
n
o
i
t
a
c
i
l

p
p
a

t
n
e
t
a
p
f
o

r
e
b
m
u
N

0
0
0
2
,
s
t
n
a
t
i

b
a
h
n

i

400

350

300

250

200

150

100

50

0

0

0.5
1997 data on R & D for EL & IRL
1998 data on R & D for NL
Provisional data for Patents, 2000

1

1.5

2

2.5

3

3.5

4

Total R & D expenditures as a percentage of GDP,1999

Source: Eurostat/OECD/EPO.

Research and development (R&D)

Throughout the 1990s, EU R&D expenditures fluctuated around 1.9% of GDP, which
was significantly below the 2.6% figure recorded by the United States, the difference
being explained by lower EU business expenditures on R&D. In its Communication to
the Spring European Council in Barcelona, the Commission has proposed to set a
target of 3% of GDP for total EU spending on R&D by the end of the decade. Within
that total, the amount funded by business should rise to around two-thirds against 55%
today. To stimulate business R&D, countries such as the UK and Portugal introduced
tax incentives for private R&D. Austria launched a new programme giving financial
support to R&D, while other Member States created R&D incubators. However, the
Community deadline for agreeing by the end of 2001 on how to deliver the
Community Patent was missed.

More intense collaboration between science and industry is required to permit the
commercialisation of R&D results. Public funding is increasingly targeted at science-
in all Member States public research
industry collaboration. At
institutions are being encouraged to direct their research efforts to areas of interest to
private firms.

the same time,

In 2001, the European Research Area continued to develop, extending the links
between national research communities. In December, agreement was reached on the
main action lines of the forthcoming sixth Research Framework Programme.

Adequate funding for basic research is crucial to expanding the knowledge base and
increasing the flow of innovations. Several measures were taken and others were
expanded upon in 2001, including the creation of a new organisation in Sweden for

30

funding research. In France, a decision was made to augment the public research
workforce.

Information and communication technologies (ICT)

The global downturn in ICT markets meant that the increase of ICT take-up in 2001
was only moderate in comparison with previous years. Moreover, progress in practice
in unbundling the local loop was slow, although this was crucial to expand high-speed
Internet access. As a result, broadband access is still patchy. On a more positive point,
the fall of Internet access prices continued. Also, the share of EU households that had
internet access at home kept on rising at a rate of almost 1 percentage point per month.
In spite of such progress, ICT take-up within the EU remains below that in the US.
While the most advanced EU Member States have Internet access rates on par or even
higher than the US, others continue to lag significantly behind.

The share of schools in which pupils have access to the Internet is above 70% in all
Member States except Greece (44%), Portugal (52%) and Austria (64%). With this
achievement, the next challenge is to further bring down the number of pupils per on-
line PC, which is below 10 already in Denmark, Luxembourg, Finland and Sweden.
Furthermore, a series of new projects were launched to reduce ICT skills shortages.

Creating a safe, predictable environment for doing e-commerce remains a top priority.
E-commerce is developing, but more slowly than expected. The copyright directive
will be in force by December 2002, but the proposal on distance marketing of
financial services still awaits a Council decision, while the directives on VAT rules for
e-commerce and on electronic invoicing are still pending.

National administrations are increasingly extending services to permit online
communication with citizens. New technologies are similarly being used on the
production side of the public sector. For instance, Denmark has launched a public
procurement portal designed to streamline procurement processes and trigger
economies of scale.

The Commission has adopted communications on creating a safer information society
and on security in electronic networks. It also has launched an e-confidence web site.

Education and training aspects of the knowledge-based society

The number of researchers per 1000 of the workforce is rising in all Member States,
but the rate of increase for the EU as a whole is below that of the United States
because of below average increases in the large Member States (Germany, France,
Italy, UK). Germany, France, Spain, Finland, Ireland, Sweden and the United
Kingdom have put in place schemes to attract foreign students and researchers or to
encourage the return of their own scientists, illustrating an increased awareness that
human resources may become inadequate for future needs. Most Member States have
taken measures to promote ICT skills, often attaching a priority to disadvantaged
groups, with Denmark, the Netherlands, Sweden, Finland and the UK generally the
most advanced Member States according to the Joint Employment Report. In terms of
basic skills 70% of the young EU population (aged 25-34) had attained at least upper

31

secondary education in 2000 ranging from above 80% in Austria, Denmark, Finland,
Germany, Sweden, and the UK to below 60% in Italy, Portugal and Spain.

In terms of inputs, public education expenditure in the EU has remained unchanged at
around 5% of GDP between 1995 and 1999. However, the results from a recent OECD
survey show that the reading, mathematical and scientific literacy of 15 year-olds are
only weakly correlated with education spending (see Graph 8). Member States efforts
to increase the efficiency of their education systems are therefore also important. This
would seem to be true in particular for Denmark and Portugal, as they combined
above average public expenditures on education with below average scores in the
OECD survey.

y
e
v
r
u
s
A
S
I
P
D
C
E
O
r
e
d
r
o

f
o
k
n
a
r

e
g
a
r
e
v
A

*
0
0
0
2

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15

Graph 8: Education expenditure & Schooling outcomes

NL & UK

FIN

A

IRL

FB

S

D

E

I

L

EL

0

1

2

3

4

5

DK

P

6

7

8

9

* The OECD programme for International student assessment (PISA) is a three yearly survey
of the knowledge and skills of 15-year-olds. The rank has been elaborated from the year
2000 results on the mean performance on the mathematical, scientific and reading literacy.

Source:
UNESCO/OECD//Eurostat.

Public expenditure as a % of GDP

2.8.

Enhance environmental sustainability

The 2001 BEPGs did not make country-specific recommendations in this area, but
contained a number of horizontal recommendations addressed to all Member States:
(i) commit to effectively implement the European Sustainable Development Strategy
agreed by the Gothenburg European Council; (ii) introduce and strengthen market-
based policies like taxation, user and polluter charges, insurance/liability schemes
and tradable emission rights; (iii) reduce sectoral subsidies and tax exemptions and
other measures which have a negative environmental impact; (iv) intensify the use of
economic instruments to curb greenhouse gas emissions, fulfil the requirements of the
Kyoto Protocol and help to de-couple economic growth from a range of environmental
pressures; and (v) agree on an appropriate framework for energy taxation at the
European level and for the creation of a single internal market for energy.

As regards the implementation of
the
Commission has issued several proposals, among the more important of which are a

the Sustainable Development Strategy,

32

draft Directive on emissions trading, and a White Paper on the European Transport
Policy.6

Based on the limited information available to the Commission, in this first year of
integration of sustainable development promotion within the BEPGs, progress by
Member States included the following:

Preparations to implement climate change policies intensified. The UK’s climate
change levy took effect from April 1st. The UK and Denmark introduced a system of
the
tradable emission permits, while several other countries, such as Sweden,
Ireland, Finland are examining the possibility of doing so. The
Netherlands,
Netherlands established a scheme of
tradable certificates for electricity from
renewable energy sources; similar systems are planned by Austria, Belgium,
Denmark, Italy, and the UK.

Taxes or charges were introduced on products such as electrical appliances (Belgium,
Portugal) and plastic bags (Ireland). France extended the TGAP to cover phosphates in
washing powders, agricultural pesticides and natural mineral aggregates. Ireland
introduced a levy on landfill of waste. Finland adopted a new act on water supply
management which requires users to pay water charges at least covering costs of water
supply and wastewater removal. Spain’s National Hydrological Plan has established a
“transfer levy” payable by the users of transferred water.

Several measures targeted energy use, in particular in transport. Belgium, Germany
and Ireland differentiated fuel excise taxes in favour of low-sulphur fuels, while the
UK widened existing differentials. Vehicle excise duties were restructured to take
account of environmental criteria in Belgium, France, Ireland, Spain and the UK.
Germany and Sweden continued established policies of switching taxes from labour to
energy. Denmark phased in new tax increases on domestic and industrial energy
consumption, in line with the 1998 tax package. France set guaranteed prices for the
next
twenty years for electricity from wind. Luxembourg introduced a tax on
electricity. However, little or no progress was made by the Council in its discussions
on energy taxation, although discussions continue under
the current Council
Presidency. Discussions on completing the internal energy market also continued.

6

European transport policy for 2010: time to decide (COM(2001) 370 final of 12.09.2001).

33

3.

SUMMARY ASSESSMENTS OF IMPLEMENTATION BY THE MEMBER STATES

3.1.

Belgium

In 2001, economic growth decelerated sharply, with real output growing at around
1.1%. The slowdown was driven by a decline in private consumption and investment
compounded by a negative contribution of net exports resulting from the deteriorating
external environment. The downward trend in unemployment was interrupted in
September. Employment grew at a much slower pace than in 2000. As regards
inflation, after having peaked in May, HICP inflation moved into a declining trend and
averaged 2.4% in 2001.

some progress

Altogether, Belgium made
in implementing the budgetary
recommendations of the 2001 BEPGs. Despite the economic slowdown, public
finances were kept under control and, for the second consecutive year, general
government accounts were in balance. The debt ratio has been on a downward path
since 1993, but remained at 106.9 % of GDP at the end of 2001, considerably above
the 60% of GDP reference value.

Some progress was made in implementing the 2001 labour market recommendations.
Efforts to reform tax and benefit systems, in order to make work pay, continued. Some
measures were agreed to enhance labour market flexibility. Their overall impact on
labour supply is unclear. On the one hand, they could reduce the labour supply of
those already in work. On the other hand, they could increase the participation rate of
those currently inactive, and provide incentives to older workers to remain longer in
employment. No major measures were undertaken to promote more wage flexibility,
although the latest
scope for wage
differentiation at sectoral level.

inter-sectoral agreement allows greater

Some progress was made in implementing the 2001 product market recommendations.
Some steps were taken to liberalise further the energy sector, but effective competition
in this sector remains low and prices are still high. The formal links between public
and private actors in different sectors of the economy, energy included, still suffer
from a lack of transparency. The reforms of the railways, public administration,
administrative simplification, personal and corporate taxation started only recently and
have yet to produce tangible results.

Good progress was made in implementing the 2001 capital market recommendations.
Several reforms were tabled to develop further the risk capital market: removal of
some quantitative constraints on pension funds’ investment, tax reforms to make the
fiscal framework more conducive to investment and entrepreneurship, planned reform
of the procedures for insolvency.

3.2.

Denmark

Economic activity decelerated to around 1.3% in 2001 as a result of the continuing
effects of adverse economic shocks. Following a stabilisation period in 2000,

34

unemployment fell slightly through 2001. The tightness of the labour market also
resulted in high wage increases in the second and third quarter of 2001. Inflation fell
continuously during 2001, after having peaked in the middle of 2000, and HICP
inflation averaged 2.3% for the whole year.

in implementing the budgetary
Altogether, Denmark made good progress
recommendations of the 2001 BEPGs. General government finances showed a large
surplus, as recommended. The remaining 2001 budgetary recommendations were also
met, and public finances appear adequate to meet the medium term challenges.

Limited progress was made in implementing the 2001 labour market recommendation.
No new measures have been taken in 2001. However, previous tax reforms will lead to
a reduction in the taxation on labour. Similarly, previous reforms of early retirement
schemes will lead to a reduced inflow into such schemes.

Some progress was made in implementing the 2001 product market recommendations.
Some effort was made to enhance conditions for competition in public procurement
and for the provision of public services at the local level, through benchmarking and
increased use of public tendering. But considerable scope for further progress remains
in this area. Partial measures were taken to strengthen competition in some sectors,
such as construction.

Regarding the 2001 capital market recommendations, some progress was made to
establish a fiscal framework more conducive to investment and entrepreneurship.
However, little was done to adjust bankruptcy laws.

3.3.

Germany

The economy slowed down considerably in 2001, with real output growing at 0.6 %.
The downturn was due to the loss in purchasing power resulting from the 1999/2000
oil price hike, the worsening international environment, and a significant decline in
construction activity. Since January 2001, this has resulted in rising unemployment,
which is likely to exceed the 4 million threshold in 2002 and threatens to undo much
of the employment gains of the last few years. Average HICP inflation in 2001 was
2.4%; after a peak rate of 3.5% in May it fell to a level of 1.7% in December.

Altogether, Germany made some progress
in implementing the budgetary
recommendations of the 2001 BEPGs. Budget deficits increased markedly, from 1.3%
of GDP in 2000 to 2.6% in 2001, due to the economic downturn and the introduction
of tax reforms. With overall growth in 2002 expected to remain at 2001 levels, there is
a risk that the 2002 deficit comes very close to the Treaty’s 3% reference value.

Some progress was made in implementing the 2001 labour market recommendations.
While the “Job Aqtiv” bill is a first step in the right direction, a more comprehensive
reform of the benefit system is still missing and the inefficiency of large-scale ALMPs
has not yet been addressed. Despite some progress, more needs to be done to adapt
wage increases to the need to achieve wage structures that better reflect productivity
differences. The use of working time accounts, agreed between social partners,

35

contributed to a more flexible organisation of work, but no progress was achieved in
making labour market regulations more flexible. Care should be taken that the reform
of works councils does not reduce labour-market flexibility.

Good progress was made in implementing the 2001 product market recommendations.
The reform of the higher education system became effective on 1 January 2002 and
the shortage of IT personnel declined. State aid continued to decline gradually and
entry into the handicraft trades was made easier, but the value of public tenders
published in the Official Journal did not increase significantly. While competition
authorities carried out numerous investigations on whether the fees charged for the use
of electricity distribution networks were justified, significant regional differences in
these fees remain. Network access charges seem higher than in most other Member
States.

some progress

Germany made
in implementing the 2001 capital market
recommendations. The reform of the taxation of holding transfers will probably
benefit also the German risk capital market. The harmonisation of the taxation of
venture capital funds will increase investor's certainty about their legal position and
thus their planning decisions.

3.4.

Greece

Despite the impact of the adverse economic shocks, economic activity was strong in
2001, with real output growing above 4%. Economic resilience was driven by
investment in preparation for the 2004 Olympic Games. The increase in employment
and the fall in unemployment suggest a mild improvement in the labour market
situation, although the unemployment rate still exceeds 10%. Following inflationary
pressures until summer 2001, inflation, over the year as a whole and as measured by
the HICP, averaged 3.6%.

in

some

implementing

Altogether, Greece made
budgetary
progress
recommendations of the 2001 BEPGs. The government’s budgetary adjustment efforts
in recent years resulted in a significant improvement of fiscal imbalances. Indeed, in
2001 the general government accounts were in balance for the first time since the early
1970s. The debt ratio, which has been on a downward path since 1996, fell just below
100% of GDP but remains considerably above the 60% of GDP reference value.
Partial privatisation of a wide-range of public companies continued, albeit at a slow
pace. The reform of the social security sector, announced in the first stability
programme, was not initiated in 2001.

the

Some progress was made in implementing the 2001 labour market recommendations.
Measures taken included numerous changes to the tax and benefit system, and a
further package of labour market reforms. Moreover the reform of the educational
system continued to be implemented. However, measures taken have not yet gone far
enough in tackling the key structural problems on the labour market. Furthermore, past
reforms have continued to be dogged by problems in implementation.

36

Some progress was made in implementing the 2001 product market recommendations.
Internal Market directives improved markedly, although the
Transposition of
transposition deficit remains high and efforts were made to promote ICT diffusion and
to reduce the administrative burden on business. However the cost of setting up a new
business remains high. The system of corporate taxation continues to discourage
firms’ growth. R&D and innovation performance is relatively poor, and competition in
liberalised network industries is progressing slowly.

Regarding the 2001 capital market recommendations, Greece made some progress. In
a bill submitted to Parliament, the government has proposed full "tax transparency" in
the tax treatment of risk capital funds, a new legal framework for the creation of
venture capital funds and favourable tax treatment for R&D expenditure. However, no
efforts to ease quantitative constraints on institutional
investment and improve
bankruptcy legislation have been reported.

3.5.

Spain

Economic activity slowed down in 2001, with real output growing at approximately
2.7%. This was due to the impact from oil and unprocessed food price hikes earlier in
the year, and subsequently in response to the international downturn. In this context,
job creation lost dynamism although the unemployment rate continued falling to 13%.
HICP inflation accelerated slightly to 3.6% on average in 2001, reflecting not only the
adverse behaviour of the most volatile components, but also an increase in core
inflation.

Spain made

budgetary
progress
Altogether,
recommendations of the 2001 BEPGs. Fiscal consolidation made additional progress
in 2001. A general government balanced budget, as recommended, is likely to have
been met.

implementing

good

the

in

Some progress was made in implementing the 2001 labour market recommendations.
A reform of employment contracts goes some way towards making permanent and
part-time contracts more flexible, although the share of temporary contracts in
employment remains very high. The government made initial efforts to encourage the
social partners to agree on a reform of collective bargaining; however, the recent
agreement between trade unions and employers for moderate wage growth in the
current year did not address the wage bargaining system or wage indexation clauses.
Limited measures to encourage labour mobility have been taken.

Good progress was made in implementing the 2001 product market recommendations.
Initiatives were taken to achieve a greater diffusion of the knowledge-based society
and efforts to simplify the regulatory burden for SMEs continued. Implementation of
the liberalisation package adopted in June 2000 continued in 2001.

Good progress was made regarding the implementation of the 2001 capital market
recommendations. Tax incentives for risk capital funds are foreseen in the draft
Finance Law and a new regulated fund type specialised in unlisted securities was

37

created to channel
bankruptcy laws to encourage entrepreneurship has been reported.

investment

to SMEs. However, no progress on adjusting

3.6.

France

Economic activity decelerated in 2001 with real output growing at around 2%.
However, resilient domestic private consumption avoided an even more severe
downturn as a result of the continuing impact of adverse economic shocks. The
slowdown induced slower employment growth and unemployment has increased since
the spring. In such a context, inflationary pressures remained very limited. After
reaching a peak in May, HICP inflation decreased to an estimated 1.8% by the end of
the year.

some

budgetary
progress
Altogether, France made
recommendations of the 2001 BEPGs. In contrast with the progress made over the
period 1996-1999, budgetary adjustment slowed down markedly in 2000 and 2001.
Indeed, the general government deficit is projected to decrease by only 0.2 percentage
point of GDP over the 1999-2001 period (from 1.6% of GDP in 1999 to 1.5% in
2001).

implementing

the

in

Some progress was made in implementing the 2001 labour market recommendations.
Reforms of the tax and benefit system have been underway for some time, although
further action is required, particularly on benefits. Policy-makers continued to monitor
the implementation of the reduction of working time and allowed flexibility in
application of working-time legislation to SMEs. However, there was no progress in
implementing the recommendation on employment protection legislation, which
called for a better balance between security and greater adaptability. New legislation
was introduced to increase employment protection, but no measures were taken to
increase adaptability.

Some progress was made in implementing the 2001 product market recommendations.
The transposition deficit of internal market directives was reduced but is still the
second worst in the EU. State aid as a percentage of GDP came down towards the EU
average. Efforts made in 2000 to reduce the administrative burden were pursued but
businesses continue to perceive it as a major constraint. The opening up of the gas and
electricity markets was pursued but at a very slow pace.

Some progress was made in implementing the 2001 capital market recommendations.
In particular by developing a fiscal framework more conducive to investment and
entrepreneurship.

38

3.7.

Ireland

The impact of supply constraints compounded by several exogenous shocks resulted
in a pronounced slowdown of the economy from double-digit growth in 2000 to
around 6.5% in 2001, most of which represents carry-over effects. The labour market
so far has proved remarkably resilient, with strong employment gains in the first three
quarters of 2001 and a limited rise in the unemployment rate to a level still close to
4% in December 2001. Annual HICP inflation has moderated since its late-2000 peak
to a two-year low of 3.4% in November 2001. However, underlying inflation has
risen, pointing to unabated domestically-generated price pressures.

Ireland made

Altogether,
budgetary
progress
recommendations of the 2001 BEPGs. Due mainly to the larger-than-expected
downturn, taxes were about 8% below the objective, leading to a general government
surplus of just 1.7% of GDP, almost 2½ percentage points lower than targeted.

implementing

good

the

in

Some progress was made in implementing the 2001 labour market recommendations.
Further income tax changes and funding to promote the provision of childcare
facilities are among the measures addressing labour supply. Evidence on earnings
indicates that wage growth exceeded the revised pay terms of the national agreement
in 2001. The challenges of a tight labour market remain in relation to mobilising
labour and future wage setting processes.

Good progress was made in implementing the 2001 product market recommendations.
Measures were taken to enhance competition in the network industries, taxi services,
pharmacies and the sale of alcoholic liquor. However, incumbent firms still have high
market shares in the network industries. Appropriate programmes were set up to
promote R&D.

Some progress was made in improving access to early-stage financing, for instance
through the establishment of a dedicated government-sponsored venture capital
scheme.

3.8.

Italy

Economic activity decelerated in 2001, with real output growth averaging 1.8%. The
slowdown is the result of weakened exports and contracting private investment
expenditure. While weakening,
the performance of the labour market remained
positive, with the rate of unemployment declining by more than a full percentage point
compared to 2000. However, unemployment remains relatively high at 9.5% of the
labour force, with large regional disparities and significant segmentations by age and
gender. HICP inflation for 2001 ended at 2.7%, mainly reflecting inflationary
pressures at the beginning of the year.

Italy made

budgetary
Altogether,
recommendations of the 2001 BEPGs. Budgetary consolidation continued in 2001.
The actual budget deficit is now officially estimated at 1.1% of GDP in 2001. The
departure from the original objective of 0.8% of GDP is largely explained by lower-

implementing

progress

some

the

in

39

than-expected economic growth. The debt ratio has been on a downward path since
1995, but remains at around 108 % of GDP, considerably above the 60% of GDP
reference value. Although the government has confirmed the strategy of fiscal
consolidation, concerns remain about the long-term sustainability of public finances,
particularly with respect to pressures from an ageing population.

Some progress was made in implementing the 2001 labour market recommendations.
Although only minor measures were actually implemented during 2001, a broad set of
labour markets reforms was proposed, which appear to be going some way towards
addressing the main structural problems. Due to the budgetary impact of the recent
slowdown, the planned overall reform of the tax system has been postponed to 2003.

Some progress was made in implementing the 2001 product market recommendations.
Measures were taken to promote the knowledge-based economy and further reduce
red tape and regulatory constraints. Progress was also achieved in increasing
competition in the energy sector and in the provision of local public services.
However, no concrete measures were taken to increase competition in professional
services.

Some progress was made in implementing the 2001 capital market recommendations.
Some of the quantitative constraints on institutional investment were removed. The
government is to propose a new reform of bankruptcy laws early 2002.

3.9.

Luxembourg

Economic activity decelerated somewhat in 2001, following record growth rates in
1999 and 2000. Nevertheless, growth probably amounted to around 5%, remaining
significantly more dynamic than its neighbouring countries, due to continued strong
growth in private and public consumption, as well as in gross fixed capital formation.
Employment kept growing at a rapid pace, while decelerating slightly. Consequently,
unemployment began to rise moderately once again. Inflation decelerated significantly
since the beginning of 2001, the annual rise in the HICP slowing down to 2.4% in
2001. Nevertheless, wages continued to increase rapidly and underlying inflation
continued to accelerate.

Altogether, Luxembourg made some progress in implementing the budgetary
recommendations of the 2001 BEPGs. While remaining comfortable,
the general
government surplus declined from the record level reached in 2000.

Some progress was made in implementing the 2001 labour market recommendation.
The government sent a bill to the Parliament concerning a revision of the definition of
eligibility for a disability pension, but without any modification of the pension level.
Earlier efforts to increase female participation produced noticeable results in the
second half of the 1990s.

the economy, Luxembourg's product markets are
Thanks to the openness of
contestable. Nevertheless,
the legal framework presents inadequacies and limited
progress was made in implementing the 2001 product market recommendations. The

40

abolition of fixed and monitored prices, the empowering of the competition authority,
and a single legislative framework for public procurement are three reforms whose
delay may limit the degree of competition.

3.10.

The Netherlands

Seven years of strong economic growth ended at the beginning of 2001, as a result of
weaker domestic demand, caused by receding private investment and sluggish private
consumption, and the deterioration in external trade. Altogether, real output grew
fast, and
above 1% in 2001. However, employment kept
unemployment, which reached record lows in the course of the year, has not yet
started to rise. Wages, which had accelerated significantly over recent years, kept
increasing at a rapid pace. Inflation jumped to 4½%-5% since the beginning of 2001,
the annual rise in HICP inflation reaching 5% as a result of mounting tensions on the
labour and good markets, but also due to a rise in indirect taxation.

increasing rather

Altogether,
the Netherlands made good progress in implementing the budgetary
recommendations of the 2001 BEPGs. The general government surplus decreased
moderately.

Some progress was made in implementing the 2001 labour market recommendations.
New financial incentives to encourage the labour market activity of benefit recipients,
older workers and low wage earners were introduced, but discussion on a reform of
the disability scheme has not yet led to tangible results.

Good progress was made in implementing the 2001 product market recommendations.
The value of public tenders published in the Official Journal has increased and the
liberalisation of the energy and transport markets is advancing. Measures were taken
to encourage ICT use and reduce the shortage of ICT experts. In spite of efforts made
to stimulate research and innovation, business expenditures on R&D as a percentage
of GDP have fallen further behind the EU average, and this has contributed to a
relatively slow labour productivity growth.

Some progress was made in implementing the 2001 capital markets recommendations.
The taxation of stock option has been reformed to help alleviate the negative effects of
their taxation at grant and a reform of bankruptcy laws is considered.

3.11.

Austria

Economic activity decelerated considerably in 2001, with real output growing at
approximately 1%. This was due to the loss in purchasing power and the slower
growth in construction activity which depressed domestic demand, while exports
suffered from slow growth in main trading partners' economies. The falling trend in
unemployment has reversed since the beginning of the year. Inflation started to
decline from the summer onwards, with HICP inflation estimated to average 2.3% in
2001.

41

Altogether, Austria made
budgetary
progress
recommendations of the 2001 BEPGs. Expenditure restraint in combination with
significant revenue side measures, essentially broadening tax bases, led to a marked
improvement in government finances, which reached balance in 2001.

implementing

good

the

in

Some progress was made in implementing the 2001 labour market recommendations.
Measures aimed at older workers’
force participation continue to be
labour
implemented, and the inflow into early retirement has started to decrease. However,
research by the IHS suggests that disincentives to working longer than the minimum
retirement age are still strong, in particular for low-wage earners, and that invalidity
pensions could be used to side-track the restricted early retirement scheme.

Some progress was made in implementing the 2001 product market recommendations.
While federal and regional legislation on public procurement have still not been
harmonised, public procurement seems to have been advertised more openly and the
establishment of a federal procurement company is a first step towards a more unified
framework. Efforts have been made to strengthen R&D at different levels and to
favour the spread of ICT and the supply of ICT experts.

Good progress was made in implementing the 2001 capital market recommendation.
Pension funds are now allowed to invest up to 5% in assets not listed in the catalogue
of permissible investments; Austria has abolished the registration fee for start-ups and
foresees an extension of tax incentives for “new” start-ups to acquisitions of existing
“start-up” companies.

3.12.

Portugal

Economic activity decelerated from the strong growth rates registered in 1999-2000 to
around 1¾% in 2001. This reflects a slowdown in the growth contribution of domestic
demand, due mainly to efforts of private sector agents to reduce their indebtedness.
This was only partly counterbalanced by an improvement of exports. Labour market
developments remained positive, with unemployment remaining below 4½%, and total
employment rising by approximately 1½%. Wages per head accelerated, reflecting the
tightness in the labour market and strong public sector wage increases. HICP inflation
rose to 4.4% in 2001.

some progress

Altogether, Portugal made
in implementing the budgetary
recommendations of the 2001 BEPGs. Fiscal consolidation faltered in 2001, mainly
due to lower-than-expected tax revenues. The latter was mainly the consequence of
the slowdown in economic activity and unexpected shortfalls
following the
implementation of the tax reform. Some progress was made in addressing the
in particular by changing the
budgetary consequences of an ageing population,
formula used to calculate pension benefits, but reform efforts need to be sustained.

Some progress was made in implementing the 2001 labour market recommendations.
Measures were taken to improve the effectiveness of the education and training
systems, but attainment and literacy levels remain significantly below most other

42

Member States. No major initiative was undertaken to ease the strict employment
protection legislation.

Good progress was made in implementing the 2001 product market recommendations.
Several measures were enacted to increase the R&D and innovation base of the
economy and to promote ICT take-up. Transposition of Internal Market directives
improved markedly, and further efforts were devoted to improving the business
environment. On the other hand, competition in key utilities is being introduced
relatively slowly, with incumbents remaining very influential and prices relatively
high. Ad hoc sector specific aid is among the highest in the EU as a share of GDP and
are only decreasing slowly. Several fiscal reforms were implemented to stimulate
investment and entrepreneurship.

Some progress was made in implementing the 2001 capital market recommendations.
Several
and
implemented
entrepreneurship. However, no real progress was made regarding quantitative
constraints on institutional investment or adjustment of bankruptcy laws.

reforms were

investment

stimulate

fiscal

to

3.13.

Finland

Economic growth slowed down sharply in 2001, with real output growing less than
1%, thus ending seven years of buoyant economic activity. This was mainly due to
sharp decline in exports, especially in the ICT sector, but also of a weakened domestic
demand,
to a lesser extent, private
consumption. Nevertheless, employment expanded favourably for most of the year
and unemployment continued to decline, although at noticeably decelerating pace
ending at 9.1% in December. HICP inflation eased markedly towards the end of the
year, after having peaked at 3.3% in May, averaging 2.7% in 2001.

triggered by construction investment and,

the budgetary
Altogether, Finland made
recommendations of the 2001 BEPGs. The budgetary position remained sound,
although in the absence of the exceptional
the general
government surplus declined from its record levels.

tax revenues of 2000,

some progress

implementing

in

Good progress was made in implementing the 2001 labour market recommendations.
Efforts were aimed at reducing the high level of structural unemployment and at
increasing incentives for older workers to remain longer in the labour force. While the
tax reductions on labour increased incentives to work in general, they have done little
in reducing high marginal tax rates for low-wage earners. The targeting and tailoring
of ALMPs is improving and efforts to prevent exclusion from the labour market have
been increased. However, measures are scheduled for 2002 that will increase the level
of unemployment benefits.

Some progress was made in implementing the 2001 product market recommendations.
Some measures were taken to enhance competition in the distribution and construction
sectors. Some measures were implemented to increase competition in public
procurement and to improve the transparency in the provision of public services but
the rate of public procurement advertising is relatively low.

43

Some progress was made regarding the implementation of the 2001 capital market
recommendations. Finland developed capital guarantees provided by the Finnish
Export and Guarantee Credit Agency to safeguard investors against losses on venture
capital investments, and launched reforms in the field of capital, income and corporate
taxation.

3.14.

Sweden

The economy performed weakly in 2001, with real GDP growth decelerating to less
than 1.5 per cent. This was mostly due to the continuing effects of adverse economic
shocks, and particularly related to the global slump in the telecom sector. In 2001,
unemployment, which has been falling since 1997, was relatively low at 5.2 per cent
of the labour force. HICP inflation averaged 2.7% in 2001. It rose sharply in spring
and has remained relatively high since then, partly due to temporary factors.

in
the 2001 BEPGs. Available evidence indicates that

the budgetary
Altogether, Sweden made good progress
recommendations of
the
recommendations were met. Public finances have been in surplus in each year since
1998, aided by tight expenditure control, and are expected to continue to be so in the
coming years.

implementing

Good progress was made in implementing the 2001 labour market recommendations
The scope and mix of ALMPs were adapted and the tax burden on income was
reduced. However, the tax burden still remains the highest in the EU, and the many
measures undertaken do not appear to be targeted at the low end of the wage scale.

progress was made

Limited
product market
recommendations. The government introduced a number of measures to simplify
regulations on public procurement. However, no new measures were taken to increase
competition in air transport and pharmaceuticals.

implementing

the 2001

in

Sweden made some progress on the implementation of the 2001 capital market
recommendations. Bankruptcy legislation was improved to encourage reconstruction
of failing companies and proposals to further reduce corporate taxation aim at
stimulating growth and investments.

3.15.

United Kingdom

While the economy decelerated in 2001, in association with the global slowdown,
growth remained respectable above 2% - supported by strong household expenditure.
Unemployment fell to around 5% by the end of the year. HICP inflation, at 1.0% in
December, was close to the lowest in the EU.

Altogether, the United Kingdom made some progress in implementing the budgetary
recommendations of the 2001 BEPGs. The government finances revealed a surplus of
around 1% of GDP in 2001 and the recommendations concerning the government
balance relating to financial years 2001-02 appear to have been fulfilled. While
government investment is growing strongly, as recommended, a 1% of GDP deficit

44

emerges in 2002/3 and persists in the medium term in the latest Convergence
Programme, also as a result of the use of a very cautious trend growth assumption.

Good progress was made in implementing the 2001 labour market recommendations.
The UK Government continued its efforts to tackle concentrated and long-term
unemployment and inactivity through its range of active labour market measures,
which have been reinforced in some respects, though it remains to be seen whether the
overall strategy is sufficient. A reform of the delivery of sickness and disability
benefits is in progress.

Some progress was made in implementing the 2001 product market recommendations.
The UK Government has taken or is considering several measures to raise productivity
such as promoting competition in certain sectors of the economy including retail
banking, car retailing and postal services. However, events over the last year have
caused the UK Government difficulties in implementing its 10-year plan for transport
in the railways sector.

Some progress was made in implementing the 2001 capital market recommendations
as the UK Government has already taken on board or is actively considering the
recommendations of the Myners Review on institutional investment.

45