Commission recommendation for the 2002 Broad Guidelines of the Economic Policies of the Member States and the Community drawn up in conformity with Article 99(2) of the Treaty establishing the European Community
Date: 2002-04-24
Institutions: European Commission
Subjects: EU Member State, European Union, action programme, economic planning, economic policy

COMMISSION OF THE EUROPEAN COMMUNITIES

Brussels, 24.4.2002
COM(2002) 191 final

COMMISSION RECOMMENDATION

for the 2002 Broad Guidelines of the Economic Policies
of the Member States and the Community

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

COMMISSION RECOMMENDATION

for the 2002 Broad Guidelines of the Economic Policies
of the Member States and the Community

2

COMMISSION RECOMMENDATION

for the 2002 Broad Guidelines of the Economic Policies

of the Member States and the Community

TABLE OF CONTENTS

I.

1.

2.

3.

GENERAL ECONOMIC POLICY GUIDELINES ................................................................. 4

Introduction...............................................................................................................................4

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

Economic recovery is taking off.....................................................................................4
2.1
2.2 Key challenges ahead .....................................................................................................5

Policy recommendations.........................................................................................................10

Ensure growth and stability-oriented macroeconomic policies....................................10
3.1
Improve the quality and sustainability of public finances ............................................13
3.2
3.3
Invigorate labour markets.............................................................................................14
3.4 Re-ignite structural reform in product markets ............................................................17
Promote the efficiency and integration of the EU financial services market ...............19
3.5
Encourage entrepreneurship. ........................................................................................20
3.6
Foster the knowledge-based economy..........................................................................21
3.7
Enhance environmental sustainability ..........................................................................22
3.8

II.

COUNTRY-SPECIFIC ECONOMIC POLICY GUIDELINES............................................... 25

1.

2.

3.

4.

5.

6.

7.

8.

9.

10.

11.

12.

13.

14.

15.

Belgium...................................................................................................................................25

Denmark .................................................................................................................................28

Germany .................................................................................................................................31

Greece .....................................................................................................................................34

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

France .....................................................................................................................................40

Ireland .....................................................................................................................................43

Italy .........................................................................................................................................45

Luxembourg............................................................................................................................49

Netherlands .............................................................................................................................51

Austria ....................................................................................................................................54

Portugal...................................................................................................................................57

Finland ....................................................................................................................................60

Sweden....................................................................................................................................63

United Kingdom .....................................................................................................................65

3

I.

1.

2.

2.1

GENERAL ECONOMIC POLICY GUIDELINES

INTRODUCTION

The EU has a well-defined economic policy strategy that is oriented towards the pursuit of
growth and stability-oriented macroeconomic policies, capable of adequately responding to
changing  economic  circumstances  in  the  short  run,  and  towards  improving  the  long-term
capacity  for  sustainable,  job-creating  and  non-inflationary  growth.  The  2002  Broad
Economic  Policy  Guidelines  (BEPGs)  adapt  and  update  this  strategy  in  the  light  of  the
political  orientations  of  the  Barcelona  European  Council  (15-16  March  2002),  also  taking
into  account  the  development  of  the  sustainable  development  strategy.  They  have  been
drawn  up  against  the  background  of  the  examination  of  the  implementation  of  the  2001
BEPGs  and  the  assessment  of  the  economic  situation  and  outlook  as  presented  in  the
Commission's Spring 2002 Economic Forecasts.

Section 2  sketches  the  economic  background  to  these  guidelines  and  identifies  the  key
economic  policy  challenges.  Section 3  then  describes  the  general  policy  recommendations
that  are  applicable  to  all  Member  States  and  the  Community.  Within  the  overall  strategy,
policy  priorities  differ  somewhat  across  Member  States  due  to  differences  in  economic
performance,  prospects,  structures  and  institutions.  Taking  due  account  of  them,  Part II
presents the country-specific economic policy guidelines.

In line with the Barcelona European Council’s call to  streamline relevant  processes  and  to
focus on implementation rather than on the annual elaboration of guidelines, the format and
frequency  of  the  BEPGs  may  change  as  from  2003.  Against  this  background,  the  2002
BEPGs opt for continuity with the previous year's edition.

MAIN PRIORITIES AND POLICY REQUIREMENTS

Economic recovery is taking off

The sharp and unexpected slowdown in economic activity that marked 2001 has shown that
the  EU  economy  still  lacks  resilience.  Macroeconomic  policies  were  put  to  the  test  and
employment growth decelerated.

However, there are now increasing signs that the economy is in the first stages of a recovery.
Some  leading  indicators  signal  that  the  economic  situation  is  stabilising.  The  swift  and
decisive  response  of  economic  policy,  sound  fundamentals,  a  restoration  of  confidence,
allied with the unwinding of the impact of a series of adverse economic shocks, provide the
platform for recovery. The smooth introduction of the euro in 1999 and the notes and coins
in  2002  brings  a  welcome  note  of  stability  and  confidence.  Notwithstanding  persisting
downside risks and uncertainty, expectations are that the EU economy is at the brink of an
economic  recovery.  It  would  gather  strength  to  reach  a  growth  rate  close  to  or  above
potential in the second half of 2002 and into 2003, i.e. at the time when the recommendations
in these guidelines are to be implemented.

4

As labour market developments reflect the economic situation with a lag, employment and
unemployment  trends  are  unlikely  to  improve  visibly  before  2003.  It  is  expected  that
inflationary  pressures  remain  contained  over  the  medium  term  and  that,  in  the  course  of
2002, HICP inflation will stabilise at levels below 2%.

Contribution to real GDP growth
in the euro area

%

Domestic demand
(incl. stocks)

Real GDP growth

Net exports

2.0

1.5

1.0

0.5

0.0

-0.5

-1.0

 Employment trends
 in the euro area

%

%

12

11

10

9

8

7

Employment growth 
(rhs)

Unemployment 
rate (lhs)

2.5

2.0

1.5

1.0

0.5

0.0

-0.5

-1.0

-1.5

-2.0

Q1-97

Q1-98

Q1-99

Q1-00

Q1-01

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Source:  Commission services.

Source:  Commission services.

2.2

Key challenges ahead

The main challenge for economic policy in the EU is to improve the well-being of its current
and  future  citizens.  To  this  end,  policies  should  be  geared  at  achieving  a  balanced  and
sustainable expansion of economic activity. The Lisbon European Council has reflected this
main  challenge  in  the  overarching  objective  of  making  Europe  the  most  competitive  and
dynamic  knowledge-based  economy  by  the  year  2010,  capable  of  sustainable  growth  with
more and better jobs and greater social cohesion. These goals can only be brought about by
balanced efforts on both the economic and social fronts.

Sound fundamentals and  the  absence  of  major  economic imbalances  put the  economy  in  a
good  starting  position.  Progress  in  structural  reforms  to  date  has  contributed  to  the  strong
economic  performance  and  job  creation  over  recent  years.  The  challenge  is  now  to  build
upon these achievements and to further strengthen the basis for future growth. The imminent
enlargement makes it all the more urgent for the EU to be sufficiently dynamic and flexible
both to offer an economic model and to rise smoothly to the inherent challenges.

Despite the progress already made, the rate of potential growth remains moderate, limiting
the economy’s leeway for a full-blown recovery before capacity constraints result in upward
price pressures. Moreover, in the long run, when labour supply will get tighter as the effect
of ageing populations sets in at full force, the potential growth rate would tend to decline in
the  absence  of  measures  to  accelerate  productivity  and  enhance  labour  force  participation
and employment.

5

The  pace  of  economic  reform  needs  to  be  stepped  up  to  attain  an  outstanding  economic
performance  and  to  meet  the  challenges  set  by  the  Lisbon  agenda  so  as  to  regain  the
conditions  for  full  employment.  Action  would  have  to  concentrate  on  four  areas:
i) safeguarding  and  further  strengthening  the  macro-economic  framework;  ii) promoting
more  and  better  jobs,  raising  labour  force  participation  and  addressing  persistent
unemployment; iii) strengthening conditions for high productivity growth; and iv) promoting
sustainable development in the interest of current and future generations.

i. –- Safeguarding and further strengthening the macroeconomic framework

Safeguarding  and  further  strengthening  the  macroeconomic  framework  enables  an
appropriate policy stance in all economic circumstances, thereby providing an environment
in which macroeconomic stability is ensured, economic cycles are smoothened and internal
dynamism  and  resilience  are  reinforced  by  a  culture  of  entrepreneurship  and  innovation.
Such  an  environment  underpins  medium-term  growth  and  increases  in  prosperity,  as  the
economy can benefit fully from progress with economic reforms.

The recent economic downturn has put macroeconomic policies to the test and has rekindled
debate about the appropriate policy reaction. It serves to underline the importance of a clear
policy framework and of a quick transition to the medium-term budgetary positions agreed in
the context of the Stability and Growth Pact (SGP).

Clarifying the macroeconomic policy framework

By  maintaining  price  stability,  monetary  policy  plays  an  important  role  both  in  stabilising
output around its trend rate and in creating an environment conducive to strengthening the
economy's supply side and potential growth. The commitment to price stability has fostered
a  culture  of  stability,  reducing  uncertainty  and  promoting  wage  moderation,  thereby
providing a necessary basis for an investment-friendly environment. The very stable inflation
expectations of below 2% bear witness to this.

A sound budgetary policy is the second pillar of the macroeconomic framework. Given the
numerous  drawbacks  of  fiscal  fine-tuning  to  stabilise  output,  the  norm  for  budgetary
behaviour should be to let automatic stabilisers operate freely, thereby avoiding pro-cyclical
policy.  Besides  providing  leeway  for  the  free  and  symmetric  play  of  automatic  stabilisers,
medium-term  budgetary  positions  in  balance  or  in  surplus  allow  for  a  steady  decline  in
government  debt  and  interest  payments  and  thereby  enhance  the  capacity  to  deal  with
budgetary challenges, inter alia those stemming from ageing populations. This basic policy
philosophy  is  anchored  in  the  SGP,  which  will  facilitate  the  task  of  monetary  policy  to
maintain price stability and enlarge its scope for being accommodative.

The  growing  interdependence  of the euro-area  economies  calls  for  a  regular  review  of  the
methods and procedures for co-ordinating macroeconomic policies and for the reinforcement
of such co-ordination. Defining general principles that guide economic policy decisions and
market  expectations  would  improve  the  credibility  and  the  transparency  of  the  economic
policy framework of the euro area.

6

Completing the transition to sound public finances

The full benefits of EMU and of the budgetary policy co-ordination arrangements covered by
the  SGP  will  only  be  realised  when  the  transition  phase  to  accomplishing  medium  term
budgetary positions close to balance or in surplus will be completed. Until then, in adverse
economic conditions, a trade-off will continue to exist between, on the one hand, budgetary
consolidation  to  prevent  breaching  the  3%  reference  value  or  to  attain  the  medium-term
positions and, on the other hand, stabilisation of output fluctuations through the free play of
automatic  stabilisers.  Therefore,  efforts  need  to  be  stepped  up  to  complete  the  transition
phase towards budgetary positions in close to balance or surplus  as  soon  as possible in  all
Member  States  and  at  the  latest  by  2004.  Beyond  providing  scope  for  the  free  play  of
automatic  stabilisers,  budgetary  policies  should  be  oriented  by  the  need  to  improve  the
quality and the sustainability of public finances. The limited window of opportunity before
the effects of ageing come to be felt more forcefully should be used to achieve sound public
finance positions.

ii.  –-  Promoting  more  and  better  jobs,  raising  labour  force  participation  and
addressing persistent unemployment

Analysing EU employment growth in a medium-term perspective, the performance has been
strong.  Besides  favourable  macroeconomic  conditions,  the  vigorous job  creation  witnessed
since 1997 also reflects the labour market reforms undertaken by Member States, inter alia
in  the  context  of  the  European  Employment  Strategy  and  the  Broad  Economic  Policy
Guidelines.  These  include  measures  to  lower  the  cost  of  labour  and/or  to  improve  the
adaptability  of  the  workforce,  sustained  wage  moderation,  improved  real  wage  flexibility,
and  cuts  in  social  security  contributions  and  taxes.  Labour  markets  have  also  tended  to
become  more  flexible,  witness  the  large  contribution  of  the  development  of  part-time  and
temporary employment to overall job creation.

Despite this  impressive  performance  in the second  half  of  the  1990s,  human  resources  are
still under-utilised in the European Union and structural problems remain. Unemployment -
and in particular long-term unemployment - is still high in a number of Member States and
the expected cyclical increase in unemployment in 2002 must be prevented from becoming
structural in nature. Unemployment is often concentrated in the more deprived regions and
among the more vulnerable groups of workers. Nevertheless, in a number of Member States,
high  unemployment  coincides  with  a  substantial  number  of  vacancies,  and  labour  market
conditions  often  vary  considerably  across  regions,  which  points  to  a  mismatch  between
labour  supply  and  demand,  due  partly  to  obstacles  to  geographical  and  occupational
mobility, as well as a lack of differentiation in wage developments.

Moreover,  labour  force  participation  rates,  especially  for  older  workers  and  women,  are
unsatisfactory and significant efforts are needed to raise employment rates to the Lisbon and
Stockholm targets and to prepare for the consequences of ageing populations. Realising the
Lisbon  targets  implies  an  increase  of  about  15  million  jobs  in  the  EU  between  2002  and
2010. To prepare for the impact of ageing, the Barcelona European Council has called for an
increase of the effective average retirement age in the EU by about 5 years by 2010.

7

Forceful  continuation  of  the  policy  action  addressed  at  reducing  unemployment  and  a
comprehensive strategy for increasing participation rates is therefore necessary, as endorsed
by the Barcelona European Council. This includes action to strengthen incentives for people
to take up work, to enable people to participate in the labour market (e.g. by increasing care
facilities for children and other dependants, promoting flexible work organisation, including
through  part-time  formula's,  education  and  training),  to  improve  information  about  job
opportunities,  to  accompany  the  return  of  long-term  unemployed  through  active  labour
market  policies,  and  to  enhance  conditions  under  which  enterprises  can  gainfully  employ
more labour. Promoting human capital formation in order to provide higher skills, adaptable
over the worker's whole life cycle, thereby contributing to better quality in work, can in this
context act as a catalyst.

iii. –- Strengthening conditions for high productivity growth

In the long run, the development of the standard of living is broadly determined by the rate
of  productivity  growth.  Maintenance  of  high  standards  of  living  in  the  longer  run,  as  the
share of the working age population starts to decline as the result of ageing, will increasingly
depend  upon  productivity  increases.  Labour  productivity  growth  in  the  Union  is  relatively
low and has actually slowed by ½ percentage point on average between the first and second
half  of  the  1990s,  essentially  as  a  result  of  job-richer  growth  on  the  back  of  structural
reforms.  At  the  cycle’s  peak  in  2000,  the  rate  was  back  at  the  average  of  the  early  1990s
reaching 1.5%. These rates do not yet allow for sustainable GDP growth rates of 3% that are
deemed necessary to fulfil the Lisbon agenda.

Developments in productivity are the result of many different factors, but depend largely on
investment  performance,  which  determines  the  structure  and  size  of  the  capital  stock  and
enables  the  penetration  of  new  technologies  in  the  economy.  A  higher  rate  of  investment
growth  raises  the  capital  available  per  worker  and  thereby  –  ceteris  paribus  –  labour
productivity.  There  is  both  a  need  and  scope  to  improve  the  investment  environment.  The
acquired  macro-economic  stability  provides  a  solid  basis  for  enhancing  the  investment
environment. A high rate of innovation in a context of strong  investment  growth increases
also the quality of the capital stock. Investment and innovation are likely to benefit from a
more  competitive  and  entrepreneurial  environment,  fostered  by  structural  reforms  on
product, capital and labour markets that improve market functioning and thus the transfer of
resources  from  low-productivity  to  higher  productivity  use.  Equally  important  are  an
adequate  regulatory  environment,  efficient  public  services,  a  satisfactory  provision  of
network  infrastructure  and  increased  investment  in  research,  education  and  training  to
enhance skills and the adaptability of the workforce.

Despite  encouraging  progress  so far,  large  segments  of  European  product  markets  are  still
insufficiently  integrated  to  make  the  Union  an  attractive  location  for  investment.  Further
reforms  are  needed  to  integrate  energy  and  communication  networks  across  Europe.  To
facilitate the cross-border provision of services, especially in the distribution sector, and an
increased mobility of both skilled and unskilled workers, increased co-ordination of national
and  Community  policies  is  required.  In  financial  services  and  capital  markets,  EMU  has
already created new opportunities for efficiency gains. Nevertheless, there is still a long and
unfinished agenda to be completed that is set out in various parts of these guidelines.

8

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

 Components of economic growth in 
the euro area

USA

Annual percentage change

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

110

100

90

80

70

60

50

40

L

B

F

IRL

EU-15

D

I

E

EL

NL

S

UK

FIN

A

JAP

P

DK

 EU target 2005

 EU target 2010

50

55

60

65

70

75

80

Employment rate as % of working age population

Source:  Commission services. * Productivity is GDP per person employed.
 Note:  Employment rate data are based on the number of jobs held by individuals irrespective of 
whether they are full-time or part-time.

Employment growth in hours worked

Growth in labour productivity per hours worked

5.0

4.5

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

1996

1997

1998

1999

2000

Source:  Commission services.

iv. –Promoting sustainable development in the interest of current and future generations

Taking  account  of  the  needs  of  current  and  future  generations,  including  environmental
sustainability and social and regional cohesion, will ensure that policy measures that aim to
boost prosperity will contribute fully to increasing the well-being of its citizens. Economic
policies  can  make  a  significant  contribution  towards  this  goal,  but  its  achievement  would
typically  require  substantial  policy  actions  in  a  number  of  areas,  which  would  tend  to  go
beyond  economic  policy  considerations  only.  Nevertheless,  by  taking  environmental  and
social  constraints  and  concerns  into  account,  economic  policy  makers  can  optimise  their
policies.

For instance, economic policies can make a major contribution to enhancing environmental
sustainability  by  making  sure  that  the  external  effects  of  economic  activities  on  the
environment  are  fully  priced  in.  Likewise,  economic  policies  can  make  an  important
contribution to the adequate preparation for the challenges posed by ageing societies notably
where labour market participation and its financial consequences are concerned. The aim is
to ensure the positive interaction of economic and social policies with a view to supporting a
long-term  sustainable  working  life  while  making  optimal  use  of  the  human  resource
potential.

Finally, economic policies can contribute to social and economic cohesion in various ways.
A  good  economic  performance  underpins  job  creation  and  jobs  are  the  best  protection
against  poverty  and  social  exclusion.  A  modern  and  active  welfare  state  that  encourages
people to work would also be important in this respect. A sound macro-economic framework
as well as efficient product, capital and labour  markets  are  important  determinants  of  both
national and regional catching-up. Economic policies can be improved in some policy areas
by better taking account of specific regional conditions. Facilitating regional labour market
adjustment by encouraging the wage formation process to better reflect differences in local
conditions and by reducing disincentives to geographic labour mobility is an important step

9

 
 
 
and should be further pursued. Furthermore, raising the effectiveness of public spending with
regional  incidence  by  improving  public  systems  for  allocation  and  delivery  should  also  be
given further consideration.

3.

3.1

POLICY RECOMMENDATIONS

Ensure growth and stability-oriented macroeconomic policies

Macro-economic  policy  plays  a  key  role  in  sustaining  growth  and  employment  and  in
preserving price stability. Over the short term, it should aim at the continuation of a well-
balanced economic expansion and the full realisation of current growth potential. Over the
medium  term,  it  should  contribute  to  the  establishment  of  the  framework  conditions  that
promote adequate levels of saving and investment to  position  the  economy  on  a  sustained,
higher, non-inflationary, growth and employment path.

In the euro area, following the precipitous decline in economic activity in 2001, growth is
expected  to  recover  and  reach  rates  close  to  or  above  potential  in  the  second  half  of  the
year, whilst inflation should decline. An appropriate and tension-free macroeconomic policy
approach consists of the following elements.

The primary objective of the single monetary policy is to maintain price stability in the euro
area.  Without  prejudice  to  this  objective,  it  supports  the  general  economic  policies  in  the
Community.

Member  States  should  achieve  and  preserve  a  sound  budgetary  position  as  agreed  in  the
context of the Stability and Growth Pact. To put public finances on a durably sound footing,
all Member States need to ensure that cyclically-adjusted budgetary positions move towards,
or remain in, balance or surplus in the coming years. Sustaining sound budgetary positions
implies that tax reforms need to be properly financed, and matched with reductions in public
expenditures  where  appropriate.  Sound  and  sustainable  public  finances  contribute  to  low
interest rates and to the crowding-in of  private investment.  It  creates  room  for  manoeuvre
for  cyclical  stabilisation,  to  cope  with  unexpected  budgetary  developments  and  puts
government  debt  on  a  more  rapidly  descending  trajectory  with  a  view  to  prepare  for  the
budgetary  challenges  associated  with  population  ageing.  Finally,  by  increasing  the
credibility  of  the  budgetary  framework  of  EMU,  they  contribute  to  a  strengthening  of
investors' confidence.

As a general principle, it is important that budgetary policies be guided by the need to avoid
pro-cyclical  stances,  which  can  exacerbate  swings  in  economic  activity, 
to
unsustainable structural balances and undermine the price-stability orientation of the single
monetary  policy.  The  norm  for  budgetary  policies  should  therefore  be  to  allow  for  the
symmetric play of automatic stabilisers over the economic cycle, subject to the respect of the
3% of GDP excessive deficit limit. During upturns, Member States should allow automatic
stabilisers to operate in full thus implying improved budget balances.

lead 

10

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

2000 2)

Date1)

20012)
2002
Stability programmes

2003

2004

2005

B
D
EL
E
F
IRL
I
L
NL
A
P
FIN
Euro area

DK
S
UK4)
EU-15

0.1
1.2(-1.3)
-1.1
-0.3
-1.4
4.5
(-1.5)
6.2
2.2(1.5)
-1.1
-1.5
6.9
-0.8

2.5
4.1
2.0
-0.1

12/-01
12/-01
12/-01
12/-01

12/-01
12/-01
11/-01
11/-01
10/-01
11/-01
12/-01
11/-01

01/-02
11/-01
12/-00

0.0

-2½

0.1

0.0
-1.4
1.4
-1.1
4.1
0.7
0.0

-2.2
4.7
-1.1

0.0
-2
0.8
0.0
-1.4
0.7
-0.5
2.8
0.4
0.0
-1.8
2.6
-0.9

Convergence programmes

1.9
4.6
-0.2
-0.8

1.9
2.1
-1.1
-0.9

0.5
-1
1.0
0.0
-1.3/-1.0
-0.5
0.0
3.1
0.2
0.0
-1.0
2.1
-0.5

2.1
2.2
-1.3
-0.6

0.6
-0
1.2
0.1
-0.5/0.03)
-0.6
0.0
3.4
0.5
0.2
0.0
2.6
0.0

2.1
2.3
-1.1
-0.1

0.7
-0

0.2
0.0/0.3

0.2

0.5
0.4

0.1

2.1

 -1.05)
-0.1

1) Dates of adoption by Member States government of updated stability or convergence programme. 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  in  a  more  prudent  growth  scenario.  4)  Financial  years.
5) Government deficit of 1.0% of GDP also projected for 2006-07.

Source: Member States' stability and convergence programme updates and Commission services.

Based  on  the  latest  2001/02  updates  of  the  stability  programmes,  following  a  slight
deterioration  in  2001,  the  aggregate  euro-area  budgetary  position  is  set  to  improve
gradually to a balanced position in 2004, one year later than foreseen in last year’s BEPGs
due to diminished growth conditions.

In general, euro-area Member States should:

i.

ii.

orient and implement their budgetary policies so as to achieve or maintain budgetary
positions  of  close  to  balance  or  in  surplus  over  the  economic  cycle;  if  budgetary
positions of close to balance or in surplus are not yet achieved, take all the necessary
action  -  in  the  context  of  the  implementation  of  the  budgets  for  2002  and  the
preparation  of  budgets  for  2003  -  to  ensure  that  such  medium-term  objectives  are
respected by 2004 at the latest;

ensure  that  tax  reforms  are  financed  appropriately  in  order  to  safeguard  the
commitment  to  sound  public  finances;  avoid  pro-cyclical  fiscal  policies  thus
contributing  to  an  appropriate  macroeconomic  policy  mix  at  the  national  and  euro-

11

area level; allow automatic stabilisers to operate in full as the recovery gets underway;
ensure a rigorous execution of their budgets so as to prevent slippage from the stability
programme targets; and

iii.

further strengthen public finances with a view to secure their long-term sustainability
by making use of the limited window of opportunity prior to the demographic changes
taking hold.

Regarding the non-euro-area Member States, monetary policy in Denmark is guided by the
fixed-exchange  rate  policy  toward  the  euro  in  the  framework  of  ERM2,  which  is  seen  as
instrumental to achieve price stability. In Sweden and the United Kingdom monetary policies
aim  at  price  stability  through  targeting  inflation.  Their  successful  achievement  will  help
create the conditions for exchange rate stability.

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

i.

ii.

orient and implement their budgetary policies so as to maintain budgetary positions of
close to balance or in surplus over the economic cycle;

ensure  that  tax  reforms  are  financed  appropriately  in  order  to  safeguard  the
commitment  to  sound  public  finances;  avoid  pro-cyclical  fiscal  policies  thus
contributing to an appropriate macroeconomic policy mix at the national level; allow
automatic  stabilisers  to  operate  in  full  as  the  recovery  gets  underway;  ensure  a
rigorous  execution  of  their  budgets  so  as  to  prevent  slippage  from  the  convergence
programme targets; and

iii.

further strengthen public finances with a view to secure their long-term sustainability
by making use of the limited window of opportunity prior to the demographic changes
taking hold.

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

i.

ii.

iii.

the increase in nominal wages be consistent with price stability;

the  increase  in  real  wages  not  exceed  growth  of  labour  productivity  taking  into
account  the  need  to  strengthen,  where  necessary,  and  subsequently  maintain,  the
profitability of capacity-enhancing and employment-creating investment; and

national  labour  institutions  and  collective  bargaining  systems,  respecting  the
autonomy  of  social  partners,  take  into  account  the  relationship  between  wage
developments and labour market conditions, thereby allowing an evolution of wages
according to productivity developments and skills differentials, in order to guarantee

12

the EU's competitiveness and to improve employment across skills and geographical
areas.

3.2

Improve the quality and sustainability of public finances

To  maximize  the  contribution  of  public  finances  to  growth  and  employment  and  the
achievement  of  the  objectives  agreed  in  Lisbon  and  Stockholm,  all  Member  States  must
achieve and sustain sound budgetary positions. This is especially important in countries that
have yet to achieve budget positions that are “close to balance or in surplus” as required by
the  Stability  and  Growth  Pact.  An  appropriate  balance  and  sequencing  have  to  be  drawn
between  running  down  public  debt,  cutting  taxes  and  continuing  to  financing  public
investment in key areas. Countries with a high level of public debt and/or that have not yet
reached  the  medium-term  budgetary  target  of  the  Pact  should  give  priority  to  budgetary
consolidation: this will ensure that  there is sufficient room  for the  automatic  stabilisers  to
operate  in  the  event  of  an  economic  downturn  and  will  help  countries  prepare  for  the
additional  budgetary  costs  of  ageing  populations.  The  assessment  of  the  sustainability  of
public finances on the basis of updated stability and convergence programmes confirms that
there  is  a  substantial  risk  of  budgetary  imbalances  emerging  in  the  future  due  to  ageing
populations in many Member States.

To this end Member States should:

i.

ii.

iii.

iv.

pursue efforts to make tax and benefit systems more employment friendly, including,
where appropriate, a reduction of the  overall  tax  burden, targeted reforms  of  the  tax
and  benefit  systems,  especially  with  respect  to  low-wage  labour,  within  continued
fiscal  consolidation,  and  by  improving  the  efficiency  of  tax  systems  (see  also
section 3.3);

promote the quality of public expenditure by redirecting towards physical and human
capital accumulation and research and development so as to ensure substantial annual
increase of per capita investment;

enhance  the  efficiency  of  public  spending  by  institutional  and  structural  reforms;  in
particular introduce or enhance the mechanisms that help assess and control spending,
including budgetary procedures;

improve the long-term sustainability of public finances by pursuing a comprehensive
three-pronged  strategy  agreed  by  the  Stockholm  European  Council.  This  involves  a
suitable  combination  of  measures  to  run  down  public  debt  at  a  fast  pace,  raise
employment rates (especially amongst women and older workers), and reform pension
and  care  systems  with  a  view  of  placing  them  on  a  sound  financial  footing.  Public
pension reserve funds could also contribute to improving the sustainability of public
finances, provided they receive regular and substantial contributions. Strengthen their
capacity  to  evaluate  the  long-term  sustainability  of  public  finances  and  factor  these
analyses  into  medium-term  budgetary  planning  processes.  This  will  help  reinforce
examination  in  the  context  of  multilateral  surveillance  as  asked  by  the  Barcelona
European Council;

13

v.

reform pension policies towards the broad  common  goals  agreed by  the  Gothenburg
and  Laeken  Councils  so  as  to  safeguard  the  adequacy  of  pensions,  maintain  the
financial  sustainability,  and  meet  changing  societal  needs;  develop  a  comprehensive
strategy  that  takes  due  account  of  the  balance  between  these  broad  objectives  and
challenges faced by individual countries; in particular introduce measures that aim at
increasing  the  effective  retirement  age  (by  restricting  access  to  early  retirement
programmes, by removing unwarranted financial biases in tax and pension systems for
older workers to leave the labour force early, and by allowing more flexible formulas
regarding  the  retirement  age),  making  the  pension  systems  cope  better  with
demographic  risks  and  expected  increases  in  life  expectancy,  making  the  pension
systems transparent regarding contributions and benefits and moving towards a greater
reliance on actuarial fairness and funding, so as to  achieve  a  better  balance  between
the different pillars within the pension systems in those Member States which have not
yet achieved that,; and

vi.

pursue tax co-ordination further so as to avoid harmful tax competition and implement
effectively the Council agreement of November 2000 on the tax package with a view
to meeting the December 2002 deadline for agreement.

3.3

Invigorate labour markets

Despite  the  impact  of  the  cyclical  slowdown,  the  labour  market  situation  continued  to
improve in 2001, even though the very positive developments of the preceding year could not
be repeated. The average unemployment rate of 7.6% was 0.5 percentage points below the
2000 average (see chart on unemployment rate). Progress towards the employment goals set
by the Lisbon and Stockholm European Councils  continued in  2001,  although  it  was  more
moderate  than  the  year  before.  The  overall  employment  rate  now  stands  at  64%,  the
employment  rate  of  women  at  55%  and  that  for  older  workers  (aged  55-64)  at  38%  (see
charts on overall, female and older workers employment rates).

Progress achieved over previous years with structural reforms of labour markets, also in the
context  of  the  European  Employment  Strategy,  has  become  visible  in  more  employment-
intensive  growth.  Sustained  wage  moderation  has  allowed  employment  to  increase
significantly and unemployment to fall without resulting in a boost to inflation; a greater use
of  temporary  and  part-time  contracts  has  contributed  to  making  labour  markets  more
flexible and inclusive; tax reductions targeted to the low end of the wage distribution have
improved incentives to take up a job; and Member States have started to move  away from
passive  towards  active  labour  market  measures.  Unfortunately,  the  pace  of  labour  market
reforms seems to have slowed down in 2001.

14

Total and female employment rates

DK

S

NL

UK

FIN

EU Target, 2010

EU Target, 2005

IRL
EU 15

F

L

B

P

A

D

EL

E

I

*

1
0
0
2

,

4
6
-
5
1

s
e
g
a

,

e
t
a
r

t
n
e
m
y
o
p
m
e

l

l

a
t
o
T

80

75

70

65

60

55

50

45

40

.

30

35

40

45

50

55

60

65

70

75

80

Female employment rate, ages 15-64, 2001 *

* Data for D, F and L are for 2000. D is estimated. 
held by individuals irrespective of whether they are full-time or part time.
Source: Commission services.

Note:

Employment rate data are based on the number of jobs 

Employment rate of older workers
in 2001* (%)

Long-term unemployment rate 
in 2001* (%)

S

DK

UK

P

IRL

FIN

NL

E

EU15

EL

D

F

A

I

L

B

L

NL

DK

A

S

IRL

UK

P

FIN

EU15

B

F

D

E

EL

I

EU target 
2010

0

10

20

30

40

50

60

70

0

1

2

3

4

5

6

7

* Data for D, F and L are for 2000. D is estimated.

* Data for D, F and L are for 2000. D is estimated.

However, important challenges remain that need to be addressed through further reforms. In
line with the discussion in Section 2.2. ii, the challenges include:

–  promoting more and better jobs;

–  increasing participation rates further, especially for women and older workers, in order
to  meet  the  Lisbon-Stockholm  targets  for  employment  and  to  prepare  for  the
consequences of ageing populations;

–  reducing high unemployment rates;

–  reducing  the  mismatch  between  demand  for  and  supply  of  labour  across  regions  and

occupations.

These challenges should also be seen in conjunction with other challenges directly relevant
for  the  labour  market,  such  as  wage  formation  and  education  and  training,  taken  up  in
sections  3.1  and  3.7,  respectively.  On  18  February  2002,  the  Council  adopted  detailed
guidelines  for  employment  policies  for  the  year  2002,  consistent  with  the  priorities  in  the
2001 Broad Economic Policy Guidelines, as well as Member State specific recommendations
therein. In pursuing labour market reforms, Member States should vigorously implement the
Employment Guidelines and the recommendations addressed to them.

15

 
 
 
 
 
 
Member States should, in particular, take the following measures:

i.

ii.

iii.

iv.

v.

vi.

adapt  tax  and benefit  systems  to  make  work  pay  and  encourage  the  search  for  jobs.
Reduce  high  marginal  effective  tax  rates,  in  particular  for  low  wage  earners,  and
remove unemployment traps. Address incentive effects of benefit schemes, including
conditionality  of  benefits,  eligibility,  duration,  the  replacement  rate,  as  well  as
availability of in-work benefits and the use of tax credits, in order to make the systems
more  employment  friendly; 
in  addition,  review  administrative  systems  and
management rigour. Reduce incentives for early retirement. Step up efforts to increase
opportunities for older workers to remain in the labour market, in order to increase by
about  five  years  the  effective  average  retirement  age  in  the  EU  by  2010,  thereby
increasing their labour market participation;

strengthen active labour market policies, by improving their efficiency both regarding
the use of resources and their effectiveness in terms of increasing regular employment.
This implies, inter  alia,  better targeting  them  to those  individuals  most  prone  to  the
risk of long-term unemployment, on those measures that have proven most successful
and to meet the demands of the labour market;

bring down obstacles to mobility within and between Member States. Along the lines
of  the  Action  Plan  Skills  and  Mobility,  foster  the  recognition  of  qualifications,
facilitate the transferability of social security and pension rights, improve information
and transparency on job opportunities and ensure that tax and benefit systems, as well
as housing markets, do not inhibit mobility;

facilitate  occupational  mobility  by  improving  lifelong  learning,  in  dialogue  with  the
social partners, thereby also contributing to better job quality and higher productivity;

promote,  in  dialogue  with  the  social  partners,  more  flexible  work  organisation  and
review employment contract regulations and related costs, with the aim of promoting
more jobs and striking a proper balance between flexibility and security. Ensure that
any reductions in overall working time do  not lead  to increases  in unit  labour  costs,
and that the future labour supply needs are taken fully into account; and

remove  existing  barriers  to  female  labour  market  activity.  Increase  the  provision  of
care  facilities  for  children  and  other  dependants,  inter  alia  in  order  to  reach  the
childcare targets agreed at the Barcelona European Council (i.e. to provide childcare
by 2010 to at least 90% of children between 3 years old and the mandatory school age
and at least 33% of children under 3 years of age). Address the underlying factors that
lead to a gender pay gap.

16

3.4

Re-ignite structural reform in product markets

Progress  in  implementing  the  economic  reform  agenda  of  the  Lisbon  strategy  has  been
mixed.  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.  Similarly,  positive  effects  are
expected from the increased access to rail freight networks. However, prospects for further
price  declines  are  likely  to  be  affected  by  physical  bottlenecks,  inadequate  regulatory
structures, slow market opening, and the high market shares of incumbents in these sectors.
This illustrates that to create a fully integrated and efficient Internal Market, further reforms
on product (goods and services) markets are needed, particularly in areas where progress
has  been  too  slow.  In  spite  of  the  fact  that  EU  goods  markets  are  becoming  increasingly
integrated,  differences  in  standards  and  regulations  continue  to  hinder  cross-border
activities.  Moreover,  the  creation  of  an  Internal  Market  for  services  has  advanced  only
slowly. In light of the above, Member States should:

i.

fully implement the Internal Market:

– 

– 

– 

– 

step up efforts to increase the transposition rate of Internal Market directives to
98.5%,  achieve  full  transposition  by  the  Spring  European  Council  in  2003  of
directives  whose  implementation  is  more  than  two  years  overdue,  and  ensure
the correct implementation of Internal Market legislation;

pursue more vigorously the elimination of remaining technical barriers to trade
by  speeding  up  the  development  of  new  product  standards  and  improving  the
application of the mutual recognition principle by national administrations;

create an effectively functioning Internal Market in services by the removal of
barriers to cross-border trade and market entry; and

further open up and render more transparent public procurement markets, inter
alia,  by  bringing  it  online  by  2003  and  by  adopting  the  public  procurement
legislative package as early as possible in 2002.

17

Internal Market directives - Transposition rate

Target March 2002

EU average March 2002

100%

99%

98%

97%

96%

95%

94%

93%

F

EL

D

P

L

IRL

A

I

B

NL

E

UK

FIN

S

DK

Source: European Commission

April 2001 March 2002

ii.

ensure effective competition, thereby delivering real benefits to consumers:

– 

– 

ensure  effective  independence,  adequate  capacity  and  effectiveness  of  the
competition  and  regulatory  authorities  and  enhance  the  coherence  of  the
application  of  competition  rules  by  the  Commission  and  the  national
competition authorities; and

continue to reduce the overall level of State aid in relation to GDP and redirect
aid toward horizontal objectives of  common  interest  and target  it  to  identified
market failures. Increase the transparency of State aid policies and assess their
effectiveness.

iii.

accelerate reforms in the network industries, while complying with universal service
obligations:

– 

– 

– 

encourage market entry and improve consumer choice in liberalised markets, in
particular  by  fully  implementing  the  new  communications  regulatory  package
by July 2003;

in  electricity  and  gas,  ensure  freedom  of  choice  of  supplier  as  of  2004  for  all
non-household consumers (amounting to at least 60% of the total market) and
establish a regulatory function. The level of electricity interconnections between
Member States should be equivalent to at least 10% of their installed production
capacity by 2005;

ensure  efficient  use  of  existing  infrastructure  and  provide  incentives  to  build
new infrastructure where necessary by taking decisions by the end of 2002 on
the  revision  of  the  guidelines  and  accompanying  financial  rules  on  trans-
European energy and transport networks; and

18

– 

in transport, take decisions by the end of 2002 on proposals concerning airport
slot allocation, port services and public services contracts; create a Single Sky
by 2004; open the trans-European rail freight network up to competition by 15
March 2003 and pursue work on the second railway package.

3.5

Promote the efficiency and integration of the EU financial services market

Financial  integration  improves  economic  performance  by  improving  resource  allocation,
fostering  greater  competition  and  reducing  the  exposure  of  the  EU  economy  to  external
shocks. While financial integration has benefited from the introduction of the euro, the EU
financial  system  remains  highly  fragmented.  Cross-border  financial  activity  is  constrained
by  a  range  of  barriers  that  reflect  the  existence  of  many  national-based  financial  systems
the  current
with  varying  characteristics.  A  notable  example  of  fragmentation 
arrangements  for  clearing  and  settlement  in  the  EU,  which  are  largely  efficient  at  the
national level but are highly inefficient in a cross-border context.

is 

The main instrument for creating an integrated EU financial system is the Financial Services
Action  Plan  (FSAP).  The  FSAP  proposes  an  extensive  set  of  measures  designed  both  to
complete the legislative framework for the single market in financial services and to ensure
that it is appropriate to markets that are constantly changing. Significant progress has been
made  in  implementing  the  FSAP,  but  sustained  efforts  are  necessary  to  ensure
implementation ahead of the 2005 deadline established by the Lisbon European Council.

The  Risk  Capital  Action  Plan  (RCAP)  is  the  blueprint  for  developing  an  integrated  and
efficient market for equity financing of young and innovative businesses. The RCAP contains
a  set  of  measures  (many  in  common  with  the  FSAP)  in  respect  of  private  equity  (venture
capital and buy out) that promote market integration, enact structural reform in areas such
as  regulation,  taxation  and  bankruptcy  law  and  foster  a  culture  of  enterprise.  The  Lisbon
European Council has set a deadline of 2003 for the implementation of the RCAP.

Integration  will  enhance  financial  stability  within  the  EU  so  long  as  institutional
arrangements for prudential supervision are adequate. In response to ongoing consolidation
within  and  across  financial  sectors,  several  Member  States  have  reformed  or  are  in  the
process  of  reforming  their  supervisory  arrangements.  The  choice  of  arrangements  varies
among Member States, which is likely to increase the need for clear procedures for cross-
border co-operation between different national supervisors.

In order to accelerate progress in financial integration, there will be a need to:

i.

step  up  efforts  by  all  relevant  parties  -  the  Council,  the  European  Parliament,  the
Commission, and the Member States - to ensure full implementation of the FSAP by
2005, and by 2003 for securities markets legislation; therefore, as highlighted by the
European  Council  in  Barcelona,  the  Council  and  the  European  Parliament  need  in
particular to adopt as early as possible in 2002 the proposed Directives on Collateral,
Market  Abuse,  Insurance  Intermediaries,  Distance  Marketing  of  Financial  Services,
Financial  conglomerates,  Prospectuses  and  Pension  Funds,  and  the  International
Accounting  Standards  Regulation;  The  Member  States  should  ensure,  as  soon  as

19

possible,  the  implementation  of  legislation  already  adopted  by  the  Council  (e.g.  the
Regulation  preventing  excessive  charges  on  cross-border  payments  in  the  retail
sector);

ii.

iii.

intensify  efforts  to  implement  the  RCAP  by  2003,  in  particular  with  regard  to
favouring a “prudent man” approach rather than limits by asset type in the regulation
of  institutional  investment,  reforming  bankruptcy  procedures  to  provide  a  better
balance  between  entrepreneurial  activity  and  investor  protection,  and  developing  a
fiscal framework more conducive to investment and entrepreneurship; and

to ensure that there are appropriate arrangements at national and Community level to
deliver efficient cross-border / cross-sector co-operation, co-ordination and exchange
of information among the various supervisory authorities.

3.6

Encourage entrepreneurship

Increased business investment is necessary to improve the productivity and raise the level of
potential  growth  of  the  European  economy.  The  creation  of  a  competitive  business
environment supported by adequate public infrastructure and a modern and efficient public
administration  is  key  to  stimulating  business  creation  and  expansion.  This  has  been
recognised by all Member States, as illustrated by the variety of measures taken to reduce
the  regulatory  burden  on  business,  to  stimulate  business  creation,  and  to  ease  access  to
finance  for  SMEs.  The  European  Charter  for  Small  Enterprises  endorsed  at  the  Feira
European  Council  (June  2000)  should  also  contribute  to  supporting  small  businesses.
Nevertheless,  differences  in  business  conditions  between  Member  States  –  in  particular  in
the  area  of  taxation  -  remain  important.  This  offers  a  wide  scope  for  learning  from  best
practice examples. Member States should:

i.

create a business-friendly environment:

– 

– 

– 

improve and simplify the corporate tax system and the regulatory environment.
Reduce  administrative  and  legal  barriers  to  entrepreneurship  to  the  barest
minimum, in particular through a reduction of the typical time and cost required
for setting up a new company;

increase the efficiency of public services, inter alia via increased use of public
tendering  and  benchmarking;  increased  participation  of  the  private  sector  and
competition  between  public  service  operators;  and  by  making  government
services available online; and

reduce barriers to cross-border economic activity associated with, among other
things,  differences  between  Member  States  in  accounting  standards,  rules  on
corporate governance, business taxation and VAT.

ii.

translate  into  action  the  commitments  made  under  the  European  Charter  for  Small
Enterprises.

20

iii.

encourage  risk-taking  through  improving  access  to  finance  especially  for  SMEs  in
their  early  stages.  Particularly  important  for  SMEs  is  the  supply  of  capital  coupled
with managerial skills (see also Section 3.5).

3.7

Foster the knowledge-based economy

In spite of recent progress, the European Union continues to lag behind the United States in
both  the  development  and  diffusion  of  new  technologies.  Moreover,  there  are  important
differences between Member States, both in terms of R&D expenditures as a percentage of
GDP  and  the  number  of  patent  applications  per  head  of  the  population.  Increased
investments  in  human  capital,  R&D  and  ICT,  by  the  private  sector  in  particular,  are
required  in  order  to  strengthen  European  competitiveness.  In  this  respect,  the  Union's
recently  approved  Galileo  satellite  radio-navigation  project  constitutes  a  major  step
forward. Businesses and citizens need to be encouraged to seize the opportunities offered by
the  knowledge-based  economy.  Education  and  training  systems  need  to  become  better
adapted to the needs of those typically disadvantaged in the labour market. This implies that
Member States should:

i.

stimulate R&D and innovation:

– 

– 

raise  overall  spending  on  R&D  with  the  aim  of  approaching  3%  of  GDP  by
2010. Two-thirds of this investment should come from the private sector. This
implies  improving  the  incentives  for  firms  to  invest  in  R&D  through  an
integrated strategy aimed at raising the level of competition on product markets,
providing  better  access  to  risk  capital,  better  protecting  intellectual  property
rights  (including  the  creation  of  an  affordable  Community  patent)  while
ensuring  more  rapid  diffusion  of  new  technologies,  and using  fiscal and  other
financial incentives;

improve  ties  between  universities  and  business  leading  to  knowledge  transfer
and  a  better  commercialisation  of  R&D  results.  Establish  clear  and  consistent
priorities for public research; and

– 

enhance collaboration on research and innovation across Europe.

ii.

promote access and use of ICT:

– 

– 

ensure  effective  competition  in  local  telecommunication  networks  (the  ‘local
loop’)  in  order  to  speed  up  the  development  of  the  European  broadband
network; and

stimulate  internet  use  across  all  strata  of  society  (i.e.  in  households,  schools,
enterprises  and  public  administrations)  and,  in  particular,  raise  the  ratio  of
internet-connected PCs to pupils to one for every fifteen pupils.

21

Internet in households
Percentage  connected - December 2001

Internet in schools
On line PCs per 15 pupils - May 2001

Use of Internet

EL

E

P

F

I

B

D

L

A

IRL

UK

FIN

DK

S

NL

EU average

EU average

 EU objective end 2002

P

EL

I

D

E

NL

F

B

IRL

A

UK

S

FIN

L

DK

P

F

E

NL

DK

I

IRL

L

UK

B

EL

FIN

D

S

A

Internet in SMEs - 2001

Public services on line 

(Availability on line of 8 services to business and 
12 to citizens- November 2001)

EU average

L

B

NL

I

EL

D

A

F

UK

E

P

DK

S

FIN

IRL

0%

20%

40%

60%

80%

0

1

2

3

4

0%

20%

40%

60%

80%

100%

0%

20%

40%

60%

80%

Source:  Commission services, ENSR Survey 2001, Observatory of European SMEs.
European Commission (study by Cap Gemini Ernst & Young).

iii.

strengthen education and training efforts:

– 

– 

both private and public, in order to increase the supply of trained researchers, to
increase  the  number  of  highly  qualified  ICT  personnel,  and  to  improve  the
general  level  of  educational  attainment  of  the  population  and  ensure  that  all
citizens have access to basic skills;

enhance  the  capabilities  of  education  and  training  systems  to  respond
adequately to changes in skill requirements, and in particular to meet the needs
of  groups  typically  disadvantaged  in  the  labour  market  such  as  women,  older
workers or early school leavers; and

– 

introduce instruments to ensure the transparency of diplomas and qualifications.

3.8

Enhance environmental sustainability

Protection  of  environmental  resources  such  as  clean  air,  water  and  soil,  maintaining
biodiversity  and  reducing  environmental  threats  to  public  health  require  an  active
environmental policy in order to ensure a responsible use of scarce natural resources and
development  which  is  economically,  environmentally  and  socially  sustainable  in  the  long
run. Commitments undertaken at international level - notably in the area of climate change -
also call for policy action.

The  Stockholm  European  Council  has  asked  to  integrate  the  promotion  of  sustainable
development  into  the  Broad  Economic  Policy  Guidelines.  As  further  emphasised  by  the
Gothenburg  European  Council,  sustainable  development  is  a  concept  that  goes  beyond  a
purely economic assessment and strives for improvements in the quality of life by promoting

22

coherent  policy  actions  based  on  an  overarching  assessment  of  the  economic,  social  and
environmental  dimension.  In  doing  so, it  takes a  long-term  view, looking at the  welfare  of
both present and future generations. Concrete priority actions have  been  identified  for  the
different policy areas. This section focuses on the integration of environmental aspects into
economic policy, in particular the use of market-based instruments, as a means of promoting
sustainable development.

Government action is often delayed by concerns about possible short-term consequences of
policies  to  protect  the  environment  on  economic  growth,  employment  and  on  the
competitiveness  of  individual  firms,  sectors  and  Member  States.  In  this  context,  while
considering the full range of policy instruments in pursuit of environmental, economic and
social  objectives,  Member  States  should  make  increased  use  of  economic  instruments  in
pursuit  of  environmental  objectives  without  putting  other  policy  objectives  in  jeopardy.
These instruments provide flexibility to industry to reduce pollution in a cost-effective way,
and  encourage  technological  innovation.  Furthermore,  they  are  often  the  most  efficient
means to curb pollution since they lead to the internalisation of external costs in prices. They
are  therefore  a  way  to  implement  more  consistently  and  cost-effectively  the  polluter-pays
principle. In this respect, better information of the citizens and firms involved and a proper
evaluation  of  instruments  are  important.  Investment  in  new,  environmentally  friendly
technology can also be an important source of progress.

Member  States  should  set  clear  targets  and  timetables  for  their  policies,  such  as  those
approved  by  the  European  Council  in  Gothenburg  in  this  context,  and  apply  them
consistently so that business and consumers can adjust smoothly. Continued action is needed
every year to bring about a gradual decoupling of economic growth from resource use, in
particular between transport growth and GDP growth. Co-ordinated and gradual but steady
and  credible  changes  in  the  level  and  structure  of  tax  rates  until  external  costs  are  fully
reflected in  prices  would  minimise structural  adjustment  problems  and  support  adaptation
and  innovative  solutions  by  firms.  This  approach  would  also  minimise  the  need  for
exemptions for those firms or sectors that are most affected. Such exemptions often reduce
the environmental effectiveness of the measure, distort the tax structure and are difficult to
remove  at  a  later  date.  Establishing  a  framework  for  the  use  of  economic  instruments  at
Community level could help avoid such distortions and underpin the Internal Market.

Accordingly,

i.

ii.

Member  States  should  introduce  and  strengthen  policies  based  on  economic
instruments  like  taxation,  user  and  polluter  charges,  insurance/liability  schemes  and
tradable emission rights. A key sector for such a policy is the transport sector with its
different modes, which still lacks an adequate consistent and integrated system of user
charges and taxes in order to appropriately integrate externalities and mirror resource
use;

in  order  to  fulfil  the  requirements  of  the  Kyoto  protocol  in  a  cost-effective  way,
Member States should prepare for the introduction of emissions trading at EU level by
ensuring  inter  alia  that  they  have  in  place  sufficiently  robust  procedures  for
monitoring, reporting and verification of emissions. Those Member States which have
already  established  emissions  trading  schemes  for  greenhouse  gases,  or  which  are

23

considering  doing  so,  should  ensure  that  their  schemes  are  compatible  with  the
Community scheme currently under discussion in the Council. Member States should
start  to  develop  their  national  allocation  plans,  and  establish  clear  rules  governing
allocation  of  emission  allowances  both  to  individual  entities  and  to  the  emissions
trading  scheme  as  a  whole.  More  generally,  Member  States  should  ensure  that  their
domestic climate change policies  and  measures  do  not  hinder  the  establishment  of  a
EU-wide  emissions  trading  scheme  and  should  also  prepare  other  measures  and
policies,  in  particular  aiming  at  more  efficient  management  of  energy  and  transport
demand;

iii. Member  States  should encourage  the  disclosure  of  environmental information  in  the
annual  accounts  of  companies  in  line  with  the  Commission  Recommendation  of
30 May 2001;

iv. Member  States  should  prepare  legislation  that  requires  companies  involved  in
environmentally  sensitive  activities  to  provide  financial  assurance  for  potential
damages they might cause;

v.

Member  States  should  reduce  sectoral  subsidies  and  tax  exemptions  and  other
measures, which have a negative environmental impact;

vi. Member  States  should  agree  by  December  2002  on  an  appropriate  framework  for

energy taxation at the European level; and

vii.

in  order  for  the  European  Union  “to  show  substantial  progress  in  enhancing  energy
efficiency by 2010”, as requested by the Barcelona European Council, Member States
should continue to implement measures targeted on energy use, including transport.

24

II. COUNTRY-SPECIFIC ECONOMIC POLICY GUIDELINES

1.

BELGIUM

The Belgian economic activity experienced a sharp deceleration in 2001, real GDP growth reaching
1%, after an exceptional year 2000 when the economy expanded by 4%; the slowdown in world trade
and  the  resulting  deterioration  in  business  confidence  were  the  main  reasons  for  this  development.
Economic  activity  is  currently  expected  to  recover  gradually  in  the  first  quarters  of  2002  and  more
firmly in the second half of the year, both export and import volumes resuming dynamism; however,
real GDP growth, on average, is not expected to exceed the result of the preceding year. In 2003, the
economy  should  expand  by  slightly  below  3%,  as  a  result  of  more  buoyant  international  trade  and
more robust domestic demand. Inflation, as measured by the HICP, is expected decelerate to clearly
below 2% in 2002, from 2.5% in 2001, and remain contained in 2003. Employment is projected to rise
in  2003,  although  at  a  more  modest  rate  compared  to  recent  past;  unemployment  is  expected  to
increase  somewhat  in  2002  but  should  resume  a  falling  trend  in  2003.  Wage  developments  would
remain moderate in the context of the new framework wage agreement to be concluded, by the end of
2002, for the period 2003-2004.

Although  declining,  the  government  debt  ratio  to  GDP  is  still  at  a  very  high  level  in  Belgium  and
requires  further  budgetary  adjustment,  in  particular  in  view  of  ensuring  the  sustainability  of  public
finance in a context of ageing populations. Pension reform must also be pursued, in particular of early
retirement  regulations,  the  complementary  pension  and  the  reinsertion  of  pensioners  in  the  labour
market,  in  order  to  face  this  challenge.  The  low  employment  rate,  the  high  regional  differences  in
unemployment,  the  lack  of  competition  in  specific  service  sectors,  the  administrative  burden  on
business  and  the  lack  of  efficiency  in  the  public  administration  represent  other  areas  requiring
attention.

Budgetary policy

In spite of the sharp slowdown in economic activity in 2001, the general government accounts were in
balance  (or  in  a  surplus  of  0.2%  of  GDP  including  the  UMTS  licences  receipts);  instrumental  in
maintaining  a  general  government  balance  was  a  high  primary  surplus,  at  6.6%  of  GDP,  reached
through retrenchment in primary expenditure and buoyant tax revenues; specific factors, such as real
estate  sales,  contributed  by  about  0.3%  of  GDP  to  this  result.  The  2001  update  of  the  stability
programme  targets  a  general  government  balance  in  2002,  and  a  surplus  of  0.5%  of  GDP  in  2003.
Maintaining high primary surpluses of the order of 6% of GDP per year remains an essential element
of  the  budgetary  adjustment  strategy,  given  the  still  very  high  level  of  the  government  debt  and  in
view of the challenges in the long term induced by the ageing population. A limit on real expenditure
growth of Entity I (federal government and social security) to 1.5% per year is considered appropriate
to achieve this objective. The decline in the government debt ratio was modest in 2001, a development
due mainly to low nominal GDP growth and to ad hoc factors; the government debt ratio is projected
to  fall  to  marginally  below  100 percent  of  GDP  at  the  end  of  2003.  In  view  of  the  above,  and
considering that Belgium is a member of the euro area, budgetary policy should aim to:

i.

in 2002, do not allow a deterioration in the government balance compared to 2001, notably
through containment of government current expenditure;

25

ii.

iii.

resume  budgetary  consolidation  in  2003  and  achieve  a  0.5%  of  GDP  general  government
surplus by adhering to the 1.5% limit on real expenditure growth for Entity  I and by strict
budgetary surveillance of all parts of government; and

define  a  comprehensive  strategy  in  order  to  prepare  for  the  budgetary  implications  of
population ageing; this strategy should aim at further reducing the debt level, reforming the
pensions  system,  addressing  in  particular  the  low  average  effective  retirement  age  and
quantifying the budgetary resources to be allocated annually to the Ageing Fund.

Labour markets

The Belgian labour market was affected by weaker economic growth in 2001. The rapid decline in the
unemployment  rate  recorded  over  the  previous  two  years  gradually  came  to  a  halt  and  it  is  now
projected to increase somewhat in 2002. Although the overall employment rate grew steadily over the
second half of the nineties, rising from 56.3% in 1996 to about 61% at the end of 2000, it is still below
the EU average, mainly because of relatively lower rates for young (29% for those aged 15-24), older
persons (only 24% for those aged 55-64), and women (51.5%). Within the framework of the “active
welfare  state”  approach,  the  gradual  shift  from  passive  policies  to  preventive  and  more  active
measures continued in 2001. Notwithstanding measures already implemented, benefit  dependency  is
still  relatively  high  for  some  segments  of  the  labour  market  and  other  measures  could  be  taken  to
remove the remaining “unemployment traps” and “activate” the still sizeable number of working age
benefit  recipients,  especially  older  workers,  not  in  employment.  Regional  differences  remain
noticeable. The employment rate in the Flanders (about 64% in 2000) was still 8-9 percentage points
higher  than  in  Wallonia  and  the  Brussels  region.  This  reflects  inadequate  labour  mobility  and
insufficient  wage  flexibility.  Linguistic  barriers,  high  housing  costs  (due  to  remaining  heavy
registration taxes), increasing traffic congestion, an inadequate public transportation network, are the
main obstacles to mobility. In view of the above, while vigorously implementing all the Employment
Recommendations adopted by the Council in February 2002, the main priorities for Belgium should be
to:

i.

ii.

iii.

iv.

consolidate recent reforms of the tax and benefit systems to reduce benefit dependency and
make work pay, in particular, by removing the remaining disincentives  for  older  people to
continue to work or re-enter the labour market;

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

promote a proper balance between flexibility and security, and monitor closely the impact on
labour supply of recent initiatives to increase working-time flexibility, in particular the new
time-credit system; and

intensify  efforts  to  increase  the  employment  rate  for  women  by  removing  disincentives  to
their entry or re-entry to the labour market.

26

Product markets, entrepreneurship and the knowledge-based economy

The openness of the Belgian economy stimulates competition on the goods markets, leading to high
labour productivity and consumer price levels in line with the EU average. The transposition rate of
Internal Market directives met the March 2002 target of 98.5%. Despite a lack of effective competition
on the local loop, the liberalisation process is progressing well in the telecommunications sector, and
broadband  access  is  diffusing  fast,  thanks  to  cheap  access  costs.  However,  the  links  between  local
public  authorities  and  private  partners  still  lack  transparency,  and  liberalisation  is  less  advanced  in
some  service  sectors  such  as  energy.  In  particular,  the  delay  in  establishing  the  independent
transmission system operator for electricity and the lack of regulatory approval of transmission tariffs
has impeded market entry. As a result, competition remains limited in these sectors, leading to high
prices.  Whilst,  on  average,  R&D  and  ICT  expenditures  are  around  EU  standards,  they  remain
concentrated in a few sectors and companies. Important reforms to reduce red tape  and increase the
efficiency  of  public  services  have  been  launched  and  have  started  to  deliver  results.  However,  the
levels of administrative burden and State aid to railways remain high. In view of the above, the main
priorities for Belgium should be to:

i.

ii.

iii.

increase competition in electricity and gas by officially designating an independent Transport
System Operator with no significant involvement from incumbents (ownership unbundling),
and  by  taking  measures  to  encourage  new  retail  suppliers  by  ensuring  fair  access  to
networks;

take  measures  to  reduce  the  distortions  of  competition  in  the  services  sectors  at  local  and
provincial level which are due to the presence of public and mixed public-private enterprises;
and

take further measures to reduce the administrative burden for businesses, including the time
and cost required for registering a new company, and to develop e-government.

27

2.

DENMARK

In  2001,  economic  growth  decelerated to  0.9%, primarily  due to  a  marked  slowdown  in  investment
growth and a deterioration of external demand growth. Output expansion is forecast to rise to some 1
¾% this year and accelerate to around 2½% in 2003, mainly driven by domestic demand. In 2002, the
factors sustaining growth  should  be private  consumption,  which  is  expected  to  rise  in line  with  real
take-home pay, and investment, which should recuperate with the expectations of a more favourable
outlook.  Danish exports  are  assumed  to  grow  fairly  in  line  with  external  demand,  and  with  imports
developing in line with final demand, the growth contribution of net exports is expected to be negative
again this year. In 2003, domestic demand should strengthen further whereas net exports are assumed
to  give  a  fairly  neutral  contribution  to  growth.  Inflation  (HICP),  which  rose  by  2.3%  in  2001,  is
forecast to remain around this level also in the current year, as rises in the prices of clothing should
compensate for the effects of somewhat lower oil prices and the “tax freeze” introduced by the new
government,  before  falling  slightly  in  2003.  The  labour  market  will  remain  tight.  Employment  is
expected  to  rise  marginally  in  the  current  year  and  by  close  to  ½  a  per  cent  in  2003.  Despite  the
slowdown  in  the  economy,  registered  unemployment  has  remained  at  a  very  low  level  and  a  small
decline in the unemployment rate is expected in 2003 as growth takes off.

The Danish economy, which currently operates at a level close to its potential,  needs  to  enhance  its
production  potential  by  focusing  on  the following  key  challenges:  Easing  labour  supply  constraints,
which  would  also  help  holding  back  the  sustained  high  pay  rises.  Competition  in  a  number  of
important business sectors remains inadequate and, taking the size of the public sector into account,
efficiency  in  this  sector  needs  to  be  further  improved.  Furthermore,  achieving  effective  restraint  of
government consumption remains essential, and this is even more compelling after the introduction of
the “tax freeze” so that the general government finances can continue to run high surpluses also in the
medium-term.

Budgetary policy

In  2001,  the  general  government  surplus  was  2.8%  of  GDP,  excluding  the  UMTS  revenues  of  0.2
percentage points. The budget surplus is expected to decline to 2.1% of GDP in the current year and
thereafter to rise to 2.4% of GDP in 2003. The decline in the surplus in 2002 is primarily due to the
fact  that  a  proposed  change  of  the  Special  Pension  Savings  Scheme  has  been  incorporated  for  the
forecast years, lowering the surplus by some ½ percentage points of GDP1. The latest update of the
Danish  convergence  programme  maintained  the  strategy  of  slowly  declining  ratios  of  primary
expenditure and taxes to GDP. As often in the past, the real increase in government consumption in
2001 exceeded the target set by the previous government. A novel element is that the new government,
which took office in November 2001, has committed itself not to raise any direct or indirect tax rates.
In addition, a ceiling on the nominal property value tax has been imposed. No expiry date has been set
for  this  “tax  freeze”.  Long-term  projections  in  the  updated  programme  suggest  that  general

1

The new  government has proposed that the  Special Pension  Savings  Scheme  (SP)  should  be  transformed  from  a
redistributive tax scheme to a compulsory, individual pension scheme effective  as of 2001. The proposal has the
majority  needed  in  the  Parliament.  The  change  will  lower  the  level  of  the  general  government  surplus  by
approximately ½ percentage points of GDP from 2002 onwards because these savings, following the change, will
be considered as private rather than public savings in the national accounts. This is in line with the deficit and debt
reporting of 28 February 2002.

28

                                                
government finances have to run annual surpluses of 1 ½ - 2 ½% of GDP up to the year 2010 in order
to  cope  with  the  financial  impact  of  the  ageing  population.  In  view  of  the  above,  budgetary  policy
should aim to:

i.

ii.

ensure that the government’s target of restraining real growth in government consumption to
1 per cent a year on average is reached, implying that the increase in 2003 preferably should
not exceed the authorities’ forecast of 0.7% in order to offset the rise of 1.3% included in the
budget for 2002; and

secure  implementation  of  the  tax  freeze  by  all  levels  of  government,  possibly  by  binding
commitments from the part  of counties  and  municipalities in the  agreements  related to the
budget for 2003.

Labour markets

The Danish employment performance is the best among EU countries, with employment rates in 2001
of 76% overall, 72% for women and 56% for older workers. The unemployment rate continued to fall
slightly in 2001, reaching 4.3%, and the labour market situation remained tight. No new reform efforts
were  undertaken  in  2001.  However,  the  previous  reforms  continue  to  reduce  inflows  to  the  early
retirement  and  disability  pension  schemes  and  marginal  tax  rate  reductions  are  due  to  take  place  in
2002 in accordance with the 1999 Whitsun package. The new government has recently announced a
tax-freeze. Despite previous reforms, there has been a clear trend towards negotiating shorter working
hours and withdrawal from the labour market is relatively high. The share of working-age people in
benefit  schemes  (including  unemployment  benefits)  and  active  labour  market  programmes  is  21%,
which in part contributes to persistent labour supply constraints. A further expansion in labour supply,
which is necessary in light of the ageing of the population, could be encouraged via tax and benefit
reforms, to make the underlying tax-benefit structure more favourable for employment. In view of the
above, while vigorously implementing all the Employment Recommendations adopted by the Council
in February 2002, the main priority for Denmark should be to:

i.

make  work  pay  by  continuing  the  reforms  of  transfer  systems  and  by  reducing  further  the
fiscal pressure on labour, especially on low and medium wage earners.

Product markets, entrepreneurship and the knowledge-based economy

The  Danish  economy  is  less  open  (as  measured  by  total  trade-to-GDP  ratio)  than  most  other  small
Member States and has a relatively high price level, which is partly due to a lack of competition in a
number of sectors. Ad hoc and sectoral State aid is low and the record in transposing Internal Market
directives  is  excellent.  Progress  has  been  made  in  liberalising  telecommunication  and  electricity
markets as well as in opening up public procurement. There has been less success in opening up gas
markets  to  competition.  ICT  penetration  is  high  and  R&D  expenditures  are  above  the  EU  average.
However, in the field of R&D, Denmark performs less well than the other Nordic Member States, in
part  owing  to  lower  business  R&D  spending  and  a  poorer  commercialisation  record.  In  addition,
according to an OECD survey, Denmark combines a high level of public education expenditure with
relatively low education results. In view of the above, the main priorities for Denmark should be to:

i.

step up efforts to enforce competition in those sectors where competition has been found to
be inadequate;

29

ii.

enhance competition in public service provision at the local level via increased participation
of the private sector and competition between public service operators; and

iii.

complete full market opening of electricity and gas markets and ensure fair network access.

30

3.

GERMANY

In 2001, German GDP increased by 0.6%. Regarding private consumption, the income tax reductions
implemented in January of the year limited the decline in the growth rate triggered by the hike in fuel
prices and unemployment, which started to rise during the year. By contrast, investment fell strongly
in  an  environment  of  low  growth  expectations.  A  further  drag  on  the  economy  was  the  substantial
depletion of inventories. As a result domestic demand remained flat in 2001. Growth therefore came
essentially  from  net  exports,  mostly  due  to  stagnant  import  volumes.  For  2002,  leading  indicators
point to a recovery by the middle of the year. Driving force should be a pick up in investment, while
consumption  is  likely  to  remain  sluggish  as  a  result  of  rising  unemployment.  Despite  the  expected
strong  upswing,  however,  annual  average  GDP  growth  in  2002  will  remain  below  1%  due  to  the
strong negative statistical overhang at the beginning of the year. On the back of higher than assumed
oil and food prices the average rise in consumer prices in 2001 reached 2.4%. The expected reversal of
these price effects should lower price pressures and keep CPI inflation below 2%, at one of the lowest
levels  in  the  euro  area.  Employment  started  to  decline  in  2001  and  will,  in  spite  of  the  expected
acceleration  of  economic  activity,  on  average  be  lower  in  2002.  As  a  consequence,  unemployment
should be higher in 2002 on average than in 2001.

As a result of the economic downswing, the government deficit in Germany rose to 2.7 % of GDP in
2001. A key challenge is, therefore, to accelerate the consolidation of public finances and to ensure a
strict  implementation  of  the  stability  programme,  in  particular  with  a  view  to  keeping  the  2002
government  deficit  below  the  Treaty’s  3%  of  GDP  reference  value.  While  the  present  cyclical
downturn as such is mainly externally induced, the growth potential of the German economy is held
back by lagged effects from re-unification, including the crisis in the construction sector, and by slow
progress in structural reform,  particularly  in  the  labour  market.  Highest  priority  should  therefore  be
given  to  reforms  aimed  at  reducing  the  persistently  high  unemployment  rate  and  regional
unemployment disparities and at improving efficiency of active labour market policies. This should be
supported by policies to increase the  employment  rate,  notably  by  reforming  the  benefit  schemes  in
order to make work pay and by tackling the disincentives to labour market participation, especially of
women. Improvements in the overall business environment, particularly by further product, capital and
labour market reform, should also contribute to strengthening Germany’s economic growth potential.

Budgetary policy

According to the most recent estimate by the Federal Statistical Office, the 2001 general government
deficit reached 2.7%  of  GDP. This  deterioration compared to  the  outcome  for  2000 (-1.3%  of  GDP
excluding UMTS proceeds) and to the projections of the October 2000 update of the German Stability
Programme  (a  projected  2001  deficit  of  1½%  of  GDP)  is  essentially  due  to  the  stronger  than
anticipated  growth  slowdown  and  some  statistical  revisions.  Expenditure  overruns,  however,  were
registered in the health care sector and in some Länder. In the current year, low GDP growth and the
rise in some benefits should imply that the deficit will not decline compared to last year, in spite of the
hike in some taxes.

In  the  Ecofin  Council  meeting  of  12  February  2002,  the  German  government  committed  itself  to
respect the 3% of GDP reference value for the general government deficit in 2002 and confirmed its
commitment  to  reach  a  close  to  balance  budgetary  position  in  2004.  This  was  reaffirmed  by  the
agreement reached between Bund and Länder in the special session of the Financial Planning Council

31

(Finanzplanungsrat)  on  21  March  2002.  In  view  of  the  above,  and  considering  that  Germany  is  a
member of the euro area, budgetary policy should aim to:

i.

ii.

iii.

iv.

ensure  that the  3%  of  GDP  reference  value  for  the  general  government  deficit  will  not  be
breached. Use any potential growth dividend to reduce the 2002 deficit below the 2 ½% of
GDP targeted in the last updated Stability Programme;

aim  at  a  sufficient  decline  of  the  2003  deficit  to  ensure  that  a  close  to  balance  position  in
2004 can be achieved. To this end ensure that the budgeted 2003 rise in expenditure at all
levels of government and in the social security systems remains close to zero and that any
potential growth dividend be used to reduce the deficit;

implement  the  necessary  reform  of  the  health  care  system  in  order  to  reduce  expenditure
pressures and to contribute to improving the quality and sustainability of public finances; and

adopt in the current parliamentary term the agreed changes to the Haushaltsgrundsätzegesetz
and  enable  an  effective  control  of  the  agreements  reached  in  the  special  session  of  the
Finanzplanungsrat of 21 March 2002.

Labour markets

The German labour market suffered from the economic downturn in 2001, when employment growth
came  to  a  halt  and  unemployment  started  to  rise  again.  The  overall  employment  rate  is,  at  65%  in
2000,  above  the  average  of  the  European  Union.  Youth  unemployment  is  relatively  low.  However,
unemployment,  half  of  which  is long-term  unemployment,  remains  high,  at  7.9% slightly  above  the
EU average. Regional unemployment rates continue to vary sharply. Despite of a recent flexibilisation
of wage bargaining, wage differentiation and mobility are not sufficient to contribute adequately to a
marked reduction of the regional differential. Positive steps have been taken through new legislation
aimed at rationalising active labour market policies (ALMPs), but the efficiency of large-scale active
programmes  in  high-unemployment  regions  must  continue  to  be  improved.  Moreover,  the  labour
market activity of low skilled workers is very low and their unemployment risk is 60 percent higher
than  that  of  the  average  worker.  Further  increases  of  the  employment  rate  will  critically  depend  on
overcoming still strong disincentives and barriers with respect to labour market activity of low skilled
workers,  older  workers  and  women.  In  view  of  the  above,  while  vigorously  implementing  all  the
Employment  Recommendations  adopted  by  the  Council  in  February  2002,  the  main  priorities  for
Germany should be to:

i.

ii.

intensify efforts to make work pay via tax and benefit reform, in particular for women and
older workers. Candidates for benefit reform are: benefit eligibility, conditionality, duration
and  replacement  rates  as  well  as  benefit  withdrawal  when  taking  up  work.  Social  security
contributions  should  be  reduced,  in  particular  at  the  low  end  of  the  wage  scale,  while
complying with the need for sound public finances;

improve  the  efficiency  of  ALMPs,  in  particular  where  they  are  used  on  a  large  scale,  and
further develop job-search  assistance  while  improving  its efficiency.  Improve  the  targeting
of ALMPs towards those groups most prone to the risk of long-term unemployment, as well
as to meet the demands of the labour market;

32

iii.

iv.

v.

promote  labour  institutions  and  collective  bargaining  systems,  respecting  the  autonomy  of
social  partners,  that  take  into  account  the  relationship  between  wage  developments  and
labour market conditions, thereby allowing an evolution of wages according to productivity
developments  and  skills  differentials,  in  order  to  improve  employment  across  skills  and
geographical  areas,  while  preserving 
stability-  and  employment-oriented  wage
developments;

take measures to make work contracts and work organisation more flexible with a view to
striking a proper balance between flexibility and security; and

remove barriers to female labour market participation, inter alia by promoting the availability
of childcare facilities.

Product markets, entrepreneurship and the knowledge-based economy

The German economy is relatively open for a large-sized economy (as measured by the total trade-to-
GDP  ratio) and  consumer  price  levels  are  close  to the  EU  average.  State  aid  is  declining  gradually.
Time and cost requirements for the start-up of a private limited company are around the EU average
and only minimal for sole traders. Germany has a strong position in the knowledge-based economy as
measured  by  business  expenditures  on  R&D,  patent  applications,  and  the  share  of  the  labour  force
with at least upper secondary education. Progress on Internal-Market related issues  (transposition  of
Internal  Market  directives,  opening  up  of  public  procurement)  has  been  limited.  Price  levels  for
electricity (households) and gas remain well above the EU average and former regional monopolists
continue  to  benefit  from  the  system  of  negotiated  third-party  access.  Finally,  the  educational
achievements of 15-year-olds and the share of high school students that go on to university are below
the  EU  average.  Two  thirds  of  the  age  group  concerned  start  a  qualified  dual  vocational  training
programme. In view of the above, the main priorities for Germany should be to:

i.

ii

iii.

ensure  effective  competition  on  electricity  and  gas  markets  leading  to  a  reduction  of  the
levels  of  and  regional  differences  in  the  fees  charged  for  the  use  of  energy  distribution
networks; establish a regulatory function for energy with a view to ensuring effective control
of the tariff-setting conditions;

reform  the  primary  and  secondary  education  system  in  order  to  improve  students’
educational achievements in general and especially to raise the share of school leavers that
go on to university; and

raise the transposition rate of Internal Market legislation with the aim of achieving the target
of 98.5% of Internal Market directives, and raise the value of public tenders published in the
Official Journal.

33

4.

GREECE

In 2001, following the deterioration in the global economy, economic activity decelerated somewhat
but  was  supported  by  domestic  factors.  Considerably  lower  interest  rates,  following  euro  area
membership  as  from  2001,  and  increasing  inflows  of  financial  resources  from  the  EU  Structural
Funds, combined with the preparation for the Olympic Games of 2004, sustained investment. At the
same  time,  a  sharp  increase  in  consumer  credit  and  recovery  in  real  disposable  income,  boosted
consumer spending. Nonetheless, external trade had a negative effect on real GDP growth, reflecting
both the high import content of domestic demand and limited improvement in competitiveness. Such a
pattern of growth is expected to persist in 2002, while an improvement is forecast for 2003 as a result
of resuming external demand. The situation in the labour market improved at a slow pace in the latest
years, employment rising at relatively low rates in the whole economy despite strong job creation in
the services and the construction sector. Inflation pressures in early 2001, resulting from second round
effects of the oil prices hike in 2000, started to ease in the second half of 2001; but, uncertainties still
remain, related to the outcome of the ongoing negotiations on the private sector wage agreement.

Despite  progress  made  in  recent  years,  medium-term  challenges  require  further  improvement  in  the
functioning  of  the  Greek  economy.  Fiscal  imbalances  were  corrected  in  recent  years,  but  the
government debt ratio remains at a very high level and requires further robust budgetary adjustment,
particularly taking account of the serious risk that  budgetary  imbalances  might  emerge  in  the  future
due to ageing populations. The current real GDP growth phase provides an opportunity to accelerate
structural reform aimed at increasing the still low level of productivity, at improving the efficiency of
the labour and product markets and at creating a better environment for business. Finally, tackling the
high rate of structural unemployment and increasing employment rates remains a key challenge.

Budgetary policy

In  2001,  the  general  government  account  achieved  a  deficit  of  0.4%  of  GDP  and  a  balance  when
including  non-budgeted  UMTS  receipt.  The  2001  update  of  the  stability  programme  projects  the
government surplus at 0.8% of GDP in 2002 and 1% of GDP in 2003; these budgetary projections are
based on high real GDP growth for the period reaching around 4% per year. The budgetary strategy
continues to be centred on the achievement of high government primary surpluses which, nonetheless,
are  expected  to  decline  over  the  period;  in  fact,  the  improvement  in  the  government  balances  fully
results  from  a  steady  decrease  in  interest  payments  while,  in  contrast,  little  retrenchment  in  current
primary expenditure is expected. The government debt ratio is forecast to decline from 99.6% of GDP
in 2001 to 94.4% of GDP in 2003, a reduction limited by autonomous factors, namely large financial
operations. In view of the above and considering that Greece is a member of the Euro area, budgetary
policy should aim to:

i.

ii.

iii.

ensure  that  the  budgetary  stance  in  2002  and  2003  does  not  contribute  to  inflationary
pressures,  also  taking  into  account  the  outcome  of  the  forthcoming 2002  national  wage
agreement in the private sector;

comply  with  the  guideline  already  issued  in  the  2000 BEPG  asking  for  the  application  of
clearly defined and binding norms for current expenditure increase in real terms;

ensure that the government debt to GDP ratio declines in line with the projected reduction in
the  government  deficit  as  well  as  with  the  increase  in  nominal  GDP  and  limit  the  use  of
financial operations influencing negatively the level of the government debt; and

34

iv.

accelerate the reform of the social security systems and in particular proceed to the reform of
the pension system from 2002 in order to avoid serious budgetary imbalances which might
emerge in future years from the ageing populations.

Labour markets

The  economic  upturn  in  recent  years  in  Greece  has  been  accompanied  by  employment  growth
(although  at  rates  below  the  euro-area  average).  While  this  employment  creation  was  initially
outstripped by increases in labour supply, in the last one or two years job growth has led to a slight fall
in the unemployment rate, notably in 2000. Nevertheless, the Greek labour market is still characterised
by a low employment rate (55.7% in 2000) and a high level of structural unemployment. Moreover,
the labour market is highly segmented with high rates of youth and female unemployment, and a high
share  of  long-term  unemployment.  Labour  market  policy  measures  in  2001  focused  on  the
implementation of the December 2000 package of labour market reforms, and the on-going reforms in
the  Public  Employment  Service  and  the  educational  and  vocational  training  system.  Despite  recent
measures,  the  labour  market  still  displays  of  a  number  of  problems  including:  heavy  labour  market
regulation; insufficient wage differentiation; and distortions to incentives to work in the formal sector
embedded  in  pension  entitlements  and  in  the  tax  system.  The  latter  include  a  strong  degree  of
progressivity of personal income taxes and a high burden on dependent employees compared with the
self-employed, even though the average tax burden is low. Moreover, the educational and vocational
training system should be further strengthened to better meet the requirements of the labour market. In
view of the above, while vigorously implementing all the Employment Recommendations adopted by
the Council in February 2002, the main priorities for Greece should be to:

i.

ii.

iii.

iv.

v.

urgently pursue reform of pensions entitlements in order to encourage older workers to take
up and remain in work;

continue  to  improve  educational  and  vocational  training  systems  in  order  to  enhance  the
skills of the labour force and meet the needs of the labour market;

continue progress in eliminating the major distortions to work incentives arising from labour
taxes;

promote changes to the wage formation system in order to ensure that wages better take into
account differences in productivity levels and local labour market conditions. In particular,
the  opt-outs  included  in  the  territorial  employment  pacts  should  be  made  a  practical
possibility; and

fully implement labour market reform packages, and monitor their impact on labour market
performance  in  order  to  ensure  that  positive  effects  are  maximised.  In  particular,  further
build  upon these  efforts  by  loosening  restrictive  employment  protection  legislation,  with  a
view to ensuring a proper balance between flexibility and security, and by speeding up the
restructuring of the Public Employment Service.

35

Product markets, entrepreneurship and the knowledge-based economy

Partly due to its geographical location the Greek economy is less open than any other Member State
(as measured by the total trade-to-GDP ratio). The effective enforcement of competition policy rules is
thus very important to guarantee high levels of competition in domestic product markets and stimulate
productivity  gains.  Indeed,  the  level  of  labour  productivity,  while  rising  strongly  in  recent  years,
remains the second lowest in the EU. The Internal Market transposition deficit was more than halved
but the transposition rate remains below the March 2002 target of 98.5%. While efforts are underway
to improve the business  environment  and enhance the  performance  of  the  public  administration, the
costs to set up a new company remain high and the system of company taxation is quite complex and
possibly constrains firms’ incentives to grow. Also because liberalisation has happened only recently,
the  market  position  of  incumbents  in  network  industries  remains  strong.  The  low  levels  of  average
educational attainment of the population remain a concern, and are among the factors responsible for
the overall still low –albeit growing– level of ICT diffusion in Greece (broadband penetration is the
lowest in the EU) and the very weak R&D and innovation performance. In view of the above, the main
priorities for Greece should be:

i.

ii.

iii.

iv.

step  up  efforts  to  increase  the  availability  of  skilled  human  capital,  promote  business
involvement in R&D and innovation and continue to improve ICT diffusion;

continue to streamline administrative rules and procedures, to increase the efficiency of the
public  administration  and  make  the  system  of  company  taxation  neutral  as  to  the  form  of
business organisation;

enhance  effective  competition  in  liberalised  network  industries,  in  particular  for  the
provision of electricity and sea transport services; and

sustain the progress made in raising the transposition rate of Internal Market legislation with
the aim of achieving the target of 98.5% of Internal Market directives.

36

5.

SPAIN

After having grown by around 4% in 1999 and 2000, output growth weakened significantly in 2001
due to a more moderate domestic demand, in particular a fall sharp of investment in equipment, and a
gradual slowdown of exports during the year. In 2002, heavily influenced by the slowdown registered
in the second half of the previous year, GDP growth is expected to decelerate further on average but
with  a  recovery  gaining  strength  through  the  year.  This  recovery  should  stem  from  both  a  gradual
improvement in domestic demand components and renewed dynamism of exports. In 2003, along with
better  international  prospects  and  underpinned  by  a  recovery  of  domestic  expenditure,  GDP  should
grow  in  line  with  estimated  potential.  Based  on  this  macroeconomic  scenario,  employment  growth
should slow down in 2002 and recover strength next year implying a decreasing unemployment rate to
around  12%  in  2003.  Inflation  is  expected  to  fall  to  around  2.5%  on  average  in  2002  compared  to
3.6% in the previous year. This  easing  of  inflationary  pressures  would  be supported  by  the  national
wage agreement signed last year to preserve wage moderation and by moderate import prices. In 2003,
inflation could further decelerate to close to 2.0% on average.

Although  Spain  made  progress  in  implementing  the  recommendations  of  the  2001  BEPGs  and
prospects  for  the  Spanish  economy  are  positive,  some  problems  remain  unsolved.  In  particular  the
long-term sustainability of public finances need to be addressed through  a  comprehensive reform  of
the pension system  since the  April  2001  agreement  between  the  government  and  the  social  partners
did  not  represent  a  significant  step  to  tackle  the  underlying  imbalances.  In  turn,  the  unemployment
rate,  although  more  than  10  percentage  points  below  its  1994  peak,  remains  high  in  comparison  to
other EU countries, along with wide disparities among regions and poor employment rates especially
for women. Finally, in spite of the easing of inflationary pressures, underlying inflation continues to
post  relatively  high  growth  rates  while  apparent  productivity  growth  remains  sluggish.  This
performance may be indicative of an insufficient degree of competition in some sectors and a lag in
the development of the knowledge-based economy.

Budgetary policy

Despite  weakening  growth  the  fiscal  consolidation  process  continued  in  2001,  when  the  general
government  sector  was  for  the  first  time  in  balance  down  from  a  0.3%  deficit  recorded  in  2000.
According to the 2002-2005 updated stability programme, the general government sector is expected
to maintain a balanced budget in 2003 and reach a small surplus of 0.2% of GDP in 2005. The fiscal
strategy outlined in the update remains unchanged compared to the previous programmes. It is based
on a restraint of primary current expenditure, supported by decreasing interest payments, which allows
for  an  increase  in  capital  expenditure.  In  turn,  the  programme  envisages  a  new  reform  of  personal
income  tax  to  take  effect  from  2003  consistent  with  the  maintenance  of  fiscal  consolidation.  The
programme incorporates the new financial system for territorial governments, which has involved the
decentralisation of tax and spending powers. In parallel with the start of this new system, the Law of
Budgetary Stability, aiming at ensuring the commitment of all general government sub-sectors to the
respect  of  the  close-to-balance  objective,  was  approved.  The  2002-2005  update  does  not  provide
appropriate  measures  to  deal  with  ageing  population.  This  is  of  concern,  given  Spain’s  particularly
exposed  demographic  profile  and  the  implied  adverse  budgetary  consequences  of  ageing.  The
announced  intention  of  pursuing  the  reform  of  the  pension  system  lacks  a  detailed  calendar.  In  the
recent past, the main measure adopted to deal with ageing remains the social security fund created in
2000 to finance future liabilities, assets of which were planned to reach 1% of GDP in 2004 according

37

to the latest stability programme. However, in early April the Spanish authorities announced that this
target would be reached in 2002. All in all, and considering that Spain is a member of the euro area,
budgetary policy in Spain should aim to:

i.

ii

iii.

ensure  restraint  of  primary  current  expenditure  as  planned,  so  as  to  maintain  the  balanced
budget position in accordance with the updated stability programme;

ensure that the reform of personal income tax to be legislated in 2002 enhances incentives to
work and save, and does not put at risk medium-term stability objectives; and

review  the  public  pension  system  in  a  comprehensive  way  so  as  to  promote  its  long-term
viability. Give priority to the use of the surpluses registered in the social security sub-sector
to further increase the pension reserve fund.

Labour markets

A marked improvement in labour market performance over the past few years means Spain is catching
up rapidly with other EU Member States in terms of employment rates. The overall employment rate
rose  from  52.3%  in  1999  to  54.7%  in  2000.  The  female  employment  rate  rose  by  three  percentage
points to 40.3%. Unemployment has continued to fall, to 12.8% in December 2001, though this is still
the  highest  in  the  EU,  and  female  unemployment  remains  double  the  rate  for  males.  Regional
unemployment  disparities  remain  severe,  with  unemployment  rates  on  the  mainland  ranging  from
6.3%  to  22.3%  (Q4  2001).  Key  structural  problems  include  the  failure  of  labour  costs  to  adjust  to
productivity  and  local  labour  market  conditions,  and  low  labour  mobility,  partly  owing  to  housing
market  rigidities  and the  operation of  certain  regional  benefit  schemes.  The  reforms  of  March  2001
appear  to  go  some  way  towards  addressing  rigidities  in  the  area  of  employment  contracts.  There
remains  further  scope  for  increasing  overall  investment  in  training  and  for  measures  to  ensure  the
efficiency  of  active  labour  market  policies.  Further  efforts  to  encourage  increased  labour  market
participation will be needed in order to sustain the impressive performance of recent years. In view of
the  above,  while  vigorously  implementing  all  the  Employment  Recommendations  adopted  by  the
Council in February 2002, the main priorities for Spain should be to:

i.

ii.

iii.

iv.

take further steps towards the reform of wage formation so that wages take better account of
regional  differences  and  evolve  according  to  productivity  developments  and  skills
differentials;

diminish obstacles to labour mobility, inter alia, through improvements to the functioning of
the  housing  market  and  reform  of  regional  benefit  schemes  and  encourage  conditions
conducive to employment creation in regions lagging behind;

ensure  that  active  labour  market  measures  are  efficient  and  tailored  to  the  needs  of  those
most prone to the risk of long-term unemployment or those with lower participation rates (in
particular women) and to the demands of the labour market;

take  further  steps  to  encourage  increased  labour  force  participation,  especially  among
women,  and  adopt  targets  for  the  adequate  provision  of  facilities  for  care  of  children  and
other dependants; and

38

v.

ensure a proper balance between flexibility and security by means of the recent employment
contract reforms, and further steps if necessary, with a view to early progress in terms of a
reduced share of fixed-term contracts and greater use of the part-time contract.

Product markets, entrepreneurship and the knowledge-based economy

The  openness  of  the  Spanish  economy  has  continually  increased  in  recent  years.  The  record  in
transposing  Internal  Market  legislation  is  among  the  best  in  the  EU.  However,  the  slowdown  of
productivity  growth  is  perceived  as  a  problem  for  the  Spanish  catching-up  economy.  The
implementation  of  the  ambitious  liberalisation  plan  launched  by  the  government  in  June  2000
continued  in  2001,  but  the  market  share  of  incumbents  in  fixed  telecommunication  and  gas  remain
high  and  the  wholesale  market  for  electricity  continues  to  suffer  from  a  lack  of  competition.  In
addition,  some  non-tradable  sectors  such  as pharmacies,  hyper-markets  and  books,  still  have  sector-
specific  regulations  with  restrictive  effects  on  competition.  Initiatives  to  increase  ICT  users  and  to
foster R&D were adopted by the government and the results are expected soon. The low public and
business  expenditure  on  R&D,  together  with  relatively  few  patent  applications,  remain  major
weaknesses relative to other Member States. Public expenditure on education is below the EU average
and  educational  attainment  is  low.  Finally,  the  regulatory  framework  for  SMEs  remains  relatively
complex, which can contribute to the long time and high cost involved in creating a new company. In
view of the above, the main priorities for Spain should be to:

i.

ii.

iii.

iv.

continue  policies  aimed  at  guaranteeing  a  level  playing  field  for  operators  in  the
telecommunications  and  energy  sectors,  at  reducing  the  market  share of the  incumbents  in
order to enhance effective competition in those sectors, and at encouraging market entry in
the wholesale market for electricity;

continue  to  take  measures  to  enforce  effective  competition  in  retail  distribution,  including
pharmacies, hyper-markets and books;

step  up  efforts  to  increase  skilled  human  capital,  business  involvement  in  R&D  and
innovation, and ICT diffusion; and

pursue the strategy to reduce the administrative burden for businesses, including the time and
cost required for registering a new company.

39

6.

FRANCE

After three years of robust growth, resulting in strong employment creation, economic activity slowed
markedly from the beginning of 2001, reflecting the impact of the deterioration in the global economy.
The  sharp  deceleration  in  exports  entailed  adjustment  in  stocks  and  investment  projects  were
postponed.  Conversely,  private  consumption,  which  benefited  from  a  robust  growth  in  disposable
income  and  a  resilient  labour  market,  remained  dynamic,  allowing  the  economy  to  avoid  a  more
severe slowdown. Prospects for 2002 and 2003 are more favourable; as the economy is not burdened
by any important imbalance, improving confidence and accelerating external demand should lead to a
rebound in GDP growth in the course of 2002. The slight deterioration in the situation in the labour
market observed since May 2001 should come to an end in the course of 2002 and the unemployment
rate  is  expected  to  recover  a  downward  path.  This  should  not  alter  significantly  the  behaviour  of
wages, which are projected to grow moderately. Finally, inflation should remain clearly below 2% in
the next two years, at one of the lowest level in the euro area.

When compared to other countries of the euro area, the French economy showed a relatively strong
resilience to the recent shock on external demand. This can be partly attributed to the strength of the
labour  market  and  to  lower  inflation,  together  with  positive  effects  of  formerly  planned  tax  cuts.
However, some further progress remains to be made. On the labour market, increasing labour market
participation  and  reducing  the  high  rate  of  structural  unemployment  remains  a  key  challenge.
Moreover, health and pension reform should be tackled, with a view to ensuring the sustainability of
public finances. Efforts should be made to secure the control of public expenditure, in particular in the
health  sector.  Finally,  in  order  to  enhance  the  medium-term  performance  of  the  economy,
liberalisation of network industries and adoption of Internal Market rules should be accelerated.

Budgetary policy

In  2001,  the  general  government  deficit  is  estimated  to  have  increased  to  1.5%  of  GDP  (1.4%
including UMTS revenues), as against 1.3% in 2000. The non-achievement of the deficit target fixed
in the 2001 Finance Law, 1% of GDP, is to be attributed partly to cyclical conditions, which reduced
tax  revenues,  and  partly  to  higher-than-planned  increase  in  nominal  expenditures.  Under  current
macroeconomic  assumptions,  taking  into  account  the  implementation  of  tax  cuts  and  the  planned
increase  in  real  expenditures,  the  general  government  deficit  should  reach  1.9%  of  GDP  in  2002
before  decreasing  only  slightly  in  2003.  The  2001  updated  stability  programme  targets  a  balanced
general  government  position  for  2004  or  2005.  In  its  Opinion  of  12  February  2002  on  the  updated
stability  programme  of  France  (2003-2005),  the  Council  urged  the  French  authorities  to  use  every
opportunity  to  reach  a  balanced  position  in  2004.  Achieving  the  budgetary  objectives  of  the  2001
updated  stability  programme  is  a  necessary  step  in  view  of  medium  term  challenges  for the  general
government finances stemming from ageing of population. In view of the above, and considering that
France is a member of the euro area, budgetary policy should aim to:

i.

ii.

ensure  that  the  government  deficit  in  2002  will  remain  below  2%  of  GDP,  limiting  the
increase in general government expenditure in real terms to  2.2% as  projected in  the  2001
updated stability programme;

in  order  to  reach  a  balanced  position  in  2004  use  every  opportunity  to  reduce  the  general
government  deficit  in  2003,  in  particular  through  increased  restraint  in  real  government
expenditure; and

40

iii.

define  without  delay  a  comprehensive  reform  of  the  pension  system  allowing  to  secure  a
sustainable evolution for public finances in the context of ageing populations.

Labour markets

After  a  number  of  impressive  years,  in  line  with  a  slowdown  in  economic  activity,  employment
growth slowed and the trend of gradual decline in the unemployment rate was halted. Despite the good
performance of previous years, the employment rate in France remains relatively low (62.0% in 2000),
and  that  of  older  workers  very  low.  The  unemployment  rate  is  still  high,  with  high  rates  of  youth
unemployment,  despite  large-scale  public  youth  job  creation  schemes.  Policy  measures  in  2001
included:  the  continued  implementation  of  the  35  hour  working  week  legislation,  notably  to  the
transition period for small- and medium-sized firms (SMEs); the introduction of a new support scheme
to help the unemployed with job search (the PARE); the continued phased introduction of the earned
income tax credit; and finally the adoption of a new law on social modernisation which strengthened
employment  protection  legislation.  Moreover,  publicly  subsidised  job  creation  schemes  have
represented a substantial share of net job creation in recent years. However, despite recent measures,
there still remain problems of disincentives emerging from the tax and benefit system, particularly for
low-paid  and  older  workers.  The  transition  to  a  shorter  working  week  could  also  prove  more
problematic  in  SMEs  despite  measures  to  allow  a  more  relaxed  implementation  in  these  firms.  In
addition, the protracted phased implementation of the shorter working week has led to the existence of
several wage minima, some of which have been rising quickly due to the interaction of the indexation
mechanism  for  hourly  minima  with  automatic increases  in  hourly  wages.  Finally,  it  is  unclear  what
impact  the  further  recent  strengthening  of  employment  protection  legislation  will  have  on  labour
market  dynamics.  In  view  of  the  above,  while  vigorously  implementing  all  the  Employment
Recommendations adopted by the Council in February 2002, the main priorities for France should be
to:

i.

ii.

iii.

consolidate recent reforms of the tax and benefit system to improve the incentives to take up
and stay in work, and to encourage job-search. Firstly, incentives for older workers to remain
in  jobs  should  be  strengthened,  in  particular  by  reducing  the  opportunities  for  early
retirement, and by reforming the overall pension system. Secondly, focus should be paid to
low-paid workers, disincentives to part-time work, and minimum income guarantee schemes;

closely  monitor  the  implementation  of  the  35-hour  working  week,  and  take  measures
necessary  to  address  any  adverse  medium-term  effects  on  wage  costs  and  labour  supply,
while encouraging the full exploitation of opportunities for more flexible work organisation;
and

reform employment protection legislation with a view to striking a proper balance between
greater flexibility and security to facilitate access to employment. Avoid any negative effects
on labour market dynamics of the recent changes to employment regulations.

Product markets, entrepreneurship and the knowledge-based economy

The  French  economy  is  open  to  international  competition  and  is  well  integrated  into  European
markets.  Labour  productivity  is  relatively  high  and  the  price  level  has  fallen  towards  the  European
average. Progress has been made in transposing Internal Market directives in the last two years and ad
hoc  State  aid  has  been  reduced  markedly.  However,  the  gas  and  electricity  markets  are  being
liberalised  at  a  slow  pace  and  France’s  record  in  transposing  the  Internal  Market  directives  is  still

41

considerably  below  the  March  2002  target  of  98.5%.  Moreover,  despite  some  improvements,  the
administrative burden on business remains among the highest in the EU. Finally, although measures
have been taken to encourage the development of a knowledge-based society, France still lags behind
most  other  Member  States  especially  in  the  use  of  the  Internet.  In  view  of  the  above,  the  main
priorities for France should be to:

i.

ii.

iii.

iv.

speed up the liberalisation of the gas and electricity sectors by implementing the current Gas
Directive without delay, by opening up markets for non-household consumers to competition
and by taking measures aiming at reducing the market share of incumbents in order to foster
effective competition;

raise the transposition rate of Internal Market directives with the aim of achieving the target
of 98.5% of Internal Market directives;

continue ongoing efforts made to reduce the administrative burden on business, especially by
lowering the time required for registering a new private limited company; and

take  measures  to  further  facilitate  access  to  the  internet  among  households,  small
businesses and schools.

42

7.

IRELAND

After  average  growth  of  9.9%  in  the  period  1996-2000,  the  Irish  economy  experienced  a  sharp
slowdown  in  the  course  of  2001.  The  weakening  of  activity  was  due  to  the  interplay  of  capacity
constraints,  foot-and-mouth  disease  precautions  and  the  downturns  of  the  international  economy  in
general  and  the  ICT  sector  in  particular,  to  which  Ireland  is  more  heavily  exposed  than  other  EU
countries.  Confidence  indicators  and  the  purchasing  managers'  index  suggest  that  a  rebound  from  a
late-2001  trough  is  underway,  with  a  strong  recovery  expected  from  about  mid-2002.  By  2003,  the
economy should have reverted to a growth rate that is sustainable in the medium term, of about 5 to 6
percent.  While  the  labour  market  proved  to  be  remarkably  resilient  in  2001,  a  further  increase  in
unemployment  seems  inevitable  in  2002,  to  some  4½  percent.  Nonetheless,  the  labour  market  is
expected  to  remain  quite  tight.  As  a  result,  some  drift  above  the  wage  provisions  in  the  national
agreement  is to  be  expected  and  domestically-generated  inflationary  pressures  are  unlikely  to abate.
Due to various indirect tax rate increases, average inflation in 2002 will probably be higher than the
4.0  percent  recorded  for  2001,  although  the  general  trend  from  the  first  quarter  of  2002  should  be
downwards.

Social partnership has been a cornerstone of Irish economic policy since 1987. The current three-year
agreement, which expires end-2002, provided for increases in after-tax income of 25 per cent or more,
to be reached through a combination of nominal wage increases and direct tax relief. A key challenge
is  to  adapt  the  current  wage  setting  process  and  the  tax  and  spending  commitments  in  national
agreements  to  the  new  environment  characterised  by  conditions  approaching  full  employment  and
more  limited  budgetary  resources.  Growth  in  discretionary  ("voted")  spending  has  been  in  double-
digits in recent years, which is not sustainable in the medium-term. Developing the necessary policies
to guide public spending in line with resources in the medium term and improving expenditure control
should be seen as another key challenge. While Ireland has taken measures to increase competition in
some markets, there remains an insufficient degree of competition in some sectors. For example, in the
areas  of  professional  services,  retail  distribution  and  network  industries,  there  is  scope  for
strengthening competition.

Budgetary policy

In  2001,  a  large  tax  shortfall  led  to  a  general  government  surplus  of  1.7  percent  of  GDP,  some  2½
percentage points below target. This is the lowest surplus since 1997. The stability programme 2002-
2004  targets  a  small  surplus  for  2002  and  envisages  a  return  to  a  (small)  deficit  for  2003-2004.
However,  in  the  event  that  the  large  contingency  provisions  against  unforeseen  developments
incorporated in the 2003-2004 targets are not used, a small surplus would be recorded in each year and
the  close-to-balance  requirement  of  the  Stability  and  Growth  Pact  would  be  broadly  respected.
Regarding debt developments, the stability programme projects a near-stabilisation of the debt ratio at
the low level of 34% of GDP. In view of the above, and considering that Ireland is a member of the
euro area, budgetary policy should aim to:

i.

ii.

iii.

ensure that the budgetary stance for 2002 is broadly neutral;

ensure  continued  compliance  with  the  close-to-balance  requirement  of  the  Stability  and
Growth Pact after 2002; and

improve expenditure control and develop, for  use in  the 2003  budget round and  beyond,  a
norm-based framework to guide public spending in the medium-term.

43

Labour markets

Employment  growth  held  up  well  during  2001,  despite  the  economic  slowdown,  with  employment
gains moderating but still averaging some 3% for the year. The overall employment rate exceeds the
EU average and female employment growth continues to outpace that for males but there still remains
scope  for  further  increases  in  the  female  employment  rate.  Unemployment  rose  slightly  during  the
second half of 2001 but the rate still remained close to 4% at year end. While this rate is likely to rise
somewhat in 2002, conditions approaching full employment are expected to  continue.  The available
evidence indicates that earnings growth remains fairly high, exceeding the 7½% pay increase for 2001
provided under the national agreement. The challenges of a tight labour market remain in relation to
mobilising  labour  and  future  wage  setting  processes.  In  view  of  the  above,  while  vigorously
implementing  all the  Employment  Recommendations  adopted  by  the  Council  in  February  2002,  the
main priorities for Ireland should be to:

i.

ii.

promote the setting of wages in line with productivity developments and skills differentials
and consistent with the maintenance of competitiveness and price stability; and

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

Product markets, entrepreneurship and the knowledge-based economy

Ireland  is highly  exposed  to  international competition  and labour  productivity  is  well  above  the  EU
average. Ireland’s price level was 5% above the EU average in 2000 and has been rising relative to the
EU average in recent years. The liberalisation of the network industries is continuing, although State-
owned incumbents still have high market shares in these sectors. Whilst regulations affect the level of
competition  in  certain  service  sectors  such  as  the  professions  and  retail  distribution  the  overall
regulatory  burden  on  business  is  low.  In  March  2002  the  rate  of  transposition  of  Internal  Market
directives (97.9%) remained below the target of 98.5%. Sectoral and ad hoc State aid is low although
total State aid (as a % of GDP) is at the top end of the range in the EU. Ireland’s ICT production (as a
% of total production) is the highest in the EU, partly due to the presence of a large number of foreign-
owned  high-tech  firms.  However,  R&D  expenditure  is  below  the  EU  average,  particularly  public
R&D,  which  is  being  addressed  by  recent  measures.  In  view  of  the  above,  the  main  priorities  for
Ireland should be to:

i.

ii.

iii.

implement  measures  to  increase  effective  competition  in  the  local  telecommunications,
electricity, gas and transport sectors in particular to address the high market share of State-
owned and private incumbents;

address government regulation, which may impair competition in certain market sectors such
as the professions and retail distribution; and

raise the transposition rate of Internal Market legislation with the aim of achieving the target
of 98.5% of Internal Market directives.

44

8.

ITALY

In  2001  real  GDP  growth  slowed  to  1.8%,  prompted  by  a  declining  external  contribution  and,
subsequently,  by  weakening  domestic  demand.  After  passing  the  trough  in  November,  economic
activity is expected to pick up gradually at the beginning of 2002 on account of the improving global
outlook  and  recovering  confidence.  The  upturn  is  likely  to  become  steeper  around  mid  year.
Investment  expenditure,  in  particular,  is  forecast  to  accelerate  in  view  of  a  temporary  tax  incentive
scheme due to expire at the end of the year. Owing to the low starting point inherited from 2001, real
GDP growth will remain well below 2% in 2002 and is expected to rise to around 2 3/4 % in 2003.
Employment  growth  is  likely  to  weaken  in  2002,  on  account  of  the  lag  with  respect  to  output.  The
performance of the labour market is forecast to improve again in 2003, with the rate of unemployment
likely to fall below 9%. With no significant pressure from import prices and wages and a still negative
output  gap  up  until  the  end  of  the  year,  inflation  is  expected  to  ease  in  2002.  However,  due  to  the
consecutive hikes in January and February, resulting from temporary effects, annual average inflation
is  unlikely  to  fall  below  2%.  It  is  forecast  to  stay  above  that  threshold  in  2003,  upheld  by  rising
demand pressure.

In the coming years fiscal policy aims at simultaneously achieving a significant reduction in the tax
burden  while  respecting  the  medium-term  objective  of  a  budget  in  balance  or  in  surplus.  Hence,
improving  the  control  and  quality  of  government  expenditure  remains  of  paramount  importance.
Although narrowing somewhat in 2001, the wide unemployment gap between the North and the South
continues  to  be  the  overriding  regional  and  labour  market  issue.  Linked  to  that  are  the  restrictive
employment protection legislation and the underdeveloped unemployment safety net. To support the
goal  of  rising  the  underlying  speed  limit  of  the  economy  to  around  3%  per  year,  economic  policy
needs to address the low employment rates as well as to accelerate the thus-far slow transition to the
knowledge-based  society  in  terms  of  educational  attainments,  skilled  human  resources  and  R&D
performance. In the same policy context, it is necessary to improve the business environment and to
enhance competition in the product markets.

Budgetary policy

The general government deficit to GDP ratio in the year 2000, previously estimated at 1.5% of GDP
(0.3% of GDP including receipts from the sale of UMTS licences), was revised to 1.7% of GDP (0.5%
including UMTS receipts). Mostly as a consequence of this revision, the general government turnout
in 2001 was a deficit of 1.4% of GDP, against a government projection of 1.1% of GDP. The 2001
public accounts benefited from one-off operations amounting to some 0.6% of GDP (sales of public
real estate assets of 0.4% of GDP, largely through a securitisation process, and 0.2% of GDP from the
securitisation of future net proceeds from the state lottery). Primary current expenditure was broadly
stable at 37.5% of GDP, after decreasing by 0.3 points of GDP between 1999 and 2000. The cyclically
adjusted deficit, according to Commission calculations, improved slightly compared to 2000, but the
underlying budgetary position does not improve if the one-off operations are netted out in both years.
The  debt  ratio  decreased  by  1.2  percentage  points  of  GDP  to  109.4%,  a  marked  slowdown  in  the
process of continued reduction. Market-related difficulties in meeting the privatisation objectives and
lower-than-expected growth mainly contributed to this slowdown. The November 2001 update of the
stability  programme  targets  a  sizeable  reduction  in  the  deficit  ratio  to  0.5%  of  GDP  in  2002  and  a
balanced budget in 2003, while the debt ratio is to fall below 100 per cent of GDP by 2004. The Italian
authorities face the challenge of securing additional and lasting reductions in the primary expenditure

45

to  GDP  ratio,  improving  the  quality  of  expenditure,  reducing  the  tax  burden  while  achieving  and
maintaining  the  close-to-balance  budgetary  objective  required  by  the  Stability  and  Growth  Pact.  In
view of the above, and considering that Italy is a member of the euro area, budgetary policy should
aim to:

i.

ii.

iii.

ensure in 2002 and 2003 the respect of a steady path of deficit reduction, in order to achieve
the objective of a balanced budget in 2003, by securing primary surpluses at the high levels
projected  in  the  updated  stability  programme,  notably  thanks  to  improved  control  of
expenditures;

ensure that the timing and the scope of the reform of taxation, outlined in the enabling act
presented  to  Parliament  and  aimed  at  reducing  the  tax  burden,  simplifying  taxation  and
narrowing  the  tax  wedge,  are  consistent  with  the  achievement  and  maintenance  of  a
budgetary position close to balance or in surplus; and

ensure that the changes to the social security system, for which the government has requested
delegated  powers  from  Parliament,  address  the  critical  aspects  recently  highlighted  in  the
report by the government commission on the implementation of the 1995 pension reform, in
particular  the  excessive  length  of  the  transition  period  to  the  new  system  and  the  still
significant  projected  increase  in  the  equilibrium  contribution  rate;  moreover,  ensure  that
further  changes  to  the  social  security  system  are  carried  out  without  generating  long-term
budgetary imbalances; implement the measures aimed at promoting supplementary privately-
funded pension schemes, clarifying the possible related budgetary costs.

Labour markets

The Italian labour market situation continued to improve in 2001, with the unemployment rate falling
from  10.4%  to  a  still  high  9.5%  and  female  labour  force  participation  increasing.  On  average,
employment grew by almost 2.1 per cent to an estimated 54.6% and the overall participation rate rose
to 60.4% (from 59.9% in 2000). Besides wage moderation, the higher employment intensity of growth
over the recent years is also due to the increased labour market flexibility “at the margin”, allowing
greater use of new and more flexible contracts (part-time, temporary jobs, fixed-term contracts, new
apprenticeship). The measures designed to lower labour costs for permanent employees continued to
have a significant impact on employment growth during 2000. However, the Italian labour market is
still  characterised  by  many  weaknesses,  notably  a  persistent  low  employment  rate,  especially  for
women (about 40%) and older workers (only 28% for the 55-64 year old). Wide regional disparities in
labour  market  performances  are  still  a  major  source  of  inefficiency.  The  unemployment  rate  in  the
South is at 19.3%, compared to 7.4% in the Centre and only 3.8% in the North. A more decentralised
wage-bargaining  system  should  be  agreed  by  the  Social  partners  in  order  to  allow  for  greater  wage
differentiation.  As  a  result  of  stricter  protection  of  workers  in  permanent  jobs  in  medium  and  large
firms  and  the  still  relatively  low  degree  of  protection  of  non-employed  and  “atypical  workers”,  the
labour market continues to be characterised by a marked dualism. The unemployment benefit system
remains  limited  in  scope  and  uneven,  with  different  schemes  and  disparities  in  benefit  conditions
(level, duration and eligibility criteria). Although the tax wedge on labour costs has been reduced over
the latest years, especially that on low-paid workers, it remains relatively high. In view of the above,
while  vigorously  implementing  all  the  Employment  Recommendations  adopted  by  the  Council  in
February 2002, the main priorities for Italy should be to:

46

i.

ii.

iii.

iv.

v.

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

ensure  the  full  implementation  of  the  recent  labour  market  reform  package  in  order  to
increase labour market flexibility and to promote greater workplace adaptability with a view
to facilitating access to employment, while maintaining a proper balance between flexibility
and security;

implement the planned comprehensive reform of the unemployment benefit system in order
to extend the coverage and the effectiveness of social protection of the unemployed, while
strengthening incentives to work;

take  steps  to  further  encourage  increased  labour  force  participation,  especially  among
women,  including  setting  targets  to  ensure  adequate  provision  of  facilities  for  care  of
children  and  other  dependants;  and  among  older  workers,  stepping  up  and  reinforcing
incentives to postpone retirement from the labour force; and

continue efforts to reduce the tax burden on labour, especially on low-paid earners,
while preserving equity goals and increasing work incentives, within the framework
of continued fiscal consolidation.

Product markets, entrepreneurship and the knowledge-based economy

The Italian economy is relatively less open (as measured by the total trade-to-GDP ratio) than other
EU economies of similar size. Labour productivity is above the EU average, but has slightly decreased
recently in relative terms. The transposition rate of Internal Market directives is below the March 2002
target of 98.5% and the number of infringement cases for violation of Internal Market rules is among
the  highest  in  the  EU.  Efforts  to  improve  the  business  environment  have  started  to  bear  fruit,  but
administrative procedures remain relatively complex,  and competition in the service  sector is  taking
hold rather slowly. Recent measures should contribute to increasing competition in the energy sector,
where incumbents retain a very strong market position and prices remain among the highest in the EU;
which may be explained in part by a fuel mix strongly based on oil products. Italy’s transition to the
knowledge-based  society  may  be  constrained  by  the  relatively  low  average  levels  of  educational
achievement  of  the  population  and  the  weak  R&D  and  innovation  base  of  the  economy.  Internet
penetration  in  households  and  in  schools  is  below  the  EU  average,  even  if  the  former  is  rapidly
catching  up.  The  development  of  e-commerce  is  relatively  slow.  In  view  of  the  above,  the  main
priorities for Italy should be:

i.

ii.

iii.

continue to strengthen the overall education and skill base of the population, further increase
private sector involvement in R&D and innovation and promote higher ICT take up;

increase effective competition in the service  sectors, particularly  professional  services,  and
implement  all  reforms  to  extend  market  opening  and  further  enhance  competition  in  the
energy  sector  in  order  to  allow  the  pass-on  of  the  benefits  of  liberalisation  to  final  users,
including households and small businesses;

sustain the efforts undertaken to reduce the administrative burden for businesses, including
the time and cost required for registering a new company; and

47

iv.

raise the transposition rate of Internal Market legislation with the aim of achieving the target
of  98.5%  of  Internal  Market  directives,  and  bring  down  the  number  of  infringement
procedures.

48

9.

LUXEMBOURG

Real GDP growth decelerated in the course of 2001 but still reached 5.1% on yearly average according
to a preliminary estimate. Domestic demand remained robust: private consumption benefited from the
tax  cuts  operated  at  the  beginning  of  the  year,  government  consumption  continued  to  increase  at  a
rather  fast  pace  and  investment  proved  dynamic.  Exports  still  increased  by  more  than  8%  over  the
year,  while  imports  rose  at  least  as  fast,  imports  of  goods  remaining  very  dynamic  in  line  with
domestic  demand.  Employment  continued  to  increase  by  more  than  5%,  hardly  less  than  in  2000,
though decelerating in the course of the year, while unemployment began to rise at the end of the year.
Wages accelerated further in 2001, rising by about 5½ % after 4.6% in 2000. On the contrary, prices
decelerated in 2001, the rise in the HICP reaching 2.4% as against 3.8% in 2000. However, underlying
inflation kept accelerating, reaching 3.3% in the second half of 2001.

Increasing the low national participation and employment rates, especially for older workers remains a
key  challenge.  Moreover,  developments  in  wages  and  labour  costs  require  attention  and  need  to  be
maintained in line with the rest of the euro area in the coming years. To this end, the wage formation
process calls for adjustment. Finally, efforts should be undertaken to accelerate implementation of the
reform of competition legislation and empowering the competition authority to apply EC law.

Budgetary policy

In  2001,  the  general  government  surplus  declined  to  4%  of  GDP  partly  as  a  result  of  decelerating
activity and of the tax cuts implemented in the framework of the 1st January 2001 tax reform; but the
main factor of decline was a large increase in government expenditure reaching 1.7% of GDP. Further
decline  in  the  surplus  is  expected  in  2002,  due  to  cyclical  factors  and  to  a  second  phase  of  the  tax
reform;  in  addition,  government  expenditure  will  continue  to  increase  at  a  very  fast  pace,  public
investment,  particularly  in  infrastructures,  is  expected  to  reach  4.6%  of  GDP  in  2002,  the  highest
percentage in the whole EU. In 2003, recovery in activity is expected to result in a renewed although
moderate  increase  in  the  government  surplus.  However,  current  government  expenditures  will
continue to expand significantly. In view of the above and considering that Luxembourg is a member
of the euro area, budgetary policy should aim to:

i.

contain current government expenditure in 2003 in order to ensure that the increase will not
exceed that of total budget expenditure and to this aim endeavour to overcome rigidities in
specific kind of current expenditure.

Labour markets

The overall performance of the Luxembourg labour market was good in 2001. The unemployment rate
remained very low and employment growth continued to be strong, largely thanks to the availability of
cross-border workers. Nevertheless, the national employment rates remain low and the labour market
has been tightening, as revealed by strong nominal wage increases. This underlines the need to better
exploit the  country’s own  labour potential,  as  indicated  by  low  national  employment  rates  for  older
workers (27%) and women (50%). In 2001, the government made some effort to restrict access to the
disability pension scheme and to increase incentives to work longer through an increase of the accrual
rate of old-age pension rights for additional years worked beyond the age of 55. In addition, female
labour  force  participation  and  flexibility  in  work  were  encouraged  by  allowing  voluntary  access  to
part-time work by full-time workers. Despite these reforms, incentives to remain in labour force could

49

be improved by further reforms of early retirement, pre-retirement and disability pension schemes. In
view of the above, while vigorously implementing all the Employment Recommendations adopted by
the Council in February 2002, the main priority for Luxembourg should be to:

i.

intensify  efforts  to  increase  the  national  employment  rate:  especially  for  older  workers  by
reducing incentives for early retirement, and by increasing incentives in pre-retirement and
disability pension schemes to remain in employment; and for women by removing obstacles
to  their  entry  or  re-entry  to  the  labour  market  (by,  inter  alia,  increasing  the  availability  of
child care facilities).

Product markets, entrepreneurship and the knowledge-based economy

The  high  degree  of  openness  of  the  Luxembourg  economy  stimulates  competition  on  the  product
markets, which results in very high productivity and prices below the EU average. Network industries
are progressively being liberalised and ICT diffusion is progressing well. However, some elements of
the  competition  framework,  such  as  obsolete  legislation  on  prices,  have  the  potential  to  restrict
competition  on  product  markets.  Moreover,  the  lack  of  empowerment  of  the  competition  authority
makes it difficult to ensure effective effective enforcement of EC competition rules. In March 2002 the
rate  of  transposition  of  Internal  Market  directives  (97.7%)  remained  below  the  target  of  98.5%.  In
view of the above, the main priorities for Luxembourg should be to:

i.

ii.

iii.

implement the announced reform of competition legislation, including the abolition of fixed
and monitored prices, the empowering of the competition authority to apply EC competition
law, and the reform of public procurement legislation;

take measures to reduce the administrative burden for businesses, including the time and cost
required for registering a new company, and to develop e-government; and

raise the transposition rate of Internal Market legislation with the aim of achieving the target
of 98.5% of Internal Market directives.

50

10.

NETHERLANDS

Real GDP growth decelerated at the beginning of 2001, reaching only 1.1% in average for the year as
against  3.5%  in  2000.  Exports  as  well  as  imports  decreased  substantially  following  the  decline  in
international  trade;  domestic  demand  was  also  subdued,  private  investment  decreasing  from  the
second  half  of  2000  and  consumption  reacting  abnormally  to  the  large  increase  in  households
disposable income,  which  was  boosted  by  fast  rising  wages  and  the  effects  of  the  tax  reform  at  the
beginning of the year. Real GDP growth is expected to pick up again in the course of 2002, as private
consumption  should  accelerate  and  exports  should  follow  the  recovery  in  international  trade:  the
expansion could reach around 1½% in 2002 and some 2¾% in 2003. Employment kept increasing fast
in 2001, though decelerating in the second part of the year. As a result of sizeable labour hoarding, the
productivity of labour declined and unemployment remained stable until the end of 2001. The increase
in employment should decelerate significantly in 2002 and recover only modestly in 2003, leading in
both years to a substantial rise in unemployment,  the  level  of  which should,  however,  remain  much
lower than in neighbouring countries. Moreover, labour markets are likely to remain quite tight. The
current  upward  pressure  on  wages  is  therefore  unlikely  to  disappear  overnight.  Inflation,  which  had
accelerated significantly in the course of 2000 to about 3% at the end of the year, partly as an effect of
rising oil prices, jumped to 5% in 2001,  due  to  a rise  in  indirect  taxation  which  was  part  of the tax
reform  and  also  to  still  rapidly  rising  wages;  price  increases  are  expected  to  decelerate  only
progressively in the coming years.

Increasing  further  labour  market  participation  by  drawing  currently  inactive  people  into  the  labour
market remains a key challenge. Moreover, due to substantial acceleration in wages in the latest years,
part of the very significant gains of competitiveness achieved during nearly 15 years have been lost.
This  might  reduce  the  benefits  for  the  Dutch  economy  from  the  world  recovery  and  dampen  future
growth  prospects.  A  second  key  challenge  is  therefore  to  ensure,  as  soon  as  possible,  a  renewal  of
wage  moderation  and  to  tackle  relatively  slow  labour  productivity  growth,  in  order  to  maintain  the
competitiveness of the economy.

Budgetary policy

The  general  government  surplus  declined  from  1.5%  of  GDP  in  2000  to  0.2%  of  GDP  in  2001
(excluding UMTS receipts), mainly as a result of a significant reduction in budgetary revenues. The
wide-ranging tax reform, which came into effect on 1 January 2001, induced a decline in government
receipts from the income tax and from the social security contributions, only partly compensated by
the increase in indirect taxes (specifically the rise in the standard VAT rate from 17.5% to 19%). This
effect was aggravated, at the end of the year, by the impact on tax revenues of the cyclical deceleration
in the economy. Moreover, the EMU-balance deteriorated 0.3 percentage points because of a one-time
expenditure due to the acquisition of the stake of DSM in EBN. This acquisition is to be seen as part
of  the  process  to  liberalise  the  Dutch  gas  market.  Although  some  spending  was  reallocated  in  the
Spring of 2001 towards  priorities in  the  areas  of healthcare,  education  and security,  the expenditure
ceilings were respected thanks to lower-than-expected interest payments and social security outlays. In
the absence of any discretionary measure, letting the automatic stabilisers fully play, the government
accounts are currently expected to be broadly in balance in 2002 and to post a moderate deficit in 2003
which might reach 0.4% of GDP, according to the Spring Commission forecasts. In view of the above
and considering that the Netherlands is a member of the euro area, budgetary policy should aim to:

51

i.

ii.

ensure that the budgetary stance in 2002 does not contribute to inflationary pressures, should
they persist notably as a result of excessive wage increases; and

avoid  a  deterioration  in  the  government  balance  in  2003  and,  to  this  end,  contain  current
government expenditure within clearly defined ceilings set in real terms.

Labour markets

The Dutch labour market continues to perform very well, with the lowest unemployment rate in the
European  Union  and  employment  rates  already  above  the  Lisbon  targets  for  the  EU  as  a  whole.
Despite the cyclical slowdown and still robust employment  growth in 2001, labour market tightness
continued  to  be  a  major  driving  force  behind  strong  wage  increases.  Further  improvement  of
employment rates will depend on continued growth of female participation and a stronger activation of
older persons and minorities. Moreover, there exists a substantial untapped reserve of labour among
benefit  claimants,  e.g.  7%  of  the  labour  force  receives  unemployment  and  social  benefits  and  11%
receive  disability  benefits  (although  some  of  those  with  partial  disabilities  are  working).  Some  new
measures were introduced, and some existing ones refined, in order to strengthen work incentives for
benefit recipients, older workers and low wage earners.  However,  the  discussion  on  a reform  of  the
disability scheme has not yet led to tangible results; and the cumulative effect of benefits, including
local  subsidies,  continues  to  create  inactivity  traps.  In  view  of  the  above,  while  vigorously
implementing  all the  Employment  Recommendations  adopted  by  the  Council  in  February  2002,  the
main priority for the Netherlands should be to:

i.

make work pay via reforms of benefit eligibility, conditionality and rules for cumulation of
benefits. Carry through and implement the planned reform of the disability scheme, thereby,
in view of the size of the stock of recipients, paying attention to both the inflow and to the
activation of those who already receive benefits.

Product markets, entrepreneurship and the knowledge-based economy

The Dutch economy is very open (as measured by the total trade-to-GDP ratio). This assures a high
level of competition and relatively low price levels in sectors producing tradable goods and services.
Market  liberalisation  has  contributed  to  relatively  low  prices  for  telephone  calls  and  electricity  use.
The  transposition  rate  of  Internal  Market  directives  met  the  March  2002  target  of  98.5%.  Measures
have  been  taken  to  encourage  ICT  use  and  reduce  the  shortage  of  ICT  experts.  However,  labour
productivity growth has been relatively slow as a result of, among other things, the rapid employment
growth in services, the low level of competition in some more sheltered services sectors (e.g. notaries,
childcare, taxis and broadband Internet), and insufficient business investment, particularly in R&D. In
spite  of  efforts  made  to  stimulate  research  and  innovation,  business  expenditures  on  R&D  as  a
percentage of GDP remain below the EU average, which may be associated with the lack of a science-
and  technology-oriented  labour  force.  The  typical  time  and  costs  required  for  setting  up  a  Private
Limited  Company  are  above  the  EU  average.  In  view  of  the  above,  the  main  priorities  for  the
Netherlands should be to:

i.

create  the  conditions  for  a  further  increase  in  business  investment  in  R&D  by  taking
measures to raise the number of science and technology  graduates entering  into the  labour
force and by promoting a more technology-oriented education;

52

ii

iii.

address  market  regulations  which  may  impair  competition  in  service  sectors,  including
notaries, childcare, taxis and broadband internet; and

take further measures to develop e-government and to reduce the administrative burden on
business, including the time and cost required for registering a new company.

53

11.

AUSTRIA

Output  growth  decelerated  in  2001  to  about  1%,  following  buoyant  economic  activity  during  the
period 1998-2000. Weak demand, worsening business confidence and excess capacities lead to a fall
in equipment investment, at the same time as construction investment plunged. Domestic demand was
furthermore  curbed  by  budgetary  consolidation.  Although  exports fell in  step  with the  slowdown  of
economic  activity  of  main  trading  partners,  the  growth  contribution  of  net  exports  remained  clearly
positive due to a strong deceleration in import growth. In 2002, domestic demand is expected to pick
up  somewhat,  thereby  offsetting  a  further  decline  in  export  growth.  As  a  result,  GDP  growth  on
average should remain more or less steady. In 2003 the projected improvement in both external trade
and domestic demand should bring output expansion close to  potential,  i.e. to  some  2½%.  Oil  price
developments and increases in excise duties drove up prices until May 2001. Higher housing costs also
added to price pressures. In 2002, by contrast, the expected easing of import prices should dominate
consumer  price  developments.  In  2003,  the  increase  in  the  HICP  is  expected  to  remain  at  the  2002
level. The expansion in total employment came to a halt in 2001. Employment is projected to decline
slightly in 2002 but job growth should resume in 2003. Unemployment started to rise in 2001 and is
expected to continue its rise in 2002 to some 4.0% of the labour force before reversing in 2003.

Although  the  budgetary  situation  improved  considerably  in  2001,  sustainability  in  a  longer-term
perspective is not ensured given the expected strong expenditure pressure stemming from the ageing
of the population. In particular, a low effective retirement age and high benefit levels continue to exert
significant  upward  pressure  on  public  pension  outlays.  Although  pension  scheme  reforms  and
moderate benefit rises in recent years have partially addressed these issues, much remains to be done
to put the pension system on a sustainable footing. Output growth in Austria has been strongly based
on factor expansion while total factor productivity growth remains rather moderate. Moreover, a weak
technology  base  stands  in  the  way  of  an  expeditious  transition  to  a  knowledge-based  economy.
Although  different  initiatives  have  been  undertaken  in  this  regard,  such  as  an  increase  in  R&D
expenditure  or  the  reinforcement  of  links  between  business  and  universities,  it  remains  to  be  seen
whether  these  measures  are  sufficient  to  help  Austria  to  catch  up  with  other  more  advanced  EU
countries in terms of a knowledge based economy.

Budgetary policy

Budgetary  consolidation  in  2001  was  impressive.  General  government  finances  improved  from  a
deficit of 1.5% of GDP (excluding UMTS proceeds) in the year before to a balanced position. As this
was  achieved  against  output  growth  much  below  trend  the  improvement  in  the  cyclically  adjusted
position was even stronger. Expenditure growth was kept at bay thanks to the ongoing effects of the
reform  of  the  pension  system  and  public  administration.  Due,  however,  to  exceptional  one-off
expenditure2, the ratio of expenditure-to-GDP (excluding UMTS proceeds) rose slightly compared to
the previous year; it is, however, projected to fall visibly in 2002. The favourable outcome in 2001 is
mainly due, therefore, to a strong increase in tax revenue as a result of predominantly base broadening
measures. As a consequence, the tax burden climbed to a record high. The stability programme update
projects a balanced budget also for the years 2002 and 2003. To attain the targets of the programme,
structural savings measures will be needed at the level of the Länder, which committed themselves to

2

Compensation payments for forced labour in World War II, capital injection for the Federal Railways
(ÖBB)

54

                                                
considerable surpluses in the framework of a national stability pact. Despite recent structural reforms,
the sustainability of the pension system is not secured in view of the sharp rise in the age-dependency
ratio in coming decades. In view of the above, and considering that Austria is a member of the euro
area, budgetary policy should aim to:

i.

ii.

iii.

implement measures leading to structural expenditure savings, especially at lower levels of
government,  so  as  to  meet  the  target  of  a  balanced  budget  in  2002  and  2003  set  in  the
updated stability programme of December 2001;

ensure  that  the  planned  reduction  in  the  high  tax  burden  enhances  incentives  to  work  and
invest and does not conflict with the target of maintaining budgetary balance; this requires
additional savings efforts at all levels of government; and

review the public pension system to ensure the sustainability of public finances, addressing
in particular the low average effective retirement age and the level of pension benefits;

Labour markets

The overall performance of the Austrian labour market remained very satisfactory in 2001. Although
the  economic  slowdown  has  started  to  be  felt  and  unemployment  has  started  to  increase,  the
unemployment rate is, at 3.6%, still among the lowest in the European Union. Skills gaps, which have
occurred  in  the  ICT  sector,  manufacturing  and  services,  are  likely  to  be  attenuated  by  the  current
slowdown. While the total employment rate is, at 68% in 2000, above average, the employment rate of
older workers appears to be stagnating at a very low level of 29%. This is problematic in view of the
high  burden  stemming  from  population  ageing.  Following  the  pension  reform  of  2000,  the  reduced
inflow into retirement experienced in 2001 looks encouraging,  but  it is  still too early  to  see the full
impact on the average retirement age. In 2001, a number of active measures that proved successful in
the past have been strengthened or refined. However, disincentives to work after the minimum age for
early retirement remain, and the lengthening of benefit duration for older workers is likely to produce
adverse  effects,  thus  weakening  the  impact  of  the  early  retirement  reform  to  which  it  is  an
accompanying  measure.  In  view  of  the  above,  while  vigorously  implementing  all  the  Employment
Recommendations adopted by the Council in February 2002, the main priority for Austria should be
to:

i.

speed  up  reform  of  tax  and  benefit  systems  to  remove  disincentives  for  older  workers  to
remain active in the labour market.

Product markets, entrepreneurship and the knowledge-based economy

Despite  Austria's  lower  exposure  to  international  competition  than  for  other  small  Member  States,
labour  productivity  and  price  levels  are  in  line  with  the  EU  average.  Important  measures  are  being
taken to rapidly liberalise network industries and to appoint sectoral regulators. Further improvements
in  the  regulatory  framework  would  foster  competition  and  increase  pressure  for  companies  to
innovate.  In  March  2002  the  rate  of  transposition  of  Internal  Market  directives  (98.1%)  remained
below the target of 98.5%. Austria’s lag in business R&D and in high tech patents also contributes to
its  relatively  weak  technology  base  which  risks  delaying  the  transition  to  the  knowledge-based
economy.  The  typical  time  and  costs  requirements  for  setting  up  a  private  limited  company  are
relatively high. In view of the above, the main priorities for Austria should be to:

55

i.

ii.

iii.

iv.

continue to take measures aimed at promoting and diffusing ICT and R&D in businesses, in
order to increase business expenditure on R&D as a percentage of GDP;

improve Austria’s integration within the Internal Market by accelerating the transposition of
Internal Market directives with the aim of achieving the target of 98.5% of Internal Market
directives and by ensuring a full application of Community rules on public procurement by
all levels of public authorities;

improve 
telecommunications regulator; and

regulatory 

the 

framework  by 

increasing 

the  effective  powers  of 

the

take  further  measures  to  reduce  the  administrative  burden  on  business,  including  the  time
and cost required for registering a new private limited company.

56

12.

PORTUGAL

Economic growth decelerated to about 1¾% in 2001, as a sharp slowdown in domestic demand was
only partly offset by an improvement in net exports. This ends an extended period of growth driven by
domestic  demand.  The  efforts  of  private  sector  agents  to  redress  their  balance  sheets,  following  the
sharp rise in indebtedness levels in recent years, are expected to limit domestic demand growth also in
2002-03, estimated to average about 1¼%. With foreign demand expected to be weak in the first half
of 2002 output growth will also remain subdued but should pick up in step with the recovery of global
demand in the latter part of the year. In view of the negative statistical overhang in the beginning of
2002, annual GDP growth is expected to reach only around 1½% in 2002, before reviving to a growth
rate  of  some  2¼%  in  2003.  After  an  upsurge  in  inflation  in  2000  and  through  2001,  due  partly  to
temporary  factors,  inflationary  pressures  have  subsided  since  the  second  quarter  of  2001.  Inflation
measured  by  the  HICP  is  projected  to  pursue  its  deceleration  in  the  near  term,  attaining  a  value  of
around  2½%  on  an  annual  average  in  2003.  The  unwinding  of  the  tight  labour  market  situation
coupled with the projected low wage increases in the public sector are expected to have a moderating
impact  on  wage  developments  and,  subsequently,  price  inflation.  Employment  growth  is  forecast  to
slow  down  significantly  during  the  2002-03  period,  after  expanding  by  1.6%  in  2001,  while
unemployment should rise somewhat, with the unemployment rate averaging about 5% in 2003.

A new government was sworn in on 6 April 2002. The consolidation of public finances will be a major
policy challenge for this government during its term. Fiscal consolidation faltered in 2001, due also to
significant  revenue  shortfalls.  However,  viewed  over  the  longer  period  it  is  the  strong  dynamics  of
government  expenditure,  which  appears  to  be  at  the  root  of  the  sluggish  budgetary  consolidation
process. The reversal of the rapid upward trend in general government outlays is, therefore, a priority
matter on the road to sounder  public finances. The  Portuguese  economy  has  lost  competitiveness in
recent years, as evidenced also by a large trade deficit. A number of factors have contributed to this, in
particular low growth of labour productivity coupled with high wage settlements. The unsatisfactory
level  and  growth  of  labour  productivity  is  associated,  inter  alia,  with  a  low  level  of  educational
attainment of the workforce which continues to be one of the most significant structural problems. The
pursuit  of  higher  levels  of  productivity  is  also  constrained  by  insufficient  competition  in  product
markets.  Portugal  is  one  of  the  EU  countries  most  exposed  to  the  budgetary  consequences  of
population ageing. A number of recent reforms have addressed this issue. Although these reforms will
improve  the  financial  balance  of  the  pension  system  in  the  longer  term,  further  action  seems  to  be
required  to  ensure  sustainability  of  public  finances.  Moreover,  the  strong  dynamics  of  health-care
expenditure  suggests  that  the  ongoing  reform  process  to  improve  the  control  and  efficiency  of
expenditure in the health care sector needs to be pursued with resolve.

Budgetary policy

Fiscal  consolidation  halted  in  2001,  with the  government  deficit increasing  to an  estimated  2¾%  of
GDP (2¼% in 2000 excluding UMTS proceeds), which compares with an initial target of 1.1%. This
is  much  higher  than  expected  in  December  2001,  when  the  authorities  submitted  their  stability
programme  update.  Slower  economic  growth  than  expected  is  an  important  factor  behind  the
considerably worse than targeted budgetary outcome in 2001. However, other factors are also behind
this,  notably  an  underestimation  of  the  revenue  losses  implied  by  the  reform  of  direct  taxes
implemented in 2001 and lower-than-projected efficiency gains in tax collection  and  administration.
Moreover,  despite  a  restrictive  package  adopted  in  June,  current  primary  expenditure  exceeded  the
target.  Finally,  the  strong  upward  revision  between  December  2001  and  April  2002  was  caused  by

57

much higher-than-estimated deficits at the level of local governments and a statistical reclassification
of  certain  capital  transactions  between  the  government  and  public  enterprises.  The  December  2001
update of the stability programme maintains the objective of balancing general government accounts
by 2004. This objective was reconfirmed by the new government. In view of the strong deterioration
of  the  deficit  in  2001  this  requires  a  considerable  more  ambitious  fiscal  consolidation  policy  in  the
period  2002-04.  In  the  Ecofin  Council  meeting  of  12  February  2002,  the  Portuguese  government
committed itself to respect the 3% of GDP reference value for the general government deficit in the
current year and confirmed its commitment to reach a close to balance position in 2004. In view of the
above, and considering that Portugal is a member of the euro area, budgetary policy should aim to:

i.

ii.

iii.

iv.

meet the 1.8% of GDP deficit target for 2002; to this end take the necessary measures in the
supplementary budget under preparation and strengthen budgetary surveillance at all levels
of government;

achieve a balanced budgetary position by  2004;  this  will require discretionary  measures  in
addition to those included in the 2001 updated stability programme;

implement the measures announced in June 2001 to rein in expenditure with determination
with a view to reducing the expenditure dynamics of general government; and

continue  the  process  of  pension  reform  by  implementing  measures  in  addition  to  those
contemplated  by  the  2001  reform  to  ensure  sustainability  of  the  pension  system  in  the
medium  and  longer  term;  introduce  effective  measures  to  curb  the  unsustainable  pace  of
health care expenditure, particularly for the consumption of pharmaceuticals.

Labour markets

The labour market situation remained favourable  in  Portugal  in 2001,  despite  the  marked  decline in
economic  activity.  The  unemployment  rate  continued  to  be  one  of  the  lowest  in  the  Union  at  just
above 4%. Employment grew by 1.5% and the employment rates are all (whether overall, female or
that  of  older  worker)  well  above  the  EU-averages.  Wage  levels  and  labour  costs  remain  among  the
lowest in the Union, but the tight labour market situation in some sectors and strong wage increases in
the  public  sector  have  triggered  nominal  wage  growth  of  over  6%  in  2000-01.  Together  with  the
modest increase in labour productivity, real unit labour costs have increased by some 3½% in 2000-01,
well above the basically unchanged level noted for the EU as a whole. In addition, the level of labour
productivity is low in Portugal, partly explained by the very low levels of educational attainment (also
for the younger age groups). On average, the share of the population that has attended at least upper
secondary  education  was  only  21%  in  1999  (compared  to  59%  on  average  in  the  EU).  Although,
Portugal  has  increased  spending  on  education  substantially  in  recent  years,  the  continued  high
incidence of early dropouts and a need to streamline and simplify the very many measures suggest a
relatively  inefficient  use  of  resources.  The  share  of  workers  with  temporary  contracts  has  almost
doubled in the last five years, partly as a result of the stricter  employment  protection legislation for
workers  with  regular  contracts.  In  view  of  the  above,  while  vigorously  implementing  all  the
Employment  Recommendations  adopted  by  the  Council  in  February  2002,  the  main  priorities  for
Portugal should be to:

58

i.

ii.

iii.

improve  education  and  training  systems  in  the  framework  of  a  better  articulated  lifelong
learning strategy in order to raise the employability and adaptability of the labour force and
increase labour productivity;

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

modernise  the  labour  market  institutions,  inter  alia  by  adapting  employment  contract
regulations,  in  order  to  minimise  the  risk  of  segmentation  between  regular  and  atypical
contracts, taking into account the need for a proper balance between flexibility and security.

Product markets, entrepreneurship and the knowledge-based economy

Partly  because  of  its  geographical  position,  the  Portuguese  economy  is  relatively  less  open  (as
measured  by  the  total  trade-to-GDP  ratio)  than  other  Member  States  of  comparable  size.  Labour
productivity is the lowest in the EU and is growing only slowly. Among the determinants of the low
productivity and overall competitiveness of the economy are the low level of educational attainment of
the workforce and the very weak involvement of the business sector in R&D and innovation. Several
measures  have  been  taken  to  promote  ICT  diffusion,  increase  R&D  activity  and  reduce  the
administrative burden on businesses. Liberalisation of network industries has made progress but there
is  still  scope  for  enhancing  competition,  as  incumbents  have  retained  strong  market  positions  and
prices remain relatively high. Portugal’s record in transposing Internal Market directives is below the
March 2002 target of 98.5%. Competition in overall product markets would greatly benefit from the
implementation  of  the  announced  reinforcement  of  the  institutional  setting  for  the  enforcement  of
competition policy and the control of sector-specific State aid, which remains the highest  in  the  EU
and is only decreasing at a slow pace. In view of the above the main priorities for Portugal should be:

i.

ii.

iii.

iv.

continue  to  strengthen  the  overall  education  and  skill  base  of  the  population  and  further
promote  the  stronger  involvement  of  businesses  in  R&D  and  innovation,  together  with
higher ICT take up;

enhance effective competition in liberalised  utilities  and especially  in  the  energy  sector,  in
order to reduce the prices for users;

monitor  the  cost-effectiveness  of  sector-specific  State  aid  schemes  with  a  view  to  their
possible reduction; and

continue progress in raising the transposition rate of Internal Market legislation with the aim
of achieving the target of 98.5% of Internal Market directives.

59

13.

FINLAND

Due  to  a  sharp  decline  in  export  growth  accompanied  by  heavy  de-stocking  the  Finnish  economy
experienced a sharp slowdown in 2001, with GDP  growth  being  estimated at  0.7  % after  5.6 %  the
year before. A gradual recovery of the external contribution to growth is expected to revive economic
activity  in  2002-03.  Furthermore,  private  consumption  should  gain  strength  owing  to  continued
income  tax  cuts,  moderating  inflation  and  continued  favourable  monetary  conditions.  However,
against  the  background  of  a  low  rate  of  capacity  utilisation  in  manufacturing  and  an  estimated
decrease  in  demand  for  additional  housing  and  business  premises,  investment  is  anticipated  to  be
weak. Inflation (HICP) eased somewhat to 2.7% in 2001 as the impact of higher prices for fuel and
food faded towards the end of the year. However, prices of services rose fairly strongly and this factor
is also expected to put a floor under price inflation in 2002-03. Employment continued to increase in
2001, though at a steeply declining pace. In 2002, employment is expected to decrease in the light of
continued subdued growth in the export-oriented manufacturing sector and only limited employment
expansion in the service sector. Consequently, unemployment is anticipated to edge up in 2002, with a
reversal expected only in 2003.

At 9.1% of the labour force the unemployment rate remained in 2001 clearly above the average of the
euro area. Most of the unemployment appears to be of a structural nature. Although efforts have been
made  to  better  target  and  tailor  ALMPs  and  to  help  the  inclusion  of  the  most  hard-to-place
unemployed in the labour market, while benefit eligibility criteria were tightened, other measures such
as  the  increase  in  unemployment  benefits  run  contrary  to  the  aim  of  increasing  incentives  to  work.
Finland  is  one  of  the  Member  States  most  exposed  to  the  effects  of  an  ageing  population.  The
government is committed to pension reform with a view to making public finances sustainable in the
long term. A number of the reform steps go in the right direction but for several of the measures the
envisaged period of implementation appears unduly long. Finland remains one of the countries with
the highest price level in the EU. This is due in part due to insufficient competition in certain sectors
calling for stepped up efforts in this area.

Budgetary policy

Central government finances are estimated to weaken from a surplus of 1.9% of GDP in 2001 to 1% in
2002. The government’s aim of achieving a structural surplus in central government finances of 1½ -
2% of GDP over the medium term appears now very difficult to achieve, the more so as, in order to
boost employment creation, the government might decide to reduce further income tax rates. Against
the  background  of  the  government’s  aim  of  preparing  for  the  forthcoming  age-related  expenditure
pressures tax cuts need to be accompanied by expenditure restraint. Central government spending in
recent years has repeatedly overshot the medium-term spending guidelines. In addition to a weakening
of central government finances, the financial balance of local governments has stayed persistently in
deficit  since  1997,  except  for  2000  when  company  taxes  were  particularly  buoyant.  Budgetary
discipline at general government level could be enhanced by a recently adopted legislation requiring
local  governments  to aim  for  medium-term  budgetary  balance  from  2002  onwards.  However, in the
absence  of  an  enforcement  mechanism  in  the  legislation  it  is  uncertain  whether  this  regulation  will
achieve the envisaged results. In view of the above, and considering that Finland is a member of the
euro area, budgetary policy should aim to:

i.

avoid  a  significant  deviation  from  the  medium-term  spending  guidelines  of  keeping
government expenditure in real terms at the level of 1999; to this end adhere tightly to the

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ii.

iii.

budget’s expenditure target for 2002 and adopt the necessary expenditure reducing measures
in the budget for 2003;

improving  the  budgetary  discipline  at  local  government  level  by  establishing  an  enhanced
surveillance  mechanism  to  the  recently  adopted  regulation  requiring  local  governments  to
aim for budgetary balance in their finances in the medium term; and

continue with determination the ongoing process of pension reform, in particular adopt and
implement  at  an  early  stage  the  envisaged  changes  in  the  pension  formula  by  taking  into
account the increased life expectancy and extending the period of calculation for pensionable
earnings to the whole work career.

Labour markets

The performance of the Finnish labour  market  in 2001  was  mixed.  While  employment  continued to
grow and unemployment to decline, real unit labour costs increased and labour productivity fell due to
a sharp slowdown in  the  economic  growth.  As a  result,  employment  growth  is expected  to cease in
2002. The unemployment rate remains at a high level, 9.1% in 2001, and is expected to rise in 2002.
Unemployment  is  predominantly  structural  in  nature,  with  large  regional  differences.  The
government’s responses to labour market problems focused strongly on the reduction of overall taxes
on labour between 1997 and 2002. However, these reductions have been essentially proportional, thus
doing  little  to  redress  the  relative  position  of  low-wage  earners,  in  particular,  with  respect  to  high
marginal  effective  tax  rates.  In  2001,  the  government  introduced  measures  to  improve  the
effectiveness of active labour market programmes (ALMPs), to prevent exclusion of the hard-to-place
unemployed  from  the  labour  market  and  to  reform  pension  systems  with  the  aim  of  increasing
flexibility regarding the retirement age and increasing incentives to remain longer in the labour force.
However, the number of working-age people in various benefit schemes and ALMPs remains high and
the late  implementation  of the latter reforms  weakens  their  effect  on  the  baby-boom  generation  and
risks delaying the achievement of the government’s objective of raising the effective retirement age. In
addition,  the  already-decided  measures  to  increase  the  level  of  unemployment  benefits  in  2002  run
contrary to the aim of increasing incentives to work and undermine the effects of tax reductions and
ALMPs. In view of the above, while vigorously implementing all the Employment Recommendations
adopted by the Council in February 2002, the main priorities for Finland should be to:

i.

ii

make  work  pay  in  order  to  reduce  the  high  level  of  structural  unemployment.  Reforms
should cover benefit schemes, including early retirement arrangements, and the lowering of
the  relatively  high  marginal  effective  tax  rates  for  low  wage  earners  in  particular.  In  this
context the eligibility criteria and job protection legislation should also be reviewed; and

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

Product markets, entrepreneurship and the knowledge-based economy

Due to its peripheral location in the European Union, the Finnish economy is potentially less exposed
to  international  competition  than  most  other  Member  States.  Consumer  price  levels  are  among  the
highest  in  the  European  Union,  which  is  partly  due  to  the  relatively  high  degree  of  market
concentration in some sectors, such as the media and retail distribution. The Finnish transposition rate
of  Internal  Market  directives  is  among  the  highest  in  the  EU  and  telecommunication  and  electricity
markets have been fully liberalised. Although the resources and powers of the competition authorities

61

have  been  increased,  Finland  is  one  of  the  few  Member  States,  which  has  not  taken  measures  to
empower  the  national  competition  authority  to  apply  EC  competition  law  directly.  Moreover,  while
improvements have been made recently, the value of public procurement that is publicly advertised is
below the European average and private sector participation in the provision of public services is low,
especially  at  the  local  level.  Measures  have  been  taken  to  promote  entrepreneurship  but  the  time
required to register a private company remains among the longest in the EU. Finally, Finland is one of
the  best  performers  in  the  European  Union  in  the  field  of  the  transition  to  the  knowledge-based
economy. In view of the above, the main priorities for Finland should be to:

i.

ii.

enhance competition in public service provision at the local level via increased participation
of the private sector and competition between public service operators;

facilitate  business  creation  by  reducing  further  the  time  required  for  registering  a  new
company; and

iii.

give the Finnish Competition Authority powers to apply Articles 81 and 82 of the EC Treaty.

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14.

SWEDEN

Sweden experienced a sharp slowdown in 2001 and real GDP growth decelerated to 1.2% from 3.6%
in 2000, heavily influenced by the global slowdown and in particular of the slump in the ICT sector.
However, the expected gradual acceleration of the world economy in 2002 and 2003 should result in
stronger  external  demand.  The  relatively  favourable  fundamentals  in  Sweden  should  also  aid  a
recovery  in  domestic  demand  in  2002  and  2003.  Overall,  real  GDP  is  expected  to  grow  by  around
1.7% in 2002 and by some 2.8% in 2003. HICP inflation increased substantially in 2001 and averaged
2.7%, partly due to temporary factors. However, the indications are that inflationary pressures should
diminish from the second quarter of 2002 and remain close to 2% into 2003. Employment growth has
been robust in recent years and was 2% still in 2001, which has contributed to a substantial fall in the
unemployment  rate,  to  5.2%  in  2001.  However,  some  lagged  effects  of  the  slowdown  of  economic
activity in 2001 are expected and a slight increase in unemployment is expected in 2002. This should
be reversed as the economy gains momentum in 2003.

Enhancing the growth potential of the economy remains a key challenge, as productivity per person
has  fallen  in  recent  years  compared  with  the  EU-15  average.  Policies  aimed  at  strengthening
entrepreneurship and growth of firms as well as efforts to improve incentives to work should be given
high  priority.  While  Sweden  ranks  high  in  terms  of  employment  rates,  increasing  labour  force
participation and foster employment nevertheless remains a key challenge in the medium term in order
to cope with an ageing population. A very high tax burden combined with relatively generous benefit
schemes  reduce  the  incentives  to  work.  Moreover,  the  effectiveness  of  labour  market  programmes
need to be monitored. Measures to enhance competition in some sectors and to increase the efficiency
of the public sector are key challenges in order to address the high price levels and the weak labour
productivity performance.

Budgetary policy

In 2001, the general government surplus rose markedly, by 1 percentage point, to 4.8 per cent of GDP.
According to the 2002 Spring Fiscal Policy Bill, continued large surpluses of 1.8 per cent of GDP in
both 2002 and 2003 are expected. Swedish medium-term budgetary policy is threefold and consists of
(i)  nominal  ceilings  on  central  government  expenditure  set  annually  for  three  years  ahead,  (ii)  a
medium-term balanced budget constraint for local governments and (iii) a 2 per cent of GDP surplus
target  for  general  government  finances  on  average  over  the  business-cycle.  The  margin  created  by
achieving  higher  surpluses  than  targeted  has  been  used  partly  for  tax  relief  and  partly  for  debt
reduction. Gross debt fell below 60% of GDP in 2000 and is expected to continue to fall and  reach
48.3% of GDP in 2004, according to the 2002 Spring Fiscal Policy Bill. This debt reduction, together
with the reformed pension system, form an important  part of  Sweden’s  strategy  for  coping  with the
ageing of the population. In view of the above, budgetary policy should aim to:

i.

ii.

continue with the strategy of lowering taxes for low and medium wage earners in 2002 and
at the same time ensure adherence to the central government expenditure ceiling; and

achieve in 2003 a general government surplus in accordance with the government’s medium-
term surplus target of 2 per cent of GDP over the cycle for the government finances while
maintaining tight expenditure control.

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Labour markets

The  Swedish  labour  market  continued  to  improve  in  2001,  despite  the  substantial  slow  down  in
economic growth. Unemployment declined to around 5% of the labour force, while employment grew
by almost 2%, boosting further the already high employment rates. In particular, the employment rate
of older workers (55-64 years old) at almost 65% in 2000 is markedly higher than in other Member
States. The remaining “labour reserve” for a further increase of labour supply in the medium term is
thus  limited.  In  fact,  relatively  high  nominal  wage  increases  in  2001  (compared  to  the  modest
performance  of  labour  productivity),  in  e.g.  the  construction  and  services  sectors,  suggest  a  certain
shortage and mismatch of labour already now. This is partly alleviated by the strong emphasis put on
training in Sweden, where almost 5% of the labour force participates in various active labour market
programmes  (ALMPs)  or  the  special,  temporary  education  programme,  which  both  contribute  to  an
improved  adaptability  of  the  work  force.  However,  recent  evaluations  of  some  types  of  ALMPs
indicate  a  relatively  mixed  outcome  (in  terms  of  the  net  gains  in  employment),  underlining  the
importance  of further improving  their efficiency.  Despite recent  measures, the tax  burden  on labour
and, in particular, on low wage earners remains one of the highest in the Union. Relatively generous
benefit levels contribute to high net replacement rates, even if comparatively strict eligibility criteria
(in  combination  with  the  active  employment  policy)  limit  the  risk  of  long-term  unemployment  in
Sweden. In view of the above, while vigorously implementing all the Employment Recommendations
adopted by the Council in February 2002, the main priorities for Sweden should be to:

i.

ii.

pursue further the reforms of tax and benefit systems to promote work incentives; and

further improve the efficiency of active labour market programmes (ALMPs) and continue to
target them at those most prone to the risk of long-term unemployment, as well as to meet
the demands of the labour market.

Product markets, entrepreneurship and the knowledge-based economy

Sweden’s  openness  (as  measured  by  total  trade-to-GDP  ratio)  is  higher  than  the  other  Nordic
economies and notably increased in the 1990s, but price levels remain high and labour productivity is
below the EU average. The record in transposing Internal Market directives is excellent, State aid is
among  the  lowest  in  the  EU,  and  reforms  of  network  industries  are  well  advanced.  However,
competition  in  public  services  provision  is  still  insufficient  at  the  local  level.  Competition  is  also
insufficient  in  some  sectors  such  as  the  retail  market  for  pharmaceutical  products,  a  state-owned
monopoly,  and  food  trade.  Sweden  has  the  highest  total  R&D  expenditure  in  the  EU  although  it  is
highly  concentrated  in  a  few  knowledge-intensive  sectors.  The  uptake  of  ICT  by  the  population  is
proceeding at a high pace and the share of the ICT industry in total production is large compared to
other Member States. In view of the above, the main priorities for Sweden should be to:

i.

ii.

enhance competition in public service provision at the local level via increased participation
of  the  private  sector  (profit  and  non-profit)  and  via  competition  between  public  service
operators; and

step up efforts to enforce competition in those sectors where competition has been found to
be inadequate, such as the retail market for pharmaceutical products and food.

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15.

UNITED KINGDOM

United Kingdom economic activity held up well in 2001 as a whole. Depressed net exports associated
with the weaker global economy were offset by exceptionally strong growth in household expenditure.
GDP rose by 2.2% in the year as a whole. Growth in 2002 is expected to be a little lower, at around
2%,  as  a  result  of  the  global  slowdown.  However,  within  2002,  growth  is  expected  to  recover  as
growth of the world economy rises and the economy continues to be supported by growth in domestic
demand, in part as a result of monetary loosening in 2001 and planned rises in government current and
capital expenditure. Growth in 2003 is expected to be a little above trend as UK export markets grow
respectably.  Inflation  is  projected  to  remain  subdued  in  2002  and  2003  as  output  remains  close  to
potential.  In  particular, increased  wage  pressures  are  not  expected  to  emerge  despite  unemployment
remaining low at no more than  5.5%.  HICP  inflation is  projected to  average  under  2% in  2002  and
2003.

The relatively low level of productivity remains a key challenge. Productivity per person employed is
below the EU average although the gap has been declining since 1995. As far as the labour market is
concerned,  the  key  challenge  remains  the  high  concentration  of  unemployment  and  inactivity  in
certain  communities.  Regional  unemployment  disparities  continued  to  rise,  although  differences
within regions remain wider than differences between them. The third key challenge is to improve the
quality of UK public services, notably in the transport sector.

Budgetary policy

The government surplus was 0.9% of GDP in 2001. The projections in the convergence programme
show the  government  finances  moving  into  small deficit  of  0.2%  of  GDP  in financial  year  2001-02
which rises to  a  deficit  of  1.1%  of  GDP  in  2002-03  and  persists  around  that  level  in  the  remaining
years of the programme, to 2006-07. A deficit of around 1% of GDP now emerges, one year earlier
than in the previous update, largely as the result of temporary economic factors (e.g. a lower level of
GDP than previously projected, and lower financial company profits). This 1% of GDP deficit persists
in the projections, both unadjusted and cyclically adjusted, as a result of a very cautious trend growth
assumption of 2.25% per annum and as a result of addressing the low level of government investment
– as suggested in the 2001 BEPGs. Gross debt relative to GDP was 39% in 2001. In the convergence
programme it is projected to fall to 36.3% by 2006-07. With a low and falling debt to GDP ratio, the
UK is in a good position to meet the consequences of ageing populations and the public finances are
sustainable on current policies. In view of these developments, budgetary policy should aim to:

i.

ii.

ensure, in preparing the budget and in framing future expenditure plans, that in 2003-04, an
outturn  for  the  general  government  balance  can  be  expected  that  respects  the  terms  of  the
Stability and Growth Pact of a budgetary position that is close to balance or in surplus; and

allow  public  investment,  net  of  depreciation,  to  rise  from  2001-02,  as  projected  in  the
convergence programme, and as suggested in the 2001 BEPGs.

Labour markets

The UK labour market remains among the best-performing in the EU. In 2000, the UK hit all of the
Lisbon/Stockholm  employment  targets,  with  an  overall  employment  rate  of  71.5%,  a  female
employment rate of 64.8% and an employment rate for older workers of 50.8%. Unemployment has

65

risen slightly in recent months (to 5.1% s.a. in December 2001) but remains close to its lowest level in
over two decades, as does long-term unemployment, which continues to fall as a share of the total. The
range of active measures aimed at tackling long-term unemployment and inactivity has been refined,
while recent reforms of benefit administration will introduce a more work-focused approach for those
on sickness and disability benefits who are able to work. However, the number of working-age people
claiming out-of-work sickness and disability benefits continued to rise to almost 2.6 million in May
2001, an increase of 2.6% over the previous year. More than 2 million of these have been claimants
for a year or more. Regional unemployment disparities continued to rise, although differences within
regions  remain  wider  than  differences  between  them.  Local  concentrations  of  unemployment  and
inactivity  in  several  areas  throughout  the  nation  remain  a  concern.  In  view  of  the  above,  while
vigorously implementing all the Employment Recommendations adopted by the Council in February
2002, the main priorities for the United Kingdom should be to:

i.

ii.

reinforce active  measures  targeted at those  communities and individuals  most  prone  to  the
risk of concentrated or long-term unemployment and inactivity; and

reform sickness and disability benefit schemes to provide people who are able to work with
the opportunities and incentives to do so.

Product markets, entrepreneurship and the knowledge-based economy

The  United  Kingdom’s  economic  environment  is  favourable  to  entrepreneurship  with  low  levels  of
regulation  and  relatively  low  corporate  tax  rates.  State  aid  is  among  the  lowest  in  the  EU  and
liberalisation  of  the  network  industries  is  well  advanced.  However  the  UK’s  level  of  productivity
remains relatively low which is partly due to factors such as weak competition in some sectors (e.g.
retail  banking,  postal  services  and  the  professions),  skills  shortages  and  under-investment  in  the
economy  including  public  services  such  as  the  railways.  The  UK  Government  has  announced  a
substantial  increase  in  investment  in  the  transport sector  through  its  10-year  plan  for  transport.  The
UK’s transposition rate of Internal Market directives was, at 98.7% in March 2002, above the target of
98.5%. As regards the knowledge-based economy, IT expenditure (as a % of GDP) and the level of
internet access are both above the EU average, although the take-up of broadband internet in the UK is
relatively low. In view of the above, the main priorities for the United Kingdom should be to:

i.

ii.

continue  to  improve  competition,  building  on  existing  policy  measures,  in  sectors  such  as
retail banking, postal services and the professions; and

deliver  the  announced  infrastructure  investment  in  the  railways,  establish  a  new  railway
infrastructure company and improve the regulation of the railway sector.

66