Communication from the Commission on the implementation of the 2002 Broad Economic Policy Guidelines (presented in accordance with Article 99 (3) of the EC Treaty) {SEC (2003) 33}
Date: 2003-01-14
Institutions: European Commission
Subjects: EU Member State, budget policy, economic analysis, economic policy, macroeconomics, public finance

COMMISSION OF THE EUROPEAN COMMUNITIES

Brussels, 14.1.2003
COM(2003) 4 final

COMMUNICATION FROM THE COMMISSION

ON THE IMPLEMENTATION OF THE 2002 BROAD ECONOMIC
POLICY GUIDELINES

(presented in accordance with Article 99 (3) of the EC Treaty)

{SEC (2003) 33}

PART I

General Assessment1)

1) Commission Communication

2

TABLE OF CONTENTS

EXECUTIVE SUMMARY........................................................................................................... 4

1.

2.

2.1

2.2

2.3

2.4

2.5

2.6

2.7

2.8

3.

3.1

3.2

3.3

3.4

3.5

3.6

3.7

3.8

3.9

3.10

3.11

3.12

3.13

3.14

3.15

Introduction..................................................................................................................... 9

Overview of key policy areas........................................................................................ 10

Ensure growth and stability-oriented macroeconomic policies ...................................... 10

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

Invigorate labour markets ............................................................................................... 21

Re-ignite structural reform in product markets............................................................... 26

Promote the efficiency and integration of the EU financial services market.................. 31

Encourage entrepreneurship............................................................................................ 32

Foster the knowledge-based economy ............................................................................ 33

Enhance environmental sustainability............................................................................. 36

Summary assessments of implementation by the Member States ............................ 38

Belgium ........................................................................................................................... 40

Denmark.......................................................................................................................... 40

Germany.......................................................................................................................... 41

Greece ............................................................................................................................. 41

Spain................................................................................................................................ 42

France.............................................................................................................................. 42

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

Italy ................................................................................................................................. 43

Luxembourg .................................................................................................................... 44

The Netherlands .............................................................................................................. 44

Austria............................................................................................................................. 45

Portugal ........................................................................................................................... 45

Finland ............................................................................................................................ 46

Sweden ............................................................................................................................ 46

United Kingdom.............................................................................................................. 47

3

The 2002 BEPGs
confirmed the well-
established economic
policy strategy

Recovery failed to
gather momentum

EXECUTIVE SUMMARY

This  Communication  relates  the  progress  made  in  response  to  the
Broad Economic Policy Guidelines (BEPGs) adopted in 2002, a year
marked  by  the  successful  introduction  of  euro  notes  and  coins.  The
2002  BEPGs  set  out  and  confirmed  the  economic  policy  strategy
aimed at contributing to the achievement of the Treaty’s fundamental
objectives  and  the  Union’s  policy  agenda  agreed  upon  by  the
European Council in Lisbon and Stockholm. This policy strategy has
taken  shape  over  recent  years  and  has  become  well-established.
Sound  macro-economic  policies  coupled  with  continuing  efforts  to
improve  the  functioning  of  our  economies  through  comprehensive
structural reforms on labour, product and capital markets should help
to strengthen the recovery in the short term, increase potential growth
in the medium term, and successfully deal with longer-term structural
and sustainability issues. Such policies would also help to strengthen
economic and social cohesion. This Communication offers an overall
assessment of the implementation of the policy recommendations set
in the 2002 BEPGs, while an assessment per Member State is given
in the accompanying working document of the Commission services.
Following up  on  the  Council’s  agreement on  streamlining  of  policy
co-ordination procedures of 3 December 2002, this “Implementation
Report”  is  being  presented  as  part  of  the  first  Implementation
Package  in  support  of  and  together  with  the  Commission’s  Spring
Report.

The following key messages emerge.

international 

Following the slowdown in 2001, growth started to recover in early
2002  but  failed  to  accelerate  thereafter.  Already  weak  domestic
demand was depressed by a further collapse in confidence following
accounting  scandals  in  the  USA,  further  slides  in  stock  prices  and
tension.  Despite  weak  economic  growth,
rising 
employment creation has continued albeit at a weak pace and the rise
of the unemployment rate – for the first time since 1996 – has been
only  marginal.  Headline  inflation  has  been  slow  to  come  down,
reflecting the upsurge in energy and fresh food prices, but also, and
more  importantly,  persistently  high  core  inflation,  especially  on
account of the services sector.

Macroeconomic
policy was broadly
adequate but was

Whereas  earlier  in  2002,  expectations  centred  on  a  tightening  of
monetary policy to stem inflationary pressure linked to the expected
recovery,  against  a  background  of  slowly  receding  inflationary

4

complicated by sticky
inflation

Budgets deteriorate
as automatic
stabilisers operate,
but also because of
discretionary
loosening in some
Member States that
can ill afford it

Quality and
sustainability of
public finances -
some progress but
long-run
sustainability far
from secured

pressure  and  continued  subdued  economic  growth  monetary
authorities kept monetary policy on hold until well into the autumn,
before  proceeding to a further  easing  towards  year-end.  For  the  EU
as a whole, the fiscal policy stance was broadly neutral if not slightly
expansionary.  Wage  increases  showed  little  sign  of  coming  down
against the background of weak economic activity and the continued
slow  growth  in  labour  productivity.  Whilst  supporting  household
purchasing  power,  sustained  wage  growth  also  contributed  to  the
stickiness  of  high  core  inflation  and  an  erosion  of  profit  margins
which, if not reverted in the context of a subsequent cyclical recovery
in productivity, could weigh on investment.

Budgetary  positions  deteriorated  clearly  in  2002  as  automatic
stabilisers acted to cushion weak economic activity but also, in some
instances, on account of discretionary loosening. In several Member
States  coping  with  still  high  structural  deficits,  progress  towards
achieving budgetary positions of close to balance or in surplus stalled
or moved into reverse, forcing the Commission to take action in the
context of the Stability and Growth Pact.  Following the  issuance of
early  warning  recommendations  to  Germany  and  Portugal  early  in
2002, it activated the Excessive Deficit Procedure  for both  Member
States  in  the  autumn.  A  recommendation  for  an  early  warning  to
France  was  also  issued  in  the  autumn.  Some  of  the  other  Member
States that had already achieved structural budget positions  close to
balance  or  in  surplus,  clearly  failed  to  maintain  them  (Ireland  and
Austria).

The  strains  on  budgets  notwithstanding,  public  investment  was
generally  maintained  or  slightly  increased  except  in  Germany,
Greece,  and  Portugal.  Germany,  Spain,  Italy  and  Portugal  took
measures to improve control over public spending. While the pension
reforms undertaken in 2002 by Portugal, Greece, Finland and the UK
are a step in the right direction, the long-run sustainability of public
finances is in most Member  States far from  secured  (particularly so
in  Belgium,  Germany,  Greece,  Spain,  France,  Italy,  Austria,  and
Portugal). In particular, the failure to move more decisively towards
sound  budget  positions  in  Germany,  Greece,  France,  Italy  and
Portugal  is  very  worrisome  in  this  regard.  Similarly,  the  failure  of
Greece  and  Italy  to  secure  a  steady  reduction  in  their  still  high
government debt ratios is a source of concern.

Labour markets -
increasing signs that
structural reforms

Reform  efforts  in  the  second  half  of  the  1990s  have  contributed  to
stimulating  employment,  amongst  others  through  increasing  the  job
content  of  growth,  and  strengthening  the  EU  economy.  Labour

5

start to pay off in
terms of increased
resilience are no
excuse for inaction
as there remains a
real need to step up
the pace of labour
market reform to
achieve the Lisbon
objectives

markets  performed  rather  well  in  2002  given  the  weak  economic
growth  as  reflected  by  continuous  employment  growth  and  only  a
marginal  increase  in  the  unemployment  rate.  To  some  extent,  this
relatively  positive  performance  seems  to  be  due  to  some  labour
hoarding, which might take its toll this year. Nevertheless, these are
also  first  tentative  signs  that  labour  market  reforms  of  recent  years
are starting to pay off. Against this background, it is disappointing to
note that the pace of further reform in 2002 remained slow and that
there is as yet little - if any - sign that the warning in the 2002 BEPGs
that the pace  of  reform  would have to  be  stepped  up to  achieve  the
Lisbon  objectives  –  a  message  subsequently  repeated  in  the  draft
Joint  Employment  Report  (JER)  -  has  been  heeded.  While  most
Member  States  made  some  progress  in  adapting  tax  and  benefit
systems  to  make  work  pay  and  encourage  the  search  for  jobs,
measures  were  generally  piecemeal  and  focussed  on  the  tax  side,
rather  than  addressing  the  combined  effects  of  taxes  and  benefits.
The Barcelona European Council's call to raise the effective average
age at which people stop working by about 5 years by 2010 has yet to
be  followed  up  by  comprehensive  active  ageing  policies  including
energetic  reform  of  pension  and  early  retirement  schemes.  Whereas
monitoring  of  the  efficiency  of  active  labour  market  policies  is
generally  speaking  inadequately  developed,  Sweden,  Denmark  and
Finland  and,  to  a  lesser  extent  Germany,  Spain  and  the  UK,  took
measures  to  strengthen  monitoring.  There  is  little  evidence  that
Member States have taken action to abolish barriers to geographical
mobility.  A  few  Member  States  (France,  Italy,  and  Portugal)  have
introduced new measures to promote flexibility on the labour market,
and  in  this  context  there  is  an  increasing  trend  to  better  balance
security with flexibility in labour markets. Member States  generally
responded  to  emerging  bottlenecks  in  labour  markets  due  to  skill
mismatches  by  further  adjusting  vocational  training  systems  and
lifelong learning strategies. Similarly, to promote female labour force
participation,  several  Member  States  took  further  measures  to
Ireland  and
increase  childcare 
Luxembourg)  and  strengthen  financial  incentives  (Belgium,  Spain,
and Ireland).

(Germany,  Spain, 

facilities 

Product markets -
full implementation
of the Internal
Market remains
difficult, good
progress has been
made on

Progress over the past year in terms of the full implementation of the
Internal  Market  has  been  disappointing.  Only  five  Member  States
(Denmark, the Netherlands, Finland,  Sweden  and  the  UK)  meet  the
European Council's target of a transposition deficit of 1.5 per cent or
less  by  the  spring  of  2003,  while  three  Member  States  (France,
Greece,  Portugal)  have  a  deficit  of  more  than  double  that  target.
Internal  Market
Moreover, 

the  stubbornly  high  number  of 

6

harmonising
competition policies
but competition in
the liberalised
network industries is
still insufficient

Capital markets -
encouraging progress
in implementing the
FSAP since
Barcelona should be
maintained; a similar
acceleration is
needed for the RCAP

Entrepreneurship –
slow improvement in
the business
environment, but
achievements vary
considerably between
Member States and
policy areas

infringement proceedings, particularly in France and Italy, shows that
the full application of Internal Market legislation leaves much to be
desired.  Furthermore,  progress  in  eliminating  remaining  barriers  to
trade  and  cross-border  service  activities  remains  very  slow.  On  the
in  strengthening
other  hand,  good  progress  has  been  made 
competition and regulatory authorities. The downward trend in State
aid  continued  (except  in  Denmark,  Ireland,  Luxembourg,  and  the
Netherlands) and the share of horizontal aid increased on account of
falling  ad  hoc  and  sectoral  aid.  The  liberalisation  process  in  the
network industries has continued, but the market share of incumbents
remains high. Competition is still insufficient even if the benefits to
consumers  of liberalising  the  telecommunication and  energy  sectors
are starting to be felt. While the Council reached political agreement
on  the  electricity  and  gas  package,  access  to  port  services  and  the
Single  European  Sky  Package,  it  is  disappointing  that  it  has  so  far
failed to agree on the revised financial regulation and guidelines for
Trans-European  transport  networks,  public  service  contracts  for
passenger transport, and airport slot allocation.

Encouraging progress has been made in integrating financial markets
and the ambitious objectives set by the Barcelona European Council
for  2002  will  be  largely  achieved.  This  positive  new  momentum
should  be  maintained  in  order  to  secure  full  implementation  of  the
Financial  services  Action  Plan  by  the  2005  deadline.  Progress  in
implementing the Risk Capital Action Plan has continued, but would
need  to  be  stepped  up  in  all  main  policy  areas  identified  therein.
financial
took  steps 
Several  Member  States 
supervision  across  sectors,  but  further  improvement  in  cross-border
co-ordination  will  be  crucial.  Initiatives  were  launched  in  order  to
help identify ways in which barriers to efficient cross-border clearing
and settlement could be removed. They will have to be followed up
by concrete proposals and decisions.

to  consolidate 

to 

improve 

Several initiatives have been taken at both Community  and  national
level 
the  business  environment  and  encourage
entrepreneurship.  The  regulatory  environment  is  improving  in  all
Member States. A number of Member States (including France, Italy,
Austria  and  Portugal)  took  measures  to  reduce  the  typical  time  and
cost 
to  alleviate
administrative  burdens,  and  to  stimulate  competition  in  certain
sectors. Reforms to increase public sector efficiency were undertaken
in  Belgium,  Denmark,  Portugal,  and  Sweden,  and  government
services are increasingly being made available online. Corporate tax
rates were lowered in France, Ireland, the Netherlands and Portugal,

in  setting  up  a  new  company, 

involved 

7

The knowledge-based
economy - slow
catching up on ICT
usage, but important
gaps remain in
business R&D and
patenting

Environmental
sustainability -
various measures
have been taken

Rather than reacting
to the slowdown by
redoubling efforts to
invigorate the
economy, policy
inertia and
backtracking are
widespread

while the corporate tax system in Greece was simplified. All Member
States  made  progress  in  implementing  the  European  Charter  for
Small Enterprises.

While  the  EU  is  slowly  catching  up  with  the  US  in  terms  of  ICT
usage, gaps in terms of patenting and business R&D remain large and
persistent.  Against  the  background  of  repeated  calls  from  the
European  Council  for  rapid  progress,  the  Council's  failure  so  far  to
agree  on  the  Community  Patent  is  a  clear  disappointment.  Internet
usage continued to increase. Some Member States acted  to  improve
education,  in  particular  by  strengthening  the  vocational  training  in
order to respond adequately to changes in skill requirements. Several
initiatives  were  taken  to  facilitate  the  transfer  of  qualifications  and
skills for academic and professional purposes.

Increased  competition  in  electricity  and  gas  markets  should  help
strengthen  the  effectiveness  of  market-based  instruments,  but  rail
freight  market  opening  progresses  only  slowly.  Existing  energy
and/or  carbon  taxes  were  increased  in  Germany  and  Sweden,
whereas the Netherlands, France and the UK took other measures to
promote environmental protection. Solid progress was made towards
adopting  the  Commission's  proposal  for  an  EC  emissions  trading
scheme,  whereas  the  UK's  greenhouse  gas  emission  trading  system
came  into  effect  and  the  Netherlands  advanced  in  preparing  for
setting  up  such  a  system.  No  progress  was  made  in  reducing
environmentally pernicious subsidies and tax exemptions.

Despite progress in some areas, the overall picture that emerges from
this review is rather disappointing. The  reaction to the slowdown in
economic growth is characterised by policy inertia and backtracking.
Once  more,  the  failure  to  act  more  decisively  on  public  finances
when growth was favourable takes its toll. Once again, governments
display  insufficient  resolve  in  pushing  through  badly  needed
structural  reform  to  instil  the  dynamism  into  the  economy  that  is
needed to move decisively towards the  Lisbon goals. It is necessary
to  match  words  with  action  and  develop  a  new  sense  of  urgency.
Rather than relying on externally driven economic expansion, the EU
should rely much more on its domestic strengths. It needs urgently to
strengthen  the  necessary  growth-supportive,  supply-side  framework
conditions.  Structural  reforms  can  be  growth  supportive  also  in  the
short run through positive effects on confidence.

8

1.

INTRODUCTION

The  EU’s  medium-term  economic  policy  strategy  is  laid  down  in  the  Broad  Economic
Policy  Guidelines  (BEPGs)  and  was  most  recently  updated  in  June  2002.1  Besides  the
pursuit of sound macroeconomic policies, it aims at comprehensive structural reform.  It
should  facilitate  flexible  responses  to  changing  economic  conditions  in  the  short  run
whilst strengthening the productive capacity of the economy over the  medium  run.  The
policy strategy can, however, only bear fruit if fully implemented.

This Communication assesses the extent to which effective policy action has been taken
in  response  to  the  guidelines.  It  thereby  provides  for  a  key  input  for  the  multilateral
surveillance of the economic policies of the Member States and the Union as envisaged
by Treaty Article 99 (3). It is also an important stepping stone for the preparation of the
next  BEPGs.  Following  up  to  the  Council’s  agreement  of  3 December 2002  on  the
streamlined approach, this “Implementation Report” is being presented in January as part
of  the  first  Implementation  Package  in  support  of  and  together  with  the  Commission's
Spring  Report.  Its  earlier  presentation  should  allow  for  a  better  follow-up  on
implementation ahead of the Spring European Council in March focusing on the follow
up  to  the  Lisbon  strategy.  In  the  light  of  the  latter’s  general  political  orientations,  the
Commission  will  present  subsequent  policy  guidance  in  early  April  in  the  form  of  its
Guidelines Package, comprising the BEPGs, the Employment Guidelines and the related
employment recommendations.

The BEPGs policy strategy

Ensure growth and stability-oriented macroeconomic policies.

Improve the quality and sustainability of public finances.

Invigorate labour markets.

Re-ignite structural reform in product markets.

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

Encourage entrepreneurship.

Foster the knowledge-based economy.

Enhance environmental sustainability.

1.

2.

3.

4.

5.

6.

7.

8.

This  Communication  is  complemented  by  a  working  document  of  the  Commission
services 
the
in-depth  assessment  of 
recommendations on a country-by-country basis. The evaluation integrates the findings of
other co-ordination processes and draws upon relevant structural indicators developed to

implementation  of 

that  provides  an 

the 

1

See  Council  Recommendation  of  21  June  2002  on  the  BEPGs,  published  in  Official
Journal No L 182 of 11 July 2002.

9

                                                
monitor progress on the Lisbon strategy. However, issues of environmental sustainability
are not included in this document due to a lack of systematic and comparable reporting on
developments in Member States.

Nevertheless,  the  conclusions  presented  should  be  interpreted  with  caution.  The
guidelines  were  adopted  only  a  short  while  ago,  and  since  then  relatively  little  new
information  has  become  available  and  the  information  that  is  available  is  partially  of  a
provisional nature.2 Even so, where considered sufficiently reliable, new information has
been taken as much as possible on board. This explains why there are sometimes small
differences in data and assessments relative to earlier reports, such as the Commission’s
draft  Joint  Employment  Report  (JER).  The  earlier  presentation  of  the  Implementation
Report has accentuated this problem. Furthermore, many recommendations in the BEPGs
have  a  medium-  and  long-term  nature,  particularly  those  relating  to  structural  reforms.
Their implementation cannot yet be assessed in a conclusive way at this stage as the full
effect of policy action takes more time to materialise.

2.

2.1

OVERVIEW OF KEY POLICY AREAS

Ensure growth and stability-oriented macroeconomic policies

2.1.1

Economic background

As the recovery failed to gain momentum …

Following  a  promising  pick-up  in  growth  in  the  first  quarter  of  2002,  the  2002  BEPGs
reckoned  with  a  further  strengthening  of  the  recovery,  which  would  bring  the  EU
economy's growth rate back to rates close to or above potential in the second half of 2002
and  into  2003.  In  the  event,  however,  some  of  the  downside  risks  to  the  main  growth
scenario  have  in  fact  materialised.  Mounting  uncertainty,  fuelled  by  continuing  stock
market  losses  and  global  political  tensions,  seems  to  have  undermined  the  confidence
needed  to  underpin the  pick  up  in  private  consumption  and  international  trade  that  was
expected  to  sustain  the  acceleration  in  economic  growth.  As  a  result,  expected  growth
over  2002  as  a  whole  is  scaled  down  by  half  of  a  percentage  point  to  below  a  meagre
1 per  cent.  The  still  expected  acceleration  of  growth  in  2003  will  also  be  much  less
pronounced.

Despite weak economic growth, labour markets continued to show remarkable resilience.
While slowing down considerably, job creation continued to outpace job losses so that -
on  balance  -  employment  continued  to  grow.  As  a  result,  and  contrary  to  earlier
expectations, unemployment in the EU is now expected to have only slightly increased in
2002 by 0.2 percentage point to 7.6 per cent of the labour force.

2

The  report  is  based  on  the  Commission’s  autumn  2002  economic  forecasts  and  data
available on 20 December 2002.

10

                                                
Inflation  has  been  slow  to  come  down  and  there  remain  differentials  between  Member
States. The upsurge in oil prices and, at the beginning of the year, fresh food prices linked
to, respectively, international tensions and bad weather, played a role. But core inflation
has also been rather resilient, especially on account of price increases in services. Factors
behind  the  latter  are  the  delayed  pass-through  of  past  increases  in  import  prices,  lower
productivity gains and lower competitive pressure in the services sector than in the non-
energy  industrial  goods  sector,  a  gradual  shift  in  the  composition  of  demand  towards
services,  increases  in  administered  prices,  declines  in  the  downward  contribution  of
deregulation,  some  impact  stemming  from  the  euro  cash  changeover  in  some  specific
services as well as the cyclical rise in unit labour costs. 3

… macro-economic policies have remained broadly neutral.

Macroeconomic policies have been accommodative in view of the weak economic growth
conditions.

Following  the  four  interest  rate  cuts  during  2001  as  inflationary  risks  resided  in
connection with decelerating economic growth, monetary policy in the euro area was kept
on hold during most of 2002. In the early part of 2002, it was widely expected that the
next move of the ECB would be to tighten in view of resurgent inflationary pressure and
the prospect of accelerating growth. In the event, however, the failure of the recovery to
gather  momentum  and  the  progressive  unwinding  of  the  impact  of  earlier  shocks
contributed to a lowering of inflationary risks. Against this background, it was not until
early December 2002, that the ECB decided to cut its key interest rates by 50 basis points.
The strengthening of the euro vis-à-vis main trading partners' currencies since the second
quarter will help to restraining inflation, supporting real disposable household income and
shifting final demand towards the domestic side. Outside the euro area, the Danish central
bank  followed  the  ECB  in  first  keeping  monetary  policy  on  hold  and  subsequently  in
cutting key interest rates by 50 basis points in early December. In Sweden, the two-step
increase in policy interest rates by 50 basis points in the spring of 2002 was subsequently
reverted in mid-November and early December. In the United Kingdom, monetary policy
was kept on hold throughout 2002.

While the overall budgetary policy stance has been broadly neutral in the euro area, the
lack  of  budgetary  consolidation  in  the  past,  and  the  outright  loosening  in  the  current
juncture  in some  of  its Member  States  that can ill  afford it  has  put  the  macroeconomic
policy framework under strain, and has likely prevented a more appropriate policy mix.
The clearly expansionary budgetary policies in Denmark, Sweden and the UK cause the
overall  budgetary  policy  stance in  the  EU  to  have  been  slightly  expansionary.  Nominal
budgetary positions deteriorated generally as automatic stabilisers acted to cushion weak
economic activity. Wage increases, having been relatively high given lacklustre growth,
have supported household purchasing power. Provided that recent increases in unit labour
costs are reversed in the context of a subsequent cyclical recovery in productivity, current

3 

Eurostat  estimates  the  impact  of  the  euro  cash  changeover  on  euro  area  inflation  in  the
first half of 2002 to be in the range of 0.0 to 0.2 percentage points. Estimates of national
statistical  institutes  indicate  that  in  some  Member  States  the  impact  may  have  been
slightly higher.

11

                                                
wage trends would still appear to be consistent with the maintenance of price stability and
job creation over the medium-term.

Graph 1 : Economic developments in the EU

Real GDP growth

Contribution to real GDP growth

%

Year/year

Quarter/quarter

Domestic demand (incl.
stock)
Net exports

Real GDP growth

2

1.5

1

0.5

0

-0.5

-1

98Q01

98Q04

99Q03

00Q02

01Q01

01Q04

02Q03

98Q01

98Q04

99Q03

00Q02

01Q01

01Q04

02Q03

%

Unemployment rate

5

4

3

2

1

0

-1

12

10

8

6

4

2

0

1997

1997

1998

1999

2000

2001

2002

Source : Commission services.

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

HICP (lhs)

Core HICP (lhs)

Energy (rhs)

Jan98

Jan99

Jan00

Jan01

Jan02

20

15

10

5

0

-5

-10

4

3.5

3

2.5

2

1.5

1

0.5

0
Jan97

12

Graph 2 : Policy mix in the euro area

%

10

Short-term interest rates

UK
DK
S
Euro area

8

6

4

2

0

7

6

5

4

3

%

Long-term interest rates

DK

UK

S

Euro area

1999

2000

2001

2002

1999

2000

2001

2002

Nominal effective exchange rate
(Index Jan 95 = 100)

Euro area

DK

S

UK

1999

2000

2001

2002

Actual net lending/borrowing
(excl. UMTS)

  DK  

  S   

  UK  

Euro area

140

130

120

110

100

90

80

70

6

4

2

0

-2

-4

-6

-8

-10

Nominal unit labour costs
(annual percentage change)

  DK  

  UK  

  S   

Euro area

1995

1996

1997

1998

1999

2000

2001

2002

Cyclically-adjusted net lending/borrowing

  DK  

  S   

  UK  

Euro area

11

9

7

5

3

1

-1

-3

6

4

2

0

-2

-4

-6

-8

1995

1996

1997

1998

1999

2000

2001

2002

1995

1996

1997

1998

1999

2000

2001

2002

13

2.1.2

Budgetary developments

The  2002  BEPGs  recommended  Member  States  to:  (i) achieve  or  maintain  budgetary
positions of close to balance or in surplus over the economic cycle and ensure the respect
of such medium-term objectives by 2004 at the latest; (ii) ensure appropriate financing of
tax reforms, avoid pro-cyclical fiscal policies and allow automatic stabilisers to operate
in full while ensuring a rigorous execution of their budgets; and (iii) further strengthen
public finances with a view to secure their long-term sustainability.

Budgetary developments in 2002

Contrary to what was expected, budgetary positions deteriorated in 2002 for the second
consecutive year. This was partly because of the work of automatic stabilisers in response
to a slower macroeconomic recovery than assumed in the 2002 BEPGs, but also because
expenditure  overruns  and/or  unfunded  tax  changes  in  several  countries  (e.g.  Germany,
France,  Ireland,  Italy,  Austria,  Portugal,  and  Finland)  led  to  deterioration  in  their
underlying  budget  position.  As  a  result,  the  actual  budget  deficit  for  the  euro  area  for
2002 is estimated at 2.3 per cent of GDP.

For all Member States, with the exception of Finland, Spain, Belgium, Denmark and the
UK,  the  budgetary  outcome  was  substantially  worse  than  projected  in  the  stability  and
convergence programmes submitted at the end of 2001, when the government deficit for
the euro area was envisaged to be 1.1 per cent of GDP in 2002 (see Table 1). Portugal and
Germany failed to respect the 3% reference value in 2001 and 2002 respectively and the
Commission  has  therefore  initiated  the  Excessive  Deficit  Procedure.  The  Portuguese
government deficit, while being clearly reduced, may still prove to be in excess of the 3%
limit  in  2002  as  well.  A  number  of  other  countries  failed  to  make  substantial  progress
towards  achieving  (e.g.  France,  Italy,  Greece)  or  maintaining  (e.g.  Ireland,  Austria)
budget positions close to balance or in surplus.

Given the persistence and severity of the slowdown in 2001 and 2002 and the budgetary
slippage that occurred in several Member States, which led to higher budget deficits than
expected in the BEPGs, it  became  clear  at  the  end of  2002  that the  achievement  of the
medium-term objective at the latest by 2004 (as agreed in the BEPGs just a few months
before) was very difficult to ensure without jeopardising the recovery. The Commission
and  Ministers  concurred  in  October  2002  that  those  Member  States  which  have  not
reached  the  close-to-balance  or  in  surplus  objective  needed  to  pursue  a  continuous
adjustment of the underlying balance by at least 0.5 per cent of GDP per year in the next
years.

Budgets for 2003

In  adopting  their  budget  laws  for  2003,  Members  States  were  guided  by  their
commitment  to  avoid  excessive  deficits  and  to  achieve  and  maintain  the  medium  term
target  of  the  Stability  and  Growth  Pact.  Accordingly,  the  nominal  and  underlying
balances  for  the  euro  area  are  expected  to  improve  in  2003,  although  marginally.
However,  among 
the
Commission's  autumn  2002  economic  forecast  indicates  that  the  adjustment  in  the

important  government  deficits 

the  Member  States  with 

14

underlying balance could fall short of 0.5 per cent in Greece, France, Italy, and Austria,
pointing  to  a  need  to  accelerate  consolidation,  also  to  secure  their  long-term
sustainability. On account of the significant divergence from budget targets in 2002 and
because  of  a  nominal  deficit  of  2.9 per  cent  of  GDP  in  2003  projected  in  the
Commission's  autumn  2002  economic  forecasts,  perilously  close  to  the  3% excessive
deficit  reference  value,  the  Commission  recommended  the  Council  to  issue  an  early
warning to France.

Table 1 : General government balance and GDP growth in 2002

Stability / convergence
programme (*)

Estimated outturn (**)

Difference

Budget
balance
(% GDP)
0.0
-2.5
0.8
0.0
-1.8
0.7
-0.5
2.8
0.4
0.0
-1.8
2.6
-1.1
1.9
2.1
-1.1
-1.0

GDP
growth
(% change)
1.3
0.8
3.8
2.4
1.5
3.9
2.3
5.3
1.3
1.3
1.8
1.6
1.8
1.7
2.4
2.3
1.8

GDP
growth
(% change)
0.7
0.4
3.5
1.9
1.0
3.3
0.4
0.1
0.2
0.7
0.7
1.4
0.8
1.7
1.6
1.6
0.9

GDP
growth
(% change)
-0.6
-0.4
-0.3
-0.5
-0.5
-0.6
-1.9
-5.2
-1.1
-0.6
-1.1
-0.2
-1.0
0.0
-0.8
-0.7
-0.9

B
D
EL
E
F
IRL
I
L
NL
A
P
FIN
Euro area
DK
S
UK
EU-15
(*) Autumn 2001 updates of the stability and convergence programmes.
(**) European Commission Autumn 2002 forecasts.
Note : the difference in the budget balance outcome with respect to plans can be attributed to other factors than the impact
of GDP growth (which takes place via the budgetary elasticities to the output gap) or discretionary policy measures. Among
them are differences in the starting budgetary positions and in the assumed GDP growth potential as well as too optimistic
assumptions for the budget balance made in the programmes with respect to the assumptions for GDP growth.
Source : Commission services.

Budget
balance
(% GDP)
-0.1
-1.3
-2.1
0.0
-0.9
-1.9
-1.9
-2.3
-1.2
-1.8
-1.6
1.0
-1.2
0.1
-0.7
0.0
-0.9

Budget
balance
(% GDP)
-0.1
-3.8
-1.3
0.0
-2.7
-1.2
-2.4
0.5
-0.8
-1.8
-3.4
3.6
-2.3
2.0
1.4
-1.1
-1.9

15

2.1.3 Wage developments

The 2002 BEPGs recommended: (i) that the increase in nominal wages be consistent with
price stability; (ii) that the increase in real wages not exceed labour productivity growth;
and (iii) that national labour institutions and bargaining systems allow wages to evolve
according to productivity and skills differentials.

Aggregate wage developments

Overall, the increase in nominal wages by about 3 per cent in 2002 is broadly in line with
medium-term  price  stability.  However,  as  in  2001,  in  combination  with  the  cyclical
slowdown in apparent labour productivity growth, it is estimated to have contributed to a
further increase in nominal unit labour costs. While being slightly lower than in 2001, the
still rather high increase of about 2½ per cent in 2002 has contributed to persistently high
core inflation.

The relatively steady increase in nominal wages, reflecting in part previously concluded
multiannual agreements, has also allowed for a rather steady increase in real wages and
supported household purchasing power. However, being slow to come down in response
to  the  slowdown  in  productivity,  real  wage  growth  has  continued  to  exceed  labour
productivity growth. The resulting further increase in real unit labour costs has weighed
on profitability.

On a country level, nominal wage increases were comparatively strong in Greece, Ireland,
the  Netherlands  and  Portugal,  i.e.  countries  with  comparatively  tight  labour  markets
and/or  relatively  high  inflation.  Real  unit  labour  costs  rose  particularly  in  Italy,
Luxembourg, the Netherlands and Finland.

Wage differentiation

In  2002,  no  new  major  policy  initiatives  have  been  taken  to  promote  national  labour
institutions and bargaining systems that allow wages to evolve more closely in line with
productivity differentials.

16

Table 2: Wage developments in 2002
(Annual percentage change)

Nominal
compensation
per employee

Real wages 1

Labour
Productivity

NULC 2

RULC 3

B

D

EL

E

F

IRL

I

L

NL

A

P

FIN

Euro area

DK

S

UK

EU-15

3.6

2.0

6.5

4.2

2.7

7.9

2.9

3.5

5.1

2.3

4.8

3.3

2.9

3.9

4.1

3.5

3.1

1.5

0.6

3.1

0.3

1.0

2.2

0.5

2.6

1.3

0.9

-0.1

2.2

0.7

2.2

1.7

0.7

0.8

0.8

0.9

3.1

0.5

0.3

2.0

-0.6

-2.6

-0.1

0.6

0.0

1.2

0.4

1.6

1.5

0.9

0.6

2.8

1.1

3.2

3.6

2.4

5.8

3.5

6.3

5.2

1.6

4.8

2.1

2.5

2.3

2.5

2.6

2.5

0.8

-0.3

0.0

-0.2

0.6

0.3

1.0

5.4

1.3

0.2

-0.2

1.0

0.3

0.6

0.1

-0.2

0.2

1 Nominal compensation adjusted by the GDP deflator.
2 Nominal unit labour costs.
3 Real unit labour costs.
Source: Commission services, Autumn 2002 Economic Forecasts.

2.2

Improve the quality and sustainability of public finances

The 2002 BEPGs recommended Member States to: (i) make tax and benefit systems more
employment  friendly;  (ii) promote  the  quality  of  public  expenditure;  (iii) enhance  the
efficiency of public spending; (iv) improve the long term sustainability of public finances;
(v) reform  pension  policies  so  as  to  safeguard  the  adequacy  of  pensions,  maintain  the
financial sustainability and meet changing social needs; and (vi) pursue tax coordination
and implement the Council agreement of November 2000 on the tax package.

Tax and benefit systems

Progress  continued  in  making  tax  and  benefit  systems  more  employment  friendly  (see
Section 2.3).

17

Quality and redirection of public expenditure

Public expenditures can be more efficiency enhancing through a reduction of the interest
burden and a re-direction of primary expenditure, amongst others to increase investment
in key areas (such as R&D, and  human  capital)  to underpin  future  competitiveness  and
growth. In 2002 interest payments continued to fall in several Member States but not at
the same speed as in the first years of EMU. In some countries (Germany, France) they
are expected to stay at the same level as the previous year and for  Austria they  will  be
likely higher.

Public investment in the EU has been very stable over recent years (see Table 3) against a
background  of  the  cyclical  swings  in  private  investment.  Nevertheless,  a  significant
decline,  in  spite  of  the  contributions  received  from  the  Community's  structural  and/or
cohesion funds, appears to have taken place in several countries with unsound budgetary
positions  such  as  Portugal,  Greece,  and  Germany.  In  contrast,  public  investment
continued  to  increase  as  a  share  of  GDP  in  those  countries  with  sound  budgetary
positions.

Table 3 : Gross fixed capital formation in the EU, share of GDP

Avg 91-95

1996

1997

1998

1999

2000

2001

2002

Total
investment
Public
investment
Private
investment

20.5

2.9

17.6

19.6

19.4

19.9

20.2

20.6

20.1

19.4

2.4

2.3

2.2

2.3

2.3

2.3

2.3

17.1

17.2

17.6

17.9

18.3

17.8

17.2

Source : Commission services, Autumn 2002 Economic Forecasts.

The composition of public expenditure did not change much during 2002. Social transfers
still  represent  the  greatest  share  (34.5 per  cent  of  total  expenditure  in  the  EU,  see
Table 4),  unchanged  from  the  previous  year.  It  reflects  in  part  the  role  of  automatic
stabilisers,  since  unemployment  related transfers  are  likely  to  have  increased  somewhat
during  the  current  economic  juncture.  However,  for  some  countries  this  could  reflect  a
relatively  high  structural  public  expenditure  on  pensions  that  might  partially  crowd  out
other social transfers and/or public investment in physical and human capital. In the EU
as  a  whole,  public  investment  (as  a  percentage  of  total  public  expenditure)  decreased
marginally from 4.9 per cent in 2001 to 4.8 per cent in 2002 for the first time after several
years. The share of interest payments decreased marginally from 7.6 per cent in 2001 to
7.4 per cent in 2002.

A  thorough  assessment  of the quality  of  public  expenditure  is  hampered  by  the  lack  of
timely  and  comprehensive  data.  Member  States  should  pursue  an  improvement  in  data
quality, through a detailed classification of the destination of public consumption.

18

Table 4 - The composition of public expenditure in 2002
(as a share of total public expenditure)

Purchases of
goods and
services*

Compensation
of employees

Subsidies

Interest

Social
transfers
other than in
kind
31.6
31.5
39.7
33.5
31.4
33.9
26.4
35.3
37.0
24.9
36.2
27.3
33.9
31.9
33.7

B
DK
D
EL
E
F
IRL
I
L
NL
A
P
FIN
S
UK

21.3
16.1
22.8
7.8
17.8
18.6
18.2
16.3
22.3
28.7
16.7
12.4
15.7
18.6
30.2

23.7
31.5
16.3
24.7
25.6
25.7
25.6
22.3
20.7
22.1
19.3
32.4
27.0
28.6
18.8

3.2
3.7
3.1
0.4
2.8
2.4
2.3
2.3
4.1
3.2
5.3
3.9
3.0
2.4
1.5

35.0
34.5

Euro area
EU-15
* Government consumption expenditure net of compensation of employees.
Source: see Table 3.

21.8
21.8

19.8
21.2

2.9
2.5

Gross
fixed
capital
formation
3.2
3.3
3.3
7.8
8.5
6.3
12.8
4.1
11.0
7.2
2.3
8.2
5.2
4.7
3.2

5.1
4.8

Others

Total

4.5
7.1
8.0
14.0
6.3
7.1
10.2
7.4
4.1
6.8
13.1
9.4
10.1
8.5
7.3

7.6
7.8

100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0

100.0
100.0

12.4
6.7
6.8
11.7
7.5
6.0
4.5
12.2
0.7
7.0
7.2
6.4
5.2
5.2
5.4

7.8
7.4

Public expenditure efficiency and control

Member States continued to apply budgetary rules and procedures to improve efficiency
and  control.  These  rules  vary  and  include  multi-annual  budgets,  expenditure  rules  with
explicit  limits  on  the  annual  growth  rate  and  agreements  between  different  levels  of
government.  However,  the  observed  slippage  from  the  fiscal  targets  shows  that  the
enforcement  of  these  rules  is  weak.  The  mechanism  to  control  public  spending  at  sub-
national  level  remains  a  key  issue  for  several  Member  States.  Germany  introduced  this
year  a  Domestic  Stability  Pact,  where  an  inter-governmental  (among  different
government  levels)  Council  can  make  recommendations  on  how  to  achieve  fiscal
discipline.  In  Portugal  the  Budgetary  Stability  Law  (effective  from  2003)  sets  more
stringent  limits  (although  temporary)  to  net  borrowing  across  all  levels  of  general
government and in case of non-respect of borrowing ceilings, the budget law can sanction
an automatic reduction in state transfers proportional to the actual deviation. In Spain new
rules will apply from 2003. Accounts should at least balance at all government levels and
the possibility to run deficits is restricted to temporary and exceptional situations. Italy is
improving  controls  on  the  dynamics  of  expenditures  of  different  central  government
bodies.

19

The  impact  of  public  expenditure  on  economic  and  social  goals  is  difficult  to  assess.
Expenditure efficiency relates to the links between inputs (mainly money, but not solely)
and output. A proper assessment would require better information, notably on measures
of  the  input  (policies  and  expenditure)  and  output  (objectives  met),  and  a  detailed
microeconomic assessment of specific policies.

Long term sustainability and reforms of pension policies

All  Member  States  are  committed  to  take  the  necessary  measures,  and  in  particular
pension  system  reforms,  to  assure long  term  sustainability.  During  2002  some  Member
States implemented reforms that are expected to limit the impact of ageing populations on
public spending (Portugal) or that will strengthen the contribution base (Finland). Other
countries continued to speed up reform processes started in the past years, such as those
directed  at  improving  incentives  for  longer  working  lives,  lowering  future  replacement
rates  in  public  schemes  and  promoting  the  development  of  private  pension  provision
through tax incentives and grants.

However, these reforms alone are not sufficient to guarantee long term sustainability in
all EU countries. The long-run sustainability of public finances is in most Member States
far from secured (particularly so in Belgium, Germany, Spain, France, Italy, Austria, and
Portugal). It is also vital to raise employment levels and to pursue overall sound public
finances  to  prepare  for  the  impact  of  ageing.  Several  Member  States  have  still  not
achieved  budget  positions  that  are  close  to  balance  and  further  delays  in  reaching  the
Stability  and  Growth  Pact  requirement  will  have  long-term  consequences  for  the
sustainability of public finances.

There would appear to be a need for stronger commitment to reduce debt levels in several
Member States with high government debt ratios, such as Italy and Greece. In Italy, the
slow pace of debt reduction came to a halt and it is expected to stay around 110 per cent
of GDP. Greek government debt would be close to 106 per cent of GDP, the same level
as in 1998. These trends do not show a satisfactory rate of reduction, that could bring debt
levels below the 60% reference value before the impact of ageing takes place (i.e. in 15 to
20 years).

Tax package

Taxation remains a source of fragmentation across the Internal Market. Having to comply
with  15  different  tax  systems  comes  at  a  cost  and  acts  as  a  break  on  growth  and
employment. It is therefore regrettable that, following its November 2000 agreement on
the tax package, the Council failed to achieve full agreement on the tax package by the
end of December 2002. The Code of Conduct Group continued its  work  with  regard  to
the  elimination  of  harmful  business  tax  regimes  and  will  soon  proceed  to  an  initial
evaluation  of  the  adequacy  of  proposals  to  dismantle  them.  Subsequent  to  the  political
agreement  on  the  text  of  the  Directive  on  taxation  of  savings  income  within  the
Community in December 2001, an agreement has been reached on the standard format to
be used for exchange of information.

20

2.3

Invigorate labour markets

The  2002  BEPGs recommended  Member  States  to:  (i) adapt  tax  and  benefit  systems  to
make  work  pay;  (ii) improve  the  efficiency  of  active  labour  market  policies;  (iii) bring
down  obstacles  to  geographical  mobility;  (iv) safeguard  employability  and  facilitate
occupational  mobility;  (v) promote  flexible  work  organisation  and  review  employment
contract regulations; and (vi) remove barriers to female labour force participation.

The  labour  market  has  shown  some  resilience  in  the  current  slowdown.  Employment
continued to increase in the EU as a whole in 2002, albeit at a much lower rate than in the
previous five years. While the impact of the slowdown could be felt in all Member States,
employment growth varied considerably, from 2.8 per cent in Luxembourg to 1.3 per cent
in  Spain  and  Ireland,  whilst  in  Germany  employment  contracted  by  0.5 per  cent.
Unemployment has picked up moderately in the EU so far, displaying the usual lag with
respect to GDP growth. Here, too, the differences across Member States are sizeable. For
almost half of the Member States, the average unemployment rate in 2002 was not higher
than  in  2001.  Reduced  rates  of  long-term  unemployment  since  1999  (see  Graph 3)
continue to reflect structural improvements in the labour market. In 2001 (2002 data are
not  yet  available),  the  overall  employment  rate  was  64 per  cent,  1.7 percentage  points
higher  than  in  1999,  before  the  start  of  the  Lisbon  strategy;  and  it  increased  over  the
period 1999-2001 in all, but one, Member State (see Graphs 4-5). Over the same period,
the  female  employment  rate  increased  by  2.1 percentage  points  to  54.9 per  cent  (see
Graph 6).  The  employment  rate  of  older  workers  increased  by  1.5 percentage  points  to
38.6  per  cent  (see  Graph 7).  However,  almost  all  of  those  Member  States  in  which  it
declined  in  2001  already  had  rates  below  the  EU  average,  a  fact  that  clearly  points  to
structural problems that need to be overcome in order to achieve the Stockholm target of
50% by 2010.

Overall, Member States made some progress with labour market reform in 2002, but the
reform momentum does not seem to have increased as compared to last year. However, in
the  current  weak  economic  conditions,  there  is  a  particular  need  to  vigorously  pursue
such reforms, in particular since bridging the gaps vis-à-vis the intermediate employment
rate targets for the EU (67% overall and 57% for women by 2005) remains an important
challenge.

Graph 3 : Long term unemployment rate

e
g
n
a
h
c

e
t
a
r

t
n
e
m
y
o
p
m
e
n
U

l

1
0
0
2
-
9
9
9
1

1

0

-1

-2

-3

L

A
DK
NL

P
UK

FIN

D

S

IRL

EU-15
F

B

I

EL

E

0

1

2

3

4

5

6

7

8

Source : Commission services.

Unemployment rate 1999

21

 
 
 
Graph 4 : Labour market situation in the EU

Unemployment

1999
2002

B

DK

D

EL

E

F

IRL

I

L

NL

A

P

FIN

S

UK

EU-15

Long-term  unemployment

1999
2001

%

%

B

DK

D

EL

E

F

IRL

I

L

NL

A

P

FIN

S

UK

EU-15

%

%

Employment rate

1999

2001

B

DK

D

EL

E

F

IRL

I

L

NL

A

P

FIN

S

UK

EU-15

Employment rate of older workers

1999
2001

B

DK

D

EL

E

F

IRL

I

L

NL

A

P

FIN

S

UK

EU-15

Female employment rate

1999
2001

18
16
14
12
10
8
6
4
2
0

8

6

4

2

0

80
70
60
50
40
30
20
10
0

80
70
60
50
40
30
20
10
0

%

80
70
60
50
40
30
20
10
0

B

DK

D

EL

E

F

IRL

I

L

NL

A

P

FIN

S

UK

EU-15

Source : Commission services. Note: Employment rata data used in this and following graphs are based on the number of persons employed. Data on full-time equivalents, 
correcting for part-time work and thereby providing for a more comparable picture, are not available for all Member States.

22

Graph 5 : Total employment rate

E

I

IRL

F

EU-15

L

D

FIN

P

NL

S

UK

DK

A

B

EL

e
g
n
a
h
c
e
a
r

t

t

n
e
m
y
o
p
m
E

l

1
0
0
2
-
9
9
9
1

4

3

2

1

0

-1

40

42

44

46

48

50

52

54

56

58

60

62

64

66

68

70

72

74

76

78

Source : Commission services.

Employment rate 1999

e
g
n
a
h
c
e
t
a
r

t
n
e
m
y
o
p
m
E

l

1
0
0
2
-
9
9
9
1

5

4

3

2

1

0

Graph 6 : Female employment rate

E

I

NL

FIN

S

UK

DK

P

A

IRL

L

F

EU-15

D

EL

B

20

25

30

35

40

45

50

55

60

65

70

75

80

Source : Commission services.

Employment rate 1999

23

 
 
 
 
 
 
 
 
Graph 7 : Older workers employment rate

FIN

E

NL

IRL

UK

DK

S

EU-15

D

EL

P

F

I

B

A

L

e
g
n
a
h
c
e
a
r

t

t

n
e
m
y
o
p
m
E

l

1
0
0
2
-
9
9
9
1

8

7

6

5

4

3

2

1

0

-1

-2

-3

20

25

30

35

40

45

50

55

60

65

70

Employment rate 1999

Source : Commission services. 

Tax and benefit systems

Improving  incentives  to  take  up  work  or  to  stay  in  employment  remains  a  serious
challenge in most Member States, in particular in view of low employment rates of older
workers and ageing populations. While some progress was made in 2002, measures taken
were generally piecemeal; no comprehensive reforms of taxes and benefits to make work
pay were launched. Most Member  States  continued  to  favour  measures on  the  tax  side,
rather  than  addressing  the  combined  effects  of  taxes  and  benefits.  Pensions  and  early
retirement  schemes  received  surprisingly  little  attention,  given  the  agreement  at  the
Barcelona  European  Council  to  raise  the  effective  average  age  at  which  people  stop
working  by  about  five  years,  by  2010.  A  major  reform  of  the  pension  system  was
introduced  in  Greece,  and  Finland  took  further  steps  in  pension  reform,  however  with
long transition periods, which implies that the impact on labour market activity is likely
to  be slow.  Several  Member  States  cut taxes  on labour (France,  Denmark,  Italy),  while
others  continued  to  implement  tax  reforms  agreed  earlier.  Belgium  took  measures  to
streamline  the  various  tax  incentives  for  recruiting  specific  groups  of  workers.  Italy
decided  to  allow  private  job  placement  services;  and  the  UK  merged  the  employment
service  with  the  benefit  administration  for  working  age  people.  Similar  employment
service reforms have been put forward by the “Hartz” Commission in Germany. In Spain,
the job-search obligation  and  mobility  requirements  attached  to  unemployment  benefits
were strengthened, and in Luxembourg, eligibility for disability benefits was tightened.

24

 
 
 
 
Active labour market policies (ALMPs)

Activation measures that are well targeted to the needs of individuals and of the labour
market  can  be  an  important  contribution  to  prevent  cyclical  unemployment  from
becoming  long-term  unemployment.  Spending  on  ALMPs  amounted  to  an  average  of
around  1  per  cent  of  Member  States’  GDP  in  2000,  but,  with  a  few  exceptions,  the
effectiveness  and  efficiency  of  these  measures  are  not  regularly  monitored.  Significant
improvements  in  this  area  were  again  made  by  countries  that  already  have  a  strong
culture  of  monitoring  the  effectiveness  and  efficiency  of  ALMP  spending,  such  as
Sweden,  Denmark  and  Finland.  A  small  number  of  other  countries  also  took  limited
measures in this area (Germany, Spain and the UK).

Geographical and occupational mobility, and skills

Several Member States face important regional disparities in labour market performance.
Few new measures were taken to encourage the regional mobility of workers. Spain has
started  to  address  disincentives  stemming  from  inconsistencies  in  the  benefit  system.
Other barriers to  mobility,  such  as rigidities  in  housing  markets,  have  not  received  any
particular attention.

The mismatch of skills offered and required in the labour market also continues to hold
back  employment.  Member  States  generally  continued  to  respond  to  the  challenge  of
bottlenecks  with  adjustments  to  their  systems  of  vocational  training  and  with  lifelong
learning  strategies;  and  the  slowdown  has  eased  short-term  labour  market  tightness  to
some extent. The two Member States (Greece and Portugal) that had received individual
recommendations to  enhance the  skills  and  productivity  of  the labour  force  made  some
progress with such reforms.

Flexibility and modernisation

In  many  Member  States,  part-time  and  flexible  working  hours  and  work  organisation,
typically  implemented  by  social  partners,  continue  to  be  a  priority.  In  France,  new
flexible  working  time  provisions  partly  compensate  for  the  global  working  time
reductions.  Italy  and  Portugal  expect  to  pass  bills  shortly  introducing  new  forms  of
employment  contracts  and  extending  the  possibilities  for  fixed-term  employment,
respectively, while Spain is seeking to make very short-term contracts less attractive, and
in  this  context  there  is  an  increasing  trend  to  better  balance  security  with  flexibility  in
labour markets. Reforms of employment protection legislation (EPL) have received little
or  no  attention.  In  Austria,  the  system  of  severance  pay  was  extended  and  made  more
conducive to mobility, while the level was reduced. Partial measures in the field of EPL
and dismissal costs were also taken in Spain and announced in France.

Barriers to female labour force participation

Difficulties in combining work and care activities, as well as labour market re-integration
after career breaks, continue to weigh on female labour market participation. A number of
Member States have taken measures to improve the availability of childcare facilities, and
ten have set targets in that respect. However, little attention was given to care for other
dependants.  Others  have  targeted  tax-benefit  reforms  towards  improving  incentives  for

25

women  to  take  up  work  (Belgium,  Spain,  and  Ireland)  and  several  Member  States
(Belgium, Germany, Austria and the UK) are gradually implementing an alignment of the
statutory retirement age of female and male workers. Despite growing awareness of the
issues involved, there is no evidence that Member States have addressed the underlying
factors leading to a gender pay gap.

2.4

Re-ignite structural reform in product markets

The  2002  BEPGs  recommended  Member  States  to:  (i) fully  implement  the  Internal
Market  (increase  transposition  rate,  eliminate  technical  barriers  to  trade,  create  an
effectively  functioning  Internal  Market  in  services  and  further  open  up  the  public
procurement  market);  (ii) ensure  effective  competition  (ensure  effectiveness  of  the
competition  and  regulatory  authorities,  secure  less  and  better  State  aid);  and
(iii) accelerate  reforms  in  the  network  industries  (encourage  market  entry,  ensure
freedom  of  choice  of  energy  supplier,  build  new  infrastructure  and  open  up  transport
markets).

Progress over the past year in terms of the full implementation of the Internal Market has
been rather disappointing with a slight fall in the IM transposition rate and slow progress
in eliminating remaining barriers to trade and cross-border service activities. On the other
hand, good progress has been made in harmonising competition policies across Europe.
The liberalisation process in the network industries has continued, but the market share of
incumbents remains high. Competition is still insufficient, but progress has been made in
the telecommunication and energy sectors in particular and in those sectors the benefits to
consumers of liberalisation are starting to be felt.

Implementation of the Internal Market

For the first time since 1992, both the total trade to GDP ratio and the share of foreign
direct investment flows in GDP declined in 2001, which could  be indicative  of  a  slow-
down  in  the  process  of  European  economic  integration.  The  degree  of  price  dispersion
between EU Member States declined from 15.3 per cent in 2000 to 14.8 per cent in 2001,
a level comparable to the one observed in the late 1990s. Price dispersion within the euro
area remained constant at around 12 per cent.

The rate of transposition of Internal Market directives has fallen slightly from 98 per cent
in  November  2001  to  97.9  per  cent  in  November  2002,  indicating  that  Member  States
have  reduced their  efforts  in  this area  (see  Graph 8).  Only  5  Member  States  (Denmark,
the Netherlands, Finland, Sweden and the UK) have at present met the target of 98.5 per
cent.  Looking  at  the  implementation  of  Internal  Market  legislation,  the  total  number  of
Internal Market infringement proceedings remains high, particularly in France and Italy.

26

Graph 8 : Implementation of the Internal market

Transposition of the Internal market directives

EU target

2001

2002

F

EL

P

A

D

IRL

I

L

B

E

UK

NL

DK

FIN

S

EU15

 Infringement cases

2001

2002

100

99

98

97

96

95

94

250

200

150

100

50

0

F

I

D

E

EL

IRL

B

UK

A

NL

P

FIN 

DK

L

S 

Source: Commission services.

The speed with which new product standards are being developed and the efficiency with
which  the  mutual  recognition  principle  is  applied  has  not  increased  significantly.  A
continued  lack  of  awareness  of  the  principle  of  mutual  recognition  and  the  perceived
costs of applying it in practice still hinder market entry in most if not all Member States.

The  Commission  recently  published  a  comprehensive  inventory  of  barriers  to  cross-
border  service  activities  by  businesses  and  consumers.4  Such  barriers  can  include,  for
example,  the  length,  complexity  and  duplication  of  administrative  formalities  and  the
existence  and  use  of  discretionary  powers  by  local  authorities.  On  the  basis  of  the
inventory, which shows problems affecting all Member States, the Commission intends to
propose measures for eliminating the barriers identified.

The value of public procurement calls for tenders published in the Official Journal as a
share  of  the  total  value  of  public  procurement  in  2001  (15 per  cent)  was  unchanged  in
comparison  with the  previous  year.  Germany  continued  to  lag  behind  with a  6 per  cent
share.  Public  procurement  is  increasingly  brought  online.  In  2002,  Denmark,  Germany
and  Ireland  have  made  particularly  good  progress  in  this  respect.  In  addition,  political
agreement has been reached on the principal points of the public procurement legislative
package, but the package has not yet been formally adopted.

4

The State of the Internal Market for Services, COM (2002) 441 final.

27

                                                
Competition and regulatory policies

Measures  have  been  taken  to  improve  the  effectiveness  of  competition  policies.  In  all
Member  States,  except  for  Luxembourg  and  Finland,  national  competition  authorities
now have powers to enforce Articles 81-82 of the EC Treaty, which deal with agreements
between  enterprises  and  abuse  of  dominant  positions.  Some  Member  States  (including
Greece, Ireland, Portugal and the UK) have taken measures to increase the resources and
operating  capacity  of  their  competition  authorities,  while  others  (Belgium,  Denmark,
Spain,  Ireland  and  Portugal)  have  reinforced  their  regulatory  authorities.  At  EU  level,
action  to  modernise  the  application  of  competition  rules  has  advanced  well.  A  new
Regulation  modernising  the  enforcement  mechanisms  of  Article 81  and 82  of  the  EC
Treaty was adopted in November 2002 and in December 2002 the Commission presented
to the Council a proposal for changes to the Merger Regulation

In 2000, State aid (excluding aid to agriculture and fisheries) exceeded 1 per cent of GDP
in Belgium, Denmark, Germany and Luxembourg. However, aid levels as a percentage of
GDP  continued  their  downward  trend  in  all  EU  Member  States  with  the  exception  of
Denmark,  Ireland,  Luxembourg  and  the  Netherlands.  At  the  same  time  the  trend  in  the
share  of  aid  to  horizontal  objectives  is  up  in  all  Member  States  with  the  exception  of
Austria.  The  Commission  State  aid  Scoreboard  and  Register  are  contributing  to  the
transparency of State aid policies. The Commission is examining ways  of  assessing  the
effectiveness of State aid as a policy instrument.

Structural reforms in the network industries

Rules for a competitive communication sector are in place, with agreement having been
reached on all elements of the telecommunications regulatory package. However, at the
end of 2001 the incumbent’s market share in local calls remained high (i.e. above 80 per
cent)  in  many  Member  States,  which  helps  explain  the  only  marginal  price  decline  for
such calls. In some countries market shares of incumbents remained high even for long-
distance calls. Despite these figures the competitive situation is improving as carrier pre-
selection is now fully implemented for local calls.

In 2002, the liberalisation of the electricity market continued with increases in the degree
of  legal  opening  in  Belgium,  Greece,  Spain,  Ireland,  Luxembourg,  the  Netherlands  and
Portugal.  In  gas,  the  degree  of  legal  market  opening  increased  in  Austria,  Denmark,
Ireland, Luxembourg, the Netherlands and Spain. Nevertheless, competition in the energy
sector, as measured by the market share of the incumbent or by the degree of switching
by gas and electricity users, remains limited (see tables 5 and 6).

28

Table 5 : Product Market : Electricity

Declared
market
opening
(2002)

Full
opening
date

Market
share of
largest
generator
(2000)

Prices large
Industrial
users
EU=100
(2002)

Prices
households
EU=100
(2002)

Large eligible
industrial users
Switch
1998-2001

Small
commercial/domestic
Switch
1998-2001

B

DK

D

EL

E

F

IRL

I

L

NL

A

P

FIN

S

UK

52

35

100

34

55

30

40

45

57

63

100

45

100

100

100

2003/7

2003

1999

-

2003

-

2005

2004(1)

-

2004

2001

2003

1997

1998

1998

91.1

36.0

34.0

97.0

42.4

90.2

97.0

46.7

-

n.a

32.6

58.5

23.3

49.5

n.a

122.6

103.1

110.5

95.2

83.9

90.6

134.8

125.2

104.0

99.4

120.0

107.3

64.7

50.0

99.0

110.1

83.7

122.1

56.1

83.2

89.4

85.5

134.6

111.1

87.8

90.2

118.4

67.5

67.9

99.8

2-5%

unknown

20-30%

nil.

10-20%

10-20%

10-20%

>50%

10-20%

20-30%

20-30%

5-10%

unknown

unknown

>50%

1 non household consumers.
Source: Commission services.

Not eligible

Not eligible

5-10%

Not eligible

Not eligible

Not eligible

Not eligible

Not eligible

Not eligible

Not eligible

5-10%

Not eligible

5-10%

10-20%
30-50%

One reason is that energy markets are not yet sufficiently integrated at the Union level.
However, political agreement has been reached in the Council on the electricity and gas
package,  including  agreement  on  a  date  for  opening  up  of  markets  for  household
customers  as  well  as  on  a  transparent  and  non-discriminatory  tariff  system  for  cross-
border transactions. Moreover, progress has been made in raising the level of electricity
interconnections between Member States.

29

Table 6 : Product Market : Gas

Declared
market
opening
(2002)

Full
opening
date

Market
share of
top
supplier
(2000)

Prices large
industrial
users
EU=100
(2002)

Prices
households
EU=100
(2002)

Large eligible
industrial users
Switch
1998-2001

Small
commercial/domestic
Switch
1998-2001

B

DK

D

EL

E

F

IRL

I

L

NL

A

P

FIN

S

UK

59

35

100

n.a

79

20

82

96

72

60

100

n.a

n.a

47

100

2003/6

2004

2000

n.a

2003

-

2005

2003

-

2003

2002

-

-

2006

1998

95

92

90.7

77.6

unknown

125.7

n.a

70

95

unknown

10

85

unknown

unknown

n.a

n.a

100

50

n.a

75.0

85.1

84.3

101.4

101.9

88.3

97.1

108.1

106.7

102.4

93.6

99.2

89.6

109.9

n.a

124.4

109.3

86.4

118.3

79.0

83.6

104.4

156.8

96.6

114.6

78.9

unknown

2-5%

<2%

n.a

20-30%

20-30%

20-30%

10-20%

5-10%

30-50%

<2%

Not eligible

Not eligible

<2%

>50%

Not eligible

Not eligible

<2%

n.a

Not eligible

Not eligible

Not eligible

2-5%

Not eligible

Not eligible

Not eligible

Not eligible

Not eligible

Not eligible

30-50%

Source: Commission services.

Some  improvements  have  been  registered  as  well  in  the  efficiency  of  the  use  of  the
interconnection infrastructure (between France and the UK, Greece and Italy, and to some
extent  between  Denmark  and  Germany)  with  market-based  mechanisms  being
increasingly  used  for  its  allocation.  Nevertheless,  capacity  allocation  and  tariff  setting
mechanisms  remain  largely  inefficient  and  continue  to  limit  competition.  Denmark,
Germany, Italy, the Netherlands, Austria, Sweden and the UK have opened up their rail
freight network to competition for domestic services. However, it looks likely that most
Member States will not have fully transposed the first railway infrastructure package by
its date of entry into force, 15 March 2003. Moreover, there is no agreement  yet in  the
Council  and  Parliament  on  the  revised  financial  regulation  and  guidelines  for  Trans-
European transport  networks, the  Second  Railway  Package,  public  service  contracts for
passenger transport and airport slot allocation. To end on a positive note, agreement was
reached in Council on the Postal Services Directive, on the Single European Sky package
and on a common position on access to port services.

30

2.5

Promote  the  efficiency  and  integration  of  the  EU  financial  services
market

The  2002  BEPGs  recommended  Member  States  to:  (i) step  up  efforts  by  all  relevant
parties  to  ensure  full  implementation  of  the  FSAP  by  2005  and  by  2003  for  securities
markets  legislation;  (ii) intensify  efforts  to  implement  the  RCAP  by  2003;  (iii) further
improve  arrangements  to  deliver  efficient  cross-border  /  cross-sector  co-operation  for
prudential purposes; and (iv) encourage the removal of barriers to efficient cross-border
clearing and settlement.

Implementation of the FSAP

The process of financial integration is progressing. Of the original 42 legislative and other
measures  in  the  Financial  Services  Action  Plan  (FSAP),  the  centrepiece  of  the
Community’s  efforts  to  integrate  European  financial  markets,  32  have  now  been
completed.  The  ambitious  objectives  set  by  the  Barcelona  European  Council  for  2002
will be largely achieved. Among the eight measures identified for adoption before the end
of the year, six have been adopted (the Regulation on International Accounting Standards,
and  the  Directives  on  collateral,  distance  marketing  of  financial  services,  insurance
intermediaries, financial conglomerates, and market abuse). The proposed Directives on
prospectuses  and  pension  funds  have  been  slightly  delayed  and  the  adoption  of  the
Directive  on  Pension  Funds  is  now  foreseen  for  March  and  of  the  Directive  on
prospectuses  for  June  2003.  The  legislative  measures  that  have  been  adopted  by  the
Council  must  now  be  transposed  into  law  in  the  Member  States.  The  current  pace  of
progress in implementing  the  FSAP  needs to  be  maintained  if  the  deadline  of  2005  for
full implementation is to be met. All outstanding measures must be adopted at EU level
by mid-2004 at the latest, so as to allow sufficient time for transposition at the Member
State  level.  In  order  to  monitor  the  impact  of  FSAP  measures  going  forward,  the
Commission  is  developing  a  set  of  indicators  that  will  focus  on  quantifying  trends  in
integration and efficiency within the EU financial market.

Implementation of the RCAP

The  risk  capital  market  has  experienced  a  severe  correction  since  mid-2000.  On  a
structural  level,  the  EU  risk  capital  market  faces  a  range  of  regulatory,  fiscal,  and
legal/administrative  constraints. The  Risk  Capital  Action  Plan (RCAP)  was  designed  to
address these constraints and progress in implementing the Plan has continued in 2002. In
addition  to  progress  in  setting  up  a  pan-EU  regulatory  framework  through  the  relevant
aspects  of  the  FSAP,  Member  States  have  undertaken  a  number  of  reforms  at  national
level.  In  some  Member  States  (Denmark,  Germany)  regulation  of  investments  by
institutional  investors  has  become  less  based  on  quantitative  constraints  in  favour  of  a
prudent-man  approach.  Several  Member  States  (Italy,  Netherlands,  and  Spain)  have
reduced the period for the discharge of residual debt by bankrupts and have eased other
regulations denying a second chance to  failed entrepreneurs.  With respect  to  improving
the fiscal framework for risk capital investment, most Member States have implemented
tax  measures  that  should  foster,  among  other  things,  the  risk  capital  market.  Such
measures  include  reduction  in  corporate  tax  rates,  tax  incentives  for  those  establishing
new  businesses,  tax  relief  on  research  and  development  expenditures  and  overall

31

investment  costs.  Several  Member  States  have  also  taken  measures  to  adapt  the  fiscal
framework  in  favour  of  employee  financial  participation  schemes  (Denmark,  UK).
However,  despite  the  adoption  of  some  measures,  the  fiscal  regimes  in  most  Member
States continue to discriminate in the treatment of interest costs and dividend payments.
In  general,  much  has  been  done  to  remove  the  existing  barriers  to  an  efficient  EU  risk
capital  market,  but  faster  progress  seems  necessary  in  all  of  the  main  policy  areas
identified in the RCAP.

Arrangements for cross-border / cross-sector co-operation for prudential purposes

A number of Member States have reformed their arrangements for financial supervision
in  2002  so  as  to  increase  cross-sector  co-operation.  In  Austria,  the  newly  established
Financial  Market  Supervisory  Authority  (FMA)  will  supervise  all  financial  institutions
and  markets.  In  Germany,  the  three  separate  supervisory  offices  for  banking,  insurance
and  securities  trading  have  combined  into  a  single  agency,  the  Federal  Financial
Supervisory  Agency  (BAFin).  In  Ireland,  a  single  regulatory  authority  for  the  financial
sector  has  been  set up  within  the  reformed  central bank.  In  Belgium,  the  existing  three
supervisory authorities will be reorganised and headed by a Financial Services Authority.
In the Netherlands, supervision is being reorganised along the lines of policy objectives
instead  of  by  sector.  In  France,  the  proposal  to  merge  the  two  financial  markets
authorities  was  reactivated.  As  Member  States  are  following  different  models  of
consolidated  financial  supervision  and  as  financial  markets  integration  is  progressing,
improved  cross-border  co-operation  will  be  crucial.  One  of  the  aims  of  the  ECOFIN
Council’s  proposal  to  extend  the  4-level  regulatory  approach  (so-called  ‘Lamfalussy
procedure’)  to  banking,  insurance,  and  financial  conglomerates  is  precisely  to  boost
regulatory convergence between the Member States.

Efficient cross-border clearing and settlement

Despite  ongoing  signals  of  market  consolidation  (e.g.  the  merger  between  Crest  and
Euroclear),  current  arrangements  for  cross-border  clearing  and  settlement  are  complex
and  fragmented,  imposing  unnecessary  costs  and  risks  on  investors.  The  Commission
issued  a  consultative  Communication  in  May  2002  aimed  at  gathering  views  on  the
priorities for action. A second Giovannini report (presently in preparation) will focus on
removing the barriers identified in the first report, examining the public policy aspects of
likely  developments  in  the  clearing  and  settlement  architecture  and  examining  some  of
the possible “models” for clearing and settlement in the future.

2.6

Encourage entrepreneurship

The  2002  BEPGs  recommended  Member  States  to:  (i)  create  a  business-friendly
environment  (improve  tax  and  regulatory  environment,  increase  efficiency  of  public
services,  reduce  barriers  to  cross-border  economic  activity);  (ii)  take  action  on  the
European Charter for Small Enterprises; and (iii) improve access to finance.

Several initiatives have been taken at both Community and national level to improve the
business  environment  and  encourage  entrepreneurship.  However,  achievements  vary
between countries and the different areas concerned.

32

Business environment

The regulatory environment is improving in all Member States, though more needs to be
done in order for the cumulative impact of many small improvements to be felt. At EU
level,  the  Commission  is  now  introducing  its  new  impact  assessment  system  and  is
implementing its action plan on better regulation. A number of Member States (including
France, Italy, Austria and Portugal) have taken measures to reduce the typical time and
cost required for setting  up  a  new  company,  to  alleviate  administrative  burdens,  and  to
stimulate competition in certain sectors.

Significant  reforms  to  increase  the  efficiency  of  the  public  sector  were  undertaken  in
Belgium (new managerial  rules  and  benchmarking,  e-government),  Denmark  (increased
use of public tendering), Portugal (rationalisation of structure of central government) and
Sweden  (development  and  use  of  benchmarking  data  base).  Increasingly  government
services are being made available online (see section 2.7).

The  Final  Report  by  the  High-level  Group  of  Company  Law  Experts  on  accounting
standards and rules on corporate governance was published. This report will be the basis
for company law reforms at EU level.  Furthermore,  the  Commission launched a  debate
with the Member States on long-term comprehensive solutions for company  taxation  in
the  European  Union.  In  2002,  statutory  corporate  tax  rates  were  lowered  in  France,
Ireland,  Luxembourg,  the  Netherlands  and  Portugal,  while  the  corporate  tax  system  in
Greece  was  simplified.  Finally,  the  adoption  of  the  Directive  for  VAT  on  e-commerce
should contribute to improving conditions for e-business (see also section 2.7).

European Charter for Small Enterprises

In 2002, all Member States made progress in implementing the recommendations of the
European  Charter  for  Small  Enterprises.  Most  Member  States  took  measures  to  reduce
the time  and  costs  required  for  setting  up  new  enterprises, to  further develop education
and  training  for  entrepreneurship, to  facilitate  business  e-commerce  and  to  improve  the
regulatory and legal environment for businesses (see above). Little action was, however,
undertaken to improve representation of small businesses’ interests.

Access to finance

Access  to  finance  remains  a  problem  for  small  and  medium-sized  enterprises  in
particular. This problem has been exacerbated by a decline in venture capital investment
and the financial difficulties that some banks are experiencing. Within the framework of
the Risk Capital Action Plan most of the Member States have developed programmes to
promote entrepreneurship and innovation.

2.7

Foster the knowledge-based economy

The  2002  BEPGs  recommended  Member  States  to:  (i) stimulate  R&D  and  innovation
(improve  framework  conditions,  encourage  knowledge  transfer  from  universities,
enhance collaboration across Europe, adopt the 6th Research  Framework  Programme);
(ii) promote access and use of ICT (speed up the development of the European broadband

33

network,  stimulate  internet  use);  and  (iii) strengthen  education  and  training  efforts  (in
order  to  improve  educational  attainments,  the  capacity  of  the  education  and  training
system to adapt, and the transparency of diplomas and qualifications).

While continuing to lag behind the US in terms of the knowledge-based economy, there
are  signs  that  the  EU  is  catching  up  (e.g.  in  ICT  usage).  However,  gaps  in  terms  of
business  R&D  and  patenting  appear  persistent.  Internet  usage  in  the  EU  continues  to
increase. The challenge is now to further accelerate the broadband rollout. Improving the
efficiency  of  the  education  system  remains  a  priority.  In  addition,  Member  States  have
strengthened the vocational training aspects of education in order to respond adequately
to changes in skill requirements.

Research, development and innovation

The Commission has launched discussions with Member States and businesses about how
to take R&D spending from the current 1.9 per cent of GDP towards the 3% target set by
the Barcelona European Council. The focus is on improving the framework conditions for
R&D and innovation. At the same time, increased attention is being devoted on how to
more effectively use existing financial resources in support of R&D and innovation. Such
efforts will contribute to a rise in productivity levels (see Graph 9).

Within the framework of the European Research Area initiative, progress has been made
in  co-ordinating  national  research  activities,  for  example  on  Aids/HIV  research.  The
recently  adopted  6th  Research  Framework  Programme  should  reinforce  this  trend.
Agreement  on  the  Community  Patent,  on  the  other  hand,  has  not  yet  been  reached.
Greece, Italy, Austria, Portugal, Sweden and the UK have taken measures to improve the
links between universities and business.

34

Graph 9 : Business expenditure in R&D and Total Factor Productivity

IRL

FIN

EL

S

130

125

120

115

110

105

)
0
0
1
=
5
9
9
1
(

1
0
0
2
P
F
T

P

I

100

0

E

0.5

A
NL

DK UK
L

B

EU

F

US

D

Japan

1

1.5

2

2.5

3

Business expenditure in R&D as a percentage of GDP - Average 1995-1999

Source: Commission services.

Information and communication technologies (ICT)

Local  competition  in  the  telecommunications  market  is  essential  for  the  further
development  of  the  ICT  sector  in  Europe.  In  legal  terms  the  local  loop  has  been
unbundled  in  all  Member  States.  However,  effective  competition  in  telecommunication
services using the local network of the incumbent is still deficient in practice (see section
2.4). The rollout of “broadband services” – i.e. the high-speed transmission of voice, data
and video signals - has been slower than expected and is still characterised by significant
dominance on the wholesale market by the incumbents. In 2001, broadband penetration
was  relatively  high  in  Belgium,  Denmark,  Germany,  the  Netherlands,  Austria,  Finland,
and  Sweden.  The  eEurope  2005  Action  Plan,  which  was  approved  by  the  June  2002
European  Council  in  Seville,  seeks  to  promote  the  development  of  broadband  services
and internet use in general.

As  a  result  of  increased  ICT  spending  and  a  decline  of  internet  access  costs,  internet
access rates have continued to rise albeit at a lower rate than in 2001. By mid-2002, 40
per cent of EU households had internet access, up  from  36  per  cent  in  2001.  However,
there  were  still  major  differences  between  Member  States.  Spain,  France  and  Portugal
appeared to be catching up to the EU average, but Greece failed to do so. Internet access

35

 
 
in schools increased as well. The ratio of students per online computer improved from 25
in 2001 to 17 in 2002, but differences between Member States are substantial. The initial
eEurope  targets  of  connecting  all  schools  to  the  Internet  and  of  training  a  sufficient
number  of  teachers  are  nearly  achieved.  Internet  penetration  in  businesses  is  far  higher
than the household rate. Nevertheless, the amount of business actually carried out online
remains modest. Fifty-five per cent of basic public services were available online in April
2002  compared  to  45  per  cent  in  October  2001.  In  this  domain  the  Benelux  countries,
Germany and Austria are the laggards.

Education and training

For the EU as a whole, public education expenditure declined slightly from 5.2 per cent
of GDP in 1995 to 5.1 per cent in 2000. However, its share in total public spending rose
by  1  percentage  point over  that same  period.  In  contrast to the  US, the level of  private
investment  in  education  is  very  low.  For  example,  private  spending  on  third  level
education  in  the  EU  is  only  0.2%  of  GDP  compared  to  1.6%  in  the  US.  Private
expenditure  on  educational  institutions  is  less  than  0.5  per  cent  of  GDP  in  all  Member
States  except  for  Germany,  Greece  and  Spain.  The  focus  on  education  and  training
policies  in  some  Member  States  appears  to  be  more  on  the  need  for  reforms  of  the
education  and  training  systems  in  order  to  increase  efficiency,  than  on  increased
spending. Indeed, some Member States invest less than others in education and training
and  yet  achieve  better  results.  Most  Member  States  have  strengthened  the  vocational
aspect of education, inter alia in order to provide alternatives to those students who might
otherwise drop out of the education system. The EU has introduced several instruments,
aimed at facilitating the transfer of qualifications and skills for academic or professional
purposes.  The  European  Credit  Transfer  System,  which  facilitates  student  mobility,
continues to expand, even beyond Europe. Moreover, steps are being taken to introduce
European bachelors and masters degrees within the framework of the Bologna process.

2.8

Enhance environmental sustainability

The  2002  BEPGs  recommended  Member  States  to:  (i) provide  impact  analyses
considering the social and environmental consequences of policy measures; (ii) increase
competition  to  increase  effectiveness  of  market-based  instruments;  (iii) introduce  and
strengthen  policies  based  on  economic  instruments  in  order  to  appropriately  integrate
externalities  and  mirror  resource  use;  (iv) prepare  for  the  introduction  of  emissions
trading at EU level more generally, prepare appropriate measures and policies to deliver
the Kyoto obligations, in particular aiming at more efficient management of energy and
transport  demand;  (v) encourage  the  disclosure  of  environmental  information  in  the
annual  accounts  of  companies;  (vi) reduce  sectoral  subsidies  and  tax  exemptions  and
other  measures,  which  have  a  negative  environmental  impact;  (vii) agree  on  an
appropriate  framework  for  energy  taxation  at  the  European  level;  (viii) implement
measures targeted on energy use, including in transport, to enhance energy efficiency.

Impact assessments

The  Commission  has  identified  in  its  2003  Work  Programme  a  number  of  major
proposals  for  which  it  will  carry  out  an  assessment  of  their  economic,  social  and

36

environmental  impacts  before  presenting  them  to  Council  and  Parliament.  To  help
Member  States  implement  strategic  environmental  assessment  as  required  by  directive
2001/42, the Commission intends issuing a guidance document in 2003.

Strengthening effectiveness of market-based instruments

 Structural reforms in product markets, namely those related to a liberalisation of network
industries  (see  section 2.4),  are  expected  to  make  enterprises  more  responsive  to  price
signals on the input side, and to compete on prices, quality and innovation rather than on
publicly  protected  or  provided  rents.  Moreover,  these  reforms  should  also  increase
customer choice. Both should help to let economic agents respond more flexibly to price
signals  and  to  switch  to  less  environmentally-harmful  energy  sources  and/or  modes  of
transport. However, progress on both structural reforms and the setting of adequate price
signals  has  been  rather  modest  in  2002  given  the  magnitude  of  the  environmental
challenges.

Pricing in environmental costs

Germany and Sweden increased existing energy and/or carbon taxes as part of their tax-
switching  policies.  Austria  is  planning  to  introduce  similar  measures.  Belgium,  the
Netherlands,  Italy  and  Spain  adjusted  their  vehicle  taxation  systems  to  take  account  of
environmental  criteria  and  France  offered  tax  breaks  for  buying  cleaner  cars,  and  for
household insulation. Finland has announced a staged increase in its tax on waste going
to municipal landfills. Sweden is increasing its waste and gravel taxes. The UK’s levy on
raw  material  aggregates  came  into  effect,  as  did  its  greenhouse  gas  emission  trading
system.  However,  some  design  features  of  this  voluntary  scheme  would  not  be
compatible with the upcoming EC emissions trading scheme (see below).

Several Member States (France, Italy, Sweden, United Kingdom) introduced reduced rate
of  excise  duty  for  alternative  road  fuels,  mainly  biodiesel.  These  national  measures
should  be  seen  in  the  context  of  the  Commission  proposal  for  reduced  taxation  of
biofuels,  on  which  the  Council  reached  political  agreement.  Luxembourg  and  the
Netherlands  joined  the  group  of  countries  offering  tax  reductions  on  low-sulphur  road
fuels,  anticipating  the  introduction  of  mandatory  standards  across  the  EU  from  2005.
Belgium is taking similar action to reduce the sulphur content of fuel used in household
heating.

Spain and Denmark announced reductions in the level of subsidy to electricity generated
from  renewable  sources,  and  Denmark  also  abolished  some  of  its  environmental  taxes.
The Netherlands is restructuring its support for renewables  to  improve  its  targeting  and
avoid “overstimulating” some types of renewable energy production.

Emissions trading

Following the ratification of the Kyoto Protocol, the Council and Parliament made solid
progress  towards  adopting  the  Commission’s  proposal  for  an  EC  emissions  trading
scheme  by  concluding  the  first  reading  by  the  end  of  2002.  Together  with  the
forthcoming Commission proposal on linking credits from Joint Implementation and the
Clean Development Mechanism to the EC emission trading  scheme,  this  should  deliver

37

an important part of the emission reductions required cost-effectively. As preparation for
implementing the EC emissions trading scheme, the Netherlands initiated work on how to
allocate emission allowances to individual companies.

Disclosing environmental information

Member  States  have  generally  taken  steps  to  inform  companies  about  the  Commission
recommendation relating to disclosing environmental information in company accounts.
Typically,  this  has  been  done  through  industry  associations  or  accountancy  bodies,  but
some  (Denmark,  Spain)  have  fully  or  partially  included  the  recommendation  into
domestic law, while  others  (France,  Germany,  Greece,  Portugal,  United Kingdom)  may
do so.

Reducing subsidies and tax exemptions with a negative environmental impact

Germany continues to reduce subsidies to coal mining and has announced its intention to
reduce  exemptions  for  manufacturing  industry  from  some  ecological  taxes.  The
Commission  is  not  aware  of  any  initiative  of  other  Member  States  to  reduce  sectoral
subsidies and tax exemptions and other measures, which have a negative environmental
impact.

Community framework for energy taxation

Finally,  the  Council  has  continued  to  discuss  the  draft  directive  restructuring  the
Community framework for the taxation of energy products but did not reach agreement
by  December  2002.  The  main  outstanding  issues  are  the  possibility  of  setting  national
levels below the new minimum levels of taxation, arrangements for the taxation of diesel
used  for  commercial  purposes,  the  duration  of  transitional  periods  for  other  energy
products.

Targeted measures to enhance energy efficiency

Improved energy efficiency has been an important part of the EU energy policy agenda
for several years and remains so. Recent EU legislation on energy efficiency in buildings
and  the  proposal  on  Combined  Heat  and  Power  generation  will  both  enhance  energy
efficiency  in  coming  years,  particularly  in  Member  States  that  have  so  far  given  less
attention to the possibilities in these areas. Germany introduced tighter energy efficiency
standards for new buildings.

3.

SUMMARY  ASSESSMENTS  OF  IMPLEMENTATION  BY  THE  MEMBER
STATES

An in-depth assessment of the implementation of the country-specific recommendations
is provided in the accompanying working document of the Commission services. On the
basis of the assessment given therein, it would appear that overall, Denmark, and Sweden
have  given  the  best  follow-up  to  this  part  of  the  BEPGs.  They  are  closely  followed  by
Belgium,  Greece,  Spain,  Ireland,  the  Netherlands,  Portugal,  and  the  United  Kingdom,

38

whereas  the  range  is  concluded  by  Germany,  France,  Italy,  Luxembourg,  Austria,  and
Finland.

Looking at individual policy areas, it appears that Denmark and Sweden have given the
best follow-up to recommendations on public finances, whereas Germany, France, Italy,
and Austria appear to be in the opposite corner. As regards labour markets, Sweden has
given  the  best  follow-up,  whilst  the  follow-up  given  in  Germany  and  Austria  would
appear 
to  product  markets,
recommendations 
entrepreneurship and the knowledge-based economy, Denmark and the United Kingdom
would  appear  to  have  given  the  best  follow-up,  whereas  the  reverse  is  true  for
Luxembourg and Finland. The others occupy the middle ground.

least  satisfactory.  On 

relating 

Table 7  provides  a  summary  overview  of  the  assessments  on  the  progress  made  in
response  to  the  country-specific  recommendations  in  the  BEPGs.  An  important  caveat
applies.  The  country-specific  recommendations,  taking  account  of  the  specific  situation
per Member  State,  may  be  more  demanding  in  some  cases  than  others. Therefore,  they
may  be  more  difficult  to  fulfil  in  some  cases  than  in  others.  Furthermore,  it  should  be
stressed  that  from  the  assessments  on  how  well  Member  States  responded  to  these
recommendations, it cannot be inferred how Member States compare in terms of absolute
performance  and  the  improvements  therein.  This  would  require  a  much  more  in-depth
analysis, including much more up-to-date information.

Table 7 : Degree of progress made in implementing the country-
specific parts of the BEPGs in 2002

Public
finances

Labour
markets

Product
markets

BELGIUM

DENMARK

GERMANY

GREECE

SPAIN

FRANCE

IRELAND

ITALY

LUXEMBOURG

NETHERLANDS

AUSTRIA

PORTUGAL

FINLAND

SWEDEN

UNITED KINGDOM

SOME

GOOD

SOME

SOME

LIMITED

LIMITED

SOME

SOME

LIMITED

SOME

LIMITED

SOME

SOME

SOME

SOME

SOME

SOME

SOME

SOME

SOME

LIMITED

LIMITED

SOME

SOME

GOOD

SOME

SOME

SOME

GOOD

SOME

SOME

GOOD

SOME

SOME

SOME

SOME

SOME

SOME

LIMITED

SOME

SOME

SOME

LIMITED

SOME

GOOD

Note:  The  indications  good/some/limited  progress  relate  to  the
overall  assessments  on  progress  per  area  as  presented  in  the
Member State summaries underneath and - in greater detail - in the
country notes contained in Part II of the Implementation Report on
the BEPGs.

39

3.1

Belgium

Belgium  is  among  the  Member  States  that,  in  overall  terms,  are  considered  to  be  in  a
middle group as it comes to follow-up to the country-specific parts of the BEPGs. Some
progress  was  made  in  following  up  to  the  public  finance  recommendations,  notably  as
regards  the  maintenance  of  a  balanced  budgetary  position.  A  resumption  of  budgetary
consolidation in  2003,  as  requested  by  the  BEPGs  is  currently  not  expected.  While  the
further steady decline in the debt ratio in 2002 is positive, the measures which have been
taken in 2002 to preparing for the budgetary implications of ageing (notably by allocating
fiscal revenues to the Ageing Fund) are insufficient to ensure long-term sustainability.

Some  progress  was  made  in  implementing  the  labour  market  recommendations.  In
particular,  action  was  taken  to  promote  continued  participation  of  older  workers  in  the
labour market, but stronger measures will be necessary to curb the early withdrawal. To a
lesser extent, actions were taken to increase female employment rates. Little action was
taken to promote geographical mobility or to achieve a proper balance between flexibility
and security. The impact of the scheme allowing temporary leave (time credit system) on
the employment rate is not yet clear.

Finally,  some  progress  was  also  made  in  respect  of  the  recommendations  on  product
markets, entrepreneurship and the knowledge-based economy. Notably, action was taken
to reduce the administrative burden for companies and to improve the efficiency of public
administration. As a step towards increasing competition in electricity and  gas  markets,
the  government  officially  designated  an  independent  transport  system  operator.  Little
action  was  taken  to  address  the  distortions  of  competition  created  by  the  lack  of
transparency resulting from the involvement of local authorities in some service sectors.

3.2

Denmark

Denmark is among the Member States that, in overall terms, are considered to have given
the best follow-up to the country-specific parts of the BEPGs. Good progress was made
in  following  up  to  the  public  finance  recommendations,  notably  as  regards  the
implementation and respect of the tax freeze by all levels of government and the targeted
restraint of real growth in government consumption.

Some  progress  was  made  in  implementing  the  labour  market  recommendations,  with
measures  having  been  taken  to  further  reduce  the  tax  burden  on  labour  and  the
presentation of a proposal for labour market reform focusing on increasing the efficiency
of labour market policies.

Finally,  good  progress  was  also  made  in  respect  of  the  recommendations  on  product
markets, entrepreneurship and the knowledge-based economy. Notably, measures, such as
a reform of the competition law, were taken to reduce the number of sectors characterised
by  weak  competition.  The  government  also  presented  a  strategy  for  increasing
competition from the private sector in the provision of public services. The electricity and
gas  markets  will  only  be  fully  liberalised  in  2003  and  2004  respectively  but  a  decision
was  taken  to  remodel  the  support  to  renewable  electricity  in  order  to  allow  for  more
competition in this sector.

40

3.3

Germany

Germany is among the Member States that, in overall terms, are considered to have given
the  least  effective  follow-up  to  the  country-specific  parts  of  the  BEPGs.  Only  limited
progress  was  made  in  following  up  to  the  public  finance  recommendations,  notably
because  of  failure  to  fulfil  the  3%  of  GDP  government  deficit  reference  value,
uncertainties pertaining to the magnitude of the resumption of budgetary consolidation in
2003, and the limited effectiveness so far of measures to contain the rise in  health  care
expenditure.  Encouragingly,  however,  the  changes  to  the  law  on  budgetary  procedures
have already become effective as from mid-2002 rather than only from 2005 onwards.

Limited  progress  was  also  made  in  respect  of  implementing  the  labour  market
recommendations.  While  steps  have  been  taken  in  response  to  recommendations  to
intensify efforts to  make  work  pay,  to  improve  the  efficiency  of  Active  Labour  Market
Policies  (ALMPs),  to  promote  flexible  work  organisation,  and  to  remove  barriers  to
female  labour  market  participation,  progress  to  date  is  considered  to  be  clearly
insufficient. No new measures were taken to promote wage developments that allow for
to  productivity  developments  and  skills  differentials.
differentiation  according 
Monitoring and evaluation of the effectiveness of ALMPs needs to be urgently improved.

Finally, some progress was made in respect of the recommendations on product markets,
entrepreneurship and the knowledge-based economy. In particular, measures were taken
to improve students’ educational achievements and to promote the inflow into university
education. The steps taken to ensure effective competition on electricity and gas markets
are  still  insufficient.  Finally,  no  progress  was  made  to  raise  the  transposition  rate  of
Internal  Market  directives  and  to  increase  the  value  of  public  tenders  published  in  the
Official Journal.

3.4

Greece

Greece  is  among  the  Member  States  that,  in  overall  terms,  are  considered  to  be  in  a
middle group as it comes to follow-up to the country-specific parts of the BEPGs. Some
progress  was  made  in  following  up  to  the  public  finance  recommendations.  A  modest
reform of the pension system was introduced, but doubts remain as to whether this reform
will  be  sufficient  to  address  the  medium-term  challenges.  While  measures  have  been
taken to ensure that the budgetary stance does not contribute to inflationary pressures, to
control  primary  spending  and  to  ensure  a  steady  decline  in  government  debt,  they  are
considered to be insufficient.

Some  progress  was  also  made  in  respect  of  implementing  the  labour  market
recommendations.  Most  progress  in  this  area  was  made  on  the  improvement  of
educational and vocational training systems so as to enhance the skills of the labour force
and  meet  the  needs  of  the  labour  markets.  Action  was  taken  to  reform  public  pension
systems  so  as  to  encourage  the  labour  market  participation  of  older  workers  and  to
improve work incentives through tax/benefit reforms, but this is not yet considered to be
sufficient.

41

Finally,  some  progress  was  also  made  in  respect  of  the  recommendations  on  product
markets,  entrepreneurship  and  the  knowledge-based  economy.  Progress  is  relatively
satisfactory as regards efforts to promote the transition to the knowledge-based economy
and to improve the business environment. Less progress has been made in opening up the
energy sector to competition and no progress was made in raising the transposition rate of
Internal Market directives.

3.5

Spain

Spain is among the Member States that, in overall terms, are considered to be in a middle
group as it comes to follow-up to the country-specific parts of the BEPGs. Some progress
was  made  in  following  up  to  the  public  finance  recommendations.  A  balanced  budget
position was maintained thanks to expenditure containment and better than expected tax
collection.  Furthermore,  the  personal  income  tax  reform  is  considered  to  enhance
incentives to work and save whilst not putting at risk the current fiscal consolidation. On
the  other  hand,  no  significant  steps  were  taken  in  response  to  the  recommendation  to
review the public pension system in a comprehensive way so as to promote its long-term
viability.

Some  progress  was  also  made  in  respect  of  implementing  the  labour  market
recommendations.  In  particular,  steps  were  taken  to  encourage  increased  female  labour
force participation, inter alia in the form of extending a scheme of reduced social security
contributions  and  additional  financial  support  for  childcare  facilities.  Measures,  though
yet  considered  to  be  insufficient,  were  also  taken  to  improve  active  labour  market
policies, to diminish obstacles to labour mobility, and to ensure a proper balance between
flexibility and security. No new measures were introduced to allow wages to better reflect
regional productivity and skill differentials.

Finally,  some  progress  was  also  made  in  respect  of  the  recommendations  on  product
markets,  entrepreneurship  and  the  knowledge-based  economy.  Progress  was  relatively
satisfactory  as  regards  initiatives  to  increase  skilled  human  capital  and  to  support  the
adoption  of  new  technologies  in  enterprises.  Several  measures  were  taken  to  ensure
effective competition in the telecommunications and gas sectors, and some measures have
aimed  at  preparing  the  electricity  sector  for  full  liberalisation.  Several  initiatives  were
announced  to  reduce  the  administrative  burden  on  business  but  they  have  not  yet  been
adopted.  Little  action  was  taken  to  remove  regulations  having  a  restrictive  effect  on
competition in retail distribution.

3.6

France

France is among the Member States that, in overall terms, are considered to have given
the  least  effective  follow-up  to  the  country-specific  parts  of  the  BEPGs.  Only  limited
progress  was  made  in  following  up  to  the  public  finance  recommendations.  While  it
appears that the 3% of GDP government deficit reference value was not breached in 2002
and some measures were introduced to limit expenditure increases, no sufficient decline
in  the  2003  deficit  was  aimed  at.  So  far,  the  government  has  not  yet  proceeded  to  the
recommended comprehensive reform of the pension system. However, it has committed
itself to do so in the first half of 2003.

42

Some  progress  was  made  in  implementing  the  labour  market  recommendations.  In
particular,  action  was  taken  to  address  adverse  medium-term  effects  of  the  35-hour
working week and, to a lesser extent, to consolidate reforms of the tax and benefit system.
Reforms  to  employment  protection  legislation  were  announced.  On  the  other  hand,  the
implementation of a coherent active ageing policy remains a challenge.

Finally,  some  progress  was  also  made  in  respect  of  the  recommendations  on  product
markets,  entrepreneurship  and  the  knowledge-based  economy.  In  particular,  measures
were taken to reduce the administrative burden on business and facilitate the use of the
internet  in  school.  However,  steps  taken  to  liberalise  the  energy  sector  appear  to  be
insufficient  and  no  progress  was  made  in  the  transposition  rate  of  Internal  Market
directives, which is the worst in the EU.

3.7

Ireland

Ireland  is  among  the  Member  States  that,  in  overall  terms,  are  considered  to  be  in  a
middle group as it comes to follow-up to the country-specific parts of the BEPGs. Some
progress  was  made  in  following  up  to  the  public  finance  recommendations.  While  the
fiscal  stance  in 2002 is likely  to  have  been  expansionary  rather  than  broadly  neutral  as
recommended, some measures were taken to improve expenditure control and new ones
announced at the end of 2002.

Some  progress  was  made  in  implementing  the  labour  market  recommendations.  Action
was taken to increase the participation of women in the labour market and, while there is
an aim to set wages in line with productivity, this has not always been achieved.

Finally, some progress was made in respect of the recommendations on product markets,
entrepreneurship  and  the  knowledge-based  economy.  While  measures  were  taken  to
increase competition in the network industries, it appears that further reforms may still be
needed,  in  particular,  to  reduce  the  market  share  of  incumbents.  Some  measures  were
taken  to  address  government  regulations  which  may  impair  competition,  while  no
progress was made to raise the transposition rate of Internal Market directives.

3.8

Italy

Italy is among the Member States that, in overall terms, are considered to have given the
least  effective  follow-up  to  the  country-specific  parts  of  the  BEPGs.  Only  limited
progress  was  made  in  following  up  to  the  public  finance  recommendations,  notably
because  there  has  been  no  clear  path  of  deficit  reduction  and  doubts  remain  whether
current  steps  of  tax  reform  are  consistent  with  reaching  a  close-to-balance  budgetary
position. Moreover, no new measures were taken to address critical aspects of the current
pension system.

Some  progress  was  made  in  implementing  the  labour  market  recommendations,  with
measures having been taken to implement the recent labour market reform package and
reduce the tax burden on  labour.  No  new  measures  were taken  to  increase labour force
participation of women and older workers.

43

Finally, some progress was made in respect of the recommendations on product markets,
entrepreneurship and  the  knowledge-based  economy.  In  particular, efforts to  reduce  the
administrative burden for businesses have been sustained and some action was taken  to
support  innovation  and  IT  use  and  to  increase  competition  in  the  service  and  energy
sectors.  No  progress  was  made  to  raise  the  transposition  rate  of  Internal  Market
directives.

3.9

Luxembourg

Luxembourg is among the Member States that, in overall terms, are considered to have
given  the  least  effective  follow-up  to  the  country-specific  parts  of  the  BEPGs.  Some
progress  was  made  in  following  up  to  the  public  finance  recommendations.  Planned
spending growth for 2003 is in keeping with what was recommended but some rigidities
in current expenditure appear to remain an issue.

Some progress was also made in implementing the labour market recommendations, with
measures having been taken to increase the national employment rate especially for older
workers and women.

Limited  progress  was  made  in  respect  of  the  recommendations  on  product  markets,
entrepreneurship and the knowledge-based economy.  In  particular,  no  decisive  progress
was  made  as  regards  the  reforms  of  competition  legislation  and  public  procurement.  A
limited  number  of  measures  have  been  implemented  to  reduce  the  still  relatively  high
administrative burden for businesses and to develop e-government while no progress was
made to raise the transposition rate of Internal Market directives.

3.10

The Netherlands

The Netherlands are among the Member States that, in overall terms, are considered to be
in a  middle  group  as  it  comes  to follow-up  to  the  country-specific  parts  of  the  BEPGs.
Some  progress  was  made  in  following  up  to  the  public  finance  recommendations.  It  is
estimated that the budgetary stance in 2002 did not contribute  to  inflationary  pressures,
even  though  public  sector  wage  increases  remained  high,  and  measures  were  taken  to
prevent a deterioration in the 2003 government balance.

Some progress was also made in implementing the labour market recommendations. New
measures  have  been  planned  to  make  work  pay,  but  tangible  results  have  yet  to
materialise.  Social  partners  and  government  have  not  yet  reached  an  agreement  on  the
reform  of  the  disability  scheme.  The  focus  of  the  envisaged  reform  is  on  reducing  the
number of new claimants.

Finally, some progress was made in respect of the recommendations on product markets,
entrepreneurship  and  the  knowledge-based  economy.  Steps  were  taken  to  enhance
competition in some service sectors while future efforts are envisaged to support the use
of ICT at schools and to raise the number of science and technology graduates. Finally,
the administrative burden on business was somewhat reduced, but few further measures
were introduced to develop the still relatively low level of e-government.

44

3.11

Austria

Austria is among the Member States that, in overall terms, are considered to have given
the  least  effective  follow-up  to  the  country-specific  parts  of  the  BEPGs.  Progress  in
public  finances  was  limited.  Austria  took  some  measures  to  reduce  structural
expenditures,  but  a  balanced  budget  in  2002  was  not  achieved,  rather  the  budgetary
position weakened substantially to a deficit of 1.8 per cent of GDP. Tax reductions were
not  matched  by  additional  expenditure  cuts  And  in  the  public  pension  system,  no  new
reform steps were taken or planned.

Progress in labour market reforms was limited. No new measures were taken to speed up
reform of tax and benefit systems with respect to older workers. The government is now
relying on allowing the 2000 pension reform to take effect. The old-age part-time scheme
turned out to be much more costly than expected.

Finally, some progress was made in respect of the recommendations on product markets,
entrepreneurship  and  the  knowledge-based  economy.  Substantial  additional  financial
resources  were  allocated  to  R&D  expenditure.  New  measures  were  taken  to  reduce  the
administrative  burden  on  business  and  an  extensive  reform  of  the  public  procurement
legislation has been carried out. However no progress was made to raise the transposition
rate  of 
the
telecommunications sector was not improved.

Internal  Market  directives  and 

framework 

regulatory 

the 

in 

3.12

Portugal

Portugal  is  among  the  Member  States  that,  in  overall  terms,  are  considered  to  be  in  a
middle group as it comes to follow-up to the country-specific parts of the BEPGs. Some
progress  was  made  in  following  up  to  the  public  finance  recommendations.  While  the
deficit has come clearly down in 2002, the general government deficit may still prove to
be  in  excess  of  the  3%  government  deficit  reference  value  in  2002.  The  government
remains  committed  to  sustained  budgetary  consolidation  with  a  view  to  achieve  the
medium-term objective of a balanced budget. The rectifying budget introduced last June
is  being  strictly  implemented.  This  has  reduced  the  dynamics  of  general  government
expenditure.  Progress  has  also  been  achieved  in  the  area  of  pension  reform,  although
further measures are needed.

Some progress was made in labour market reforms, including the implementation of the
new national Lifelong Learning strategy. Following discussions with the social partners, a
draft  law,  which  includes  a  two-year  limit  for  the  expiry  of  collective  agreements  and
greater  flexibility  of  working  time,  could  be  adopted  in  Parliament  at  the  beginning  of
2003.

Finally,  some  progress  was  also  made  in  respect  of  the  recommendations  on  product
markets,  entrepreneurship  and  the  knowledge-based  economy.  Several  measures  were
taken  to  improve  the  education  and  training  of  the  population,  to  promote  business
involvement in R&D and to develop the use of ICT in SMEs. Some effort was made to
enhance  competition  in  liberalised  utilities  but  the  protocol  establishing  a  common
Iberian electricity market has been delayed. The current relatively high level of state aid

45

remains  under  review.  Finally,  no  progress  was  made  to  raise  the  transposition  rate  of
Internal Market directives.

3.13

Finland

Finland is among the Member States that, in overall terms, are considered to have given
the least effective follow-up to the country-specific parts of the BEPGs. Finland has made
some  progress  in  the  area  of  public  finances.  The  government  surplus  in  2002  is
estimated at 3.6% of GDP. Central government expenditure exceeded the original target
for 2002 by 1.0 per cent in real terms and, moreover, that of the spending ceiling, agreed
in March 2001, by 3.1 per cent in real terms. The overrun in 2002 was mainly caused by
additional discretionary spending on various welfare services. Furthermore, according to
the  2003  budget,  expenditure  in  2003  will  exceed  the  government  spending  guideline
agreed in March 2002 by about 0.4 per cent in real terms. However, the government has
taken some measures to improve budgetary discipline of the local authorities. Also it has
agreed, together with social partners, on a significant reform of private pension schemes.

Some progress has been made in labour market reforms. Tax reductions lowered the tax
rate  for  low  and  medium  wage  earners  by  about  1  percentage  point  in  2002.  The
government expects that proposed measures for 2003 will further reduce the tax burden
on labour by about 1 percentage point. An overhaul of ALMPs was introduced to target
measures better to individual needs.

Finally,  limited  progress  was  made  in  respect  of  the  recommendations  on  product
markets, entrepreneurship and the knowledge-based economy. Some measures have been
taken to enhance competition for public services. The time necessary for the registration
of new companies seems to have been recently reduced, but no significant concrete action
can  be  reported  in  this  area.  No  new  measures  were  taken  to  give  the  Competition
Authority further powers to apply Articles 81-82 of the EC Treaty.

3.14

Sweden

Sweden is among the Member States that, in overall terms, are considered to have given
the best follow-up to the country-specific parts of the BEPGs. Good progress was made
in  implementing  the  public  finance  recommendations.  The  tax  cuts,  corresponding  to
some 1.1 per cent of GDP, implemented in 2002 were in line with the 2002 BEPGs. The
public  finances  are  expected  to  be  in  comfortable  surplus  in  2002.  Central  government
expenditure ceilings have been respected in each year since their introduction in 1997 and
this has  helped contain expenditure  and  strengthen  credibility  of  sound  public  finances.
However,  the  budgetary  margins  incorporated  in  the  ceilings  for  2003  and  2004  were
narrowed further in the Budget Bill for 2003.

Good progress has been made in implementing the 2002 labour market recommendations
with further reforms to tax and benefit systems to promote work incentives, such as the
increase  of  basic  tax  allowances  and  lower  marginal  tax  rates  for  some  wage  earners.
Sweden  has  also  markedly  improved  the  targeting  of  traditional  labour  market
programmes.  It has improved  the  mix  of  the  remaining  programmes  focussing  more  on
quality than on quantity.

46

Finally, some progress was made in respect of the recommendations on product markets,
entrepreneurship  and  the  knowledge-based  economy.  Competition  in  public  service
provision at the local level remains limited, although some further measures to enhance
competition have been introduced, like a law that allows private companies to challenge
public sector procurement decisions. Some measures were taken to reinforce competition
in the food and construction sectors and to a lesser extent in the pharmaceutical sector.

3.15

United Kingdom

The United Kingdom is among the Member States that, in overall terms, are considered to
be in a middle group as it comes to follow-up to the country-specific parts of the BEPGs.
Some  progress  was  made  in  implementing  the  public  finance  recommendations.  Public
investment after recent slippage to plans, is rising well and is planned to rise strongly in
the latest official projections, as recommended. The public finances are expected to move
sharply  into  deficit  in  2002  both  on  account  of  below  trend  growth  and  a  rise  in
discretionary expenditure.  In 2003, a further small deterioration in both the nominal and
cyclically-adjusted deficit is forecast.

Some  progress  was  made  in  implementing  the  2002  labour  market  recommendations.
Although  the  whole  range  of  active  labour  market  measures,  partly  targeted  at
disadvantaged  areas,  have  not  yet  been  fully  evaluated,  figures  on  the  basic  outcomes
suggest a potentially positive but small impact on improving employability. Measures to
provide work-focussed support for all benefit claimants have been introduced. However,
there  appears  to  be  little  incentive  for  those  who  would  like  to  seek  work  to  come  off
incapacity benefits in order to do so.

Finally, good progress was made in respect of the recommendations on product markets,
entrepreneurship  and  the  knowledge-based  economy.  Under  new  legislation,  the
independent Competition Authorities have been given more powers  to  take  competition
policy decisions and action has been taken towards improving competition in sectors such
as  retail  banking,  postal  services  and  to  a  lesser  extent,  the  professions.  In  the  rail
transport, investment is continuing and a new infrastructure company has been set up and
the regulation of this sector has slightly improved.

47