Commission Recommendation on the broad guidelines for the economic policies of the Member States and the Community (under Article 99 of the EC Treaty)
Date: 2005-04-12
Institutions: European Commission
Subjects: economic policy, economic priority, labour market, macroeconomics, microeconomics

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 12.4.2005 
COM(2005) 141 final 

2005/0057 (CNS) 

INTEGRATED GUIDELINES FOR GROWTH AND JOBS 
(2005-2008) 

Communication from the President, 
in agreement with vice-President Verheugen and Commissioners Almunia and Spidla 

including a 

COMMISSION RECOMMENDATION 

on the broad guidelines for the economic policies of the Member States and the 
Community  
(under Article 99 of the EC Treaty) 

and a  

Proposal for a 

COUNCIL DECISION 

on guidelines for the employment policies of the Member States  
(under Article 128 of the EC Treaty) 

(presented by the Commission) 

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TABLE OF CONTENTS 

1.1. 

1.2. 

1.3. 

1.4. 

The need to increase the focus on growth and jobs ......................................................3 

Looking ahead ..............................................................................................................5 

Integrated Guidelines (2005-2008)...............................................................................6 

Content and structure....................................................................................................8 

Part 1 – Commission Recommendation on the Broad Economic Policy Guidelines 
(2005-2008)...............................................................................................................................12 

Section A – Macroeconomic policies for growth and jobs.......................................................13 

A.1 

A.2 

Macroeconomic policies creating the conditions for more growth and jobs..............13 

Ensuring a dynamic and well-functioning euro area ..................................................16 

Section B – Microeconomic reforms to raise Europe’s growth potential.................................18 

B.1 

B.2 

Making Europe a more attractive place to invest and work .......................................18 

Knowledge and innovation for growth .......................................................................21 

Part 2 – The Employment Guidelines (2005-2008) ..............................................................24 

Annex........................................................................................................................................27 

1. 

2. 

3. 

Attract and retain more people in employment and modernise social protection 
systems........................................................................................................................27 

Improve adaptability of workers and enterprises and the flexibility of labour  
markets........................................................................................................................28 

Increase investment in human capital through better education and skills ................29 

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EXPLANATORY MEMORANDUM 

This communication sets out the first integrated guidelines for growth and jobs for the period 
2005-2008, in accordance with the request from the 2005 Spring European Council. 

This explanatory memorandum covers both the Commission Recommendation on the Broad 
Economy  Policy  Guidelines  (BEPGs)  and  the  proposal  for  a  Council  Decision  on  the 
Employment Guidelines (EGs). 

1.1. 

The need to increase the focus on growth and jobs 

The period that followed the Lisbon European Council in March 2000 was marked by a sharp 
reversal  of  fortune  for  the  global  economy.  Optimism  about  future  growth  prospects,  the 
buoyancy  of  the  stock  market  and  investor  confidence  in  the  new  technological  revolution 
gave  way  to  heightened  uncertainty  over  the  global  economy.  Amongst  the  factors  that 
appear to have caused this are the bursting of the dot.com bubble in 2001, the downturn in 
world  trade  in  2001,  accounting  scandals,  geopolitical  uncertainty  stemming  from  terrorist 
attacks,  and  the  war  in  Iraq.  The  uncertainty  created  by  these  factors  affected  confidence 
among businesses and consumers dampening domestic demand. As a result average annual 
growth in some Member States remained below 1% over the period 2001-2003.  

The  economic  recovery  has  gradually  taken  hold  since  the  second  half  of  2003  and, 
although the European Union’s (EU) economic performance was disappointing in the second 
half of 2004, the Commission’s latest forecasts predict a rebound in economic activity in the 
course of 2005. Historically low interest rates and the projected rise in employment and real 
wages contribute to the right conditions for such an improvement in domestic demand. 

Against  this  backdrop,  inflation  has  remained  moderate,  in  spite  of  movements  in  energy 
prices,  and  employment  growth  has  also  held  up  well,  supported  by  moderate  wage 
developments.  

Unemployment  rates  are  projected  to  decrease,  albeit  slowly,  to  8.7%  in  2006.  The 
estimated overall employment rate is 62.9% for EU-25 in 2003, which is significantly below 
the agreed target level of 70%. Progress towards the female employment rate target of 60% 
has  been  slow,  with  the  rate  now  standing  at  56.1%  for  EU-25,  but  is  expected  to  pick  up 
again. The employment rate of older workers, which continued to climb to just over 40.2% 
has the largest gap to bridge towards the 50% target for 2010. At the same time, progress in 
improving quality in work has been mixed and the economic slowdown has raised the profile 
of social inclusion problems. Long-term unemployment increased again after several years of 
decline and seems unlikely to fall in the near future. 

The economic recovery has to a large extent been dependent upon the resurgence of global 
growth and the rapid increase in world trade. As the world growth cycle reaches maturity and 
absorbs the dampening effect of higher world oil prices, the emphasis will fall increasingly 
on domestic demand in the EU to provide greater impetus to the upswing. 

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Although the EU’s return to a higher rate of economic growth comes as a welcome relief, the 
sluggishness of its economic recovery is a continuing source of concern. It means that the EU 
economy  is  in  several  respects  further  away  from  its  goal  of  becoming  the  world’s  most 
competitive economy than was the case in March 2000. Against this background and in spite 
of the fact that the Union’s competitors were generally hit by the same economic shocks the 
gulf  between  Europe’s  growth  potential  and  that  of  its  economic  partners  has  not 
significantly narrowed. 

The first explanation for the continued under-performance of the Union economy is that its 
labour input remains comparatively low. Efforts made by the Member States allowed the 
employment rate to increase from 61.9% in 1999 to 62.9% in 2003. However, there remains 
a  considerable  scope  for  further  improvement,  notably  among  young  and  older  workers,  if 
the Lisbon targets are to be reached. The relatively low employment rate, together with the 
relatively  low  number  of  working  hours,  indicates  that  Europe  has  a  reservoir  of  unused 
labour. A substantial part of the potential labour force is left unoccupied, unable to contribute 
to an increase in living standards.  

The  second  key  explanation  for  the  EU’s  poor  performance  is  linked  to  its  low  level  of 
productivity growth. Productivity growth has been on a declining trend for several decades. 
Over  the  last  10  years,  this  trend  can  be  partly  explained  by  the  re-entry  of  a  significant 
number of less skilled workers into employment. Nevertheless, a major part of the decrease is 
due  to  low  business  investment  and  a  slowdown  in  the  rate  of  technological  progress  and 
innovation,  and  relatively  slow  Information  and  Communication  Technologies  (ICT) 
diffusion.  Hourly  labour  productivity  growth  in  Europe  has  slowed  down  further  since  the 
start  of  the  decade,  resulting  in  a  lower  labour  productivity  growth  trend  than  its  leading 
competitors  for  the  first  time  in  several  decades.  Currently,  more  than  a  third  of  the 
differential in living standards (namely GDP per capita) between the EU and the USA is the 
result  of  differences  in  hourly  productivity.  Whilst  reversing  the  trend  of  slowing 
productivity  growth  is  the  major  competitiveness  challenge  facing  the  Union,  it  also 
represents a prime means of increasing growth. 

Achieving higher growth potential and more jobs will provide an essential contribution 
to sustainable development and social cohesion in the EU. On the other hand, policies for 
social and environmental sustainability should contribute to a dynamic and high employment 
economy,  capable  of  developing  and  implementing  the  technologies  with  which  to  protect 
the  quality  of  life  for  future  generations.  Together  with  the  increased  focus  on  growth  and 
jobs, the integrated guidelines for the period 2005-2008 provide flexibility for Member States 
to  choose  the  local  responses  that  best  address  their  reform  challenges,  thereby  fostering 
national ownership. 

The new start for the Lisbon strategy, as reflected in these integrated guidelines, aims to 
set out the appropriate responses to these developments. It defines a strategy that addresses 
a relatively weak growth performance and insufficient job creation. Comprehensive reforms 
in  product  and  labour  markets  constitute  an  integral  part  of  this  approach;  Commission 
estimates  show  that  reforms  in  the  second  half  of  the  1990s  resulted  in  an  increase  in  the 
potential growth rate of almost half to three quarters of a percentage point over the medium 
term. Over a ten-year period, this would imply an increase in the GDP level of up to 7 or 8%. 

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Given  the  heterogeneity  of  reform  measures  and  the  complementarities  and  trade-offs 
between  reforms  in  different  domains,  the  precise  costs  of  inaction  may  be  difficult  to 
measure but they remain substantial. 

In the medium term, against the background of insufficient progress with the Lisbon strategy 
and only a moderate economic recovery, hampered by a continuing lack of confidence, focus 
on  growth  and  employment  is  necessary  to  preserve  and  enhance  living  standards  in  the 
Union,  while  respecting  the  objective  of  sustainable  development.  In  a  longer  time-frame, 
this  focus  is  all  the  more  important  to  prepare  for  trends  that  could  significantly  affect  the 
outlook for growth and employment. Internally, the ageing of Europe’s population will put 
an enormous strain on public finances and the labour supply. Commission estimates suggest 
that the pure impact of ageing populations would be to reduce the potential growth rate by up 
to 1 percentage point by 2040. Externally, globalisation is leading to the integration of new 
countries  into  the  international  economic  system.  The  EU  must  seize  the  opportunities 
provided by the opening up of rapidly growing markets in Asia, such as China and India. At 
the  same  time,  the  EU  must  deal  with  the  resulting  new  international  division  of  labour, 
particularly  as  China  begins  to  specialise  more  in  high  value-added  goods  and  as  India 
develops as a global hub for outsourcing. The threat of increasing resource scarcity or price 
volatility, climate change and loss of biodiversity also present major challenges.  

1.2. 

Looking ahead 

The Community and the Member States should face these challenges with a spirit of realistic 
optimism.  There  are  many  examples  of  successful  reforms  and  economic  turnarounds  that 
prove that change can be successful. It is particularly encouraging that the urgency of taking 
actions  to  meet  the  challenges  is  widely  recognised.  There  is  general  willingness  to  push 
forward reforms that will put the Union on a higher growth path and realise our social and 
environmental ambitions. The EU has a high potential for developing further its competitive 
advantages,  and  it  is  crucial  that  actions  are  pursued  with  determination  to  exploit  fully 
that potential and to enhance confidence among EU citizens. 

In  this  context,  the  EU  and  the  individual  Member  States  should  put  the  emphasis  on 
investment  in  knowledge  to  ensure  the  economic  dynamism  and  the  vigour  of  the  whole 
European  economy.  The  realisation  of  a  knowledge  society,  based  upon  human  capital, 
education,  research  and  innovation  policies,  is  key  to  boost  our  growth  potential  and 
prepare  the  future.  A  sustainable  growth  also  requires  greater  demographic  dynamism, 
improved  social  integration  and  fuller  utilisation  of  the  potential  embodied  by  European 
youth as recognised by the European Council in adopting the European Youth Pact. 

Together  with  the  completion  of  the  internal  market  and  the  promotion  of  fair  competition 
the  establishment  of  a  favourable  climate  to  business  and  enterprise,  the  development  of 
infrastructures, building an adaptable and inclusive labour market, knowledge driven reforms 
are sources of economic growth and higher productivity. And all are more likely to take place 
against a background of growth supporting macroeconomic policies.  

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1.3. 

Integrated Guidelines (2005-2008) 

These  issues  call  for  a  focus  on  reforms  to  raise  the  Union’s  growth  potential,  while 
maintaining sound macroeconomic policies that underpin the success of reform efforts. The 
agreement on how to strengthen and implement the Stability and Growth Pact reached by the 
European Council will allow budgetary policies to be adopted which address these issues in a 
more  consistent  manner1.  Boosting  the  Union’s  growth  potential  will  help  to  achieve  the 
overarching objective of sustainable development.  

The Integrated Guidelines are a direct reflection of these priorities at European level. They 
represent a concrete step in the process of refocusing and embracing the Lisbon strategy. 

Refocusing on growth and employment 

The  European  Council  of  March  2005  has  just  relaunched  the  Lisbon  strategy  by 
refocusing on growth and employment in Europe, in accordance with the Commission’s 
proposals2.  By  taking  this  decision,  the  Heads  of  State  and  Government  have  delivered  a 
clear message concerning the Union’s priorities over the next few years. The Union, at both 
European and national levels, is to focus on these areas from now on and take the necessary 
action  to  promote  knowledge,  attract  more  people  into  the  labour  market  and  create  more 
jobs3.  

Particular attention needs to be paid to the delivery of the Lisbon agenda. In order to achieve 
these  objectives,  the  Union  must  do  more  to  mobilise  all  the  resources  at  national  and 
Community levels — including the Structural Funds and rural development — so that their 
synergies  can  be  put  to  more  effective  use.  Furthermore,  the  involvement  of  relevant 
stakeholders  can  help  to  raise  awareness  of  the  need  for  structural  reforms,  improve  the 
quality  of  implementation,  and  increase  the  sense  of  ownership  of  the  Lisbon  strategy. 
Member  States  and  the  Community  should  take  every  opportunity  to  involve  regional  and 
local governments,  social  partners and civil society in the implementation of the integrated 
guidelines. They should detail progress made in this area in the Lisbon reporting framework. 

In  order  to  make  this  refocusing  process  effective,  the  European  Council  has  decided  to 
strengthen  the  consistency  and  complementarity  nature  of  the  existing  mechanisms  by 
launching a new cycle of governance. These improvements simplify the process considerably 
and  should  ensure  that  the  priorities  in  question  can  be  embraced  and  implemented  at 
national level. 

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to 

the 

annexed 

conclusions 
Report 
(http://ue.eu.int/cms3_fo/showPage.asp?lang=en&id=432&mode=g&name=). 
COM(2005) 24, 2.2.2005: Working together for growth and jobs – A new start for the Lisbon strategy. 
Conclusions 
2005, 
(http://ue.eu.int/cms3_fo/showPage.asp?lang=en&id=432&mode=g&name=). 

the  European  Council 

of  March 

European 

Council 

March 

2005, 

the 

of 

of 

of 

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A new cycle of governance 

–  First of all, the Commission has been asked by the European Council to incorporate the 
priority  given  to  growth  and  employment  into  new  Broad  Economic  Policy  Guidelines, 
based on Article 99, to ensure the economic consistency of the three economic, social and 
environmental  dimensions  of  the  Lisbon  strategy,  and  to  prepare  new  Employment 
Guidelines, based on Article 128 of the Treaty. Both of these key instruments  thus tally 
with  the  objectives  of  the  Lisbon  strategy,  with  a  view  to  promoting  growth  and 
employment.  

–  Overall consistency is reinforced even further by incorporating both texts into one and 
the  same  document,  thus  making  it  possible  to  present  to  the  Union  and  the  Member 
States  a  clear  strategic  vision  of  the  challenges  facing  Europe  in  the  macroeconomic, 
microeconomic and employment fields. 

–  The  Integrated  Guidelines  thus  provide  the  Community  and  the  Member  States  with  a 
stable  and  coherent  framework  which  makes  it  possible  to  implement  priority 
measures  approved  by  the  European  Council. They  will  serve  as  a  basis  for  drawing  up 
the  national  reform  programmes  which  the  Member  States  are  asked  to  present  in  the 
autumn of 2005. To this end, they will have to identify the specific measures which they 
intend  to  take  (or  have  already  taken)  in  order  to  support  growth  and  employment  at 
national  level,  with  each  Member  State  focusing  particular  attention  on  the  main 
challenges facing it. 

–  The Guidelines — like the national programmes which will be derived from them — 
will  be  valid  for  three  years,  in  order  to  provide  the  stability  required  for  their 
implementation.  These  national  programmes  should  be  the  result  of  a  debate  at  national 
level with the competent parliamentary bodies and the social partners, in accordance with 
the traditions of each of the Member States. This is essential if these programmes are to be 
embraced by all those concerned. 

–  The Guidelines may, where necessary, be adjusted each year in line with the provisions of 
the  Treaty.  The  national  programmes  may  be  amended  by  the  Member  States  to  take 
account of domestic policy requirements. 

–  The efforts to make the Integrated Guidelines consistent should also apply to the national 
programmes. These should therefore bring together within a single summary document 
all the existing national reports which are relevant to the Lisbon strategy. This includes, 
in  particular,  the  national  reports  on  employment,  the  so-called  “Cardiff”  reports  on  the 
process  of  economic  reform,  and  the  sectoral  implementation  reports  (duly  simplified), 
which are covered by the open method of coordination. The national strategic plans laying 
down priority expenditure with regard to the Structural and Cohesion Funds will also be 

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included  (once  the  regulations  have  been  adopted)4.  Using  this  simplified  mechanism  of 
reports, the Member States will thus be able to focus more fully on implementation. 

–  These national reform programmes should be followed up by separate implementation 
reports in the following years (autumn 2006 and 2007), incorporating the sectoral reports 
mentioned above, before being replaced by new programmes, which will reflect the new 
integrated guidelines issued in the spring of 2008. 

The  Commission  reserves  the  right  to  issue  a  communication  in  the  near  future  containing 
explanatory information to help the Member States draw up their respective programmes in 
the context of the Integrated Guidelines. This information could cover, for instance, the most 
relevant  challenges  for  each  of  the  Member  States,  a  common  framework  and  format,  the 
integration  of  the  existing  sectoral  reports  and  the  monitoring  of  the  programmes  by  the 
Commission. 

Finally, the Commission will present a “Lisbon Community Programme 2005-2008”, to run 
in  tandem  with  the  national  programmes,  which  will  cover  all  the  measures  to  be  taken  at 
Community  level  to  promote  growth  and  employment.  This  programme  will  reflect  the 
measures  included  in  the  Communication  from  the  Commission  to  the  Spring  European 
Council5 and, in particular the Community elements6 of the Lisbon Action Programme. 

1.4. 

Content and structure 

In  recognition  of  the  fact  that  macro-microeconomic  and  employment  policies  are 
interrelated and should be mutually reinforcing, the integrated guidelines are presented in one 
comprehensive document with two parts.  

Part 1 – The Broad Economic Policy Guidelines 

This  part  of  the  integrated  guidelines  includes  the  Commission  Recommendation  on  the 
Broad Economic Policy Guidelines, applicable to all Member States and to the Community. 
As one of the main instruments of economic policy coordination, it reflects the new start for 
the  Lisbon  strategy  and  concentrates  on  the  contribution  of  economic  policies  to  higher 
growth and more jobs.  

This part provides guidance on macroeconomic and microeconomic policies in the Member 
States and the Community in the areas offering the greatest potential for improving growth 
and  employment.  Section  A  deals  with  the  contribution  that  macroeconomic  policies  can 
make in this respect. Section B focuses on the measures and policies that the Union and the 
Member States must carry out in order to make Europe a more attractive place to invest and 
work and to boost knowledge and innovation for growth.  

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6 

In the subsequent communication on the national reform programmes, the Commission will present its 
guidelines  on  the  methods  of  integrating  the  follow-up  reports  on  the  open  methods  of  coordination 
and the strategic plans concerning the Structural Funds. 
COM(2005) 24, 2.2.2005: Working together for growth and jobs – A new start for the Lisbon Strategy. 
SEC(2005)  192,  3.2.2005,  working  document  accompanying 
the 
Commission to the European Council. 

the  Communication  from 

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Policy  measures  and  structural  reforms  to  implement  these  guidelines  will  benefit 
substantially from stable macroeconomic conditions and policies. Macro and micro economic 
policies interact strongly and are mutually reinforcing. Without growth and stability-oriented 
macroeconomic  policies,  the  potential  benefits  of  structural  reform  will  not  be  realised 
because of bottle-necks and imbalances in the economy. At the same time, structural reforms 
can  contribute  to  stable  macroeconomic  policies  by  making  markets  more  efficient  and 
thereby  exerting  downward  pressures  on  prices  and  increasing  the  economy’s  resilience  to 
shocks.  A  comprehensive  reform  strategy,  supported  by  stable  macroeconomic  conditions, 
will ensure that these interactions and complementarities are fully taken into account. 

Part 2 – The Employment Guidelines 

This  part  of  the  integrated  guidelines  includes  the  proposal  for  a  Council  decision  on  the 
Employment  Guidelines,  on  which  the  European  Parliament,  the  European  Social  and 
Economic  Committee  and  the  Committee  of  the  Regions  will  be  consulted,  in  accordance 
with  Article  128  of  the  Treaty.  These  guidelines  –  and  the  related  European  Employment 
Strategy – play a central coordinating role for the employment policies of the Member States. 
Since 1997, the Strategy has contributed to improving the focus, monitoring and reporting of 
employment policies across the EU. 

This part concentrates on the contribution of employment policies to creating more and better 
jobs,  as  defined  by  the  new  Lisbon  Agenda.  Employment  policies  can  make  a  decisive 
contribution  to  raising  employment  and  productivity  growth,  and  to  strengthening  social 
cohesion.  The  modernisation  of  social  protection  systems  is  also  necessary  to  ensure  their 
adequacy,  financial  sustainability  and  responsiveness  to  changing  needs  in  society  and  to 
support lasting economic and employment growth7.  

The  Employment  Guidelines  set  out  the  overall  employment  objectives  and  priorities  for 
action for the EU and its Member States. Employment policies should go hand-in-hand with 
reforms in the services, product and financial markets and interact positively with growth and 
employment-oriented  macroeconomic  policies.  Therefore,  in  order  to  ensure  proper 
integration and consistency, cross-references are made between relevant guidelines in parts 1 
and 2. 

7 

The Social Agenda (COM(2005) 33) covers these elements in greater detail. 

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Integrated guidelines for growth and jobs (2005-2008) 

Macroeconomic guidelines 

(1) 

(2) 

(3) 

(4) 

(5) 

(6) 

To secure economic stability. 

To safeguard economic sustainability. 

To promote an efficient allocation of resources. 

To promote greater coherence between macroeconomic and structural policies. 

To ensure that wage developments contribute to macroeconomic stability and growth. 

To contribute to a dynamic and well-functioning EMU. 

Microeconomic guidelines 

(7) 

(8) 

(9) 

To extend and deepen the internal market. 

To ensure open and competitive markets. 

To create a more attractive business environment. 

(10)  To  promote  a  more  entrepreneurial  culture  and  create  a  supportive  environment  for 

SMEs. 

(11)  To expand and improve European infrastructure and complete agreed priority cross-

border projects. 

(12)  To increase and improve investment in R&D. 

(13)  To facilitate innovation and the take up of ICT. 

(14)  To encourage the sustainable use of resources and strengthen the synergies between 

environmental protection and growth. 

(15)  To contribute to a strong industrial base. 

Employment guidelines 

(16)  To  implement  employment  policies  aimed  at  achieving  full  employment,  improving 

quality and productivity at work, and strengthening social and territorial cohesion. 

(17)  To promote a lifecycle approach to work. 

(18)  To ensure inclusive labour markets for job-seekers and disadvantaged people. 

(19)  To improve matching of labour market needs. 

(20)  To promote flexibility combined with employment security and reduce labour market 

segmentation. 

(21)  To ensure employment-friendly wage and other labour cost developments. 

(22)  To expand and improve investment in human capital. 

(23)  To  adapt  education  and 

training  systems 

in  response 

to  new  competence 

requirements. 

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* 

* 

* 

Consequently, the Commission: 

–  recommends  the  following  broad  guidelines  for  the  economic  policies  of  the 
Member  States  and  the  Community,  in  accordance  with  Article  99  of  the  EC 
Treaty, and 

–  proposes  the  following  Council  Decision  on  guidelines  for  the  employment 
policies of the Member States, in accordance with Article 128 of the EC Treaty. 

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Part 1 

Commission Recommendation on the 
Broad Economic Policy Guidelines (2005-2008) 

COMMISSION RECOMMENDATION 

on the broad guidelines for the economic policies of the Member States and the 
Community (under Article 99 of the EC Treaty) 

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Section A – Macroeconomic policies for growth and jobs8 

A.1  Macroeconomic policies creating the conditions for more growth and jobs 

Securing economic stability to raise employment and growth potential 

Sound macroeconomic policies are essential to support a well-balanced economic expansion 
and  the  full  realisation  of  current  growth  potential.  They  are  also  vital  for  establishing 
framework conditions that will promote adequate levels of savings and investment, as well as 
a stronger orientation of the  latter towards knowledge and innovation, so as to position the 
economy on a sustained, higher, non-inflationary, growth and employment path. In planning 
for  the  future,  firms  and  individuals  must  have  confidence  that  price  stability  will  be 
maintained, and that exchange rates and long-term interest rates will be reasonably stable. 

Monetary  policies  can  contribute  by  pursuing  price  stability  and,  subject  to  this  being 
achieved,  by  supporting  other  general  economic  policies.  For  some  of  the  new  Member 
States, it will be important that monetary policies allow a further decline in long-term interest 
rates  and  an  exchange  rate  regime  that  is  directed  towards  achieving  sustainable  real  -  and 
nominal - convergence. Eventual participation in European exchange-rate mechanism (ERM) 
II will help to strengthen those endeavours. An additional macroeconomic policy challenge 
for some of these Member States is to keep relatively high current account deficits within the 
range where sound external financing can be secured. In this respect, fiscal restraint will be 
essential  to  reduce  current  account  deficits,  as  financing  such  deficits  could  become  more 
difficult once privatisation is completed. 

Securing a sound budgetary position will allow the full and symmetric play of the automatic 
budgetary stabilisers with a view to stabilising output around a higher and sustainable growth 
trend.  For  those  Member  States  that  have  already  achieved  sound  budgetary  positions  the 
challenge is to retain that position without recourse to one-off and temporary measures. For 
the remaining Member States it is vital to take the necessary action to achieve their medium 
term budgetary objectives in particular as economic conditions improve, thus avoiding pro-
cyclical  policies  and  putting  themselves  in  a  position  in  which  sufficient  room  for  the  full 
play of automatic stabilisers is ensured prior to the next economic downturn. For individual 
Member  States  the  medium-term  budgetary  objective  varies  depending  on  the  current  debt 
ratio and potential  growth, while preserving sufficient margin below the reference value of 
3% of GDP. 

8 

In  implementing  the  policy  guidelines  set  out  below,  Member  States  should  note  that  the  country-
specific recommendations issued in the context of the Council Recommendation of 26 June 2003 on 
the broad guidelines of the economic policies of the Member States and the Community (for the 2003-
2005) period as completed and updated in the context of the Council Recommendation of 5 July 2004 
on the 2004 update of these guidelines, remain valid as background references. 

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Guideline. To secure economic stability, Member States should maintain their medium-term 
budgetary objectives over the economic cycle and, as long as this objective has not yet been 
achieved,  take  all  the  necessary  corrective  measures  in  line  with  the  Stability  and  Growth 
Pact. Subject to this, Member States should avoid pro-cyclical fiscal policies. Member States 
posting current account deficits that risk being unsustainable should work towards correcting 
them  by  implementing  structural  reforms  to  boost  external  competitiveness  and  also 
contribute to their correction via fiscal policies (Integrated guideline No 1). 

Safeguard long-term economic sustainability in the light of Europe’s ageing population 

Europe’s  ageing  population  poses  serious  risks  to  the  long-term  sustainability  of  the 
European  Union  (EU)  economy.  According  to  the  latest  projections,  by  2050  the  EU’s 
population of working age (15-64) will be 18% lower than in 2000 and the number of people 
aged  over  65  years  will  have  increased  by  60%.  This  not  only  implies  higher  dependency 
ratios, it also means that there will be an increased debt burden, higher real interest rates and 
lower potential output unless action is taken now to safeguard the long-term sustainability of 
the EU economy.  

Member States can address the economic implications of ageing by pursuing a faster pace of 
debt reduction and by taking measures to raise employment rates and increase labour supply 
so as to offset the impact of future declines in the number of persons of working age. It is 
also essential to modernise social protection systems so as to ensure that they are financially 
viable,  while  at  the  same  time  ensuring  that  they  fulfil  their  goals  in  terms  of  access  and 
adequacy, in the face of higher dependency ratios and the rising needs linked to an increase 
in the number of elderly persons. In particular improved interaction between social protection 
systems  and  labour  markets  can  remove  distortions  affecting  retirement  decisions  and 
encourage extended working lives against a background of increased life expectancy. 

Guideline.  To  safeguard  economic  sustainability  Member  States  should,  in  view  of  the 
projected  costs  of  ageing  populations,  undertake  a  satisfactory  pace  of  government  debt 
reduction to strengthen public finances, reform pension and health care systems to ensure that 
they are financially viable while being socially adequate and accessible, and take measures to 
raise  employment  rates  and  labour  supply  (Integrated  guideline  No  2).  See  also  integrated 
guideline “Promote a lifecycle approach to work” (No 17). 

Promote an efficient allocation of resources and coherent macroeconomic and structural 
policies 

Well-designed tax and expenditure systems that promote an efficient allocation of resources 
are  a  necessity  for  the  public  sector  to  make  a  full  contribution  towards  growth  and 
employment, without jeopardising the goals of economic stability and sustainability. This can 
be  achieved  by  redirecting  expenditure  towards  growth-enhancing  categories  such  as 
Research  and  Development  (R&D),  physical  infrastructure,  human  capital  and  knowledge. 
Member  States  can  also  help  to  control  other  expenditure  categories  through  the  use  of 
expenditure rules and performance budgeting and by putting mechanisms in place to ensure 
that  individual  reform  measures  and  overall  reform  packages  are  well-designed.  A  key 

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priority for the EU economy is to ensure that tax structures and their interaction with benefit 
systems promote higher growth potential through more employment and investment. 

Guideline. To promote an efficient allocation of resources Member States should, without 
prejudice  to  guidelines  on  economic  stability  and  sustainability,  direct  the  composition  of 
public  expenditure  towards  growth-enhancing  categories,  adapt  tax  structures  to  strengthen 
growth potential and ensure that mechanisms are in place to assess the relationship between 
public spending and the achievement of policy objectives and ensure the overall coherence of 
reform packages (Integrated guideline No 3). 

The role of sound macroeconomic policies is to provide conditions conducive to employment 
creation and growth, but ultimately it is structural reforms to promote efficient markets and 
well designed public interventions that determine sustainable growth in output and welfare. 
A  failure  on  the  part  of  structural  policies  to  deliver  higher  growth  will  undermine 
macroeconomic  stability,  for  example,  through  budget  deficits,  persistent  inflationary 
pressures and a lack of adjustment capacity in the face of temporary or permanent economic 
shocks.  A  key  feature  of  Member  States’  overall  economic  strategy  is  to  ensure  that  they 
have  a  consistent  set  of  structural  policies  that  support  the  macroeconomic  framework  and 
vice  versa.  In  particular,  market  reforms  need  to  improve  the  overall  adaptability  and 
adjustment capacity of economies in response to changes in cyclical economic conditions and 
also longer term trends such as globalisation and technology. 

Guideline. To promote greater coherence between macroeconomic and structural policies 
Member  States  should  pursue  reforms  that  support  the  macroeconomic  framework  by 
increasing  flexibility,  mobility  and  adjustment  capacity  in  response  to  globalisation, 
technological advances and cyclical changes (Integrated guideline No 4). See also integrated 
guideline “Promote flexibility combined with employment security and reduce labour market 
segmentation” (No 20). 

Ensure  that  wage  developments  contribute  to  macroeconomic  stability  and  complement 
structural reforms 

Wage developments can contribute to stable macroeconomic conditions and an employment-
friendly policy mix provided that real wage increases are in line with the underlying rate of 
productivity growth over the medium term and are consistent with a rate of profitability that 
allows  for  productivity,  capacity  and  employment-enhancing  investment.  This  requires  that 
temporary factors such as increases in productivity caused by a cyclical rebound or one off 
rises in the headline rate of inflation do not cause an unsustainable trend in wage growth and 
that wage developments reflect local labour market conditions. 

Given the continued upward pressure on oil and raw material prices, vigilance is needed over 
the  impact  of  wage  settlements  and  labour  cost  increases  on  price  competitiveness.  Efforts 
can  be  made  at  EU  level  to  foster  continued  dialogue  and  information  exchange  between 
monetary and fiscal authorities and the social partners via the Macroeconomic Dialogue. 

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Guideline.  To  ensure  that  wage  developments  contribute  to  macroeconomic  stability  and 
growth and to increase adaptability Member States should promote nominal wage increases 
and labour costs consistent with price stability and the trend in productivity over the medium 
term,  taking  into  account  differences  across  skills  and  local  labour  market  conditions 
(Integrated  guideline  No  5).  See  also  integrated  guideline  “Ensure  employment-friendly 
wage and other labour cost developments” (No 21). 

A.2 

Ensuring a dynamic and well-functioning euro area 

The  need  to  achieve  higher  growth  and  employment  is  particularly  acute  in  the  euro  area 
given  its  recent  subdued  economic  performance  and  its  low  level  of  potential  growth  of 
around  2%  (Commission  estimates).  Domestic  demand  has  been  particularly  muted  in  the 
euro area, with both private consumption and investment significantly below that of the EU-
25 as a whole in 2004. Muted private consumption seems to be rooted in continuing concerns 
regarding  employment  prospects  (with  unemployment  continuing  to  be  around  9%),  the 
sustainability of pensions systems and public finances more generally and income prospects 
in the medium term.  

The  challenge  for  the  euro  area  is  to  ensure  the  realisation  of  current  growth  potential  and 
even more to raise its growth potential over time. This is best achieved through growth and 
stability  oriented  macroeconomic  policies  and  comprehensive  structural  reforms.  Both  are 
also  particularly  salient  for  euro  area  Member  States  as  they  have  an  important  impact  on 
their capacity to adequately adjust to shocks with an asymmetric impact and therefore on the 
economic resilience of the euro area as a whole. Furthermore, the economic performance of, 
and policies pursued by, individual euro area Member States affect common goods such as 
the euro’s exchange rate, interest rates and price stability. All this implies a need for stronger 
macroeconomic and structural policy coordination in the euro area. 

Economic  and  Monetary  Union  (EMU)  places  a  particular  premium  on  safeguarding  fiscal 
discipline, to protect such common goods. The absence of national interest and exchange rate 
policies implies also an increased need to achieve and maintain sound budget positions which 
provide sufficient budgetary margin to absorb the impact of cyclical fluctuations or economic 
shocks with an asymmetric impact. 

Structural  policies  that  foster  the  smooth  adjustment  of  prices  and  wages  are  essential  to 
ensure that euro area Member States have the capacity to rapidly adjust to shocks (such as the 
current  oil  price  shock)  and  to  help  to  reduce  unwarranted  inflation  differences  between 
Member  States.  Policies  that  increase  the  responsiveness  of  labour  markets,  through 
encouraging widespread labour participation, occupational and geographical mobility and the 
setting  of  wages,  together  with  reforms  that  enhance  product  market  flexibility  are 
particularly important in this respect. 

To contribute to international economic stability and better represent its economic interests, it 
is critical for the euro area to play its full role in international monetary and economic policy 
cooperation.  Whilst  the  creation  of  a  stable  Eurogroup  Presidency  will  help  to  coordinate 

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euro  area  members’  positions,  the  external  representation  of  the  euro  area  remains 
fragmented and incomplete, preventing the euro area from taking a leading strategic role in 
the development of the global economic system.  

Guideline.  To  contribute  to  a  dynamic  and  well-functioning  EMU,  euro  area  Member 
States need to pay particular attention to fiscal discipline, and in this connection  those that 
have  not  yet  reached  their  medium-term  budgetary  objective  should  pursue  an  annual 
improvement in their cyclically-adjusted budget deficit net of one-offs and other temporary 
measures of 0.5% of GDP as a benchmark, while ensuring a higher adjustment effort in good 
times; press forward with structural reforms that will improve euro area competitiveness and 
economic adjustment to asymmetric shocks; and ensure that the euro area’s influence in the 
global  economic  system  is  commensurate  with  its  economic  weight  (Integrated  guideline 
No 6). 

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Section B – Microeconomic reforms to raise Europe’s growth potential 

Structural reforms are essential to increase the EU’s growth potential, because they increase 
the efficiency and adaptability of the European economy. To yield maximum synergies, they 
are best implemented in a comprehensive and coordinated way. 

Raising  Europe’s  growth  potential  requires  making  progress  in  both  job  creation  and 
productivity growth. Since the mid-1990s, productivity growth in the EU has slowed down 
markedly.  Reversing  this  trend  is  the  major  competitiveness  challenge  facing  the  Union, 
especially in the light of its ageing population. Population ageing alone is estimated to reduce 
by nearly half the current rate of potential growth. An acceleration of productivity growth is 
thus indispensable to maintain and increase future living standards.  

Productivity  gains  are  fuelled  by  investment  and  innovation.  Making  Europe  a  more 
attractive  investment  location  and  spurring  investment  in  knowledge  and  innovation  are 
therefore key elements of the Lisbon Action Programme agreed at the 2005 Spring European 
Council.  This  is  why  national  and  regional  programmes  supported  by  the  Structural  Funds 
and  the  Cohesion  Fund  will  be  increasingly  targeted  on  investments  in  these  fields  in 
accordance with the Lisbon objectives. 

B.1  Making Europe a more attractive place to invest and work 

The attractiveness of the European Union as an investment location depends inter alia on the 
size  and  openness  of  its  markets,  its  regulatory  environment  and  the  quality  of  its 
infrastructure.  Increased 
labour 
productivity  levels  depend  on  investment  in  physical  and  human  capital  as  well  as  in 
knowledge and infrastructure.  

investment  will  make  Europe  more  productive  as 

Extend and deepen the Internal Market 

The  ability  of  European  producers  to  compete  and  survive  in  the  Internal  Market  is  key  to 
their  competitive  strength  in  world  markets.  A  fully  integrated  Internal  Market  would  also 
make  the  EU  more  attractive  to  foreign  investors.  Whilst  the  Internal  Market  for  goods  is 
relatively  well  integrated,  services  markets  remain,  legally  or  de  facto,  rather  fragmented. 
This applies in particular to energy and transport markets and to the regulated professions. In 
order  to  promote  growth  and  employment  and  to  strengthen  competitiveness,  the  internal 
market  of  services  has  to  be  fully  operational  while  preserving  the  European  social  model. 
The  elimination  of  tax  obstacles  to  cross-border  activities  and  the  removal  of  remaining 
impediments to worker mobility would also bring important efficiency gains. Finally, the full 
integration  of  financial  markets  would  raise  output  and  employment  by  allowing  more 
efficient allocation of capital and creating better conditions for business finance.  

Despite general acknowledgement of the potential benefits of a single European market, the 
transposition  rate  of  Internal  Market  directives  remains  disappointingly  low.  Furthermore, 
directives are often not implemented or applied correctly, as illustrated by the high number of 
infringement  proceedings  launched  by  the  Commission.  Member  States  need  to  cooperate 
more positively with each other and with the Commission to ensure that they deliver the full 
benefits of Internal Market legislation to their citizens and businesses. For example, there is 
considerable  scope  for  further  improvements  in  public  procurement  practices.  Such 

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improvements would be reflected in an increase in the share of public procurement publicly 
advertised.  Moreover,  more  open  procurement  would  lead  to  significant  budgetary  savings 
for the Member States.  

Guideline. To extend and deepen the Internal Market, Member States should speed up the 
transposition of Internal Market directives, give priority to stricter and better enforcement of 
Internal Market legislation, accelerate the process of financial market integration, eliminate 
tax  obstacles  to  cross-border  activities  and  apply  EU  public  procurement  rules  effectively 
(Integrated guideline No 7). 

Ensure open and competitive markets inside and outside Europe  

Open  and  competitive  markets  contribute  to  more  efficient  use  of  resources,  lead  to  better 
organisation of work within companies, and can act as a stimulus to innovation. Competition 
policy has played a key role in ensuring a level playing field for firms in the EU, and can also 
be  instrumental  to  look  at  the  wider  regulatory  framework  around  markets,  in  order  to 
promote the conditions which will allow firms to compete effectively. A further opening up 
of  European  markets  to  competition  can  be  achieved  by  a  reduction  in  the  general  level  of 
State  aid,  while  making  allowance  for  genuine  market  failures.  This  movement  must  be 
accompanied  by  a  redeployment  of  remaining  State  aid  in  favour  of  support  for  certain 
horizontal objectives such as research and innovation and the optimisation of human capital. 

Structural  reforms  that  ease  market  entry  are  a  particularly  effective  tool  for  enhancing 
competition.  These  will  be  particularly  important  in  markets  that  were  previously  sheltered 
from  competition  because  of  anticompetitive  behaviour,  over-regulation  (permits,  licences, 
minimum capital requirements, legal barriers, shop opening hours, regulated prices, limited 
sales periods, etc.), or because of trade protection. The Council has already invited Member 
States  to  screen  existing  domestic  legislation  for  compatibility  with  EU  rules  in  order  to 
remove market barriers and open up competition in the internal market.  

In addition, the implementation of measures already agreed to open up the network industries 
to  competition  should  help  to  ensure  lower  prices  overall  and  greater  choice  while 
guaranteeing the delivery of services of general economic interest to all citizens. Competition 
and regulatory authorities should ensure sufficient competition in liberalised markets, where 
the market share of the incumbent often remains very high. 

A  common  approach  in  dealing  with  third  countries  is  essential  so  as  to  improve  market 
access conditions for EU firms. The successful completion of an ambitious agreement in the 
framework  of  the  Doha-Round  should  further  open  up  world  markets  to  trade  and 
investment, thus contributing to raising potential growth. 

Guideline. To ensure open and competitive markets, Member States should give priority to 
the removal of regulatory and other barriers  that hinder competition in key sectors; a more 
effective enforcement of competition policy; selective market screening by competition and 
regulatory  authorities  in  order  to  identify  and  remove  obstacles  to  competition  and  market 
entry; a reduction in State aid that distorts competition; and a redeployment of aid in favour 
of  support  for  certain  horizontal  objectives  such  as  research  and  innovation  and  the 
optimisation  of  human  capital.  Member  States  should  also  fully  implement  the  agreed 
measures  to  open  up  the  network  industries  to  competition  in  order  to  ensure  effective 
competition in European wide integrated markets, allowing at the same time to guarantee the 

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satisfactory  delivery  of  high  quality  services  of  general  economic  interest  (Integrated 
guideline No 8). 

Improve European and national regulation  

Market  regulation  is  essential  to  create  a  low  cost  environment  in  which  commercial 
transactions  can  take  place.  It  also  serves  to  correct  market  failures  or  to  protect  market 
participants.  Nevertheless,  the  cumulative  impact  of  regulations  may  impose  substantial 
economic costs. It is therefore essential that regulations are well-designed and proportionate.  

When preparing or revising legislation, Member States should systematically assess the costs 
and benefits of their legislative initiatives. This implies consultation of relevant stakeholders, 
while  allowing  them  sufficient  time  to  respond.  Member  States  are  invited  to  develop 
national better regulation agendas and report on these in their national Lisbon programmes.  

In the Commission’s approach to better regulation, the economic, social and environmental 
impacts  of  new  or  revised  regulations  are  carefully  assessed  to  identify  the  potential  trade-
offs  and  synergies  between  different  policy  objectives.  Moreover,  existing  regulation  is 
screened for simplification potential and its impact on competitiveness is assessed. Finally, a 
common  approach  to  measuring  the  administrative  costs  of  new  and  existing  legislation  is 
being developed.  

Significant  improvements  in  the  regulatory  environment  can  therefore  be  achieved  by 
reducing  the  costs  associated  with  regulation,  including  administrative  costs.  This  is 
especially  important  for  small  and  medium-sized  enterprises  (SMEs),  which  usually  have 
only  limited  resources  to  deal  with  the  administration  imposed  by  both  Community  and 
national legislation.  

Guideline.  To  create  a  more  attractive  business  environment,  Member  States  should 
improve the quality of their regulations through a systematic and rigorous assessment of their 
economic,  social  and  environmental 
the 
administrative  costs  associated  with  regulation.  Moreover,  Member  States  should  consult 
widely on the costs and benefits of their regulatory initiatives, in particular where these imply 
trade-offs between different policy objectives (Integrated guideline No 9). 

into  consideration 

impacts,  while 

taking 

Europe needs to foster its entrepreneurial drive more effectively and it needs more new firms 
willing  to  embark  on  creative  or  innovative  ventures.  Learning  about  entrepreneurship 
through all forms of education and training, should be supported and relevant skills provided. 
To this end, partnerships with companies should be encouraged. The creation and growth of 
businesses can also be encouraged by improving access to finance, adopting tax systems to 
reward  success  and  providing  business  support  services,  notably  for  young  entrepreneurs. 
Particular  emphasis  should  be  put  on  facilitating  the  transfer  of  ownership,  revising 
bankruptcy laws, and improving rescue and restructuring proceedings.  

Guideline.  To  promote  a  more  entrepreneurial  culture  and  create  a  supportive 
environment for SMEs, Member States should improve access to finance, adapt tax systems, 
strengthen  the  innovative  potential  of  SMEs,  and  provide  relevant  information  and  support 
services  in  order  to  encourage  the  creation  and  growth  of  start-ups  in  line  with  the  SMEs 
Charter. In addition, Member States should reinforce entrepreneurship education and training 
(cross reference to the relevant employment guideline). Member States should also facilitate 

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the  transfer  of  ownership,  revise  their  bankruptcy  laws,  and  improve  their  rescue  and 
restructuring proceedings (Integrated guideline No 10). 

Expand and improve European infrastructure 

Modern  infrastructure  is  an  important  factor  affecting  the  attractiveness  of  locations.  It 
facilitates  the  mobility  of  persons,  goods  and  services  throughout  the  Union.  Modern 
transport, energy and electronic communication infrastructure is a prerequisite for reaping the 
benefits  of  a  re-invigorated  Lisbon  strategy.  By  reducing  transport  costs  and  by  widening 
markets, interconnected and interoperable trans-European networks help foster international 
trade and fuel Internal Market dynamics. Moreover, the  ongoing  liberalisation of European 
network industries fosters competition and drives efficiency gains in these sectors. 

In  terms  of  future  investment  in  European  infrastructure,  the  implementation  of  30  priority 
transport  projects  identified  by  Parliament  and  Council  in  the  Trans  European  Network 
(TEN)  transport  guidelines  as  well  as  the  implementation  of  the  Quick-start  cross-border 
projects for transport, energy and broadband communications identified under the European 
Initiative  for  Growth  should  be  considered  a  priority.  Infrastructure  bottlenecks  within 
countries  need  to  be  tackled  as  well.  Appropriate  infrastructure  pricing  systems  can 
contribute to the efficient use of infrastructure and the development of a sustainable modal 
balance.  

Guideline. To expand and improve European infrastructure and complete agreed priority 
cross-border  projects  with  the  particular  aim  of  achieving  a  greater  integration  of  national 
markets within the enlarged EU. Member States should develop adequate transport, energy or 
ICT  infrastructures,  notably  in  cross-border  sections,  as  an  essential  condition  to  achieve  a 
successful  opening  up  of  the  network  industries  to  competition.  .  In  addition,  they  should 
introduce appropriate infrastructure pricing systems, as a means to internalise environmental 
costs to ensure the efficient use of infrastructures and the development of a sustainable modal 
balance (Integrated guideline No 11). 

B.2 

Knowledge and innovation for growth 

Knowledge  accumulated  through  investment  in  R&D,  innovation  and  education  is  a  key 
driver  of  long-run  growth.  Policies  aimed  at  increasing  investment  in  knowledge  and 
strengthening  the  innovation  capacity  of  the  EU  economy  are  at  the  heart  of  the  Lisbon 
strategy for growth and employment. 

Increase and improve investment in R&D 

R&D  affects  economic  growth  through  various  channels:  first,  it  can  contribute  to  the 
creation  of  new  markets  or  production  processes;  second,  it  can  lead  to  incremental 
improvements in already existing products and production processes; and third, it increases 
the capacity of a country to absorb new technologies. 

The  EU  is  currently  spending  around  2%  of  GDP  on  R&D  (although  ranging  from  below 
0.5% to above 4% of GDP across Member States) , barely up from the level at the time of the 
launch of the Lisbon strategy. Moreover, only around 55% of research spending in the EU is 
financed by industry. More rapid progress towards meeting the collective EU target of raising 
research  investment  to  3%  of  GDP  is  needed;  two  thirds  of  the  overall  investment  should 

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come from the private sector. Member States are invited to report on their R&D expenditure 
targets  for  2008  and  2010  and  the  measures  to  achieve  these  in  their  national  Lisbon 
programmes.  The  main  challenge  is  to  put  in  place  framework  conditions,  instruments  and 
incentives  for  companies  to  invest  in  research,  Public  research  expenditure  must  be  made 
more  effective  and  the  links  between  public  research  and  the  private  sector  have  to  be 
improved. Poles and networks of excellence should be strengthened and better use should be 
made of public support mechanisms including fiscal measures to leverage private R&D. It is 
also essential to ensure that companies operate in sufficiently competitive environment since 
competition provides an important incentive to private spending on innovation. In addition, a 
determined effort must be made to increase the number and quality of researchers active in 
Europe,  in  particular  by  attracting  more  students  into  scientific,  technical  and  engineering 
disciplines,  and  enhancing  the  career  development  and  the  transnational  and  intersectoral 
mobility of researchers. 

Guideline.  To  increase  and  improve  investment  in  R&D,  Member  States  should  further 
develop  the  mix  of  measures  to  foster  business  R&D  through:  improved  framework 
conditions  and  ensuring  that  companies  operate  in  a  sufficiently  competitive  environment; 
increased  and  more  effective  public  expenditure  on  R&D;  strengthening  centres  of 
excellence;  making  better  use  of  support  mechanisms,  such  as  fiscal  measures  to  leverage 
private  R&D;  ensuring  a  sufficient  supply  of  qualified  researchers  by  attracting  more 
students  into  scientific,  technical  and  engineering  disciplines  and  enhancing  the  career 
development  and  the  transnational  and  intersectoral  mobility  of  researchers  (Integrated 
guideline No 12). See also integrated guideline “Expand and improve investment in human 
capital” (No 22). 

Facilitate innovation, the uptake of ICT and the sustainable use of resources 

The dynamism  of the European  economy is crucially  dependent on its  innovative capacity. 
The  economic  framework  conditions  for  innovation  need  to  be  in  place.  This  implies  well 
functioning  financial  and  product  markets  as  well  as  clearly  defined  and  affordable 
intellectual  property  rights.  Innovations  are  often  introduced  to  the  market  by  new 
enterprises,  which  may  meet  particular  difficulties  in  obtaining  finance.  Measures  to 
encourage the creation and growth of innovative enterprises, including improving access to 
finance, should therefore enhance innovative activity. Technology diffusion can be fostered 
by  the  development  of  innovation  poles  and  networks  as  well  as  by  innovation  support 
services  targeted  at  SMEs.  Knowledge  transfer  via  researcher  mobility,  Foreign  Direct 
Investment (FDI) or imported technology is particularly beneficial for lagging countries and 
regions. 

The  EU  has  been  unable  to  reap  the  full  benefits  of  the  increased  production  and  use  of 
Information and Communication Technologies (ICT). This reflects the still continuing under-
investment in ICT, institutional constraints and organisational challenges to the adoption of 
ICT.  Technological  innovation  ultimately  depends  on  a  growth-conducive  economic 
environment. Uptake of ICTs particularly depends on an adaptable organisation of work and 
flexible markets.  

Guideline. To facilitate innovation and the uptake of ICT, Member States should focus on 
improvements  in  innovation  support  services,  in  particular  for  technology  transfer,  the 
creation of innovation poles and networks bringing together universities and enterprises, the 

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encouragement  of  knowledge  transfer  through  FDI,  better  access  to  finance  and  affordable 
and clearly defined intellectual property rights. They should facilitate the uptake of ICT and 
related changes in the organisation of work in the economy (Integrated guideline No 13). 

Lasting  success  for  the  Union  also  depends  on  addressing  a  range  of  resource  and 
environmental  challenges  which,  if  left  unchecked  will  act  as  a  brake  on  future  growth.  In 
this context, recent developments and prospects on oil prices have emphasised the acuity of 
the  energy  efficiency  issue.  Further  delay  in  addressing  these  challenges  would  raise  the 
economic costs of taking action. This implies for example measures to tackle the problem of 
climate change, to make more rational use of resources and to halt the loss of biodiversity. 
The use of market-based instruments, so that prices better reflect environmental damage and 
social  costs,  plays  a  key  role  in  this  context.  Encouraging  the  development  and  use  of 
environment-friendly technologies and the greening of public procurement can improve the 
innovative  performance  and  enhance  the  contribution  to  sustainable  development  of  the 
sectors concerned. For example, EU companies are amongst the world leaders in developing 
new renewable energy technologies. In particular, in a context of continued upward pressure 
on  energy  prices,  and  accumulating  threats  to  the  climate,  it  is  important  to  push  energy 
efficiency 
to  both  sustainable  development  and 
competitiveness. 

improvements  as  a  contribution 

Guideline.  To  encourage  the  sustainable  use  of  resources  and  strengthen  the  synergies 
between  environmental  protection  and  growth,  Member  States  should  give  priority  to  the 
internalisation  of  external  environmental  costs;  to  increasing  energy  efficiency  and  to  the 
development  and  application  of  environment-friendly  technologies.  The  implementation  of 
these priorities should be in line with existing European commitments and with the actions 
and instruments proposed in the Environmental Technologies Action Plan (ETAP), through 
the  use  of  market-based  instruments,  risk  funds  and  R&D  funding,  greening  of  public 
procurement  and  the  removal  of  environmentally  harmful  subsidies  alongside  other  policy 
instruments (Integrated guideline No 14). 

Contribute to a strong European industrial base  

The recent slowdown in EU productivity growth is partly related to the EU’s difficulty in re-
orienting  its  economy  towards  the  newer,  higher  productivity  growth  sectors.  In  order  to 
enhance and sustain economic and technological leadership Europe must increase its capacity 
to  develop  and  market  new  technologies.  The  synergies  from  jointly  addressing  research, 
regulatory  and  financing  challenges  at  the  European  level,  where  for  reasons  of  scale  or 
scope individual Member States cannot successfully tackle market failures in isolation, have 
not  always  been  fully  exploited,  programmes  such  as  Galileo  or  those  in  the  aeronautics 
industry  being  exceptions.  As  a  result,  the  EU  has  been  unable  to  fully  realise  its 
technological potential. The pooling of European excellence and the development of public-
private partnerships where the benefits for society are larger than those for the private sector 
will help tap this potential. 

Guideline. To contribute to a strong European industrial base, Member States should focus 
on the development of new technologies and markets. This implies in particular commitment 
to  the  setting  up  and  implementation  of  joint  European  technology  initiatives  and  public-
private  partnerships  that  help  tackle  genuine  market  failures,  as  well  as  the  creation  and 
development of regional or local clusters (Integrated guideline No 15). 

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Part 2 

The Employment Guidelines (2005-2008) 

Proposal for a 

COUNCIL DECISION 

on guidelines for the employment policies of the Member States (under Article 128 of 
the EC Treaty) 

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2005/0057 (CNS) 

Proposal for a  

COUNCIL DECISION  

on guidelines for the employment policies of the Member States 

THE COUNCIL OF THE EUROPEAN UNION, 

Having regard to the Treaty establishing the European Community, and in particular Article 
128(2) thereof, 

Having regard to the proposal from the Commission9, 

Having regard to the Opinion of the European Parliament10, 

Having regard to the Opinion of the European Economic and Social Committee11, 

Having regard to the Opinion of the Committee of the Regions12, 

Having regard to the Opinion of the Employment Committee, 

Whereas: 

(1) 

(2) 

(3) 

(4) 

Article  2  of  the  Treaty  on  the  European  Union  sets  the  Union  the  objective  of 
promoting economic and social progress and a high level of employment. Article 125 
of the Treaty establishing the European Community states that Member States and the 
Community  shall  work  towards  developing  a  coordinated  strategy  for  employment 
and particularly for promoting a skilled, trained and adaptable workforce and labour 
markets responsive to economic change. 

The  Lisbon  European  Council  in  2000  launched  a  strategy  aimed  at  sustainable 
economic  growth  with  more  and  better  jobs  and  greater  social  cohesion,  with  long 
term employment targets, but five years later the results are mixed;  

The  presentation  of  an  integrated  package  of  Employment  Guidelines  and  Broad 
Economic Policy Guidelines contributes to refocusing the Lisbon Strategy on growth 
and  employment.  The  European  Employment  Strategy  has  the  leading  role  in  the 
implementation of the employment objectives of the Lisbon strategy. 

In  line  with  the  conclusions  of  the  Spring  European  Council  of  22  and  23  March 
2005,  the  objectives  of  full  employment,  job  quality,  labour  productivity  and  social 
cohesion  must  be  reflected  in  clear  priorities:  to  attract  and  retain  more  people  in 
employment  and  modernise  social  protection  systems;  to  improve  adaptability  of 

9 
10 
11 
12 

OJ C …, …, p. . 
OJ C …, …, p. . 
OJ C …, …, p. . 
OJ C …, …, p. . 

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workers  and  enterprises  and  the  flexibility  of  labour  markets;  and  to  improve 
investment in human capital through better education and skills. 

(5) 

(6) 

The Employment Guidelines should be fully reviewed only every three years, while 
in the intermediate years until 2008 their updating should remain strictly limited. 

The  employment  recommendations  adopted  by  the  Council  on  14  October  200413 
remain valid as background reference. 

HAS DECIDED AS FOLLOWS: 

The guidelines for Member States' employment policies as set out in the Annex are hereby 
adopted.  

Article 1 

All  aspects  of  the  guidelines  shall  be  taken  into  account  in  the  employment  policies  of  the 
Member States and be reported upon in the Lisbon National Programmes submitted annually.  

Article 2 

Article 3 

This decision is addressed to the Member States. 

Done at Brussels, 

For the Council 
The President

13 

OJ L 326 of 19.10.2004 

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ANNEX 

1 

ATTRACT  AND  RETAIN  MORE  PEOPLE  IN  EMPLOYMENT  AND  MODERNISE  SOCIAL 
PROTECTION SYSTEMS 

Achieving  full  employment,  and  reducing  unemployment  and  inactivity,  by  increasing  the 
demand  for  and  supply  of  labour,  is  vital.  This  goes  hand-in-hand  with  improving  the 
attractiveness of jobs, quality at work and labour productivity growth, and reducing the share 
of working poor. Synergies between quality at work, productivity and employment should be 
fully exploited. Determined action is needed to strengthen social inclusion, prevent exclusion 
from  the  labour  market  and  support  integration  in  employment  of  people  at  a  disadvantage, 
and  to  reduce  regional  disparities  in  terms  of  employment,  unemployment  and  labour 
productivity,  especially 
lagging  behind.  Equal  opportunities,  combating 
in  regions 
discrimination and gender mainstreaming are essential for progress. 

Guideline. Implement employment policies aiming at achieving full employment, improving 
quality and productivity at work, and strengthening social and territorial cohesion. Policies 
should contribute to achieving an average employment rate for the European Union (EU) of 
70%  overall,  of  at  least  60%  for  women  and  of  50%  for  older  workers  (55  to  64),  and  to 
reduce  unemployment  and  inactivity.  Member  States  should  set  national  employment  rate 
targets for 2008 and 2010 (Integrated guideline No 16). 

Raising  employment  levels  is  the  most  effective  means  of  generating  economic  growth  and 
promoting socially inclusive economies whilst ensuring a safety net for those unable to work. 
Promoting  a  new  lifecycle  approach  to  work  and  modernising  social  protection  systems  to 
ensure  their  adequacy,  financial  sustainability  and  responsiveness  to  changing  needs  in 
society  are  all  the  more  necessary  because  of  the  expected  decline  in  the  working-age 
population.  Special  attention  should  be  paid  to  tackling  the  persistent  employment  gaps 
between women and men, and the low employment rates of older workers and young people, 
as  part  of  new  intergenerational  approach.  Action  is  also  required  to  tackle  youth 
unemployment  which  is  on  average  double  the  overall  unemployment  rate.  The  right 
conditions must be put in place to facilitate progress in employment, whether it is first time 
entry,  a  move  back  to  employment  after  a  break  or  the  wish  to  prolong  working  lives.  The 
quality of jobs, including pay and benefits, working conditions, job security, access to lifelong 
learning and career prospects, are crucial, as are support and incentives stemming from social 
protection systems. The implementation of the European Youth Pact should be a contribution 
to a lifecycle approach to work. 

Guideline.  Promote  a  lifecycle  approach  to  work  through:  a  renewed  endeavour  to  build 
employment pathways for young people and reduce the youth unemployment; resolute action 
to  eliminate  gender  gaps  in  employment,  unemployment  and  pay;  better  reconciliation  of 
work and private life, including the provision of accessible and affordable childcare facilities 
and  care  for  other  dependants;  modern  pension  and  healthcare  systems,  ensuring  their 
adequacy,  financial  sustainability  and  responsiveness  to  changing  needs,  so  as  to  support 
participation  in  employment  and  longer  working  lives,  including  appropriate  incentives  to 
work  and  discourage  early  retirement;  support  for  working  conditions  conducive  to  active 
ageing  (Integrated  guideline  No  17).  See  also  integrated  guideline  “To  safeguard  economic 
sustainability” (No 2). 

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Facilitating  access  to  employment  for  job  seekers,  preventing  unemployment  and  ensuring 
that those who become unemployed remain closely attached to the labour market and increase 
their  employability  are  essential  to  increase  participation  and  combat  social  exclusion.  This 
requires breaking down barriers to the labour market by assisting with effective job searching, 
facilitating access to training and other active labour market measures and ensuring that work 
pays,  as  well  as  removing  unemployment,  poverty  and  inactivity  traps.  Special  attention 
should  be  paid  to  promoting  the  inclusion  of  disadvantaged  people  in  the  labour  market, 
including  through  the  expansion  of  social  services  and  the  social  economy.  The 
unemployment  gaps  for  people  at  a  disadvantage,  as  well  as  between  non-EU  and  EU 
nationals,  remain  too  high  and  should  be  substantially  reduced  in  line  with  any  national 
targets. Combating discrimination, promoting access to employment for disabled people and 
integrating migrants and minorities are particularly essential. 

Guideline.  Ensure  inclusive  labour  markets  for  job-seekers  and  disadvantaged  people 
through: active and preventive labour market measures including early identification of needs, 
job search assistance, guidance and training as part of personalised action plans, provision of 
social services necessary to support the labour market inclusion of disadvantaged people and 
contribute to social and territorial cohesion and to the eradication of poverty; and continuous 
review  of  tax  and  benefit  systems,  including  the  management  and  conditionality  of  benefits 
and  reduction  of  high  marginal  effective  tax  rates,  with  a  view  to  making  work  pay  and  to 
ensuring adequate levels of social protection (Integrated guideline No 18). 

To allow more people to find better employment, it is also necessary to strengthen the labour 
market infrastructure at national and EU level, including through the EURES network, so as 
to  better  anticipate  and  resolve  possible  mismatches.  In  this  context,  mobility  of  workers 
within the EU is key and should be fully ensured. Full consideration must also be given to the 
additional labour supply resulting from immigration of third country nationals. 

labour  market 

Guideline.  Improve  matching  of  labour  market  needs  through:  the  modernisation  and 
strengthening  of 
institutions,  notably  employment  services;  greater 
transparency  of  employment  and  training  opportunities  at  national  and  European  level  to 
facilitate  mobility  across  Europe;  better  anticipation  of  skill  needs,  labour  market  shortages 
and  bottlenecks;  appropriate  management  of  economic  migration  (Integrated  guideline 
No 19). 

2 

IMPROVE ADAPTABILITY OF WORKERS AND ENTERPRISES AND THE FLEXIBILITY OF 
LABOUR MARKETS 

Europe  needs  to  improve  its  capacity  to  anticipate,  trigger  and  absorb  economic  and  social 
change. This requires employment-friendly labour costs, modern forms of work organisation 
and  well-functioning  labour  markets  allowing  more  flexibility  combined  with  employment 
security  to  meet  the  needs  of  companies  and  workers.  This  should  also  contribute  to 
preventing the emergence of segmented labour markets and reducing undeclared work.  

In today's increasingly global economy with market opening and the continual introduction of 
new technologies, both enterprises and workers are confronted with the need, and indeed the 
opportunity, to adapt. While this process of structural changes is overall beneficial to growth 
and employment, it also brings about transformations  which are disruptive to some workers 
and  enterprises.  Enterprises  must  become  more  flexible  to  respond  to  sudden  changes  in 
demand  for  their  goods  and  services,  adapt  to  new  technologies  and  be  in  a  position  to 

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innovate constantly in order to remain competitive. They must also respond to the increasing 
demand for job quality which is related to workers' personal preferences and family changes, 
and they will have to cope with an ageing workforce and fewer young recruits. For workers, 
working  life  is  becoming  more  complex  as  working  patterns  become  more  diverse  and 
irregular and an increasing number of transitions need to be managed successfully throughout 
the  lifecycle.  With  rapidly  changing  economies  and  attendant  restructuring,  they  must  cope 
with  new  ways  of  working, 
including  enhanced  exploitation  of  Information  and 
Communication Technologies (ICT) and changes in their working status, and be prepared for 
lifelong  learning.  Geographical  mobility  is  also  needed  to  access  job  opportunities  more 
widely and in the EU at large. 

Guideline.  Promote  flexibility  combined  with  employment  security  and  reduce  labour 
market  segmentation  through:  the  adaptation  of  employment  legislation,  reviewing  where 
necessary the level of flexibility provided by permanent and non-permanent contracts; better 
anticipation  and  positive  management  of  change,  including  economic  restructuring,  notably 
changes linked to trade opening, so as to minimise their social costs and facilitate adaptation; 
support  for  transitions  in  occupational  status,  including  training,  self-employment,  business 
creation  and  geographic  mobility;  the  promotion  and  dissemination  of  innovative  and 
adaptable  forms  of  work  organisation,  including  better  health  and  safety  and  diversity  of 
contractual  and  working  time  arrangements,  with  a  view  to  improving  quality  and 
productivity at work; adaptation to new technologies in the workplace, determined action to 
transform  undeclared  work  into  regular  employment  (Integrated  guideline  No  20).  See  also 
integrated guideline “To promote greater coherence between macroeconomic and structural 
policies” (No 4). 

To  maximise  job  creation,  preserve  competitiveness  and  contribute  to  the  general  economic 
framework,  overall  wage  developments  should  be  in  line  with  productivity  growth  over  the 
economic  cycle  and  should  reflect  the  labour  market  situation.  Efforts  to  reduce  non-wage 
labour  costs  and  to  review  the  tax  wedge  may  also  be  needed  to  facilitate  job  creation, 
especially for low-wage employment. 

Guideline.  Ensure  employment-friendly  wage  and  other  labour  cost  developments  by 
encouraging the right framework for wage-bargaining systems, while fully respecting the role 
of  the  social  partners,  to  reflect  differences  in  productivity  and  labour  market  trends  at 
sectoral  and  regional  level;  and  monitoring  and,  where  appropriate,  reviewing  the  structure 
and level of non-wage labour costs and their impact on employment, especially for the low-
paid and those entering for the first time the labour market (Integrated guideline No 21). See 
also  integrated  guideline  “To  ensure  that  wage  developments  contribute  to  macroeconomic 
stability and growth” (No 5). 

3 

INCREASE  INVESTMENT  IN  HUMAN  CAPITAL  THROUGH  BETTER  EDUCATION  AND 
SKILLS 

Europe needs to invest more in human capital. Too many people fail to enter or remain in the 
labour market because of a lack of skills, or due to skills mismatches. To enhance access to 
employment for all ages, raise productivity levels and quality at work,  the EU needs  higher 
and  more  effective  investment  in  human  capital  and  lifelong  learning  for  the  benefit  of 
individuals,  enterprises,  the  economy  and  society.  Member  States  are  committed  to 
establishing comprehensive lifelong learning strategies by 2006. 

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Knowledge-based  and  service-based  economies  require  different  skills  from  traditional 
industries; skills which also constantly need updating in the face of technological change and 
innovation.  Workers,  if  they  are  to  remain  and  progress  in  work,  need  to  accumulate  and 
renew  skills  regularly.  The  productivity  of  enterprises  is  dependent  on  building  and 
maintaining  a  workforce  that  can  adapt  to  change.  Governments  need  to  ensure  that 
educational  attainment  levels  are  improved  and  that  young  people  are  equipped  with  the 
necessary key competences, in line with the European Youth Pact. All stakeholders should be 
mobilised  to  develop  and  foster  a  true  culture  of  lifelong  learning  from  the  earliest  age.  To 
achieve a substantial increase in public and private investment in human resources per capita, 
it is important to ensure fair and transparent sharing of costs and responsibilities between all 
actors.  Member  States  should  make  better  use  of  the  Structural  Funds  and  the  European 
Investment Bank for investment in education and training. 

Guideline. Expand and improve investment in human capital through: the establishment of 
efficient  lifelong  learning  strategies,  according  to  European  commitments,  including 
appropriate  incentives  and  cost-sharing  mechanisms  for  enterprises,  public  authorities  and 
individuals,  in  particular  to  significantly  reduce  the  number  of  pupils  leaving  school  early; 
increased  access 
including 
apprenticeships and entrepreneurship training ; and enhanced participation in continuous and 
workplace training throughout the life-cycle, especially for the low-skilled and older workers 
(Integrated  guideline  No  22).  See  also  integrated  guideline  “To  increase  and  improve 
investment in R&D” (No 12). 

initial  vocational,  secondary  and  higher  education, 

to 

Setting ambitious objectives and increasing the level of investment by all actors is not enough. 
To ensure that supply meets demand in practice, lifelong learning systems must be affordable, 
accessible and responsive to changing needs. Adaptation and capacity-building of education 
and  training  systems  is  necessary  to  improve  their  labour  market  relevance,  their 
responsiveness to the needs of the knowledge-based economy and society and their efficiency. 
ICT can be used to improve access to learning and better tailor it to the needs of employers 
and employees. Greater mobility for both work and learning purposes is also needed to access 
job opportunities more widely in the EU at large. The remaining obstacles to mobility within 
the European labour market should be lifted, in particular those relating to the recognition and 
transparency of qualifications and competences. It will be important to make use of the agreed 
European  instruments  and  references  to  support  reforms  of  national  education  and  training 
systems. 

Guideline.  Adapt  education  and  training  systems  in  response  to  new  competence 
requirements through: better identification of occupational needs and key competences, and 
anticipation  of  future  skill  requirements;  broadening  the  supply  of  education  and  training 
tools;  developing  frameworks  to  support  the  transparency  of  qualifications,  their  effective 
recognition  and 
the 
attractiveness,  openness  and  high  quality  standards  of  education  and  training  systems 
(Integrated guideline No 23). 

the  validation  of  non-formal  and 

learning;  ensuring 

informal 

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* 

* 

* 

In taking action, Member States should pay special attention to ensuring good governance of 
employment  policies.  They  should  establish  a  broad  partnership  for  change  by  involving 
parliamentary bodies and stakeholders, including those at regional and local levels. European 
and  national  social  partners  should  play  a  central  role.  Member  States  should  define 
commitments  and  targets  in  line  with  the  EU  Guidelines  and  Recommendations.  Good 
governance  also  requires  transparency  in  the  allocation  of  administrative  and  financial 
resources. In agreement with the Commission, Member States should target the resources of 
the  Structural  Funds,  in  particular  the  European  Social  Fund,  on  the  implementation  of  the 
European Employment Strategy and report on the action taken. Particular attention should be 
paid to strengthening institutional and administrative capacity in the Member States. 

In  implementing  the  policies  guidelines  set  out  above,  Member  States  should  note  that  the 
national  recommendations,  progress  indicators  and  targets  set  in  the  2003  Employment 
Guidelines and 2004 Recommendations remain valid as background references. 

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