Council Recommendation of 12 July 2005 on the broad guidelines for the economic policies of the Member States and the Community (2005 to 2008)
Date: 2005-07-12
Institutions: Council of the European Union
Subjects: economic growth, economic policy, employment policy, macroeconomics, microeconomics

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COUNCIL RECOMMENDATION

of 12 July 2005

on the broad guidelines for the economic policies of the Member States and the Community (2005
to 2008)

(2005/601/EC)

THE COUNCIL OF THE EUROPEAN UNION,

structural reforms, improve the quality of implementation, and
increase the sense of ownership of the Lisbon strategy.

Having regard to the Treaty
Community, and in particular to Article 99(2) thereof,

establishing the European

Having regard to the recommendation from the Commission,

Having regard to the discussion by the European Council on 16
and 17 June 2005,

Whereas a Resolution on the recommendation from the
Commission was adopted by the European Parliament,

HEREBY RECOMMENDS:

INTRODUCTION

The European Council of March 2005 relaunched the Lisbon
strategy by refocusing on growth and employment
in
Europe (1). 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. Europe must focus
its policies further on growth and employment to achieve the
Lisbon goals, against a sound macroeconomic policy back-
ground and within a framework aimed at social cohesion and
environmental
the
Lisbon strategy.

sustainability, which are vital pillars of

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 so that their synergies can be put to more
effective use. Furthermore, the involvement of relevant stake-
holders can help to raise awareness of the need for growth
and for
and stability orientated macroeconomic policies

(1) Conclusions

European
(http://ue.eu.int/cms3_fo/showPage.asp?lang=en&id=432&mode
=g&name).

of March

Council

the

of

2005

To this end, these Broad economic policy guidelines (BEPGs)
reflect the new start for the Lisbon strategy and concentrate
on the contribution of economic policies to higher growth
and more jobs. Section A of these BEPGs deals with the contri-
bution that macroeconomic policies can make in this respect.
Section B focuses on the measures and policies that the Member
States should carry out in order to boost knowledge and inno-
vation for growth and to make Europe a more attractive place
to invest and work. In line with the conclusions of the Brussels
(22 and 23 March 2005), as a general
European Council
instrument
the BEPGs
for coordinating economic policies,
should continue to embrace the whole range of macroeconomic
and microeconomic policies, as well as employment policy
insofar as this interacts with those policies; the BEPGs will
ensure general
three
strands of the strategy. The existing multilateral surveillance
arrangements for the BEPGs will continue to apply.

consistency between the

economic

These guidelines are applicable to all Member States and to the
Community. They should foster coherence of reform measures
included in the national reform programmes established by
Member States and will be complemented by the Lisbon
Community Programme 2005 to 2008 covering all actions to
be undertaken at Community level in the interest of growth and
Implementation of all relevant aspects of these
employment.
guidelines should take into account gender mainstreaming.

THE STATE OF THE EU ECONOMY

Economic activity in the EU which had gathered momentum
since mid-2003, decelerated in the second half of 2004 because
of the effect of external factors such as high and volatile oil
prices, the slowdown in world trade expansion and the appre-
ciation of the euro. In part, lack of resilience in some European
economies may also originate from persisting structural weak-
nesses. Real GDP growth is expected to continue at a moderate
pace in 2005, but the lower than expected carry over from
the overall annual average. The
2004 will
contribution of domestic demand to the recovery has so far
been uneven among Member States, but a gradual strengthening
is expected during the year, supported by favourable financing
conditions (including low real interest rates) and contained infla-
tionary pressures.

inevitably affect

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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. Structural and
macro-policies need to be thought of against the background
of an increase in the prices of raw materials, notably oil, and a
downward pressure on industrial prices. The return to potential
growth rates in the EU therefore depends, to a large extent, on
increasing confidence among businesses and consumers, as well
as on favourable global economic developments, including oil
it
prices and exchange rates. Against
is
important
and
economic policies
that
stronger domestic
conditions
thereby help to create
demand and job creation on the short term, and that structural
reforms contribute to an expansion of growth potential in the
medium term.

this background,
inspire
confidence
for

Unemployment rates are projected to decrease, albeit
slowly, to 8,7 % in 2006. The estimated overall employment
rate is 63,0 % 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 55,1 % 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 sluggishness of the EU’s economic recovery is a continuing
source of concern. 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.
the gulf between Europe’s growth
Against
this background,
potential and that of its economic partners has not significantly
narrowed.

— The second key explanation for the EU’s poor performance
is linked to its low level of productivity growth. Produc-
tivity growth has been on a declining trend for several
decades.

SECTION A

MACROECONOMIC POLICIES FOR GROWTH AND JOBS (1)

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. This should help to maintain favourable
long-term interest
to reasonable
exchange rate developments. In planning for the future, firms
and individuals must have confidence that price stability will be
maintained.

rates and to contribute

Monetary policies can contribute by pursuing price stability and,
without prejudice to this objective, by supporting other general
economic policies with regard to growth and employment. For
new Member States, it will be important that monetary policies
contribute towards achieving sustainable real – and nominal –
convergence. Exchange rate regimes constitute an important
part of the overall economic and monetary policy framework
and should be orientated towards achieving real and sustainable
nominal convergence. Participation in ERM II, at an appropriate
stage after accession, should help those endeavours. An addi-
tional macroeconomic policy challenge for some of
these
Member States is to keep current account deficits within the
range where sound external financing can be secured. In this
to reduce current
respect,
account deficits.

restraint will be essential

fiscal

— 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 63,0 % in 2003. However, there remains a consid-
improvement, notably among
erable scope for
further
young and older workers,
if the Lisbon targets are to be
reached.

(1) 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 to 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 back-
ground references.

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Securing a sound budgetary position will allow the full and
symmetric play of the automatic budgetary stabilisers over the
cycle 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. For the remaining Member States, it is vital
to take all the necessary corrective measures to achieve their
medium-term budgetary objectives in particular if 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 over the cycle is ensured
prior to the next economic downturn. In line with the Ecofin
report
the Stability and
Growth Pact’ endorsed by the European Council (22 and 23
March 2005), for individual Member States the medium-term
budgetary objective should be differentiated according to the
diversity of economic and budgetary positions and devel-
opments as well as of fiscal risk to the sustainability of public
finances, also in the face of prospective demographic changes.
The Stability and Growth Pact requirements applying to the
euro area Member States also apply to ERM2 Member States.

‘Improving the implementation of

it

is necessary that

Guideline No 1. To secure economic stability for sustainable growth,
1. in line with the Stability and Growth Pact, Member States
should respect their medium-term budgetary objectives. As
long as this objective has not yet been achieved,
they
should take all the necessary corrective measures to achieve
it. Member States should avoid pro-cyclical
fiscal policies.
those Member States
Furthermore,
having an excessive deficit take effective action in order to
ensure a prompt correction of excessive deficits, and 2.
Member States posting current account deficits that
risk
being unsustainable should work towards correcting them
by implementing structural reforms, boosting external compe-
titiveness and, where appropriate, contributing to their
correction via fiscal policies. See also integrated guideline
‘To contribute to a dynamic and well-functioning EMU’
(No 6).

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 economy. According to
latest projections, by 2050 the EU’s population of
the
working age (15 to 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, unless action is taken now to safeguard long-term
fiscal sustainability, there could be an increased debt burden,
due to the increase in the age-related public expenditure, and
lower potential output per capita, due to the reduction in the
working age population, and future difficulties financing the
pension, social insurance and health care systems.

increase,

to 63,0 % in 2003,

to raise employment

Member States should address the economic implications of
ageing by, as part of
the well-established three-pronged
strategy for
tackling the budgetary implications of ageing,
pursuing a satisfactory pace of debt reduction and providing
rates and increase labour
incentives
supply so as to offset the impact of
future declines in the
number of persons of working age. Notwithstanding the
recent
the still relatively low
employment
rate indicates that Europe has a reservoir of
unused labour. The scope for further improvements is thus
considerable, notably amongst women, young and older
workers.
to
modernise social protection systems so as to ensure that they
are financially viable, providing incentives to the working age
population to actively participate in the labour market, while at
the same time ensuring that they fulfil their goals in terms of
access
improved interaction
In particular,
between social protection systems and labour markets can
remove distortions and encourage the extension of working
lives against a background of increased life expectancy.

In line with this strategy,

is also essential

and adequacy.

it

Guideline No 2. To safeguard economic and fiscal sustainability as
a basis for increased employment, Member States should, in view
of the projected costs of ageing populations, 1. undertake a
satisfactory pace of government debt reduction to strengthen
public finances; 2. reform and re-enforce pension, social
insurance and health care systems to ensure that they are
financially viable, socially adequate and accessible, and 3.
take measures to increase labour market participation and
labour supply especially amongst women, young and older
workers, and promote a lifecycle approach to work in order
to increase hours worked in the economy. See also integrated
guideline ‘Promote a lifecycle approach to work’ (No 18, and
Nos 4, 19, 21).

Promote a growth, employment orientated and efficient allocation of
resources

towards growth-enhancing categories

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

and by putting
that

(R & D), physical

individual

in place

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Guideline No 3. To promote a growth- and employment-orientated
resources, Member States should,
and efficient allocation of
without prejudice to guidelines on economic stability and
sustainability, redirect the composition of public expenditure
towards growth-enhancing categories in line with the Lisbon
strategy, adapt tax structures to strengthen growth potential,
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. See also integrated guideline ‘To encourage the
sustainable use of resources and strengthen the synergies
between environmental protection and growth’ (No 11).

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

Structural reforms, consistent with sound fiscal positions in the
short and medium term, are essential to increase productivity
and employment in the medium term, thus leading to the full
realisation and strengthening of growth potential. They also
contribute to fiscal sustainability, macroeconomic stability and
resilience to shocks. At the same time, appropriate macroe-
conomic policies are key towards reaping the full benefits of
structural reforms in terms of growth and employment. 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. In this regard, an effort towards
reforms of tax and benefit systems should be pursued in order
to make work pay and avoid any possible disincentive for
labour market participation.

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
the medium term and are
of productivity growth over
consistent with a rate of profitability that allows for produc-
tivity, capacity and employment-enhancing investment. This
requires that temporary factors such as variation in productivity
caused by cyclical factors or one off rises in the headline rate of
inflation do not cause an unsustainable trend in wage growth
and that wage developments
labour market
conditions.

reflect

local

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 stability and price competi-
tiveness. The fact that this second round effect has not been
observed so far is welcome. These issues need to be taken into
account in the continued dialogue and information exchange
between monetary and fiscal authorities and the social partners
via the macroeconomic dialogue.

the

right

should encourage

Guideline No 4. To ensure that wage developments contribute to
macroeconomic stability and growth and to increase adaptability
Member States
framework
conditions for wage-bargaining systems, while fully respecting
the role of
the social partners, with a view to promote
nominal wage and labour cost developments consistent
with price stability and the trend in productivity over the
medium term, taking into account differences across skills
and local
labour market conditions. See also integrated
guideline ‘Ensure employment-friendly labour cost devel-
opments and wage-setting mechanisms’ (No 22).

Promote coherent macroeconomic, structural and employment policies

The role of
to provide
sound macroeconomic policies
conditions conducive to employment creation and growth.

is

Guideline No 5. To promote greater coherence between macroe-
structural and employment policies, Member States
conomic,
should pursue labour and product markets reforms that at
the same time increases the growth potential and support the
factor
macroeconomic framework by increasing flexibility,
mobility and adjustment capacity in labour and product
markets in response to globalisation, technological advances,
demand shift, and cyclical changes.
In particular, Member
States should renew impetus in tax and benefit reforms to
improve incentives and to make work pay;
increase adapt-
ability of labour markets combining employment flexibility
and security; and improve employability by investing in
human capital. See also integrated guideline ‘Promote flex-
security and reduce
ibility combined with employment
labour market segmentation, having due regard to the role
of the social partners’ (No 21 and No 19).

A.2. Ensuring a dynamic and well-functioning euro area

In its last spring forecast,

The need to achieve higher growth and employment is parti-
cularly acute in the euro area given its recent subdued economic
performance and its low level of potential growth of around
2 % (Commission estimates).
the
Commission revised downwards its prevision for 2005 at a
1,6 % growth in the euro zone. Economic divergence may
increase in the euro zone,
internal
demand and inflation pressures. The deceleration of economic
growth in the euro area in the second half of last year can be
attributed to both external factors, high and volatile oil prices,
slowing global trade growth and the appreciation of the euro, as
well as internal rigidities. On the external side, adverse oil price
developments and persisting global
imbalances continue to
represent non-negligible downside risks.

in terms of growth,

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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 in particular employment prospects (with unem-
ployment continuing to be around 9 %) as well as income
prospects in the medium term. The level of confidence and
the lack of sustained improvement on the consumption side
have continued to weight on investment.

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 orientated macroeconomic policies and comprehensive
structural reforms. Both are also particularly salient for euro
area and ERM2 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 economic
performance of, and policies pursued by, individual euro area
the euro’s
Member States affect common goods
exchange rate, interest rates price stability and the cohesion of
the euro area. All this implies a need for effective policy coor-
dination, both in the EU and in the euro area, to improve
growth potential and performance.

the euro area as a whole. Furthermore,

such as

that

foster

The absence of national
interest and exchange rate policies
implies also an increased need to achieve and maintain sound
budget positions over
the cycle which provide sufficient
budgetary margin to absorb the impact of cyclical fluctuations
or economic shocks with an asymmetric impact. Structural
policies
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 avoid unwarranted infla-
tionary developments. Policies that increase the responsiveness
of
through encouraging widespread labour
participation, occupational and geographical mobility and the
setting of wages,
together with appropriate product market
reforms, are particularly important in this respect.

labour markets,

In the short run, the policy mix in the euro area needs to
support economic recovery while at the same time safeguarding
long-term sustainability and stability. At the current juncture, it
is important that the policy mix underpins confidence among
consumers
remaining
and investors, which also implies
committed to medium-term stability. Budgetary policy has to
ensure a fiscal position consistent with the need to prepare for
the impact of ageing populations on the one hand and to
accomplish a composition of public expenditure and revenues
that fosters economic growth on the others.

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 a stable Eurogroup Presidency will

help to coordinate euro area members’ positions, the external
representation of the euro area has to be improved, on the basis
the Vienna agreement of 11 and 12
of
the framework of
the euro area can take a leading
December 1998, so that
the global economic
strategic role in the development of
system.

Guideline No 6. To contribute to a dynamic and well-functioning
EMU, euro area Member States need to ensure better coordi-
nation of their economic and budgetary policies, in particular,
1. pay particular attention to fiscal sustainability of
their
public finances in full compliance with the Stability and
Growth Pact; 2. contribute to a policy mix that supports
economic recovery and is compatible with price stability,
and thereby enhances
and
confidence
consumers in the short run, while being compatible with
long term sustainable growth; 3. press forward with structural
increase euro area long-term potential
reforms that will
improve its productivity, competitiveness
growth and will
and economic adjustment
to asymmetric shocks, paying
particular attention to employment policies, and 4. ensure
that
influence in the global economic
system is commensurate with its economic weight.

the euro area’s

among business

SECTION B

MICROECONOMIC REFORMS TO RAISE EUROPE’S GROWTH
POTENTIAL

are

the

Structural reforms are essential to increase the EU’s growth
potential and support macroeconomic stability, because they
increase
the European
efficiency and adaptability of
economy. Productivity gains
fuelled by competition,
investment and innovation. 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. Part of this slowdown comes from
increased
low-skilled workers. However,
reversing this trend in productivity is a major challenge facing
the Union, especially in the light of its ageing population. Popu-
lation ageing alone is estimated to reduce by nearly half the
current rate of potential growth. An acceleration of productivity
growth and increasing hours worked are thus indispensable to
maintain and increase future living standards, and ensure a high
level of social protection.

employment of

B.1. Knowledge and innovation — engines of sustainable

growth

is a key driver of

inno-
Knowledge accumulated through investment in R & D,
long-run growth.
vation and education,
in knowledge and
increasing investment
Policies aimed at
strengthening the innovation capacity of the EU economy are
at the heart of the Lisbon strategy for growth and employment.
is why national and regional programmes will be
This
increasingly
in
accordance with the Lisbon objectives.

targeted on investments

in these

fields

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Increase and improve investment in R & D, with a view to establishing
the European Knowledge Area

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 the
business sector. Low levels of private R & D investments are
identified as one of the main explanation for the EU/US inno-
vation gap. More rapid progress towards meeting the collective
EU target of raising research investment
to 3 % of GDP is
needed. 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, better overall use should be made of public
support mechanisms to boost private sector innovation, and a
better leverage effect of public investments and a modernised
management of research institutions and universities should be
ensured. It is also essential to ensure that companies operate in
a competitive environment
since competition provides an
In
important
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 engi-
neering disciplines, and enhancing the career development and
the transnational and intersectoral mobility of researchers, and
reducing barriers to mobility of researchers and students.

incentive to private spending on innovation.

The international dimension of R & D should be strengthened
in terms of joint financing, development of a more critical mass
in critical areas requiring large funds and
at
through reducing barriers
researchers and
students.

to mobility of

the EU level

Guideline No 7. To increase and improve investment in R & D, in
particular by private business, the overall objective for 2010 of
3 % of GDP is confirmed with an adequate split between
private and public investment, Member States will define
specific intermediate levels. Member States should further
develop a mix of measures appropriate to foster R & D, in
particular business R & D, through: 1. improved framework
conditions and ensuring that companies operate in a suffi-
ciently competitive and attractive environment; 2. more
effective and efficient public expenditure on R & D and
developing PPPs; 3. developing and strengthening centres of
excellence of educational and research institutions in Member
States, as well as creating new ones where appropriate, and
technologies
improving the cooperation and transfer of
between public research institute and private enterprises; 4.
developing and making better use of incentives to leverage
private R & D; 5. modernising the management of research
institutions and universities, and 6. ensuring a sufficient
supply of qualified researchers by attracting more students
into scientific,
technical and engineering disciplines and
enhancing the career development and the European, interna-
tional as well as inter-sectoral mobility of researchers and
development personnel.

Facilitate innovation

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 efficient and affordable
means to enforce 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,
should therefore
including improving
enhance innovative activity. Technology diffusion, and policies
to better integrate national innovation and education systems,
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 bene-
ficial for lagging countries and regions.

to finance,

access

forms of

improvements

should focus on: 1.

innovation, Member
Guideline No 8. To facilitate all
in innovation
States
support services,
in particular for dissemination and tech-
nology transfer; 2. the creation and development of inno-
vation poles, networks and incubators bringing together
universities, research institutions and enterprises,
including
at regional and local level, helping to bridge the technology
gap between regions; 3. the encouragement of cross-border
knowledge transfer, including from foreign direct investment;
4. encouraging public procurement of innovative products
and services; 5. better access to domestic and international
finance, and 6. efficient and affordable means to enforce
intellectual property rights.

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The diffusion of information and communication technologies
(ICT), in line with the objectives and actions of the upcoming
i2010 initiative, is also an important way to improve produc-
tivity and, consequently, economic growth. The EU has been
unable to reap the full benefits of the increased production and
use of Information and communication technologies (ICT). This
institu-
reflects the still continuing under-investment in ICT,
tional
to the
and organisational
adoption of ICT. Technological innovation ultimately depends
on a growth-conducive economic environment. In this context
the use of intelligent logistics is an efficient way of ensuring that
costs at the European sites of production remain competitive. A
market of electronic communication open and competitive is
also important in this regard.

constraints

challenges

Guideline No 9. To facilitate the spread and effective use of ICT and
build a fully inclusive information society, Member States should:
1. encourage the widespread use of ICT in public services,
SMEs and households; 2. fix the necessary framework for the
related changes in the organisation of work in the economy;
3. promote a strong European industrial presence in the key
segments of ICT; 4. encourage the development of strong ICT
and content
industries, and well-functioning markets; 5.
ensure the security of networks and information, as well as
convergence and interoperability in order to establish an
frontiers, and 6. encourage the
information area without
deployment of broad band networks,
the
poorly served regions,
in order to develop the knowledge
economy. See also integrated guideline ‘Promote flexibility
combined with employment
security and reduce labour
market segmentation, having due regard to the role of the
social partners’ (No 21).

including for

To strengthen the competitive advantages of the 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
higher productivity growth sectors.

In order to enhance and sustain economic and technological
leadership, Europe must increase its capacity to develop and
including ICT. The synergies from
market new technologies,
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, should be analysed and exploited. The EU
has still not managed to fully realise its technological potential.
The pooling of European excellence and the development of
public-private partnerships and cooperation between Member
States where the benefits for society are larger than those for
the private sector will help tap this potential.

a

solid industrial

base, Europe needs

Guideline No 10. To strengthen the competitive advantages of its
fabric
industrial
throughout its territory. The necessary pursuit of a modern
and active industrial policy means strengthening the compe-
titive advantages of the industrial base, including by contri-
buting to attractive framework conditions for both manufac-
turing and services, while ensuring the complementarity of
the action at national,
transnational and European level.
Member States should: 1. start by identifying the added
value and competitiveness factors in key industrial sectors,
and addressing the challenges of globalisation, and 2. also
and
focus on the development of new technologies
markets.
to
(a) This
initiatives based on public-
promote new technological
private partnerships
and cooperation between Member
States, that help tackle genuine market failures. (b) This also
implies the creation and development of networks of regional
or local clusters across the EU with greater involvement of
SMEs. See also integrated guideline ‘Improve matching of
labour market needs’ (No 20).

in particular commitment

implies

Encourage the sustainable use of resources

In this context,

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. A policy
towards energy efficiency is important to reduce the vulner-
ability of
the European economy to oil prices variations.
Further delay in addressing these challenges would raise the
economic costs of
taking action. This implies for example
measures to make more rational use of resources. Measures in
this area will also be important to tackle the problem of climate
change.
it is important that Member States
renew efforts to meet the obligations according to the Kyoto
protocol. Member States should notably continue the fight
against climate change in order to achieve that
the global
temperature increase does not exceed 2 °C above pre-industrial
levels, while implementing the Kyoto targets in a cost-effective
way. Member States should pursue the engagement of halting
in
the loss of biological diversity between now and 2010,
particular by
into other
policies, given the importance of biodiversity for certain
economic sectors. 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 devel-
opment and use of environment-friendly technologies,
the
greening of public procurement, paying particular attention to
SMEs, and the removal of environmentally harmful subsidies
alongside other policy instruments can improve the innovative
performance and enhance the contribution to sustainable devel-
opment 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,
to push energy efficiency
improvements as a contribution to both growth and sustainable
development.

incorporating

requirement

important

this

is

it

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Guideline No 11. To encourage the sustainable use of resources and
strengthen the
synergies between environmental protection and
growth, Member States should: 1. give priority to energy effi-
ciency and co-generation,
the development of sustainable,
including renewable, energies and the rapid spread of envir-
onmentally friendly and eco-efficient technologies, (a) inside
the internal market on the one hand particularly in transport
and energy, inter alia, in order to reduce the vulnerability of
the European economy to oil price variations, and (b) towards
the rest of the world on the other hand as a sector with a
considerable export potential; 2. promote the development of
means of internalisation of external environmental costs and
decoupling of economic growth from environmental degra-
dations. The implementation of these priorities should be in
line with existing Community legislation and with the actions
and instruments proposed in the Environmental Technologies
Action Plan (ETAP), inter alia, through, (a) the use of market-
based instruments, (b) risk funds and R & D funding, (c) the
sustainable production and consumption
promotion of
patterns including the greening of public procurement,
(d)
paying particular attention to SMEs, and (e) a reform of
subsidies that have considerable negative effects on the envir-
onment and are incompatible with sustainable development,
with a view to eliminating them gradually; 3. pursue the
objective of halting the loss of biological diversity between
now and 2010,
this
in particular by
requirement
into other policies, given the importance of
biodiversity for certain economic sectors, and 4. continue
to fight against climate change, while implementing the
Kyoto targets in a cost-effective way, particularly in regard
to SMEs. See also integrated guideline ‘To promote a
growth- and employment-orientated and efficient allocation
of resources’ (No 3).

incorporating

the transposition rate of

Despite general acknowledgement of the potential benefits of a
single European market,
internal
market directives remains disappointingly low. Furthermore,
directives are often not implemented or applied correctly, as
infringement proceedings
illustrated by the high number of
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 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.

enforcement of

internal market

Guideline No 12. To extend and deepen the internal market,
Member States should: 1. speed up the transposition of
internal market directives; 2. give priority to stricter and
better
legislation; 3.
eliminate remaining obstacles to cross-border activity; 4.
apply EU public procurement rules effectively; 5. promote a
fully operational internal market of services, while preserving
the European social model, and 6. accelerate financial market
integration by a consistent and coherent implementation and
enforcement of the Financial Services Action Plan. See also
integrated guideline ‘To improve matching of labour market
needs’ (No 20).

B.2. 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, the quality of its labour
force and its infrastructure.

Extend and deepen the internal market

In order

Whilst the internal market for goods is relatively well integrated,
services markets remain, legally or de facto, rather fragmented
and labour mobility remains low in Europe.
to
promote growth and employment and to strengthen competi-
tiveness, the internal market of services has to be fully opera-
tional while preserving the European social model. The
European Council has requested all efforts to be undertaken
within the legislative process in order
to secure a broad
consensus for moving towards a single market for services.
The elimination of obstacles to cross-border activities 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.

Ensure open and competitive markets inside and outside Europe

in Europe's

The open global economy offers new opportunities for stimu-
economy.
lating growth and competitiveness
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
effectively. A further opening up of European
compete
markets to competition can be achieved by a reduction in the
general level of remaining State aid. This movement must be
accompanied by a redeployment of remaining State aid in
favour of support for certain horizontal objectives. The review
of State aid rules should lead to a further push in this direction.

Structural reforms that ease market entry are a particularly
effective tool for enhancing competition. These will be parti-
in markets that were previously sheltered
cularly important
the
from competition because of anticompetitive behaviour,
existence of monopolies, over-regulation (for example permits,
licences, minimum capital requirements,
legal barriers, shop
opening hours, regulated prices, etc. may hinder the devel-
opment of an effective competitive environment), or because
of trade protection.

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In addition, the implementation of measures already agreed to
open up the network industries to competition (in the areas of
electricity and gas, transport, telecommunications and postal
services)
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 regu-
latory authorities
should ensure competition in liberalised
markets. At the same time, the satisfactory delivery of high
quality Services of general economic interest at an affordable
price must be guaranteed.

also serves to correct market failures or to protect market parti-
cipants. Nevertheless, the cumulative impact of regulations may
impose substantial economic costs. It is therefore essential that
regulations are well-designed and proportionate. The quality of
the European and national regulatory environments is a matter
of joint commitment and shared responsibility at both the EU
and Member State level.

structural

External openness to trade and investment, also in a multilateral
context, by increasing both exports and imports,
is an
important spur
to growth and employment and can thus
reform. An open and
reinforce the delivery of
strong system of global trade rules is of vital importance for
the European economy. The successful completion of an
ambitious and balanced agreement in the framework of the
Doha-Round as well as the development of bilateral and
regional
should further open up
markets to trade and investment, thus contributing to raising
potential growth.

agreements,

trade

free

trade and other barriers

Guideline No 13. To ensure open and competitive markets inside
and outside Europe and to reap the benefits of globalisation,
Member States should give priority to: 1. the removal of
regulatory,
that unduly hinder
competition; 2. a more effective enforcement of competition
policy; 3. selective screening of markets and regulations by
competition and regulatory authorities in order to identify
and remove obstacles to competition and market entry; 4. a
reduction in State aid that distorts competition; 5. in line with
the upcoming Community Framework, a redeployment of aid
in favour of support for certain horizontal objectives such as
research, innovation and the optimisation of human capital
and for well-identified market failures; 6. the promotion of
external openness, also in a multilateral context; 7. full imple-
mentation of the agreed measures to open up the network
industries to competition in order to ensure effective compe-
tition in European wide integrated markets. At the same time,
the delivery, at affordable prices, of effective services of
general economic interest has an important role to play in
a competitive and dynamic economy.

Improve European and national regulation

Market regulation is essential to create an environment in which
commercial transactions can take place at competitive price. It

When preparing or revising legislation, Member States should
systematically assess the costs and benefits of their legislative
initiatives. They should improve the quality of their regulations,
while preserving their objectives. This implies consultation of
relevant stakeholders. 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 simpli-
fication 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.
Member States should establish systems for simplification of
existing regulation. They should consult widely on the costs
and benefits of
their regulatory initiatives or their lack of
action, particularly where trade-offs between different policy
objectives are implied. Member States should also ensure that
appropriate alternatives to regulation are given full consid-
eration.

Significant improvements in the regulatory environment can
therefore be achieved by taking into account cost-benefit
including adminis-
considerations associated with regulation,
small and
trative costs. This
medium-sized enterprises
(SMEs), which usually have only
limited resources to deal with the administration imposed by
both Community and national legislation.

is especially important

for

Guideline No 14. To create a more competitive business envir-
onment and encourage private initiative through better regulation,
Member States should: 1. reduce the administrative burden
that bears upon enterprises, particularly on SMEs and start-
ups; 2. improve the quality of existing and new regulations,
while preserving their objectives, through a systematic and
rigorous assessment of
(including
impacts, while considering and
health) and environmental
the administrative
in measurement of
making progress
burden associated with regulation, as well as the impact on
competitiveness, including in relation to enforcement, and 3.
encourage enterprises in developing their corporate social
responsibility.

their economic,

social

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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. The entrepreneurship dimension should
be integrated in the life long learning process as from school.
To this end, partnerships with companies should be encouraged.
The creation and growth of businesses can also be encouraged
by improving access to finance and strengthening economic
to reward
including by adopting tax systems
incentives,
reducing non-wage labour costs and reducing the
success,
administrative burdens
through the
provision of relevant business support services, notably for
young entrepreneurs,
like the creation of one-stop contact
points and the stimulation of national support networks for
enterprises. Particular emphasis should be put on facilitating
the transfer of ownership and improving rescue and restruc-
turing proceedings in particular with more efficient bankruptcy
laws.

start-up notably

for

strengthen economic incentives,

Guideline No 15. To promote a more entrepreneurial culture and
create a supportive environment for SMEs, Member States should:
1. improve access to finance, in order to favour their creation
and growth, in particular micro-loans and other forms of risk
including by
capital; 2.
simplifying tax systems and reducing non-wage
labour
costs; 3. strengthen the innovative potential of SMEs, and
like the creation of
4. provide relevant support services,
one-stop contact points and the stimulation of national
in order to favour their
support networks for enterprises,
creation and growth in line with Small firms’ Charter.
In
addition, Member States should reinforce entrepreneurship
education and training for SMEs. They should also facilitate
the transfer of ownership, modernise where necessary their
bankruptcy laws, and improve their rescue and restructuring
proceedings. See also integrated guidelines ‘To promote a
growth- and employment-orientated and efficient allocation
of resources’ (No 3) and ‘To facilitate all forms of innovation’
(No 8, Nos 23 and 24).

interoperable trans-European networks help foster international
trade and fuel internal market dynamics. Moreover, the ongoing
liberalisation of European network industries fosters compe-
tition and drives efficiency gains in these sectors.

cross-border projects

In terms of future investment in European infrastructure, the
implementation of 30 priority transport projects identified by
in the transEuropean network (TEN)
Parliament and Council
transport guidelines as well as the implementation of
the
renewable
quick-start
energy and broadband communications and research identified
under the European Initiative for Growth and the implemen-
tation of the transport projects, supported by the Cohesion
Fund, should be considered a priority. Infrastructure bottlenecks
within countries need to be tackled as well. Appropriate infra-
structure pricing systems can contribute to the efficient use of
infrastructure and the development of a sustainable modal
balance.

transport,

for

by

complementing

TEN networks,

Guideline No 16. To expand, improve and link up European infra-
structure and complete priority cross-border projects with the
particular aim of achieving a greater integration of national
markets within the enlarged EU. Member States should: 1.
develop adequate conditions for resource- efficient transport,
energy and ICT infrastructures, in priority, those included in
the
Community
mechanisms, notably including in cross-border sections and
peripherical regions, as an essential condition to achieve a
successful opening up of the network industries to compe-
tition; 2. consider the development of public-private part-
nerships, and 3. consider the case for appropriate infra-
structure pricing systems to ensure the efficient use of infra-
structures and the development of a sustainable modal
balance, emphasizing technology shift and innovation and
taking due account of environmental costs and the impact
on growth. See also integrated guideline ‘To facilitate the
spread and effective use of ICT and build a fully inclusive
information society’(No 9).

Expand and improve European infrastructure

Done at Brussels, 12 July 2005.

Modern infrastructure is an important factor affecting the attrac-
tiveness of locations. It facilitates the mobility of persons, goods
and services throughout the Union. Modern transport, energy
and electronic communication infrastructure is an important
reducing
factor of
interconnected and
transport costs and by widening markets,

reinvigorated Lisbon strategy. By

a

For the Council

The President

G. BROWN