The economic outlook 2002.
Date: 2018-02-19
Institutions: Directorate-General for Parliamentary Research Services
Subjects: economic convergence, economic forecasting, economic growth, economic policy, economic situation, euro, macroeconomics, tax

Directorate-General for Research
WORKING PAPER

THE ECONOMIC OUTLOOK 2002

Economic Affairs Series

ECON 129 EN

QA-48-02-230-EN-N

Directorate-General for Research
WORKING PAPER

THE ECONOMIC OUTLOOK 2002

IAIN BEGG, JACQUES LE CACHEUX, WOLFGANG WESSELS, INGO LINSENMANN

(Trans European Policy Studies Association (TEPSA)).

Economic Affairs Series

ECON 129 EN

07-2002

This study was requested by the European Parliament's committee on Economic and Monetary
Affairs within the annual research programme.

This paper is published in the following languages:
DE, EN (original), FR.

Authors

:

Trans  European  Policy  Studies  Association  (TEPSA)  and  member
institutes.  Expert  group:  Iain  Begg,  Jacques  Le  Cacheux,  Wolfgang
(rapporteur).
Wessels 
Country-specific  data  have  been  assembled  by  national  experts  from
TEPSA  institutes  on  the  basis  of  a  questionnaire  from  the  expert
group.

(project-coordinator), 

Ingo  Linsenmann 

Responsible Official: Ben Patterson

Division for Economic, Monetary and Budgetary Affairs
(352) 43 00-24114
Tel.:
Fax:
(352) 43 00-27721
Email gpatterson@europarl.eu.int

Manuscript completed in January 2002.

Copies can be obtained through:

Publications Office
Tel.:
Fax:
Email: dg4publications@europarl.eu.int

(352) 43 00-24053/20347
(352) 43 00-27722

Further information on DG4 publications can be accessed through:

www.europarl.eu.int/studies

Luxembourg, European Parliament, 2002

ISBN 92-823-1655-6

The opinions expressed in this document are the sole responsability of the author and do not
necessarily represent the official position of the European Parliament.

Reproduction  and  translation  for  non-commercial  purposes  are  authorised,  provided  the
source is acknowledged and the publisher is given prior notice and sent a copy.

© European Communities, 2002

Printed in Luxembourg

ECONOMIC OUTLOOK 2002

CONTENTS

EXECUTIVE SUMMARY........................................................................................................................... V

1.

2.

3.
4.

NEW MODES OF GOVERNANCE IN EUROPEAN ECONOMIC POLICY-MAKING AND THE ROLE OF THE
EUROPEAN PARLIAMENT................................ ................................ ................................ ...................... V
THE IMPLEMENTATION OF THE BROAD ECONOMIC POLICY GUIDELINES AND OF THE STABILITY AND
CONVERGENCE PROGRAMMES BY MEMBER STATES ................................ ................................ ............ VII
2.1. Macro-economic policies................................ ................................ ................................ ............. vii
2.2. BEPGs' recommendations on budgetary policy................................ ................................ ........... viii
2.3. BEPGs' recommendations on labour markets................................ ................................ ................ ix
2.4. BEPGs' recommendations on product markets, entrepreneurship and

the knowledge-based economy ................................ ................................ ................................ ....... x
2.5. BEPGs' recommendations on the efficiency and integration of the EU financial services market . xii
2.6. BEPGs' recommendations on environmental sustainability ................................ ......................... xiii
ECONOMIC AND ECONOMIC POLICY CONVERGENCE ................................ ................................ ............ XIII
RECOMMENDATIONS TO THE EUROPEAN PARLIAMENT................................ ................................ ........ XIV
4.1. On the adjustment of procedures of the cycles monitoring macro-economic policies ................... xiv
4.2. On the format of the BEPGs ................................ ................................ ................................ ....... xiv
4.3. On policy proposals................................ ................................ ................................ ..................... xv
4.4. On the future role of the European Parliament in the European macro-economic coordination

process................................ ................................ ................................ .......................... xvi

PART I – MACRO-ECONOMIC POLICY-MAKING IN THE EC ...........................................................1

CHAPTER I –   THE NEW MODES OF GOVERNANCE IN ECONOMIC POLICY MAKING: A MINOR ROLE FOR THE

2.1.1.
2.1.2.
2.1.3.
2.1.4.

EUROPEAN PARLIAMENT?................................ ................................ ................................ ....... 1
CHAPTER II – THE IMPACT OF EUROPEAN ECONOMIC POLICY-MAKING ON THE NATIONAL LEVEL ...................... 4
2.1. Awareness of national policy actors................................ ................................ ............................... 4
The Broad Economic Policy Guidelines................................ ................................ ............................... 4
The position of the European Parliament on the BEPG ................................ ................................ ........ 7
The stability and convergence programmes................................ ................................ .......................... 8
The position of the European Parliament on the stability and convergence programmes ..................... 10
2.2. Functioning of economic policy making ................................ ................................ ....................... 10
The coherence of the BEPGs with the general orientation of Member States' economic policies ......... 10
Assessment of the Commission's implementation report for the year 2000 ................................ ......... 12
Institutional adaptations on member state level................................ ................................ .................. 12
CHAPTER III – CONCLUSIONS ................................ ................................ ................................ ..................... 14

2.2.1.
2.2.2.
2.2.3.

PART II – IMPLEMENTATION OF THE BROAD ECONOMIC POLICY GUIDELINES AND THE

STABILITY AND CONVERGENCE PROGRAMMES.........................................................17

CHAPTER IV – GENERAL IMPLEMENTATION ANALYSIS IN CROSS-NATIONAL PERSPECTIVE .............................. 17

4.1. Growth- and stability-oriented macroeconomic policies and t he quality and sustainability of

4.3.1.
4.3.2.

public finances ................................ ................................ ................................ ............................ 17
Invigorate labour markets................................ ................................ ................................ ............ 24
4.2.
4.3. Ensure efficient product (goods and services) markets ................................ ................................ . 28
Completion of the Internal Market................................ ................................ ................................ ..... 28
Reinforce competition ................................ ................................ ................................ ....................... 29
4.4. Promote the efficiency and integration of the EU financial services market ................................ . 30
4.5. Encourage entrepreneurship................................ ................................ ................................ ........ 31
Create a business-friendly environment ................................ ................................ ............................. 31
Encourage risk-taking ................................ ................................ ................................ ....................... 33
4.6. Foster the knowledge-based economy ................................ ................................ .......................... 33
Promoting Economic Growth................................ ................................ ................................ ............. 33
Stimulate R&D and innovation................................ ................................ ................................ .......... 34
Access and use of ICT: education and learning ................................ ................................ .................. 34
4.7. Enhance environmental sustainability ................................ ................................ ......................... 36

4.6.1.
4.6.2.
4.6.3.

4.5.1.
4.5.2.

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ECONOMIC OUTLOOK 2002

CHAPTER V – OVERVIEW ON THE IMPLEMENTATION OF COUNTRY SPECIFIC RECOMMENDATIONS IN

THE BEPGS AND THE SCPS ................................ ................................ ................................ .. 38
5.1. Belgium ................................ ................................ ................................ ................................ ....... 38
5.2. Denmark................................ ................................ ................................ ................................ ...... 40
5.3. Germany................................ ................................ ................................ ................................ ...... 42
5.4. Greece................................ ................................ ................................ ................................ ......... 45
5.5. Spain ................................ ................................ ................................ ................................ ........... 47
5.6. France................................ ................................ ................................ ................................ ......... 49
Ireland................................ ................................ ................................ ................................ ......... 52
5.7.
5.8.
Italy................................ ................................ ................................ ................................ ............. 54
5.9. Luxembourg................................ ................................ ................................ ................................ . 56
5.10. Netherlands ................................ ................................ ................................ ................................ . 58
5.11. Austria................................ ................................ ................................ ................................ ......... 60
5.12. Portugal ................................ ................................ ................................ ................................ ...... 62
5.13. Finland................................ ................................ ................................ ................................ ........ 64
5.14. Sweden ................................ ................................ ................................ ................................ ........ 67
5.15. United Kingdom ................................ ................................ ................................ .......................... 69
CHAPTER VI – OVERVIEW ON THE IMPLEMENTATION OF COUNTRY SPECIFIC RECOMMENDATIONS................... 73

PART III – ECONOMIC CONVERGENCE AND PROSPECTS .............................................................77

CHAPTER VII – THE GLOBAL ECONOMIC CONTEXT................................ ................................ ....................... 77
CHAPTER VIII – THE OBJECTIVE OF CONVERGENCE ................................ ................................ ..................... 78
8.1. The pursuit of price stability ................................ ................................ ................................ ........ 79
8.2. The pursuit of fiscal sustainability ................................ ................................ ............................... 79
8.3. Exchange rate and long term interest rate convergence ................................ ............................... 80
8.4. Conclusions ................................ ................................ ................................ ................................ . 81

BIBLIOGRAPHY........................................................................................................................................ 89

FIGURES AND TABLES

FIGURE 1.1. THE EU CO-ORDINATION OF ECONOMIC POLICY (ART. 99 TEC) ................................ .................... 3
TABLE 4.1.1. GDP GROWTH (PER CENT PER ANNUM) ................................ ................................ ..................... 18
TABLE 4.1.2 GENERAL GOVERNMENT FISCAL BALANCE................................ ................................ ................ 20
TABLE 4.1.3. GENERAL GOVERNMENT FISCAL BALANCE................................ ................................ ................ 22
TABLE 4.1.4. GENERAL GOVERNMENT DEBT................................ ................................ ................................ .. 23
TABLE 4.2.1. STANDARDISED UNEMPLOYMENT RATES (PER CENT)................................ ................................ .. 25
TABLE 6.1

SYNTHETIC SUMMARY OF THE IMPLEMENTATION OF COUNTRY SPECIFIC RECOMMENDATIONS
INCLUDED IN THE BEPGS 2001 ................................ ................................ ................................ . 75
TABLE 7.1.
THE GLOBAL ECONOMIC OUTLOOK: AN OVERVIEW OF THE LATEST FORECASTS .......................... 77
TABLE 8.1.1. CONSUMER PRICES................................ ................................ ................................ ................... 83
TABLE 8.2.1. NET LENDING (+) OR NET BORROWING (-), GENERAL GOVERNMENT................................ ............ 84
TABLE 8.2.2. CENTRAL GOVERNMENT DEBT................................ ................................ ................................ ... 85
TABLE 8.3.1. NOMINAL BILATERAL EXCHANGE RATES AGAINST THE ECU/EURO (1970 – 2003) ...................... 86
TABLE 8.3.2. LONG TERM INTEREST RATES (1986 – 2001) ................................ ................................ ............. 87

* * *

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  EXECUTIVE SUMMARY

The  first  part  of  the  study  investigates  the  role  of  the  European  Parliament  and  of  the  new
modes of governance that have been introduced in recent years in European economic policy-
making. Chapter I focuses on the European level of policy-making, while chapter II analyses
the impact on the national level, paying particular attention to the awareness of national actors
and  the  functioning  of  macro-economic  policy  co-ordination.  It  ends  with  conclusions  with
regard  to  the  procedures  of  European  economic-policy  making  as  well  as  the  role  of  the
European  Parliament  (chapter  III).  They  concern  both  the  European  level  as  well  as  the
national  level  of  decision-making,  and  are  the  basis  for  some  of  the  recommendations  to  the
European Parliament which follow this executive summary.

In the second part of the study, the implementation of the Broad Economic Policy Guidelines
(BEPGs)  as  well  as  the  stability  and  convergence  programmes  of  the  Member  States  is
analysed.  The  BEPGs  and  the  stability  and  convergence  programmes  have  been  analysed
together, as the stability and convergence programmes and the opinions of the Ecofin Council
on  these  programmes  feed  into  the  BEPGs  that  are  adopted  a  few  months  later1.  Given  the
interest  shown  by  the  Members  of  the  European  Parliament  when  the  interim  report  was
presented to the Committee on Economic and Monetary Affairs on the 3 December 2001, the
current economic situation and the outlook for the year 2002 especially after 11 September is
examined  more  explicitly.  The  cross-national  assessment  in  chapter  IV  refers  to  the  general
recommendations of the BEPGs, while chapter V takes up the country-specific findings. The
cross-sectoral  analysis  of  the  country-specific  recommendations  has  been  limited  to  the
presentation of key developments in the Member States, covering the four policy areas of the
BEPGs 2001: budgetary policy, the labour market, the product market and knowledge-based
economy, and capital markets. The reports on the Member States do not address every single
country-specific  recommendation,  instead,  a  summary  of  the  implementation  of  the  country-
specific recommendations is presented in chapter VI. A number of general recommendations
to  the  European  Parliament  have  been  drawn  up  on  the  basis  of  the  policy  implementation
study presented in part II.

The third and final part of the study returns to the global economic context and examines the
prospects  for  economic  recovery  in  the  EU  (chapter  VII).  Furthermore,  it  analyses,  on  the
basis  of  the  criteria  laid  down  in  art.  121  TEC,  the  development  of  economic  and  economic
policy convergence up to the year 2003 on the basis of recent forecasts (chapter VIII).

1. 

NEW  MODES  OF  GOVERNANCE  IN  EUROPEAN  ECONOMIC  POLICY-MAKING
AND THE ROLE OF THE EUROPEAN PARLIAMENT

Governments have created a complex set of rules that allow national and European actors both
to participate in the EU policy cycle and to employ instruments that have an increasing impact
on the domestic arena. However, new modes of EU governance in economic policy, such as
the open method of coordination, offer little access and influence to the European Parliament
in comparison with the conventional Community methods.

In  the  "soft"  procedures  for  the  coordination  of  economic  policy,  EU  institutions  other  than
the European Commission are involved only to a very limited extent. The European Parliament

1 This is a deviation from the draft structure of the study presented in the initial tender, but was considered to

be more effective and avoids too many repetitions.

                                               
ECONOMIC OUTLOOK 2002

is granted only  ex ante consultation and  ex post  information rights. Also in the wider context
of macro-economic policy-making, the involvement of the European Parliament is distinctively
different  from  other  policy  areas.  The  macro-economic  dialogue  explicitly  excludes  the
participation of the EP, while the open method of coordination entails little or no role for the
European  Parliament  as  it  is  largely  focussed  on  the  Member  States,  with  the  European
Commission assigned certain tasks. Nor do the procedures for preparing the new annual spring
European Council meeting involve the European Parliament.

The  role  of  the  EP  is  thus  reduced  to  observing  and  commenting  on  the  process.  As  a
consequence  of  the  essentially  intergovernmental  procedures  to  make  the  multilateral
surveillance  process  work,  a  broad  European  debate  on  the  economic  options  as  part  of  a
deliberative  democracy  has  been  inhibited.  A  democratic  opening-up  of  the  policy-making
procedures  established  to  co-ordinate  the  macro-economic  policies  of  the  Member  States
needs to be envisaged.

The  BEPGs  do  not  constitute  a  legal  obligation  on  the  Member  States  to  implement  the
recommendations.  If  they  are  to  be  an  effective  element  of  macroeconomic  policy
coordination,  the  BEPGs  must  command  the  attention  of  national  actors.  The  timing  of  and
procedures for decision-making at the national level of this multi-level economic governance
are  of  critical  importance  in  this  regard.  The  evidence  suggests  a  growing  awareness  of  the
BEPGs amongst national actors in recent years. Such awareness has developed hand in glove
with  a  growing  appreciation  of  the  interrelation  between  the  various  components  of  (euro-
zone)  macro-economic  policy  and  with  the  more  vigorous  approach  taken  by  the  European
Union since medium-terms economic goals were set at the Lisbon European Council in 2000.

Even  though  the  awareness  and  public  acknowledgement  of  the  BEPGs  by  governmental
policy-makers  is  rising  and  even  while  some  Member  States  have  begun  to  adapt  domestic
processes in macro-economic policy making, the attention paid by national parliaments to the
BEPGs  as  well  as  to  parliamentary  procedures  to  deal  with  the  BEPGs  and/or  their
implementation at the national level is uneven. In several Member States, the BEPGs do not
play any significant role in parliamentary debates. Only in a few cases have the BEPGs been
subject  to  party  political  debate,  either  on  specific  recommendations  or  on  the  coordination
procedure  as  a  whole.  For  the  latter,  the  Irish  debate  on  the  Council  recommendation  is  the
best  example.  Public  awareness  and  public  discourse  on  this  new  form  of  European
governance  seems  to  be  much  less  developed.  Political  debate  and  public  discourse  remain
distant from the real content of the BEPG, while press coverage is, with the exception of the
Irish case, almost non-existent. In this respect, the attention given to the BEPGs by the media
is strikingly different from the attention given to the Stability and Growth Pact.

With regard to the awareness of national actors of the position of the European Parliament on
the  BEPGs  in  its  resolutions,  the  evidence  is  not  encouraging.  In  most  Member  States  the
resolutions play little or no significant role.

The  general  orientation  of  Member  States'  economic  policy  and  the  approach  taken  in  the
BEPGs  are  largely  consistent.  In  some  respects,  the  general  recommendations  "state  the
obvious"  and  are  thus  an  example  of  "form  follows  function"  dynamics.  They  contain  topics
"that are on the agenda anyhow". The BEPGs are recognised as containing an assessment of
performance  as  well  as  offering  new  perspectives  on  policy  direction.  They  thus  inform  the
policy debate and certainly add value. Moreover, the BEPGs are conducive to improvements
in economic policy in other EU Member States, thus generating a positive spill-over to all EU
members at large, but without imposing a single "model" of policy-making.

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ECONOMIC OUTLOOK 2002

Nonetheless,  this  does  not  rule  out  cases  in  which  Member  States  do  not  strictly  follow
recommendations  included  in  the  BEPGs,  be  they  general  or  country-specific.  In  cases  of
potential  misalignment  between  the  recommendations  and  Member  States'  policies,  the
recommendations  are  a  matter  for  political  debate  or  are  simply  ignored.  Most  notably  in
budgetary  policy,  but  also  in  the  other  policy  fields,  national  political  choices  can  lead  to  a
different  prioritisation  of  various  objectives,  as  the  BEPGs  are  considered  precisely  as
guidelines and recommendations and hence not as binding in character. A distinct divergence
between  the  medium  and  long-term  targets  agreed  upon  at  the  European  level  and  current
Member  States'  policies  is  not  evident,  however.  A  case  which  is  less  an  issue  of  non-
compliance than one of philosophical opposition, is the medium term plan for fiscal policy in
the United Kingdom.

2. 

THE  IMPLEMENTATION  OF  THE  BROAD  ECONOMIC  POLICY  GUIDELINES
AND  OF  THE  STABILITY  AND  CONVERGENCE  PROGRAMMES  BY  MEMBER
STATES

2.1.  Macro-economic policies

The EU economy manifestly slowed in the second half of 2001 and even though it is expected
to avoid recession in 2002, growth is projected to be below trend. Current projections suggest
that  there  will  be  slower  growth  in  2002  in  all  the  developed  economies.  For  the  EU,  the
revised forecast for growth in 2002 is 1.4% (euro zone 1.3), with an estimate for growth in
2001 of 1.7 (euro zone 1.6). Headline inflation in the euro area is expected to have fallen by
December to 2.0%, although "core" inflation is not. However, by historical standards inflation
rates  in  most  countries  are  very  low  at  present.  The  consensus  amongst  forecasters  is  that
inflation will continue to fall during early 2002, a trend that will be compounded not least if oil
prices remain close to their present level.

The silver lining in the recent economic downturn is that pressures on wage inflation have, on
the whole, diminished as the ability of wage negotiators to secure pay increases well above the
rate  of  inflation  will  be  curtailed.  This  will  allow  those  Member  States  with  relatively  tight
labour markets to contain inflation more easily. Not withstanding the consequences that might
arise from changes to labour market regulation, unemployment is likely to rise by 0.3% both in
the euro zone and in the EU in 2002.

Comparatively  decisive  action  by  monetary  authorities  on  both  sides  of  the  Atlantic,  and
reasonably  sound  economic  "fundamentals"  have  made  it  more  likely  that  the  slowdown  will
be short-lived. Despite the remaining uncertainties about the prospects for, and timing of, an
economic recovery in the EU, there can be little doubt that the fortunes of the US economy
will have an influence. The general consensus amongst forecasters is for the US slowdown to
"bottom out" early in 2002 at a growth rate ranging from 0.5% to 0.7%. The recovery will be
a  marked  one,  with  growth  returning  towards  2000  rates  by  2003.  The  EU  is  expected  to
follow a similar course, with economic growth recovering towards rates of between 2.6% and
2.9%  in  2003.  From  a  macroeconomic  forecasting  perspective,  the  assessment  of  11
September is that while geo-political turbulence may have prolonged the economic slowdown
in the short-term by adding to an already uncertain economic environment, such turbulence is
unlikely to harm the medium-term growth potential of the advanced industrial economies.

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2.2.  BEPGs' recommendations on budgetary policy

The  BEPGs'  recommendations  on  budgetary  policy  have  to  be  reviewed  in  the  light  of  the
stronger than expected economic downturn in the year 2001, especially since September. For
those  countries  which  remain  some  way  off  a  budgetary  position  of  "close  to  balance  or  in
surplus", the consolidation of public finances has become one of the main political priorities.

The economic performance of several Member States in 2001 has been below the expectations
set  out  in  the  2001  BEPGs.  While  the  events  of  11  September  have  clearly  accentuated  the
global economic deterioration, it is important to stress that they cannot adequately account for
either the downturn in the EU economy since the spring of last year, nor its marked impact on
a  number  of  Member  States.  Structural  reform  has  not  gone  far  enough  to  enhance  in  a
sufficient way the euro area economy's resilience to exogenous shocks.

Due  to  the  recent  developments,  many  countries  have  missed  the  government  fiscal  balance
targets as set out in the stability and convergence programmes and reiterated in the BEPGs.
The  average  general  government  balance  in  the  EU,  net  of  UMTS-proceeds,  is  projected  to
have  been  -0.5%  of  GDP  in  2001,  but  this  reflects  a  somewhat  better  figure  for  the  three
"outs" than the twelve "ins". For the euro area, an overall deficit of -1.1% of GDP in 2001 is
predicted so that the overall public finances worsened for the first time since 1993. The targets
of the Member States as documented in the 2nd  stability  or  convergence  programme  updates
will  therefore  be  missed  by  0.5%  of  GDP  for  the  euro  zone  and  by  0.3%  for  the  EU  as  a
whole. Given the slowdown and the operation of automatic stabilisers, these cannot really be
seen as unduly worrying figures, although they do break the trend toward fiscal consolidation
that has characterised the period since 1993.

It is apparent that a number of those Member States singled out in the BEPGs for criticism of
the targets set for the year have seen the greatest deterioration in their public finances. Other
countries,  however,  are  expected  to  outperform  the  general  government  balance  target,
although  in  some  cases  they  may  have  been  helped  by  the  cautious  assumptions  upon  which
the programme updates were based. Other countries are also likely to diverge from the target
of  a  budgetary  position  close  to  balance  or  in  surplus.  Had  the  automatic  stabilisers  not
functioned as they did, the scale of the downturn could well have been greater. Furthermore,
some  Member  States  have  reacted  within  the  year  by  exercising  budget  revisions,  mainly  to
prevent  expenditure  overshoots,  and  thus  prevented  a  further  deterioration  of  government
balances. As the target is one to be achieved over the economic cycle, rather than year by year,
modest deficits need not be seen as alarming.

In  the  preparation  of  budgets  for  2002,  those  countries  having  already  achieved  positions  of
close  to  balance  or  in  surplus  have  by  and  large  followed  the  recommendation  to  preserve
these budgetary positions. In Ireland and Finland especially, but also in Greece, the surpluses
projected  in  the  2000  update  have  been  reduced  significantly  with  less  pronounced
adjustments  made  in  other  countries.  None  of  these  changes  can  be  regarded  as  particularly
worrying from the point of view of macroeconomic balance, to the extent that they reflect the
operation  of  automatic  stabilisers.  However,  they  will  mean  that  progress  towards  lower
public debt will be postponed.

Among  the  four  countries  within  the  euro  area  which  have  sizeable  deficits,  the  situation  is
most worrying in the case of Germany which projects a general government deficit of between
2  and  2.5%.  For  France,  the  updated  stability  programme  foresees  a  broadly  neutral  fiscal
stance  over  2001-2002  (1.4%  deficit),  Portugal's  deficit  is  forecast  to  decrease,  but  will  still
remain  above  1.6%  (1.8  in  the  programme  update).  As  for  Italy,  while  the  Commission

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projects a deficit of 1.2% in 2001 and in 2002, the government aims at a reduction to 0.5% in
2002.  It  should  be  emphasised  that  all  these  projections  will  be  sensitive  to  the  overall
performance of the EU economy as well as to policy changes. If recovery manifests itself as
quickly as, and on the scale that, the forecasters anticipate, the fiscal positions of all countries
should  be  comfortable,  but  if  the  slowdown  is  prolonged,  the  risks  will  be  greater.  In  the
aftermath  of  the  slowdown,  countries  with  existing  budgetary  imbalances  will  have  to  take
action  if  they  are  to  uphold  their  commitment  to  achieve  a  balanced  budget  or  achieve  a
surplus by the end of the current stability programme period, i.e. by 2004.

Recommendations  to  make  tax  and  benefit  systems  more  employment  friendly,  taking  into
account  the  need  for  fiscal  consolidation,  and  to  promote  the  quality  of  public  expenditure
have  been  addressed  to  a  certain  extent  by  individual  Member  States,  but  the  real  challenge
lies in securing the political will to push through these structural policies. Thus, only modest
progress can be noted for several members, with the focus on reforms of tax systems, leading
in most cases to a reduction of the tax burden, and on reforms of the social security sector, in
particular, pensions systems.

In  Sweden,  the  main  concern  with  regard  to  the  Convergence  Programme  is  linked  to  the
weak  external  value  of  the  Swedish  krona.  It  is  undervalued  according  to  the  Swedish
government and does not reflect the underlying economic fundamentals of strong growth and
low inflation, although this should not be taken to mean that Sweden can be expected to join
the ERM2. With regard to the United Kingdom, the possibility of conflict between the "golden
rule"  under  the  UK's  Code  for  Fiscal  Stability  and  the  SGP  medium-term  budgetary
requirement persists.

2.3.  BEPGs' recommendations on labour markets

Employment growth decelerated substantially during the year 2001 and is projected to reach
just 1.1% in the EU. The deceleration will continue in 2002 down to a projected rate of 0.2%
before – under the current economic forecasts – picking up again to a rate of 1.0% in 2003.
The employment rate is expected to remain more or less unchanged in 2002 at 62.1% in the
euro area. Thus in 2002 and for the first time since the beginning of the Luxembourg process,
job creation will virtually grind to a halt. Consequently, while the harmonised unemployment
rate has declined further in the year 2001 (7.8% in November 2001 in the European Union),
unemployment is likely to rise in the year 2002 by 0.3 percentage points to 8.6% in the euro
zone  and  8.0%  in  the  EU.  The  growth  in  unemployment  will,  however,  be  mitigated  by  a
slower increase in the labour force.

The  BEPGs  recommendations  on  labour  markets  address  a  variety  of  aspects,  reflecting  the
still diverse labour market situation in the Member States. Overall, and given the medium-term
nature of the recommendations, Member States have in many cases implemented or are in the
process  of  implementing  measures  and  thus  can  be  said  to  have  responded  to  the
recommendations.  It  is,  however,  too  early  to  conduct  a  thorough  assessment  of  the  many
measures  taken.  Still,  in  most  countries  an  intensified  and  more  keenly  targeted  effort  is
required.  Important  structural  weaknesses  remain,  especially  with  respect  to  the  still  high
unemployment levels, in particular amongst young people. Significant gender gaps also remain
and the low employment rate of older workers continues to persist in several countries.

Labour  market  policies  in  some  countries  have  also  been  targeted  towards  the  fields  of
childcare and other dependent care, for example by increasing child benefit rates or childcare
places, or by focusing on the integration of workers with disabilities, while other countries still
have  to  considerably  improve  their  efforts.  Not  all  of  these  actions,  especially  on  improving

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female  employability,  are  sufficient  if  employment  is  to  be  increased  to  the  agreed  levels.
Although  the  rise  in  women's  participation  has  been  rather  high  in  the  last  few  years,  it  has
relied mainly on part-time jobs. Comprehensive approaches on gender mainstreaming seem to
be  lacking  in  many  Member  States.  In  those  countries,  where  the  employment  rate  of  older
people is a particular problem, curbs on early retirement schemes have been introduced, which
should  keep  senior  citizens  in  the  work  force.  However,  a  comprehensive  approach  in  the
direction  of  an  active  ageing  policy  is  still  missing  in  most  Member  States,  while  measures
taken so far remain highly fragmented and incoherent. Some labour market reforms to increase
labour market flexibility seem to have had less impact than expected and are in need of further
improvement.

An  important  contribution  to  employment  growth  is  the  reduction  of  labour  charges,  either
generally  or  specifically  targeted  at  labour  force  segments,  that  is  for  example  at  low-paid
workers. The tax burden on labour has decreased in several Member States, although wage or
non-wage  labour  costs  still  remain  high  in  some  countries.  A  special  focus  in  a  number  of
countries  has  been  low  income  levels.  By  reducing  marginal  tax  rates  or  by  supplementary
public  funding,  also  with  regard  to  part-time  contracts,  employment  creation  should  be
facilitated.  Efforts  to  reduce  corporate  tax  rates  have  progressed  in  many  countries  and  will
provide  further  incentives  for  job-creation.  All  in  all,  tax  reductions  seems  to  have  been
modest, with the exception of those pertaining to low wage jobs.

With  regard  to  labour  mobility  within  and  between  Member  States,  not  much  has  changed;
there is little sign of any increase in the cross-national mobility of the unemployed to seek jobs.

Measures  for  the  certification  of  skills  and  capabilities  as  well  as  training  schemes  should,
according  to  the  Guidelines,  be  linked  to  a  coherent  life-long  learning  strategy,  but  is  not  in
place  in  all  countries.  Several  Member  States  have  to  continue  their  efforts  to  provide
encouragement to alternative means of training and access to employment, especially in terms
of improving the quality of continuing learning efforts by implementing workable strategies.

Not all of the recommendations on labour markets, however, are in line with domestic policy
preferences. Recommendations to reduce taxes are controversial in some countries and subject
to more fundamental debates, even if these recommendations are issued within the context of
guidance on labour market reform.

2.4.  BEPGs'  recommendations  on  product  markets,  entrepreneurship  and  the

knowledge-based economy

The  BEPGs  recommendations  on  product  markets  and  the  knowledge-based  economy
promote the full implementation of the Internal Market and the reinforcement of competition
and  efforts  to  encourage  entrepreneurship,  as  well  as  more  investments  in  R&D,  innovation
and ICT, and in educational and training systems.

With regard to the transposition of internal market legislation, progress has been made in all
but  two  countries  in  the  last  six  months.  At  present,  five  Member  States  fulfil  the  1.5%
transposition deficit target in advance of the 2002 Spring European Council in Barcelona, one
is  close  to  this  target  and  several  others  have  made  substantial  progress.  On  average,  the
current transposition deficit record stood at 2.0% in November 2001. Only 90% of directives
have been transposed in all Member States, and in some areas, such as transport or consumer
policy, the transposition record is still at or well below 75%.

Developments  with  regard  to  the  further  opening  of  the  public  procurement  market  are
underway in several Member States. The implementation of the public procurement directives

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in national law has been finalized in some Member States. The further development of on-line
availability has progressed in several Member States. The value of public procurement which is
openly advertised compared to the total value of public procurement has increased from 11%
in  1997–1999  to  15%  in  2000.  Disparities  between  the  Member  States  persist,  however,
ranging from 6% to levels above 20%. A number of countries have continued reforms in the
administrative  execution  of  public  procurement,  for  example  by  centralising  public
procurement in one agency.

With  regard  to  reinforced  competition  in  network  industries,  the  speed  of  the  proposed
liberalisation  has  proved  to  be  rather  slow  in  some  cases.  Some  Member  States  have  re-
modelled  their  regulatory  authorities  to  promote  effective  competition  in  the  gas  and
electricity  markets.  On  the  other  hand,  concentration  has  increased  in  some  sectors  in
anticipation  of  the  emergence  of  a  pan-European  market,  the  consequence  being  that  they
achieve an increasingly dominant domestic position. It should be the aim of the institutions to
achieve  the  full  opening  of  the  gas  and  electricity  market  by  the  year  2005  in  the  European
Union.

With regard to both the reduction of the overall level of State aid in relation to GDP as well as
with  regard  to  the  increase  in  transparency  of  State  aid  policies,  Member  States  have  made
progress  in  recent  years.  Between  1997  and  1999,  overall  state  aid  (in  relation  to  GDP)  has
been reduced by over 30% in the EU. In 1999 the EU average was about 1% of GPD, ranging
from approx. 0.5% to more than 1.5%. Most Member States have gradually redirected aid to
horizontal objectives that are not targeted towards specific companies, sectors or regions. In
addition,  ad-hoc  aid  has  been  cut  substantially  in  recent  years.  With  the  establishment  of  the
Commission's state aid scoreboard, peer pressure should increase on those members states that
do  not  live  up  to  the  targets  set  and  should  prevent  Member  States  from  back-tracking  on
recent positive trends in these economically more difficult times.

With  regard  to  recommendations  on  encouraging  entrepreneurship  and  the  creation  of  a
business-friendly  environment,  evidence  on  the  regulatory  and  administrative  environments
provides  grounds  for  guarded  optimism.  Still,  the  regulatory  and  administrative  environment
differs significantly across the Member States. At the same time, Member States continue to
introduce regulations at too quick a pace. The main priority areas identified for simplification
of  the  regulatory  environment  are  employment  and  working  conditions,  VAT  payments  and
refunds, product conformity and certification for approval.

All  Member  States  are  engaged  in  efforts  to  promote  entrepreneurship,  both  within  the
education system and among potential entrepreneurs. All Member States saw an improvement
in  their  scientific  and  innovation  performance.  While  some  countries  are  clearly  catching  up,
those  who  had  already  been  leading  continue  to  register  further  improvements  in  innovation
performance. In other Member States, research and technological development and innovation
are  clearly  losing  momentum.  Although  the  situation  in  the  four  largest  EU  economies  is
improving, it is doing so at rates that are below the EU average.

Differences  among  Member  States  also  persist  in  the  effective  rates  of  company  taxation.  In
the field of VAT harmonisation, progress has been rather slow, with little success from efforts
to simplify the obligations of operators regarding VAT, since no agreement has been reached
at Council level.

The  sectors  with  the  strongest  medium-term  employment  growth  at  EU  level  have  been  and
continue  to  be  those  characterised  by  either  high  technology  or  ICT-related  jobs  and/or  by
high  knowledge  intensity  as  reflected  in  the  high  educational  levels  of  the  workforce.

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Differences  in  productivity  growth  between  EU  Member  States  are  a  result  not  only  of
differences in the use of ICT, but also in some cases a result of the catch-up process. Despite
the  recent  downturn  of  the  economy,  Europe's  long-term  demand  for  skilled  ICT  people
remains strong. Estimates indicate that the ICT skills gap will reach the amount of 1.5 million
workers by 2003.

Recent figures underline the fact that although R&D investment plays an important part in the
transition  to  a  knowledge-based  economy,  overall  spending  on  R&D  measures  in  the
European  Union  has  not  substantially  improved  in  recent  years.  The  disparity  which  exists
between  the  different  EU  Member  States  has  even  increased,  showing  a  considerable  north-
south "cleavage". In some EU Member States, targets have been set in order to increase the
R&D  quota,  complemented  by  additional  funds  and  tax  incentives  for  businesses.  For
European  competitiveness  to  be  strengthened,  it  is  necessary  to  raise  private  sector
involvement  contributing  to  a  better  commercialisation  of  R&D  results  and  to  the
establishment of a European Research Area.

With regard to access and use of ICT technologies, statistics show an upward trend. There are
steadily more households gaining access to the Internet, with the percentage rising from 28%
in  2000  to  38%  in  2001.  In  addition,  some  Member  States  focus  on  the  development  of  a
regulatory framework for the ICT sectors as well as on the development of e-Administration
and further taxation incentives to foster investment.

A special focus in 2001 has been set on e-Learning measures. Industry, but also governments
and  administrations,  are  moving  into  this  area.  Efforts  have  been  taken  by  some  Member
States  to  reinforce  the  advanced  training  of  human  resources  in  Science  and  Technology
alongside  initiatives  to  encourage  co-operation  between  entrepreneurs  and  R&D  systems.  In
this  context,  detailed  analysis  of  life-long  learning  requirements  in  the  knowledge-based
society  will  entail  redefining  basic  skills,  to  include,  for  instance,  new  information  and
communication technology.

2.5.  BEPGs'  recommendations  on  the  efficiency  and  integration  of  the  EU  financial

services market

The  BEPGs'  recommendations  on  capital  markets  refer  in  particular  to  securities  markets
legislation  and  the  Financial  Service  Action  Plan,  risk  capital  markets,  and  to  the  prudential
supervision  of  financial  markets.  Since  the  adoption  of  the  BEPGs  2001,  progress  has  been
made at EU level on the Financial Service Action Plan. By mid-December 2001, twenty-five of
the  forty-two  measures  in  the  Action  Plan  had  been  completed,  although  for  some  of  the
measures the institutions are behind the schedule set by the FSAP. Member States will have to
ensure that implementation of the measures at national level is carried out within the deadlines.

Significant  progress  has  also  been  made  in  implementing  the  Risk  Capital  Action  Plan,
although  the  integration  of  EU  financial  markets  is  still  far  from  complete.  Venture  capital
investment  in  Europe  has  tripled  between  1998  and  2000,  and  investment  in  early-stage
venture capital has increased fourfold. However, venture capital investment as a percentage of
GDP  in  the  Member  States  show  marked  differences.  Besides  improvements  at  the  supply
side, more steps have to be taken to increase the demand side, making it easier especially for
SMEs to create new businesses and take up new ideas. The global economic downturn as well
as  the  current  problems  in  the  stock  markets  will  however  affect  venture  capital  investment
and, thus, will require more efforts from the Member States to continue with their efforts to
reform business taxation. Progress can be noted for almost all Member States.

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Special emphasis was given to the easing of bankruptcy laws in the BEPGs. While virtually all
Member  States  acknowledged  the  importance  of  this  issue,  not  all  have  actually  started  or
completed legislative processes to implement this recommendation.

With  regard  to  prudential  supervision,  several  Member  States  have  made  progress  in
continuing either the implementation of recently adapted laws or the legislative process leading
to  the  establishment  of,  mostly,  integrated  supervisory  authorities  for  different  financial
services.  However, 
in  some  countries,  new  prudential  supervision  mechanisms  are
controversial.

2.6.  BEPGs' recommendations on environmental sustainability

The  BEPGs'  recommendations  on  environmental  sustainability  were  part  of  the  general
recommendations.  First  conclusions  are  difficult  to  draw  based  on  the  variety  of  measures
taken  and  fields  of  action  proposed.  Nevertheless,  a  modest  shift  towards  the  application  of
market-based instruments in pursuit of environmental objectives can be observed and support
for  technological  innovation  is  being  pursued  by  Member  States.  As  many  measures  are  still
fragmented, the development or implementation of a national sustainable development strategy
is still to be achieved by most Member States. "Mainstreaming" measures on the national level,
as on the European level, are very rare.

The  integration  of  sustainability  as  a  major  principle  of  economic  and  fiscal  policy  into
Member  States'  national  policies  will  be  the  key  challenge  for  Member  States  in  order  to
support  innovation  and  investment,  and  to  create  and  combine  environmental  as  well  as
economic and social benefits.

3. 

ECONOMIC AND ECONOMIC POLICY CONVERGENCE

The  objective  of  convergence  is  promoted  at  the  EU  level  by  the  closer  coordination  of
Member  States'  economic  policies  in  general,  and  in  particular  through  the  BEPGs  and  the
process  of  multi-lateral  surveillance.  Its  relevance  in  a  Union  of  ever-increasing  economic
interdependence is evident, not least for the sake of achieving of a high level of sustainable and
non-inflationary growth and for the smooth functioning of EMU.

Over the last decade there has been a marked convergence in consumer price inflation towards
price stability in the run-up to EMU. The average rate of inflation will remain at around 2%
over the forecast horizon, while the standard deviation around this mean is expected to fall to
around 0.4 percentage points. Over the longer term and even in recent memory, this reflects a
picture of price stability and a state of close convergence.

By  1999,  the  sustainability  of  the  government  financial  positions  had  converged  towards
generally more sound fiscal positions, with deficits averaging just 0.1% of GDP. The standard
deviation had fallen to 2.1 percentage points. Significant progress has been made with respect
to the Union's stock of public debt. The average ratio of debt to GDP stood in 1995 at 73% of
GDP; but a concentrated effort by Member States pushed this ratio down to 64.4% in 1999,
which  was  above  but  at  least  approaching  the  desired  ratio  of  60%.  The  standard  deviation
was still relatively high at 27.5 percentage points.

The  global  economic  slowdown  will  lead  to  a  deterioration  in  the  Union's  fiscal  position  as
automatic budgetary stabilisers begin to operate and discretionary fiscal policy is relaxed. As a
result,  the  average  public  deficit  looks  set  to  rise  over  the  Commission's  forecast  horizon  to
around  0.5%.  The  Commission's  view  is  largely  echoed  by  the  OECD's  forecasts,  both  of
which demonstrate convergence in that the standard deviation around the new average looks

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set to fall to around 1.3% in 2003. The average level of debt will fall in the opinion of both the
Commission  and  the  OECD  to  around  54%  in  2003,  thus  leaving  the  Union  well  within  the
Maastricht definition of fiscal sustainability.

As  regards  exchange  rate  stability,  Denmark  is  the  sole  member  of  the  exchange  rate
mechanism  of  the  European  Monetary  System.  This  accounts  for  the  greater  stability  of  the
Danish krone when compared with the Swedish krona and sterling over the forecast horizon.
The Danish krone looks set to remain at its ERM II reference rate of 7.46 krone to the euro
for  the  foreseeable  future.  The  Swedish  krona,  in  contrast,  is  expected  to  fall  from  a  rate  of
8.81 krona to the euro in 1999 to a rate of 9.64 by 2003. Sterling gained against the euro from
1999 to the present, with its rate rising from 66 pence to the euro in 1999 and reaching a peak
below 59 pence to the euro, but is expected to slip slightly from today's rate to 63 pence by
2003.  Even  in  the  light  of  these  forecasts,  however,  the  non-participating  Member  States  of
EMU enjoy a comparatively stable relationship with the euro as reflected by trends in the long-
term interest rate (regarded as a predictor of long-term inflation).

Euro  zone  long  term  interest  rates  have  not  surprisingly  converged  to  markedly  lower  rates
over the last decade as a result of the efforts made to curb inflation in phase 2 of EMU and
then monetary unification. The same is true of the non-participating Member States, however.
In the Maastricht Treaty's own terms, this is evidence of a durable convergence between the
non-participating Member States and the euro zone.

It was noted that "[national policy] convergence relates to performance and not necessarily the
policies implemented by the Member States". The evidence presented points towards a marked
and continued economic policy convergence in the EU and euro zone alike. In both the run-up
to monetary union and over the forecast horizon, the economic policies of the Member States
have conformed to the convergence criteria of price stability, fiscal sustainability and nominal
exchange  rate  stability.  Although  recent  economic  events  will  require  an  adjustment  in
macroeconomic  policies  it  is  unlikely  that  this  adjustment  will  jeopardize  the  objective  of
convergence in any real sense.

4. 

RECOMMENDATIONS TO THE EUROPEAN PARLIAMENT

4.1.  On the adjustment of procedures of the cycles monitoring macro-economic policies

i) 

An amendment to the policy-making procedures leading to inclusion of a revision clause
within the BEPGs should be foreseen, without, however, referring this task solely to the
Ecofin Council.

ii)  Member  States  should  be  encouraged  by  the  EP  to  step  up  efforts  to  adapt  national
policy-making, 
the  European
coordination  framework.  Despite  progress  in  this  respect  in  recent  years,  national
parliaments  in  particular  should  pay  greater  attention  to  the  BEPGs,  in  particular,  and
economic policy coordination generally.

implementation,  and  surveillance  procedures 

to 

iii)  There is a further need to consider closer cooperation in fiscal and monetary policies in

the euro zone.

4.2.  On the format of the BEPGs

iv)  The  BEPGs  2002  should  focus  on  a  clear  set  of  policy  recommendations,  because
otherwise there is a danger of overload. In addition, since policy-makers at the national
level  tend  to  consider  the  country-specific  recommendations  without  paying  much

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attention  to  the  introductory  chapter,  the  BEPGs  should  be  free  from  excessive
duplication and unnecessary repetition.

v)  One possible option could be a policy document formulating the broad and multi-annual
economic  policy  direction  of  the  European  Union  and  its  Member  States,  based  on  a
proposal  of  the  European  Commission,  with  full  participation  by  the  European
Parliament.  The  specific  policy  recommendations  for  each  member  state,  the  country-
specific  parts  of  the  BEPGs,  could  become  more  precise,  discussing  the  country's
specific needs and in the light of the policy instruments available.

vi)  With  regard  to  the  importance  given  to  the  consequences  of  the  ageing  population,
especially on the pension and social security systems, it might be worthwhile to separate
pensions from the chapter on Labour Markets. In addition, the theoretical and empirical
links between unemployment, the social security system and the pension system are not
as obvious as the current chapter implies.

vii)  The exchange rate is an important part of the policy mix for non-euro area countries but
it is not considered in the BEPGs. In consequence the guidelines have failed to address
the  contradiction  between  the  internal  and  external  balance  of  the  economy,  and  its
relationship to the value of the currencies outside the euro-area. This deficiency could be
remedied  by  extending  the  BEPGs  2002  to  include  a  discussion  of  exchange  rate
developments  for  the  non-participating  members  of  EMU,  taking  into  account  the
potential effects of other policy recommendations on the exchange rate. By implication
such an inclusion would increase the relevance of the BEPGs in the policy debates of the
non-euro-zone Member States.

viii)  Finally,  although  much  progress  has  been  made  in  countries  which  are  substantially
below the EU average with regard to economic development, the credibility of general
policy recommendations would greatly benefit from doses of modesty and realism. The
steady  re-iteration  of  recommendations  without  real  improvements  is  a  dangerous
political  game  both  for  the  system's  credibility  and  for  the  actors  involved.  The
recommendations need to be further oriented to the medium and long-term targets set by
the Lisbon European Council meeting.

4.3.  On policy proposals

ix)  Growth-  and  stability-oriented  macro-economic  policies 

in  conjunction  with
comprehensive structural reforms at the member state level as well as at the EU level are
crucial for a recovery of several Member States' economies. With uncertainty about the
pace  and  timing  of  recovery  from  the  current  slowdown,  Member  States  will  have  to
keep  a  close  watch  on  developments  and  be  prepared  to  take  fiscal  action  to
complement monetary policy if signs of a worsening slowdown appear. If the slowdown
proves, as is forecast, to be short-lived, the countries that have allowed their deficits to
rise, especially Germany, will have to accelerate fiscal consolidation.

x) 

Even  though  times  are  difficult,  necessary  structural  reforms  should  not  be  unduly
delayed. Pension reforms remain particularly necessary in several Member States.

xi)  Structural reforms in labour market policies are necessary in many Member States. They
should continue tax and benefit reforms so as to remove financial disincentives to take
up  work  and  prevent  early  retirement.  Generally,  the  member  countries  should  be
encouraged to intensify their efforts by developing preventive and employability-oriented
strategies,  especially  to  combat  youth  unemployment  and  long-term  unemployment.

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National  targets  for  female  participation  in  employment  –  as  agreed  in  Lisbon  –  and
gender mainstreaming strategies need to be established in all Member States.

xii) 

Implementing coherent life-long learning strategies should be a key task for the Member
States in order not only to improving the employability but also to lay the grounds for
employment growth and stronger entrepreneurship in the future. New technologies must
play a central role in these strategies.

xiii)  While  progress  has  been  made  by  reducing  bureaucracy  and  administrative  burdens,
these  efforts  have  to  be  continued  on  all  levels  to  encourage  further  entrepreneurship.
The  Commission  proposals  for  a  simplification  and  improvement  of  the  regulatory
environment  are  thus  to  be  welcomed  and  should  lead  to  a  coherent  forward-looking
approach of the European Union.

xiv)  Member  States  should  live  up  to  their  commitment  to  improve  the  efficiency  and
competitiveness of network industries providing services of general interest. It should be
the aim of the institutions to achieve the full opening of the gas and electricity market by
the  year  2005  in  the  European  Union,  and  to  increase  efforts  in  the  integration  of
telecommunications and transport services.

xv)  Efforts  have  to  be  intensified  in  the  area  of  Research  and  Technology,  both  on  the
European and the member state level. In this respect, tax incentives can be part of such a
strategy  to  increase  private  R&D  investment,  while  Member  States  should  set  national
targets for public R&D investment growth.

xvi)  The  European  institutions  as  well  as  the  Member  States  have  to  secure  a  timely
implementation  of  the  Financial  Service  Action  Plan  in  order  to  ensure  the  continued
stability  and  competitiveness  of  the  EU  financial  sector  and  to  promote  growth  and
employment.

xvii)  Member  States  should  intensify  efforts  to  set  up  and  implement  national  sustainable
development  strategies,  addressing  employment,  economic  reforms,  social  and
environmental policies in a mutually reinforcing way.

4.4.  On  the  future  role  of  the  European  Parliament  in  the  European  macro-economic

coordination process

xviii) What  is  needed  is  a  broad  public  debate  on  all  aspects  of  European  macro-economic
policy  making,  involving  all  European  and  national  actors,  to  establish  an  effective,
balanced and democratically accountable policy mix for the European Union.

xix)  In  order  to  improve  public  awareness  of  European  economic  policy  coordination,  the

involvement of the EP in this procedure should be strengthened.

xx) 

In order to have an impact on the economic policies of the Member States, the European
Parliament  should  focus  more  on  long-term  analysis  of  the  operation  of  the  processes,
rather than on issues of short-term economic management policy.

xxi)  An  annual  debate  bringing  together  representatives  of  the  European  Parliament  and
national parliaments of the member state on the implementation of the BEPG should be
encouraged, or joint committee meetings of economic and monetary affairs committees
of the European Parliament and the Member States. Such a debate should complement
enhanced  debates  within  national  parliaments  on  the  subject  of  the  stability  and
convergence programmes. Closer cooperation could be sought within the framework of
COSAC.

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xxii)  The  Convention  on  the  future  of  the  European  Union  might  deal  with  the  relationship
between the "classic Community method" and the "new open method of coordination".
In  this  regard,  the  EP's  delegation  to  the  Convention  should  underline  the  urgent  need
for  more  democratic  accountability  throughout  all  EU's  policy-making  methods.  Any
policy-making  method  involving  governments  needs  a  clear-cut  feedback  to  directly
elected  politicians;  the  Convention  should  be  seen  as  a  chance  to  establish  a
comprehensive  set  of  rules  to  organise  a  more  democratic  and  transparent  kind  of
economic governance.

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PART I – MACRO-ECONOMIC POLICY-MAKING IN THE EC

ECONOMIC OUTLOOK 2002

Chapter I –  THE NEW MODES OF GOVERNANCE IN ECONOMIC POLICY MAKING: A

MINOR ROLE FOR THE EUROPEAN PARLIAMENT?

During  the  last  fifty  years  of  European  co-operation  and  integration  Member  States'
governments as well as the EC/EU institutions have created, reformed and used a variety of
instruments  and  procedures  within  a  triangle  between  markets,  governments  and  non-
governmental  networks  as  an  arena  for  "the  mediation  of  the  interests  of  governments,
administrations,  supranational  institutions  and  interest  groups" 2.  New  and/or  revised  sets  of
provisions offer European and national actors additional incentives and opportunity structures
to solve their most serious socio-economic problems (see article 2 TEU, articles 2, 3, 4, 99,
125 TEC). Governments have created a complex set of rules that allow national and European
actors  both  to  participate  in  the  EU  policy  cycle  and  to  employ  instruments  that  have  an
increasing  impact  on  the  domestic  arena.  However,  in  comparison  with  the  conventional
Community  methods,  the  new  modes  of  EU  governance  in  economic  policies,  including  the
open method of coordination, offer little access and influence to the European Parliament.

EMU is not a single-rule exercise. It includes three sets of provisions resulting in three modes
of governance: a "supranational" policy-making in monetary matters (art. 105 TEC), a "hard"
coordination  in  fiscal  policy  (art.  104  TEC  and  the  Stability  and  Growth  Pact),  and  a  "soft"
coordination of employment policy (the Luxembourg process, art. 128 TEC) and of economic
policy  more  generally  (the  BEPGs,  art.99  TEC).  Each  of  these  provisions  and  their
"institutional  designs"3  allocate  different  instruments  to  the  EU  level  and  enable  access  and
participation  for  different  groups  of  governmental  as  well  as  non-governmental  domestic
actors. These rules have been further developed in recent years at meetings of the European
Council  from  Luxembourg  in  1997,  Lisbon  in  2000  to  Stockholm  in  Spring  2001.
Governments  have  formed  institutional  and  procedural  channels  for  running  their  "business"
more effectively.

In  monetary  policy,  treaty  provisions,  the  statutes  of  the  European  System  of  Central  Banks
(ESCB) and the ECB, as well as secondary legislation, including the rules of procedure of the
ECB bodies, have laid down rules for a distinct institutional setting and policy-cycle style as
patterns  of  behaviour  which  can  be  labelled  as  "supranational"  policy-making.  The  ECB  is
solely responsible for decision-making in monetary policy. In principle, the ECB is constrained
only by the treaty provision that its actions be pursued in order to maintain price stability (art.
105 TEC). In monetary policy, the ECB has the legal obligation to submit its annual report to
the  European  Parliament  (art.  113  (3)  TEC),  an  obligation  which  has  been  voluntarily
extended to quarterly reports. The annual report has to be presented by the President of the
ECB  with  the  EP  using  this  opportunity  to  hold  a  general  debate.  The  EP  can  also  request
hearings  with  members  of  the  Executive  Board  including  the  president.  It  has  become  a
practice  that  the  EP  Committee  on  Economic  and  Monetary  Affairs  conducts  quarterly
"monetary dialogues" with the ECB.

2 Peterson  J.,  "Decision-making  in  the  European  Union:  towards  a  framework  for  analysis",  Journal  of

European Public Policy, 2:1, 1995, p. 69-93.

3 Fligstein N. and McNichol J.A., "The institutional terrain of the European Union", Sandholtz W. and Stone
Sweet  A.  (eds.),  European  Integration  and  Supranational  Governance ,  Oxford  University  Press,  New
York, 1998, p. 59-91.

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In fiscal policy, Member States have established distinct rules for a "hard" coordination in the
procedures  laid  down  in  art.  104  TEC,  completed  by  the  fifth  protocol  to  the  Maastricht
Treaty and further elaborated by the provisions of the Stability and Growth Pact of June 1997,
to put into practice the excessive deficit procedure. These rules include supervisory roles on
national  budgets  for  the  European  Commission  and  the  Economic  and  Financial  Committee,
leading  to  Council  recommendations  against  a  "sinner"  state.  "Hard"  coordination  in  fiscal
policy refers to the procedure enabling the Council to decide, voting by qualified majority, on
considerable financial sanctions against a member state in case of a continuous breach of the
provisions  (art.  104  (11)  TEC).  The  procedures  assign  no  decisive  role  to  other  European
institutions. The European Parliament is informed only afterwards and Member States cannot
appeal to the European Court of Justice at a certain phase of the procedure. Nevertheless, the
EP has repeatedly commented on the annual assessment of the implementation of stability and
convergence  programmes,  which  are  submitted  by  the  Member  States  as  part  of  the
surveillance procedures and assessed by the Council.

Also in the area of economic policy, the EP has a weak role. "Soft" coordination procedures
have been introduced in art. 99 TEC with instruments such as monitoring policy processes and
outcomes,  providing  general  policy  orientations,  benchmarking,  and  the  publication  of  "best
practices". In contrast to the art. 128 TEC procedure on employment policy, art. 99 TEC on
the  BEPGs  foresees  a  recommendation  of  the  Council  to  a  member  state  deviating  from  the
principles laid down in the treaty. The Council can decide that these recommendations should
be publicised, thus exposing the member state concerned to public debate on this issue (cf. the
case  of  Ireland  in  February  2001).  In  addition  to  the  art.  99  procedure,  the  Member  States
agreed  in  1998  to  enhance  the  deliberation  and  interaction  process  on  economic  policy  by
establishing  the  so-called  "Cardiff  Process"  on  structural  reforms  in  the  Member  States.  To
complement  the  various  processes  on  employment  and  economic  policy  coordination,  they
established in 1999 the so-called "Cologne process", constituting a Macro-Economic Dialogue
at Community level between all relevant policy actors, including the social partners. Finally, a
"social summit", with the participation of the EU-Presidency, a "troika" of EU governments,
social partners and the European Commission, will now be held before each spring European
Council meeting to develop and improve coordination of tripartite consultation on the various
aspects of the Lisbon strategy. These coordination procedures can be labelled "soft" since the
instruments have no direct legal impact for the Member States and do not include any sanction
mechanisms as does the "hard" coordination of fiscal policy.

Member States have put the BEPGs (BEPG) at the centre of coordination. Thus the BEPGs
are  not  only  a  simple  monitoring  mechanism  for  Member  States'  policies  among  others,  but
indeed  the  central  policy  tool  for  economic  policy  coordination  encompassing  the  policy
coordination  mechanisms  for  fiscal,  economic  and  employment  policies.  As  the  Helsinki
European  Council  meeting  put  it,  "the  BEPGs  provide  the  framework  for  the  definition  of
overall  policy  objectives  and  orientations.  The  synergy  between  these  Guidelines,  the
Employment Guidelines and the monitoring of structural reform should be further developed
under the political guidance of the European Council" 4.

Against this background, the Member States have amended the procedures as laid down in the
treaty  provisions  by  reorganising  the  preparatory  work  prior  to  the  adoption  of  the  BEPGs
and  by  giving  certain  tasks  to  the  newly  established  annual  spring  meeting  of  the  European
Council.  Since  the  year  2000,  the  Ecofin  Council  forwards  the  BEPGs  to  other  relevant

4 Helsinki European Council, Presidency conclusions, Brussels, 10 and 11 December 1999, indent 32.

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Council formations to assume responsibility for implementation in their respective areas. These
Council  formations  should  also  submit  contributions  by  the  end  of  January  in  view  of  the
formulation  of  the  forthcoming  BEPGs.  Based  on  the  draft  of  the  European  Commission,
which  shall  be  explicitly  based  on  the  stability  and  convergence  programmes,  the  Joint
Employment Report and the Cardiff reports, as well as own assessments of the implementation
of the BEPGs, the Ecofin Council holds an orientation debate at its meeting which precedes
the annual spring meeting of the European Council, and drafts a key issues paper being then
reviewed  by  the  European  Council.  Afterwards,  the  Ecofin  Council  submits  on  a
recommendation  of  the  European  Commission  another  draft  to  the  June  meeting  of  the
European Council for discussion and endorsement. Only after this procedure will the Council
adopt the BEPGs as provided for in the Treaty.

Figure 1.1. The EU co-ordination of Economic policy (art. 99 TEC)

Stage Å
ECOFIN  may decide with QM on
recommendation of Commission
that ec onomic policy  of member
state is not in line with principles
laid down in  the Treaty and may
give recommendation s. ECOFIN
may decide with QM on
recommendation of Commission
that these recommendations are
publicised .
EP is informed by the
Commission and President of the
Council, who m ay  be asked to
speak at the EP-Committee on
Economic and Monetary Affairs

Stage Ä
Early next year Commission
publishes report on the
implementation of the BEPG.

Stage ¬
ECOFIN asks other Councils to analyse the
BEPG for elements which are subject to their
implementation, and to submit proposals for
the next BEPG until end of Jan uary.
Commission makes a recommendation.

 Governments, Administrations,
Parliaments and Political Parties,
Socio-Economic Intermediary
groups and networks

Stage  
ECOFIN  has a debate on the
orientations of the BEPG
(prepared by Commission)
before the Ext. European
Council in Spring.

European Council debates on
key questions (Key Issues
Paper) prepared by ECOFIN.
EFC is central in the
preparation of the BEPG.

Stage Ã
Adoption of BEPG by
ECOFIN with qualified
majority; information of
the EP

Stage ƒ
ECOFIN  makes draft on basis of
Commission recommendation, including
discussion results of European Council and
contributions of other Council formations.
Forwards this for discussion at the June
European Council

In the "soft" coordination procedures of the economic policy-cycles, EU institutions other than
the  European  Commission  are  involved  to  a  limited  extent.  The  European  Parliament  is
granted  "only"  ex  ante  consultation  and  ex  post  information  rights5.  So  far,  the  European
Parliament  has  exercised  these  powers  by  commenting  on  the  various  policy  documents
produced  within  the  policy-cycle,  i.e.  on  the  preparatory  report  to  the  Commission
recommendation (state of the European economy), on the Commission recommendation itself,
as  well  as  in  the  wider  context  of  macro-economic  policy  on  the  annual  assessments  of  the
stability  and  convergence  programmes  and,  for  example,  on  the  annual  spring  European
Councils.  Furthermore,  the  EP  Economic  and  Monetary  Affairs  Committee  holds  regular

5 Art.  128  TEC  on  employment  policy  coordination  foresees  the  ex  ante  consultation  of  the  Economic  and

Social Committee and of the Committee of the Regions.

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general meetings with the European Commission and the Council presidency during the year
on the development of the economy and the BEPGs.

Also  in  the  wider  context  of  economic  policy-making,  the  involvement  of  the  European
Parliament  is  distinctively  different  from  other  policy  areas.  The  macro-economic  dialogue
explicitly  excludes  the  participation  of  the  EP.  The  currently  promoted  open  method  of
coordination  does  not  foresee  a  role  for  the  European  Parliament  as  it  is  focussed  on  the
Member States with certain tasks allocated to the European Commission. Also the procedures
for  preparing  the  new  annual  spring  European  Council  meeting,  including  the  recently
established "Social Summit", do not involve the European Parliament.

The  role  of  the  EP  is  thus  reduced  to  observing  and  commenting  on  the  process.  As  a
consequence,  the  predominently  intergovernmental  procedures  to  make  the  multilateral
surveillance  process  work  have  until  now  prohibited  a  broad  European  debate  on  the
economic options as part of a deliberative democracy. A democratic opening-up of the policy-
making  procedures  established  to  co-ordinate  the  macro-economic  policies  of  the  Member
States should be envisaged.

Chapter  II  –  THE  IMPACT  OF  EUROPEAN  ECONOMIC  POLICY-MAKING  ON  THE

NATIONAL LEVEL

The  central  feature  of  soft  policy-coordination  is  the  non-binding  character  of  the
recommendations  contained  in  the  BEPGs.  The  BEPGs  thus  do  not  constitute  a  legal
obligation  on  the  Member  States  to  implement  the  recommendations6.  In  order  to  be  an
effective  element  of  (euro-zone)  macro-economic  policy  coordination  two  features  are  of
critical importance for the national level of this multi-level economic governance. The first and
more  general  question  refers  to  the  attention  paid  to  the  BEPGs  by  national  actors  and  the
awareness of the policy recommendations. Second, with regard to budgetary policy, the timing
and the procedures of decision-making on national level give some indication on how policy
recommendations  of  the  BEPGs  have  the  chance  to  be  incorporated  in  the  governmental
programme and budget for the succeeding budgetary year.

2.1. Awareness of national policy actors

2.1.1. The Broad Economic Policy Guidelines

The evidence suggests a growing awareness of the BEPGs amongst national actors in recent
years.  Such  awareness  has  developed  hand  in  glove  with  a  growing  appreciation  of  the
interrelation  between  the  various  components  of  (euro-zone)  economic  policy  and  with  the
more  vigorous  approach  taken  by  the  European  Union  since  medium-term  economic  goals
were  set  at  the  Lisbon  European  Council.  Several  features  of  this  awareness  can  be
distinguished.

First  and  foremost,  the  awareness  and  the  public  acknowledgement  of  the  BEPGs  by
governmental policy-makers  is  by  far  the  most  developed.  Governments,  and  in  particular,
the  relevant  ministries  for  Finance  and  Economics  are  increasingly  aware  of  the  BEPGs  and
they  now  form  a  significant  part  of  the  context  within  which  policy  is  developed.  Some

6

It  has  been  noted,  however,  that  art.  202  TEC  stipulates  a  legal  obligation  of  the  Council  to  "ensure
coordination of the general economic policies of the Member States". Cf. European Parliament Committee
on  Economic  and  Monetary  Affairs,  Report  on  the  Commission's  communication  on  strengthening
economic policy coordination within the euro area, A5-0307/2001, Brussels, 14 September 2001, p. 13.

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Member  States  have  been  more  willing  than  others  to  adapt  national  policy-making,
implementation,  and  surveillance  procedures  to  the  timing  set  by  the  European  coordination
procedure. This seems to go hand in hand with the attention paid by national policy-makers to
the BEPGs. Two examples can be given.

a) 

b) 

In  Germany,  the  BEPGs  have  been  incorporated  in  the  country's  economic  policy-
making process. The Finance Ministry, which is the key-player in the implementation
process  of  the  BEPGs,  relates  all  its  policy-formulations  (Annual  Report,  Monthly
Report) explicitly to the BEPGs , even going so far as to adopt a similar structure7.
The Ministry of Finance has set up an inter-ministerial committee that discusses and
supervises the implementation of the BEPGs (the ministries involved are: Ministry of
Finance,  Ministry  of  Labour  and  Social  Affairs,  Ministry  of  Economics  and
Technology,  Foreign  Office,  Ministry  of  Education  and  Research,  and  the
Chancellery).

In  Greece,  official  government  positions,  such  as  those  contained  in  the  National
Economy and Finance Report on the 2002 Budget or those expressed by the Prime
Minister and Ministers in Parliament, refer explicitly to the BEPGs. The Minister of
Finance's General Report on the 2002 Budget –  submitted to Parliament on October
2001 dwells extensively on the constraints arising for economic policy-making out of
the BEPGs. The  BEPG 2000 goals, mainly the effort to obtain full employment, to
promote  the  information  society,  to  keep  social  cohesion  and  to  face  the  fiscal
implications  of  population  ageing  have  been  frequently  referred  to  in  economic
policy and general political statements.

There  is  also  a  growing  tendency  to  refer  explicitly  to  the  specific  policy  recommendations
included  in  the  BEPGs  both  in  the  updated  programmes  of  the  Stability  and  Convergence
Programmes and in the reports on economic reforms, i.e. the Cardiff reports.

Looking  at  the  attention  paid  by  national  parliaments  to  the  BEPGs  as  well  as  to
parliamentary procedures  to  deal  with  the  BEPGs  and/or  their  implementation  on  national
level,  the  picture  indicates  a  much  lower  degree  of  convergence.  Some  national  parliaments
have  more  highly  developed  procedures  than  others,  but  a  clear  distinction  has  to  be  made
with regard to the application of formal procedures and the effective use of these procedures.
Furthermore, in most parliaments, the BEPGs are considered by specialised committees, either
special  European  Committees,  or  by  the  relevant  sector-specific  committees.  Again,  some
examples can be given.

In  Germany,  the  implementation  process  is  supervised  by  several  parliamentary  committees,
i.e. the Finance-Committee, the EU-Committee and the Budget-Committee. Members of these
committees  however  admit,  that  the  BEPGs  do  not  play  a  major  role  in  the  debates.  There
have  been  no  detailed  discussions  in  the  parliamentary  committees  simply  because  the
Committees did not ask for them. With respect to the plenary sessions of the Bundestag, there
is  no  formal  information  procedure  related  to  the  BEPGs.  Yet,  there  is  a  formal  ex  ante
information procedure concerning the BEPGs prior to each Ecofin Council meeting at which
the  guidelines  are  scheduled  for  discussion.  There  has  not  been  any  specific  debate  on  the
BEPGs, however.

7 See also the first issue of the recently created Monthly Report of the Ministry of Finance with an article on
the  BEPGs  and  their  impact  on  German  economic  policy  making. Cf.  Bundesministerium  der  Finanzen,
"Die Grundzüge der Wirtschaftspolitik als zentrales Instrument der wirtschaftlichen Koordinierung in der
EU", Monatsbericht des BMF no. 8, Berlin, 2001, p. 49-54.

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In  the  UK,  the  scrutiny  Committee  of  the  House  of  Commons  does  consider  the  BEPGs  in
some detail, but the resulting Parliamentary report is largely a summary of the BEPGs and the
UK Government's response to them8. Effective debate on the BEPGs in Parliament is limited
by the confrontational style of Commons politics, Euroscepticism and the complex nature of
the issues. The confrontational style of the Commons means that even Committee debates are
used  as  an  opportunity  for  the  opposition  to  criticise  government  economic  policy  and  for
government MPs and the minister to argue its virtues. Euroscepticism is evident in the way the
debates focus on the process rather than the guidelines. All these problems are manifest in the
2000 debate on the BEPGs9.

In  the  Netherlands,  the  BEPGs  are  regularly  forwarded  to  Parliament.  They  are  explicitly
referred to in parliamentary debates with the Minister of Finance prior to Ecofin meetings. It is
interesting  to  note  in  this  regard  that  such  debates  cover  both  policy  developments  in  the
Netherlands  and,  in  a  more  general  sense,  in  other  parts  of  the  EU.  After  initial  scepticism
about their importance, there is currently growing appreciation of the BEPGs, especially in the
Standing Parliamentary Commission on Finance. They are considered to be most effective with
respect  to  those  issues  which  fall  within  the  domain  of  Ecofin,  because  their  objectives  are
more readily quantifiable. In other fields, such as structural adjustment, the absence of a clear
yardstick makes assessment more difficult. One side-effect of the application of BEPGs is that
the role of Ecofin has become more prominent compared to other Councils in the social and
economic field. This is generally regarded as a positive development because of the fact that it
effectively secures the promotion of sound economic policies.

Other countries, however, show a rather different picture. For example, in Austria, the BEPGs
do  not  play  any  significant  role  in  discussions  in  the  Austrian  Parliament.  The  topic  was
apparently  on  the  agenda  in  the  current  legislative  period  only  once  when  on  the  21  March
2001 the grand committee of the National Council discussed preparations for the BEPGs 2001
within  the  context  of  a  more  general  discussion  about  the  European  Council  in  Stockholm
(22/23  March  2001).  In  the  discussion  itself,  the  BEPGs  or  closely  related  topics  were  not
mentioned10.

In  some  cases,  the  BEPGs  have  been  subject  to  party  political  debate,  either  on  specific
recommendations  or  on  the  coordination  procedure  on  the  whole.  For  the  latter,  the  Irish
debate on the Council recommendation is the best example and is dealt with more extensively
below. For party political debate in Sweden, opposition parties right of the centre, as well as
the employer organisations, have stressed to the government that the guidelines should not be
treated as an à la carte menu but rather implemented in full. The guideline on lowered level of
taxation is a particular bone of contention in this regard. In France, the contents and general
philosophy of the BEPG, especially with regard to macroeconomic and tax orientations, have
been a subject of debate in the Parliament, as some components of the government's left-wing
majorité plurielle consider their orientations too liberal.

In the UK, it is difficult to discern a debate specifically arising from the recommendations of
the BEPGs. This is partly due to a lack of specificity in the recommendations, e.g. "keep the
underlying position of government finances broadly unchanged", or because they accord with

8 House  of  Commons,  European  Scrutiny  Committee,  Broad  Economic  Policy  Guidelines,  Nineteenth

Report, London, 2000.

9 House of Commons, European Standing Committee B, Broad Economic Policy Guidelines, London, 2000.
10 Austrian  Parliament,  "Stenographische  Protokolle  des  Nationalrates",  no.  IV-9  of  annexes,  Vienna,  21

March 2001.

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widely  accepted  views  of  desirable  economic  policy  measures,  e.g.  "increasing  the  supply  of
skilled  ICT  personnel".  Where  the  content  of  the  BEPGs  has  entered  into  debate  is  as  an
assessment  of  government  economic  policy.  Thus  the  Government  uses  favourable  comment
as an endorsement, whereas the opposition uses unfavourable comments to criticise economic
policy.  In  this  way,  the  BEPGs  are  informing  the  political  debate  on  the  determination  of
national policy, although they are not seen as directly influencing that policy. For example, an
extensive  debate  on  the  "golden  rule"  in  Parliament  has  been  largely  carried  out  without
considering its possible incompatibility with obligations under the BEPGs and the SGP. Even
where  discussions  do  occur  in  relation  to  the  BEPGs11  the  impact  on  the  policy-making
process appears to be extremely limited. For example, in response to the Ecofin's opinion on
the  UK's  Convergence  Programme,  the  Economic  Secretary  to  the  Treasury  (a  junior
government minister) stressed to the Parliament's Treasury Select Committee that the opinion
was non-binding and that the government felt little obligation to respond to it 12.

At  the  same  time,  public  awareness  and  public  discourse  to  this  new  form  of  European
governance  seems  to  be  much  less  developed.  Political  debate  and  public  discourse  remain
remote from their real content, press coverage is almost non-existent – with the exception of
the  Irish  case.  In  this  respect,  the  attention  given  to  the  BEPGs  by  the  media  is  strikingly
different  from  the  attention  given  to  the  Stability  and  Growth  Pact.  This  divergence  is
obviously due to the legal obligations and the possibility of sanctions put down in article 104
TEC  and  compounded  by  Council  Regulation  no.  1467/97  and  raises  the  question  of  an
amendment of the provisions in art. 99 TEC. It furthermore seems to underline the European
Parliament's contention that public awareness of European economic policy coordination can
be substantially improved by strengthening the involvement of the EP in this procedure.

2.1.2. The position of the European Parliament on the BEPG

This  study  has  paid  particular  attention  to  the  awareness  of  national  actors  concerning  the
position of the European Parliament on the BEPGs in its resolutions. The available evidence is
not  encouraging13.  In  many  Member  States  the  resolutions  do  not  play  any  significant  role.
While  in  Germany,  the  positions  adopted  by  the  EP  are  "carefully  read"  in  the  Ministry  of
Finance,  systematically  included  in  the  briefing  for  the  Minister,  and,  as  such,  "taken  into
account", there has not been any impact as of yet. In Greece too, positions of the EP on the
BEPGs  and  -more  generally  speaking-  the  EP's  positions  overall  in  economic  policy  matters
have not successfully penetrated either the political system's awareness of public discourse as
carried out in the media (or, even, in academic discussion). The same can be said in the United
Kingdom  where  the  EP  resolutions  are  not  used  by  the  Government  to  inform  policy  in  this
area.  Some  parliaments  and  relevant  committees  receive  the  positions  adopted  by  the
European  Parliament,  but  evidence  shows  that  they  are  dealt  with  neither  in  parliamentary
debate nor even in committee structures.

11 House of Commons, Treasury Select Committee, Minutes of Evidence for Monday 2 May, The Council of

Finance Ministers, Session 2000-2001, HC 459-i Committee, London, 2001.

12 M. Johnson in: House of Commons, Treasury Select Committee, Minutes of Evidence for Monday 2 May,

The Council of Finance Ministers, Session 2000-2001, HC 459-i Committee, London, 2001, p. 21.

13 Cf. Wessels W., Maurer A. and Mittag J. (eds.), "Fifteen into One? The European Union and its Member
States", Manchester University Press, Manchester, 2002 (forthcoming). See also, on national parliaments,
Maurer A. and Wessels W. (eds.), "National Parliaments on their ways to Europe: Losers or Latecomers?",
Nomos Verlagsgesellschaft, Baden-Baden, 2001.

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This  situation  is  not  really  surprising  given  the  resolutions'  inevitably  rather  general  content
and  lack  of  country-specific  comment.  The  role  of  the  EP  is  seen  by  UK  senior  government
officials  as  being  most  useful  in  long-term  analysis  of  the  operation  of  the  processes,  rather
than  in  the  short-term  consideration  of  economic  policy,  which  is  thought  to  be  legitimated
through national parliament. This analysis seems to be shared by actors from other European
countries  and  thus  neatly  reflects  the  overall  current  understanding  of  the  European
Parliament's  role  in  the  European  economic  co-ordination  process,  at  least  by  governmental
actors.

2.1.3. The stability and convergence programmes

The  available  evidence  indicates  that  national  actors  are  well  aware  of  the  stability  and
convergence  programmes  with  differing  degrees  of  penetration  into  the  policy-making
processes.  In  general  the  awareness  for  the  stability  and  convergence  programmes  is  much
higher than for the BEPG. Some examples from Member States illustrate this assessment.

In fiscal policy-making in Germany, the stability and convergence programme is considered to
be  the  defining  element  in  the  overall  macroeconomic  strategy  and  setting  out  of  the  time-
horizon  for  the  consolidation  process.  As  one  official  puts  it:  "since  its  creation,  the
programme has become the centrepiece of our policy". Its definition and the updates define the
broad  guidelines  applicable  to  all  sectors  of  government.  With  respect  to  budgetary  policy,
however,  the  stability  and  convergence  programme  is  of  minor  importance.  The  programme
only refers to the broad fiscal policy stance. The distribution of costs and expenditures within
the  cabinet  is  not  directly  related  to  it.  This  explains,  why  the  programme  –  as  well  as  the
BEPGs – is not a topic of major debates in the parliamentary committees. It defines the overall
negotiation space in which the political manoeuvres on distribution-related issues take place.

In  Austria,  the  updated  stability  programmes  and  the  related  Ecofin  Council  opinions  are
regularly discussed by the budget committee of the National Council. Especially in the last two
years  the  stability  programmes  and  the  Ecofin  Council  opinions  have  been  included  in  the
national  political  debate  about  the  governments  fiscal  policy.  The  critique  of  the  Ecofin
Council concerning Austria's fiscal policy in May 2000 was a welcome argument for the new
government  with  which  to  accuse  the  former  government  of  an  irresponsible  budget  policy.
The  positive  opinion  of  the  Ecofin  Council  concerning  the  second  update  of  the  stability
programme  in  February  2001  was  again  a  welcome  argument  for  the  government  in  the
political debate. Another reason for the higher awareness of the stability programmes was the
negotiations between the government, the Bundesländer and the municipalities about an intra-
Austrian stability pact in order to lay down the contributions of the territorial authorities to the
achievement of the "zero-deficit".

In Sweden, the programmes are discussed in the Standing Committee on Finance and the EU
Advisory  Committee  before  they  are  discussed  in  the  Council.  In  2001,  the  proposed
recommendation to Ireland for not following the economic guidelines was discussed in the EU
Advisory committee, where opinions differed14. The procedure with convergence programmes
is  taken  very  seriously  by  the  Swedish  government  and  the  stability  of  public  finances  is
considered to be very important.

14 Some  parties  argued  that  the  recommendation  was  a  challenge  of  national  sovereignty  and  should  be
resisted. However, the government supported the recommendation to Ireland and considered the content of
it  uncontroversial.  It  was  considered  to  be  in  Sweden's  national  interest  that  inflation  is  avoided  in  other
Member States and the EU area at large.

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In the United Kingdom, the Convergence Programme has become an integral part of the UK
budgetary  cycle.  The  assessment  by  Ecofin/Council  is  regarded  as  an  important  but  non-
binding  assessment  of  the  UK's  economic  strategy.  The  convergence  programmes  are  not
subject  to  significant  consideration  in  Parliament.  This  is  because  they  consist  largely  of
government measures that have already been announced. For example, discussion of the UK's
budgetary  position  takes  place  in  relation  to  the  budget,  not  in  relation  to  the  convergence
programme.  Ecofin/Council  opinions  on  the  UK  convergence  programme  would  only  be
subject to significant debate in the aftermath of an adverse recommendation.

The impact of the Ecofin Council opinions depends on their nature. Some opinions are policy-
related,  some  contain  formal  requirements.  Legal  and  formal  decisions  taken  by  the  Ecofin
Council have a very strong impact as they include elements such as the recent new version of
the "Code of Conduct", which defines the legal framework for the stability and convergence
programmes,  along  with  their  statistical  requirements.  The  impact  of  non-formal  opinions
seem to be quite weak. These opinions are sometimes considered during the drafting process.
Yet,  as  government  officials  have  explained,  most  statements  by  Ecofin  are  very  broad  and
political and thus have little impact on the stability and convergence programme.

With regard to the involvement of national parliaments in the establishment of national stability
or convergence programme, so far no national parliament has formally endorsed the document
before it has been transferred to the European level. During the update of the programmes at
the end of the year 2000, the governments of France and Sweden submitted the programme to
the national parliament before it was submitted to the EU and it was only in France that the
government  actually  presented  the  programme  in  parliament  with  a  debate  following  this
presentation.  While  in  Ireland  the  parliament  and  in  Luxembourg  the  relevant  parliamentary
committee can discuss the programme, the Dutch parliament can also vote on a resolution. In
all  other  countries,  no  similar  procedures  exist  or  are  in  operation 15.  Nevertheless,  as  the
stability  and  convergence  programmes  usually  do  not  constitute  a  completely  new
governmental  programme  but  indeed  refer  to  the  national  budgets,  indirect  parliamentary
endorsement is given by the vote during the budgetary procedure.

There  is,  however,  a  trade-off  between  the  tight  synchronisation  of  annual  budgetary
procedures  and  the  submission  of  the  stability  or  convergence  programme16,  which  is  also
relevant to the more important question of the impact of the Ecofin opinion on national fiscal
policy.  If,  as  it  has  been  the  case  during  the  last  three  rounds  of  the  surveillance  procedure,
national  budgetary  processes  have  been  concluded  by  the  time  of  the  endorsement  of  the
opinion  in  Ecofin,  possible  more  principle  European  recommendations  or  even  concerns
cannot  be  taken  into  consideration  before  the  next  budgetary  procedure.  Recommendations
dealing with the next year's budget are moreover based on current forecasts and assumptions
which might very easily change during the course of the year. If a further strengthening of the
fiscal policy procedure is desired, the timing of the European co-ordination procedure should
then  be  adapted  so  that  Member  States'  governments  submit  their  stability  or  convergence
programme  at  the  beginning  of  the  annual  budgetary  procedure  on  the  national  level,  thus
enabling parliaments to take into account the opinion of Ecofin when adopting the budget.

15 Cf. European Commission, "Public Finances in EMU 2001", European Economy, No 3, 2001, p. 44.
16 The  United  Kingdom  is  an  exception  as  its  budget  does  not  run  on  a  calendar  year  basis  as  are  those

countries which have adopted medium-term frameworks to which annual budgets have to comply.

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2.1.4. The  position  of  the  European  Parliament  on  the  stability  and  convergence
programmes

Resolutions  by  the  EP  are  read  and  analysed  by  civil  servants  in  the  relevant  ministries.  The
resolutions are (in most but not all cases) forwarded to the members of national parliaments
and to the relevant national parliamentary committees involved in the economic policy-making
process.  They  are  discussed  neither  in  these  committees,  however,  nor  in  parliament.
Furthermore,  the  absence  of  interest  from  the  press  was  noted  in  most  Member  States.  The
European  Parliament's  resolutions  are  not  considered  to  have  any  discernable  impact  on
government  policy.  Even  favourable  positions  of  the  EP,  such  as  the  support  of  the  golden
rule in the United Kingdom17, are not referred to by governments.

In general, they are considered to be too long and not precise enough. Officials state that the
MEPs "apparently lack precise knowledge of the issues". The format of EP resolutions is said
to be ineffective: introductory statements are too long; precise recommendations, demands or
criticisms  are  not  formulated  concretely  but  hidden  in  imprecise  policy-statements.  EP
resolutions could have a much stronger impact if they became more target-oriented.

2.2. Functioning of economic policy making

2.2.1. The  coherence  of  the  BEPGs  with  the  general  orientation  of  Member  States'
economic policies

Comparing  the  overall  general  orientation  of  Member  States'  economic  policy  and  the
approach  taken  in  the  BEPGs,  a  broad  coherence  can  be  observed.  In  some  respects,  the
general  recommendations  "state  the  obvious"  and  are  thus  an  example  of  "form  follows
function"  dynamics.  They  contain  topics  "that  are  on  the  agenda  anyhow".  The  general
direction of the guidelines and recommendations is usually supported by governments, a fact
which is hardly surprising given the procedures leading to the adoption of the BEPGs and the
role assigned to national civil servants during the preparatory phase.

The  BEPGs  are  recognised  as  containing  an  assessment  of  performance  as  well  as  offering
new  perspectives  on  policy  direction.  They  thus  inform  the  policy  debate  and  certainly  add
value. Moreover, the BEPGs are conducive to improvements in economic policy in other EU
Member States, thus generating a positive spill-over to all EU members at large, but without
imposing a single "model" of policy-making.

With  regard  to  the  form  of  the  Council  recommendations  it  was  noted  that  there  are  many
repetitions. Some of the general recommendations are also considered to be quite "ambitious".
With  respect  to  the  country-specific  recommendations,  however,  governmental  officials  in
Member States note the Commission's "impressive self-confident determination in formulating
precise  policy  requirements".  They  agreed  that  the  country-specific  recommendations  do  not
necessarily  state  the  obvious  and  that  the  demands  formulated  by  the  Commission  are
considered to be less surprising than they are demanding. The Commission is said to succeed
in pushing through recommendations that it considers to be of major importance, especially at
the time when country-specific recommendations are drafted.

17 European Parliament, Committee on Economic and Monetary Affairs, "Report on the annual assessment of
the  implementation  of  stability  and  convergence  programmes  2001",  A5-0127/2001,  Brussels/Strasbourg,
2001, point 4, p. 7.

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This overall assessment does not rule out cases in which Member States do not strictly follow
recommendations  included  in  the  BEPGs,  be  they  general  or  country-specific.  In  cases  of
potential  misalignment  between  the  recommendations  and  Member  States'  policies,  the
recommendations  range  from  being  a  matter  of  political  debate  to  a  simple  utterance  to  be
safely  ignored.  Most  notably  in  budgetary  policy,  but  also  in  the  other  policy  fields,  national
political  choices  sometimes  lead  to  a  different  prioritisation  of  various  objectives,  as  the
BEPGs are considered precisely as guidelines and recommendations and hence not as binding
in character. A distinct divergence between the medium and long-term targets agreed upon on
European level and current Member States' policies is not apparent, however.

Some examples can be cited, with Ireland being the most notable one. It was the first country
to be criticised by the Ecofin Council, based on art. 99 (4) TEC because Irish budgetary policy
was  adjudged  to  be  inconsistent  with  the  BEPGs  2000.  In  the  recommendation  the  Ecofin
Council  noted  that  the  Irish  budget  for  2001  is  expansionary  and  pro-cyclical  and  therefore
inconsistent  with  the  guideline  to  ensure  economic  stability.  In  some  cases,  the  timing  of
reforms is discussed. The government in Sweden, for example, may agree with the content of
a  recommendation  but  may  not  consider  it  to  be  an  appropriate  time  to  implement  such
reform18.  Differences  concerning 
the
the  speed  and 
recommendations have also come to the fore on occasion in Austria. This stems primarily from
the  difficulties  of  implementing  certain  policy  goals  in  a  given  political  landscape  with
established structures, different actors and vested interests. Some recommendations are not in
line  with  the  ideas  of  the  government  and  are  therefore  ignored.  This  is  the  case  with  the
recommendation of the BEPGs 2001 to continue reforms in the pension system. Since reforms
of the pension system usually lead to emotive public debates, the government is reluctant to air
this topic prior to the 2003 general elections 19. Whether the mounting pressure in the context
of  the  open  method  of  coordination  in  the  field  of  pensions  will  change  this  position  of  the
government remains to be seen.

the  methods  of 

implementing 

A  case  which  is  less  an  issue  of  non-compliance  than  one  of  philosophical  opposition,  is  the
medium-term  plan  for  fiscal  policy  in  the  United  Kingdom.  The  problem  here  arises  because
the  Code  for  Fiscal  Stability  permits  the  UK  government  to  run  a  budget  deficit  over  the
medium  term  (providing  that  it  is  for  the  sake  of  public  investment),  thus  contravening  the
terms of the Stability and Growth Pact. While arguments in favour of the Stability and Growth
Pact  are  well  rehearsed  in  the  literature,  the  Code  for  Fiscal  Stability  has  also  received  high
praise. The Code represents a marked improvement in fiscal policy-making in the UK. Kell20
finds such rules to be well-formed, transparent and enforceable and judges that the Fiscal Code
of  Conduct  conforms  in  several  important  aspects  to  the  ideal  fiscal  rules  as  advocated,  for
example, by Kopits and Symansky21. From this perspective, the BEPG's criticisms of UK fiscal
policy can be seen less as an appeal to virtuous economic behaviour and more as a defence of
one  economic  doctrine  against  another.  Indeed,  this  point  was  borne  out  in  recent  debates

18 Cf.  Junestav  M.,  "Labour  Cost  Reduction,  Taxation  and  Employment.  The  Swedish  Case"  Draft  Paper
prepared  for  the  SALTSA  Workshop  "The  Transposition  of  European  "Soft"  Social  Policy  Measures  at
National Level", Brussels, 2001.

19 See  the  comments  made  by  the  Austrian  permanent  secretary  for  finance  on  the  occasion  of  the  Ecofin

meeting in May 2001, cf. Der Standard, 8 May 2001.

20 Kell M.S., "An Assessment of Fiscal Rules in the United Kingdom", International Monetary Fund, Working

Paper no. 01/91, Washington, 2001.

21 Kopits G.F. and Symansky S., "Fiscal Policy Rules", International Monetary Fund,  Occasional  Paper  no.

162, Washington, 1998.

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surrounding  the  future  of  the  Stability  and  Growth  Pact  in  which  the  merits  of  expenditure
targets (similar to those of the UK) over the existing deficit targets were openly discussed. As
a consequence it should be recognised that any further criticisms of UK fiscal policy within the
BEPGs could well intensify this debate still further.

2.2.2. Assessment of the Commission's implementation report for the year 2000

Assessing  the  Commission's  implementation  report  for  the  year  2000  the  study  in  general
considers it as adequately reflecting the implementation of the BEPGs by the Member States.
The  Commission's  implementation  report  is  said  to  have  provided  a  useful  and  accurate
appraisal  of  the  implementation  of  the  BEPGs  2000.  In  the  UK,  senior  government  officials
described  the  report  as  a  valuable  and  hitherto  absent  form  of  feed-back  on  the  BEPGs
implementation. Some national actors, however, although they are in agreement with most of
the  report,  objected  to  some  judgements  of  the  Commission.  In  Germany,  for  example,  the
criticism  of  the  pension  reform  was  considered  to  be  too  harsh,  insufficiently  justified  and,
above all, "rather imprecise".

Furthermore,  is  has  been  noted  that  in  some  areas  the  Commission's  implementation  report
seems  to  accept  fairly  vague  measures  as  being  sufficient  whereas  in  other  areas  concrete
actions have been deemed insufficient. In Austria, for example, the Commission considered the
recommendation  to  replace  one-off  measures  to  consolidate  public  finances  by  permanent
measures as having been adequately addressed by an announcement that the budget would be
balanced by 2002. However, the Commission itself criticises the fact that such balance will be
reached  through  increases  in  the  already  high  tax  burden.  Other  measures  taken  by  the
Austrian  government  have  been  deemed  to  be  insufficient,  however.  Examples  include  the
pension reform and the liberalisation of the energy markets. As the pension reform, which is
designed to raise the retirement age, took effect only on 1 October 2000, it is thus rather early
to  evaluate  the  effects  of  this  reform.  Nevertheless,  the  Commission  regards  the  reform  as
insufficient  and  predicts  increasing  spending  pressures  in  the  public  pension  system22.  In  the
area of energy markets the Austrian parliament adopted an "Energy Liberalisation Act" in the
summer  of  2000  that  will  fully  liberalise  the  electricity  and  gas  markets  by  2001  and  2002
respectively.  Although  this  more  than  covers  the  EU  directives  on  the  liberalisation  of  the
energy  markets,  the  Commission  was  not  satisfied  and  continued  to  criticise  "rigidities  and
high prices"23.

2.2.3. Institutional adaptations on member state level

The co-ordination procedures of macro-economic policy-making not only affect policy choices
of  national  actors,  but  are  also  related  to  institutional  adaptations  on  member  state  levels.
While  the  non-binding  character  of  the  art.  99  TEC  procedure  on  the  BEPGs  does  not
necessitate  institutional  changes  on  the  domestic  levels,  the  Treaty  provisions  on  budgetary
discipline  explicitly  refer  to  national  policy-making  procedures.  Within  the  framework  of  the
excessive deficit procedure, which fills out art. 104 TEC in regard to the hard coordination in
fiscal  policy,  Member  States  have  committed  themselves  to  ensure  that  domestic  budgetary

22 This assessment is shared by the IMF, that also expects continued pressure to reform the pension system.
Cf. International Monetary Fund, Public Information Note on the conclusion of Article IV consultation with
Austria, Washington, 2001.

23 European  Commission,  Report  on  the  Implementation  of  the  2000  Broad  Economic  Policy  Guidelines ,

ECFIN/176/01-EN, Brussels, 2001, p. 115.

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procedures will enable them to fulfil the treaty requirements24. It is in this area that institutional
adaptations have taken place or are in the process of being implemented. Two features can be
distinguished25.

With the medium-term targets set by the Stability and Growth Pact, mechanisms are necessary
to amend domestic procedures which are oriented towards annual budget cycles. A number of
members  states  have  therefore  established  expenditure  control  mechanisms  or  medium-term
budget planning procedures, albeit with different degrees of enforcement mechanisms. Multi-
annual  budgeting  frameworks  have  been  established  by  six  countries  (i.e.  Ireland,  Italy,  the
Netherlands,  Finland,  Sweden  and  the  UK).  They  vary  with  regard  to  the  introduction  of
expenditure  ceilings  either  for  the  central  government  as  a  whole  or  for  departmental
expenditure  envelopes,  as  well  as  with  regard  to  the  binding  character  of  these  expenditure
ceilings.  In  some  cases,  these  expenditure  ceilings  are  generally  formulated  as  an  objective
(e.g. in the case of Italy), while in other cases explicit mechanisms will be enforced in case of
expenditure  overruns.  In  other  countries,  spending  targets  are  set  without  being  explicitly
incorporated into multi-annual budgeting systems. In addition, these mechanisms are in various
countries complemented by rules on how to deal with growth dividends on the revenue side.
Finally, some countries complement expenditure control frameworks with numerical budgetary
rules.

A second feature refers to the contribution of the various levels of government to the general
government balance under the Stability and Growth Pact (SGP). As the central government is
the level of government responsible vis-à-vis the European level, budgetary developments on
the regional and local level may have a decisive impact on aggregate budgetary balance. The
""financial significance" of sub-national government in the SGP context depends upon the part
of  total  general  government  expenditure  they  account  for,  and  the  existence  of  independent
powers  of  borrowing  and  the  possibility  to  claim  transfers  from  the  central  government  to
cover  financial  shortfalls"26.  In  this  context,  the  percentage  of  sub-national  government
expenditure differs substantially between the Member States, being relatively high in Germany,
Spain,  Sweden,  Finland  and  Denmark  and  relatively  low  in  Ireland,  the  Netherlands  and
Portugal.  Also  in  Belgium,  local  government  enjoys  a  relatively  high  level  of  financial
autonomy.

While  respecting  the  autonomy  of  local  and  regional  governments,  Member  States  have  to
varying degree established procedures to increase central government power over sub-national
finances.  These  include  borrowing  limitations  for  sub-national  governments  or  a  direct
balanced-budget  constraint  (as  in  the  case  of  Sweden),  or  co-ordination  procedures  between
different  levels  of  government.  These  can  take  the  form  of  –  usually  legally  non-binding  –
agreements  established  in  appropriate  bodies  (such  as  the  Finance  Planning  Council  in
Germany or the Fiscal and Financial Council in Spain) or national stability pacts (as is the case
in Austria).

As this overview demonstrates, European co-ordination procedures present serious problems
of adaptation on the domestic level and, depending on national differences, Member States are
continuing  to  introduce  institutional  arrangements  which  should  contribute  to  a  better
implementation of both the BEPGs and the Stability and Growth Pact.

24 Art. 3 of the protocol on the excessive deficit procedure of the TEC.
25 Cf for the following, European Commission, "Public Finances in EMU 2001",  European Economy,  No  3,

2001, p. 38ff.

26

ibid., p. 45.

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Chapter III –  CONCLUSIONS

With regard to the procedures of European economic-policy making as well as the role of the
European Parliament, some conclusions can be drawn. They concern both the European level
as well as the national level of decision-making.

(1)  Further  reforms  of  the  existing  procedures  should  be  considered  if  the  European  Union
wants to achieve the goals set in Lisbon. Some progress has been made in recent years. Policy
learning – as opposed to adopting one single model – as well as the necessities stemming from
the  start  of  stage  three  of  EMU  have  led  to  a  number  of  improvements  in  economic-policy
coordination.  Apart  from  the  widening  of  scope  of  policies  addressed  by  European
coordination  (e.g.  the  Cardiff  process  on  structural  reforms,  but  also  other  policy  spill-overs
from EMU), the strengthening of the horizontal links between various Council formations in
their  preparation  of  the  input  into  the  BEPGs,  can  be  seen  as  a  major  improvement.
Furthermore  it  has  led  to  additional  adaptations,  including  the  European  Commission's
preparatory work for the BEPGs.

While these efforts aim at making the procedures more coherent and effective, more has to be
done in order to enable European actors to base their assessments and policy choices on sound
and comparable statistical data. The "code of conduct" and setting-up of the "Lisbon" list of
indicators  (agreed  between  the  Commission  and  the  Council  and  approved  by  the  European
Council in late 2000) are initial steps taken in this respect 27.

(2) In order to make the policy instrument of the Broad Economic Guidelines more effective, a
revision  of  its  structure  and  content  should  be  considered.  First,  it  should  again  be  stressed
that  the  general  policy  recommendations  are  often  stating  the  obvious  and  thus  have  little
direct impact on the Member States' macro-economic policies. It could be argued that many of
these  recommendations  are  also  covered  by  the  conclusions  of  European  Council  meetings
which  lay  the  foundation  of  the  macro-economic  policy-stance  of  the  Union-  by  the
governments  of  the  Member  States.  Second,  the  BEPGs  need  to  be  relieved  from  too  many
duplications  and  repetitions.  Policy-makers  on  the  national  level  tend  to  consider  solely  the
country-specific recommendations without paying much attention to the introductory chapter.

One  possible  option  could  be  a  policy  document  formulating  the  broad  economic  policy
direction of the European Union and its Member States, which however necessitates a treaty
revision. This document should be adopted not on the basis of the art. 99 TEC procedure, but
based on a proposal of the European Commission and with full participation of the European
Parliament. Given the general character of such an economic strategy, it could well be adopted
as  a  multi-annual  programme.  This  procedure  will  add  to  the  awareness  given  to  European
economic  policy  coordination  and  might  lead  to  the  necessary  public  discourse  on  the  key
economic options available.

Nevertheless,  the  introduction  of  such  a  general  policy  document  should  preferably  not  be
accompanied by provisions that are legally more binding for the Member States, both for euro
zone  Member  States  as  well  as  for  the  European  Union  as  a  whole.  The  introduction  of
possible sanctions if Member States do not adhere to policy recommendations in the BEPG or
in the Ecofin opinions on the stability and convergence programmes – provided art. 104 TEC
and the Stability and Growth Pact is fully respected – is at present not advisable, as it might

27 The European Commission had to acknowledge that, by presenting the report on the implementation of the
2000 Broad Economic Policy Guidelines, it was not able to give "a conclusive judgment about the degree of
implementation" based on the available data.

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ECONOMIC OUTLOOK 2002

lead  to  the  adoption  of  a  "one  model  fits  all"  approach  without  taking  into  account  national
diversity.

(3)  With  regard  to  the  specific  policy  recommendations  for  each  member  state,  the  country-
specific  parts  could  become  more  precise,  discussing  the  specific  needs  and  possible
instruments  of  a  country  in  a  more  detailed  way.  However,  the  BEPGs  2002  should  not
present  too  many  policy  recommendations,  because  there  is  a  danger  of  overload.  It  could
furthermore  be  helpful  if  the  Council  tries  to  merge  the  BEPGs  and  the  opinions  on  the
stability and convergence programmes. Given the timing of the publication of the opinions, in
most  cases  (i.e.  for  countries  with  budgetary  cycles  starting  on  1  January)  these  opinion
cannot be taken into account by the Member States' budgetary procedures anyway. However,
the Commission and the Council clearly have to tread carefully, because Member States have
already shown that they take a dim view of advice which they feel is either unjustified or based
on questionable economic analysis, Ireland in 2001 being a case in point.

(4) The timetable for the Guidelines does not seem to maximise their effect on the economic
policies  of  the  Member  States,  especially  when  the  economic  situation  changes  and  the
guidelines  remain  focused  on  economic  forecasts  run  for  the  entire  year28.  As  can  be  seen
during  the  period  of  the  BEPGs  for  2001,  economic  developments  –  which  are  determined
also by factors outside the sphere of influence of the political and economic actors within the
European Union – can therefore change the basis of the recommendations agreed upon in the
BEPGs.  An  amendment  to  the  policy-making  procedures  leading  to  the  BEPGs  to  include  a
revision clause should be foreseen, without, however, referring this task solely to the Ecofin
Council.

(5)  There  is  the  basic  understanding  that  not  only  does  the  European  policy-cycle  with  the
BEPGs at its centre need to be adjusted, but moreover that proposals should be made towards
reconciling national policy cycles with the European timetable. Recommendations on national
reports  could  in  this  regard  be  transposed  at  a  more  appropriate  time  into  national
programmes.  Adaptation  processes  on  the  national  level  should  thus  lead  to  a  greater
convergence  of  national  policy  formulation  and  policy-making  and  should  further  coordinate
national  policies  with  European  timetables.  This  could  lead  in  turn  to  increased  efforts  by
actors in national and European institutions to combine the various instruments of economic
and social policies in order with the aim of producing a successful "policy mix" that would be
in line with the treaty objectives (arts 2, 4, and 105.1 TEC).

(6)  In  the  EMU  macroeconomic  system,  which  combines  EU-level  decision-making  on
monetary policy by the ECB with national decision-making on fiscal policy, the arguments for
rules  constraining  fiscal  autonomy  are  persuasive.  The  SGP  and  the  BEPG  are  the  chosen
instruments for this purpose, but it should be recognised that there is a degree of arbitrariness
in  the  target  values  for  the  deficit  and  debt,  and  that  differently  configured  rules  might  be
equally  or  more  effective.  It  has  been  suggested,  for  example,  that  the  UK  approach,  which
includes a symmetrical inflation target in relation to monetary policy and the so-called golden
rule for fiscal policy (allowing deficits to increase if there is a corresponding public investment,
as  opposed  to  spending  on  public  consumption),  offers  a  more  attractive  policy  mix.  It  can
also  be  argued  that  rules  which  are  not  properly  respected  will  not  be  effective,  so  that
implemented matters, as well as the way rules are framed.

28 See  also  European  Parliament  Committee  on  Economic  and  Monetary  Affairs,  "Report  on  the
Commission's recommendation for the broad guidelines of the economic policies of the Member States and
the Community in 2001", A5-0165/2001, Brussels, 2 May 2001, p. 10.

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(7) At the same time, the channels provided in the new coordination procedures for domestic
actors  should  be  broadened  as  they  are  currently  too  few  in  number  to  offer  a  credible
alternative to domestic opportunities in national policy-making structures. This is in particular
true for the national parliaments as they are the central actors in national budgetary procedures
and,  above  all,  important  contributors  to  public  discourse  in  the  Member  States.  Initial
proposals  have  been  made  in  this  respect  calling,  for  example,  for  an  annual  debate  on  the
assessment  of  the  implementation  of  the  BEPGs  between  the  European  Parliament  and  the
national  parliaments  of  the  euro  area  along  with  corresponding  debates  within  national
parliaments  on  the  updated  stability  programmes  of  their  governments29.  It  would  also  be
useful  to  focus  on  the  BEPGs  in  sessions  of  the  COSAC30  or  joint  committee  meetings  of
economic  and  monetary  affairs  committees  of  the  European  Parliament  and  the  Member
States.

(8)  This  does,  above  all,  include  a  strengthening  of  the  European  Parliament  in  order  to
promote  a  broad  European  debate  on  the  economic  options  as  part  of  a  deliberative
democracy.  A  democratic  opening-up  of  the  policy-making  procedures  established  to  co-
envisaged.
ordinate 

the  Member  States 

economic 

policies 

should 

be 

of 

29 Cf.  the  resolution  of  the  European  Parliament,  "The  Commission  communication  on  strengthening
economic policy coordination within the euro area (COM(2001) 82 - C5-0173/2001 - 2001/2083(COS))",
adopted in plenary on the 4th of October 2001

30 This could be done either by setting up a COSAC-related permanent working group of MEPs and MPs, or
by granting the COSAC's agendas at least one session to deal with EMU and economic policy-making.

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PART II – IMPLEMENTATION OF THE BROAD ECONOMIC
POLICY GUIDELINES AND THE STABILITY AND
CONVERGENCE PROGRAMMES

Chapter 

IV  –  GENERAL 

IMPLEMENTATION  ANALYSIS 

IN  CROSS-NATIONAL

PERSPECTIVE

The  following  chapter  provides  a  cross-national  perspective  on  the  implementation  of  the
BEPGs of 2001 as well as the stability and convergence programme updates for 2000/2001.
The BEPGs for the year 2000 are taken into account where relevant, but a detailed overview
of the recommendations of the year 2000 is not provided, given the implementation report of
the European Commission as well as the nature of the BEPG in general, i.e. the consecutive
updating of the BEPG ensures that developments of the preceding year are taken into account
when establishing the BEPG for the current year31.

The  chapter  follows  the  structure  of  the  general  recommendations  of  the  BEPG  2001  and
looks both at the general orientation of the guidelines as well as the implementation record of
the Member States.

4.1.  Growth-  and  stability-oriented  macroeconomic  policies  and  the  quality  and

sustainability of public finances

The key challenges for the Member States and the EU as a whole did not change significantly
during  the  year  2001,  although  it  can  be  argued  that  the  deterioration  in  global  economic
conditions  reinforced  the  pressures  on  economic  policy.  In  the  light  of  the  global  economic
downturn  in  the  year  2001  and  the  uncertainty  about  the  timing  and  speed  of  recovery,  the
internal growth dynamics have become more important. Growth- and stability-oriented macro-
economic  policies  in  conjunction  with  comprehensive  structural  reforms  at  the  member  state
level as well as at the EU-level are crucial for a recovery of several Member States' economies.
In this respect, the economic performance of several Member States in 2001 has been below
the expectations set out in the 2001 BEPGs. These were written at a time when the extent of
the  global  economic  downturn  was  not  yet  visible,  as  a  result  of  which  they  were  overly
optimistic.  While  the  events  of  11  September  clearly  accentuated  the  global  economic
deterioration,  it  is  important  to  stress  that  they  do  not  fully  account  for  the  downturn  in  the
EU  economy  since  the  spring  of  last  year,  nor  its  marked  impact  on  a  number  of  Member
States.  With  hindsight,  it  is  clear  that  Germany,  in  particular,  was  already  on  the  brink  of
recession  by  the  summer  of  2001.  As  the  OECD  notes,  the  attacks  "aggravated  this
deterioration by eroding confidence"32, and it is clear that the this had a dampening effect on
economic activity.

Nevertheless, many indicators of economic activity suggest that the worst is now over, even if
it  is  likely  that  some  measures  –  notably  unemployment  –  will  continue  to  paint  a  sombre
picture  in  the  first  half  of  2002.  An  analysis  just  released  by  UBS  Warburg  states  that  "our

31 As  stated  in  subparagraph  2.2.2.,  the  implementation  report  of  the  European  Commission  of  the  BEPGs
2000  (European  Commission,  Report  on  the  implementation  of  the  2000  Broad  Economic  Policy
Guidelines,  ECFIN/176/01-EN,  Brussels,  07.03.2001)  is  considered  as  an  adequate  overview  of  the
developments of the macro-economic policies of the Member States in this year, both by national actors and
by the authors of this study.

32 OECD, OECD Economic Outlook, No. 70, December 2001, p. 3ff.

 
                                               
ECONOMIC OUTLOOK 2002

own leading indicator suggests that co-incident indicators of confidence in the industrial sector
should, broadly, continue to rise over the coming months, implying that the recovery will take
hold quite quickly."

It  has  to  be  recognised  that  the  European  economy  cannot  be  expected  to  be  immune  from
global economic developments, and that the downturn affected export growth which, in turn,
led  to  a  cut  in  business  investment.  It  also  became  apparent  mid-way  through  2001  that
domestic  demand  in  the  Euro-zone  was  not  as  strong  as  expected.  As  the  European
Commission  Autumn  Forecasts  points  out,  "structural  reform  has  not  gone  far  enough  to
enhance  in  a  sufficient  way  the  euro  area  economy's  resilience  to  exogenous  shocks.  The
terms-of-trade shock was reflected in rising unit labour costs, not because of wage increases,
that  remained  moderate,  but  because  productivity  developments  were  lagging  behind"33.
However,  the  fall-off  in  demand  was  clearly  also  important,  and  it  would  appear  that  the
Commission spring forecasts under-estimated its effects.

Table 4.1.1. GDP Growth (per cent per annum)

Commission

new SCPs

1999

2000

2001

2002

2001

2002

1.1

3.0
2.1
1.9
3.4
4.1
2.9
10.9
1.6
5.7
3.7
2.8
3.4
4.0
4.5
2.1
2.7
2.6

4.0
Belgium
3.2
Denmark
3.0
Germany
4.3
Greece
4.1
Spain
3.1
France
11.5
Ireland
2.9
Italy
9.5
Luxembourg
3.5
Netherlands
3.0
Austria
3.4
Portugal
5.7
Finland
3.6
Sweden
2.9
UK
3.4
Euro Area
3.3
European Union
Data for 1999 and 2000: Eurostat, structural indicators, last update: 11.01.2002
European Commission, Autumn 2001 Forecasts for 2001-2002, European Economy,
Supplement A, Economic Trends, No 10/11 - October November 2001.
Denmark has not yet submitted its convergence programme update.

0.75
4.1
3.0
2.3
6.8
2.0
3.9
2.0
1.3
2.0
0.6
1.7
2.25

1.3
1.6
0.7
3.5
2.0
1.5
3.3
1.3
3.0
1.5
1.2
1.5
1.7
1.6
1.7
1.3
1.4

1.3
1.3
0.7
4.1
2.7
2.0
6.5
1.8
4.0
1.5
1.1
1.7
0.5
1.4
2.3
1.6
1.7

1.3

1.25
3.8
2.4
2.5
3.9
2.3
5.3
2.0
1.3
1.75
1.6
2.4
2 – 2.5

The  2001  BEPGs  start  with  the  rather  obvious,  though  ultimately  not  very  meaningful
recommendation that the macro-economic policies of the Member States should be orientated
towards sustaining growth and employment and preserving price stability. The text goes on to
call on the Member States to aim for a balanced economic expansion and to try to realise their
growth  potential.  The  advice  also  stresses  the  importance  of  fiscal  policies  geared  to  the

33 European  Commission,  "Autumn  2001  Forecasts  for  2001-2002",  European  Economy,  Supplement  A,

Economic Trends, No 10/11, October/November 2001, p. 8.

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ECONOMIC OUTLOOK 2002

achievement of budgetary positions close to balance or in surplus and of careful monitoring to
ensure that there is no slippage from the stability programme targets.

Member  States  were  also  counselled  to  prepare  budgets  for  2002  which  continue  to  assure
fiscal positions close to balance or in surplus and at the same time to avoid pro-cyclical fiscal
policies. Those Member States most at risk from inflationary pressures and overheating were
advised  to  tighten  budgetary  policy,  to  pursue  wage  moderation  and  to  advance  structural
reforms  aimed  at  an  appropriate  macroeconomic  policy  mix.  These  recommendations  are
consistent  with  the  ambitions  of  the  SGP  and  represent  what  might  be  termed  "the  Brussels
consensus" about how macroeconomic policy in the euro-zone should be conducted.

It  is,  therefore,  instructive  to  look  at  what  has  happened  and  it  is  apparent  that  recent  fiscal
policy  developments  and  prospects  present  a  mixed  picture.  On  the  one  hand,  the  collective
budget deficit of the euro area has continued to shrink, falling to 0.8% of GDP in 2000 (net of
UMTS revenues), a drop of 0.5% of GDP compared with 1999, and at the same time the tax
burden is being lowered in most countries. Moreover, most of the one-off budgetary receipts
from the sale of UMTS licences have, as agreed, been used to reduce debt.

On the other hand, there is evidence that public finances in the European Union deteriorated in
the year 2001. The average general government balance in the EU, net of UMTS-proceeds, is
projected to have been -0.5% of GDP in 2001, but this reflects somewhat better figures for the
three  "outs"  than  the  twelve  "ins".  For  the  euro  area,  the  Commission  projects  an  overall
deficit of – 1.1% of GDP in 2001 so that the overall public finances worsened for the first time
since  1993.  The  targets  of  the  Member  States  as  documented  in  the  2nd  stability  or
convergence programme updates will therefore be missed by 0.5% of GDP for the euro zone
and  by  0.3%  for  the  EU  as  a  whole.  Given  the  slowdown  and  the  operation  of  automatic
stabilisers, these cannot really be seen as particularly worrying figures, although they do break
the trend toward fiscal consolidation that has characterised the period since 1993.

A  recent  analysis  by  the  Commission  confirms  that  the  deterioration  in  public  finances  is
largely attributable to the operation of automatic stabilisers in a macroeconomic environment
that is significantly less favourable than expected in the above-mentioned stability programmes
and  envisaged  at  the  time  the  BEPGs  were  agreed.  The  Commission  analysis  also  suggests
that the cyclically-adjusted budget balances of the euro are set to deteriorate slightly in 2001.
The silver lining in the recent economic downturn is that pressures on wage inflation have, on
the whole, diminished as the ability of wage negotiators to secure pay increases well above the
rate  of  inflation  will  be  curtailed.  This  will  allow  those  Member  States  with  relatively  tight
labour markets more easily to contain inflation, with a further impetus coming from the fall-off
in oil prices.

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ECONOMIC OUTLOOK 2002

(per cent of GDP, excl. UMTS revenues): comparison between SCP 2000 and Commission forecast

Table 4.1.2  General Government Fiscal Balance

SCP 2000

(a)
2001

(b)
2002

Commission
(d)
2002

(c)
2001

Difference

(a)-(c)

(b)-(d)

-0.5
Belgium
-1.0
Denmark
Germany*
-1.7
-1.2
Greece
-0.4
Spain
-1.4
France
-2.0
Ireland
-0.7
Italy
0.3
Luxembourg
-0.5
Netherlands
-0.4
Austria
-0.9
Portugal
-1.5
Finland
-0.5
Sweden
0.5
United Kingdom
-1.1
Euro Area
-0.8
European Union
European Commission, Autumn 2001 Forecasts for 2001-2002, European Economy, Supplement A,
Economic Trends, No 10/11 - October November 2001.

-0.4
-0.8
-1.0
-0.9
0.1
-0.6
-1.9
-0.4
1.8
0.3
0.6
-0.9
0.1
-0.7
0.6
-0.5
-0.3

0.3
2.6
-1.0
1.5
0.2
-0.6
3.8
-0.5
2.5
1.0
0.0
-0.7
4.4
2.1
-0.1
-0.3
-0.1

-0.2
2.0
-2.5
-0.4
0.1
-1.6
2.4
-1.2
4.4
1.3
-0.2
-2.0
4.8
3.9
1.2
-1.1
-0.5

-0.2
1.6
-2.7
0.3
-0.2
-2.0
1.8
-1.2
2.8
0.5
-0.4
-1.6
2.9
1.6
0.4
-1.4
-0.9

0.2
2.8
-1.5
0.5
0.0
-1.0
4.3
-0.8
2.6
1.0
-0.8
-1.1
4.7
4.6
0.6
-0.6
-0.2

Turning to individual Member States, it is apparent that a number of those singled out in the
BEPGs for criticism of the targets set for the year, have seen the greatest deterioration in their
public  finances.  Germany,  arguably,  is  where  the  cause  for  concern  is  greatest,  not  least
because  its  economic  weight  means  that  what  happens  there  has  a  proportionally  greater
impact on the euro area as a whole. Its deficit is expected to be around 2.5 – 2.6% of GDP in
2001,  missing  the  stability  programme  target  by  1.0%  of  GDP  and  the  outlook  for  the  year
2002,  according  to  forecasts  from  the  European  Commission  and  the  German  government
itself  in  the  updated  Stability  Programme  at  the  end  of  2001,  is  no  better.  In  an  "alternative
scenario",  which  is  in  line  with  the  OECD  and  the  European  Commission  forecasts,  the
German  government  admits  that  the  situation  is  not  likely  to  improve  with  the  government
deficit of Europe's largest economy dangerously close to the stability pact criterion of 3% of
GDP34.

Other  countries  are  also  likely  to  diverge  from  the  target  of  a  budgetary  position  close  to
balance  or  in  surplus,  although  as  the  target  is  one  to  be  achieved  over  the  economic  cycle,
rather than year by year, modest deficits need not be seen as alarming. In France, the deficit
will  be  around  1.4  and  1.6%  depending  on  the  forecasts,  a  deterioration  compared  to  the
stability programme of 0.4 to 0.6%; in Italy, the deficit target will be missed by 0.3 or 0.4%
resulting in a deficit of 1.2 or 1.1% and finally, Portugal's deficit will be around 2.0 or 2.2%, a

34 Note that the baseline scenario in the programme update foresees a deficit of 2.0%, the alternative scenario

projects a 2.5% deficit.

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ECONOMIC OUTLOOK 2002

deterioration  of  0.9  or  1.1  percentage  points  compared  to  the  2000  stability  programme
update target.

As  the  European  Commission  pointed  out  in  early  2001  when  assessing  the  development  of
public  finances  in  the  year  200035,  these  countries  have  missed  the  opportunity  of  a  more
favourable  economic  situation  in  2000  to  pursue  budget  consolidation  in  a  medium-term
perspective: "While this is largely due to welcome reductions in the tax burden, accompanying
expenditure  reforms  have  been  postponed  or  toned  down  in  some  countries,  including
measures to modernise pension systems." Given that the economic slowdown has been more
pronounced  than  expected,  these  increases  in  deficits  are  not  surprising.  Indeed,  had  the
automatic  stabilisers  not  functioned  as  they  did,  the  scale  of  the  downturn  could  well  have
been greater. Nevertheless, many finance ministers might broadly agree with the Commission
view and want to return to fiscal consolidation once recovery takes hold.

Other  countries  (Spain,  Luxembourg,  the  Netherlands,  Austria,  Sweden,  and  Finland),
however, are expected to meet or outperform the general government balance target set out in
their  stability  or  convergence  programme  updates  submitted  at  the  end  of  the  year  2000  or
early 200136, although in some cases they may have been helped by the cautious assumptions
on which the programme updates were based. Spain and Austria are very close to a balanced
budget,  while  Luxembourg,  the  Netherlands,  Sweden  and  Finland  have  with  comfortable
budget  surpluses.  Another  group  of  countries,  i.e.  Belgium,  Denmark,  and  Ireland,  are
expected  to  keep  their  budgets  close  to  balance  or  in  surplus  even  though  their  budget
execution will be lower than expected. For Ireland a marked decline in the budget surplus is
expected to continue in 2002, although the fact that it started from a very high surplus has to
be borne in mind. With the exception of Belgium, the other three countries have managed to
produce substantial budget surpluses. Finally, Greece is in a somewhat exceptional position as
the country will miss the government fiscal balance by almost 1.0% ending up with a budget
deficit of minus 0.4% according to the Commission (0.3% in the programme update)

In line with the Stability and Convergence Pact, the BEPG advised Member States to prepare
budgets for 2002 in keeping with the need to achieve or preserve budgetary positions close to
balance or in surplus and to avoid pro-cyclical fiscal policies. Those countries having already
achieved  these  budgetary  positions,  have  by  and  large  followed  this  recommendation.  Major
budgetary  imbalances  seem  to  have  been  avoided.  Nevertheless,  in  some  cases,  especially
Ireland  and  Finland,  but  also  Greece,  the  surpluses  projected  in  the  2000  update  have  been
reduced  significantly.  In  Finland,  the  reduction  of  its  cyclically  adjusted  balance  will  be
substantial in 2002. Less pronounced adjustments to the budgetary balance targets have been
made by Belgium (down 0.3% in 2002 according to the programme update) and Spain (0.2%).
None  of  these  changes  can  be  regarded  as  particularly  worrying  from  the  point  of  view  of
macroeconomic balance, to the extent that they reflect the operation of automatic stabilisers.
However,  they  will  mean  that  progress  towards  lower  public  debt,  especially  by  Greece  and
Belgium will be postponed. Greece has substantially revised the projected debt reduction up to
2004 while Belgium only foresees a temporary slowdown in 2002. Some countries, however,
will  stick  to  their  projections  from  the  last  programme  update  or  have  even  adjusted  the
projected fiscal balance upwards.

35 European Commission, "Public Finances in EMU 2001", European Economy No 3, 2001, p. 2f.
36 Note that there is a very substantial difference in the projection of the United Kingdom's balance. While the
European Commission expects a surplus of 1.2%, the UK, in its convergence programme update predicts a
deficit of 0.2% for the budget year 2001/2002.

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Table 4.1.3. General Government Fiscal Balance
(per cent of GDP, excl. UMTS revenues): Figures according to the 3rd stability and
convergence programmes updates 2001

  2000

  2001

  2002

  2003

  2004

0.1

0.6

0.5

0.0

-0.2

Belgium
Denmark
Germany
Greece
Spain
France
Ireland
Italy
Luxembourg
Netherlands
Austria
Portugal
Finland
Sweden
United Kingdom
France: based on cautious assumption (GDP growth of 2.5% in 2003 and 2004). Denmark has not yet
submitted its convergence programme update.

-2 -2.5
0.8
0.0
-1.4
0.7
-0.5
2.8
1.0
0.0
-1.8
2.6
2.1
-1.1

0.0 -1.0
1.2
0.1
-0.5
-0.6
0.0
3.4
1.0
0.2
0.0
2.6
2.3
-1.1

-1-2
1.0
0.0
-1.3
-0.5
0.0
3.1
1.0
0.0
-1.0
2.1
2.2
-1.3

-2.5
-0.3
0.0
-1.4
1.4
-1.1
4.1
1.0
0.0
-2.2
4.7
4.6
-0.2

-1.3
-1.1
-0.4
-1.4
4.5
-1.5
6.2
1.5
-1.5
-1.8
6.9
4.1
2.0

The situation differs with regard to the four countries within the euro area which have sizeable
remaining deficits. As mentioned above, the situation is most worrying in the case of Germany
which  projects  a  general  government  deficit  of  between  2  and  2.5%,  with  most  of  the
international institutions' forecasts being at the higher end of this projection. For France, the
updated  stability programme  foresees  a broadly  neutral fiscal  stance over  2001-2002
(-1.4%), the European Commission is much less optimistic with a 0.4% deterioration from -
1.6 to -2.0%. Portugal's deficit is forecast to decrease compared with 2001-2002, but will still
remain above 1.6%. As for Italy, while the Commission projects a deficit of 1.2% in 2001 and
in 2002, the government aims at a reduction to 0.5% in 2002. It should be emphasised that all
these projections will be sensitive to the overall performance of the EU economy as well as to
policy changes. If recovery manifests itself as quickly as, and on the scale that, the forecasters
anticipate,  the  fiscal  positions  of  all  countries  should  be  comfortable,  but  if  the  slowdown  is
extended, the risks will be greater.

In  some  respects,  the  stability  programme  updates  appear  to  have  been  based  on  relatively
sanguine  views  about  recovery  prospects.  Some  measures  included  in  the  budgets  for  the
current year 2002 are temporary and do not indicate any major impact on longer-term fiscal
sustainability  and  some  consolidation  measures  might  not  turn  out  to  be  as  effective  as
planned. Thus, if the recovery does not happen as soon as projected in some of the programme
updates,  in  consequences  in  regard  to  lower  tax  receipts,  or  be  higher  than  projected
the  slowdown  (for  example  for  unemployment
government  expenditure  related 
compensation),  the  safety  margins  included  in  the  budgets  might  not  be  sufficient.  The
European  Central  Bank  warns  in  its  December  report  that  this  might  even  lead  to  a  deficit

to 

22

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ratio above the reference value which "would trigger the preparation by the Commission of a
report on the existence of an excessive deficit"37.

ECONOMIC OUTLOOK 2002

Table 4.1.4. General Government debt
(as percentage of GDP)

Belgium
Denmark
Germany
Greece
Spain
France
Ireland
Italy
Luxembourg
Netherlands
Austria
Portugal
Finland
Sweden
United Kingdom
Euro Area
European Union

1999
115.9
52.0
61.3
103.9
63.4
58.5
49.3
114.6
6.0
63.1
64.7
54.5
47.3
65.3
45.7
72.6
68.0

Commission
2000
110.3
46.1
60.3
102.7
60.7
57.6
38.6
110.5
5.3
56.1
63.1
53.7
44.0
55.7
42.8
70.2
64.1

2001
107.0
43.2
60.0
99.8
58.0
57.1
34.3
108.2
5.3
51.8
62.3
53.5
42.7
52.7
39.3
68.8
62.5

2002
103.9
42.5
61.0
98.5
57.3
57.3
30.8
106.9
5.2
48.9
61.2
53.5
42.0
50.5
37.2
68.4
61.8

2000
109.3

60.3
102.7
60.4
57.6
38.6
110.5
5.3
56.1
63.5
53.7
44.0
55.6
39.9

new SCP
2002
103.3

2003
97.7

2004
93.0

60.0
97.3
55.7
56.3
33.7
104.3
4.6
47.7
59.6
55.7
42.9
49.7
37.2

59.0
94.4
53.8
55.7
33.8
101.0
4.2
45.0
57.2
55.5
43.0
47.3
37.0

57.0
90.0
51.9
54.5
34.1
98.0
3.9
42.0
54.7
54.0
41.8
45.2
36.8

2001
107.0

60.0
99.6
57.5
57.1
35.8
107.5
5.0
51.8
61.8
55.9
42.7
52.3
38.1

Data for 1999 and 2000: Eurostat, structural indicators, last update: 11.01.2002

European Commission, Autumn 2001 Forecasts for 2001-2002, European Economy, Supplement A, Economic
Trends, No 10/11 - October November 2001.
Member States: Stability and convergence programmes updates 2001
France: figures based on cautious assumption of GDP growth, Denmark not yet published

In  the  aftermath  of  the  slowdown,  countries  with  existing  budgetary  imbalances  will  have  to
take action if they are to uphold their commitment to achieve a balanced budget or achieve a
surplus by the end of the current stability programme period, i.e. by 2004. The maintenance of
a  medium-term  perspective  in  the  fiscal  policies  of  the  euro  area  countries  is  crucial  to  the
overall credibility of the Stability and Growth Pact which, in turn, strengthens the confidence
of  consumers  and  investors,  particularly  in  the  current  context  of  weaker  economic  growth.
Fiscal  consolidation  is,  inevitably,  easier  in  periods  of  economic  growth,  although  the
experience of the 1999-2000 cyclical up-turn is that some Member States were loath to make
some of the changes that might have put them in more favourable positions today.

Finally, the BEPGs recommend that Member States continue to make tax and benefit systems
more  employment  friendly,  taking  into  account  the  need  for  fiscal  consolidation,  and  to
promote  the  quality  of  public  expenditure.  These  supply  side  ambitions  include  investing  in
physical  and  human  capital  and  research  and  development,  strengthening  the  efficiency  of
public spending by institutional and structural reforms, improving the long-term sustainability
of  public  finances  by  focussing  on  actions  to  raise  employment  rates,  the  reduction  in

37 European Central Bank, Monthly Bulletin, December 2001, Frankfurt/Main, p. 55.

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ECONOMIC OUTLOOK 2002

government debt and further reforms of the pension and health system, and finally by pursuing
tax  co-ordination  on  the  European  level.  All  of  these  aims  are  –  notwithstanding  their
"motherhood and apple pie" character – in principle, likely to ease constraints and facilitate the
long-term  conduct  of  macroeconomic  policy.  The  real  challenge  lies  in  securing  the  political
will to push through these structural policies.

4.2.  Invigorate labour markets

This  section  of  the  BEPG  2001  contains  the  statement  that  "Member  States  should  take
advantage  of  the  favourable  macroeconomic  conditions  to  make  the  necessary  structural
improvements  in  labour  markets  and  move  towards  the  goal  of  full  employment".  With  the
benefit of hindsight, it is clear that the statement relied on an overly optimistic assessment of
macroeconomic  conditions,  with  several  Member  States'  economies  stagnating.  In  this  much
more  adverse  economic  context,  although  structural  reforms  remain  desirable,  it  is  not
surprising that the pace has slowed.

While the strong employment performance of recent years continued during 2000 with a net
job  creation  of  1.7%  in  the  European  Union,  employment  growth  decelerated  substantially
during the year 2001. Currently, employment growth in 2001 is projected at only 1.1% with
deceleration  continuing  in  2002  with  a  projected  0.2%  before  –  under  the  current  economic
forecasts – it will pick up again in 2003 (1.0% for the EU-15). Compared to the job creation
of 2.4 million in the euro area in 2000, only 3.3 million jobs are likely to be created in the euro
area  between  2001  and  2003.  The  employment  rate  is  expected  to  remain  more  or  less
unchanged in 2002 at 62.1% in the euro area. Thus, for the first time since the beginning of
the Luxembourg process, job creation will almost grind to a halt in 2002. This means that the
Lisbon target of a 70% employment rate by 2010 will be all the harder to meet.

Consequently, while the harmonised unemployment rate has declined further in the year 2001,
reaching  its  lowest  level  since  1991  (7.8%  in  November  2001  in  the  European  Union),
unemployment is likely to rise in the year 2002 by 0.3% to 8.6% in the euro zone and 8.0% in
the EU according to the Commissions Autumn Forecast. The increase in unemployment will
be restricted only by the slower increase in the labour force. The projections for the year 2002
expect  a  reduction  of  unemployment  in  Greece  alone,  while  the  increase  in  Ireland  and  the
Netherlands will be higher than in the rest of the EU even if total unemployment there remains
substantially  below  the  EU  average.  Nevertheless,  comparing  the  2002  forecast  with  the
unemployment rates of 2000, rates will still decrease by approximately 1% in those countries
with high unemployment rates, that is in Greece, Spain and Italy, with the exception of Finland
(-0.4%  over  the  two  years)  and  France  (-0.2%).  In  Austria,  the  unemployment  rate  is
projected to increase by 0.5% over the two years, albeit to a rate which is half the euro area
average.

It falls to the EU and its Member States to continue with the reform package included in the
BEPGs  as  well  as  in  the  employment  guidelines  in  order  to  insulate  the  labour  market  in
general  as  well  as  the  specific  target  groups  from  the  effects  of  the  global  economic
slowdown. In recognition of this fact, the European Council in Laeken has recently endorsed
the  2002  employment  guidelines,  the  individual  recommendations  to  the  Member  States  and
the  joint  employment  report  2001.  The  2002  employment  guidelines  as  well  as  the  country-
specific recommendations will form the basis for the employment policies in the BEPGs 2002.
Nevertheless, only a coherent approach which includes the other policy areas addressed in the
BEPGs is likely to achieve a sufficient degree of progress in the labour market.

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ECONOMIC OUTLOOK 2002

With  regard  to  the  BEPGs  2001,  seven  general  recommendations  were  addressed  to  the
Member  States.  Given  the  rather  medium-term  nature  of  the  recommendations,  Member
States  have  in  many  cases  implemented  or  are  in  the  process  of  implementing  measures  and
thus  can  be  said  to  having  responded  to  the  recommendations.  However,  a  thorough
assessment of many measures that have been taken can only be made in due time. Still, in most
countries  efforts  have  to  be  intensified  and  better  targeted,  while  important  structural
weaknesses  remain,  especially  with  respect  to  the  high  unemployment  levels,  in  particular
amongst young people. Significant gender gaps also remain, as does the low employment rate
of older workers in several countries.

Table 4.2.1.Standardised Unemployment Rates (per cent)

Belgium
Denmark
Germany
Greece
Spain
France
Ireland
Italy
Luxembourg
Netherlands
Austria
Portugal
Finland
Sweden
UK
Euro Area
European Union

   1999

   2000

   2001

8.8
5.2
8.6
11.6
15.9
11.2
5.6
11.3
2.4
3.4
3.9
4.5
10.2
7.2
6.1
9.9
9.1

7.0
4.6
7.9
11.1
14.1
9.4
4.2
10.5
2.4
3.0
3.7
4.1
9.8
5.9
5.5
8.9
8.2

6.9
4.0
7.9

13.1
8.6
3.8
9.5
2.4
2.4
3.8
4.3
9.1
5.1
5.1
8.4
7.7

   2001*
6.9
4.6
7.8
10.6
13.0
8.7
3.8
9.5
2.2
2.3
3.9
3.8
9.2
5.2
5.1
8.3
7.7

  2002*

  2003*

7.0
4.7
8.2
10.1
13.0
9.2
4.5
9.6
2.4
3.2
4.3
4.3
9.4
5.6
5.4
8.6
8.0

6.9
4.6
7.8
9.6
12.1
8.7
4.5
8.9
2.2
3.5
4.2
4.7
9.3
5.4
5.4
8.2
7.6

Data for 1999, 2000, 2001: Eurostat, structural indicators, last update: 11.01.2002
*    European Commission, Autumn 2001 Forecasts for 2001-2002, European Economy,

Supplement A, Economic Trends, No 10/11 - October November 2001.

A key challenge for several Member States is the increase in participation among women and
older  workers  in  the  labour  market,  although  success  of  recent  measures  in  these  fields
remains  generally  low.  As  central  elements  in  such  a  strategy,  the  BEPG  2001  mentioned
equal opportunities action schemes, ensuring adequate provision of care facilities for children
and other dependants, reforming early retirement schemes and guaranteeing life-long learning.
Furthermore, it is necessary to promote the participation of disabled people, ethnic minorities
and migrants.

In  those  countries,  where  the  employment  of  older  people  is  well  below  the  Stockholm
European  Council's  target  rate  of  50%  by  2010,  there  has  been  a  reform  of  early  retirement
schemes,  which  should  keep  senior  citizens  in  the  work  force  (for  instance  in  Belgium,
Luxembourg,  Austria).  However,  a  comprehensive  and  active  ageing  policy  is  still  absent  in
most  Member  States,  while  measures  taken  so  far  remain  highly  fragmented  and  incoherent.
Special  policies  for  young  people  have  been  introduced  or  are  being  continued  (in  France,
Italy, United Kingdom) but the planned targets have not been widely met.

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ECONOMIC OUTLOOK 2002

Labour market policies have also been targeted in the field of  childcare and other dependent
care (Ireland, Netherlands), for example by increasing child benefit rates (Ireland, planned in
Austria) or childcare places (Netherlands), or by focusing on the integration of workers with
disabilities (planned in Luxembourg), while other countries still have to considerably improve
their efforts (Spain). Also in this respect, not all of these actions, especially those to improve
female  employability,  are  sufficient  to  increase  employment  up  to  the  levels  agreed  upon
(Spain).

Although  the  rise  in  women's  participation  has  been  rather  high  in  the  last  few  years,  this
development was based on mainly part-time jobs. It will be necessary to intensify efforts in this
respect to achieve the Lisbon target (60% female employment rate by 2010). Currently, with
the  employment  rate  of  women,  comprehensive  approaches  on  gender
regard 
mainstreaming seems to be lacking in many Member States (especially in Belgium, Italy, Spain
and  Luxembourg).  National  targets  for  female  participation  in  employment  –  as  agreed  in
Lisbon – need to be established in all Member States.

to 

Activities for the (re-)integration of  ethnic minorities into the labour market proved partially
encouraging (Netherlands, Italy, Sweden), although these measures responded partly to labour
market  shortages  (especially  in  Italy);  generally  the  situation  of  minority  groups  did  not
improve  substantially.  Denmark  and  the  Netherlands  have  set  up  concrete  targets  for  ethnic
minorities.

An  important  contribution  to  employment  growth  is  the  reduction  of  labour  charges,  either
generally  or  specifically  targeted  at  labour  force  segments,  that  is  for  example  low-paid
workers.  The  tax  burden  on  labour  has  decreased  in  several  Member  States  (Belgium,
Germany,  Finland,  France,  Italy,  Sweden,  Spain,  the  United  Kingdom),  while  wage  or  non-
wage  labour  costs  still  remain  at  high  levels  in  some  countries  (Austria,  Belgium,  Denmark,
Finland, Germany and Sweden).

Particular  emphasis  has  been  placed  in  a  number  of  countries  on  the  issue  of  low  income
levels. By reducing marginal tax rates or by supplementary public funding, also with regard to
part-time contracts, employment creation is expected (Belgium, Denmark, Germany, France).
Efforts  to  reduce  corporate  tax  rates  have  progressed  in  many  countries  and  will  provide
further  incentives  for  job-creation.  All  in  all,  tax  reductions  have  been  modest  (except  the
United  Kingdom),  probably  with  the  exception  of  those  pertaining  to  low  wage  jobs.  Some
countries will continue to use tax and benefit reform to remove financial disincentives to take
up work and postpone early retirement.

Furthermore,  reforms  to  benefit  schemes,  such  as  those  which  have  limited  and  tightened
conditions  for  unemployment  benefits  (Denmark,  Finland,  Sweden)  or  disregarded  a  certain
percentage of low level earnings for social assistance calculations (Finland) have boosted still
further  the  incentive  to  take  up  jobs,  even  if  the  implementation  of  such  reforms  made  slow
progress. Changes to pension schemes further reduced incentives for early retirement (Austria,
Finland, Denmark). However, impediments to changes in the established benefit schemes were
encountered in, for example, the Netherlands.

With  regard  to  labour  mobility  within  and  between  Member  States,  major  success  is  still
awaiting; the impact of cross-national mobility on unemployment and employment-seeking has
been  rather  disappointing.  No  substantial  figures  are  presented  as  to  the  number  of  non-
national  job-seekers  in  EU  countries.  In  Luxembourg,  the  possibility  of  cross-border
organisation of apprenticeship training will be considered. The emergence of a European-wide

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ECONOMIC OUTLOOK 2002

system  of  job  vacancies  or  even  a  European  wide  labour  market  is  still  a  hypothetical  issue,
however.

The  certification  of  skills  and  capabilities  as  well  as  training  schemes  is  another  way  of
increasing  the  employability  of  people,  especially  young  people  (e.g.  in  Austria,  Belgium,
Portugal),  or  of  including  older  people  into  the  labour  market  (Sweden).  In  general,  this
measure should, according to the BEPGS, be linked to a coherent  life-long learning strategy,
which  is,  however,  not  in  place  in  all  countries  (in  particular  in  Belgium,  Greece,  Italy,
Portugal  and  Spain).  In  particular,  Germany,  Greece,  Portugal  and  Luxembourg  would  have
to continue their efforts to provide encouragement to alternative means of training and access
to  employment,  especially  in  terms  of  improving  the  quality  of  continuing  learning  efforts.
Especially  in  the  field  of  life-long-learning  schemes,  the  Southern  European  countries  will
require considerable effort to implement workable strategies.

Long-term unemployment is a problem for a number of countries. While some countries have
successfully targeted specific measures to the long-term unemployed, the situation in Belgium,
Germany  (especially  in  the  Eastern  part),  Sweden  and  the  United  Kingdom  for  example  has
not  improved  significantly.  In  the  Netherlands,  long-term  unemployed  people  leaving  the
benefit system are offered incentives in the shape of a tax-free bonus, while in other countries
firms  hiring  long-term  unemployed  persons  receive  exemptions  from  taxes  or  social  security
charges (Italy).

Generally,  member  countries  should  be  encouraged  to  intensify  their  efforts  by  developing
preventive  and  employability-oriented  strategies,  building  on  the  early  identification  of
individual needs (as in the case of younger unemployed). In this context, the Member States
are  called  upon  to  review  their  public  employment  services,  encouraging  cooperation  with
other service providers.

Measures  are  required  to  make  contracts  more  flexible  and  by  so  doing  meet  the  needs  of
target groups, e.g. by introducing time credit systems (Belgium), part-time practices (Austria,
Greece,  Italy),  or  by  removing  obstacles  on  part-time  contracts  (Spain).  Not  all  of  these
measures have been successful and as such require a more effective implementation (Austria,
Germany, Greece and Italy).

The introduction of greater  flexibility with respect to  wage dispersion, for example to reflect
differences  in  skills  and  qualifications  between  sectors  and  regions,  seems  to  be  difficult.
Especially in Belgium, Germany (in particular Eastern Germany), but also in Ireland, Italy and
Spain  regional  disparities  are  still  considerable,  while  in  the  United  Kingdom  the  skill  gap
represents a major problem.

Although the participation of women in the labour market has been on the increase over the
last  few  years,  this  high  level  of  growth  has  been  built  on  part-time  jobs,  a  pay  gap  in  the
private sector of around 15-20%, and persistent glass ceilings in terms of career development
and  management  positions38.  Although  some  progress  has  been  achieved  in  recent  years
(especially in Austria, Belgium, Portugal and the United Kingdom), much remains to be done
in this field in, for example, the Netherlands, Austria, Germany, or Ireland. So far, no country
has  been  able  to  implement  effective  measures  to  reduce  substantially  the  gender  gap  in
payments.  The  main  progress  has  been  made  with  respect  to  the  preparation  of  reports  and
studies, with a view to future policy action (Belgium and Germany).

38 Cf. European Commission / Council of the European Union, Joint Employment Report 2001.

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4.3.  Ensure efficient product (goods and services) markets

4.3.1.  Completion of the Internal Market

The BEPG 2001 repeated the aim that Member States should achieve deficit in transposition
of internal market legislation transposition deficits of less than 1.5% before the 2002 Spring
European  Council  in  Barcelona.  This  target  was  set  by  the  European  Council  meeting  in
Stockholm,  March  2001,  and  refers  to  the  internal  market's  legal  framework,  now
encompassing  nearly  1,800  legislative  measures  as  defined  by  the  European  Commission.
Recent  figures  published  by  the  European  Commission  in  November  2001  indicate  that
progress  has  been  made  in  all  but  two  countries  (Sweden  and  Luxembourg)  since  the  last
survey  in  May  200139.  Five  Member  States  currently  fulfil  the  target  (Finland,  Denmark,
Sweden, the Netherlands, and Spain), with Italy being close to the target with a transposition
deficit of 1.7%. The Internal Market Scoreboard also notes that progress in Finland, Greece,
the  Netherlands,  Italy  and  Denmark,  has  been  substantial.  On  average,  the  current
transposition deficit stood at 2.0% in November 2001.

Those  Member  States  which  are  not  on  course  to  achieving  the  target  by  Spring  2002  and
those with a negative transposition record in recent months will need to step up their efforts to
maintain a truly European internal market for companies and citizens alike. This is especially
important  for  some  of  the  larger  countries,  i.e.  France,  the  UK  and  Germany,  as  they
constitute  a  substantial  share  of  Europe's  internal  market.  The  Commission's  findings  also
confirm  that  only  90%  of  directives  have  been  transposed  in  all  Member  States,  and  that  in
some  areas,  such  as  transport  or  consumer  policy,  the  transposition  record  is  still  at  or  well
below 75%. The transposition of internal market legislation should also be coupled with other
policy  strategies.  For  example,  if  the  European  Union  and  its  Member  States  pay  special
attention to environmental policy, as agreed in Gothenburg 2001 and included in the European
Sustainable  Development  Strategy,  transposition  of  legislation  is  a  key  area  in  which  the
Member States can demonstrate their commitment to this long-term strategy.

Finally, plans to simplify and improve the regulatory environment, presented by the European
Commission to the European Council in Laeken40, will lead to an action plan (to be presented
in June 2002), which will include proposals to the Member States for a better transposition of
Community acts. This initiative within the framework of the White Paper on Governance will
also target the European level and thus offers the opportunity for a more coherent approach.

Developments with regard to the further opening of the public procurement market are under
way  in  several  Member  States.  The  implementation  of  the  public  procurement  directives  in
national law has been finalized in some Member States, e.g. in Germany by the implementation
of the new ordinance on the award of contracts (VgV,  Vergabeverordnung) which concluded
the  transposition  of  two  EU  directives  in  national  law.  The  further  development  of  on-line
availability  has  progressed  in  several  Member  States,  in  some  Member  States  pilot  projects
have  started.  In  several  Member  States,  e.g.  in  Austria  and  the  UK,  administrative  reforms
enhance the transparency of public tendering. The value of public procurement which is openly
advertised  compared  to  the  total  value  of  public  procurement  has  increased  from  11%  in

39 European Commission, DG Internal Market, "Internal Market Scoreboard", no. 9, November 2001.
40 European Commission, "Communication from the Commission, simplifying and improving the regulatory

environment, COM(2001) 726 final", Brussels, 05.12.2001.

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1997–1999  to  15%  in  2000 41.  Disparities  between  the  Member  States  persist,  however,
ranging  from  6%  in  Germany  to  levels  above  20%  in  Denmark,  Spain,  the  UK,  Ireland  and
Sweden  and  Greece  (1999  data),  with  major  improvements  evident  in  Austria,  Italy  and  the
Netherlands. The ratio of public procurement published in the Official Journal as a percentage
of  the  total  amount  of  public  procurement  has  increased  by  36%  since  1999.  The  European
Commission  finds  evidence  of  substantial  progress  in  Spain,  Sweden,  the  Netherlands,  Italy,
Austria, Denmark and the United Kingdom in 200042. Most of these countries have continued
in their reforms of the administrative execution of public procurement, for example in Austria
where  the  public  procurement  procedure  had  been  centralised  under  the  control  of  a  single
authority.

4.3.2.  Reinforce competition

The opening up of  network industries, according to strictly defined time tables is required by
community directives. In the area of energy supply service, in the last two years, a number of
countries  have  opted  for  full  rather  than  partial  liberalisation.  At  the  moment,  approximately
65%  of  electricity  demand  in  the  EU  is  open  to  competition,  with  incumbent  operators  still
maintaining  market  shares43.  Some  Member  States  have  furthermore  enhanced  the  operation
of  regulatory  authorities  with  the  aim  of  promoting  effective  competition  in  the  gas  and
electricity  markets  (e.g.  the  Netherlands  and  the  United  Kingdom).  On  the  other  hand,
concentration  has  increased  in  some  sectors  as  companies  prepare  for  a  European-wide
market,  with  the  consequence  that  such  companies  have  achieved  a  more  dominant  position
(e.g. in Sweden). It should be the aim of the institutions to achieve the full opening of the gas
and  electricity  market  by  the  year  2005  in  the  European  Union,  provided  that  this  has  no
negative effect on high standards of environmental protection.

Further steps were taken with regard to the reform of postal services, for example in Finland,
Ireland and the United Kingdom. Liberalisation in railway transport has proven to be a difficult
task  for  some  countries:  customers'  dissatisfaction  is  sometimes  very  high,  a  most  notable
problem  having  occurred  in  the  United  Kingdom  with  the  bankruptcy  in  October  2001  of
Railtrack, the company which owns the track and stations of the rail system.

With regard to the capacity and effectiveness of the competition and regulatory authorities, as
well as the co-operation between member state and Community authorities, progress is evident
in, for example, the recent revision of competition laws in Denmark and the reform of laws in
Spain and the United Kingdom.

With regard to both the  reduction of the overall level of State aid in relation to GDP and the
increase  in  transparency  of  State  aid  policies,  Member  States  have  made  progress  in  recent
years44.  Between  1997  and  1999,  the  level  of  state  aid  as  a  percentage  of  GDP  has  been

41 Cf. European Commission, statistical and technical annex to the "Report on the functioning of Community
product  and  capital  markets  COM(2001)  736  final",  Brussels,  07.12.2001,  p.  30;  and  p.  18  in  the  report
itself.

42 Cf.  European  Commission,  "Report  on  the  functioning  of  Community  product  and  capital  markets,

COM(2001) 736 final", Brussels, 07.12.2001.

43 Cf. for a recent analysis, European Commission, DG Economic and Financial affairs, "Market performance
of  network  industries  providing  services  of  general  interest:  a  first  horizontal  analysis",  Brussels,
07.12.2001.

44 Cf.  European  Commission,  "State  Aid  Scoreboard,  second  edition,  COM(2001)  782  final",  Brussels,

20.12.2001.

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reduced by 30%. In 1999 the EU average was about 1% of GPD, ranging from approx. 0.5%
in  the  UK  to  more  than  1.5%  in  Finland  and  Ireland.  Sweden,  the  Netherlands,  Italy  and
Greece  are  below  the  EU  average.  Most  Member  States  have  gradually  redirected  aid  to
horizontal  objectives  that  are  not  targeted  towards  specific  sectors  or  specific  regions.  The
most  important  horizontal  objectives  concern  small  and  medium-sized  enterprises,  energy
saving,  the  environment,  as  well  as  research  and  development.  In  this  sense,  the
recommendations of the European Council meetings in Stockholm and Lisbon to move away
from  sectoral  or  regional  objectives,  underline  an  already  existing  trend.  In  addition,  ad-hoc
aid has been cut substantially in recent years. With the establishment of the Commission's state
aid scoreboard, peer pressure is expected to increase on those members states that do not live
up  to  the  targets  as  well  as  on  those  who  might  undo  their  progress  in  economically  more
difficult times. The transparency of state aid policies as well as the reduction of administrative
burden has been improved in a number of Member States.

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

Since the adoption of the BEPGs 2001, progress has been made with regard to the  Financial
Service  Action  Plan  (FSAP)  on  the  European  level  especially  with  the  final  adoption  of  the
European  Company  Statute,  the  directives  on  Undertakings  for  Collective  Investment  in
Transferable  Securities  (UCITS),  the  amendment  on  to  the  Money  Laundering  directive  and
the  regulation  on  cross-border  bank  transfers,  as  well  as  through  the  establishment  of  the
Securities  Committee  and  the  Committee  of  Securities  Regulators.  By  mid-December  2001,
twenty-five out of the forty-two measures in the Action Plan had been completed45, although
the  institutions  are  behind  the  schedule  set  by  the  FSAP  for  some  of  the  measures.
Considerable effort will be needed on the part of Member States to ensure that measures at the
national level will be implemented within the specified deadlines.

Significant progress has also been made with regard to the implementation of the Risk Capital
Action  Plan46,  although  the  integration  of  EU  financial  markets  is  still  far  from  complete.
Venture  capital  investment  in  Europe  has  tripled  between  1998  and  2000,  and  investment  in
early-stage  venture  capital  has  increased  fourfold.  However,  venture  capital  investment  as  a
percentage  of  GDP  in  the  Member  States  shows  marked  differences,  with  the  UK  and  the
Netherlands  having  reached  almost  0.4%,  while  in  Austria,  is  below  0.1%.  Besides
improvements  on  the  supply  side,  efforts  are  required  to  bolster  the  demand  side,  that  is  to
make  it  easier  for  SMEs  especially  to  create  new  businesses  and  take  up  new  ideas.  The
information  now  available  on  the  time  and  costs  for  starting  up  a  new  business,  showing  a
considerable  reduction  in  many  Member  States,  should  be  used  by  those  Member  States
lagging behind to increase their efforts to reduce administrative and financial burdens.

The global economic downturn as well as current stock markets problems will affect venture
capital investment and make it more difficult for Member States to press on with reforms to
the taxation system. Progress is evident in almost all Member States, especially with regard to
tax exemptions, the simplification of the tax framework for venture capital funds, the lowering
of  capital  gains  tax  on  the  acquisition  of  stock  options  and  the  exemption  of  capital  gains
raised from the transfer of shares and other equity interests. Nevertheless, progress is required

45 Cf.  European  Commission,  "Fifth  progress  report  on  the  Financial  Services  Action  Plan  -  An  Integrated
European Financial Market - Europe Must Deliver on Time, COM(2001) 712 final", Brussels, 30.11.01.
46 Cf.  European  Commission,  "Communication  from  the  Commission  to  the  Council  and  the  European
Parliament on implementation of the Risk Capital Action Plan (RCAP), COM(2001) 650 final", Brussels,
25.10.2001.

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to  facilitate  cross-border  economic  activities,  a  task  which  requires  further  co-operation
between the Member States.

Special emphasis was given to the easing of bankruptcy laws in the BEPGs. While virtually all
Member States have acknowledged the importance of this issue, not all of those having been
specifically  addressed  have  started  or  completed  legislative  processes  to  implement  this
recommendation.

With  regard  to  the  prudential  supervision,  several  Member  States  have  made  progress  in
continuing either the implementation of recently adapted laws (e.g. Ireland, Austria, Finland)
or  the  legislative  process  leading  to  the  establishment  of,  mostly,  integrated  supervisory
authorities  for  different  financial  services  (e.g.  Germany).  However,  in  some  countries,  new
prudential supervision mechanisms have proved to be controversial (e.g. Greece).

4.5.  Encourage entrepreneurship

4.5.1.  Create a business-friendly environment

Evidence  on  the  regulatory  and  administrative  environments  provides  grounds  for  guarded
optimism47.Yet, the regulatory and administrative environment differs significantly across the
Member States. Data suggest that between 1999 and 2001 there has been a modest decrease
in the percentage of firms considering the regulatory and administrative rules to be an obstacle
to  enterprise  performance.  At  the  same  time,  the  dispersion  across  the  Member  States  has
widened with firms in Denmark, Germany, Greece, Luxembourg, the Netherlands and Finland
reporting  an  increase  in  these  constraints.  There  has  been  no  change  in  the  case  of  firms  in
Belgium  and  in  the  UK.  Firms  in  the  remaining  seven  Member  States  firms  responded  that
there  had  been  an  improvement.  With  regard  to  regulatory  quality,  which  relates  to  the
efficiency,  effectiveness  and  transparency  of  regulations  and  related  government  formalities,
several  Member  States  have  launched  initiatives  to  simplify  and  reduce  the  volume  of
legislation through, for example, systematic reviews or sunset clauses.

At the same time, Member States continue to introduce regulations at too quick a pace. This is
made  clear  by  the  notifications  of  draft  technical  regulations  by  the  Member  States.  The
number of notifications has grown from 591 in 1999 to 751 in 2000, the figures for the first
half  of  2001  indicate  a  slight  decrease,  albeit  from  a  high  level.  A  large  share  of  companies
were dissatisfied in 2001 with the quality of their regulatory environment; many have not yet
felt  any  impact  from  government's  attempts  to  simplify  legislation,  particularly  companies  in
France,  Germany  and  Denmark.  The  main  priority  areas  identified  for  simplification  of  the
regulatory  environment  are  employment  and  working  conditions  (especially  in  Belgium,
Greece,  France,  Ireland),  VAT  payments  and  refunds  (especially  in  Denmark,  Finland,
Netherlands and Portugal) and product conformity and certification or approval (especially in
Germany, Spain, Italy, Netherlands, Sweden and the UK).

Several Member States have taken or continued to apply measures towards a streamlining of
the  administrative  procedures  related  to  the  setting  up  of  new  businesses.  Data  confirm  a
trend towards shorter procedures, especially in Member States where the procedures had been
the  longest.  Some  improvements,  for  example  in  Ireland,  have  been  dramatic.  Yet,  there
remains  important  scope  for  progress,  by  convergence  on  best  practice.  The  time  taken  to

47 Cf. European Commission, DG Internal Market, "Internal Market Scoreboard", no. 9, November 2001.

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register a new private limited company in the EU ranges from less than one week up to four
months, depending on the member state.

All  Member  States  are  engaged  in  efforts  to  promote  entrepreneurship,  both  within  the
education  system  –  through  courses,  business  games  and  visits  to  companies  –  and  among
potential  entrepreneurs.  In  the  Netherlands,  a  consultative  commission  on  entrepreneurship
and education has been established, with representatives from the business community, various
education sectors and social organisations. France and the United Kingdom have set up a joint
club  to  promote  inter-university  co-operation  in  entrepreneurship,  while  in  Spain  the
government offers grants for university students to follow a six-month programme of practical
training in business. All Member States furthermore saw an improvement in their scientific and
innovation performance. However, experiences have been diverse. While some countries, such
as  Ireland,  Spain  and  Portugal,  are  clearly  catching  up,  those  who  had  already  been  leading,
such  as  Finland  and  Denmark,  continue  to  register  further  improvements  in  innovation
performance. In other Member States, research and technological development and innovation
are  clearly  losing  momentum.  Although  the  situation  in  the  four  largest  EU  economies
(France, Germany, UK and Italy) is improving, it is doing so at rates below the EU average.

Differences  among  Member  States  also  persist  in  the  effective  rates  of  company  taxation.
These  differences  could  impact  on  economic  decisions  by  both  discriminating  between
domestic  inward-bound  and  outward-bound  investment  and  influencing  the  choice  of
composition of the investment in terms of assets and of sources of finance. In order to tackle
the  existing  tax  obstacles  to  the  Internal  Market,  the  Commission  has  proposed  a  two-track
strategy48  involving  both  targeted  remedial  measures  and  a  longer-term  comprehensive
solution consisting of providing companies with a common consolidated tax base for their EU-
wide  activities.  Harmful tax  competition  constituted  a  major  challenge  in  2001.  On  11  July
2001,  the  Commission  announced  the  launching  of  state  aid  investigations  directed  at  11
corporate tax schemes in eight Member States, thus adding momentum to the elimination of
harmful  tax  competition  in  the  EU.  Luxembourg's  finance  companies  regime  and  the
Netherlands'  special  fiscal  regime  for  international  financing  activities  are  among  those  to  be
investigated. The EC also called upon four other Member States to put certain tax regimes in
conformity with the EU rules.

On  the  other  hand,  public  procurement  markets  have  become  increasingly  transparent.  The
proportion of public procurement published in the Official Journal increased considerably, with
significant gains being realised in Spain, Sweden, the Netherlands, Italy, Austria, Denmark and
the  UK.  However,  improvements  have  not  been  the  same  in  all  countries  and  as  a  result,
differences  in  the  market  transparency  of  public  procurement  across  Member  States  have
grown.  Registered  awards  of  contracts  resulting  from  cross-border  tendering  have  also
increased. This might indicate that public procurement markets are opening up to international
competition

In  the  field  of  VAT  harmonisation,  progress  has  been  rather  slow.  Efforts  to  simplify  the
obligations of operators with respect to VAT, has not been forthcoming, since no agreement
has been reached on this matter at Council level even though proposals have the backing of the
European Parliament, the Economic and Social Committee and operators.

48 Cf.  European  Commission,  "Communication  from  the  Commission  to  the  Council,  European  Parliament,
and the Economic and Social Committee, Towards an Internal Market without tax obstacles A strategy for
providing companies with a consolidated corporate tax base for their EU-wide activities, COM (2001) 582
final", Brussels, 23.10.2001.

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4.5.2.  Encourage risk-taking

The  general  financial  conditions  affecting  specifically  SMEs  and  in  particular  those  SMEs
showing a fast-growth profile stand in need of improvement. Of particular relevance for SMEs
are measures to reduce costs and red-tape in order to access the deep and liquid capital market
in the EU that has emerged since the introduction of the euro. Mutual guarantee societies are a
possible solution to public guarantee schemes to solve the problem of obtaining bank loans for
enterprises  lacking  collateral.  The  special  exemption  schemes  on  VAT  applying  to  small
businesses, which differ widely from one member state to another are in need of an overhaul.

Prospective small businesses encounter a variety of logistical and financing problems in getting
going.  Around  a  quarter  of  SMEs  in  the  EU  encounter  difficulties  in  surviving.  The  worst
problems  seem  to  arise  in  Greece  and  in  Portugal.  However,  in  several  Member  States  –
Belgium, Ireland and the Netherlands and, to a lesser extent, Austria, Finland, Sweden and the
United  Kingdom  –  SMEs  emerge  as  much  more  confident,  focusing  their  activities  on
improving quality, innovation and profitability. While most SMEs reported no constraints on
business performance over the past two years, several reported difficulties with administrative
regulations, while others pointed to problems in gaining access to finance.

Business angels (informal private investors) can play a crucial role in helping SMEs. It is only
in recent years that networks of  business angels  (BANs) have been formed. Evidence shows
that between 1999 and 2001 there has been a 25% increase in the number of BANs across the
EU,  to  130.  The  importance  of  BANs  in  supporting  and  sustaining  growth  of  SMEs  lies  in
their  contribution  to  resolving  financial,  managerial  and  information  problems.  Providing  an
environment  that  is  conducive  to  the  formation  of  BANs  or  similar  sources  of  guidance  for
small firms and entrepreneurs is one of the challenges which face Member States.

4.6.  Foster the knowledge-based economy

4.6.1.  Promoting Economic Growth

Information  and  communication  technology  (ICT)   is  having  a  profound  impact  on  the
potential for economic growth, being one of the main sources of competitiveness and increases
in  incomes49.  The  sectors  with  the  strongest  medium-term  employment  growth  at  EU  level
have been and continue to be those characterised by either high technology or ICT-related jobs
and/or by high knowledge intensity as reflected in the high educational levels of the workforce.
Differences  in  productivity  growth  between  EU  Member  States  are  not  only  the  result  of
different use of ICT, but in some cases also reflect a catch-up process, especially by countries
like  Greece,  Finland  and  Ireland,  as  compared  to  Denmark,  the  UK,  Germany,  or
Luxembourg.

Despite the recent downturn of the economy, Europe's long-term demand for people with ICT
skills  remains  strong.  Estimates  indicate  that  the  ICT  skills  gap  would  widen  to  1.5  million
workers by 2003.

A  central  question  is  how,  specifically,  the  ICT  and  e-business  skills  gap  affects  enterprises,
notably  SMEs  –  both  ICT  and  end  user  industries.  There  is  a  particular  need  to  close  the
supply and demand gap rapidly, and provide concrete solutions to help EU enterprises adapt

49 Cf.  European  Commission,  "Communication  from  the  Commission  to  the  Council  and  the  European
Parliament,  The  Impact  of  the  E-Economy  on  the  European  Enterprises:  Economic  Analysis  and  Policy
Implications, COM 2001 (711) final", Brussels, 29.11.2001.

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to  the  e-Economy.  Enterprise-focused  policy  actions  should  concentrate  on  concrete  and
pragmatic  solutions.  In  this  respect  a  number  of  tools  should  be  explored,  including  tax
incentives for mobility and maximising the range of skill development tools used by enterprises
(e.g. knowledge networks, and corporate universities or skills programmes set up by industry
and business schools).

4.6.2.  Stimulate R&D and innovation

The transition of the European Union into a knowledge-based economy has begun, but it still
lags significantly behind the United States and Japan. Deficiencies in areas such as investment
in new technologies, high-tech patenting and internet penetration are still remarkable. The gap
between US high-tech patenting in Europe and European patenting in the United States is still
large.

Recent  figures  underline  that  although  R&D  investment  is  an  important  contribution  in  the
direction  of  a  transition  to  a  knowledge-based  economy,  the  overall  spending  on  R&D
measures  in  the  European  Union  has  failed  to  improve  substantially  in  recent  years.  In  the
context of a stagnating economy, expenditure remains at 1990s levels. The variation between
EU Member States has even increased, showing a considerable north-south "cleavage". While
some countries are firmly situated above the EU-average of 1.9% of GPD (in 2000)50, that is
for  example  Sweden,  Finland,  Germany  and  France,  others  are  below  1%  in  overall  R&D
spending  (Greece,  Portugal  and  Spain).  Both  business  (at  1.2%)  and  public  expenditure  (at
0.7%) have made scant progress in recent years.

In some EU Member States, targets have been set in order to increase the R&D quota (e.g.
the  UK,  aiming  at  2.5%  of  GPD  by  2005),  complemented  by  additional  funds  and  tax
incentives for businesses. In Germany, a University Initiative for the Future has been financed
from the UMTS-linked interest savings. In France, the government has prepared the basis for a
closer cooperation in R&D between the public and private sectors, including the setting up of
seed capital funds. Also within the framework of the Risk Capital Action Plan, measures have
been implemented to encourage businesses to increase their expenditure in innovative fields.

It  is  essential  that  European  competitiveness  be  strengthened:  timetabled  policy  steps  to
facilitate a  knowledge-based economy  have  to  be  increased,  a  business  climate  supportive  of
innovation  has  to  be  set-up;  venture/risk-capital,  that  will  encourage  investment,  has  to  be
provided. In this context, it is necessary to raise private sector involvement contributing to a
better  commercialisation  of  R&D  results  and  to  the  establishment  of  a  European  Research
Area.  Programme.  For  Member  States  that  are  major  beneficiaries  of  EU  structural  funds,
programmes and investments have to be set up; the framework for high-tech patenting needs
to  be  improved,  ties  between  university  and  business  leading  to  knowledge  transfer  and  a
better commercialisation of R&D results should be established.

4.6.3.  Access and use of ICT: education and learning

The  necessity  of  access  to  and  use  of  ICT  technologies  has  gained  much  attraction  in
discussions  and  debates  in  EU  Member  States  recently.  The  percentage  of  households  with
acess to the Internet at home has risen steadily from 28% in 2000 to 38% in 2001. This trend
is  asymmetrical,  however,  with  northern  EU  countries  achieving  a  figure  of  over  50%
(Denmark,  Sweden  and  Netherlands  at  above  60%),  whilst  southern  countries  lag  behind

50 Eurostat estimate.

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(Greece at around 10%, Spain and Portugal below 30%). Some Member States have reacted
to  this  challenge.  For  example  Spain  has  made  progress  through  the  development  of  a
regulatory framework for the ICT sectors as well as the development of e-Administration and
further taxation measures to foster investment. A large number of Member States have put a
special stress on e-government, education and research as well as on the organisation of work
and  electronic  commerce.  Nonetheless,  northern  countries,  such  as  Sweden,  remain  at  the
forefront as regards ICT-related production and internet usage.

A special emphasis was placed in 2001 on e-Learning measures. While in the past, training in
information technology (IT) skills was the mainstay of E-learning - covering at present 76% of
all  offers-
  other  industry  areas  as  well  as  governments  and  administrations  are  moving  into
this  area.  It  is  necessary  to  provide  internet  access  to  pupils  in  schools  and  students  in
university;  to  improve  the  compulsory  training  of  teachers  and  academic  staff;  to  establish
further steps helping to reduce the costs of internet usage; to accompany the strengthening of
the  regulatory  framework  for  e-commerce  by  a  vigorously  promoted  and  far-reaching
communication strategy.

The latest developments in education and training efforts can particularly be seen in the PISA
study.  The  study,  the  most  comprehensive  international  survey  ever  undertaken,  shows  that
the results of many EU Member States -

 with the exception of Finland -

 are not satisfactory.

Some  Member  States  have  reacted  to  the  shortcomings.  As  the  example  of  Portugal  shows,
efforts have been taken to reinforce the advanced training of human resources in Science and
Technology  as  well  as  initiatives  to  encourage  the  co-operation  between  entrepreneurs  and
R&D systems and a new R&D program consisting of a joint venture between corporations and
research institutions.

In  this  context,  detailed  analysis  of  life-long  learning  requirements  in  the  knowledge-based
society  will  entail  redefining  basic  skills,  to  include,  for  instance,  the  new  information  and
communication  technologies  and  of  foreseeable  employment  market  trends.  The  analysis
should  include  the  specific  needs  of  groups,  which  have  been  excluded  from  training  and
education as well as the adaptation requirements of teachers and trainers.

Certain  countries,  especially  Finland,  the  Netherlands  and  Spain,  strongly  emphasise  the
innovative potential of ICT for teaching and learning and are investing considerable resources
and effort into this field. The e-Luxembourg initiative, for its part, illustrates policy and action
on  a  broad  front  in  favour  of  integrating  ICT  into  the  education  and  training  domain.  It
includes  curriculum  reform,  teacher  training  and  re-training,  matching  learning  pathways  to
new  occupational  profiles  in  the  Information  Society,  demystifying  ICT  and  motivating
potential  learners  to  take  up  digital  literacy  courses  with  the  help  of  local  multi-purpose
learning centres. The production of quality ICT–based learning materials preoccupies some of
other countries – with diverging views on how quality may best be assured. There is obviously
no  best  way.  "Best  practices"  should  be  compared  but  carefully  evaluated  in  terms  of  the
respective  national  characteristics  in  this  field.  Due  to  resistant  traditional  patterns  imports
might not work in the desired direction; lessons for other countries need to be drawn carefully.
Sweden  clearly  states  that  monitoring  quality  is  a  national  (rather  than  European)
responsibility.  Finland,  on  the  other  hand,  does  not  favour  any  regulatory  system,  on  the
grounds  that  monitoring  quality  is  a  professional  responsibility  for  individual  education  and
training practitioners themselves. However, the United Kingdom is keen to develop Europe-
wide  quality-control  standards  for  ICT-based  methods  and  the  personnel  engaged  in

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developing  and  using  these,  including  a  quality  mark  for  ICT-based  materials,  capable  of
working in concert with European procedures for mutual recognition51.

4.7.  Enhance environmental sustainability

the  2001  BEPGs 

The  general  recommendations  of 
included  recommendations  on
environmental  sustainability.  These  concern  the  implementation  of  the  European  Sustainable
Development Strategy agreed by the Gothenburg European Council meeting, the introduction
and  strengthening  of  market-based  policies,  the  reduction  of  sectoral  subsidies  and  tax
exemptions which have negative environmental impact, efforts to fulfil the requirements of the
Kyoto  Protocol  and  a  call  for  an  agreement  on  the  European  level  on  an  appropriate
framework for energy taxation. The following overview presents some of the measures taken
recently  by  Member  States,  partly  on  the  basis  of  the  recommendations,  partly  as  a
continuation of policies already decided upon.

With  its  1999  electricity  reform  Denmark  introduced  –  besides  the  liberalisation  of  the
electricity  market  –  a  system  of  tradable  –  transferable  emission  permits  for  CO2  emissions
(CO2 quotas) from the electricity sector as from 2000. The first quotas have been determined
for 2000-2003. Additionally, a report on the green market economy was prepared in 2001, in
order  to  analyse  the  possibilities  of  introducing  market-oriented  tools  for  the  promotion  of
environmental  protection.  As  to  the  overall  Danish  energy  policy,  the  use  of  marked-based
instruments – such as taxes and marketable quotas – is increasing. In the area of waste taxes,
product specific taxes are used to reduce consumption and waste quantities.

Germany carried on shifting the tax burden from labour to energy. The Eco-Tax is the main
measure taken to enhance environmental sustainability in this regard. Additionally, the German
government  reached  an  agreement  with  the  energy  supply  companies  in  June  2000  to
terminate  the  use  of  nuclear  power  after  the  next  32  years.  No  new  nuclear  plant  will  be
approved.  The  German  government  encourages  the  creation  and  use  of  renewable  energy
sources. Thus, private investors in wind energy benefit from tax exemptions. With the feed-in
arrangements in the wind energy sector, premium prices for power purchase are guaranteed by
additional public funding, which should give investors confidence for further investments in the
wind energy market. As to solar energy, Germany will finance its "100 000 roofs programme"
from  1999-2003  with  €  560  million,  providing  an  essential  incentive  to  the  photovoltaic
industry.  In  order  to  further  promote  voluntary  environmental  protection  and  management
within companies, the German government in January 2002 agreed upon a draft for a new law
on  EMAS  (Environmental  Management  and  Audit  Scheme)  Eco-Audit  to  provide  additional
incentives for companies and firms to join EMAS (no longer every site will then be evaluated
separately, but numerous sites of the same company will be evaluated and registered as one).
Presently,  a  national  strategy  for  sustainable  development  is  drafted  by  the  government  in
order to merge environmental, economic and social goals and to integrate intermediate actors
in the implementation of these goals.

In  Greece,  the  energy  sector  has  been  stimulated  by  tax  exemptions  and  reductions  for  the
investment  in  or  use  of  renewable-related  energy  products  like  solar  thermal  water-heating.
This sector is moreover funded by subsidies from the public side.

51 Cf. CEDEFOP, "Memorandum on Lifelong learning Consultation Process: A Review of member state and
EEA Country Reports", Thessaloniki, October 2001 (to be published in 2002 in the CEDEFOP Panorama
Series).

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In Spain, companies are provided tax relief for investing in renewable energy projects and at
the  same  time  the  public  sector  funding  through  the  Energy  Savings  and  Efficiency  Plan  has
been reduced due to the overall success of wind energy.

In France,  the  implementation  of  the  recommendations  is  in  progress.  Tax  credits  to  reduce
global warming (tax credit for thermal insulation outlays; tax credit for the purchasing of low-
polluting  cars)  have  been  implemented  as  well  as  lower  taxes  for  firms  investing  in  power-
saving equipment. Additionally, the growth of the French biofuels industry is supported by the
application  of  lower  fuel  excise  duty  rates  to  biofuels;  French  financial  support  for  biodiesel
was nearly € 120 million in 2000.

In relation to the goal of environmentally sustainable development, the Irish Department of the
Environment published a Sustainable Development Plan in November 2000 to look into how
Ireland intends to implement the Kyoto Protocol. However probably due to the main goal to
reduce  inflation,  indirect  tax  measures  like  tradable  emissions  permits  or  carbon  or  nitrogen
taxes  were  shelved  in  the  last  budget.  Although  the  National  Development  Plan  requires  all
projects  to  be  subjected  to  an  Environmental  Impact  Assessment  plan,  in  essence,  little  has
been done of a fiscal nature to encourage environmentally sustainable growth.

In Italy, parts of the revenues received from energy taxes are used to benefit energy efficiency
or  other  environmental  projects.  Additionally,  the  "10  000  roofs  programme"  (similar  to  the
German  "100  000  roofs  programme")  supports  (by  additional  public  funding)  changes  in
consumption habits in the energy sector towards the use of renewable energies. On the other
hand,  the  increase  of  excise  duties  with  regard  to  an  environmental  tax  reform  has  been
abandoned.

In  the  Netherlands,  the  trading  system  for  industrial  NOx  emissions  has  been  linked  to  a
voluntary  agreement  with  the  industry  to  reduce  NOx  intensity  of  emissions  and  energy
consumption.

In  Austria,  an  energy  tax  on  natural  gas  and  electricity  was  introduced,  and  ecological
elements were integrated into transport taxation. With regard to private energy consumption,
the  doubling  of  the  electricity  tax  as  of  June  2000  counterbalanced  to  some  extend  price
reductions  resulting  from  market  liberalisation  in  this  area.  Furthermore,  EU  law  and  low
harmonisation in the area of taxation hindered further integration of environmental aspects in
important areas of fiscal policy. Currently the issue of increased use of environmental taxes is
intensively discussed at the national level.

In  Finland,  the  taxation  will  shift  in  the  future  toward  capital,  property,  environmental  and
energy taxes. The government is currently especially concentrating on how environmental and
energy taxation can be used to implement the Kyoto protocol.

In  Sweden,  taxes  on  CO2  emissions  and  energy  (with  the  exception  of  biomass)  support  the
increase of biomass district heating and biomass combined heat and power plants. The taxes
especially  raised  the  prices  of  coal-fired  heating  and  coal-fired  combined  heat  and  power
plants.  Generally,  in  Sweden,  biomass  is  excluded  from  energy,  carbon  dioxide  and  sulphur
oxide taxes.

In  the  United  Kingdom,  the  government  has  responded  to  the  BEPG's  stress  on  sustainable
development by introducing a Climate Change Levy (CCL). The 2001 budget introduced the
CCL, a tax on non-domestic users of electricity, gas, liquefied petroleum gas (LPG) and solid
fuels. This measure is significant in helping the UK to meet its commitments under the Kyoto
Protocol. The government is, however, under pressure to modify the measure because of its

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impact on energy-intensive business. As a result, the governments fuel price escalator, which is
designed  to  discourage  excessive  use  of  motor  vehicles  has  been  abandoned  following
disruptive  fuel  protests  in  the  autumn  of  2000.  In  addition,  the  practice  of  emissions-trading
also  plays  an  important  part  in  the  UK's  environmental  policy  strategy.  The  2000  Spending
Review sets aside 2000 £30 million over the period 2003-04 to provide financial incentives for
firms to join the Emissions Trading Group.

First  conclusions  are  difficult  to  draw  based  on  the  variety  of  measures  taken  and  fields  of
action  proposed.  Nevertheless,  a  modest  shift  towards  the  application  of  market-based
instruments  in  pursuit  of  environmental  objectives  can  be  observed,  the  support  for
technological  innovation  is  being  pursued  by  Member  States.  As  many  measures  are  still
fragmented, the development or implementation of a national sustainable development strategy
is still to be achieved by most Member States. "Mainstreaming" measures on the national level,
as on the European level, are very rare.

the 

the  contents  of 

recent  national  developments  with 

the  BEPG's
Comparing 
recommendations for sustainable development, further reforms are needed. The integration of
sustainability  as  a  major  principle  of  economic  and  fiscal  policy  into  the  Member  States'
national  policies  will  be  the  key  challenge  for  Member  States  in  order  to  support  innovation
and  investment,  and  to  create  and  combine  environmental  as  well  as  economic  and  social
benefits. The assessment of the economic, social and environmental dimensions also have to be
incorporated  in  the  planning  of  new  policies.  It  should  include  further  market  reforms,
including targeted taxation, concrete measures to raise revenues for environmental purposes,
and  the  broad  use  of  sustainability  impact  assessments  for  all  major  policy  proposals.  The
introduction of national strategies for sustainable development should finally lead to a coherent
"mainstreaming" of relevant sectoral policies.

Chapter  V  –  OVERVIEW  ON  THE  IMPLEMENTATION  OF  COUNTRY  SPECIFIC

RECOMMENDATIONS IN THE BEPGS AND THE SCPS

5.1. Belgium

With regard to  budgetary policy, due to the global economic slowdown, which in particular
affects Belgium as an export-oriented country (export growth was down to 0.8% in 2001 from
9.7%  in  2000),  and  lesser  private  consumption,  Belgium  will  not  be  able  to  achieve  the
targeted  2001  budget  surplus.  However,  a  balanced  budget  (including  UMTS-proceeds)  is
expected;  without  these  proceeds  the  budget  will  be  close  to  balance  with  a  slight  deficit  of
0.2%  of  GDP.  This  result  has  been  achieved  not  least  by  the  extraordinary  budget  control
exercise  in  July  2001  and  in  the  light  of  a  substantial  downward  revision  of  GDP  growth
targets  (1.1%  in  2001  instead  of  2.5  as  projected  in  the  2000  update  of  the  stability
programme)52.

While  the  government  and  the  European  Commission  project  an  identical  GDP  growth  for
2002, i.e. 1.3%, the projections for the fiscal balance differ. The government, in line with the
OECD projections, expects to secure a balanced budget. The European Commission is slightly
more  pessimistic  with  a  deficit  of  0.2%,  but  in  both  cases  it  is  lower  than  the  0.3%  of  GDP
surplus  aimed  at  in  the  last  programme  update.  Total  expenditure  will  stay  within  the
projections.  The  updated  stability  programme  foresees  a  primary  surplus  of  6%  for  2002,  in

52 Belgium's Stability Programme 2002-2005, November 2001, p. 11.

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line  with  the  BEPG  recommendation.  While  the  gross  debt  ratio,  which  has  decreased  to
107% in 2001, is projected to further decrease to 103.3% in 2002, albeit at a slower pace, the
target  for  2005  of  88.6%  remains  practically  unchanged.  Nevertheless,  the  underlying
projections in the programme update leading to the fulfilment of a balanced budget in 2002 are
rather  optimistic.  Indeed,  real  general  government  primary  expenditure  is  likely  to  increase
beyond  1.5%  –  a  major  benchmark  –  in  2001  and  in  2002.  In  part,  this  is  due  to  the
implementation  of  reforms,  especially  the  income  tax  reform,  but  also  a  consequence  of
expenditure increases in health care53.

Belgium has made progress with regard to the pension reform in 2001 with the Ageing Fund
being  established  in  September  2001  which  will  benefit  from  budget  and  social  security
surpluses,  non-fiscal  revenues  (such  as  the  UMTS  processed  in  2001)  and  income  from
investments effected by the Ageing Fund. The strategy to achieve sufficient financial sources
to  cover  the  costs  of  the  ageing  population  will  however  rely  heavily  on  the  continuation  of
debt-reduction and thus on securing sustainable finances in the long-term.

With  regard  to  the  labour  market,  Belgium  has  continued  to  reduce  labour  charges,
especially those concerning young people and the elderly. Until now, however, the tax burden
on labour remains one of the highest in the EU and employment amongst older workers is still
the  lowest  in  the  EU.  Tax  incentives  are  planned  in  the  budget  year  2002,  e.g.  amending
personal  income  tax,  i.e.  allocation  of  a  tax  credit  to  low  income  earners  to  promote  their
(re)entry in the labour market raising the net income of low paid employees via a reduction in
their  social  security  contributions.  As  a  measure  to  maintain  older  workers  on  the  labour
market, the tax reduction presently granted to pensioners and pre-pensioners will be halved for
the "new" pre-pensioned. Whether these new measures to provide positive incentives to stay
at work will indeed significantly reduce early exit from work, remains to be seen. Still, the tax
burden on labour remains one of the highest in the EU.

In  order  to  support  youth  employment  and  strengthen  education  and  training,  a  "young
person's first job" scheme came into operation in April 2000. Enterprises employing more the
fifty people must take on a number of young people under a "first job" agreement. The 2002
budget proposal also includes a measure to link the payment of young people's "minimex" to a
training obligation. As to the regional disparities in employment, they are difficult to eliminate
given the language barriers, the cost of moving and the uprooting of family life.

Belgium  continued  to  make  efforts  to  increase  participation  rates  of  women  and  older
workers,  an  attempt  which  is  directly  linked  to  a  generally  low  employment  rate  in  these
categories.  Several  measures  were  taken  in  this  respect,  among  other,  a  time-credit  system
allowing career interruptions for 3 months minimum and 1 year maximum, the possibility for
older  workers  to  opt  for  an  indefinite  half-time  career  break,  increasing  tax  allowances  for
child-care costs and adapting the cost of child-care to revenue. Negotiations are being held in
the  education  sector  to  increase  the  "exit"  age  of  teachers  from  55  to  58  years.  A  working
time reduction on full pay for older workers in the health sector is now being implemented.

The pace of reform in the product market and the knowledge-based economy has not been
substantial. In the gas and electricity sector which, according to the BEPG, should be opened
up to competition, not much progress has been achieved. The bill for the household consumer
remains high. As to wholesale users, they are not able to benefit from increased foreign (i.e.
German) competition because of a lack of import capacity at the Belgian borders.

53 Cf. IMF Article IV consultation on Belgium, preliminary conclusions, 26 November 2001.

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The collapse of SABENA, the envisaged closure of 400 post offices and the financial problems
of  the  Belgian  railroad  system  have  provoked  a  debate  within  the  coalition  government
(liberal,  socialist,  green)  on  how  to  address  the  problems  of  autonomous  companies  i.e.
companies that provide universal services and are being run by independent managers with the
public  authorities  as  major  or  sole  shareholders.  Currently  discussed  are  options  to  improve
the quality of the oversight by the public authorities or to privatise further.

As to the alleviation of the administrative burden on businesses, that is the reform of federal
public administration, progress is slow. A recent report mentioned that it takes, on average, 90
days to set up a business and acquire all the necessary (8) certificates.

As  regards capital  markets and  financial  services,  the  government  and  social  partners  have
agreed  on  a  draft  law  (to  be  implemented  in  2002)  on  a  "second  pension  pillar",  i.e.
complementary  group  pension  capitalisation  at  sectoral  or  enterprise  level.  A  law  was  also
passed in 2001 permitting employee participation in the capital of their enterprises. The self-
financing of the SMEs has been promoted by a partial tax exemption on reinvested profits. A
task force has been set up to facilitate SMEs' access to financing. Supervisory structures have
been revised along the lines of the Lamfalussy report on the regulation of securities markets.

Euronext, i.e. the merger of the Brussels, Paris and Amsterdam stock exchanges allowed the
Belgian companies – operating so far on a modest-sized market – to trade on a wide, liquid
market.  This  should  support  the  exceptional  growth  of  the  private  equity  market.  The
economic  downturn  is  provoking  a  financial  one:  banks  who  added  financial  intermediation
and insurance to their core business are presently issuing profit warnings. It also affects SMEs'
access  to  bank  credit.  The  degree  of  concentration  of  the  Belgian  banking  and  insurances
sector is presently very high.

5.2. Denmark

With regard to  budgetary policy,  the  significant  downward  revision  of  GDP  growth  due  to
the  international  economic  slowdown  will  particularly  affect  the  surplus  in  the  general
government  finances.  It  is  expected  to  be  somewhat  lower  than  previously  estimated,  in
particular in 2002 and 2003. Government surplus in 2001 is predicted to stay at around 2.0%
(as  opposed  to  the  2.8%  target  in  the  convergence  programme  update  in  2000)54.  The  main
contribution  to  the  reduction  of  the  government  surplus  has  to  be  attributed  to  lower  tax
revenues  from  enterprises  as  well  as  from  pension  companies.  Current  forecasts  predict  that
real growth of government consumption will stay below the projected 1.9% with the European
Commission and the OECD assuming a 1.7% rise.

The  European  Commission's  Autumn  2001  forecast  is  broadly  consistent  with  the
Government's  revised  projection  of  October  2001.  It  is,  however,  noteworthy  that  the
Commission  forecasts  a  significantly  higher  budget  surplus  in  2002  (2.1.%  of  GDP  vs.  the
Government's  estimate  at  1.6%  of  GDP).  As  the  Ministry  of  Economic  Affairs55  points  out,
the surplus on general government finances in 2002 is expected to be reduced by almost 1% of
GDP  mainly  due  to  the  loss  of  revenue  from  taxation  of  pension  capital  stemming  from  the
decline in equity prices. The Danish Economic Council56 also notes that "a main reason for the

54 European  Commission,  "Autumn  2001  Forecasts  for  2001-2002",  European  Economy,  Supplement  A,
Economic  Trends,  No  10/11,  October/November  2001,  p.  42;  Danish  Ministry  of  Economic  Affairs,
Revised short term forecast for Denmark, October 2001.

55 Danish Ministry of Economic Affairs, Revised short term forecast for Denmark, October 2001.
56 Danish Economic Council, 2001, Dansk økonomi, forår 2001.

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fall [in the government surplus from 3% of GDP in 2000 to 1% of GDP in 2002] is the lack of
revenue from taxation of returns in pensions funds following the drop in stock prices during
this  year".  It  is  also  noteworthy  that  the  various  forecasts  largely  agree  that  the  economic
slowdown will not affect the unemployment rate significantly. This can be attributed to the fact
that the Danish labour market is very tight with a very high degree of capacity utilisation.

As  already  noted  in  the  updated  convergence  programme  of  December  2000,  the  general
government  finances  are  quite  sensitive  to  market  fluctuations.  Estimates  indicate  that
decreases  in  GDP  of  1%  below  the  trend  development  of  GDP  worsen  the  balance  by
approximately  0.8%  of  GDP.  According  the  projections  made  by  the  Danish  Economic
Council (2001a), the Government will not reach its target of a budget surplus of above 2% of
GDP  in  any  of  the  years  up  to  200457.  The  medium  and  long  term  policy  framework  in
particular focuses on budgetary policy and labour market policy. The impact of ageing of the
population on the labour market is clearly the greatest challenge in the longer run. If the labour
supply  is  not  raised  in  the  coming  years,  labour's  contribution  to  economic  growth  will  be
reduced  significantly  and  this  will  make  it  more  difficult  to  meet  the  fiscal  requirements
stemming from the demographic shifts58.

In light of the expected increase in the share of elderly people in the population beyond 2005,
it is a high priority for the Danish government to run a surplus in general government finances
of 2-3% of GDP up to 2010 so that the ratio can be further reduced to around 25% in 2010.
This  is  a  precondition  for  meeting  the  challenges  from  the  ageing  of  the  population  without
future tax increases or reductions in public services.

Denmark  has  problems  in  complying  with  the  recommendation  on  local  government
consumption,  in  line  with  the  Council  recommendation  contained  in  its  opinion  on  the  2000
updated  on  the  convergence  programme  to  strengthen  the  institutional  framework.  As  the
constitution  grants  local  government  a  wide  degree  of  independence  and  co-ordination
between central and local government on the overall level of expenditures and taxes is based
on voluntary agreements (the agreements being not legally binding), it is difficult to implement
these recommendations without violating the constitutional independence of local government.
With regard to the  labour market, the implementation of the 3rd  stage  of  the  labour  market
reform  continued  in  2000  and  2001.  The  shortening  of  the  total  benefit  period  from  5  to  4
years and the advancing of the right and duty of activation was completed in early 2001. The
Finance Act for 2001 contained minor adjustments of the labour market reform, including new
instruments of active labour market policy, aiming to facilitate a more effective job search. A
reform  of  the  early  retirement  scheme,  inducing  senior  citizens  to  postpone  their  retirement
from the labour market, was implemented in 1999. In December 2000, agreement was reached
on  another  early  retirement  pension  reform.  This  reform,  coming  into  effect  in  2003,  will
simplify the early retirement pension system and support the active line, with as few people as
possible on passive maintenance. This reform assumes that an intensified effort will be made to
create  more  flex  jobs  (i.e.  jobs  with  salary  supplement)  so  that  more  people  with  reduced
fitness for work may be employed.

57 Note  that  any  reference  to  the  year  2002  are  based  on  the  proposal  by  the  former  government.  With  the
elections, the Finance Act proposal for 2002 is automatically rejected. The publication of Denmark's update
of the convergence programme is foreseen for the end of January 2002.

58 Cf. Danish Economic Council, 2001, Dansk økonomi, Efterår 2001; and Regeringen, "En holdbar fremtid –

Danmark 2010", 2001.

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Another part of the structural reform of the labour market is the tax inducements included in
the Whitsun package, i.e. a reduction of marginal taxes at low income levels (to 43.5% in the
year  2002)59.  The  lowering  of  income  taxes  levied  by  central  government  is  however  partly
offset by the rise in income taxes to lower levels of governments. One problem still remaining
on the agenda is the better integration of ethnic minorities into the labour market.

On the product markets, several initiatives have been taken to intensify competition, not least
in retail trade. Liberalisations are thus being made in respect of shop opening hours and in the
pharmacy  sector.  Increasing  public  sector  efficiency  is  centred  on  an  increased  use  of
procurement,  not  least  by  the  recently  established  Public  Procurement  Portal.  The  public
research  efforts  have  also  been  considerably  strengthened.  Through  the  revision  of  the
Competition  Act,  the  Competition  Council  has  since  1  October  2000  had  the  authority  to
apply the provisions of EC treaty articles 81 and 82. Denmark thus complies with the specific
recommendation  in  BEPG  2000  to  continue  to  take  action  to  strengthen  competition  policy
and make sure that it is enforced in full and to give the competition Council powers to enforce
EC articles 81 and 82. Thus, the BEPG may have had an effect in inducing this policy reform.

There exist, however, a number of areas in which the competition on the product markets can
be  intensified.  In  the  Competition  Report  1999,  51  sectors  were  identified  in  which
competition were insufficient. It is the Government's ambition that the number of sectors with
competition  problems  is  to  be  halved  by  the  year  2010.  Furthermore,  there  is  still  a  large
potential in the public sector for introducing tender arrangements.

On capital markets, a number of initiatives have been implemented, i.e. initiatives which have
made it easier for financial companies to participate in the internationalisation. For instance an
improvement  of  the  supervision  of  financial  groups  has  been  implemented  and  limitations  on
ownership  structure  have  been  repealed.  A  Bankruptcy  Council,  established  in  2001,  will
present recommendations for a reform of the Danish Bankruptcy Act.

Furthermore, framework conditions on the stock market have improved. Elsewhere, a bill has
been proposed on a flexible share ceiling based on the prudent man principle, as well as a bill
on the establishment of specialised funds for investments in small innovative enterprises. There
has been a substantial increase in Danish venture capital investments in recent years.

5.3. Germany

With regard to  budgetary policy, the situation in Germany is of increasing concern. First of
all, the target to attain a general government deficit of 1.5% of GDP in 2001 will not be met.
The updated Stability Programme of Germany now forecasts a general government deficit of
around 2.5%, in line with the major forecasts of the European Commission, the OECD and the
IMF. In addition to a projected GDP growth of only 0.75%, which is 2% lower than projected
in the last programme update, several other factors have contributed to this sharp rise in the
government deficit. The programme update refers to the revised deficit in the year 2000 from
1%  to  1.3%  which  affects  the  government  fiscal  balance  of  200160,  as  well  as  to  increased
expenditure  for  the  Bundesanstalt  für  Arbeit,  an  increased  expenditure  in  the  social  security
payments,  especially  the  abolition  of  expenditure  ceilings  for  the  drugs'  budget  in  the  health
sector contributes to a high deficit in this sector, and a sharp decrease in tax revenues based on

59 Cf. European Commission,"Public Finances in EMU 2001", p. 122.
60 as it affects the borrowing requirements of the general government sector, now projected to read 2.5% of
GDP  in  2001;  cf.  European  Commission,  "Autumn  2001  Forecasts  for  2001-2002",  European  Economy,
Supplement A, Economic Trends, No 10/11, October/November 2001, p. 21.

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the economic slowdown. Government expenditure is expected to grow by 1.5% in 200161. A
further deterioration of the government deficit in the year 2001 was prevented by a realization
of  proceeds  from  the  sale  of  government  holdings  accumulating  to  approximately  0.5%  of
GDP62.

In  the  light  of  the  current  difficult  economic  situation,  Germany  will  not  meet  the  targeted
reduction of the general government deficit in the year 2002 of 1%, but instead is now aiming
at  a  deficit  of  approximately  2%63.  The  updated  stability  programme  makes  clear  that  this
target will be difficult to meet, as it maintains the year-on-year reduction of 0.5% of the deficit
as projected in the 2000 update. One of the major uncertainties will be the development of tax
revenues in the year 2002, already taking into account the marked downward revision by the
November Steuerschätzung of  € 9.8 bn for 2002. In addition, financial strains in the pension
and  unemployment  insurance  systems  will  almost  certainly  reduce  further  the  room  for
manoeuvre.  Nevertheless,  net  borrowing  in  2002  is  to  be  held  unchanged  at  €  21.1  bn.  The
major  international  institutions  are  much  less  optimistic  than  the  German  government  with
regard to the government deficit in the year 2002. The European Commission is projecting a
2.7%  deficit  while  the  IMF  in  its  December  update  and  the  OECD  envisage  a  2.5%  deficit.
These projections position the fiscal situation of Germany very close to the 3% deficit criterion
of  the  Maastricht  Treaty.  The  government  has  responded  to  these  diverging  projections  by
including  a  sensitivity  analysis  in  the  programme  update  based  on  a  0.25%  higher  average
annual expenditure growth as well as a lower growth assumption. In both cases – as well as in
the combined case – the deficit projection for the year 2002 is in line with the 2.5% projection
of the IMF and the OECD.

Nevertheless,  the  Government  maintains  that  it  is  on  target  to  achieve  a  balanced  general
government budget by the year 2004, in line with the Stability Programme, although it declares
this aim to be "extremely ambitious" and depending on the development of the expenditure at
all  levels  of  government.  In  addition,  the  government  hopes  to  achieve  a  balanced  budget  at
the federal level by the year 2006, taking into account the further reduction of income taxes in
the  year  2005,  a  reduction  already  adopted  in  the  framework  of  the  tax  reform  of  the  year
200064.

In order to reinforce budgetary policy coordination among the various levels of government,
the Haushaltsgrundsätzegesetz (Law on Budgetary Principles for Federation and Länder) has
been  change  by  the  institutions.  While  both  the  Federal  and  the  Länder  level  commit
themselves  to  reduce  net  borrowing  with  the  aim  of  achieving  budget  balance,  the
Finanzplanungsrat  (Financial  Planning  Council)  which  also  involves  the  main  sub-national
actors  (Länder  and  Gemeinden),  has  been  allocated  new  tasks.  It  will  now  be  able  to  make
recommendations both on a joint expenditure line for Federation and Länder as well as in the
event  of  a  need  to  restore  budgetary  discipline.  This  new  "arrangement"  is  not  however  a
national stability pact, nor will the recommendations of the Finanzplanungsrat have a binding
character.

The  pension  reform  has  been  adopted  and  its  implementation  started  on  1  January  2002.  As
the Commission implementation report for the BEPG 2000 already stated, the pension reform

61 German Stability Programme Update, December 2001, p. 20.
62 German Stability Programme Update, December 2001, p. 25.
63 The updated programme assumes a GDP growth of 1.25% in 2002.
64 Note that the sensitivity analysis of the programme update deviates from this target by indicating a general

government deficit of 1% in 2004 and 2005.

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"represent an important, albeit in the long-term not sufficient step in this direction"65. Also the
reform  of  the  health  sector  has  not  been  pursued  satisfactorily  in  the  year  2001  and
contributions to the medical care insurances had to be increased at the beginning of the year
2002.

Also  in  the  area  of  labour  markets,  the  developments  in  the  year  2001  are  rather  mixed.
Some active labour market policies were adopted in 2000 to improve the efficiency of active
labour market programmes, directing  € 21.7 bn to infrastructure measures mainly in the new
Länder. In order to obtain precise information on the effectiveness on these measures and to
improve  them,  the  German  government  has  asked  a  "Benchmarking  Group"  (within  the Job
Alliance) to study active labour market policies theoretically and empirically, which submitted
its critical report in September. The German government has announced, however, that it will
look  at  the  conclusions  and  review  its  active  labour  market  programmes.  The  new  Job
Activation Law of the federal government will focus on a reorientation of the concept of job
placement  and  advisory  services.  Nevertheless,  improvements  especially  with  regard  to  the
situation  of  the  long-term  unemployed  (in  particular  in  the  Eastern  part  of  the  country)  are
unsatisfactory, with the employment rate below now the EU average and no improvements in
the last few years. No progress is evident with regard to wage dispersion to reflect differences
in  skills  and  qualifications  between  different  sectors  and  regions,  while  wage  growth  has
continued  to  be  modest  in  2001.  The  prospects  for  the  year  2002  are,  however,  uncertain,
partially as a result of the upcoming general elections.

On the issue of further reforms of the tax and benefit system (especially for low-wage labour)
and  lower  non-wage  labour  costs,  the  Ministry  of  Finance  argues  that  the  second  and  third
stages of the Tax-Reform will have a strong impact on the low-wage sector: The basic tax-free
allowance  will  rise  and  the  basic  tax  rate  will  be  reduced  from  25.9%  to  15%.  Some  model
projects have started to reduce wage costs at the lower end of the pay scale, which have not
yet been fully evaluated. Most recent announcements of the government (as of January 2002)
indicate  that  even  without  an  in-depth  evaluation,  some  of  these  projects  are  bound  to  be
extended. One of the main priorities of the current government has been to stabilise non-wage
labour  costs.  It  had  been  successful  until  Autumn  2001,  when  contribution  rates  to  the
mandatory medical scheme started to rise.

In the field of product markets and the knowledge-based economy, various new initiatives
have  been  launched  and  others  implemented.  In  December  2000,  the  Law  on  Discounts  and
the Ordinance on Premiums was repealed. This measure may be influenced by the opening of
European Markets and the single currency: it is meant to insure equal competitive conditions
for  suppliers  at  home  and  abroad  in  trade  on  the  Internet  after  the  EU  Directive  on  e-
commerce  comes  into  force.  Some  minor  measures  relevant  to  e-commerce,  SMEs  and
venture  capital  were  adopted.  Additionally,  the  German  government  has  launched  a  project
group "Reducing Bureaucracy". In 1999 a reform of the legislation on the award of contracts
had  been  initiated.  It  was  concluded  in  February  2001  by  the  implementation  of  the  new
ordinance  on  the  award  of  contracts  (VgV).  In  addition  to  the  revision  of  substantive  award
provisions  to  implement  two  EU  directives  in  national  law,  the  VgV  contains  a  further
improvement  in  the  legal  protection  for  enterprises  interested  in  public  sector  contracts.  On
the reduction of regional differences in local electricity costs, the Monopolies Commission has
reached the conclusion that the liberalisation of the German electricity market has so far been

65 European  Commission,  "Report  on  the  Implementation  of  the  2000  Broad  Economic  Policy  Guidelines,

ECFIN/176/01-EN", Brussels, 2001, p. 57.

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largely successful without strong regulatory pressure66. The German government continues to
hold talks with the Energy Industry, however, in order to enhance competition in this market.

In the area of the knowledge-based economy, several measures of minor importance are trying
to increase the efficiency of education and research (in particular a University Initiative for the
Future,  financed  from  the  UMTS-linked  interest  savings).  Additionally,  a  concept  for
reforming the regulations on appointments at Universities was approved. Other minor projects
include  projects  on  e-commerce  and  venture  capital.  Finally,  besides  the  reform  of  the
regulations  on  appointment  at  universities,  the  German  government  has  tackled  some  minor
measures  related  to  IT  issues  within  its  programme  "Innovation  and  Jobs  in  the  Information
Society of the 21st Century"67. These measures do not relate to the higher education system,
however.  The  government  has  set  up  a  federal  programme  for  a  limited  period  of  time  in
addition to the present level of expenditure by the  Länder to close investment gaps in modern
IT  technologies  in  vocational  schools;  it  has  introduced  an  Internet  certificate  for  the
unemployed.

The further development of the risk  capital market is in progress. The German government
stresses that gross investment by venture capital companies in Germany rose to about € 3.8 bn
in  2000  and  has  entered  a  consolidation  phase  in  2001 68.  This  trend  continued  in  2000  and
puts  the  German  market  ahead  of  its  European  peers.  Nonetheless,  the  area  "Innovation"  in
Germany's  new  technology  concept  will  give  young  technology-based  firms  new  means  of
obtaining  financial  resources.  The  funds  will  be  given  in  the  form  of  participation  capital  or
long-term  loans  by  the  Credit  Agency  for  Reconstruction  (Kreditanstalt  für  Wiederaufbau)
and the  Deutsche Ausgleichsbank. The main reform proposal that falls under the topic of the
efficiency  of  the  EU  financial  services  market  is  the  government's  proposal  to  bring  the
supervision  of  banks,  brokers  and  insurance  companies  together  in  one  "All-Finance-
Supervision"  (Allfinanzaufsicht).  This  new  institution  would  be  financed  entirely  by  the
supervised  banking  institutions  (until  now,  only  90%  are  financed  privately)  and  its  budget
would become independent from the state budget. The law was adopted by cabinet but has not
been voted by the Bundestag yet.

5.4. Greece

In the field of  budgetary policy, Greece has maintained the rigour of its fiscal policy stance.
The  same  goes  for  the  emphasis  placed  on  wage  restraint  in  collective  negotiations  with  the
targets  agreed  upon  for  2000-2001  being  adhered  to  notwithstanding  union  and  political
pressures  to  revise  and  ease  such  constraints  through  the  renegotiation  of  collective
agreements.  The general government fiscal balance has been revised downwards  to between -
0.6%  (OECD)  and  -0.4%  (European  Commission)  with  the  updated  Stability  Programme  of
the government expecting a deficit of 0.3% (all figures excluding UMTS-proceeds of 0.4% of
GDP). Apart from the slower GDP growth (4.1 instead of 5.0% targeted in the 2000 update)
and  higher  inflation  figures  for  the  year  2001,  the  government  attributes  this  mainly  to  an
important  decline  the  profitability  of  the  business  sector,  the  continuing  crisis  of  the  Athens
Stock  Exchange  and  the  loss  in  interest  income  both,  of  the  business  sector  and  the
households.  The  fiscal  policy  stance  is  considered  to  be  neutral.  Alongside  the  issuance  of
large-scale  convertible  bonds  issues  in  lieu  of  privatisation  and  extensive  securitisation  of

66 Cf. the report "Competition Policy in Network Structures" which was presented in June 2001.
67 Cf. Bundesministerium der Finanzen, "Jahreswirtschaftsbericht", Berlin 2001, p. 49-50.
68 Cf. 4th Cardiff Report Germany, November 2001, p. 53.

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future EU-funds inflows, a deep cut of defence spending was introduced in Spring 2001 so as
to keep the promised budgetary targets for the year 2001.

The  budget  for  2002  and  the  stability  programme  update  foresees  a  general  government
balance of 1.0% of GDP (which is more optimistic than the European Commission – 0.3% and
the  OECD  –  0.6%).  Doubtful  aspects  of  the  government  forecasts  are  especially  a  rather
optimistic growth rate (still at 3.8% as opposed to 5.2 in the 2000 update), including a timely
conversion  of  Structural  Funds  and  related  spending  to  growth  (and  most  importantly)  to
employment. The general government primary surplus in 2002 it projected to be 6.4%.

Privatisation efforts have been adversely affected by the Stock Market collapse in 2000-2001.
The  telephone  company/OTE  has  had  the  majority  of  its  share  capital  pass  to  the  private
sector in 2001 while the public power company/PPC has been listed at the Stock Exchange:
still, the management of both stays resolutely under the Government's authority. Privatisation
of  shipyards  goes  ahead  but  at  a  slow  pace;  the  same  goes  for  the  State-owned  refineries.
Privatisation  efforts,  nevertneless,  continue:  the  Public  Power  Corporation  (PPC/DEH)  has
been  successfully  introduced  to  the  Stock  Exchange,  the  sale  of  one  third  of  the  State  oil
company  (ELLPE)  goes  forward  (with  strong  interest  from  Russian  players);  OLYMPIC
AIRWAYS  prospects  look  far  less  successful;  tourist  areas/hotels  of  the  public  sector  also
face  the  consequences  of  the  crisis.  The  updated  stability  programme  indicates  a  substantial
privatisation programme to be implemented in the year 2002.

The  most  disappointing  initiative  has  been  the  one  undertaken  for  Social  Security  reform.  A
special assessment of the Social Security system was prepared by the (British) Government's
Actuaries. All studies undertaken indicated that both a structural impasse and a financial trap
are  lurking  ahead.  A  framework  for  radical  reform  was  introduced  in  May  2001  but  was
almost  unanimously  rejected.  Now  a  step-by-step  approach  is  being  attempted,  structured
around  social  dialogue  but  with  any  real  change  deleted  from  the  options  that  were  initially
debated.  Clearly,  in  this  are  a  much  more  progress  is  necessary.  This  field  appears  to  be  the
most difficult to tackle, with local and regional elections due in 2002 and national elections for
2003.

Policy  recommendations  such  as  enhancing  the  flexibility  of  the  labour  market,  stepping
forward  more  credibly  in  privatisations  undertaken  and  in  overall  market  liberalisation  and  –
last  but  by  no  means  least  –  addressing  the  Social  Security  growing  imbalances  have  been
steadily in the forefront of public discourse under the overall heading of "promoting structural
change".  Tangible  results  have  been  moderate  –  and  their  reliability  looks  quite  shaky  as  of
late. Labour market flexibility has been the main goal of a late-2000 legislative reform, which
was  to  provide  for  flexible  arrangements  in  working  time,  part-time  practices  (as  well  as
limitations in overtime so as to create new employment opportunities). This reform has been
introduced  by  law,  while  the  social  partners  were  asking  for  time  to  find  a  negotiated
settlement: this gave way to recriminations against the legislation from both employers and the
labour unions, while the press joined in with further criticism. After six months in operation,
the labour reforms are considered to have introduced in practice more rigidities than flexibility.
Reformed labour legislation is considered as "unworkable" and "out of touch with reality", the
cost burden of conforming to the new legislation is estimated at close to 8% of the overall pay
package  for  manufacturing.  Only  two  dozen  large  undertakings  are  considered  to  be  able  to
cope with the law's requirements without sustaining competitive disadvantage.

In the field of product markets and the knowledge-based economy, emphasis hat been put
on market liberalisation. In the energy market, this proceeds at an institutional level, but mid-
2001 licenses given for private electricity production do not look set to lead to radical changes

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in the country's energy balance anytime up to 2004. Telecoms liberalization has proceeded at a
faster pace, but five or six service providers who have started operating in early 2001 did so
under unfavourable overall market conditions.

The  knowledge-based  economy  is  supposed  to  be  the  beneficiary  of  a  large  segment  of
Structural  Funds  financing  (3rd  Community  Support  Framework).  To  date  the  relevant
programs do not seem to have gone ahead, however.

Privatisation  efforts  continue,  albeit  in  a  somewhat  inconsistent  manner.  The  Public  Power
Corporation (PPC/DEH) has been successfully introduced on the Stock Exchange. The sale of
one  third  of  the  State  oil  company  (ELLPE)  goes  forward,  while  prospects  for  the  sale  of
OLYMPIC  AIRWAYS  look  far  less  rosy.  It  is  symptomatic  that  the  main  interest  in  buying
OLYMPIC came from a private airline, AXON, which was forced into bankruptcy itself at the
end of 2001. A different, experimental path for change is a series of merger-cum-privatisation
deals, which are expected to put some dynamism back into the economy. The "mega-merger"
of the State-controlled National Bank of Greece with the major private Alpha Credit Bank has
been  expected  to  bring  about  increased  competitivity  in  the  banking  sector,  but  has  run  into
difficulties of late. The same goes for mergers in the construction sector (notably the merger
between  market  leaders  Elliniki  Technodomiki/AKTOR/TEB)  and  in  electronics/technology
(e.g.  mergers  of  Intracom/Intrasoft,  Altec/Sysware):  initially  offered  tax  breaks  have  been
withdrawn for all deals that have already proceeded, thus creating uncertainties.

In the field of capital markets, the abrupt cutting of interest rates due to joining the Euro area
has  created  a  rapidly  increasing  credit  demand  –  especially  from  households.  Along  with
cutthroat competition in the banking sector, which has been through a phase of consolidation
culminating  in  the  mega-merger  of  the  National  Bank  with  Alpha  Credit  (recently  facing
difficulties), uncertainties have surfaced about the prudential supervision of the Banks and the
credibility  of  their  risk  assessment  mechanisms.  Both  the  IMF  and  the  Bank  of  Greece  have
been  voicing  concern  and  new  supervision  processes  are  supposed  to  be  implemented.  The
question is to what extent compliance is to be expected, in the view of competitive pressures
(and the rearrangement of competences in top-down consolidation cases).

5.5. Spain

In  the  field  of  budgetary  policy,  Spain  has  continued  in  its  fiscal  consolidation  throughout
2001. Despite experiencing inflation above the EU average and weakened economic activity,
Spain  is  likely  to  achieve  a  balanced  budgetary  position  in  the  year  2001.  While  the  central
government deficit will be 0.2% higher than projected (0.5% instead of 0.3%), this difference
will be fully compensated by a 0.5% surplus in the Social Security system (instead of 0.3%).
Territorial governments will achieve the projected balanced budget69.

With regard to the budget year 2002, the Spanish government is quite optimistic with regard
to  the  key  economic  indicators  affecting  public  finances.  While  the  government  has  already
revised most assumptions for Spain for the year 2002 downwards and, in addition, has given
an alternative and more pessimistic scenario as part of the updated stability programme, most
other  institutions  are  clearly  closer  to  the  alternative  scenario  in  their  analysis.  With  a  GDP
growth of 2.4% in 2002 (as opposed to 2.0% forecast by the European Commission and the
OECD), the more or less stable tax revenues projected in this assumption – based on the rise

69 The updated Stability Programme Spain (2001, p. 18) states that the surplus of the Social Security system
have allowed larger inflows to the Reserve Fund, a fact which is supposed to contribute to the medium- and
long-term sustainability of the Spanish pension system.

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of  VAT  and  excise  duties  on  some  items  –  are  essential  to  achieve  the  target  of  a  balanced
budget.  Secondly,  interest  rates  are  projected  to  remain  moderate.  With  regard  to  the  long-
term sustainability of public finances and despite the better than expected performance in gross
debt  reduction  in  2001  (achieving  a  gross  debt  of  57.5%  of  GDP  in  the  present  programme
update as opposed to 58.9% targeted in the 2000 update), the reduction in the ratio of debt to
GDP now projected in the years to come will be less marked than envisaged in the previous
update.

A  positive  achievement  is  the  new  General  Law  of  Budgetary  Stability  which  will,  among
other  things,  set  limits  on  the  growth  of  central  government  spending.  It  will  lead  to  the
preparation of a multi-annual budget projection, including annual ceilings on spending growth.
The establishment of a "contingency fund", which can only be drawn on in specified cases, will
also  ensure  that  unforeseen  needs  can  be  met  without  altering  budgetary  structure  or
orientation70. In addition, a social agreement signed by the government and the social partners
in  2001  should  contribute  to  the  improvement  and  development  of  the  social  protection
system71.

Economic  policy  in  year  2001  has  built  on  the  crucial  importance  of  an  adequate  policy  to
foster  growth  and  the  labour  market  with  an  emphasis  on  an  adequate  employment  policy.
Although job creation has been positive – however with a marked slowdown in the year 2001
which  will  be  accelerated  in  2002  –  the  amount  of  temporary  contracts  created  is  of  high
concern. This kind of jobs is not efficient in terms of productivity per worker. In addition, the
level of unemployment is still the highest in EU (with an estimated 13% average in 2001) and
with  unsolved  structural  problems,  not  least  the  high  regional  and  sectoral  disparities.  The
labour  market  reform  in  2001  has  especially  targeted  a  revision  of  legislation  regulating
employment contracts which should lead to a reduction of the number of fixed-term contracts
while at the same time the abolition of the limit of part-time working hours should contribute
to  more  flexibility  of  the  labour  market.  On  wage  moderation,  an  agreement  between  the
social partners in 2001 should ensure wage moderation in 2002.

Spain has continued to review policies especially in the area of regional employment services
which need to be better coordinated and which should lead to stronger regional mobility of the
work force. The most important problem is, however, high unemployment among women and
young  people.  While  ALMP  measures  have  been  adopted  in  order  to  increase  the  female
employment rate, these actions are still considered to be insufficient, especially in the field of
childcare for 0 to 3 years old and other dependant care. In general, Spain should improve its
efforts by establishing an integrated gender mainstreaming approach. A coherent approach is
also needed in the field of life-long learning, especially by adopting and implementing the new
law on Vocational Training. In view of the specific recommendation on the labour market in
2000  and  2001,  Spain  can  be  said  to  have  made  progress  but  with  the  implementation  of
measures adopted or in process to be adopted still pending, the effects can only be assessed in
due time.

With regard to the specific recommendations on product markets and the knowledge-based
economy, the priority in Spain has been the implementation of the reform of competition law
in the last two years, including the transposition of internal market legislation, the liberalisation

70 Cf. Spanish Stability Programme Updated, 2001, p. 23.
71 Cf. 4th Cardiff Report Spain, December 2001, p. 40ff.

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of  telecommunications,  the  reinforcement  of  the  competition  law,  the  reinforcement  of  the
competition framework in sectors such as electricity, gas and retail distribution.

With  regard  to  ICT,  Spain  has  advanced  by  the  development  of  a  regulatory  framework  for
the  ICT  sectors  as  well  as  the  development  of  the  e-Administration  including  greater  online
availability of public services, the launch of an Action Plan on training measures as part of the
Info XXI Initiative Action Plan and further taxation measures to foster investment in the ICT
field. In general, investments in Research and Development have increased substantially in the
last two years. Finally, Spain is progressing in the simplification of the regulatory framework
for SMEs.

With regard to the recommendations on  capital markets, Spain has continued to develop its
capital  markets.  Reforms  have  been  introduced  to  support  business  access  and  to  facilitate
investment in unlisted securities. A new Finance Law is in the legislative process which should
clarify  the  concept  of  risk  capital  and  relax  some  aspects  of  current  rules  which  may  have
acted to deter their equity investment72. Measures will include continuing entitlements to tax
benefits  after  the  market  flotation  of  investee  companies  and  simpler  rules  for  channelling
investments through holding companies. Furthermore, tax treatment of risk capital funds and
companies have been made more advantageous by an exemption on capital gains raised from
the  transfer  of  shares  and  other  equity  interests  in  investee  companies  under  determined
conditions.

5.6. France

The  recent  slowdown  in  activity,  along  with  the  coming  up  of  general  and  presidential
elections,  exerts  a  significant  influence  on  policy  orientations,  especially  budgetary  policy.
For one thing, because of unexpected reduction in growth in 2001, tax receipts are lower and
some  expenditures  higher  than  planed  in  the  budget  voted  a  year  ago  for  2001.  The
government  has  decided  not  to  stick  to  its  deficit  target,  and  as  a  result  general  government
deficit,  excluding  UMTS  receipts,  is  targeted  at  1.4%  of  GDP  in  2001.  However,  real
in  2001.  The  2000
government  expenditures  will 
recommendation to orient the reform of the pension system towards long-term sustainability of
government  finances  was  not  met  as  the  pension  reserve  fund  created  in  1999,  expected  to
reach  10%  of  GDP  in  2020  (in  constant  terms),  will  contribute  to  finance  only  a  relatively
small percentage of additional expenditures. Except for the reform of private pensions acted in
1993,  there  has  thus  far  been  no  pension  system  reform,  thereby  indicating  the  main  policy
failure  of  the  government.  Although  the  importance  of  such  a  reform  is  overwhelmingly
acknowledged,  it  is  questionable  that  measures  taken  will  be  sufficient  to  avoid  serious
problems due to the demographic trends.

increase  as  foreseen  by  1.6% 

As for 2002, the voted budget is based on a rather optimistic growth forecast (over 2%), and
in spite of this it foresees an increase in the deficit compared to the last fiscal year. In addition,
the government has already decided to increase the amount of the Prime pour l'emploi, and to
anticipate  its  payment  to  eligible  households  during  the  first  quarter  of  2002.  Government
expenditures  in  real  terms  are  expected  to  grow  by  1.8%  in  2002,  as  opposed  to  1.6%  as
recommended by the BEPGs. The government deficit would remain at 1.4% of GDP.

However, the government confirms the respect of its commitment to the multi-annual public
finance programme, thus public finances should be balanced in 2004 under an assumption of

72 Cf. 4th Cardiff Report Spain, December 2001, p. 27-29.

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3%  average  annual  growth  until  2004.  As  for  unemployment,  it  is  still  relatively  high  (the
OFCE forecast for 2001 is 8.9% of the labour force) and would decrease to 8.4% at the end
of  2002,  but  only  thanks  to  an  increase  in  subsidised  jobs  (emplois-jeunes,  contrats  emploi-
solidarité)  whose  costs  may  jeopardise  the  implementation  of  public  expenditures  targets.
Moreover, the reduction of working time also proves to be very costly for public finances, as it
is  accompanied  by  a  reduction  in  employers'  social  contributions  and  public  subsidies.  In
December  2001,  the  Conseil  constitutionnel  censored  the  article  of  the  law  that  allowed
government  to  finance  part  of  this  cost  by  not  paying  back  its  debt  to  social  funds,  even
though  the  funds'  budgets  for  2001  are  in  surplus,  thanks  to  the  increase  in  employment
observed over the past five years. Additional financial margins for manoeuvre will be allocated
in part to reducing public deficits, and in equal part to reducing compulsory levies.

The  key  developments  in  France  are  currently  labour  market  reforms  with  the  35-hours
working  week  legislation,  the  improvement  of  incentives  to  work  and  the  reduction  of
inactivity  traps.  Tax  measures  have  been  taken  to  increase  labour  supply:  marginal  effective
tax rates on low-paid workers have been reduced. The lowest rate of personal income tax has
been  cut  and  further  cuts  will  be  implemented  through  until  2003.  Changes  have  also  been
made to housing taxes and benefits (they have been lengthened after a household has found a
job),  and  to  eligibility  requirements  for  health  coverage  (CMU,  Couverture  Maladie
Universelle). From September 2001 onwards, eligible households (low-wage earners) benefit
from a new tax credit scheme (Prime pour l'emploi) which increases the incentives to take up
full time work at or just above the minimum wage.

The  medium-  and  high-income  households  will  benefit  from  the  pursuit  of  the  income  tax
reduction that will be implemented over 5 years (marginal tax rates will be slightly reduced),
while those with low income from work will benefit from a doubling of the earned income tax
credit (Prime pour l'emploi, from 2.2% to 4.4% of earned income, for individuals with earned
income between 0.3 and one minimum wage, then decreasing up to 1.4 minimum). These two
measures  will  again  be  reinforced  in  2003,  so  that  households  will  benefit  from  higher  take
home  pay  the  total  amount  will  reach  €  3.1  billion  at  the  end  of  2002.  These  measures  are
supposed  to  favour  consumption  and  to  improve  incentives  to  work.  The  rate  of  corporate
income tax is also being progressively lowered over three years, by eliminating the Juppé sur-
tax,  legislated  in  1996.  In  2002,  the  legal  rate,  including  the  social  contribution  levied  on
profits, will be 35.43%. From small businesses, the rate has been further lowered, from 26.5%
in  2001  to  15.45%  in  2002.  Altogether,  the  tax  receipts  from  corporate  income  tax  will  be
reduced by € 2 billion in 2002 compared to a benchmark of unchanged legislation. In addition,
the planned reduction of local business tax (Taxe professionnelle), whose reform had started
three  years  ago,  will  further  reduce  and  eventually  eliminate  by  2003  the  share  paid  on  the
wage bill. Firms will thus benefit from an additional reduction of € 1.33 billion in their tax bills
in  2002.  Finally,  the  business  contribution  levied  on  wage  bills  to  finance  the  unemployment
insurance is being reduced by 0.2 percentage points.

Little  has  been  done  to  review  the  main  income  guarantee  benefits.  The  recommendation  to
reform  employment  protection  legislation  with  a  view  to  better  combining  security  with
greater  adaptability  to  facilitate  access  to  employment,  was  partially  implemented.  Since
January  2001,  the  French  government  and  social  partners  (patronat  et  syndicats)  adopted  a
"Plan d'Aide au Retour à l'Emploi" (PARE) which offers each unemployed person a  bilan de
compétence, an aide à la formation and job opportunities which seem relevant to their ability.
After three refusals, the unemployed person loses his or her benefit allocation. The PARE is
considered as an active labour market policy increasing the employability of the jobless as well
as their incentives to find a job. The Emplois-Jeunes scheme, i.e. the introduction of subsidised

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jobs for young people created in 1997 and initially planned for a 5 year period only, has been
continued.

So  far,  the  implementation  of  the  working  time  reduction  law  for  large  companies  has  not
induced  a  significant  increase  in  unit  labour  costs:  social  contributions  rebates,  wage
moderation and hourly productivity gains were the main factors behind this. However, in 2000
and 2001, there were signs of hiring difficulties in some sectors. These could interact with the
implementation of the working time reduction law in small firms from 2002, which will trigger
a  reduction  in  the  hours  of  labour  supplied.  The  French  government  decided  in  September
2001  to  disentangle  the  enforcement  of  this  working  time  reduction  for  small  and  medium-
sized firms. Several new measures are included in the Budget Law for 2002 with regard to a
reduction of labour costs73.

With regard to the product market and the knowledge-based economy, the widening of the
liberalisation  of  network  industries  is  in  progress:  the  liberalisation  of  the  gas  and  electricity
markets started in 2000 but at a slow pace. France created a new regulatory authority for the
electricity  sector  at  the  beginning  of  2000.  Accounting  separation  has  been  achieved  for  the
activities of Electricité de France. A further draft law (adopted in 2001) has opened the way
for accounting separation for Gaz de France. In the telecommunications sector, the local loop
was  unbundled  in  early  2001.  UMTS  licenses  were  granted  in  mid-2001.  Efforts  to  simplify
formalities for business and to encourage innovation were continued in 2000 with measures to
support cooperation in R&D between the public and private sectors, including: the setting up
of  seed  capital  funds;  support  for  incubators;  and  tax  incentives  for  investment  by  business
angels. However, France shows a relatively low penetration rate of both Internet and mobile
phones.  The  government  adopted  a  wide  range  of  measures  in  July  2000  to  encourage  the
diffusion  of  IT  throughout  the  population.  The  degree  of  implementation  of  the  specific
recommendations in the 2001 BEPGs is still rather limited. While no progress has been made
with  regard  to  the  recommendations  to  step  up  efforts  to  liberalise  network  industries,
progress  made 
internal  market  directives  continues.  Administrative
simplifications  are  included  in  the  budget  proposal  for  2002  (e.g.  scrapping  of  "certificat  de
conformité" for photocopies) and tax regimes and payment of taxes have been simplified. The
share of ad hoc State aid in total has started to decrease but remains above EU average when
expressed as a share of GDP.

transposing 

in 

On the  capital market,  the  Commission's  implementation  report  for  2000  rightly  stated  that
no  measures  were  taken  to  further  facilitate  investment  by  institutional  investors  in  stock
markets and in venture capital. The recommendation to give particular attention to the actions
put forward in the October 1999 Risk Capital Communication, as examples of good practice
to  improve  the  taxation  framework,  enhance  enforcement  of  bankruptcy  legislation  and  to
promote  the  further  development  of  employee  ownership  schemes,  can  be  said  to  have  been
partially  implemented  by:  the  merger  between  Paris,  Amsterdam  and  Brussels  exchanges  to
form  Euronext;  the  creation  of  long  term  savings  plans;  a  better  protection  of  minority
shareholders; and by the privatisation of Hervet Bank. Risk capital investment was encouraged
through  an  extension  of  tax  exemptions  for  business  angels,  a  simplification  of  the  tax
framework for venture capital funds, and capital gains tax on the acquisition of stock options

73 Cf.  L'Observatoire  Français  des  Conjonctures  Économiques  (OFCE),  "French  Economy  Team", Revue  de
l’Observatoire Français des Conjonctures Économiques (OFCE) no. 79, October 2001; Government of the
French Republic, Projet de loi de finances 2002, Paris, 2001; French National Accounts.

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has been lowered to that applying to ordinary capital gains (only for modest capital gains and
when shares are held for more than two years).

The  recommendations  in  the  2001  BEPG  to  develop  further  the  capital  market  by  easing
constraints on institutional investments in equities and further adapting the fiscal framework so
as to facilitate investment and entrepreneurship, the latter to be also encouraged by adjusting
the  enforcement  of  bankruptcy  laws  have  been  partially  tackled:  Stock-savings  plans  (plans
d"épargne en actions) can now include European stocks and the reduction of taxes following
investment in SMEs has been extended74.

5.7.

Ireland

Ireland was the first country to be criticised by the Ecofin Council, based on art. 99 (4) TEC
because Irish budgetary policy was adjudged to be inconsistent with the BEPGs 2000. In the
recommendation the Ecofin Council noted that the Irish budget for 2001 is expansionary and
pro-cyclical  and  therefore  inconsistent  with  the  guideline  to  ensure  economic  stability.  The
Irish were, therefore, asked to gear the budget for 2001 to this objective. In response, the Irish
government argued that direct tax reductions were necessary as a stimulus to labour supply in
the economy and to fulfil obligations under the Programme for Prosperity and Fairness (PPF),
the  latest  Social  Partnership  agreement.  Significant  infrastructural  investment  in  the  National
Development  Plan  and  on  health  and  education  were  also,  it  believed,  necessary  to  ensure
continued  sustainable  growth 
the  next  century.  The  February  2001  Ecofin
recommendation,  as  well  as  the  BEPGs  recommendation  requested  a  correction  of  the  2000
overheating  by  fiscal  tightening  in  2001,  as  it  was  seen  as  highly  unlikely  that  the  tax
reductions would increase the labour supply enough to offset the inflationary pressure, given
the  near  or  above  full-employment  conditions  in  the  Irish  economy  and  the  huge  wage
pressure.

into 

During 2001, Irish growth has decelerated rapidly, albeit from a very high level in 2000, due to
external  developments,  most  notably  the  global  slowdown  in  demand  for  ICT,  a  sector  very
important  for  Irish  exports.  Measures  against  the  spread  of  foot  and  mouth  disease  had
negative effects on the agricultural sector and the tourism industry. The slowdown of the US
economy particularly hit Ireland, as the US manufacturing sector is a major source of foreign
direct investment into Ireland. As a consequence, GDP growth in Ireland in 2001 is projected
at between 6.5 and 6.8%, according to the most recent forecasts. Despite a strong increase in
wages, driven by labour shortages, inflation pressures have eased with the Harmonised Index
of Consumer Prices (HICP) rate coming down from 5.3% in 2000 to 4.0% in 2001 and 2002
(with the Commission projecting only 3.3 in 2002). This rate is still above the average inflation
and the norm in the euro zone.

The Irish government kept a tight control of expenditure, even imposing some spending cuts,
and introduced tax measures that helped to ease the short-term pressures on demand. Among
those measures, the special savings incentive scheme is designed to promote saving by offering
tax incentives to savers The Ecofin Council, in its conclusions of 6 November 2001, noted that
with these measures, "its recommendations have been to same extent adhered to".

Private consumption is estimated to have increased by about 6% in 2001 (down from 9.9 in
2000) and is expected to grow at a marginally lower rate in 2002, then more slowly in 2003 as

74 Cf.  Projet  de  loi  de  finances  2002  (French  government)  and  L'Observatoire  Français  des  Conjonctures
Économiques  (OFCE),  "French  Economy  Team",  Revue  de  l'Observatoire  Français  des  Conjonctures
Économiques (OFCE) no. 79, October 2001.

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a result of competitive pressures curbing wage increases and increased private savings. Total
government  expenditure  is  projected  to  increase  1%  of  GDP  in  2002,  mainly  by  additional
spending  for  health  services,  education  and  science,  roads  and  transport  and  housing  within
the framework of the National Development Plan.

Mainly  as  a  result  of  the  revision  of  growth  for  the  next  years,  Ireland  has  abandoned  the
target  of  reaching  a  gross  government  debt  ratio  of  less  than  25%  by  the  end  of  the  current
stability programme period. It is now expected to decline from 35.8 in 2001 to 34% in 2003,
by  any  standards  a  considerable  achievement,  bearing  in  mind  the  level  of  debt  in  the  late
1980s.  With  regard  to  the  proposal  of  pension  reform,  in  1999  it  was  decided  to  initiate  a
policy of prefunding part of the future costs of social welfare and public service pensions by
setting aside 1% of GNP annually for this purpose. The "social Welfare Reserve Fund" catered
for  future  social  welfare  pension  outlays,  while  the  "Public  Service  Pension  Fund"  was
targeted  at  future  public  sector  pension  outlays.  Privatisation  receipts  from  the  flotation  of
semi-state  enterprises  will,  in  addition,  be  used  to  further  help  alleviate  this  particular
budgetary requirement. Thus, the public finances are and remain sound.

The  recommendations  on  labour  markets  are  connected  with  the  wider  macroeconomic
budgetary  problems  discussed  above.  The  2001  BEPGs  recommended 
that  wage
developments  should  be  consistent  with  the  maintenance  of  price  stability .  Also,  tax-benefit
incentives were encouraged to facilitate a higher female participation rate in the labour force.
The  National  Employment  Action  Plan  2000  contains  many  provisions  designed  to  alleviate
wage pressures due to the tight labour market. Yet it must be remembered that such measures
are not in the overall spirit of the BEPGs recommendations, which would simply prefer fiscal
contraction  as  a  means  of  dampening  aggregate  demand,  and  thus  reducing  wage  pressures.
The  main  provisions  of  the  National  Employment  Action  Plan  2000  (NAP)  included  a
preventative approach designed to stop the drift into long-term unemployment and break the
path  dependency  that  is  often  experienced  by  unemployment  young  people  aged  25-34.  To
directly  combat  existing  long-term  unemployment, Foras  Áiseanna  Saothair  (Education  and
Training  Authority)  increased  the  proportion  of  participants  in  its  courses  coming  from  the
long-term  unemployed,  from  20%  to  25%  during  2000.  A  further  €  12.7  bn  will  be  spent
through the National Development Plan upon the four "pillars" of the NAP.

Participation rates of women in the workforce have increased significantly during the past five
years. The National Development Plan allocated € 317 million to the development of childcare
facilities. The December 2000 budget for the 2001 fiscal year involved a further incentive for
child  care  in  Ireland,  a  four-week  extension  of  maternity  leave,  additional  spending  on  extra
childcare support staff, and to provide for 15 civil service crèches. Complementary measures
to encourage female labour market participation in increasing child benefit rates for first and
second children.

Major reforms recommended in relation to the  product markets and the knowledge-based
economy  amount  to  providing  a  much-needed  external  stimulus  to  reform  in  sectors  where
such competition was or still is lacking. The recommendation of trying to induce competition
into  "network"  industries  currently  or  previously  dominated  by  state  monopolies  has  proven
institutionally problematic with the Irish Congress of Trade Unions, but the government seems
to  be  overcoming  such  opposition.  Recommendations  for  improved  product  market
competition  and  to  give  greater  power  to  the  Competition  Authority  have  proven  less
contentious and the Government made moves towards implementing the recommendations in
these areas during 2000. New legislation giving the Competition Authority power to enforce
Articles 81 and 82 of the EC Treaty is currently being planned by the  Dáil (Lower House of

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the  Irish  Parliament).  Legislation  giving  legal  power  over  takeover  and  merger  cases  to  the
Competition Authority has been undertaken in 2001.

The  presence  of  large  state-owned  or  formerly  state-owned  incumbents  in  the  network
industries of electricity, gas, telecommunications and the health insurance market has deterred
market entry and most of these markets retain dominated by a single firm market structures.
However,  plans  to  give  independent  regulatory  agencies  greater  power  and  to  enforce  more
rigid competition policy are gradually coming into effect. Transport market liberalisation has
encountered  severe  political  obstacles.  However,  several  privatisations  plans  are  underway,
while the franchising of railway services and local transport in the Dublin urban area has not
proceeded as planned but is being continued.

In  relation  to  the  general  guideline  of  creating  a  knowledge-based  society,  Ireland  has  made
some  progress  in  relation  to  furthering  state-sponsored  human  capital,  R&D  and  ICT
investment  –  areas  in  which  Irish  investment  is  below  the  EU  average.  However,  Internet
penetration rates in Irish homes increased from 17% to 35% between May and October 2000,
and the level and rate of increase in Internet penetration are now well above the EU average.
With improvements in local phone charges with telecommunications liberalisation, this rate of
penetration  should  improve.  The  Europe  action  plan  is  slowly  being  implemented  in  all
secondary  schools  as  part  of  the  National  Development  Plan,  and  numerous  complicated
subsidies and corporation tax incentives have been designed to stimulate private sector R&D
further too.

Capital  market  provisions  in  the  BEPGs  in  relation  to  seed  and  venture  capital  have
propelled  the  Government  into  a  number  of  regulatory  and  market  reforms  in  the  area.  In
February 2001, the Irish Financial Services Regulatory Authority was established with an remit
to  control  consumer  interests  in  the  banking  and  insurance  markets.  The  Central  Bank  of
Ireland  was  also  assigned  responsibility  to  regulate  insurance  and  investment  intermediaries.
Though there is a fear of increased market distortions and bureaucracy from such actions, the
regulation is seen as necessary to maintain consumer confidence in the banking and insurance
markets. Privatisation of the Trustee Savings Bank and the Industrial Credit Corporation has
been proceeding, but delayed by fears of an inappropriate flotation price as occurred with the
flotation of Telecom Éireann in 1999. The move to trade Government bonds and gilts in the
euro  clear  market  in  the  wake  of  EMU,  while  effectively  meaning  the  disappearance  of  the
Irish  bond  market,  will  provide  a  deeper  risk  and  liquidity  pool  in  which  to  trade  such
instruments.  The  purchase  of  the  Xetra  trading  system  from  the  Deutsche  Börse  will  also
facilitate greater volume trading of equities on the Irish Stock Exchange.

5.8.

Italy

With  regard  to  budgetary  policy,  Italy  will  not  meet  the  target  of  a  general  government
deficit of 0.8% as projected in the last stability programme update and thus fails to meet the
recommendations  both  of  the  Ecofin  opinion  on  the  programme  update  and  of  the  BEPGs
2001. While the government, in its new programme update, expects a deficit of 1.1% of GDP,
the  Commission  Autumn  forecast  (1.2%)  and  the  OECD  (1.4%)  are  less  optimistic.  In  the
light  of  the  economic  slowdown,  the  Italian  government  introduced  several  measures  in  July
2001 to contain public expenditure for goods and services, to reduce reimbursements for drug
prescriptions, to accelerate sales of real estate assets and to support investments. In addition,
tax revenues produced an unexpected windfall. With these measures, Italy was able to prevent
a  further  deterioration  of  the  general  government  deficit  in  2001  and  total  expenditure  is
believed to stay at 47.2% of GDP, as projected in the 2000 programme update.

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The  stability  programme  update,  which  was  concluded  in  October  2001,  projects  that  the
general government deficit target of 0.5% in 2002 can be achieved, even though GDP growth
projections have been reduced by 0.8% to 2.3% in 2002. As one of the measures taken by the
government,  tax  reductions  included  in  the  budget  of  2001  have  been  postponed  and  an
acceleration of additional asset sales is planned. As the Commission Autumn forecast as well
as the OECD indicate some of the assumptions of the government for the year 2002 might be
over optimistic. This concerns, in particular, the revenue created by the sale of publicly-owned
real-estate, where reliable information on the scope of these properties does not exists, as well
as  the  projected  effects  of  the  measures  to  encourage  the  surfacing  of  the  underground
economy.  Thus,  projections  of  the  Commission,  the  OECD  and  the  IMF  expect  the  deficit
above  1%  of  GDP.  Furthermore,  the  updated  stability  programme  keeps  the  commitment  to
achieve a balanced budget by the year 2003, based on a primary surplus of above 6% of GDP.
However prospects for the implementation of this goal are again subject to great uncertainty.

The reduction of the gross government debt ratio throughout the stability programme period
have been revised downwards with a new target of 98% of GDP in 2004. Structural reforms,
especially  on  public  expenditure,  are  slowly  underway  within  the  programme  for  the
government's  terms  in  office.  In  addition,  new  agreements  on  the  health  sector  within  the
framework  of  Italy  internal  stability  pact  have  been  concluded  which,  on  the  one  hand,  will
shift the responsibility of regional expenditure overruns to the regions themselves, i.e. they will
have to be covered from their own resources, and on the other hand, regions will have greater
autonomy  with  regard  to  the  control  of  expenditure  and  the  limiting  of  demand.  The
implementation  of  the  pact  and  its  amendments  will,  however,  be  crucial  for  the  control  of
public  finances.  In  the  field  of  pension  reform,  another  important  recommendation  in  the
BEPGs, a report from the Brambilla Commission is currently being discussed which contains
several  reform  options;  but  real  progress  has  been  very  modest  so  far  and  put,  at  risk  the
government's medium-term expenditure and taxation plans.

With regard to the labour market, employment has continued to rise, continuing the trend of
the year 2000. The unemployment rate is going to be reduced by 1 to 9.5% according to the
Commission Autumn forecast, i.e. above the EU average, before it is rises moderately in 2002
with  employment  growth  decelerating  more  substantially.  Regional  disparities  remain  strong,
however. Public expenditure and fiscal incentives to investment and to new hiring continue to
focus on the southern region of the country. The recommendations on the BEPG on the labour
market in Italy especially concern the reduction of the tax burden on labour. Some incentive
measures were included in the 2001 budget law which have led to a rise in permanent full-time
contracts.  Measures  taken  in  the  second  part  of  the  year  2001  were,  among  others,  the
transposition  of  the  European  directive  on  fixed-term  contracts,  new  fiscal  and  social
contribution  incentives  to  combat  the  hidden  economy,  as  well  as  the  introduction  of  the
possibility  of  tax  rebate  for  education  and  training  expenditure.  Furthermore,  a  reduction  of
social security contributions is planned in order to give an incentive for companies as well as
workers and thus to increase the employment rate. As the European joint employment report
notes, however, structural reforms of the labour market continue to be postponed and others
continue  at  a  slow  pace.  Thus,  the  more  far-reaching  BEPGs  recommendations  cannot  be
considered as being implemented fully.

In  Autumn  2001,  the  government  presented  a  white  book  on  employment  and  social  issues
which aims at improving the employment performance. The white book particularly focuses on
increasing  the  employment  of  young  people,  women  and  older  people.  Measures  should
facilitate  the  use  of  part-time  contracts  and  thus  also  contribute  to  a  better  market  entry  of
young people and women, the simplification of regulations for private job-market services, and

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the use of ICT in the labour information system. Proposed measures should also address the
problem  of  wage  developments  not  taking  into  account  productivity  and  regional  labour
market differentials. The proposals of the new government are thus very much in line with the
BEPGs recommendations of 2001. However, implementation will only commence later in the
year.

With  regard  to  product  markets  and  the  knowledge-based  economy,  Italy  has  made
progress with regard to the liberalisation of key network industries, for example in the energy
sector  where  the  demand  side  of  the  market  has  been  further  liberalised.  More  competitive
pricing has been introduced in the gas sector, the unbundling of the local telephone loop has
progressed,  as  well  as  the  introduction  of  new  powers  for  the  Antitrust  Authority.
Regulations, however, have to be streamlined, and the implementation of measures has to be
accelerated at the local level.

In regard to promotion of the business sector's involvement in Research and Development, and
to the encouragement of the wider diffusion of ICT and the use of e-commerce, Italy remains
below  the  EU  average  despite  having  increased  its  commitment  in  recent  years.  In  order  to
increase  the  effectiveness  of  the  measures  taken,  local  administrative  capacity  and  law
enforcement especially needs to be improved. This is even more important in the South, which
is lagging behind considerably in the field of innovation. The implementation of the Tremonti
Law  should  be  completed  by  the  end  of  the  year  2002.  It  includes  incentives  for  investment
decisions,  simplifies  procedures  and  encompass  a  wide  range  of  eligible  beneficiaries.  A
business  taxation  reform,  which  should  reduce  corporate  income  taxation  to  33%  and
simplifation of procedures is planned.

On  the  BEPGs  recommendation  for  capital  markets,  no  real  progress  can  be  noted  so  far
with regard to the adjustment of bankruptcy laws, although a proposal has been submitted to
Parliament.  Venture  capital  investment  decreased  in  2001,  as  in  most  other  Member  States.
This  is  still  below  the  EU  average  but  remains  firmly  above  1999-levels.  Positive  effects  are
expected  from  the  continuation  of  the  privatisation  programme  of  the  government  in  2002,
while regulatory reforms have also been pursued further.

5.9. Luxembourg

The  present  general  slow-down  in  economic  growth  does  not  endanger  the  successful
execution  of  Luxembourg  budgetary  policy.  Despite  a  new  round  of  tax  cuts  and  revenue
loss due to the growth slowdown, a general government surplus of 4.1 and of 2.8% of GDP
in,  respectively,  2001  and  2002  is  expected  by  the  government  according  to  the  updated
stability programme. In 2003, the surplus should increase again. The forecast of a 3.9% GDP
growth  in  2001  and  of  5.3%  in  2002,  followed  by  an  upswing,  are  reassuring75.  A  potential
weakness of the Luxembourg economy is the still limited number of sectors on which growth
depends  and  their  unequal  contribution  towards  it.  In  other  words,  Luxembourg's  growth
performance  is  largely  determined  by  a  small  number  of  sectors  among  which  the  financial
sector stands out. Luxembourg's general government expenditure continued to grow (40.3%
of GDP as opposed to 39.8% projected in the stability programme update of December 2000),
but  public  revenue  increased  even  faster  (44.4%  as  opposed  to  42.6%).  Wage  inflation
accelerated during the first half of 2001, mainly due to the fact that a wage indexation tranche
fell  due  in  April  2001.  HICP  is  projected  to  rise  by  2.6%  in  2001,  with  underlying  inflation
having  increased  even  further,  and  by  2.2%  in  2002  according  to  the  Commission  Autumn

75 The Commission in its Autumn forecast projects a GDP growth in 2002 of 3.0%.

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forecast. This will support wage moderation in the next two years, even though a new wage
indexation tranche is likely to fall due during the second half of 2002.

Despite  the  lower  growth  rates  in  2001  and  2002,  the  Government  intends  to  proceed,  as
decided in 2000, with the ongoing reductions in income taxes. A first reduction took place in
2001 and is to be followed by a 0.9% reduction in 2002. Corporate tax should also be reduced
in 2002 by approximately 1.5% of GDP.

During the year 2001, Luxembourg made further progress with regard to pension systems and
the long-term sustainability of the Luxembourg pension scheme. A round table (Rentendësch),
including the social partners, adopted a package of measures to the benefit of pensioners under
the private sector pension scheme, which will come into effect as of March 200276.

With regard to the  labour market, one challenge for Luxembourg is to increase the national
employment rate and to mobilise the "reservoir" of national labour supply in view of looming
skill  shortages  and  increasing  wage  levels.  Early  retirement,  pre-retirement  and  disability
pension schemes have encouraged many to withdraw early from the labour market. Mobilising
measures to counteract that effect are being taken e.g. the introduction of parental leave with a
guarantee  of  re-employment  and  (1999)  targeted  activation  programmes.  In  June  2001,  the
social partners agreed on proposals of the government to promote active ageing by restricting
access  to  occupational  invalidity  and  by  keeping  older  workers  in  employment.  Some
measures were taken for the integration of the disabled and for people most excluded from the
labour market. A "service for workers with reduced capacity" within the employment service
is  planned.  Employers  and  local  authorities  are  supported  to  promote  women's  access  or
return to employment by providing day care facilities for children and dependent persons.

The  tax  reform  which  was  introduced  in  2001  will  also  encourage  employment  through  a
significant  reduction  of  labour  taxation  by  increasing  the  non-taxable  minimum  income.  The
taxation  on  income  brackets  has  been  reduced  and  will  be  further  reduced  in  2002.
Furthermore, the Government plans to reduce the tax burden on businesses to 30% in 2002.
Employment growth is forecast at 5.4% in 2001 and at 2.3% in 2002 while unemployment is
expected to rise moderately from 2.2 to 2.4 and returning to the 2001 level in 2003.

In the year 2000, in accordance with the BEPG Recommendations on  product markets and
the knowledge-based economy, the transposition deficit of the internal market legislation has
been  significantly  reduced  and  a  body  for  assessing  progress  has  been  set  up.  The  relatively
small size of Luxembourg's civil service seems to be a major reason behind some of the delay
in  transposing  Community  directives.  Regional  aids  have  also  been  reduced.  But  price
regulation in some sectors and the lack of power of the competition authority continue to limit
the  degree  of  competition  in  the  product  markets.  However,  a  change  in  the  law  on  prices,
competition  and  consumer  protection  is  being  prepared,  which  is  to  be  seen  in  conjunction
with  the  move  towards  a  more  decentralized  European  Competition  policy.  Thus,  the  2001
recommendation  on  the  implementation  of  the  announced  abolition  of  fixed  and  monitored
prices  and  the  establishment  of  a  new  independent  competition  authority  with  the  powers  to
investigate and to sanction is being taken into account.

With  regard  to  the  knowledge-based  economy,  Luxembourg  continues  to  implement  the
"Luxembourg"  Programme  with  a  special  focus  on  e-government,  education  and  research,
organisation of work, and electronic commerce. Furthermore, the government is sticking to its
commitment to increase the budgetary support for R&D to 0.3% of GDP by 2004.

76 Updated stability programme Luxembourg, November 2001, p. 21f.

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With respect to the capital market, Luxembourg was not given any recommendation in 2001.
In view of extending the reach of the Luxembourg stock exchange, a cross-border agreement
has linked the Luxembourg exchange to Euronext (merger of the French, Dutch and Belgian
stock  markets).  This  agreement  has  to  be  seen  as  another  step  towards  the  creation  of  a
world-wide integrated stock market. The market share of the Luxembourg stock exchange of
all international bonds quoted on European stock markets is 65%. As a result of the increased
activity rate of the Luxembourg financial market in 2000, the number of workers employed in
the  banking  sector  has  increased  by  1.451,  i.e.  an  increase  of  7.1%  compared  to  a  5.6%
increase for the economy as a whole. The recent law on electronic commerce should stimulate
e-banking  even  further.  Nevertheless,  the  banking  sector  was  hit  by  the  financial  turmoil  in
2001.

5.10. Netherlands

With  regard  to  budgetary  policy,  the  Netherlands  will  be  able  to  achieve  the  general
government balance target set in the 2000 stability programme update of 0.7 - 1.0% of GDP,
despite lower than projected GDP growth (which according to the 2001 programme update,
will be 2.0% instead of 4.0% with more recent figures being less optimistic)77. The reduction
of  general  government  gross  debt  has  been  a  major  achievement.  It  will  even  surpass  the
targets going down to 51.8% of GDP and thus firmly below 60%. Thus, budgetary policy and
results have been in line with the recommendations, even though inflation was well above the
EU average, mainly as a result of the increase of value added tax and higher food prices. The
problem of overheating has disappeared since the economic slowdown.

The  2002  budget  is  continuing  the  macro-economic  policy  stance  of  previous  years,  thus
projecting  budgetary  surpluses  not  only  in  2002  but  in  the  coming  years,  too.  On  top  of  the
extra  public  spending  of  EUR  4.4  billion  laid  down  in  the  coalition  agreement  and  the  extra
spending  increases  in  previous  years,  the  government  has  found  room  within  the  spending
limits for an additional injection of  € 3.8 billion in 2002. While achieving a large reduction of
government  debt,  additional  expenditure  in  2002  is  mainly  targeted  at  care,  education  and
safety.  Much  of  the  extra  spending  in  these  priority  social  sectors  will  be  used  to  improve
substantially  employment  conditions  in  the  public  sector.  The  extra  money  available  is  partly
the result of lower expenditure, e.g. on interest and social security, due to the sharp reduction
in government debt and lower interest rates, and the fact that unemployment was lower than
was  assumed  in  the  coalition  agreement.  The  increases  in  expenditure  are  subject  to  the
spending  limits  for  the  central  government  budget  in  the  narrow  sense  (excluding  care  and
social  security),  the  social  security  and  labour  market  sector,  and  the  care  sector.  A  less
substantial  tax  cut  than  the  radical  reform  in  2001  is  planned  for  2002,  targeted  at  specific
groups.  The  main  objectives  are  to  encourage  job-seekers,  especially  people  re-entering  the
labour  market,  and  to  tackle  the  poverty  trap.  Revenue  in  2002  from  taxes,  social  insurance
contributions  and  natural  gas  is  expected  to  exceed  the  benchmarks  based  on  the  coalition
agreement  that  were  presented  in  the  1999  Budget  Memorandum.  According  to  the  stability
programme update, the government is going to use approximately 75% of the revenue windfall
during its term in office for debt reduction while the remainder is used for additional tax cuts.
With this, the coalition agreement specifying that revenue windfalls should be allocated equally

77 More  recent  forecasts  are  projecting  a  lower  GPD  growth,  i.e.  the  Commission  Autumn  forecasts  expects
1.5.%  while  the  OECD  expects  1.3%.  The  2001  programme  update  of  the  government  was  submitted  in
mid-October 2001. The general government surplus in 2001 is now projected to be slightly lower than the
figures given in the programme update, i.e. at 0.7% of GPD.

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to debt reduction and tax cuts has been amended, and is in line with the BEPG and stability
programme  recommendations  on  securing  the  long-term  sustainability  of  public  finances  in
view of the ageing population and on containing inflationary pressures.

Labour market reforms, including sustained wage moderation, reduction of minimum wages
for  young  employees,  the  dynamic  development  of  temporary  employment  agencies,  and  the
growth of part-time jobs, have increased labour flexibility. Consequently, the labour supply has
increased  considerably  and  the  employment  rate  has  sharply  risen,  while  unemployment  has
been substantially reduced in recent years. Nevertheless, due to the less favourable economic
outlook for the year 2002, unemployment will rise again in 2002. This could lead to a slowing
down  of  wage  increases,  though  remaining  rather  strong  as  collective  labour  agreements  for
2002 are already underway.

With regard to the recommendations on labour markets, various initiatives have been taken to
alleviate the poverty trap. The tax reform of 2001, with its focus on the poverty trap and on
reducing disincentives in the benefit system, cannot be fully assessed at the moment. In 2002
several  measures  will  be  taken  to  increase  the  labour  supply,  especially  of  older  people  and
people without jobs. Progress to reduce the high number of persons outside the labour market
supported  by  passive  income  support  schemes  has  been  disappointing.  The  government  and
social partners are still pondering ways and means of reforming the disability pension scheme –
as recommending by the Donner Commission – in order to stem the growing number of people
with  an  invalidity  benefit  and  to  promote  a  reintegration  of  those  already  receiving  benefit.
Proposals  include  disability  benefits  only  to  people  who  are  100%  incapacitated,  while  the
partially disabled will be encouraged to find suitable jobs that fits their capabilities.

With regard to the  product markets and the knowledge-based economy,  the  efficiency  of
product markets is on the whole satisfactory. Moreover, competition policy is now more pro-
active than it was before. With regard to further progress in enforcing the public procurement
directives,  the  government  has  taken  action  to  improve  the  awareness  of  procurement  rules
and to facilitate the correct application of those rules. More measures are still in progress.

As  regards  ICT  and  the  knowledge-based  economy  many  policy  papers  have  been  published
and many policy initiatives have been taken, e.g. the establishment of a Task Force ICT and
Knowledge  which  aims  at  strengthening  the  cooperation  between  the  public  and  the  private
sector,  including  improved  synergy  between  private  business  and  research  institutes.  It  is
particularly  focused  on  wireless  technology,  embedded  systems,  software  engineering  and
multimedia.  It  will  also  will  offer  a  market-place  for  ICT  knowledge,  supported  by  a  special
website on Internet. Another example is the provision of subsidies for innovative pilot projects
in the field of R&D aimed at technological breakthroughs, which are useful for a multitude of
applications  throughout  the  economy.  In  order  to  increase  the  supply  of  ICT  personnel  and
trained  researchers  an  "ICTpuntonline"  has  been  established  in  order  to  match  supply  and
demand  in  the  labour  market  by  disseminating  information  and  ideas  amongst  IT  managers,
personnel managers, trainers, teachers, student counsellors etc.

The  privatisation  of  the  railways  has  produced  disappointing  results  so  far,  especially  as
regards the punctuality of transport services. While the liberalisation of the cable market is not
yet  in  sight  within  the  next  two  years,  the  liberalisation  of  gas  and  electricity  markets  is
progressing on schedule, for – progressively – big, medium and small users. The management
of gas and electricity infrastructure has been entrusted to a separate legal entity, ensuring non-
discriminatory access. A separate body, which is part of the National Competition Authority,
is responsible for supervising the technical agreements on the security of supply as well as the
network and supply tariffs.

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More generally, there is still ample room for the improvement of the functioning of markets.
Various public initiatives have been taken to foster a knowledge-based society, but the process
seems mainly market-driven.

Capital  markets  in  the  Netherlands  function  smoothly.  The  Netherlands  has  a  very  strong
financial  sector.  Even  the  market  for  venture  capital  is  well-developed.  A  Bankruptcy  Act
Amendment Bill relating to the promotion of the effectiveness of the moratorium and winding
up procedures has been submitted to the Second Chamber of Parliament.

5.11. Austria

With regard to budgetary policy, the Austrian stability programme update of November 2001
forecasts  that  Austria  will  already  have  achieved  a  balanced  budget  in  the  year  200178.  The
main  contributors  to  this  better  than  expected  performance  were  savings  made  in  interest
payments, administrative reforms and lower than budgeted expenditure on employees. These
improved the expenditure side, while the development of tax payments (income and corporate
tax) helped to increase the revenue side of the budget. The public debt ratio in 2001, however,
turned  out  0.4  worse  than  expected  (at  61.8%)  although  the  plan  to  attain  the  60%  ratio  in
2002has been maintained. All in all, this positive result was achieved despite a much lower real
GDP  growth  in  2001  (1.3%  down  from  2.8%  as  projected  in  the  2000  update)  and  at  the
expense of rising unemployment and a decrease of households' purchasing power.

The  supreme  goal  of  the  current  government  is  to  achieve  a  balanced  budget  by  2002,  or
rather  to  maintain  it.  It  is  to  be  achieved  on  the  expenditure  side  by  a  pension  reform  and
reduced  civil  service  payroll,  on  the  revenue  side  by  a  number  of  increased  or  newly
introduced taxes and public charges. These fiscal measures are expected to have a dampening
impact on household net incomes. A reduction in the number of public employees is expected
with the introduction of annualised working-time models in the public service from 1 January
2002  resulting  in  savings  in  overtime  payments.  Discretionary  (i.e.  non-mandatory)
expenditure in the public sector is to be cut as a result of a variety of measures. A policy of
wage moderation in the public sector from 2001 to 2003 will also have the effect of curbing
spending. For 2002, a percentage increase of 0.8% was agreed. Government transfer payments
are  to  be  concentrated  on  core  functions,  inter  alia  by  continuing  on  the  course  of  making
certain areas into independent companies. Federal payments to all hived-off areas are also to
be limited.

On the revenue side a series of measures in the field of taxes and public charges is projected to
increase government income by 1% of GDP. Further privatisations will also contribute to the
revenues. Another important element of the government strategy to achieve a balanced budget
is the new burden-sharing arrangement with the states and the municipalities. However, some
measures  are  planned  that  will  increase  expenditure  or  reduce  revenues.  These  measures
include:  special  programmes  for  disabled  persons;  the  new  family  allowance  introduced  by
2002;  increased  R&D  Funds;  and  reduction  of  non-wage  labour  costs.  The  new  childcare
allowance (Kindergeld) will enter into force on 1 January 2002. The new childcare allowance
will  be  paid  to  every  parent  staying  at  home  or  only  working  part-time  (earning  less  than €
14,535 a year) for up to three years (when both parents divide parental leave between them).
Benefit levels have increased sightly.

78 Note that both the Commission Autumn Forecast as well as the Austrian National Bank predict a deficit of

0.2% of GDP, which however will be better than 2000 stability programme target of 0.7%.

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It remains to be seen if the implementation of several of these measures will have the intended
effects. The budgetary consolidation in any case will have some consequences for other policy
sectors covered by the BEPGs, e.g. employment policies. At the same time, further reforms of
the pension system are still only in the planning stage despite the recommendation in the 2001
BEPGs.

As  regard  recommendations  for  the  labour  market,  Austria  was  most  notably  asked  to
increase incentives for older workers to remain active in the labour market. The major pension
reform,  which  became  effective  on  1  October  2001,  includes  several  incentives  to  raise  the
relatively low retirement age in Austria and a gradual increase in the early retirement age by a
total of 18 months (to 56.5 for women and 61.5 for men), a penalty/reward system for taking
or postponing early retirement and the abolition of early retirement due to reduced ability to
work. Another important element of this reform is the reduction of survivors' pensions in cases
where  there  is  an  entitlement  to  a  private  pension.  To  support  the  development  of  the  third
pillar of the pension system the tax benefit for private retirement provision will be increased.

Under  the  heading  of  "social  targeting"  the  government  implemented  several  measures  to
enhance the incentives of the unemployment insurance system to take up work. The maximum
replacement rate was reduced, and the conditions of eligibility for unemployment benefits were
tightened. A package of measures for older workers entered into force on 1 October 2000. It
included  a  bonus/malus  system  for  employers'  contributions  to  the  unemployment  insurance
scheme when they hire or fire workers over 50 years of age.

Also  with  regard  to  the  general  recommendations,  several  reforms  introduced  relate  to  the
guidelines. A change in social security legislation entered into force on 1 January 2001. Non-
working  spouses  (without  children  and  other  dependent  persons  to  look  after)  of  employed
persons no longer have free access to health insurance. This measure was intended to increase
the revenues of the social security institutions (in the context of achieving a balanced federal
budget by 2002) as well as to encourage participation in the labour market. The first reports of
the  social  security  institutions  indicate,  however,  that  the  first  goal  will  not  be  achieved
because of the considerable administrative cost of identifying the persons that are now obliged
to insure themselves.

Country-specific  recommendations  on  product  markets  were  implemented  during  the  years
2000 and 2001. The energy markets liberalisation act passed parliament in July 2000. This act
fully liberalises the electricity and gas markets. The original electricity market liberalisation act
of the former government intended a liberalisation in three steps up to 19 February 2003. This
timetable was in accordance with EC Directive 96/92 and would have opened the market to a
degree  of  about  36%  (for  consumers  with  a  consumption  exceeding  9  GWh  per  year).  The
new  government  decided  to  liberalise  the  market  completely  by  October  2002.  A  new
electricity  regulation  authority  is  competent  to  supervise  the  market.  A  similar  development
took place in the natural gas market. The partial liberalisation in accordance with EC Directive
98/30 was replaced by full liberalisation by October 2002.

The relatively low R&D quota of 1.8% of GDP is to be increased to 2% by 2002 and 2.5% by
2005. For the current legislative period the government has earmarked a special fund of  € 0.5
billion  for  its  "technological  offensive".  As  institutional  innovation,  a  Research  and
Technology Council was set up that is responsible for the distribution of the special funds. The
Council developed a strategy paper in order to help the government to achieve its ambitious
goal  of  a  R&D  quota  of  2.5%  by  2005.  In  addition,  businesses  will  be  encouraged  to  spend
more on R&D. The tax reform 2000 provides for an increase of the research allowance.

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In  March  2001,  the  National  Council  adopted  a  law  that  will  create  a  federal  public
procurement agency. Public procurement, which is now in the responsibility of the individual
ministries,  will  thereby  be  centralised  and  streamlined.  The  government  expects  savings  of
about  €  41.4  million  per  year.  Further  policies  with  regard  to  the  general  recommendations
were  taken  in  the  field  of  competition  policy  and  on  privatisation.  Since  the  year  2000  the
Cartel Court has been empowered to launch cartel proceedings at its own discretion. In June
2001 the government presented its plans to install an independent competition authority and to
appoint  a  federal  attorney  to  supervise  competition.  In  April  2001,  the  Broadcasting  and
Telekom  Control  GmbH  (Rundfunk  und  Telekom  Regulierungsbehörde)  was  created.  This
authority  combines 
fields  of
telecommunication and electronic media. With an amendment to the Penal Code in May 2000
the  elements  of  bankruptcy  were  redefined  in  order  to  decriminalise  entrepreneurship  and  to
give  entrepreneurs  a  second  chance.  Finally,  the  Austrian  Industrial  Holding  Corp.  (ÖIAG)
privatised  several  state-owned  enterprises.  Privatisation  included  the  Postal  Savings  Bank,
more than 17% of the Vienna Airport AG, the State Printing Office and Telekom Austria AG.
These privatisations reduced the liabilities of the ÖIAG from € 6.26 billion to €

supervisory  competencies 

regulatory  and 

 2.73 billion.

the 

in 

Several  measures  were  taken  to  strengthen  the  Austrian  capital  market.  These  measures
included the abolition of the stock exchange turnover tax, tax benefits for stock options under
certain  conditions,  the  abolition  of  the  inheritance  tax  for  the  acquisition  of  holdings  of  less
than 1% of shares in public limited companies by way of succession and a tax allowance of €
726.70 for the issue of employee shares is raised to € 1,453.50.

An expert team on Bank supervision examined the possibility and perspective of a reform of
the  banking  supervisory  authority  and  presented  its  final  report  at  the  end  of  2000.  In  July
2001 the National Council adopted a law that will implement a financial markets supervisory
authority which is to supervise all financial institutions. This authority, that shall be operative
by  April  2002,  will  replace  several  authorities  that  supervised  different  kinds  of  financial
institutions.

5.12. Portugal

In  budgetary  policy,  according  to  the  latest  forecasts,  the  overall  governmental  deficit  for
2001  is  estimated  at  2.2%  of  GDP.  The  higher  deficit  is  mainly  due  to  a  shortfall  in  tax
revenue,  resulting  from  a  considerably  less  favourable  performance  of  both  domestic  and
international economies. GDP growth projections for 2001 had to be revised to 2.0% and 1.75
in 2002 in the updated stability programme. The Commission in its Autumn forecasts was less
optimistic  (1.7  and  1.5  respectively).  In  general,  a  decrease  in  domestic  demand  and  the
international  background  will  mainly  contribute  to  this  negative  development  in  2002.  As  a
consequence, however, inflation which had picked up substantially in 2001 will decelerate in
2002 to 2.8%.

With regard to the recommendation to rectify government expenditure in case of lower than
projected  revenue  in  2001,  the  government  implemented  a  budget  revision  in  June  which  is
likely to reduce total expenditure by 0.6% compared to the 2000 stability programme update.
The rectifying budget aimed mainly at lowering current expenditure, i.e. to compensate for the
estimated tax revenue shortfall, further tax measures to stimulate saving and investment; and a
regularisation of the financial situation of the National Health Service and other measures to
support the reform of the system.

In the light of the economic downturn, Portugal aims at keeping its pace in the reduction of
the deficit ratio of the budget during 2002 and 2003 and hopes to compensate for the strong

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revision of the general government deficit in 2001 only in 2004 in order to meet the medium-
term  target  of  a  balanced  budget.  With  its  new  programme  update,  the  government  neither
fulfils the aims of the last update, nor the recommendations in the Ecofin opinion on its update
and in the BEPGs 2001. During 2001, the gross debt level actually deteriorated (from 53.7 to
55.9% of GDP) and is expected to be reduced at a much slower pace than projected in the last
programme update in 2000.

Portugal  made  some  progress  in  the  area  of  the  health  care  system  in  order  to  improve
expenditure control and efficiency and to strengthen the financial position of the social security
sector. Some measures have already been taken, especially with regard to the improvement of
financial  control,  while  others  are  still  in  the  planning  stage79.  The  implementation  of  the
Public Expenditure Reform Programme for the period 2002/2004 should further increase the
efficiency  and  quality  of  expenditure,  the  development  of  a  more  active  tax  policy,  and  an
acceleration  of  tax  reliefs  on  labour  and  capital  as  a  means  of  stimulating  aggregate  supply.
With  this,  private  consumption  and  economic  growth  should  be  sustained.  In  addition,  the
programme  should  help  to  restructure  the  state  corporate  sector  and  thus  lower  the  heavy
burden it represents to public finances. Finally, a new Budgetary Framework Law defines the
general and horizontal rules for the budget and accounts of the General Government, as well
as the rules and procedures related to the State Budget and the State accounts, including the
Social  Security  Sub-sector.  It  should  support  the  control  of  expenditure  and  aims  at  multi-
annual financial programming.

In spite of positive developments in the labour market policy of Portugal, structural problems
remain,  such  as  low  levels  of  education  and  qualifications  within  the  workforce  (especially
among  the  older  workers),  low  productivity  levels  and  a  largely  undeveloped  service  sector.
The  slow  progress  on  these  matters  may  create  difficulties  for  convergence  towards  the
average  development  levels  of  the  European  Union.  According  to  the  Commission  Autumn
forecast, employment growth is likely to decrease to 0.7% in 2002 after 1.5% in 2001. While
unemployment will only moderately decrease in 2001 it will rise in 2002 (to 4.3%) and 2003,
which will however still be substantially below the EU average. Wage moderation will thus be
maintained  in  the  next  two  years,  both  in  the  private  and  public  sector,  not  least  by  the
projected deceleration in inflation.

The 2001 National Employment Plan foresees measures to improve the qualification of human
resources  by  permanent  training  measures,  programmes  of  education  and  training  of  adults,
training  for  currently  employed  workers  and  specific  training  for  the  short  and  long-term
unemployed.  Furthermore,  Portugal  aims  at  combating  labour  market  mismatches  and  at  the
same  time  steps  up  social  protection  and  reducing  poverty  policies.  In  February  2001,  the
Economic and Social Council agreed on specific measures to improve job conditions, hygiene
and  safety,  hazard  prevention,  employment  policy,  labour  market  conditions,  education  and
training (the agreements on "Employment policy, labour market, education and training" and
on  "Working  conditions,  occupational  wealth  and  safety  and  combating  occupational
accidents"). Labour market regulations were amended to combat non-registered employment.
The  monitoring  of  situations  of  fixed-term  contracting  proceeded  by  an  intensification  of
inspections and further incentives for employers to change fixed-term contracts into permanent
contracts. Furthermore, measures aiming to reduce early school leaving, a double certification
scheme  and  increases  in  vocational  courses  are  planned,  while  a  comprehensive  lifelong

79 Cf. Stability Programme update Portugal, December 2001, p. 15f.

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learning  strategy  has  been  developed  but  needs  to  be  implemented  in  the  light  of  ambitious
targets.

The  2001  Cardiff  report  of  the  Portuguese  government  presents  an  overview  on  the
developments  in  the  area  of  product  markets  and  knowledge-based  economy.  Most
notably,  the  Third  Community  Support  Framework  is  now  in  the  process  of  being
implemented, focussing on the improvement of structural problems such as the promotion of
competitiveness  of  companies,  the  modernisation  of  SME  and  the  spreading  of  new
technology. Enhanced efforts have been made with regard to R&D investment, most notably
via the new Integrated Program for the Support to Innovation, the reinforcement of advanced
training of human resources in Science and Technology as well as initiatives to encourage the
co-operation between entrepreneurs and R&D systems and a new R&D program consisting of
a joint venture between corporations and research institutions. Furthermore, the regime of tax
incentives for corporate R&D has been revised. In the ICT sector, the certification of skills as
well as training efforts have been improved.

With  regard  to  the  recommendation  for  further  liberalisation  in  the  energy  sector,  the
directives concerning the common rules for the liberalisation of the natural gas market and the
constitution and maintenance of security reserves of oil products were transposed in January
2001.  The  liberalisation  of  the  electricity  market  is  in  process  (by  revising  the  respective
regulations).  Associated  transport  and  distribution  network  average  tariffs  in  the  electricity
energy sector could be reduced by further liberalisation efforts. Finally, a better transposition
of community legislation can be noted (down to 2.5%, EU-average in November 2001: 2.0%),
a trend which has been continued in recent years.

The  Cardiff  report  notes  that  development  of  the  risk  capital  market  has  been  stimulated
through  the  inclusion,  in  the  context  of  the  Community  Support  Framework,  of  credit  lines
specifically tailored for this kind of investment. Venture capital institutions can deduct 100%
of  the  profits  from  the  companies  in  which  they  take  shares,  following  a  revision  of  the  tax
allowance  statute.  Furthermore,  some  other  tax  related  measures  were  taken.  On  the
recommendation regarding bankruptcy legislation, that is, the adjustment of the legislation on
winding-up  and  liquidations  to  the  needs  of  economic,  social  and  forensic  legal  systems,  a
legislative proposal has not yet been submitted80.

5.13. Finland

With regard to  budgetary policy in Finland, despite the substantial revision of GDP growth
targets  in  2001  (while  the  2000  stability  programme  update  projected  a  4.2%  growth,  latest
figures  expect  only  a  small  growth  of  0.5  to  0.6%),  Finland  seems  to  secure  the  projected
general  government  financial  balance  of  4.7%  of  GDP.  Nevertheless,  both  government
expenditure  and  revenue  increased  substantially  compared  to  the  targets  set  in  the  stability
programme  update.  In  addition,  the  employment  situation  points  to  persistent  structural
problems 
the
telecommunications,  as  basis  for  economic  growth  has  had  a  very  negative  impact  on
economic performance in 2001.

labour  market  and  Finland's  heavy  reliance  on  one  sector, 

the 

in 

With regard to the year 2002, the overall view of future economic development of the country
is  less  optimistic  than  before.  With  global  economic  growth  prospects  for  2002  bleak,  the
Finnish  government  has  cut  growth  prospects  by  half  and  estimates  GDP  growth  at  1.6%  in

80 Cf. 4th Cardiff Report Portugal, November 2001.

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2002. The period of falling exports is expected to be over, however. The update assumes that
the growth in domestic demand will range around 2% and total output is anticipated to grow
about  1.5%.  Employment  will  cease  to  grow  and  unemployment  is  expected  to  slightly  rise.
The  average  employment  rate  is  forecast  at  67.5%  of  the  working  age  population  and  the
unemployment rate at 9.5 of the labour force81.

The  update  for  2001  assumes  that  the  surplus  in  central  government  finances  in  2001  will
correspond  to  1.9%  of  GDP  (with  the  general  government  balance  at  2.6%  of  GDP).  This
marks  a  remarkable  drop  from  the  2000  surplus  of  3.5%  of  GDP  and  is  mainly  due  to  the
business cycle. In 2002 the central government's total revenue is estimated to hold steady at
the  current  year's  level.  Total  corporate  tax  revenue  will  fall  further,  but  the  increase  in  the
central  government's  share  of  revenue  compared  with  the  municipalities  will  offset  this  from
the  stand-point  of  central  government  tax  revenue.  The  government  will  pursue  its  policy  of
tax  reductions  as  implied  in  the  BEPGs  despite  of  the  decreasing  performance  of  the
economy82. The budget proposal for 2002 includes tax cuts amounting to  € 665 million (0.5%
of total output), which was agreed in the collective bargaining negotiations in November 2000.
The  central  government's  share  of  the  tax  cuts  is  70%.  Finally,  the  reduction  of  general
government  gross  debt  is  expected  to  come  to  a  standstill  in  2002  and  2003  with  a  light
increase of 0.3% over the two years, but should gradually continue in 2004. The main reason
for this change of forecast can be attributed to the lower surplus and the changed investment
policy of the pensions insurance companies.

The Finnish  labour market situation is one of the greatest concerns for the country. Despite
the  high  rate  of  economic  growth  that  has  been  achieved  in  recent  years  the  level  of
unemployment  has  remained  at  a  relatively  high  level.  Unemployment  has  come  down  from
crisis levels more rapidly than in other countries, but unemployment remains in the early 2000's
as  the  main  economic  problem  of  Finland.  The  Ministry  of  Finance  predicted  that
unemployment  would  remain  at  the  level  of  9%  for  the  years  2000-2001.  This  would  mean
that the employment rate would remain at the level of 67.5% for the year 200283. Employment
has  gone  up  and  the  present  rate  already  exceeds  the  EU  average.  The  explanation  is  that
Finnish  unemployment  is  of  a  structural  nature.  The  growth  of  the  demand  for  labour  has
taken  place  in  high  technology  sectors  and  does  not  offer  employment  for  an  ageing
population  and  often  inadequately  trained  surplus  labour.The  Finnish  labour  market  is,  in
consequence  not  in  equilibrium.  Other  serious  problems  include  a  high  benefit  dependency
among  the  working-age  population,  high  taxation  on  labour  and  a  compressed  wage
distribution.  Furthermore,  there  are  labour  bottlenecks  in  certain  regions  and  sectors  while
other  regions  experience  severe  structural  problems  manifested  in  disproportionately  high
unemployment  rates  among  low-skilled  and  older  workers.  Progress  has,  however,  been
sluggish.

The  Council  recommendations  both  for  the  year  2000  and  2001  pointed  to  the  need  to
improve  the  functioning  of  the  labour  market  through  reforms  in  policies  that  enhance
incentives for the labour reserves to enter the employment market. Reducing the high level of
taxation  was  seen  as  one  of  the  key  instruments.  In  a  similar  way  also  the  reform  of  the
pension  system  was  seen  as  an  instrument,  no  doubt  the  improvement  of  the  employment

81 Updated  Stability  Programme  for  Finland,  November  2001,  Ministry  of  Finance,  Economics  Department,

Economic Survey, September 2001, p. 4.

82 Ministry of Finance, Economics Department, Economic Survey, September 2001, p. 10.
83

ibid.

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to 

to  wider  economic  policy  arrangements.  As  a  response 

situation  is  the  key  issue  for  the  Finnish  government  in  its  economic  policy.  The  present
government,  nominated  in  spring  1999,  has  set  the  improvement  of  employment  as  its  main
objective.  Employment  policy  measures  are  part  of  the  incomes  policy  arrangement  and
the
therefore  subject 
recommendations,  the  Finnish  government  in  2000  initiated  preparations  to  reform  the
employment and unemployment pensions schemes. The preparation of the reform takes place
in a tripartite process including government, employers and workers. Legislative measures are
due to be outlined in 2002.  Key proposals in the employment promotion issues imply first of
all  the  rise  of  the  eligibility  age  limit  for  the  "additional  daily  allowance"  after  500  days  of
unemployment  from  57  years  to  59  years.  Also  an  eligibility  condition  of  5  years  of  work
history in the past 15 years will be applied. Daily unemployment allowances would be granted
until the age of 65 and changes related to the "additional daily allowances" would replace the
current  system  of  unemployment  pension.  Measures  proposed  aim  at  keeping  employees
actively in working life for a longer period than currently and thus provide a solution to future
shortages of labour. Within the National Action Plan adopted in spring 2001, the key policy
instrument  is  education  policy.  A  report  on  education  policy  is  to  be  given  to  Parliament  in
2002.

In the field of product markets and the knowledge-based economy, Finland has made very
positive progress in the transition to a knowledge-based economy and in the functioning of the
market system in product markets in recent years. Finland is an open economy and stands high
in the process of introducing the internal market legislation. The response of the government
to market reforms indicated in recommendations on public procurement at the local level and
increase competition in specific sectors such as distribution, construction and the media sector,
has  been  positive.  A  key  economic  policy  goal  of  the  government  is  to  safeguard  the
preconditions  for  sustainable  economic  growth  by  implementing  structural  reforms  on  the
product,  capital  and  labour  markets.  The  November  2001  update  of  the  stability  programme
points to measures in industrial policy focus. Key areas of interest comprise measures to boost
the competition environment and market access as well as the promotion of entrepreneurship.
The  update  stresses  that  efforts  have  been  made  to  reduce  the  amount  of  sector-specific
business subsidies and to replace them with the development of the operating environment of
business and intangible investments. The system of business subsidies has been made simpler,
supervision  of  aid  has  been  boosted  and  measures  have  been  taken  to  better  evaluate  the
impact of subsidies.

In the field of capital markets the recommendations for both years noted with satisfaction the
progress made. The Finnish capital market has experienced a rapid and very dynamic growth
since  the  mid-1990's.  The  deepening  of  the  capital  market  goes  hand  in  hand  with  the
expansion of the Finnish economy. The 2001 Cardiff report of the government states that new
rules and regulations on insider trading based on a self-regulatory regime of the markets have
been  drafted  and  that  the  securities  settlement  system  and  service  chain  have  been
strengthened. During 2001, further reforms are underway on the financial markets, including
measures  to  enhance  the  infrastructure  of  the  stock  markets  and  developments  in  the
regulatory regime of financial conglomerates and in the operating environment of companies
offering financial services. Finally, the right of non-financial companies to accept deposit funds
and the competition environment of the statutory earnings-related pension scheme, are in the
process of being reformed84.

84 Cf. 4th Cardiff Report Finland, November 2001, p. 21.

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5.14. Sweden

With  regard  to  budgetary  policy,  the  Swedish  economy  and  public  finances  are,  in  the
opinion  of  the  government,  well-prepared  to  face  the  global  economic  slowdown.  No
extraordinary  savings  are  planned,  but  the  government  says  that  it  may  have  to  revise  this  if
the  economic  situation  deteriorates85.  The  main  reason  for  this  concern  is  the  international
economic  slow-down,  not  least  in  the  ICT  sector.  The  terrorist  attack  in  the  US  has  further
added to the slow-down. The GDP-growth projection was revised from 3.5% to 1.7% from
one  convergence  programme  update  to  the  next.  Due  to  strong  public  finances,  low
unemployment and low expectations for inflation, the government does not expect Sweden to
be  unduly  affected  by  international  economic  conditions86.  However,  the  Swedish  krona  fell
against the euro in 2001, even before the terrorist attack, but is expected to appreciate again in
2002.

Sweden decided in 1997 on a medium-term target for the public finances: the budget surplus
should  amount  to  an  average  of  2%  of  GDP  over  the  business  cycle.  A  successful  result
presupposes  that  expenditure  is  under  control.  Since  1997,  the  Riksdag  has  established
nominal  expenditure  ceilings,  which  cannot  be  exceeded  without  the  Riksdag  passing  a
resolution to that effect87. The aim of achieving a surplus of 2% of GDP over a business cycle
has  since  remained.  The  convergence  programme  update  foresees  a  net  lending  of  2.1%  of
GDP in 2002 and 2.2 and 2.3 for 2003 and 2004 respectively. Thus, the government, in line
with  its  medium-target,  is  more  optimistic  than  the  Commission  Autumn  forecast  as  well  as
the OECD, based on higher GDP growth targets. The government expects that discretionary
fiscal policy will contribute 1.7% of GDP and that tax and expenditure reforms will increase
disposable income by 1.4% of GDP. In total, however, government expenditure will decrease
slightly over the next three years according to the convergence programme update.

Sweden  can  be  said  to  have  responded  well  to  the  general  recommendations  in  the  BEPGs
2000  and  2001.  Sweden  showed  good  progress  in  implementing  the  country-specific
guidelines.  Measures  have  been  taken  in  response  to  recommendations  on  lowering  the  tax
burden.  Both  in  2000  and  2001  measures  were  taken  to  reduce  the  taxation  on  low  and
middle-income earners (achieved by compensating for individual contributions used to finance
earnings-related and supplementary pensions and by raising the limit for national income tax so
that  fewer  wage  earners  pay  national  income  tax)  and  this  work  will  continue.  The  tax  cuts
made in 2000 and 2001 amount to about 1.5% of GDP in total. Sweden has also continued the
strategy of maintaining high government surpluses and reducing public debt. The government
has stressed the importance of wage restraint to the social partners. A mediation institute was
creatd by the state in 2000 with the task both of mediating in labour conflicts and supporting
the wage formation process.
Several  new  initiatives  were  launched  in  the  budget  bill  for  200288,  presented  in  September
2001: lower taxation on income (again achieved by compensating for individual contributions
used  to  finance  earnings-related  and  supplementary  pensions  and  by  raising  the  limit  for
national  income  tax);  lower  tax  on  real  estate  (property);  lower  taxation  on  income  from

85 Ministry  of  Finance,  "Regeringens  proposition  Prop.  2001/02:1  Budgetpropositionen  för  2002",

Finansdepartementet, Stockholm, 2001.

86 Ringholm, B., "Vi räknar med ökad tillväxt", Dagens Nyheter, Stockholm, 20 September 2001.
87 Cf. Ministry of Finance, "Sweden's Convergence Programme 1998-2001", Stockholm, December 1998.
88 Cf.  Ministry  of  Finance,  "Regeringens  proposition  Prop.  2001/02:1  Budgetpropositionen  för  2002",

Finansdepartementet, Stockholm, 2001.

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capital property (achieved by raising the limit so that fewer pay such tax); making child care
fees less dependent on income (setting a ceiling on child care fees, also intended to improve
job incentive and avoid poverty traps); and reduced VAT on books. The disposable income of
households is expected to raise by 2.7% during 2002. Taxation on energy, carbon dioxin, and
waste  will  instead  increase  as  part  of  a  green  tax  shift.  The  proposed  tax  reductions  are
expected  to  contribute  to  an  increase  in  disposable  income  of  households  and  thus  to
consumption and savings. The employers organisation, the centre-right opposition, and some
bank  economists  state,  however,  that  while  households  are  targeted  in  the  budget  bill,
sufficient attention has not been paid to enterprises89.

The  recommendations  related  to  the  functioning  of  labour  markets  and  the  need  to  reduce
taxation  on  labour  are  potentially  controversial  in  the  eyes  of  the  Swedish  government.
Sweden is repeatedly recommended to pursue reforms of tax and benefit systems to promote
work incentives and reduce the tax burden for low income earners. The tax reductions in 2000
and  2001  are  seemingly  not  considered  enough  in  the  view  of  the  Commission  and  Council;
and  it  is  true  that  total  labour  costs  have  in  fact  increased  in  2001 90.  In  February  2001,  a
reform  of  the  unemployment  benefit  insurance  was  implemented.  Formally  the  new  rules  are
less strict but in practice they are supposed to be more effective, since the former rules were
unevenly  implemented.  Pressure  on  occupational  and  geographical  mobility  of  unemployed
persons has increased through the tightening of benefit rules. Sweden has also adopted a long-
term  approach  to  removing  poverty  traps  and  reducing  marginal  effects.  Still,  labour  market
policy is the field where Sweden is least in accord with the EU's views.

One  recommendation,  which  is  repeated  each  year  to  Sweden,  and  which  is  controversial  in
principle,  concerns  the  need  for  lower  taxes.  It  is  controversial  in  principle  because  the
Swedish  position  is  that  taxes  are  an  issue  of  national  competence.  Part  of  the  employment
policy  recommendations  in  2000,  Sweden  was  invited  to  set  a  goal  for  the  tax  reductions.
However,  this  has  not  been  implemented.  In  the  view  of  the  Swedish  government,  to  have
European  goals  for  the  level  of  taxation  is  not  in  line  with  the  subsidiarity  principle.  In
addition, to have high taxes is considered a political choice and the NAP for 2000 states that
"The primary purpose of taxes is to finance the welfare system and thereby contribute to social
security  and  justice"91.  Moreover,  Sweden  has  objections  to  the  way  in  which  the  level  of
taxation  is  measured  in  the  EU.  The  Swedish  view  is  also  that  the  issue  of  the  size  of  the
public sector or the size of public expenditure is not a matter for discussion at the EU level so
much  as  the  structure  of  taxation.  Another  matter  of  disagreement  concerns  labour  market
regulation,  where  particularly  the  OECD  considers  Swedish  regulation  to  be  too  strict.  The
government  does  not  agree  that  the  introduction  of  further  flexibility  is  necessary.  In
conclusion,  although  this  is  not  shared  by  all  national  actors  in  Sweden,  both  the  policy
direction of lowered taxation and review of tax and benefit systems to avoid marginal effects
and poverty traps can be understood partly as a result of EU economic coordination.

89 Cf. Dagens Industri, 21 September 2001.
90 Cf.  Junestav  M.,  "Labour  Cost  Reduction,  Taxation  and  Employment.  The  Swedish  Case"  Draft  Paper
prepared  for  the  SALTSA  Workshop  "The  Transposition  of  European  "Soft"  Social  Policy  Measures  at
National Level", Brussels, 2001.

91 According  to  Junestav,  the  unwillingness  to  set  a  target  for  taxes  is  also  an  implication  of  a  certain
economic  theory  that  denies  a  connection  between  taxes  and  employment.  Cf.  Junestav  M.,  "Labour  Cost
Reduction,  Taxation  and  Employment.  The  Swedish  Case",  Draft  Paper  prepared  for  the  SALTSA
Workshop  "The  Transposition  of  European  "Soft"  Social  Policy  Measures  at  National  Level",  Brussels,
2001.

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In  regard  to  the  reform  of  product  markets  and  the  knowledge-based  economy,  Sweden
has  been  at  the  forefront  of  opening  markets  for  competition,  e.g.  as  regards  electricity,
telecommunications,  postal  services  and  transport  sectors  such  as  taxi,  bus,  railway  and
domestic air traffic. Moreover, Sweden is in the forefront as regards ICT-related production
and  use  of  the  internet  as  well  as  the  development  of  new  financial  markets,  such  as  fund
savings.  Competition  policy  has  been  strengthened.  And  yet,  looking  at  the  current
competition situation, not all the intentions of the reforms have been met. Consumers have not
yet benefited to the extent that was expected from market liberalisation, at least not in terms of
lower consumer prices. Concentration has increased in some sectors when the companies are
preparing for a Europe-wide market, the consequence being that they achieve an increasingly
dominant  position  in  Sweden,  e.g.  the  electricity,  petroleum  and  banking  sectors.  That
liberalisation does not automatically benefit consumers, perhaps providing a lesson for others.
Still, 
the  deregulation  of
telecommunications  and  electricity  has  contributed  to  lower  inflation  in  1999  by  0.3
percentage points, and has thus led to considerable gains for the Swedish economy. Both on
electricity and telecomms, prices are lower in Sweden than the EU average92.

the  national  Cardiff 

for  2000  estimates 

report 

that 

The recommendations related to structural reform of product, service and capital markets are,
however, well in line with the government's general policy. On product markets, Sweden has
been recommended to increase competition in particular sectors: retail and wholesale trade and
construction.  Sweden  has  also  been  recommended  to  continue  improving  competition  in  air
transport and pharmaceuticals and to continue to enhance efficiency in public procurement and
the  provision  of  public  services.  Measures  have  been  taken  in  response  to  all  the  guidelines,
not always leading to concrete results in 2001. However, the Commission in its report on the
implementation  of  the  2000  broad  economic  guidelines  commented  that  the  opening  up  of
public  procurement  remains  insufficient  and  that  there  is  scope  for  further  progress  in
increasing  the  efficiency  of  public  services.  A  permanent  committee  to  deal  with  quality  and
development issues related to public procurement is now planned for 2002.

On capital markets, some progress has been made with regard to the adaptation of the fiscal
framework  in  order  to  develop  the  risk  capital  market  to  make  it  more  conducive  to
investment and entrepreneurship. A committee was set up to review the tax rules relating to
dividends  and  capital  gains.  Corporate  and  capital 
to  stimulate
entrepreneurship  and  investment  are  currently  being  simplified.  Legislative  measures  on  the
adjustments of bankruptcy law are planned for early 2002 based on proposals of the Right of
Property Committee.

in  order 

taxation 

5.15. United Kingdom

With  regard  to  budgetary  policy,  the  government's  financial  position  is  very  strong,  with
current  budget  surpluses,  low  levels  of  debt  and  very  limited  pension  liabilities  in  the  long
term. This financial position has been achieved despite a comparatively low level of taxation.
Fiscal  policy  over  the  next  two  years  will  be  driven  by  ambitious  plans  designed  to  boost
public  expenditure.  Macroeconomic  stability  remains  a  high  priority,  however,  with  plans  in
place  to  achieve  a  public  sector  expenditure  to  GDP  ratio  of  37.2%  in  2002-03,  and  a

92 Regeringskansliet,  Näringsdepartmentet,  "Benchmarking  av  näringspolitiken  2001.  Indikatorer  inom  åtta
områden  som  påverkar  ekonomisk  tillväxt", Departementsserien  (Ds)  no.  2001:20,  Stockholm,  2001.  On
the politics of structural reform in Sweden, cf. Jacobsson K., "The Cardiff Process of Structural Reform in
Sweden", Paper presented at the ETUI seminar on "Structural reform in Europe. A Trade union perspective
on the Cardiff Process", Brussels, 2001.

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reduction  of  general  government  gross  debt  to  36.6%  by  2005-06.  The  most  important
development  is  the  expansion  of  public  expenditure  with  increased  current  and  capital
expenditure  concentrated  particularly  on  education  and  health,  plus  additional  investment  in
transport. The motivation here is domestic concern over the poor state of public services in the
UK.

The  UK  had  a  surplus  of  2.0%  of  GDP  for  the  fiscal  year  2000-2001,  but  in  the  December
2001 convergence programme this is predicted to become a deficit of 0.3% of GDP for 2001-
2002.  This  is  the  result  of  lower  tax  receipts  as  growth  has  slowed,  higher  current  spending
and  a  significant  increase  in  investment.  Deficits  of  around  1%  of  GDP  are  predicted  from
2002-2003  to  the  end  of  the  forecast  period  2006-2007.  These  are  consistent  with  the  UK's
Code  for  Fiscal  Stability  and  Golden  Rule  because  the  borrowing  is  well  below  the  much
increased level of net investment. There is, however, a difference in interpretation between the
UK  Government  and  the  Commission/Council  as  to  whether  this  is  consistent  with  the
Stability  and  Growth  Pact's  objective  of  a  medium  term  budgetary  position  that  is  "close  to
balance  or  in  surplus".  In  all  other  respects  the  general  policy  orientations  of  the  BEPG  are
broadly accepted in the UK.

With  regard  to  public  investment,  the  UK  was  encouraged  in  the  BEPGs  2000  to  boost
substantially  the  ratio  of  fixed  investment  to  GDP.  As  the  Commission  subsequently
acknowledged,  the  UK  made  some  progress  towards  this  goal  when  net  government  net
investment as a share of GDP rose from 0.4% in 1999-2000 to 0.7% in 2000-01, following the
government's second comprehensive spending review. In an appeal for further progress in this
field,  the  BEPGs  2001  calls  upon  the  UK  government  to  honour  its  commitment  to  double
public  investment  (net  of  depreciation)  as  a  share  of  GDP  between  the  period  2000-01  and
2003-04.  The  latest  Public  Expenditure  Statistical  Analyses  (PESA)  clearly  reveals  that  the
UK remains on course to achieve this goal93.

93 Her  Majesty's  Treasury,  "Public  Expenditure  Statistical  Analyses",  presented  to  Parliament  by  the
Chancellor of the Exchequer by Command of Her Majesty in April 2000, The Stationary Office, London,
2001.

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ECONOMIC OUTLOOK 2002

On  labour  markets,  the  BEPGs  advocate  active  policy  measures,  designed  to  boost  the
employability  of  disadvantaged  groups,  in  particular  the  long-term  and  young  unemployed.
Alongside this, the guidelines stress the need to reform passive labour market policy so as to
reduce disincentives to work. The UK, in particular, is urged to address the spatial dimension
to unemployment with the aim of lowering the proportion of households with no one at work.
Moreover,  the  UK  is  encouraged  to  provide  a  "fresh  start"  to  individuals  within  the  first  12
months of unemployment. The UK has accordingly extended the New Deal to target groups
that  face  a  high  risk  of  unemployment.  Alongside  such  policy  developments,  an  integrated
programme of benefits and employment advice and work-focused interviews, known as ONE,
is  being  piloted  at  present.  At  this  comparatively  early  stage,  the  New  Deal  can  claim
considerable success, with an additional 305,240 young people moving from benefit to work
since 1998 and youth unemployment down to 75% of the 1997 level94.

Aside  from  advocating  stronger  active  labour  market  policies,  the  BEPGs  in  2000  and  2001
called on Member States in general and the UK in particular to reform tax and benefit systems
with  the  aim  of  increasing  the  incentives  to  work.  The  UK  has  responded  to  these
recommendations  in  the  context  of  its  Welfare  to  Work  Programme.  The  centrepiece  of  this
initiative  is  the  Working  Families  Tax  Credit  (WFTC),  which  guarantees  a  minimum  income
for working families in excess of the minimum wage, improved childcare tax credit and lower
rates of marginal tax and benefit withdrawal. Initial studies have suggested that the WFTC will
induce a modest increase in the overall labour supply95. Such findings also augur well for the
success of a working tax credit for childless people, scheduled for introduction in 2003. Work
incentives  for  low  income  workers  were  further  by  the  introduction  in  May  1999  of  a  10%
starting rate of income tax, which was complemented in the 2001 budget by a widening of the
tax bands relating to this starting rate and a reduction in the basic rate of tax to 22%.

With  regard  to  the  product  markets  and  the  knowledge-based  economy,  Research  and
Development (R&D) plays a key role in the development of a Knowledge-Based Society. The
BEPGs  2000  call  upon  the  UK  to  reverse  the  trend  of  declining  R&D  efforts.  The  UK
response was a revised and updated R&D policy in a White Paper on Science and Innovation
(July  2000),  the  paper  unveiled  plans  for  a  £  1  billion  programme  of  investment  in  the  UK's
scientific  infrastructure,  alongside  a  £  140  million  investment  to  improve  the  working
relationship  of  business  and  the  research  community.  Altogether  the  2000  Spending  Review
allocates an additional £ 725 million to the Science budget over the periods 2001–02 to 2003–
04.

A  knowledge-based  society  requires  that  individuals  have  both  the  opportunities  to  use
information  technology  and  the  skills  to  benefit  from  it.  Thus,  low-cost  high-speed  internet
access is an objective of the BEPGs 2000, but although off-peak access charges are low in the
UK , the development of high-speed internet access has been slow and patchy and broadband
charges remain high. Government measures have so far had little impact on this problem. The
BEPGs 2001 challenge to increase the supply of skilled personnel is being tackled within the
context of the New Deal, which is designed to equip unemployed people with skills that are in

94 Cf. Riley R. and  Young  G.,  "Does  welfare-to-work  policy  increase  employment?:  Evidence  from  the  UK
New Deal for Young People", National Institute for Economic and Social Research,  Discussion Paper  no.
183, London, 2001.

95 Cf. Blundell R. and Reed H., "The Employment Effects of the Working Families Tax Credit", The Institute

for Fiscal Studies, Briefing Note no. 6, London, 2000.

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high  demand.  Likewise,  the  government  is  well  on  course  to  meet  its  obligations  under  the
BEPGs 2000 on internet access in schools.

Efficient product markets promoted under the BEPGs, require increased competition, effective
competition  policy  and  liberalisation.  The  UK  in  particular  is  called  upon  to  bolster
competition in the retail banking services, car retailing and postal services and to reform of its
transport system. The UK has shown considerable initiative in responding to these guidelines.
There has been a radical overhaul of competition policy. The 1998 Competition Act – whose
major provisions were finally implemented in 2001 – achieves a closer approximation between
UK  and  EU  procedures.  Plans  for  a  further  reform  of  competition  policy  are  set  out  in  the
government's White Paper on Productivity and Enterprise (July 2001).

The already extensive liberalisation of the UK economy is being further developed in relation
to  postal  services  and  energy  markets.  A  new  Postal  Services  Act  came  into  effect  in  July
2000  with  the  aim  of  boosting  competition  in  postal  services.  A  new  energy  regulator  –  the
Gas and Electricity Markets Authority – was established in 2000 under the new Utilities Act to
promote effective competition in the liberalised gas and electricity markets. While progress in
the field of utilities liberalisation has been welcomed by Ecofin, the UK has been criticised for
failing to co-ordinate "the procurement procedures of entities operating in the water, energy,
transport and telecommunications sectors", thus violating Directive 98/4/EC. The Commission
has referred this matter to the European Court of Justice.

Transport  remains  a  problem;  the  July  2000  long-term  strategy  for  transport  has  yet  to  bear
fruit.  Despite  a  planned  75%  increase  in  investment  over  the  previous  decade  and  an
integrated  approach,  years  of  under-investment  continue  to  dog  the  system.  Thus,  train  and
London  Underground  reliability  have  been  falling  and  doubts  are  being  expressed  about  the
viability  of  the  public-private  partnership  (PPP)  to  deliver  the  investment  -a  situation  not
helped  by  the  bankruptcy  in  October  2001  of  Railtrack  the  company,  which  owns  the  track
and stations of the rail system.

In  order  to  enhance  efficient  and  integrated  capital  markets,  the  commitment  to  implement
this action plan is reinforced in the BEPGs 2001 along with other recommendations for capital
market reform. The UK in particular is urged to address the high failure rate amongst SMEs,
while tackling weaknesses in its capital market, which limit investment by pension funds in risk
capital. The publication in March 2001 of the Myner Review of Institutional Investment goes
some way towards addressing this problem. In turn the UK government has adopted Myner's
recommendation to replace the Minimum Funding Requirement (MFR) with a system that is
less biased towards investment in UK-quoted equities and gilt.

With regard to retail banking, the Financial Services and Markets Act received Royal Assent in
June 2000. Under the terms of this act, a Financial Services Authority becomes the statutory
regulator  for  the  industry  as  whole,  replacing  a  system  that  had  separate  regulators  for
different financial services. The objective of the act is to deliver a consistent level of consumer
protection  across  all  financial  institutions.  Consumer  rights  are  protected  in  this  regard
through the establishment of a single Ombudsman to cover all aspects of financial services.

72

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Chapter  VI  –  OVERVIEW  ON  THE  IMPLEMENTATION  OF  COUNTRY  SPECIFIC

RECOMMENDATIONS

ECONOMIC OUTLOOK 2002

specific 

The following table summarises the implementation record of Member States in dealing with
the  country 
the  BEPGs.  Complementary
recommendations  in  the  opinions  of  Ecofin  on  the  stability  and  convergence  programme
updates  for  2000/2001  have  not  been  included,  as  most  of  these  recommendations  simply
repeat the more detailed recommendations contained in the BEPGs.

recommendations 

included 

in 

The summary table uses the criteria for assessing implementation adopted by the Commission
in its report on the implementation of the BEPGs. Careful examination of the report suggests
that  the  difference  between  "partial  implementation"  and  "implementation  in  progress"  is  not
always  unambiguous.  "Partial  implementation"  is  apt  to  be  used  not  only  when  the  policy
action is incomplete, but also where the country-specific recommendation includes more than
one  measure.  Beyond  the  obvious  definition,  "Implementation  in  progress"  is  also  used  in
those cases where the recommendations refer to an ongoing process, e.g. "develop further the
risk-capital market".

73

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ECONOMIC OUTLOOK 2002

74

PE 314.399

Table 6.1 Synthetic summary of the implementation of country specific

recommendations included in the BEPGs 2001

ECONOMIC OUTLOOK 2002

Member State

Policy area

Belgium

Budgetary policy
Labour markets

Denmark

Germany

Greece

Spain

France

Ireland

Italy

Product markets, knowledge-based
economy

Capital markets

Budgetary policy
Labour markets

Product markets, knowledge-based
economy

Capital markets

Budgetary policy
Labour markets

Product markets, knowledge-based
economy

Capital markets

Budgetary policy
Labour markets

Product markets, knowledge-based
economy

Capital markets

Budgetary policy
Labour markets

Product markets, knowledge-based
economy

Capital markets

Budgetary policy
Labour markets

Product markets, knowledge-based
economy

Capital markets

Budgetary policy
Labour markets

Product markets, knowledge-based
economy

Capital markets

Budgetary policy
Labour markets

Product markets, knowledge-based
economy

Capital markets

c
i
f
i
c
e
p
s

f
o
.
o
N

-
n
e
m
m
o
c
e
r

s
n
o
i
t
a
d

l
l
u
f

n
o
i
t
a
t
n
e
m
e
l
p
m

i

l
a
i
t
r
a
p

n
o
i
t
a
t
n
e
m
e
l
p
m

i

1

1

1

1

1

2
3

3

1

2

1
2

1

3
2

3

1

2
2

2
2

1

4
1

1

2
2

4

4
3

3

1

3
1

2

1

4
3

3

1

4
4

5

1

3
3

2

1

3
3

4

1

4
2

3

1

4
3

4

1

n
i

n
o
i
t
a
t
n
e
m
e
l
p
m

i

s
s
e
r
g
o
r
p

o
n

n
o
i
t
a
t
n
e
m
e
l
p
m

i

1

1

2

1

1

2

1

1

2

1

2

1

2

2

1

1

2
1

1
1

1

2

1
1

1

75

PE 314.399

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Table 6.1 Summary of the implementation of country specific recommendations

included in the BEPGs 2001 (cont.)

ECONOMIC OUTLOOK 2002

Member State

Policy area

Luxembourg

Budgetary policy
Labour markets

Product markets, knowledge-based
economy

Netherlands

Capital markets

Budgetary policy
Labour markets

Austria

Portugal

Finland

Sweden

Product markets, knowledge-based
economy

Capital markets

Budgetary policy
Labour markets

Product markets, knowledge-based
economy

Capital markets

Budgetary policy
Labour markets

Product markets, knowledge-based
economy

Capital markets

Budgetary policy
Labour markets

Product markets, knowledge-based
economy

Capital markets

Budgetary policy
Labour markets

Product markets, knowledge-based
economy

Capital markets

United Kingdom Budgetary policy
Labour markets

Product markets, knowledge-based
economy

Capital markets

Overall summary Budgetary policy
Labour markets

Product markets, knowledge-based
economy

Capital markets

c
i
f
i
c
e
p
s

f
o
.
o
N

s
n
o
i
t
a
d
-
n
e
m
m
o
c
e
r

2

1
1

0

3

1
2

1

3

1
2

1

3

2
5

1

3

2
2

1

3

2
2

1

3

1
2

1

49

32
42

14

n
o
i
t
a
t
n
e
m
e
l
p
m

i

l
l
u
f

2

1

2

1

1

1

9

4
0

0

l
a
i
t
r
a
p

n
o
i
t
a
t
n
e
m
e
l
p
m

i

n
i
n
o
i
t
a
t
n
e
m
e
l
p
m

i

s
s
e
r
g
o
r
p

o
n

n
o
i
t
a
t
n
e
m
e
l
p
m

i

1

1

1
2

1

1

2

1

1

1
5

1

2
1

1

1

1
2

1

1

2

1

8

8
27

9

1

1

1

1

2

1

1

1

1

23

17
13

4

2

1

9

3
2

1

76

PE 314.399

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PART III – ECONOMIC CONVERGENCE AND PROSPECTS

ECONOMIC OUTLOOK 2002

Chapter VII –  THE GLOBAL ECONOMIC CONTEXT

As  a  major  trading  bloc,  the  EU  cannot  insulate  itself  from  developments  in  the  global
economy  and  the  trends  in  the  last  year  have,  on  the  whole,  been  adverse,  notably  the  slide
into  recession  in  the  US  and  Japan  since  the  end  of  2000.  Yet,  at  much  the  same  time,  oil
prices had reached a cyclical peak, a development that contributed to a jump in the headline
rate  of  inflation  in  many  countries.  The  uncertainty  about  the  depth  and  duration  of  the  US
recession, tragically aggravated by the events of 11 September 2001, have led to considerable
difficulty in forecasting the key macroeconomic, with most forecasters progressively becoming
more pessimistic in projections published in the latter half of 2001. However, with monetary
authorities on both sides of the Atlantic having acted pretty decisively, and with the respective
economies  reasonably  sound  on  "fundamentals",  the  likelihood  is  that  the  slowdown  will  be
short-lived,  and  the  latest  private  forecasts  are  now  confirming  the  mainstream  forecasters'
view that recovery is in sight.

Table 7.1. The Global Economic Outlook: An overview of the latest forecasts

EU Commission

OECD

IMF

UBS Warburg

EU
2000
2001
2002
2003
US
2000
2001
2002
2003

3.3
1.7
1.4
2.9

4.2
1.6
0.5
3.4

3.3
1.7
1.5
2.9

4.1
1.1
0.7
3.8

3.4
1.7
1.3
-

4.1
1.0
0.7
-

3.3
1.6
1.3
2.6

4.1
1.0
0.5
3.5

Source: European Commission, "Autumn 2001 Forecasts for 2001-2002", European Economy, Supplement A,
Economic Trends, No 11/11, October/November 2001. OECD, OECD Economic Outlook, No. 70, December
2001,
IMF, World Economic Outlook December 2001: The Global Economy After September 11, International
Monetary
Fund, Washington DC, 2001; UBS Warburg, Review of 2001, UBS Warburg, London:, 2001

The slowdown in the US economy, which began in the final quarter of 2000, and the unstable
geopolitical environment which emerged in September 2001 have had a significant impact on
growth  prospects  in  the  EU  economy.  With  regard  to  the  latter,  there  are  four  main
transmission mechanisms through which the events of 11 September have affected the global
macroeconomic  environment96:  the  first  surrounds  the  tragic  loss  of  life,  the  destruction  of
property  and  the  disruption  to  the  aviation,  tourist  and  leisure  industries;  the  second  is
associated with the damage to consumer and investor confidence with regard to the prospect
for recovery; the third is linked to the response of financial markets to the increased economic

96

IMF,  "The  IMF  World  Economic  Outlook,  The  Global  Economy  After  September  11",  International
Monetary Fund, Washington DC, December 2001.

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ECONOMIC OUTLOOK 2002

uncertainty;  the  fourth  is  associated  with  developments  in  global  commodity  markets,  where
commodity prices in general and oil prices in particular have weakened as demand has slowed;
the  net  impact  of  these  factors  on  the  EU  economy  account,  in  large  measure,  for  the
substantial revision in the Commission's economic forecasts between the Spring and Autumn
of 2001. During this period, the Commission's growth forecasts for 2001 and 2001 were cut
by 1.2 and 1.6 percentage points, respectively.

Despite  the  remaining  uncertainties  amongst  forecasters  about  the  prospects  for,  and  timing
of,  an  economic  recovery  in  the  EU  there  can  be  little  doubt  that  the  fortunes  of  the  US
economy will have an influence. As can be seen in Table 7.1 the general consensus amongst
the  forecasters  surveyed  here  is  for  the  US  slow-down  to  "bottom  out"  early  in  2002  at  a
growth  rate  ranging  from  0.5%  to  0.7%.  The  recovery  will  be  a  marked  one,  with  growth
returning  towards  2000  rates  by  2003.  The  EU  is  expected  to  follow  a  similar  course,  with
economic  growth  stalling  in  2002  at  rates  of  between  1.3%  and  1.5%  and  then  recovering
towards  rates  of  between  2.6%  and  2.9%.  Thus,  from  a  macroeconomic  forecasting
perspective,  the  assessment  of  11  September  is  that  while  geo-political  turbulence  may  have
prolonged  the  economic  slowdown  in  the  short-term  by  adding  to  an  already  uncertain
economic environment, such turbulence is unlikely to harm the medium-term growth potential
of the advanced industrial economies.

Chapter VIII –  THE OBJECTIVE OF CONVERGENCE

Article 2 of the Treaty Establishing the European Community lists amongst its objectives the
desire  to  promote  a  "high  degree  of  convergence  of  economic  performance".  In  addition  to
being an intrinsic objective, convergence was also an entry requirement for the third and final
stage  of  EMU,  and  remains  as  a  condition  for  prospective  new  adherents  to  the  single
currency.  It  was  in  the  context  of  EMU  that  the  Union's  understanding  of  convergence  was
fleshed  out.  In  essence  it  revolves  around  the  fulfilment  of  the  four  convergence  criteria  set
out in article 121 TEC. Convergence is defined in this context as:

  The achievement of a high degree of price stability.
  The sustainability of the government financial position.
  The  observance  of  the  normal  fluctuation  margins  provided  for  by  the  exchange-rate
mechanism  of  the  European  Monetary  System,  for  at  least  two  years  without  devaluing
against the currency of any other Member State.

  The durability of convergence achieved by the Member State and of its participation in the
exchange-rate  mechanism  of  the  European  Monetary  System  being  reflected  in  the  long-
term interest-rate levels.

The  objective  of  convergence  is  promoted  at  the  EU  level  by  the  closer  coordination  of
Member  States'  economic  policies  in  general,  and  in  particular  through  the  BEPGs  (BEPG)
and the process on multi-lateral surveillance (Article 99(3) TEC).

In  March  1998,  the  European  Monetary  Institute  –  the  forerunner  to  the  European  Central
Bank – published a Convergence Report in accordance with Article 109j TEC, to assess the
extent and sustainability of economic convergence within the European Union. Of the fifteen
Member  States,  twelve  were  deemed  to  be  in  accordance  with  the  four  criteria.  Of  the
remaining  three,  the  United  Kingdom,  Greece  and  Sweden  –  as  non-participants  in  the
exchange rate mechanism – broke the nominal exchange rate criteria, while Greece also failed
the  price  stability,  long-term  interest  rate  and  fiscal  sustainability  requirements.  In  terms  of
entry  to  EMU,  the  picture  of  convergence  remains  largely  the  same  today  as  it  did  in  1998.

78

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ECONOMIC OUTLOOK 2002

The  exception  is  Greece,  which  was  deemed  by  the  ECB,  in  its  May  2000  Convergence
Report,  to  have  now  fulfilled  all  four  criteria.  Greece  duly  became  the  twelfth  participant  in
stage three of EMU on 1 January 2001.

As an intrinsic objective of the Union, however, the achievement of convergence in economic
performance  is  far  from  being  a  one-shot  game.  Its  relevance  in  a  Union  of  ever-increasing
economic  interdependence  is  continuous,  not  least  for  the  sake  of  achieving  of  a  high  level
sustainable  and  non-inflationary  growth  and  for  the  smooth  functioning  of  EMU.  This  fact
raises questions about the current extent of convergence for participants and non-participants
of  EMU  alike  and  for  the  prospect  of  continued  convergence  in  the  light  of  prevailing
economic circumstances. In answering this question, the Maastricht Criteria may continue to
serve as the essential indicators of convergence.

8.1. The pursuit of price stability

An  annual  measure  of  change  in  consumer  prices  over  the  last  decade  is  presented  in  Table
8.1.1. As might be expected, there is a marked convergence towards price stability in the run-
up to EMU, with the average rate of inflation falling from 4.4% in the period 1991-1995 to
just  1.5%  on  the  eve  of  monetary  union.  The  standard  deviation  has  fallen  over  the  same
period from 4.4 to 0.7 percentage points, indicating a closer clustering of prices around more
stable levels. In spite of fears to the contrary, this trend has been maintained during the new
currency's  infancy.  The  average  rate  of  inflation  will  remain  at  around  2%  over  the  forecast
horizon,  while  the  standard  deviation  around  this  mean  is  expected  to  fall  to  around  0.4
percentage points. Over the longer term and even in recent memory, this reflects a picture of
price  stability  and  a  state  of  close  convergence.  To  be  sure,  moderate  inflationary  pressures
were generated against the backdrop of a weak euro and rising oil prices, with the result that
consumer  prices  rose  by  2.6%  and  2.9%  in  2000  and  2001.  According  to  both  Commission
and OECD forecasts, however, such pressures will gradually abate over the next two years in
response to the sharp falls in oil prices and the attenuation of economic growth. Naturally, the
speed  of  this  adjustment  will  be  contingent  on  any  gains  in  the  value  of  the  euro  on
international currency markets.

Turning  to  a  more  disaggregated  level,  the  three  highest-inflation  Member  States  of  2000  –
Ireland,  the  Netherlands  and  Portugal  –  are  expected  to  exert  a  tighter  grip  on  prices.  Most
notable is the Netherlands, where inflation looks set to fall from 5.2% in 2000 to just 1.9% in
2001. The much-publicised price-effects of rapid economic growth in Ireland are also likely to
gradually  subside,  with  the  rate  of  inflation  forecast  to  fall  from  5.3%  in  2000  to  between
3.2% and 2.9% in 2003.

8.2. The pursuit of fiscal sustainability

A broad overview of public finances in the Union over the last decade is presented in Tables
8.2.1 and 8.2.2. Once again, the convergence in the economic performance of Member States
in the run-up to monetary union is evident. On average over the period 1991-95, the Member
States  ran  a  deficit  of  4.9%.  There  was  some  deviation  around  this  mean,  however,  with  a
standard deviation of 3.1 percentage points. This reflected comparatively large deficits in the
likes  of  Greece  (11.5%),  Italy  (9.1%),  Sweden  and  the  United  Kingdom  (6.0%).  By  1999,
public  finances  had  converged  to  a  more  sustainable  level,  with  an  average  fiscal  position  of
0.1% being realised. The standard deviation had fallen to 2.1 percentage points, even though
some countries had, by then, moved substantially into surplus (Luxembourg, 3.7%; Denmark,
3.1%; Ireland, 2.3%; and Finland, 1.9%). Significant progress has been made with respect to

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the Union's stock of public debt. The average ratio of debt to GDP stood in 1995 at 73% of
GDP, well in excess of the Maastricht Treaty's ratio of 60%. Dispersion around this mean was
considerable  (30.2  percentage  points),  reflecting  the  high  levels  of  public  debt  in  Belgium
(133.4%), Italy, (123.3%) and Greece (108.7%). A concentrated effort on the part of Member
States pushed this ratio down to 64.4% in 1999, which was above but at least approaching the
desired ratio of 60%. Belgium (115.9%), Italy (114.6%) and Greece (108.5%) remained well
off  this  average,  however,  so  that  the  standard  deviation  was  still  relatively  high  at  27.5
percentage points.

Fears were raised in the run-up to EMU about the prospect for continued fiscal convergence
once the "carrot" of membership had finally been eaten. Once inside monetary union, in other
words,  a  member  state  would  have  little  incentive  to  keep  to  the  entry  requirements  since
membership is virtually irrevocable. In the absence of carrots, "sticks" such as the Stability and
Growth  Pact  and  the  Broad  Economic  Guidelines  have  prevented  fiscal  profligacy  and,
arguably, engendered a more responsible approach to fiscal policy-making. The average fiscal
position  looks  set  to  rise  over  the  Commission's  forecast  horizon  to  around  0.5%.  The
Commission  forecast  view  is  largely  echoed  by  the  OECD's  forecasts,  both  of  which
demonstrate convergence in that the standard deviation around the new average looks set to
fall to around 1.3% in 2003. The global economic slowdown will lead to a deterioration in the
Union's  fiscal  position  as  automatic  budgetary  stabilisers  begin  to  operate  and  discretionary
fiscal  policy  is  relaxed,  with  Belgium,  France,  Germany,  Austria  and  Portugal  expected  to
move into a deficit position between 2000 and 2003. It is, however, important to note that the
change affects all countries. The most significant adjustment will come from Germany, where
the  deficit  is  expected  to  rise  to  2.7%  in  2002,  according  to  the  Commission  forecasts.
According to both the Commission and the OECD, however, the fiscal position will tighten in
2003 to between 2.2% and 1.8%, thus leaving Germany in conformity with the Stability and
Growth  Pact,  despite  expectations  that  the  ceiling  would  be  breached  and  the  Excessive
Deficit  Procedure  invoked.  A  similar  picture  is  revealed  upon  inspection  of  the  government
debt forecasts. The average level of debt will fall in the opinion of both the Commission and
the  OECD  to  around  54%  in  2003,  thus  leaving  the  Union  well  within  the  Maastricht
definition  of  fiscal  sustainability.  Further  improvement  is  expected  on  the  part  of  Belgium
(98.9%), Italy (103.4%) and Greece (95.1%), although there is clearly some scope for further
reductions.  Of  moderate  concern  too  is  Germany,  where  the  relaxation  in  the  fiscal  position
will be reflected in the opinion of the OECD by an increase from a level of 60% in 2001 to one
of  61%  in  2002.  This  change  is  tiny  when  the  forecast  error  is  taken  into  account  and  the
forecasts also suggest that Germany's debt ratio is set to fall again in 2003.

8.3. Exchange rate and long term interest rate convergence

Turning to the non-participating Member States, Table 8.3.1. records bilateral exchange rates
with respect to the euro and before it the ECU. Of the three, Denmark is the sole member of
the exchange rate mechanism of the European Monetary System. This accounts for the greater
stability  of  the  Danish  krone  when  compared  with  the  Swedish  krona  and  sterling  over  the
forecast horizon. The Danish krone looks set to remain at its ERM II reference rate of 7.46
krone to the euro for the foreseeable future. The Swedish krona, in contrast, is expected to fall
from a rate of 8.81 krona to the euro in 1999 to a rate of 9.64 by 2003. Sterling gained against
the euro from 1999 to the present, with its rate rising from 66 pence to the euro in 1999, but is
expected  to  slip  slightly  from  today's  rate  to  63  pence  by  2003.  Even  in  the  light  of  these
forecasts, however, the non-participating Member States of EMU enjoy a comparatively stable
relationship  with  the  euro  as  reflected  by  trends  in  the  long-term  interest  rate  (regarded  as

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predictors  of  long-term  inflation),  as  recorded  in  Table  8.3.2.  Euro-zone  interests  have  not
surprisingly converged to markedly lower rates over the last decade as a result of convergence
and  then  monetary  unification.  The  same  is  true  of  the  non-participating  Member  States,
however.  Long-term  interest  rates  in  Denmark  have  converged  from  8.5%  over  the  period
1986  –  90  to  5.1%  in  2001.  Swedish  rates  have  fallen  over  the  same  period  from  11.7%  to
5.1%, while the long-term interest UK rates fell from 9.9% to 4.9%. In the Maastricht Treaty's
own terms, this is evidence of a durable convergence between the non-participating Member
States and the euro zone.

8.4. Conclusions

In an exploration of the concept of convergence in the context of the recent White Paper on
European Governance, it was noted that "[national policy] convergence relates to performance
and not necessarily the policies implemented by the Member States"97. The evidence presented
in this section points towards a marked and continued economic policy convergence in the EU
and euro zone alike. In both the run-up to monetary union and over the forecast horizon, the
economic policies of the Member States have conformed to the convergence criteria of price
stability,  fiscal  sustainability  and  nominal  exchange  rate  stability.  Although  recent  economic
events will require an adjustment in macroeconomic policies it is unlikely that this adjustment
will jeopardize the objective of convergence in any real sense.

97 Working Group 4a, "Involving Experts in the Process of National Policy Convergence",  Group Report for
the European Commission's White Paper on Economic Governance,  Office for Official Publications of the
EC, Luxembourg. 2001, p.7.

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Table 8.1.1. Consumer Prices
percentage change on previous year, 1995-2003

Belgium
Denmark
Germany
Greece
Spain
France
Ireland
Italy
Luxembourg
Netherlands
Austria
Portugal
Finland
Sweden
UK
Average
Std Deviation
EU-15
Euro-area

1991-95+
2.7
1.8
3.5
13.8
5.6
2.3
2.5
5.7
3.0
2.5
3.0
7.7
3.1
4.7
4.1
4.4
2.9
4.1
3.9

1996+
2.3
2.5
1.7
8.5
3.4
1.8
1.4
4.3
1.6
1.6
2.5
3.6
1.7
1.2
2.6
2.7
1.8
2.6
2.5

1997+

1998+

1999

2000

2001*

2.3
3.7
0.7
2.7
2.9
0.2
7.3
2.5
3.8
2.6
0.1
3.2
2.9
1.6
4.0
2.7
1.7
2.0
1.5

3.4
3.5
2.3
2.1
4.1
3.4
7.5
1.8
2.3
4.1
1.5
4.7
5.5
2.4
2.7
3.4
1.5
2.8
2.9

1.1
2.1
0.6
2.1
2.2
0.6
2.5
1.7
1.0
2.0
0.5
2.2
1.3
0.6
1.3
1.5
0.7
1.2
1.2

2.7
2.7
2.1
2.9
3.5
1.8
5.3
2.6
3.8
2.3
2.0
2.8
3.0
1.3
0.8
2.6
1.0
2.1
2.4

2.4
2.3
2.4
3.6
3.7
1.8
4.0
2.7
2.6
5.2
2.4
4.3
2.7
2.7
1.3
2.9
1.0
2.5
2.8

2001**
2.3
2.1
1.9
3.3
3.7
1.7
4.2
2.8
2.6
4.6
2.6
4.3
2.6
2.6
1.5
2.9
0.9
-
-

2002*

1.4
1.7
1.5
2.7
2.3
1.4
3.3
1.7
2.2
2.6
1.7
2.8
2.0
2.2
1.3
2.1
0.6
1.7
1.8

Source: Commission (2001), (1999) and (1998).
+  Based on a Deflator for Consumer Prices rather than the Harmonised Consumer Price Index.
*   Based on Commission's November 2001 Forecasts.
** Based on latest OECD Forecasts.

83

Table 8.2.1. Net lending (+) or net borrowing (-), general government
(as a percentage of GDP, 1970-2003)

Belgium
Denmark
Germany
Greece
Spain
France
Ireland
Italy
Luxembourg
Netherlands
Austria
Portugal
Finland
Sweden
UK
Average
Std Deviation
EU-15
Euro-area

1991-95
-5.9
-2.4
-2.9
-11.5
-5.6
-4.6
-2.6
-9.1
1.7
-3.5
-3.8
-5.0
-4.8
-7.6
-6.0
-4.9
3.1
-5.2
-4.9

1996
-3.2
-0.7
-1.5
-7.5
-4.7
-4.1
-0.4
-6.7
2.9
-5.1
-3.7
-3.3
-3.5
-3.5
-4.7
-3.3
2.6
-4.2
-4.1

1997

1998

1999

2000

2001*

-1.8
0.1
-2.6
-3.9
-3.1
-3.0
0.6
-2.8
3.8
-1.2
-1.9
-2.0
-1.6
-2.0
-2.0
-1.6
1.9
-2.4
-2.6

-1.0
0.9
-1.7
-2.5
-2.3
-2.7
2.0
-2.7
2.5
-0.8
-2.4
-1.5
1.4
2.3
0.2
-0.6
1.9
-1.5
-2.0

-0.6
3.1
-1.6
-1.8
-1.1
-1.6
2.3
-1.8
3.7
0.4
-2.2
-2.1
1.9
1.7
1.2
0.1
2.1
-0.7
-1.3

0.1
2.5
1.2
-1.1
-0.3
-1.4
4.5
-0.3
6.1
2.2
-1.1
-1.5
6.9
4.1
4.3
1.7
2.9
1.1
0.3

0.0
2.2
-2.5
0.0
0.1
-1.5
2.4
-1.2
4.4
1.3
-0.2
-2.0
4.8
3.9
1.2
0.9
2.3
-0.5
-1.1

2001**
0.0
2.0
-2.5
0.2
0.0
-1.5
3.2
-1.4
-
1.1
0.0
-1.7
3.7
3.8
2.2
0.7
2.0
-
-

2002*

-0.2
1.6
-2.7
0.3
-0.2
-2.0
1.8
-1.2
2.8
0.5
-0.4
-1.6
2.9
1.6
0.4
0.2
1.6
-0.9
-1.4

Source:  European  Commission,  "Autumn  1998  forecasts  for  1998-2000",  European  Economy,  Supplement  A,  Economic  trends,  No.  10,  Office  for  Official
Publications  of  the  EC,  Luxembourg,  October  1998;  European  Commission,  "Autumn  1999  forecasts  for  1999  –  2001",  European  Economy,  Supplement  A,
Economic trends, No. 10/11, Office for Official Publications of the EC, Luxembourg, October/November 1999; European Commission, "Autumn 2001 Forecasts for
2001-2002", European Economy, Supplement A, Economic Trends, No 10/11, Office for Official Publications of the EC, Luxembourg, October/November 2001;
and Datastream.
*   Based on Commission November 2001 Forecasts.
** Based on latest OECD Forecasts.

84

Table 8.2.2. Central government debt
(as a percentage of GDP, 1970-2003)

1995

1996

1997

1998

1999

2000

2001*

Belgium
Denmark
Germany
Greece
Spain
France
Ireland
Italy
Luxembourg
Netherlands
Austria
Portugal
Finland
Sweden
UK
Average
Std deviation
EU-15
Euro-area

133.4
69.3
57.1
108.7
64.0
54
84.3
123.3
5.6
77
68.5
64.1
57.1
76.6
51.8
73.0
30.2
70.2
72.9

126.5
69.3
59.7
111.3
67.4
54.8
71.1
122.5
6.2
73.8
68.7
63.8
56.5
74.4
52.6
71.9
29.0
71.4
73.9

121.2
65.0
60.8
108.5
66.0
57.1
62.2
120.2
6.0
68.5
63.9
60.4
53.9
73.6
51.2
69.2
28.1
70.5
73.8

119.7
55.6
60.9
105.0
64.7
59.5
54.8
116.4
6.4
66.8
63.9
54.7
48.8
70.5
48.1
66.4
27.8
69
73.7

115.9
52.0
61.3
103.9
63.4
58.5
49.3
114.6
6.0
63.1
64.7
54.5
47.3
65.3
45.7
64.4
27.5
67.5
72.7

110.3
46.1
60.3
102.7
60.7
57.6
38.6
110.5
5.3
56.1
63.1
53.7
44.0
55.7
42.8
60.5
27.3
64.4
70.2

107
43.2
60.0
99.8
58.0
57.1
34.3
108.2
5.3
51.8
62.3
53.5
42.7
52.7
39.3
58.3
27.0
62.5
68.8

2001**
104.4
42.4
58.6
100.7
58.3
57.8
29.5
106.7
4.4
52.8
61.4
53.2
39.5
50.1
41.6
57.4
27.1
-
-

2002*

103.9
42.5
61.0
98.5
57.3
57.3
30.8
106.9
5.2
48.9
61.2
53.5
42.0
50.5
37.2
57.1
26.8
61.8
68.4

Source:  European  Commission,  "Autumn  1998  forecasts  for  1998-2000",  European  Economy,  Supplement  A,  Economic  trends,  No.  10,  Office  for  Official
Publications  of  the  EC,  Luxembourg,  October  1998;  European  Commission,  "Autumn  1999  forecasts  for  1999  –  2001",  European  Economy,  Supplement  A,
Economic trends, No. 10/11, Office for Official Publications of the EC, Luxembourg, October/November 1999; European Commission, "Autumn 2001 Forecasts for
2001-2002", European Economy, Supplement A, Economic Trends, No 10/11, Office for Official Publications of the EC, Luxembourg, October/November 2001.
*   Based on Commission's November 2001 Forecasts.
** Based on latest OECD Forecasts.

85

Table 8.3.1. Nominal Bilateral Exchange Rates against the ECU/euro (1970 – 2003)

Denmark
Sweden
United Kingdom

1970-73
7.66
5.35
0.45

1974-85
7.53
5.8
0.59

1986-90
7.94
7.23
0.69

1991-95
7.64
8.53
0.76

1996-03
7.45
8.98
0.67

1999
7.44
8.81
0.66

2000
7.45
8.45
0.61

Source:  European  Commission,  "Autumn  2001  Forecasts  for  2001-2002",  European  Economy,  Supplement  A,  Economic  Trends,  No  10/11,
Office for Official Publications of the EC, Luxembourg, October/November 2001.

86

1999

Table 8.3.2. Long Term Interest Rates (1986 – 2001)

Belgium
Denmark
Germany
Greece
Spain
France
Ireland
Italy
Luxembourg
Netherlands
Austria
Portugal
Finland
Sweden
UK
Average
Std deviation
EU-15
Euro-area

1986-90
8.5
10.8
6.8
-
12.9
9.1
10.2
12.3
8.0
7.1
7.4
17.1
11.7
11.7
9.9
10.3
2.8
9.8
9.7

1991-95
8.1
8.7
7.3
-
11.2
7.8
8.5
12.0
7.5
7.4
7.5
13.0
9.8
10.0
8.5
9.1
1.8
8.9
9.0

1994
7.8
7.9
6.9
-
10.1
7.3
8.1
10.4
7.2
6.9
6.7
10.4
8.4
9.5
8.1
8.3
1.3
8.2
8.1

1995
7.5
8.3
6.8
-
11.3
7.5
8.3
11.9
7.2
6.9
7.2
11.5
8.8
10.2
8.2
8.7
1.8
8.6
8.6

1996
6.5
7.2
6.2
-
8.7
6.3
7.3
9.2
6.3
6.2
6.3
8.6
7.1
8.1
7.8
7.3
1.0
7.3
7.2

1997
5.8
6.2
5.7
-
6.4
5.6
6.3
6.7
5.6
5.6
5.7
6.4
6.0
6.7
7.0
6.1
0.5
6.2
6.0

1998
4.7
4.9
4.6
8.5
4.8
4.6
4.8
4.8
4.7
4.6
4.7
5.0
4.8
5.0
5.5
5.1
1.0
4.9
4.8

Source:  European  Commission,  "Autumn  1998  forecasts  for  1998-2000",  European  Economy,  Supplement  A,  Economic  trends,  No.  10,
Office for Official Publications of the EC, Luxembourg, October 1998; European Commission, "Autumn 1999 forecasts for 1999 –  2001",
European  Economy,  Supplement  A,  Economic  trends,  No.  10/11,  Office  for  Official  Publications  of  the  EC,  Luxembourg,
October/November 1999; European Commission, "Autumn 2001 Forecasts for 2001-2002", European Economy, Supplement A, Economic
Trends, No 10/11, Office for Official Publications of the EC, Luxembourg, October/November 2001.

87

ECONOMIC OUTLOOK 2002

88

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