Source: EURLEX
Language: en
Format: md

**COMMISSION OF THE EUROPEAN COMMUNITIES**

**Brussels, 23.04.1997**
**COM(97) 169 final**

#### **Progress report on the implementation of the** **1996 Broad Economic Policy Guidelines**

**(presented by the Commission)**

#### **Table of contents**

1. Macroeconomic policy-mix conducive to growth, employment and convergence 1

1.1. Macroeconomic policy-mix 1

1.2. Upturn in economic activity 3

1.3. Gradually improving employment outlook 4

1.4. Social dialogue 4

2. Price and exchange rate stability 5

2.1. Price stability 5

2.2. Exchange rate stability 7

3. Sound public finances 8

3.1. The pace and size of consolidation efforts 8

3.2. The composition and durability of consolidation efforts 12

4. Better functioning of product and services markets 14

5. Fostering employment and labour market reforms 16

5.1. Wage developments 16

5.2. Labour market reforms 17

Box: Main labour market reforms in EU countries in recent years 20

_**Aa**_

#### Progress report on the implementation of the 199S Broad Economic PoEicy Guidelines

The 1996 Broad Economic Policy Guidelines confirmed and developed the policy

recommendations laid down in previous Broad Guidelines. The present document reviews the

progress made in implementing the Community's economic policy strategy according to each of the

headings in the 1996 Guidelines.

**1.** **Macroeconomic policy-mix for growth, employment and convergence**

_**1.1**_ _**Macroeconomic policy-mix**_

_In line with previous Guidelines, the_ _1996_ _Broad Economic Policy Guidelines recommended a_
_"stable macroeconomic framework characterised by:_

_-_ _a stability-oriented_ _monetary policy_ _whose task is not undermined_ _by_ _inappropriate_
_budgetary and wage developments;_

_-_ _sustained efforts to consolidate public finances in most Member States consistent with the_
_objectives of their convergence_ _programmes;_

_nominal wage trends consistent with the price stability objective; at the same time, real wage_
_developments_ _should be below the increase in productivity_ _in order to strengthen_ _the_
_profitability of employment-creating investment. "_

In overall terms, the macroeconomic policy-mix in the Community has been in line with these

recommendations. Both monetary policies, fiscal policies and wage trends have evolved

favourably:

- Monetary policies have been credibly oriented towards achieving and maintaining price

stability, both in Member States where inflation was already low and in Member States where

further progress in disinflation was needed. At the same time, monetary conditions have

provided room for an upturn in GDP growth in the Community. Short-term interest rates have

reached historically low levels in Germany and countries whose currencies are linked closely to

the DEM, and they have fallen considerably in most other Member States. This was mads

possible by subdued price pressures and favourable budgetary and wage developments.

Moreover, the credibility of the monetary policy framework has increased in several countries,

particularly those which have established central bank independence and have made large

efforts to fulfil the Treaty's convergence criteria for participation _in_ EMU.

- Governments in virtually all countries have taken significant steps to consolidate their public

finances in 1996-97. Although some countries to some extent have relied on one-off measures

which will need to be complemented by lasting budgetary measures, a substantial structural

improvement in the budgetary position is clearly taking place in the Community. Furthermore,

the framework for the maintenance of sound public finances over the medium term has been

strengthened with the political agreement on the Stability and Growth Pact at the Dublin

European Council.

#### **_d_**

In most countries, wage agreements have increasingly been consistent with the Guidelines

recommendation. For the Community as an average, nominal compensation per employee rose

by 3/2 per cent in 1996 and the average rate of wage increases is expected to be around 3 per

cent in 1997. With a productivity growth trend of around 2 per cent, this is consistent both

with the price stability objective and with the objective that annual real wage developments

should be sufficiently below the productivity trend to strengthen the profitability of investment

in the Community.

The increasingly well-balanced macroeconomic policy-mix in the Community as a whole has

already brought important benefits. The exchange rate misalignments which occurred during 1995

have been broadly reversed and a higher degree of exchange rate stability has returned within the

ERM. Long-term interest rates have converged towards lower levels. The most spectacular

reductions in bond yields have occurred in countries where the prospects for budgetary

convergence have improved most significantly. Between April 1995 and March 1997, the yield on

ten-year benchmark bonds declined in Spain, Italy, Portugal and Sweden by between 440 and 550

basis points. Bond yields in other Member countries also dropped significantly during 1995 and

1996 as they managed to decouple to a significant degree from US long rates.

Table 1

**Improved economic policy-mix**

Nominal
compensation
per employee
(% change p.a.)

Real effective
exchange rate [1] (unit labour costs)

(1993 = 100)

Change in interest
rates since April 1995

Short Long
rates [3) ] rates [4) ]

Change in
cyclicallyadjusted budget
balance

Real unit
labour costs [?) ]

(% change pa.)

March
1996 1997 1996 1997 1996 1997
1997

-2.0

-2.3

-1.3

-5.0

-2.2

-2.2

-5.5

-1.6

-1.6

-5.3

-3.3

-4.4

-1.0

March.

1997

-1.8

-3.3

-1.4

-5.4

-3.5

-4.4

-1.1

-3.4

-1.5

-1.1

-4.5

-2.9

-4.6

-0.5

1.8

3.1

2.5

11.7

4.6

2.6

2.7

5.5

**1-2**

1.9

6.5

3.2

7.4

3.6

0.5

1.6

0.8

2.2

1.2

0.7

-0.4

3.6

-0.2

1.1

0.9

-0.7

0.6

1.2

2.6

3.4

2.3

9.4

2.6

2.5

4.1

4.9

2.7

1.8

5.0

3.0

4.8

4.2

-1.4

-0.3

-1.1

1.1

-0.6

-0.4

-2.5

-0.1

-1.1

-1.5

0.7

0.3

4.6

-0.9

-1.0

-0.6

-1.9

0.6

0.6

-0.8

-1.4

0.9

-0.6

-1.9

-0.7

0.3

-0.1

-0.2

B

DK

D

EL

E

F

**IRL**

I

**NL**

A

P

**FIN**

S

UK

Q2
1995

109.1

104.7

106.8

112.5

94.1

103.8

92.9

82.5

105.4

105.4

103.9

117.1

96.2

95.1

Ql
1997

101.2

1024

96.7

123.4

93.8

99.6

97.6

101.6

97.3

99.6

106.8

114.4

110.3

108.9

1.0

0.2

0.3

1.7

2.3

1.2

0.2

0.6

1.5

1.8

1.6

1.7

4.6

1.7

EUR 100.1 [2) ] 101.9 [2) ] -2.4 -2.5 1.0 1.3 3.5 3.2 -0.7 -0.6

^Relative to 23 industrialised countries.
Z) Relative to 9 industrial non-EC countries.
3) 3-month inter-bank rate
4) 10-year benchmark.
5) Nominal unit labour cost deflated by GDP deflator.
_Source._ Commission services, Spring 1997 forecasts.

Although there could be a backlash if the credibility of budgetary objectives were undermined,

sounder macroeconomic policies are now underpinning a "virtuous circle" where budgetary

consolidation has led to lower interest rates which strengthens the growth prospects of the economy

and lowers government interest payments. The sound economic policies have led to an

improvement in economic confidence and a gradual strengthening in economic activity.

_1.2_ _Upturn in economic activity_

The set-back to demand growth and the loss of confidence among economic operators in the second

half of 1995 ~ which occurred mainly as a result of unfavourable interest rate and exchange rate

developments rooted in a lack of credibility of economic policies in some Member States ~ has

given way to a renewed upturn. Thus, the soundfy-based recovery which began in mid-1993 and

which was temporarily interrupted in 1995 is now entering its second phase. Economic activity

grew at a pace of _VA_ per cent (annualised rate) in the first half of 1996, in spite of a large

correction of stock levels. In line with expectations, the pace of expansion accelerated to around

_2V<_ per cent in the second half of 1996.

The near term prospects are for a progressive strengthening of the recovery. Economic confidence

improved sharply over the last months of 1996 and the first months of 1997. Conditions on the

supply side of the economy are favourable to a sustained pick-up in economic activity and job

creation, and demand prospects are improving.

On the supply side, the fundamentals in terms of prospects for moderate wage increases and sound

investment profitability are better even than they were during the high-growth period 1986-90 and

the first leg of the recovery in 1994 and early 1995. The prospects for moderate wage increases

are underpinned by low and stable inflation expectations related to the enhanced credibility of the

stability framework and by efforts to improve the functioning of the labour market in several

Member States. Real wage increases have generally moderated relative to productivity and

average investment profitability in the Community is now higher than at any time since the 1960s.

Even though real interest rates are also higher than in the 1960s, the current and prospective level

of profitability provides a good basis for a strong pick-up in investment as demand prospects

strengthen.

On the demand side, the rebound is expected to be broadly based and well-balanced. Internal

demand _in_ the Community is underpinned by easier monetary and financial conditions, and the

outlook for the international environment remains favourable. On balance, the competitiveness of

the Community has improved as a result of exchange rate movements since 1995 and modest

increases in unit labour costs in the EC. Exports are likely to accelerate, driven both by healthy

extra-EC exports and a rebound in intra-EC trade in line with strengthening internal demand

Private consumption growth will be sustained by moderate real wage increases, gradually

improving employment prospects and a decline in precautionary savings. As capacity utilisation

picks up, investment in equipment will be boosted by better demand prospects, sound business

profitability and low interest rates. Low long-term interest rates and rising income should lead to a

gradual acceleration in construction investment. Against this background, output growth is

expected to accelerate to around its trend rate in 1997 and above its trend rate in 1998.

The main risk to this outlook arises from the possible emergence of doubts as to whether

governments will meet their budgetary objectives in 1997. Such doubts could lead to pressure on

interest and exchange rates with potentially damaging consequences for output, investment and

employment. Moreover, consumers wary of uncertain job prospects could hold back more than

expected on new purchases. On the other hand, as the positive effects of lower interest rates

progressively comes through and if the recent improvement in confidence is sustained, a self
feeding cycle of increased spending and employment could lead to a more positive outcome.

_**1.3**_ _**Gradually**_ _**improving employment**_ _**outlook**_

Employment growth, which typically reacts to changes in output growth with a certain lag,

suffered a set-back in early 1996 in most countries. But as economic activity gradually firmed,

total employment in the Community stabilised and then began rising slowly in the second half of

1996. These trends were reflected in the evolution of unemployment. Average unemployment

stabilised during the first half of 1996 and has since edged down marginally. However, trends

varied significantly between Member States. The unemployment rate was on a declining trend in

late 1996/early 1997 in all the countries where economic activity was expanding at a healthy pace,

including the United Kingdom, Finland, Ireland, the Netherlands and Denmark. In contrast,

unemployment was still increasing in Germany, France and Sweden in late 1996/early 1997 as the

recovery was still hesitant and, in some cases, as special factors contributed to a rise in the number

of unemployed.

The rebound in economic activity will lead to progressively stronger job creation. However, the

labour force will also increase and unemployment is likely to decline only gradually during 1997

and somewhat faster in 1998.

The high level of unemployment points to the need for a continuation and reinforcement of the

economic policy strategy for growth and employment in the Community. A stable and investment
enhancing macroeconomic policy-mix is necessary to ensure sustained economic growth and job

creation over the medium term, capable of ensuring a marked reduction in unemployment and of

employing progressively the high potential residing in the unused labour reserve in the Community.

In countries (Denmark, Ireland, Luxembourg and the Netherlands) which have for some time

followed economic policies and achieved wage trends ~ helped also by an intensive and effective

social dialogue ~ approximately in line with the Broad Economic Policy Guidelines and which

have reduced their budget deficit ratios to below the Maastricht Treaty's reference value of 3

percent of GDP, the results in terms of sustainable economic growth and job creation have been

favourable and are clearly among the best in the Community.

_**1.4**_ _**Social**_ _**dialogue**_

_The_ _1996_ _Broad Guidelines noted that the Commission intended to intensify its dialogue with the_
_social partners._ _The_ _social_ _dialogue should also be intensified, where possible and according to_
_prevailing traditions, at the national level._

The Commission has continued its dialogue with the social partners at the European level in the

framework of the Confidence Pact, originally proposed by President Santer. The European Social

Partners agreed a committed response on the themes of: youth unemployment, lifelong learning and

better use of Structural Funds for job creation, in a macroeconomic environment conducive to

growth and employment. With respect to the macroeconomic framework, there was a noteworthy

consensus in favour of the economic policy strategy laid down in the Broad Economic Policy

Guidelines. The Social Partners agreed on the great importance of completing EMU and

recognised that, to ensure credibility, the Treaty provisions must be met in full. At the heart of the

strategy is the need to improve competitiveness, and to foster higher and more employment
creating growth, mainly supported by capacity-expanding investment. More active and efficient

labour market policies must also be implemented to increase incentives and ensure that people are

able to take up the job opportunities thus created.

In Germany, the government and the social partners launched an "Alliance for jobs" in January

1996 with the aim of halving unemployment by the year 2000, but the initiative has not progressed

as hoped for. In Ireland, a new tripartite agreement (Partnership 2000) was concluded covering

the period to the year 2000. In Austria, co-ordination between the social partners was re
intensified in order to help meet the Maastricht-criteria. In Italy, an accord was reached in

September 1996 to introduce more flexibility in employment contracts, better incentives for part
time work and co-ordinated action to promote business expansion in less developed regions. In

Spain, agreement between the social partners was reached on specific issues on a case-by-case

basis and in early 1997 agreement was reached on a reform of job protection legislation. In

Portugal, a "strategic agreement" was reached covering a wide range of issues, including

employment, education, social security, tax reform, income policies, competitiveness, productivity

and reform of the public administration. In the remaining countries, including countries such as

the Netherlands and Denmark where long-standing social consensus has provided a basis for

comparatively favourable economic performance, the social dialogue has continued according to

national traditions.

**2.** **Price and exchange rate stability**

_**2.1**_ _**Price stability**_

_For the Community as a whole, the 1996 Guidelines urged that the expected_ _2'A_ _percent inflation_
_result in_ _1996_ _be improved upon in_ _1997._ _The Guidelines recommended that in the countries_
_where inflation was below 2 per cent (Belgium, Germany, France, Luxembourg, the Netherlands,_
_Austria and Finland) or just above 2 per cent (Denmark and Ireland), the task would be to_
_consolidate this performance over the medium term. In Sweden, where inflation had come down_
_significantly, and in the United Kingdom, where inflation was around 3 per cent and on a_
_downward_ _trend,_ _economic policies were to aim at consolidating the results achieved._ _Spain,_
_Portugal and Italy were urged to reduce inflation to below 3 per cent by 1997 while in Greece,_
_efforts to reduce inflation needed to be continued and enhanced._

For the Community as a whole, inflation declined broadly in line with expectations to 2 4 per cent

in 1996. The latest trends point to an improved outcome in 1997. As described in the

Commission's 1996 Report on Convergence, the generalised fall in inflation was the result of a

number of factors These included monetary policies targeted at price stability, an improved

credibility of the price stability framework, enhanced wage moderation, stronger competitive

pressures related _inter alia_ to the Single Market, reduced pressure from fiscal policy and. for some

countries, currency appreciation from previous lows. Cyclical factors as reflected in a significant

output gap and low domestic demand also contributed to lower inflation in many cases.

On the basis of the latest HICP data [1], inflation in Belgium, Denmark, Germany, France, Ireland,

Luxembourg, the Netherlands, Austria and Finland was about 2 per cent or less and price

increases are likely to remain around _VA_ per cent or less in all cases in 1997.

In the countries mentioned, low inflation in 1996 was generally underpinned by moderate wage

increases. The rate of increase in nominal compensation per employee, including employers' social

contributions, was below 3 % per cent and in some cases even below 2 per cent.

The prospects for price stability in 1997 are reinforced by the outlook for moderate wage

increases. In Belgium, Germany, France, the Netherlands, Finland and Austria, the outlook is for

increases in nominal labour costs per employee of 3 per cent or less in 1997. In Denmark, recent

wage settlements should lead to an average increase in wage costs of around _VA_ per cent per year

over the next two to three years unless wage drift increases.

Table 2

Inflation developments

(% change p.a.) |

The credibility of the

price stability framework

is well established in the

countries mentioned. On

the basis of the results

for 1996 and the outlook

for 1997, all of these

countries appear to be

consolidating their price

stability performance in

accordance with the

1996 Guidelines

recommendation.

In Sweden, inflation fell

sharply during 1996.

This was partly due to

temporary factors,

including a reduction in

VAT on food as of 1

January 1996 and the

strong appreciation of

Private consumption

deflator

Feb 97
t/t-12

1994

Nominal |
compensation |
per employee I

HICP

Feb 97 [1] '

Dec 96 [1] '

1996

1995

1996

1994

1995

3.3

2.0

2.1

1.8

8.3

3.6

1.8

1.7

4.3

1.9

2.0

2.0

3.1

1.2

1.2

2.8

2.7

3.2 1.6 2.0 1.8 1.9 2.0 4.6 2.3 1.8

1.8 2.1 2.1 1.9 2.1 2.0 3.8 3.6 3.1
2.7 1.9 1.8 1.2 1.3 1.6 3.4 3.6 2.5

10.8 9.3 8.3 7.9 7.6 6.5 12.2 12.5 11.7
4.8 4.7 3.6 3.6 3.4 2.5 2.2 2.2 4.6
2.1 1.7 1.8 2.1 2.0 1.7 2.2 2.3 2.6

2.6 2.0 1.7 1.7 2.6 0.7 2.7
4.6 5.8 4.3 4.0 3.5 2.3 2.9 4.8 5.5
2.3 0.7 1.9 1.2 1.3 1.5 4.0 2.2 1.6
2.7 0.9 2.0 1.5 1.5 1.6 2.4 2.0 1.2
2.9 1.3 2.0 1.8 1.8 1.5 3.4 3.7 1.9
4.8 4.2 3.1 2.9 3.0 2.4 10.7 2.5 6.5

1.4 0.2 1.2 1.5 1.0 0.6 3.5 4.3 3.2
3.0 2.4 1.2 0.8 0.8 1.1 4.8 2.9 7.4
2.5 2.6 2.8 2.0 3.6 2.4 3.6

3.3 3.0 2.7 2.4 2.3 2.0 3.3 3.1 3.5

hmetic average of twelve monthly harmonised indices relative to the
imetic average of the twelve monthly harmonised indices of the previous
ad.

_zj__ Commission services, Spring 1997 forecasts.

1.8

1.9

1.2

7.9

3.6

2.1

1.9

2.1

1.3

7.6

3.4

2.0

B

DK

D

EL

E

F

BRL

I

L

NL

A

P

FIN

S

UK

EUR

" Arit

arith

peri
_Soura_

3.2

1.8

2.7

10.8

4.8

2.1

2.6

4.6

2.3

2.7

2.9

4.8

3.5

1.3

1.5

1.8

3.0

1.0

0.8

4.6

3.8

3.4

12.2

2.2

2.2

2.6

2.9

4.0

2.4

3.4

10.7

3.5

4.8

3.6

2.3

3.6

3.6

12.5

2.2

2.3

0.7

4.8

2.2

2.0

3.7

2.5

4.3

2.9

2.4

1.4

3.0

2.5

3.3

1.6

2.1

1.9

9.3

4.7

1.7

2.0

5.8

0.7

0.9

1.3

4.2

0.2

2.4

2.6

3.0

4.0

1.2

1.5

1.8

2.9

1.5

0.8

2.4

2.3

2.0

2.0

1.6

6.5

2.5

1.7

1.7

2.3

1.5

1.6

1.5

2.4

0.6

1.1

2.0

2.0

3.1

1 Harmonised Indices of Consumer Prices; inflation is calculated on the basis of the arithmetic average of
the HICP of the last 12 months (March. 1996-Feb. 1997) relative to the average of the previous twelve
months (March 1995-Feb. 1996): the Commission services' assessment for Ireland is based on quarterly
data.

the Swedish krona from previous LOWS. The latest trends point towards continued low rates of

price increases. However, labour costs per employee increased by around 7.4 per cent in 1996; a

rate which would clearly not be compatible with the maintenance of price stability, growth and

employment over the medium tenn. Recent wage agreements have been concluded at lower levels

but after allowing for wage drift, the rate of labour costs increases per head could still be close to 5

per cent in 1997. If Sweden is to live un to the Guidelines recommendation and the results in terms

of price stability are to be consolidated, a marked deceleration in nominal wage increases is

required.

In the UK, the large appreciation of the Pound Sterling in late 1996 and early 1997 exerted a

restraining impact on price pressures in early 1997. On the other hand, consumption growth v/as

buoyant and the output gap was closing at a fast rate. Unemployment has fallen rapidly to levels

which have historically been associated with an upturn in wage pressures. Thus, although inflation

is expected to subside slightly and the growth of nominal compensation per employee is forecast to

be around 4 per cent in 1997, the risks of a worse outcome cannot be disregarded. The UK

authorities need to be vigilant in guarding against the emergence of a price-wage spiral if the

results in terms of low inflation are to be consolidated.

In Portugal, annual inflation fell to 3.0 per cent by February 1997 (latest 12 months over previous

12 months; HICP) while the latest figure stood at 2.4 per cent (February 1997 over February

1996; HICP). Disinflation is helped by lower nominal wage increases and by continued labour

productivity gains in excess of the Community average. In Spain, inflation is on a downward trend

and while annual HICP inflation amounted to 3.4 per cent by February 1997, the latest figure was

down to 2.5 per cent. Given the continued anti-inflationary vigilance of the monetary authorities

and good prospects for continued moderate wage increases, Spain is on track to achieve low

inflation in 1997. In Italy, inflation has come down sharply over the course of 1996 and early

1997 (annual inflation at 3.5 per cent but latest figure at 2.3 per cent) helped by stability-oriented

monetary policies, slightly moderating wage increases and a large appreciation of the lira since

mid-1995. The growth of nominal compensation per employee is expected to edge downwards but

it may still be close to 5 per cent in 1997. Nevertheless, with a stable lira and pressure on

operating margins, the government's inflation target of 2.5 per cent for the year as an average

(CPI) _is_ within reach. In all three countries, the 1996 Guidelines recommendation is set to be

fulfilled and inflation is expected to undershoot the 3 per cent mark with some margin.

In Greece, efforts to reduce inflation have been continued and enhanced in line with the 1996

Guidelines recommendation. Annual inflation measured by the HICP fell to 7.6 per cent (latest 12

months over previous 12 months) while the latest figure (February 1997 over February 1996;

HICP) stood at 6.5 per cent. Continued efforts are required in order tc reach the government's

target of 4.5 per cent inflation by year-end (CPI).

_2.2 Exchange rate stability_

_The_ _1996_ _Guidelines reiterated that all Member States must continue to treat their exchange-_
_rate policies as a matter of common interest within the framework of the European_ _Monetary_
_System._ _The policies_ _recommended_ _in the Guidelines would contribute to an_ _appropriate_
_alignment of exchange rates within the Community and would contribute to create the conditions_
_for participation in the exchange rate mechanism for countries not already_ _participating._

Since 1995, sounder economic policies in the Community, increased budgetary credibility in a

number of Member States and a strengthening US-dollar have contributed to a more appropriate

alignment of exchange rates within the Community. The rebound in the US-dollar reflected the

relatively strong cyclical position of the US economy as well as changes in the respective policy
mix in the US and (he Community. Enhanced policy credibility helped the Italian lira, the Swedish

krona and several other currencies to recuperate much or all of earlier losses relative to the DEM.

The pound sterling appreciated markedly relative to most ERM currencies in late 1996 and early

1997 against the background of the stronger dollar, high economic growth and prospects for a rise

in interest rates. The spring 1995 overvaluation of the DEM, and currencies closely linked to the

DEM, has been unwound.

Finland and Italy joined the exchange rate mechanism of the EMS on 14 October and 25

November 1996, respectively. Currently, 12 Member States participate in the exchange rate

mechanism (ERM); only Greece, Sweden and the United Kingdom do not participate.

Within the ERM, the spread between the strongest and weakest currencies in the grid narrowed

progressively to some 2 per cent in late September 1996. Subsequently, this spread widened as the

Irish pound appreciated significantly relative to other ERM currencies. This was the result of

three factors, namely the appreciation of the pound sterling and the US-dollar relative to the ERM
currencies, the strong cyclical position of the Irish economy which has not led to a tightening of

budgetary policies; and the higher levels of interest rates associated with the strong growth.

All other ERM currencies remained within narrow margins against each other. In overall terms,

exchange rate stability within the ERM has been maintained and improved since the adoption of

the 1996 Broad Guidelines.

**3.** **Sound public finances**

_3.1 The pace and size of consolidation efforts_

_The 1996 Guidelines stressed that the generally unsatisfactory state of the public finances in the_
_Community should lead Member States to review and, where necessary, to strengthen their fiscal_
_consolidation plans. The_ _Council_ _recommended that virtually all Member States should aim at_
_lowering the budget deficit to, at most, 3 percent of GDP in 1997, as a step towards the objective_
_of close to balance in the medium term._

_The Guidelines stipulated that Denmark and_ _Ireland,_ _which already respected the 3 percent_
_reference value, should move towards more ambitious medium-term targets._ _In the case of_
_Denmark these targets were set out_ _in_ _its May 1996 convergence programme._ _Germany, France,_
_Austria, Finland, Sweden and the Netherlands were urged to resolutely_ _implement_ _their_ _fiscal_
_consolidation programmes and. if necessary, strengthen them to ensure that the objectives were_
_met. In the United Kingdom,_ _it_ _was important thai action be taken to keep spending to planned_
_levels to respect the 3 percent target for_ _1997._ _In Spain and Portugal, a_ _determined_
_implementation of the budget component of their convergence programmes was required._ _Italy_
_was urged to introduce significant measures to achieve and improve upon the planned budgetary_
_consolidation._ _In Greece, sustained efforts on a wide range_ _affronts_ _was_ _needed._

_Budget results in 1996:_ All Member States except Germany made progress towards reducing their

budget deficit in 1996. For the average of the Community, the budget deficit declined to 4.3

percent of GDP in 1996 from 5.0 per cent of GDP in 1995. This improvement was achieved

despite the deterioration in the cyclical position which exerted an adverse impact on tax revenues

and public spending. Adjusted for cyclical effects, the budget balance for the Community as an

average improved by 1 percentage point of GDP, according to the estimates of the Commission
services [2] . This represented a much larger reduction in the cyclically-adjusted budget deficit than

had been achieved in the preceding years (table 3). The cyclically-adjusted deficit was reduced

significantly in a large majority of Member countries in 1996. Among the countries subject to a

1996 Council decision on the existence of an excessive deficit, only Germany failed to make

substantial progress in reducing the cyclically-adjusted budget deficit in 1996.

Table 3

Actual and cyclically-adjusted general government budget balances

(per cent of GDP)

Actual budget balance Change in actual Change in cyclically'
(level) budget balance adjusted balance

1994 1995 1996 1994 1995 1996 1994 1995 1996

B -5.1 -4.1 -3.4 2.3 1.0 0.7 2.0 1.0 1.0
DK -3.6 -1.9 -1.6 0.3 1.7 0.3 -1.0 1.3 0.2
D [2) ] -2.4 -3.5 -3.8 1.0 -1.1 -0.3 0.8 -0.9 0.3

Actual budget balance
(level)

1994 1995 1996

Change in actual

budget balance

1994 1995 1996

1.0

1.7

-1.1

2.9

-0.3

0.8

-0.3

2.6

-1.2

-0.6

-0.7

0.4

1.1

2.4

0.7

-0.7

-0.3

1.3

-0.1

0.2

0.1

2.3

0.3

1.0

2.1

0.4

0.0

0.7

0.3

1.3

-0.2

-0.2

0.4

1.8

2.0

1.0

1.0

0.2

0.3

1.7

2.3

1.2

0.2

0.6

1.5

1.8

1.6

1.7

4.6

1.7

0.7

0.3

-0.3

1.8

2.2

0.7

1.1

0.3

0.1

1.6

1.4

1.9

2.5

4.3

1.7

2.0

-1.0

0.8

2.0

0.6

-0.4

0.1

-0.1

-3.4

-1.6

-3.8

-7.4

-4.4

-4.1

-0.9

-6.7

1.8

-2.4

-3.9

-4.1

-2.6

-3.6

-4.4

-4.1

-1.9

-3.5

-9.2

-6.6

-4.8

-2.0

-7.0

1.7

-4.0

-5.3

-6.0

-5.1

_**-7.9**_

-6.1

EL

E

F

IRL

I

L

NL [3] 
A

P

FIN

S

UK

-5.1

-3.6

-2.4

-12.1

-6.3

-5.6

-1.7

-9.6

2.9

-3.4

-4.6

-6.4

-6.2

-10.3

-6.8

1.0

1.3

-0.9

2.9

-0.6

0.5

-2.4

2.0

-0.3

-0.5

0.5

-0.6

0.6

0.4

EUR -5.5 -5.0 -4.3 0.7 0.5 0.7 0.2 0.3 1.0

1 ) A "+" indicates an improvement; a "-" indicates a deterioration in the budget balance.
2) Excluding unification-related debt and asset assumptions by the federal government in 1995 (Treuhand,
eastern housing companies and Deutsche Kreditbank) equal to 229 bn. DEM
3) Excluding for 1995 a net amount of 32.84 bn. NLG of exceptional expenditure related to the reform of the
financing of the social housing societies.
&M«£g^Comnu^sionService^

In 1996, the budget deficit remained below 3 per cent of GDP in Denmark, Ireland and

Luxembourg. However, Denmark made less-than-expected progress in reducing its deficit and the

objective stated in the convergence programme (1.0 percent of GDP) was not achieved. The

budget overrun was mainly due to an overshoot in public spending. In Ireland, the budgetary

situation improved more than expected as revenues were boosted by high economic growth.

2 The Commission services' method of cyclical adjustment takes a cautious approach in that it produces

_levels_ of cyclically-adjusted budget deficits which tend to be higher compared to those of other methods,

including those used by the OECD and the IMF. Given that these discrepancies mainly relate to

differences in the estimated _level_ of trend (potential) GDP, annual _changes_ in the cyclically-adjusted

deficit typically do not vary significantly across the various methods.

However, notwithstanding the positive effects of the economic cycle, expenditure growth breached
the government's initial target by a considerable margin for the second year running. Despite the
need to tighten budgetary policies in the current cyclical environment and the need to secure a
larger budgetary safety margin for when cyclical conditions become less favourable, there was no
improvement in the cyclically-adjusted budget deficit in 1996.

Both the Netherlands and Finland managed to reduce their deficits to below 3 percent of GDP in

1996. Although helped by relatively high economic growth, this was mainly the result of

determined consolidation efforts.

Belgium, France, Austria, Portugal and Sweden succeeded in bringing their deficit down to around
or below 4 per cent of GDP. In these countries, the budget improvement was considerable in 1996,
and for several of them the outcome was better than the government's target. In Belgium, the
budget deficit was above the original objective (3.4 per cent against 3 per cent of GDP), but the
country has made significant headway towards the 3 per cent reference value. In France, the
outcome was marginally above the target set in the convergence programme (4.1 per cent vs. 4 per
cent of GDP). In Spain and the United Kingdom, the deficit declined to 4.4 percent of GDP. In
all of these countries, fiscal consolidation programmes were resolutely implemented in line with the

Guidelines recommendation.

Gennany was the only Member State in which the budget deficit increased in 1996. As a result of
adverse cyclical conditions, the deficit reached 3.8 per cent of GDP after 3.5 per cent in 1995.
Despite efforts to strengthen expenditure control, hardly any improvement was made to the
cyclically-adjusted budget balance in 1996. Most of the budgetary measures agreed in Germany
during 1996 take effect in 1997.

Italy achieved only a modest reduction in the budget deficit which turned out at 6.7 per cent of
GDP in 1996 against 7.0 percent of GDP in 1995. Both worse-than-expected cyclical conditions
and budgetary slippage contributed to the disappointing result. With the adoption of the budget for

1997, the decision was taken to accelerate the pace of fiscal adjustment. With respect to the
budget discipline of local government an important new set of rules was included in the budget for

1997.

In Greece, the budget deficit was reduced to 7.4 per cent of GDP in 1996. The improvement was
to a large extent due to a reduction in the interest burden made possible by lower interest rates and
a stable debt-to-GDP ratio. The tax base has not been broadened as expected and real current
expenditure has been reduced only marginally.

_Debt-to-GDP trends in_ _1996:_ Although the Member States achieved a widespread and significant
improvement in budgetary positions in 1996, the budgetary imbalances in the Community were
still large. This resulted in a continued upward trend in the debt-to-GDP ratio in 1996. For the
Community as an average, the debt ratio rose from 71.2 per cent in 1995 to 73.2 per cent of GDP
in 1996. The debt ratio continued rising in Germany, Spain, France, Austria and the United
Kingdom. The debt ratio remained at or below 60 per cent of GDP only in France, Luxembourg,
Finland and the United Kingdom, but it was declining in a number of Member States (see table 4).

**10**

_Budgetary prospects for_ _1997:_ Efforts

to achieve sound public finances have

been stepped up throughout the

Community. Virtually all Member

States are aiming to reduce their budget

deficits to, at most, 3 percent of GDP by

1997, as a step towards the objective of

close to balance in the medium term.

The only exception is Greece where the

government aims to reduce the deficit to

4.2 percent of GDP.

Among the countries which had a budget

surplus or a budget deficit below 3 per

cent of GDP in 1996 (Denmark, Ireland,

Luxembourg, the Netherlands and

Finland), the deficit is expected to fall

further in Denmark, the Netherlands and

1 ) Government deposits with the central bank, government

Finland. These countries are thus holdings of non-government bonds and public
moving in the direction of more enterprises related debt amounted to some 16 % of

GDP in 1996.

ambitious medium-term targets. In _Source:_ Commission Services, Spring 1997 forecasts.
Denmark, the budgetary outlook in 1997

is now more favourable than expected in the May 1996 convergence programme and a small

surplus is aimed at. However, the budget for 1997 includes some one-off measures and is buoyed

by a favourable cyclical position. Also, reaching the objective depends on the ability to conduct

tighter discipline in 1997 than was achieved in 1996. In Finland, a general government surplus is

targeted in 1999. The budget for 1997 and the ceilings for central government expenditure in

1998-2001 are in line with a steady reduction in deficits in the coming years.

In all of the remaining countries, with the exception of Greece, measures have been adopted to

reduce budget deficits to 3 per cent of GDP in 1997. Furthermore, governments have generally

undertaken strong commitments to take any supplementary measures which might be needed to

meet this target.

In Belgium, Germany, France, Austria, Portugal and Sweden, the planned improvement in 1997

relative to 1996 to reach the 3 per cent target is around 1 percentage point of GDP or less. In

Germany, most of the measures contained in the policy packages for growth, investment and jobs

presented in early 1996 have been agreed and are taking effect from 1997 onwards. The

government has announced that further corrective measures would be taken if there were a further

shortfall in tax revenues in 1997. In France, the return to balanced social security accounts will

not be reached in 1997 as had originally been planned, but measures have been taken to reduce the

social security deficit, and to keep the general government balance within the target in 1997.

In Spain and in the United Kingdom, the planned deficit reduction in 1997 relative to 1996 is

around 1 _Vz_ percentage points. In Spain, the government has affirmed its commitment to reach the

3 percent target and a draft law on expenditure control has been approved to prevent expenditure

overruns. In the United Kingdom, deficit reduction is helped by tight expenditure control and tax

receipts boosted by relatively strong economic growth.

Italy has adopted measures to achieve a very large improvement in the budgetary position in 1997

in order to reach the 3 per cent target. Following the worse-than-expected outcome in 1996, a

mini-budget was put forward in March.

In Greece, the convergence programme aims at a general government deficit of 4.2 percent of GDP

in 1997. The government has adopted a series of measures to reduce government expenditure and

to reach the target.

_**3.2 The composition and durability of consolidation efforts**_

_The 1996 Guidelines identified the following general principles for budgetary_ _consolidation:_

_(i) restraining expenditure increases, as opposed to further increases in the overall tax burden;_
_among the issues to be addressed were pensions, health care costs and subsidies._

_(ii)_ _redirecting government spending, when possible, towards productive activities such as_
_infrastructure, human capital and active labour market measures._

_(Hi)_ _improving the efficiency of public services; in some cases through increased use of_
_privatisation and user-fees._

_(iv) reducing the overall tax burden, but conditional upon first putting the budget deficit on a_
_firm downward_ _path._

In 1996, the nature of Member States' consolidation efforts was not always in conformity with the

Guidelines. The share of public expenditures in GDP was reduced in the majority of Member

States in 1996 but it increased in Denmark, where it was already among the highest in the

Community, as well as in France and Italy. Tax pressure increased, to a varying extent, in

Denmark, Spain, France, Italy, Austria, Portugal, Finland and Sweden (table 5).

In 1997, budgetary consolidation is expected to be achieved mainly through expenditure restraint.

For the Community as an average, the expenditure share is expected to decline by nearly _VA_

percentage point this year. Provided current spending plans are adliered to and economic growth

picks up broadly as expected, the share of public expenditures in GDP is expected to fall in

virtually all Member States. Average tax pressure is expected to remain constant in 1997.

In a number of countries, the emphasis in consolidation efforts has shifted to expenditure restraint

m 1997. In France, where most consolidation measures in 1996 took the form of tax increases,

measures in 1997 (including restraint in public administration and a reform of the social security

system, mainly concerning health care) are expected to lead to virtually no increase in real

expenditure while taxes are slightly reduced. In Germany, consolidation measures concentrate on

reduced spending (pension, sickness insurance and health care, subsidies, public sector

employment and administrative costs). In Spain, key measures include a wage freeze in the public

sector, a reduction in government employment, pension reforms and indirect tax increases. In

Austria, the emphasis is shifting to expenditure restraint and includes health care reforms. In

Finland, the 1997 budget improvement relies almost exclusively on expenditure cuts while some

taxes arc being reduced. In the UK, the government is aiming to keep spending within narrow

limits. In Italy, where social spending was not affected by budgetary consolidation and non
interest expenditure grew in real terms in 1996, progress is expected to be made in reducing the

share of public expenditures in GDP in 1997. However, much of this comes from lower interest

payments and the tax burden will increase again.

**12**

Some countries have relied to a considerable extent on deferrals of public investment to achieve

deficit reduction in the short term This is the case in Spain (albeit From a high level) and. to a

lesser extent, _in_ Germany and France. In the United Kingdom, there has been a switch from public

to private provisions. Only a few countries (Portugal, Finland) have raised public investment as a

share of GDP in recent years.

Table 5

Receipts, expenditures and interest payments of general government

(in % of GDP)

Receipts Expenditure ((if which) Interest payments

1994 1995

1996 1994

1995 1996 19S4

1996

8.6

6 5

3.7

11.5

5.3

3.8

4.8

10.8

0.3

5.6

4.4

4.9

5.S

7.1

3.7

10.1

7.1

3.4

14.2

5.1

3.6

5.7

11.0

5.9

4.2

6.5

5.1

6.8

3.3

**53.7**

60.3

49.3

44.7

446

54.5

36.5

52.7

43.6

50.8

53.0

46.0

**58.3**

**66.2**

41.9

**50.3**

**58.8**

**45.6**

37.3

40.1

50.4

**35.6**

45.9

45.4

48.4

49.1

42.3

**55.7**

62.6

37.6

55.3

**62.6**

49.3

48.0

47.7

54.6

39.8

54.9

53.9

53.9

47.4

60.9

69.8

43.3

**54.5**

**59.9**

**49.9**

47.0

46.3

54.3

37.6

52.1

43.9

53.2

**53.6**

46.8

**58.8**

67.2

43.6

**1995**

9.1

6.7

3.7

12.4

5.4

3.7

5.0

11.4

0.3

6.0

4.3

6.5

5.3

7.1

3.7

**50.3**

**58.0**

46.3

**37.9**

**39.6**

**49.5**

**35.6**

45.1

45.6

**49.1**

48.3

41.2

**53.7**

**59.3**

37.8

B

DK

D

EL

E

F

IRL

I

L

NL

A

P

FIN

S

UK

**50.2**

**59.0**

46.8

**35.8**

41.4

**49.0**

38.2

45.2

50.6

49.4

41.3

**54.7**

59.4

**36.5**

EUR **46.0** **45.9** **46.1** **51.5** 50.9 50.3 5.3 5.4 **5.4**

_Source._ Commission services, Spring 1997 forecasts.

Budgetary adjustments in Member States are relying to a varying extent on one-off measures,

particularly in 1997. The use of one-off measures has in some cases contributed to strengthen the

credibility of meeting the 3 per cent reference value by 1997 and has had positive effects en

interest rates in some countries. Needless to say, however, the temporary nature of such measures

does not contribute to a sustained improvement in the fiscal position. Therefore, in order not to

undermine confidence in the establishment of sound public finances, they must be supplemented by

measures which provide a lasting improvement to the budgetary situation. In spring 1998, when

the decision will be made as to which countries have achieved a high degree of sustainable

convergence required for the participation in the third stage of EMU from 1.1.1999, the

Commission will assess the durable character of budget improvements also on the basis of

Member States' budgets for 1998 and their convergence programmes.

With respect to the Guidelines recommendation to reduce the tax burden, conditional upon first

putting the deficit on a downward path, tax pressure has been reduced considerably in recent years

only in the Netherlands and Ireland. In the Netherlands, reforms in the social security sector have

continued. In Ireland, the latest budget and the social agreement covering the period up to the year

2000 will accelerate progress on this front.

###### **4. Better functioning of product and services markets**

_The_ _1996_ _Guidelines recommended a reinforcement of competition policies and a curbing of_
_State aids._ _It_ _was crucial to exploit the Single Market potential through the transposition into_
_national_ _law and the effective enforcement of legislation._ _In addition, measures should be_
_implemented aimed at promoting innovation, the information society, and SMEs._ _Environmental_
_policies should rely more on market-based instruments, including fiscal ones._

A variety of measures, too numerous to be reviewed in full in the present document, have been

taken at both the Community and the national level to boost the competitiveness and efficiency of

the European economies. The present review concentrates on developments at the Community

level and lists the most important initiatives taken at the national level in 1996.

Although transposition of Single Market measures continued to improve in 1996, inadequate

transposition still emerges as a major concern in some sectors and areas. At the Community level,

by early February 1997, the Council had adopted 259 Single Market proposals from the

Commission, leaving just 11 outstanding. Of these, 4 concern company law while the rest cover

company taxation, intellectual property, the free movement of persons, foodstuffs, insurance,

veterinary controls and phytosanitary controls.

The measures adopted include 218 directives requiring national implementation laws. On average,

Member States had transposed over 94 per cent of these into their domestic legal systems by

February 1997, with 64 per cent correctly transposed by all Members States and 80 per cent by 14

Member States.

The Commission services' 1996 Single Market Review [3] demonstrated that Member States'

product markets have become highly integrated as a result of globalisation and the Single Market,

although product standards continue to raise difficulties; however, in product markets associated

with public procurement and/or subject to nationally distinct regulations (e.g., pharmaceuticals)

integration has failed to make much headway. For manufacturing products, Member States'

domestic demand has increasingly been supplied by products imported from other Member States.

Reductions in price-cost margins also show that the degree of competition in manufacturing sectors

has significantly increased. Only in sectors associated with traditional or regulated public

procurement has the effect on price cost margins been rather insignificant. Convergence in prices

of identical products around the Community also suggest that the Single Market has led to further

integration of goods markets. Markets in services have remained significantly less integrated than

goods markets, but substantial progress has taken place. Around the Community, competition and

efficiency are intensifying. But state aids, national taxes and domestic regulations continue to

fragment some markets, particularly for services.

3 See Commission Communication on "The impact and effectiveness of the Single Market"
(COM(96)52(), October 1996) and "Economic Evaluation of the Internal Market" _(European Economy,_
Reports and Studies, No. 4, 1996).

**14**

The chief areas where work still remains in terms of transposing _am_ implementing Community

legislation in the Member States concern public procurement, intellectual property and insurance.

The Single Market Review also indicated that uneven enforcement of EU legislation is a persistent

barrier to trade or fair competition. This problem will be addressed in the Internal Market Action

Plan currently in preparation.

In the field of telecommunications, the Community made further progress towards foil

libéralisation, most notably by the adoption of two Commission Directives opening up competition

in mobile telephony and requiring the abolition of monopoly rights in voice telephony in most

Member States by I January 1998. In the energy sector, the Council adopted a directive on

common rules for the internal market in electricity. Tins directive provides for the gradual opening

of competition over a period of six years. The corresponding proposal concerning the gas industry

_is_ still before the Council. In the transport sector, the Council adopted a directive opening up

competition for the provision of ground services at airports.

With a view to removing unnecessary obstacles to the diffusion of innovation, the Commission

adopted a new regulation in January 1996, simplifying the conditions for exemption under Article

85 for technology transfer agreements. The Commission also adopted a communication updating

its 1994 action plan for the information society and announced its intention to bring forward

proposals to harmonise legislation concerning intellectual property rights in this field.

In order to give a new impetus to the promotion of SMEs at the Community level, the Council

adopted the third multi-annual programme for SMEs in December 1996. In its "Integrated

programme for SMEs and the craft sector" of July 1996, the Commission envisages

complementing the measures of the multi-annual programme with other measures such as joint

action with Member States to facilitate access to the information society and the simplification of

Community legislation.

In the area of environment and taxation, the Commission adopted a proposal for an energy
products tax in early 1997 [4] . This proposal represents a re-structuring of the system of excise

duties which would both extend the scope of taxation to all energy products that damage the

environment, and increase the levels of taxation on these products from 1998 and again in the year

2000. Such steps provide important price signals to energy users, encouraging them to reduce

consumption and thereby cause less pollution. The Commission also adopted a Communication on
the use of environmental taxes and charges in the internal market [5] . This Communication is

intended to assist the Member States in their efforts to use fiscal instruments for environmental

ends while respecting the requirements of the Treaty and the Single Market. The Communication

emphasises that there is considerable room for action by the Member States, who are encouraged

to increase the use of such taxes and charges.

4 Proposal for a Council Directive re-structuring the Community framework for the taxation of energy
products (COM(97)30 final of 12/03/97).

5 Communication from the Commission "Environmental taxes and charges in the Single Market"
(COM(97)9 final of 26/03/97).

**15**

At the national level, a comprehensive programme to improve competitiveness was put forward by

the German government entitled "Offensive for entrepeneurship and innovation" This included

measures to promote SMEs (easing of the fiscal burden on founders of new businesses, mobilising

risk and venture capital, credit subsidies etc.) and innovation (financing conditions for applied

R&D, reduced patenting costs for SMEs, etc.). Shopping hours have been liberalised and

numerous other measures to improve the functioning of the economy are planned. The Spanish

government put forward a package of structural measures, including action to reduce state aid to

public enterprises, ease taxation on SMEs, and boost competition. In Portugal, the "strategic

agreement" reached between the social partners and the government refers to the reinforcement of

competition policies and to measures aimed at promoting innovation, the information society and

SMEs. In Finland, the government has taken a large number of measures in favour of SMEs

(better access to financing, training measures, etc.) and in Austria, increased financial and

institutional support is given for innovation, research and development. In Denmark, a new

competition law was put forward in 1996 which aims to strengthen anti-trust rules and bring the

national framework more in line with that of other Member countries.

##### **5. Fostering employment and labour market reforms**

**5.** **/** _**Wage**_ _**developments**_

_The 1996 Guidelines recommended that real wage developments should be below the increase in_
_productivity in order to strengthen the profitability of employment-creating investment._ _Higher_
_employment growth would be fostered by the maintenance of appropriate average wage trends_
_and in some cases by wage differentials that better reflect productivity differentials._ _Where_
_possible, the 1996 Guidelines urged that a reduction in non-wage labour costs should be used to_
_encourage employment._

In recent years, wage trends in the Community have increasingly been in line with the objective of

price stability, thereby allowing monetary and financial conditions favourable to growth and

employment creation, as well as with the objective to strengthen investment profitability, thereby

allowing the upswing to be supported by rapidly rising investment. For the Community as a

whole, real wage costs (nominal compensation per employee deflated by the GDP deflator)

increased by less than 1 per cent for the fourth consecutive year in 1996. This was sufficiently

behind both trend and actual growth in labour productivity (at around 2 and 1.5 per cent,

respectively) to provide remuneration for the higher stock of capital employed per worker and to

strengthen the return on investment in the Community. The prospects for 1997 and 1998 are for a

continued respect of this guideline in the Community.

The condition that real wage costs should increase at a slower rate than labour productivity was

respected in nearly all Member States in 1996. In Greece, Portugal, Finland and especially in

Sweden, real wage costs outpaced labour productivity in 1996. In these countries a deceleration in

real wage increases is needed to enhance job creation in a durable fashion.

In the Community, the restoration of healthier levels of investment profitability has laid the ground

for higher economic growth sustained by capacity-widening and employment-creating investment

as demand prospects brighten. However, aggregate real wage moderation impacts only slowly on

the employment-intensity of growth. Another, more rapid route towards a more employment
intensive pattern of growth would be to encourage a downward widening of the wage cost scale as

outlined in the Commission's 1997 Annual Economic Report.

**16**

Some countries have taken steps in the direction of ensuring that wage cost differentials take better

account of productivity differentials between different occupations and skill levels and between

different regions. A targeted reduction of non-wage labour costs at the lower end of the wage scale

has taken place in France, Belgium and the Netherlands. In the Netherlands, the legislated

minimum wage has increased by less than median wages. In contrast, there has been no halt to the

process towards wage equalisation ahead of productivity trends between the former western and

eastern Lander of Germany. High wage costs relative to productivity continues to hamper job

creation in the eastern Lander of Germany.

Table 6

Growth, employment and productivity

Labour productivity
(% change p.a.)

Real wage costs per

employee
(% change p.a.)

Real unit labour cost
(% change p.a.)

Real GDP growth
(% change p.a.)

Employment
(% change p.a.)

96

0.0

1.0

-1.2

1.0

2.9

-0.1

3.8

0.4

2.4

1.9

-0.7

0.7

1.4

-0.6

0.7

0.3

0.3

0.3

1.6

1.7

0.2

GDP deflator

90-92 93-96

93-96

93-96

-0.4

-0.4

-1.0

1.2

0.1

0.0

3.1

-1.5

2.3

1.1

1.1

-0.5

-0.9

-1.4

0.2

-0.4

93-96

1.4

2.4

2.2

0.6

1.6

1.3

4.4

2.3

2.7

1.3

1.7

2.4

4.0

2.8

2.4

96

90-92

0.5

0.0

1.8

0.1

0.3

0.2

1.8

0.7

3.6

2.1

2.0

0.9

-4.2

-2.1

-1.5

90-92

1.9

2.1

2.0

0.9

1.2

1.3

3.3

1.1

0.6

1.2

1.7

2.0

0.7

1.3

0.6

96

93-96

1.1

2.7

1.2

1.8

1.5

1.2

7.5

1.1

5.0

2.3

1.3

1.6

2.8

1.4

2.7

96

-1.4

-0.3

-1.1

1.1

-0.6

-0.4

-2.5

-0.1

-2.2

-1.1

-1.5

0.7

0.3

4.6

-0.9

-0.7

3.6

1.5

1.6

-2.0

2.5

1.6

4.2

1.6

2.6

1.6

1.9

5.5

2.5

1.4

1.6

1.7

1.7

1.5

-0.1

1.2

1.4

2.6

0.2

1.0

1.9

0.4

-1.0

-0.2

0.2

3.1

2.1

6.4

0.5

0.8

90-92

1.7

-0.6

-0.4

-2.8

1.3

0.3

0.9

0.6

1.9

0.4

0.2

3.4

B

DK

D

EL

E

F

IRL

I

L

NL

A

P

FIN

S

UK

EUR

USA

JAP

90-92

2.3

1.0

4.2

1.2

2.2

1.5

5.0

1.3

4.2

2.8

3.1

2.9

-3.6

-0.4

-0.7

0.7

1.5

1.1

0.8

-0.5

0.6

1.5

-0.2

0.8

0.5

1.0

1.5

1.2

2.4

0.9

0.6

93-96

-0.7

-0.8

-1.1

0.2

-2.0

-0.6

-2.8

-2.4

-1.9

-0.8

-0.6

-0.9

-2.7

-0.5

-1.5

-1.4

0.2

-0.1

1.3

1.5

2.5

1.5

0.8

1.5

4.5

0.5

1.2

1.0

1.7

2.4

1.9

1.7

1.4

1.5

1.0

2.9

1.0

0.8

96

1.4

2.4

1.4

2.6

2.2

1.3

8.4

0.7

3.6

2.8

1.0

3.0

3.3

1.1

2.1

1.6

2.4

3.6

2.0

0.8

1.0

1.7

1.1

3.4

1.6

3.0

1.3

1.4

0.6

1.4

1.2

1.8

1.8

0.5

1.8

0.1

0.9

0.3

0.5

-0.3

USA 1.1 3.0 2.4 0.3 1.7 1.4 1.2 0.8 1.0 1.7 1.0 1.8 0.5 0.2 0.8
JAP 3.4 1.3 3.6 1.6 0.2 0.6 1.8 1.0 2.9 1.5 0.8 0.5 -0.3 -0.1 -2.3

_Source:_ Commission services, Spring 1997 forecasts.

_**5.2 Labour market reforms**_

_The 1996 Guidelines encouraged Member States to intensify their actions to reform labour_
_markets in a number of areas, including occupational and regional mobility,_ _employment_
_services, education systems, active labour market policies particularly_ _for the_ _long-term_
_unemployed, incentives for the employment of low-skilled labour, and working time adaptation._

The commitment to reduce unemployment as the main aim of economic policy has become part of

the EU-wide strategy for employment initiated by the Essen European Council in 1994. Since then,

the policy recommendations have been refined and made more precise in the subsequent European

Councils and a close process of monitoring of their implementation has been developed in co
operation with the Member States.

**17**

Strategies and concrete measures at the national level have been embodied in multi-annual

employment programmes (MAPs). MAPs allow a closer monitoring of national employment

strategies and concrete measures, thereby facilitating identification and exchange of best practices.

A first assessment of their implementation has been presented to the European Council in Dublin.

In the implementation of the MAPs, Member States have taken a very wide array of measures

covering all the priority issues identified in Essen. On the demand side, the attention has focused

on wage moderation and measures to reduce non wage labour costs as well as the promotion of

flexible types of work arrangements and in some cases, the reduction in hiring and firing costs,

with the aim of increasing the employment content of growth. On the supply side, work incentives

and employability have been fostered through reforms of the social protection systems, active

labour market policies (ALMPs) and training.

The attached Box provides a snapshot of some of the major labour market measures implemented

in EU Member States in recent years. Some emerging patterns of reform involving one or several

countries can be identified:

- Countries characterised by a traditionally high degree of social protection have started to curb

their support levels via a revision of benefit duration and replacement incomes and, more

frequently, through tightening of eligibility rules and controls on active job search by recipients.

This has been coupled with increased flexibility of working time (for instance, the Netherlands)

and emphasis on training and other ALMPs (the Nordic countries). Although some effort has

been done to improve the efficiency and effectiveness of the latter measures, they may be

expensive for public finances, at least in the short run, and may entail dead-weight and

substitution effects.

- Measures to deregulate the labour market have been implemented in high unemployment

countries. Spain, in particular, relaxed statutory employment protection for permanent

employees, moving away from the deregulation "at the margin" (spreading of temporary

contracts) which had deepened the segmentation of the labour market.

- Countries relying on a system of in-work benefits to top up income from work (the UK and

Ireland) have implemented measures to reduce the high marginal effective tax rates in order to

tackle potential poverty traps.

- Wage moderation has largely been implemented throughout the EU. Furthermore, a large

number of countries have introduced reductions in non-wage labour costs, either through

general cuts in social security contributions (e.g., Spain, Portugal, Finland, the UK, the

Netherlands) or via reductions targeted on low wages to foster demand for low skilled labour

(for instance, France, Belgium, the Netherlands).

Although it is too early to assess the effectiveness of these structural reforms on employment

creation and unemployment, a number of messages seem to emerge from EU countries which have

been relatively more effective in tackling unemployment in recent years (the Netherlands,

Denmark, the UK and, to an extent, Ireland). At least some of the key elements of their success

appear to lie in:

- the comprehensive character of the structural reforms, including those in product and service
markets and a strengthening of incentives to take up work, compared to the case of numerous
but sparse measures without a critical mass;

- the involvement of a large share of the working population, including labour market insiders,
thereby improving the perception of equity of the reforms, or the focus on a specific, but highly
relevant "system failure" in the functioning of the labour market or the operation of the social
protection system;

- the appropriate macroeconomic conditions combining a reasonable growth performance and the
credibility of the commitment to sound macroeconomic management.

These basic pre-conditions allow to optimise synergy between various measures and, by enhancing
the political and social acceptability of the structural reforms, reduce the likelihood of future policy

reversal.

**19**

BOX: Main labour market reforms in EU countries in recent years

Vocational education and training

Apprenticeship schemes have been expanded (in A, B, FIN, F, D, IRL and E) and/or reviewed to
respond more effectively to market needs (in DK, P, UK, D, IRL, I). A wide variety of innovative
instruments to promote continued training have been implemented in IRL, F, NL, DK.

Working time flexibility

Widespread use of part-time contracts in DK, NL, S and the UK. Regulation on part-time work
(E) and temporary contracts (D) have been relaxed; working time legislation has been liberalised
(P, FIN, A). Other forms of working time flexibility have been introduced (A, D, B, DK, E, FIN,

F).

Hiring and firing costs

Permissive stance of employment protection legislation in the UK and DK. Move to ease
legislation for permanent workers in E and to increase the threshold for the application of job
protection from companies with 5 employees to 10 employees in D. Alternatively, higher flexibility
has been allowed via non standard labour contracting (fixed term contracts, part time) temporary
work agencies, in a number of MS.

Non-wage labour costs

General reductions in non-wage labour costs (E, P, FIN, UK, NL) and targeted reduction at low
end of the wage scale (for instance, F, B, NL).

Unemployment benefits and tax wedge

Replacement ratios and duration have been reduced in DK, IRL, NL, E and S and eligibility and
availability to work requirements have been tightened in several countries (DK, UK, FIN, S, D).
Adaptation of in-work benefits in UK and IRL to tackle poverty traps. Action to curb high
marginal effective tax rates in F, UK, DK, IRL, S and NL (the latter reduced also the overall tax
wedge on labour).

Active labour market policies

Substantive reforms of Public Employment Systems including, in some cases, the elimination of
public monopoly in job brokerage, in S, FIN, DK, D, A, NL and B. Special efforts and targeting
of ALMPs as well as measures under the above headings for the categories most affected by
unemployment in most of the MS.

**20**

###### **ISSN 0254-1475**

## COM(97) 169 final

# **DOCUMENTS**

### EN 10 01 Catalogue number : CB-CO-97-166-EN-C ISBN 92-78-18936-7

Office for Official Publications of the European Communities

L-2985 Luxembourg