CELEX: 31986D0667
Language: en
Date: 1986-12-22 00:00:00
Title: 86/667/EEC: Council Decision of 22 December 1986 adopting the annual report on the economic situation in the Community and laying down economic policy guidelines for 1987

31 . 12 . 86                                   Official Journal of the European Communities                                   No L 385 / 1
                                                                           II
                                                    (Acts whose publication is not obligatory)
                                                                COUNCIL
                                                              COUNCIL DECISION
                                                               of 22 December 1986
                      adopting the annual report on the economic situation in the Community and laying down
                                                       economic policy guidelines for 1987
                                                                  ( 86 / 667 / EEC)
  THE COUNCIL OF THE EUROPEAN COMMUNITIES ,                                     HAS ADOPTED THIS DECISION :
                                                                                                          Article 1
  Having regard to the Treaty establishing the European
  Economic Community ,
                                                                                The Council hereby adopts the annual report on the
                                                                                economic situation in , and economic policy guidelines to be
 Having regard to Council Decision 74 / 120 / EEC of 18                         followed by , the Community , contained in Part I of the
 February 1974 on the attainment of a high degree of                            Report annexed hereto , and lays down the economic policy
 convergence of the economic policies of the Member States of                   guidelines to be followed by the Member States , contained in
 the European Economic Community ( J ), as amended by                           Part II of the said Report .
 Decision       75 / 787 / EEC ( 2 )          and     by      Decision
 79 / 136 / EEC ( 3 ), and in particular Article 4 thereof,                                               Article 2
                                                                                This Decision is addressed to the Member States .
 Having regard to the proposal from the Commission ,
 Having regard          to    the     opinion     of the     European           Done at Brussels , 22 December 1986 .
 Parliament ( 4 ),
                                                                                                                      For the Council
 Having regard to the opinion of the Economic and Social                                                               The President
 Committee ( 5 ),                                                                                                        G. SHAW
(') OJ No L 63 , 5 . 3 . 1974 , p. 16 .
( 2 ) OJ No L 330 , 24 . 12 . 1975 , p . 52 .
( 3 ) OJ No L 35 , 9 . 2 . 1979 , p. 8 .
( 4 ) OJ No C 322 , 15 . 12 . 1986 .
( 5 ) OJ No C 333 , 29 . 12 . 1986 .
 ---pagebreak---  ---pagebreak--- 31 . 12 . 86 Official Journal of the European Communities No L 385 / 3
             ANNUAL ECONOMIC REPORT
                               1986 / 87
 ---pagebreak--- No L 385 / 4                                Official Journal of the European Communities                    31 . 12 . 86
                                               ANNUAL ECONOMIC REPORT 1986 / 1987
                                                                CONTENTS
                              Part I — Reduction of unemployment in a more dynamic European economy
                                 For an effective implementation of the cooperative Community strategy
                                                                                                       Page
             1.      Summary and conclusions                                                              6
             2.      Evolution of the economy and convergence                                            11
             2.1 .   The world economy                                                                   11
                     Box : Economic consequences of the oil price counter-shock                          16
             2.2 .   The economic outlook in the Community                                               18
             2.3 .   Nominal and real convergence in the Community                                      25
             3.      The cooperative growth strategy for more employment                                 36
             3.1 .   Objectives and methods                                                              36
             3.2 .   Forecasts for 1986 and 1987 seen from the viewpoint of the cooperative strategy     39
             3.3 .   Macroeconomic policy imperatives in 1987 and beyond                                 41
                     Box : Medium-term scenarios for the cooperative strategy                            48
             4.      Contribution of policies to the cooperative strategy                                49
             4.1 .   Monetary guidelines and coordination questions                                      49
             4.2 .   Budgetary policy                                                                    54
             4.2.1 . Budget deficits , public debt , growth and employment                               54
             4.2.2 . Public expenditure , taxation , growth and employment                               55
             4.3 .   Wages and the labour market                                                         60
             4.3.1 . Incomes and wage costs                                                              60
             4.3.2 . Adapting the labour market for more employment-creating growth                      62
             4.4 .   The adaptability of markets                                                         65
             4.5 .   Financing Community policies : the budget and financial engineering                 68
             4.6 .   Social dialogue                                                                     71
             4.7 .   International economic policy coordination                                          72
 ---pagebreak--- 31 . 12 . 86                             Official Journal of the European Communities                             No L 385 / 5
                                           Part II — Economic policy in the Member States
                                                                                                             Page
             Application of the cooperative growth strategy for more employment in the Member States in 1987  75
             Belgium                                                                                          76
             Denmark                                                                                          79
             Federal Republic of Germany                                                                      82
             Greece                                                                                           85
             Spain                                                                                            88
             France :                                                                                         91
             Ireland                                                                                          94
             Italy                                                                                            97
             Luxembourg                                                                                      100
             Netherlands                                                                                     102
             Portugal                                                                                        105
             United Kingdom                                                                                  107
 ---pagebreak--- No L 385 / 6                               Official Journal of the European Communities                                   31 . 12 . 86
                                                                ANNEX
                                                                PART I
                  REDUCTION OF UNEMPLOYMENT IN A MORE DYNAMIC EUROPEAN ECONOMY
                                      FOR AN EFFECTIVE IMPLEMENTATION OF THE
                                           COOPERATIVE COMMUNITY STRATEGY
                                                1.   SUMMARY AND CONCLUSIONS
1.1 .  In adopting the last Annual Economic Report                          compared with the trend in recent years , when
       ( 1985 / 86 ), after taking note of the favourable                   unemployment has been rising or remaining station­
       opinions of Parliament , the Economic and Social                     ary at a high level .
       Committee and the European social partners , the
       Council endorsed the Commission's proposed                           However , such progress does not yet mean full
       'cooperative growth strategy for more employment' in                 employment . There remains an urgent need for
       the Community .                                                      complementary measures , particularly as regards
                                                                            youth unemployment and long-term unemployment ,
        The aim of the strategy is to achieve a significant and             if relatively large groups of the population are not to
       lasting reduction of unemployment over a period of                   be left jobless for a long time to come . The political
       several years . Unemployment in Europe is the result of              and social long-term implications of such a
       serious economic and social disequilibria . It cannot be             development could be disastrous . The sectoral and
       overcome with ad hoc measures that merely treat the                  regional changes associated with the necessary
       symptoms . The Community strategy takes both the                     adjustment       of      production    structures     and
       macro- and microeconomic , as well as the social                     technological progress also require back-up measures
                                                                            to take account of the social dimension : the faster the
       aspects of the problem , into account and attempts to
       tackle unemployment at its root . At a macroeconomic                 Community economy regains its momentum , the
       level , this means that there must for some time to come             easier it will be to deal with problems here .
       be continued moderation in the growth of real wages ,
       but that at the same time there must be an appropriate               If the Community strategy is to be successful , there
       evolution of demand conforming to stability                          must be evolution , in some cases substantial , in
       requirements . This combination will strengthen                      economic policies and behaviour compared with the
       profitability , investment and employment . At the                   past . Such changes are under way . They must be
       microeconomic level , paying due regard to the social                speeded up and consolidated . It is a question of
       aspects , the adaptability of markets for goods ,                    ensuring that economic agents make a balanced
       services , capital and labour must be improved , and , in            contribution to the success of the strategy and that the
       particular , the establishment of new firms , the                    acceptance of economic policy is reinforced . The
       development of vocational training and the                           social dialogue at Community level , and in particular
       introduction of new technologies must be promoted .                  at national level , is therefore an important instrument
       This will facilitate the necessary structural change ,               in implementing the strategy .
       generate a new economic impetus and make it possible
       to improve further the competitiveness of the
       European economy , taking advantage of the large               1.2 . This Annual Economic Report 1986 / 87 examines
       European internal market .                                           economic trends and outlook and updates economic
                                                                            policy guidelines in the light of the Community
       The more dynamic and more employment-creating                        strategy .
       growth resulting from such a policy was illustrated
       with an annual rate of some 3 to 3,5 % at Community
       level for the period 1986 to 1990 . This might be              1.3 . The Community 's economic environment has
       associated with average employment growth of some                    changed considerably as a result of the fall in oil
       1 to 1,5 % a year , which would allow the average                    prices , the normalization of the dollar exchange rate
       unemployment rate in the Community to be brought                     and the fall in interest rates . The oil-consuming
       down by just under four percentage points by                         industrial countries have never experienced such a
       1990 ( 1 ). This would represent major progress                      sharp improvement in their terms of trade in so short a
                                                                            period of time in the post-war years . The devaluation
                                                                            of the dollar took place against a background of better
1   1990 : EUR 10 some 7% , EUR 12 some 8%                                  coordination , to which the Plaza agreement in
 ---pagebreak--- 31 . 12 . 86                               Official Journal of the European Communities                                  No L 385 / 7
       September 1985 and the results of the Tokyo Summit                        or manufactured output , these countries could be
       in May 1986 contributed . The fall in interest rates                      constrained to reduce further their growth and
       constitutes welcome , but insufficient , assistance for                   their imports .
       the highly indebted developing countries . The recent
       negotiations on Mexico's foreign debt and domestic
       adjustment policy can also be seen as an example of
       positive developments . The agreement reached in                     But even if there is a favourable development of the
       Punta del Este in September 1986 to start a new round                world economy , the Community will not be receiving
       of multilateral trade talks in the framework of GATT                 any great stimulus towards growth from world trade
       lends strength to the hope that the trend towards                    in the next few years . This is due to the nature of the
       protection can be halted and reversed .                              necessary process of adjustment : a reduction in the
                                                                            huge United States trade deficit , and consolidation of
                                                                            the position of the OPEC and developing countries .
                                                                            For the Community , this is a further reason to
                                                                            reinforce international cooperation to facilitate the
       Despite these positive developments at international                 necessary adjustments at the world level and intensify
       level , considerable efforts are still necessary if the              its effort to augment its own growth potential .
       major problems facing the world economy are to be
       solved . There remains an urgent need to improve the
       international monetary system . If there is to be a
       return to an acceptable distribution of current account
       balances at world level , there must be a gradual              1.4 .  Within the Community, the moderate upswing is
       reduction in the United States budget deficits and                   continuing in 1986 , and will probably persist in 1987 .
       expansionary fiscal measures in Japan , together with a              According to forecasts , growth in real GDP should
       further rise in the value of the yen . The most                      accelerate slightly ( 1985 : 2,4% ; 1986 : 2,5% ; 1987 :
       important contribution that the Community and the                    2,8 % ) but it has not yet reached the level which would
       EFTA countries can make to this international process                be possible and necessary in order to secure a
       of adjustment is to reinforce their own growth on solid              substantial and lasting fall in unemployment in the
       foundations . An adequate expansion of world trade                   Community . Certainly , the threshold beyond which
       depends therefore basically on a stronger growth in                  economic growth produces higher employment is now
       Japan and Europe . Moreover , the problem of the                     appreciably lower than it was in the sixties or
       heavily indebted developing countries can be resolved                seventies . An increase of some 0,8 % in employment is
       only in the longer term against a background of                      expected in 1986 and 1987 . The labour force is
       stronger world-wide growth .                                         continuing to grow , however , which is due less and
                                                                            less to demographic factors and increasingly to
                                                                            changing labour market behaviour ; the average
                                                                            unemployment rate in the Community will fall only
                                                                            slightly ( EUR 9 : 1985 : 11,1% ; 1986 : 11% ; 1987 :
       However , compared to present forecasts , the growth                 10,8% ). This is still thoroughly unsatisfactory .
       prospects for world trade could be significantly
       reduced by the serious risk factors weighing upon the
       international economic environment . These risks can
       be identified as follows :                                           Similarly unsatisfactory is the pattern of growth
                                                                            across the regions and Member States of the
                                                                            Community. Before the first oil shock , the
       — a significant further devaluation of the dollar or                 less-developed regions and countries were clearly
           uncontrolled movements of exchange rates .                       catching up in terms of real GDP per head , but this
                                                                            process has since come to a halt or has even partially
                                                                            been reversed . In 1986 and 1987 there seems still to be
       — an insufficient or inappropriate adjustment                        no real convergence under way . Promotion of this
           process in Japan and the United States which could               process is an essential element in reinforcing the
           lead to a rapid increase in protectionism - in spite             economic and social cohesion of the Community .
           of the intentions declared at Punta del Este - , a
           recession in the United States or a resurgence of
           inflation ,
                                                                            In overall terms , growth in the Community now
                                                                            derives from internal demand. This shift occurred in
       — a major further change in the price of oil ,                       the first half of 1986 , hesitantly at first , and meant
                                                                            that last spring's growth forecasts for 1986 had to be
                                                                            revised downwards slightly . The dynamic elements in
       — an aggravation of the situation of the developing                  real   domestic    demand     are  now    investment  in
           countries : confronted with the continued drop in                equipment ( 1986 : 6,1% ; 1987 : 6,9% ) and private
           the terms of trade for the primary materials which               consumption ( 1986 : 3,7% ; 1987 : 3,5 % ); investment
           they export and a lack of sufficient external                    in construction is recovering , while public
           financing or growing outlets for their agricultural              consumption continues to grow very slowly . Despite
 ---pagebreak--- No L 385 / 8                             Official Journal of the European Communities                                     31 . 12 . 86
     the worsening in the real current account balance for                will take account of the lower rate of inflation in most
     goods and services , which has negative repercussions                countries . Concerning this last point , the importance
     on growth , the Community's nominal current account                  of the social dialogue is evident.
     surplus is continuing to rise temporarily ( 1985 : 0,5 %
     of GDP ; 1986 : 1,2% ; 1987 : 0,9% ).
                                                                    1.5 . The clear improvements in supply-side conditions
     These developments primarily reflect the considerable                achieved over the last few years and the positive effects
     improvement in the terms of trade as a result of the                 of the fall in the price of oil are not sufficient to move
     falling price of oil and the devaluation of the dollar .             the Community spontaneously towards a path of
     The Community's oil bill has been halved ; the                       adequate and employment-creating growth allowing
     purchasing power of private households will increase                 unemployment to be reduced in the way which is
     considerably in 1986 and 1987 in most countries ; yreal              desired . Medium-term studies show that , despite the
     wage costs per head show practically no increase in                  better conditions , the average growth rate for the
     1986 , but could speed up again in 1987 ; the                        years 1986 to 1990 could continue to lie below 3 % ,
     profitability of firms has improved , even if the                    and that in these circumstances unemployment in the
     Community average is still far below the level which                 Community of Twelve could still be above 10% in
     obtained before the first oil shock ; in some                        1990 . One reason is that , in the next few years , there
     Community countries , the improvement in the terms                   will be no strong stimulus towards growth coming
     of trade has partially been used to take measures in                 from the international environment . The Community
     order to relieve the pressure on public budgets .                    cooperative growth strategy for more employment,
                                                                          which was adopted last year and is summarized in
                                                                          point 1.1 above , has not lost its relevance . Quite the
                                                                          reverse , it must now be implemented deliberately and
                                                                          with determination. It is in this way that the
                                                                          improvement under way in supply conditions and
     The sustained growth of investment by enterprises                    behaviour can be put to the service of a faster growth
     which is apparent in 1986 and forecast for 1987 not                  of employment and that the favourable conditions
     only supports demand but also leads to an increase in                resulting from the fall in the oil price and lower
     productive capacity. However , the overall level of                  inflation can be best exploited . If this opportunity is
     investment: in the Community ( as a percentage of                    not seized in 1987 and 1988 , it will no longer be
     GDP ) remains about four points lower than its level                 possible to reduce unemployment in the Community
     before the first oil shock , and the increase in                     significantly by the end of the decade .
     productive capacity and creation of new jobs still need
     to accelerate progressively . An increased investment
     effort therefore remains necessary for several years .
                                                                          The effective implementation of the Community
                                                                          strategy for growth and employment is also an
                                                                          important element for achievement of the major
                                                                          projects and tasks that the Community is committed
     There has been a further fall in inflation rates, and a              to in the medium-term . In this context , there is a
     strengthened convergence towards greater stability .                 particular link of mutual reinforcement . The
     This favourable development is also largely due to the               encouragement of technological advance and the
     improvement of the terms of trade . The fall in import               completion of the internal market will supply an
     prices , notably for oil products , puts a brake on the              essential boost to the economic potential and
     rise in the consumer price index and leads , in most                 competitivity of the Community ; simultaneously , the
     countries , to a slower growth in nominal wages and                  achievement of this task will be significantly aided -
     costs . But this must also be regarded as a success for              from the social point of view also - if implementation
     the more convergent stabilization policies pursued for               of the strategy leads effectively to a more vigorous and
     several years in the EMS and the Community . The                     employment-creating growth . This growth should
     average inflation rate in the Community (private                     greatly help the catching-up process of backward
     consumption prices 1986 : 3,7% ; 1987 : 3,0% ) has                   regions and the reconversion of declining industrial
     now fallen to a level which has not been seen                        regions ; simultaneously , the reinforcement of the
     for 20 years . This greater stability and price                      economic and social cohesion of the Community and
     convergence must be maintained and consolidated .                    the renewal of the process of real convergence should
     Some optimism seems justified in this regard . Even if               contribute to increasing the economic potential and
     capacity utilization rates have risen , the recovery in              dynamism of the Community . Finally , growth with
     investment is beginning to contribute to an increase in              stable monetary conditions should facilitate the
     capacity , and the point at which tensions appear may                development of the EMS and monetary cooperation ;
     be receding . Moreover , the evolution of import prices              at the same time the creation of a zone of monetary
     does not seem to imperil internal stability in 1987 and              stability encourages trade , reinforces integration and
     there are chances that the growth of nominal wages                   dilutes the impact of external shocks .
 ---pagebreak--- 31 . 12 . 86                                Official Journal of the European Communities                                  No L 385 / 9
1.6 .   In 1987 and during the following years , the effort to                themselves more easily sustain private consumption
        improve supply conditions and the adaptability of                     and , at the same time , produce additional revenue for
        markets must be pursued . However , when the positive                 the public authorities as well as lower expenditure .
        impact of the improvement of the terms of trade fades ,
        it will be necessary to sustain internal demand,
        consistently with the goals of medium-term
        consolidation of public finance .
                                                                       1.7 .  Public finance policy has an important but
                                                                              particularly difficult role to play in implementing the
                                                                              Community strategy . The goal of medium-term
                                                                              consolidation of public finances should be further
        Business investment should and can be the most
                                                                              pursued . At the same time , it is important that all
        dynamic factor . It would suffice that present trends                 existing and future room for manoeuvre should be
        become more dynamic to arrive at the expansion                        exploited in a determined fashion , and as quickly as
        necessary for achievement of the objectives of the                   possible , in order to improve the conditions governing
        Community strategy . Any investment is , of course ,                  supply and demand through the lowering of taxes and
        based on a realistic economic assessment ; this is why it             social security contributions and by stepping up public
        is important to pursue efforts to improve profitability ,            investment . This margin comes from supplementary
        reduce real interest rates on a sound basis and promote              receipts and lower expenditures resulting from more
       the use of risk capital . However , the decision to invest            vigorous growth and the increase in employment .
        also depends upon confidence and entrepreneurial                     However , the room for manoeuvre available to the
        readiness to take risks ; thus a positive influence                  various Member States differs very considerably . The
        must be brought to bear on these attitudes . The                     situation appears to be most favourable in Germany
       contribution of entrepreneurs therefore is to respond                 and Luxembourg . In France , existing room for
       to increasing profitability with higher , and more                    manoeuvre is being used , large tax reductions already
       job-creating investment .                                             being foreseen for 1987 and supplementary
                                                                             reductions announced for 1988 , while the budget
                                                                             deficit would be simultaneously reduced in each of the
                                                                             two years . If growth were to strengthen still further
       Public investment and in frastructure investment in the               abroad , and , particularly in the Community ,
       broader sense, which must not all be financed from                    budgetary policy in France would be facilitated all the
       public funds , should likewise form a dynamic                         more . In the United Kingdom , the Government , in its
       component of demand . Public investment has suffered                  autumn statement , provided for an increase in public
       from the consolidation of public finance; since the                   expenditure of some £4 750 million in 1987 / 88 . This
       beginning of the 1970s , its share of Community GDP                   will mean that public expenditure in 1987 / 88 is
       has declined by almost 1 ,5 percentage points . There is              planned to be about 2 % higher in real terms than the
       now a need to make up for the ground lost as far as                   estimated out-turn in 1986 / 87 . On the other hand ,
       economically viable projects of this kind are                         the persistent , excessively high deficits and the level of
       concerned . Here , the necessary initiatives must be                  the public debt in Belgium , Greece , Ireland , Italy and
       taken , both at national and Community level , and the                Portugal mean that priority must continue to be given
       private and public resources required must be made                    to the consolidation of public budgets . In recent years ,
       available . The room for manoeuvre enjoyed by the                     Denmark has shown that this can be campatible with a
       public authorities as a result of restructuring and                   favourable trend in business investment and in
       additional revenues or decreased expenditure through                  employment . Although , in the final group of countries
       growth and employment should , to some extent , be                    ( Denmark , Spain , the Netherlands ), budgetary
       exploited in implementing such projects .                             constraints are less severe , other factors in the
                                                                             foreseeable future limit the scope for macroeconomic
                                                                             action .
       In the next few years , private consumption, as the
       biggest aggregate in domestic demand , can also
       sustain demand . The moderate increase in real wages ,                In 1987 and 1988 it will therefore probably only be
       increased employment and the lowering of taxes and                    possible for a small group of countries to use
       social security contributions , due to the use of                     budgetary policy to exert an overall influence on
       increased budgetary room for manoeuvre , enable                       supply and demand conditions . It is also of
      private consumption to rise in the medium term at real                 importance that the number of such countries is
      rates of growth which approximate to GDP growth                        increasing as the economic recovery is further
      rates . In this connection , it is important that                      progressing . This beneficial chain reaction must be
      reductions in taxation and social security                             reinforced through concerted action . In addition , all
      contributions are effected relatively early on , while                 Member States continue to have supplementary room
       adhering to the goal of medium-term consolidation of                  for manoeuvre to create more favourable conditions
      public finances . At a later stage , when the profitability            for increasing employment through the restructuring
      of firms has strengthened and there is a greater                       of public revenue and expenditure ( including the
      increase in employment , growth in employment and                      selective dismantling of subsidies ). These possibilities
      gradually accelerating increases in real wages can                     should not be underestimated and an exchange of
 ---pagebreak--- No L 385 / 10                              Official Journal of the European Communities                                    31 . 12 . 86
       experiences should take place . The principle of                      should rapidly show up in a stronger rise in
       restructuring should also apply to the Community                      employment . Some reduction of social security
       budget .                                                              contributions could also help to strengthen
                                                                             employment . However , this should rely on the use of
                                                                             available financial headroom and should not affect
                                                                             either the quality of social protection regimes or their
1.8 .  Despite the considerable changes that have occurred                   financial balance . Moreover , adjustments of certain
       in the international monetary environment , the basic                 excessive or outdated labour market rules and
       principles governing monetary policy in the                           regulations could help to create new jobs . A large
       Community do not need to be adapted . The aim of                      number of initiatives to promote job creation ,
       monetary policy should continue to be appropriate                     especially for the self-employed and in small
       financing of the available scope for real growth and , at             businesses , have been taken or are being examined ;
       the same time , consolidating and , where necessary,                  they should be encouraged and experiences in this
       extending the successes that have already been                        field exchanged .
       achieved in regard to the reduction in inflation rates .
       Until now , the task of monetary policy has been
       greatly     facilitated    by     external     economic               In many cases , the measures to improve the
       developments . The devaluation of the dollar and the                  adaptability of markets , and in particular , the labour
       decline in oil prices and United States interest rates                market , have important social repercussions that
       have created further headroom for interest-rate cuts                  should be discussed in detail with the social partners .
       without posing any risks on the inflation front . A                   Some of them are largely a matter of free collective
       further sharp fall in the dollar might require a flexible             bargaining between the two sides of industry . This is
       response on the part of interest rates in Europe in                   true , for example , of the reorganization and reduction
       order to counter the danger of a renewed overshooting                 of working time , which can likewise make the growth
       of the dollar , together with the adverse repercussions               process more employment-creating provided it has a
       this would have in the medium term . However , care                   neutral impact on the level of costs .
      must be taken here to ensure that there is no new
       build-up of inflationary potential . The erosion of
      inflationary expectations and the stronger trend of                    In this connection , the principle set out in last year's
       aggregate saving are also expected to bring about a fall              Annual Economic Report should continue to apply ,
      in long-term real interest rates on a sound basis in                   namely : 'The spirit in which the debate about market
      most countries . This is consistent with the strategy .                adaptability is held is important for its success . The
      The EMS has shown itself to be a stabilizing factor .                  objective behind efforts to increase flexibility is not to
      Closer convergence coupled with moves to liberalize                    destroy achievements made on the social front but to
      capital movements has accentuated the need for                         create more jobs . As far as at all possible , therefore ,
      tighter economic policy coordination , not only                        economic efficiency should be reconciled with the
      domestically between monetary policy , budgetary                       maintenance and further development of social
      policy and income trends but also between Member                       achievements .'
      States . The progress that has been made in
      establishing a zone of monetary and currency stability
      is reducing the dependency on external influences .
      This provides a sound basis for further progress in            1.10 . If the Community growth strategy' for more
      integrating the economies of Europe .                                 employment is to be successful, it is important that the
                                                                            guidelines it contains should also be translated into
                                                                            practice in all Member States . This is true both of
                                                                            macroeconomic and microeconomic measures in the
1.9 . The measures to improve market adaptability and the                   economic policy field and of the social dialogue at
      business environment , to foster the establishment of                 Community and national level .
      new and , in particular , small and medium-sized
      businesses , to promote vocational training as well as
      to encourage the development and application of new                   In its communication , due for presentation to the
      technologies , must be advanced as a matter of                        Council ( Economic and Financial Affairs ) in July
      priority . Completion of the internal market is an                    1987 , the Commission intends to conduct an interim
      essential element for reinforcing competition and                     assessment of the way in which the Community
      improving markets . Labour market policy is                           strategy is being implemented . Discussion of the
      especially important for the achievement of                           Commission's interim assessment could provide the
      employment-creating growth . The social partners                      Council ( Economic and Financial Affairs ) with an
      should continue to pursue moderate real wage                          opportunity to fulfil the mandate assigned to it by the
      increases conducive to employment until such time as                  European Council of The Hague 'to follow progress in
      employment-creating investment becomes sufficiently                   implementation of the cooperative growth strategy
      profitable and the unemployment rate shows a                          adopted at the end of 1985 .' In this context , and in
      continuing marked decline from one year to the next .                 order to facilitate this work , the Commission invites
      Substantial progress has been made in moderating real                 governments of the Member States to submit by the
      wage increases in most countries in recent years and ,                beginning of May a short report on the initiatives and
      provided there is adequate growth in demand , this                    tangible economic policy measures taken by them in
 ---pagebreak---  31 . 12 . 86                                Official Journal of the European Communities                                  No L 385 / 11
         their   own    country.     These      reports,   possibly             Directive 74 / 121 / EEC of 18 February 1974 on
         accompanied by reports compiled by the social                          stability , growth and full employment in the
         partners , could be discussed in the Economic Policy                   Community 0 ), to take the necessary initiatives ,
         Committee and as a part of the European social                         taking into account the particular conditions in
         dialogue .                                                             individual countries .
                                                                                In addition , the Commission invites the social
         At national level , the social level , the social dialogue             partners to engage , if appropriate on their own
         on the various aspects of the Community strategy has                   initiative , in dialogue at the national level on the
         not made sufficient headway in many countries . The                    themes of the Community strategy .
         Commission is , therefore , calling on Member States'
         Governments , pursuant to Article 3 of Council                 (') OJ No L 63 , 5 . 3 . 1974 , p. 19 .
                                    2.    EVOLUTION OF THE ECONOMY AND CONVERGENCE
 2.1 . The world economy                                                A halving of the dollar price implies a fall in the cost of the
                                                                        western world's consumption of some US $ 220 000 million .
                                                                        Over a half of this oil is traded internationally implying lower
                                                                        payments to net oil-exporting countries from net oil
In the last 18 months , there have been three striking                  importers of about US $ 120 000 million . The fall in the
 developments in the world economy — the halving of dollar
                                                                        Community's total oil bill ( including domestic production ),
oil prices , a correction of the dollar's overvaluation and the
reduction in interest rates . All of these three interconnected
                                                                        based on 1985 consumption levels , is worth some 85 000
                                                                        million ECU ( 2,5 % of GDP ), while the net oil import bill
developments will help the world economy move back                      will fall by some 60 000 million ECU ( 1,8 % of GDP ).
towards a more stable growth path in the medium term .
Nonetheless , the short-term forecast of world economic
growth is not much more optimistic than it was at this time
last year. Growth in the OECD area as a whole is expected to
be about 2,5 % in both 1986 and 1987 , slightly less than in            The slowing of inflation caused by the oil price cut has
 1985 .                                                                 helped in the lowering of interest rates . In the United States ,
                                                                        short-term rates declined by 1 V2 percentage points in the year
                                                                        to July 1986 , while long-term rates declined even more , by
                                                                        2 V2 percentage points . There were similar falls in the
Oil prices have fallen from a range of US $ 25 to 30 per barrel         Community (where short-term rates also declined by 1 V2
in 1985 to US $ 10 to 15 per barrel during the course of this           percentage points and long-term rates by 2 percentage
year. The proportionate fall is even greater measured in                points ). The marked easing in monetary policy , especially in
European currencies . Thus the spot oil price fell in dollars by        the United States , has significantly contributed to these
around 50 % in the 12 months to September 1986 ; in ECU it              interest-rate movements ( see Graphs 8 and 9 ).
fell some 65% . The impact will not be limited to the oil
market itself but there will also be widespread indirect
effects , namely the reduction in the oil bill , the
disinflationary impulse , the beneficial consequences for              Lower oil prices and interest rates lead to higher profitability
potential output in industrial countries and thus the                  in energy consuming industries , with the likelihood that
possibility of economic policies consistent with a faster rate         industrialists may either increase new investment or delay
of growth . A halving of the price of oil is unprecedented and          scrapping of older plant . This would imply a certain
the effects on the world economy cannot be predicted at all            'supply-side' increase in potential output .
surely .
Prices as low as US $ 10 to 15 per barrel are expected to              The widespread falls in interest rates are a welcome but
induce a significant increase in oil consumption and a greater         insufficient help for the heavily indebted developing
energy intensity of growth which would be even more                    countries . A generalized decline in interest rates of 1
marked if domestic prices of other energy sources were to              percentage point is worth around US $ 7 000 million per
adjust to this fall . Domestically , this risks accentuating           year to the indebted developing countries (reflecting the
problems associated with the protection of the environment .           extent of their short-term or floating rate debt). However ,
Externally , allied to the fall in oil supply from producing           at the same time , the indebted developing countries have
countries , a marked increase in consumption of oil and                suffered a further deterioration of their terms of trade
oil-based products would increase the probability of a rapid           (- 1,7% in 1985 ) and a fall in their export earnings
recovery in their price .                                              (- 1,6% in 1985 and - 0,9% forecast for 1986 ). As a
 ---pagebreak---  No L 385 / 12                                Official Journal of the European Communities                                           31 . 12 . 86
 result , they incurred a larger deficit on current account and          countries have improved greatly in 1986 ( by 7 V2 % but by
 were on the whole unable to increase their growth rate                  more than 30% excluding intra-OECD ) trade ), the largest
 ( 4,1 % in 1985 and 3,3 % forecast for 1986 ). In particular ,          improvement recorded since the war . However , the volume
 the oil exporters ( mainly OPEC but also Mexico , China and             of world imports ( excluding the Community), weighted by
 Malaysia ) face a period of austerity , implying a cut in               the Community's market shares , is likely to grow only very
 imports . The prospects are , however , better for some newly           slowly ( about 1,3% in 1986 , 2,4% in 1987 ). This
 industrialized countries ( for example Taiwan and South                 underlines the growing need for a domestically generated
 Korea ) where the alignment of their currencies to the                  economic expansion in Europe as a whole .
 weakening US dollar has given them a great competitive
 advantage .
                                                                         Present economic indicators signal for 1987 neither strong
 The fall in the dollar to date , although large ( 33 % against the      growth nor a recession in the world economy . However ,
 ECU in the 18 months to September 1986 , 40% against the                there are risks attached even to this rather moderate outlook ,
 yen ), is not on its own sufficient to equilibrate rapidly the          and the hypothesis of the Commission as regards world trade
 United States trade account . In the first half of 1986 , the fall      could prove to be optimistic . Thus :
 in oil prices countered the effects on the terms of trade of the
 dollar's devaluation . However , dollar oil prices are not , in
 the Commission's short-term forecasts , expected to fall much              ( i ) The depreciation of the dollar has not yet led to an
 further , so rising non-oil import prices will thereafter worsen                 acceleration of inflation in the United States . However ,
 the terms of trade . In time, this will lead to an adjustment in                 it is probably only a matter of time before the dollar's
 United States export-import volumes ; but for 1986 and                           depreciation results in more marked import prices for
 1987 , it is not yet possible to anticipate an improvement in                    the United States , and some upward adjustment of
 the trade deficit since expenditure on imports could increase                    world commodity prices denominated in dollars .
 faster than receipts from exports (J-curve effect ). Moreover                    Therefore , the risk of resurgent inflation should not be
 the current account is being progressively weighed down                          underestimated . If a contractionary budgetary policy
 with the interest service burden of the accumulating foreign                     required to reduce the budget deficit were to coincide
 debt of the United States . These factors mean that the United
                                                                                  with a tightening of monetary policy either to prevent
 States current account deficit is expected to remain well in                     an excessive fall of the dollar's exchange rate or to
excess of US $ 100 000 million in 1986 and 1987 . The
                                                                                  choke off a rapid increase in inflation , then a recession
 surpluses of the Community and Japan will increase                               there could well result ;
 substantially in 1 986 because of the oil price effect . As a share
of GDP , Japan's surplus could be over 4% in 1986 , a
percentage four times greater than that of the
Community .                                                               ( ii ) Oil prices could recover more rapidly than presently
                                                                                  expected , especially if, as began to be the case already in
                                                                                  mid-1986 , OPEC-countries were able to act in concert
                                                                                  to restrict output . It is possible that the fixing of quotas
As regards domestic adjustment policies in the United States,                     by the OPEC countries in mid- 1986 has already begun
the Gramm-Rudmann-Hollings Deficit Reduction Act ,                                a movement in this direction . However , it must be
enacted at the end of 1985 , sought to impose rigid budgetary                     recognized that the oil price is now potentially volatile
                                                                                  in both directions .
discipline reducing the federal budget deficit to zero over five
years . However , the outlook for the achievement of this
objective remains uncertain . Nevertheless , the pressure for
deficit reduction from the US $ 230 000 billion level of fiscal
                                                                        ( iii ) The international debt and banking system as a whole is
year 1986 is strong , implying a restrictive US fiscal policy for                 still exposed to the possibility of major country defaults
several years . Budgetary policy in Japan remains geared                          stemming from high international indebtedness and the
towards the objective of strengthening the public finances in                     rather unsatisfactory outlook for developing
the medium term . In the autumn , a programme of measures                         countries .
supporting domestic demand was , indeed , adopted by the
Government including , in particular , accelerated spending of
3 000 000 000 000 yen ( 1% of nominal gross domestic
product ) on public works . Despite these measures , it appears
nevertheless that the repercussions of the gains in the terms of        In the last year, the world economic environment has
trade to the whole economy , and in particular to consumers ,           changed dramatically with the lower oil price and dollar
are only coming through unevenly and have not as yet                    exchange rate and lower interest rates . The magnitude and
generated the stimulatory effect which was initially                    the suddenness of the associated improvement in the terms of
expected .                                                              trade of the oil consuming industrialized countries is
                                                                        unprecedented in post-war history. It should be expected that
                                                                        domestic demand in the industrialized countries will be
                                                                        strong enough to avoid a slowdown in the trend of world
The overall growth in world trade of manufactures should                demand and output. However, the economic adjustment
remain moderate . The terms of trade of the industrialized              process will take time and there is a danger of disruptions in
 ---pagebreak---  31 . 12 . 86                                     Official Journal of the European Communities                                      No L 385 / 13
 this process towards a new, more balanced state of the world                     accelerate the process of correcting the major balance of
economy. Industrialized countries in particular must                              payments disequilibria . The debt situation of the developing
implement specific, coordinated policies in order to benefit                       countries is also still precarious, and represents a risk to the
fully from the improved supply side conditions and to                              international economy.
                                                                          TABLE 1
                                                             World output , trade and prices
                                                                                       1984         1985         1986        1987
               Real gross domestic product —
                % change on preceding year:
               EUR 12                                                                     2,2         2,4           2,5        2,8
               Other OECD                                                                 5,5         3,4           2,6        2,4
               — USA                                                                      6,5         2,8           2,8        2,3
               — Canada                                                                   5,0         4,5           3,3        2,8
               — Japan                                                                    5,7         4,5           2,0        2,4
               — rest OECD                                                                3,3         3,6           2,5        2,4
               Total OECD                                                                 4,4         3,0           2,6        2,5
                Volume of world inports —
                % change on preceding year:
               Including EUR — world import weights                                       9,3         3,4           3,8        4,4
               Excluding EUR — world import weights                                      10,4         2,2           2,3        3,1
               Excluding EUR — EUR markets weights                                        7,5         1,9           1,3        2,4
                World export prices in US $ —
                % change on preceding year:
                Raw materials excluding fuels                                           - 1,5      - 10,5           3,2      - 1,6
                Crude oil ( fob )                                                       - 4,5       - 3,0       - 47,3      - 12,9
                Manufactured products                                                   - 2,8       - 1,2          17,3        4,0
               Balance on current account — billions of US S.­
               EUR 12                                                                     2,8        14,4         50,5        43,5
               Other OECD                                                             - 67,5       - 74,4       - 65,8      - 75,5
               — USA                                                                 - 101,6      - 117,7      - 139,5     - 140,5
               — Canada                                                                   1,9       - 1,7         - 5,4      - 6,5
               — Japan                                                                   35,1        49,2          85,0       79,0
               — rest OECD                                                              - 3,0       - 4,3         - 6,0      - 7,6
               Total OECD                                                             - 64,7       - 60,0       - 15,3      - 32,0
               OPEC countries                                                           - 6,0         1,4       - 32,2      - 24,8
               Other developing countries i 1 )                                       - 20,0       - 22,2       - 22,3      - 21,2
                Other countries ( 2 )                                                    25,2         5,0         - 1,4      - 0,7
               Errors and omissions                                                   - 65,5       - 75,8       - 71,1      - 78,6
               ( ! ) Other developing countries include China , Yugoslavia and South Africa .
               ( 2 ) Other countries exclude intra-Comecon trade .
               Source: Commission services ( based on October economic forecasts ).
 ---pagebreak--- No L 385 / 14                               Official Journal of the European Communities                                            31 . 12 . 86
                                                                   TABLE 2
                 The savings / investment balance for the United States , Japan and the Community (% of GNP / GDP)
                                                              Source of funds                                  Use of funds
                                                Private
                                                                                                      Current              General
                                                                  Private            Surplus          account       +       Govt ,
                                                savings         Investment           savings
                                                                                                       surplus              deficit
            USA       1985                       17,2              16,6                 0,6             - 2,9       +        3.5
                     1986                        16,4              16.5               - 0,1             - 3,5       +        3,4
                     1987                        15,9              16.6               - 0,7             - 3,3       +        2.6
            Japan    1985                        32,9              28,0                 4,9               3,7       +        1,2
                     1986                        34,2              28,9                 5,3               4,3       +        1,0
                     1987                        33,5              29,5                 4,0               3,5       +        0,5
            EUR 12 1985                          21,7              16,1                 5,6               0,5       +        5,1
                     1986                        22,4              16,5                 5,9               1,2       +        4,7
                     1987                        22,6              17,0                 5,0               0,9       +        4,1
            NB: National accounts data for USA , Japan and the Community are not on a strictly comparable basis .
            Source: Commission services ( based on October 1986 economic forecast ).
 ---pagebreak--- 31 . 12 . 86                                  Official Journal of the European Communities                          No L 385 / 15
                                                                      GRAPH 1
                                                                   The price of oil
                     Average import prices of crude oil in the Community ( EUR 12 ) in US $ , ECU and in real terms
                                                                (Index 1973 = 100)
             (') Deflated by the price deflator of private consumption .
             Source : Eurostat and Commission services .
 ---pagebreak--- No L 385 / 16                                  Official Journal of the European Communities                                               31 . 12 . 86
             Economic consequences of the oil price counter-shock
             The fall in oil prices is one of the major factors in the economic situation in 1986 . Assuming an oil price
             of US $ 15 a barrel on average in 1986 (a plausible , if not certain , assumption), the decline on the
             1985 dollar price is 45 % . The major depreciation of the dollar against the ECU has further amplified
             this development, with the ECU price of a barrel of oil in 1986 about 55 % down on the 1985 price .
             The extent of the decline , in view of the important role played by oil as a source of energy in our
             economies , suggests that this oil price counter-shock will have major implications for the outlook of
             the economies of Europe .
             These implications will affect both the short-term and the medium-to-long-term outlook, and they
             will extend not only to supply and demand , but also to economic policy. Two preliminary reservations
             must , however , be stated :
             — The assumption is made here of a definitive fall in the oil price . The consequences are thereof
                  assumed to have the necessary time to work through to their full extent ( in contrast to the scenarios
                  presented in the main body of the text where the oil price recovers in the medium term ). As a result ,
                  no delay in the reactions of economic agents is introduced while , in economic reality, uncertainty
                  on the durability of the fall potentially slows down changes in behaviour .
             — Besides , other developments ( e.g. the depreciation of the dollar ) have also occurred in 1986 which
                  interfere with the consequences of the oil counter-shock alone . The favourable effects which can
                 be expected for Europe cannot, therefore, be translated into an immediate and precisely
                 predictable improvement in the European short-term economic situation .
                                                                      TABLE 3
                                 Estimated effects of the decline in oil prices from US $ 27 to 15 per barrel
                                                       Level of              Level of               Level of
                                                         GNP
                                                                                                                     Current balance
                                                                         consumer prices          employment
                                                       ( as % )               ( as % )               ( as % )
                                                                                                                      ( as % of GNP)
                                                  1986          1987     1986          1987    1986           1987   1986        1987
            Estimates of
            the Commission (*)
            Germany                                1,4           1,7    - 1,7         - 2,4     0,9            1,2      1,4        0,3
            France                                0,9            1,9    - 1,4         - 2,2     0,9            1,2      1,5        0,9
            Italy                                 0,3           2,1     - 1,2         - 2,9     0,2           0,7       1,5        0,5
            United Kingdom                        0,3           0,9     - 0,3            0,2    0             0      - 1,4       - 0,7
            EUR 10                                0,9           1,4     - 1,4         - 2,2     0,5           0,9       1,0        0,5
            Estimates of the
            Hermes model ( 2 )
            France                                1,1           1,9     - 3,5        - 4,4     0,3              0,5
            Sources :
            (') These estimates have been made by the Commission services and are not directly based on econometric models . The estimate
                for the Community as a whole ( EUR 10 ) is based on figures for individual countries .
            (2) The Hermes model (Harmonized European research for macrosectorial and energy systems) is based on the assumption that
                30 % of increased profits are invested in the modernization of industry .
 ---pagebreak--- 31 . 12 . 86                                Official Journal of the European Communities                                      No L 385 / 17
             In the short term, two direct effects of the oil price counter-shock will appear : first , income transfers
             from oil-producing countries to net oil-importing countries ; and secondly , widespread reduction in
             the production costs of oil users . If oil prices average US $ 15 a barrel , substantial transfers of income
             will take place ; equivalent to 1,8 points of GDP for the European Community , with marked
             differences between countries depending on their degree of dependence ( ranging from 4,1 points for
             Portugal to - 0,8 points for the United Kingdom ). Taken separately (*), this would lead to a more
             rapid growth in GDP at constant prices , the level of which at the end of two years would be 1,5 %
             higher than that which would have been the case without the fall in oil prices . However , these
             favourable effects will be attenuated by the decline — indeed , probably , the collapse — of imports by
             oil-producing countries , although it seems to be agreed that the overall impact will still be postive for
             European countries . In addition , the fall in oil prices should ease public deficits ( savings in expenditure
             on energy of from 0,1 to 0,5 percentage points of GDP and growth in real terms in the base of taxation
             and other compulsory contributions ).
             The improvement in the terms of trade due to the oil price counter-shock will also lead to a very
             marked decline in the rate of inflation in the European countries (except probably in the United
             Kingdom because of the depreciation of sterling). The decline might be almost 2 % by the end of two
             years . This has already led to a major fall in nominal long-term interest rates ( - 2,0 points from July
             1985 to July 1986 for the Community), while , paradoxically , the decline in short-term rates seems
             more hesitant , as it is strongly associated with exchange-rate movements . The decline in interest rates
             plays an important role because of the improvement in the solvency of borrowers , even in the short
             term , as a function of the percentage of their borrowing that is subject to adjustable rates . The trend
             towards disinflation should also facilitate the task of the monetary authorities .
             In the long-term, the staying power of these effects will depend crucially on whether oil prices remain
             low , but also on economic expectations of oil prices . Even if oil prices were to remain close to US $ 15
             a barrel for some time , they could then begin to rise again under the combined pressure of increasing
             world demand for oil and declining supply . The long-term effects are thereof shrouded in uncertainty .
             Supply effects which , by definition , come through fully only in the medium-to-long term , would arise
             mainly from an increase in profitable capacity . Certain investment plans that would not have been
             implemented without the oil price counter-shock , because it would have been impossible to generate
             adequate profit margins , can now go ahead , owing to the improvement in expected profitability . In
             the early years , this effect may be reinforced by decisions to postpone the scrapping of older
             equipment , which will remain profitable for longer as a result of the fall in oil prices . Although these
             pure supply effects are difficult to evaluate , they might lead to an increase in productive capacity of
             2 to 5 % in the long term for the Community as a whole .
             The fall in oil prices has major consequences for economic policy . It is likely , sooner or later,
             depending on the country concerned , to loosen the various constraints on monetary and fiscal policy
             as inflation declines , public deficits contract and the balance on current account improves in most
             Community countries . The indirect consequences leading to a greater margin for manoeuvre of
             economic policy would increase . This can only help towards the implementation of the cooperative
             growth strategy for more employment .
             (') This figure is based on the ceteris paribus assumption , in particular unchanged economic policy , and is thus
                 additional to the effects of other shocks ( Gramm-Rudman-Hollings Law , weakness of the dollar , etc .).
 ---pagebreak---   No L 385 / 18                              Official Journal of the European Communities                                     31 . 12 . 86
  2.2 .   The economic outlook in the Community                         level , thus becoming the main factor supporting the upswing.
                                                                         The highest growth rate of private consumption , just under
                                                                         5% , will be achieved in Germany .
 The fundamental changes in the economic environment
 mentioned — halving of the oil bill , correction of the US $           Alongside private consumption , investment continues to
 exchange rate , decreases in interest and inflation rates —            support the economic recovery , even though growth rates
 have improved the growth prospects in Europe in the                    here are not as high as those which were typical of earlier
 medium term . However , at the beginning of 1986 , the                 upswings . This is mainly due to less expansionary investment
 economy's upturn , which in any case was rather modest ,               in construction which in 1986 , however , will grow by
 showed signs of faltering . Oil producers had cut their                around 2,3% , after declining in 1985 ( —-2,6% in real
 demand for industrial goods faster than the oil consumers              terms ). Investment in equipment is by contrast still on a clear
 have increased their domestic demand . OPEC and Comecon                upward trend ( real increase around 6% ). This is confirmed
 countries in particular , which in 1985 together accounted for         by the most recent surveys of investment in European
 more than a third of total Community exports to third                  industry . According to this survey , last autuam's already
 countries , even reduce significantly their imports in 1986 ( by       expansionary investment plans of industrial companies for
 around 25 % and 11 % in volume , respectively ). In addition ,         1986 have been revised upwards in nearly all the member
 most non-oil developing countries could barely step up their           countries ( from +7 to + 10% in real terms ). Investment
 imports in 1986 due to external debt problems , low                    growth in industry in 1986 thus remains more buoyant than
 commodity prices and associated lack of foreign exchange .             in the economy as a whole . The relatively strong investment
 Non-Community OECD countries did increase their                        increase in 1985 and 1986 has so far led only to a
 imports , but in total the Community's export markets will             stabilization of the number of industrial jobs in the
 barely expand in 1986 . As a result , in addition to the loss in       Community . This underlines the need for a continued strong
 price competitiveness , Community exports at constant prices           investment trend in the coming years in order to replace the
 could even fall somewhat . It is thus mainly because                   jobs lost as a result of insufficient investment activity in the
 intra-Community imports are buoyant that member                        second half of the 1970s and early 1980s ( see Graph 10 ).
 countries exports in 1986 will increase by about 2,2% in
 volume terms , less than half as much as in 1985 ( 5,7% ).
                                                                        As in recent years , the increase in public consumption is well
                                                                        below the average growth rate of domestic demand (1 ,7 % ).
                                                                        On the whole there will be a marked expansion of domestic
Imports of member countries from outside the Community ,                demand in the Community in 1986 ( + 3,8 % in real terms
on the other hand , will increase significantly more sharply .         compared with 2,2% in 1985 ).
External trade will make a significant negative contribution
to the Community's real growth . Without this negative
impact , growth in the Community would be more than
 1 percentage point higher . This negative impulse from the
Community's net real exports is , however , a substantial              In contrast to the situation as far as the growth of real gross
contribution to the process of reabsorbing the imbalances in           domestic product is concerned , the terms of trade effect has
world trade . In spite of these large changes in the volume of         worked through almost immediately in the case of consumer
exports and imports , the Community's current account will             prices, in spite of the fact that the reduction in costs has not
register a significantly higher surplus in 1986 than in 1985           been fully reflected in final selling prices . Yet , the average
( equivalent to some 1,2% of nominal gross domestic                    European consumer has benefitted more from the terms of
product compared with 0,5 % in 1985 ), due to the marked               trade gain than the consumer in Japan , where a relatively
improvement in the terms to trade .                                    larger part of this external gain has remained in the enterprise
                                                                       sector . As the Community consumer surveys have shown , the
                                                                       steadying of prices has led to a significant increase in
                                                                       purchasing power in Europe . The average rise in consumer
                                                                       prices in 1986 ( around 3,7% ) will be the lowest in the
                                                                       Community for the past 20 years .
In the first half of 1986 , the weakness in exports was only
partly offset by buoyant domestic demand. Because
purchasers expected prices to fall further , they held back for
a time in the early months of the year . Companies
demonstrated this by their partial de-stocking of inputs.              Despite the considerable improvement in real per capita
Consumers at first used the unexpectedly large increase in             wages ( 2,3 % , using the consumer price deflator), real labour
real incomes to build up their savings . But there is evidence of      costs per capita will remain stable in the Community in 1986
a revival in final demand , starting in the second quarter . This      ( on the basis of the GDP deflator). This favourable situation ,
is also borne out by the improvement in the consumer                   which will not be repeated in the coming years , is due to the
climate , a leading indicator based on regular surveys in the          large improvement in the terms of trade , which has reduced
Community. Private consumption is expected to increase in              companies' costs and at the same time increased the
1986 by about 3,7% in volume terms at the Community                    purchasing power of consumers .
 ---pagebreak--- 31 . 12 . 86                               Official Journal of the European Communities                                  No L 385 / 19
The upswing , though not very dynamic so far , has also had           For 1987 , there is no sign so far of the risk of overheating .
an impact on the labour market. In 1986 , in the Community ,          On average , for all the member countries in 1987 , the
the number of persons in employment is expected to rise by            Commission actually forecasts a further slowdown in
0,8 % , well above the average for the 1960s and 1970s ( see          consumer prices ( 3,0% compared with 3,7% in 1986 ),
Table 4 ). In macroeconomic terms the threshold , above               mainly because of progress in fighting inflation in the
which increases in output begin to have an effect on                  member countries which have so far still had high rates of
employment , appears to have again been brought down .                price increase ( Greece , Spain , Portugal and Italy ). In the
However , the increase in employment is also attributable to          other member countries the inflation rate is probably
specific measures of labour market policy as well as the              stabilizing at the relatively low 1986 level or will only
growth of part-time employment . The increase in                      increase slightly .
employment will be above average in Denmark ( 1,9% ),
Spain ( 1,8% ) and Germany and the Netherlands ( 1,1 % in             In 1987 , domestic demand ( + 3,5% ) will again make the
both countries ). Despite the marked rise in the numbers              most important contribution to growth ; the increase is likely
employed , the Community's unemployment will decline only             to be somewhat lower than the 1986 figure . The main
slightly in 1986 ( from 12% in 1985 to 11,9% , EUR 12 )               growth factors will continue to be private consumption
because the size of the Community's labour force continues            ( 3,5% in real terms ) and fixed investment ( 5,1% in real
to increase ( by some 0,8 % in 1986 ). Recently , this has been       terms ); investment in equipment ( 6,9 % in real terms ) will be
due more to the rising participation rate ( especially among          much more dynamic than construction ( 3,2 % in real terms ).
women ), than demographic factors .                                   The expansion of public consumption will still be relatively
                                                                      slow ( 1 ,3 % ). In addition , exports can hardly be expected to
                                                                      provide a stimulus to the European economy in 1987 . After
Despite this gradually improving labour market situation ,            standing almost still in 1986 , the Community's export
certain segments of the labour force still pose specific              markets will probably grow slightly next year ( by some
problems . Of particular significance is the continuing rise in       2,4 % in real terms ) as world trade again picks up somewhat .
the share of long-term unemployment in the Community : at             Member country exports ( inside and outside the
present about 40 % of the unemployed have been out of work            Community ) could grow by 3,5 to 4% in 1987 . But , since
for more than one year , compared with 36% in 1983 .                  Community imports will go on growing vigorously ( around
Although it is difficult to make direct comparisons between           6,5% ), external trade will continue to make a negative
Member States , there appear to be important differences in           contribution to the Community's real growth (probably
this respect . For example , while in Denmark the proportion           - 0,8 % compared with - 1,2% in 1986 ). The Community
of long-term unemployed in the total is only 6 % , it is over         will therefore continue to contribute to the process of
50 % in Belgium , the Netherlands and Spain , and is between          adjusting the disequilibria of world trade . Despite the
30 and 40% in Germany , France , Ireland , Italy and the              unfavourable trend in the Community's external trade in
United Kingdom . The total number of unemployed young                 volume , the current account will remain substantially
people has declined slightly ( from 4,6 million in 1985 to 4,5        positive ( 0,9% of GDP or US $ 42 000 million in 1987 ,
million in 1986 , i.e. about 35% of total unemployed —                I,2% of GDP or US $ 52 000 million in 1986 ).
EUR 9 ). This reflects demographic changes and special
efforts of Member States to extend basic training and                 All in all , the growth of the Community economy as a whole
education . Nevertheless , the unemployment ratio of young            in 1987 is likely , on present policies , to remain just under the
persons between 15 and 25 years remains intolerably high at           3% mark . Growth rates will range from 3,6% in Italy to
the Community level ( around 20% ).                                    - 0,2 % in Greece . Although employment is again increasing
                                                                      ( 0,8% a year in 1986 and 1987 ) unemployment remains
                                                                      excessively high ; in 1987 , the unemployment rate in the
Economic outlook for 1987. The gradual recovery in                    Community of Twelve will probably only fall from 1 1 ,9 % to
economic activity in the Community will , in 1987 , be                II,7% .
entering its fifth year . According to the normal cyclical
pattern of earlier upturns , this would mark the late phase in        Economic recovery in the Community is continuing. This is
the recovery process , and the upper cyclical turning point           due in large part to the transfer in incomes following the
would not be far off. But in the current situation , this             considerable fall in import prices . Domestic demand,
conclusion seems unfounded , since the cyclical upswing this          especially private consumption and investment, are the
time differs markedly from its predecessors . Unlike 1972 / 73        strongest growth elements, while the Community 's external
and 1979 / 80 , rising capacity utilization has so far not been       export markets are on the whole weak . Lower price increases
associated with upward pressure on prices , but on the                and interest rates are improving medium-term growth
contrary with falling inflation rates . Nor have unit labour          prospects . Some first successes are beginning to be registered
costs started to accelerate , as they have usually done in late       in reducing the high level of unemployment in the
phases of an upturn , because the labour shortages typical of         Community, but these fall short of what is required or
earlier recoveries have not occurred .                                possible.
 ---pagebreak---   No L 385 / 20                                        Official Journal of the European Communities                                                      31 . 12 . 86
                                                                                 TABLE 4
                                                        EUR 12 : Main economic aggregates 1961 to 1987
                                                                                                                                           (Annual percentage changes)
                                                          1961 to      1974 to
                                                                                     1981         1982        1983         1984       1985      1986 (»)    1987 ( 2 )
                                                          1973         1980
                              r value                      10,2         14,6         10,8         11,2         9,6          8,8        8,5         8,8         6.4
  Gross domestic              I volume                       4,8         2,2        - 0,1          0,5         1,2          2,0        2,4         2,5         2,8
  product                  I
                              ^ deflator                     5,1        12,1         10,9         10,6         8,3          6,6        6,0         6,2         3.5
  Private consumption deflator                               4,6        12,1         12,1         10,4         8,4          7,0        5,8         3,7         3,0
                              r private ( 13 )               5,6         1,2        - 1,7       - 2,2        - 1,7          3,5        1,7         5,2         5.0
  Gross fixed
  capital formation ]
                             I public ( 13)                  3,2       - 0,6        - 6,8          5,3         0,7       - 1,0         0,5         1,2         2,0
                                total                        5,6         0,5        - 4,1       - 1,5        - 0,4          1,3        2,4         4,2         5.1
       of which :               construction                                                 Il                                      - 2,6         2,3         3,2
                                equipment                                                                                              8,0         6,1         6,9
  Domestic demand ( const , prices )                         5,0         2,1        - 1,8          0,8         0,8          1,4        2,2         3,8         3,5
       National indicator
       Gap with respect to other
       OECD countries                                     - 0,6        - 0,2        - 4,1          1,0       - 1,9       - 4,2       - 1,1         0,4         0,9
                            r nominal                      10,0         14,9         12,8        10,9          9,9          7,6        6,8         6,0         4,8
 Compensation
 of employees              J real A (3)                      4,7         2,5          1,7          0,3         1,5          0,9        0,8       - 0,1         1,3
 per head                   1        g ( 3)                  5,2         2,5          0,6          0,4         1,4          0,6        1,0         2,3         1,8
 Productivity ( 4 )                                          4,5         2,2          1,1          1,5         2,1          2,1        2,0         1,8         2,0
 Real unit labour costs ( 5 )                            100          104,5        104,3       103,0        102,4       101,1         99,9       98,1         97,4
 Profitability ( 5 ) ( 6 )                               100            67,4        60,0         60,4        62,3         64,7        68,2       75,5         79,0
 Competitiveness ( 5 ) ( 7 )                             100          108,8        105,5         98,9        93,2         86,7        85,6       95,1         95,9
 Employment                                                  0,3         0,0       - 1,2        - 0,9       - 0,8        - 0,2         0,4         0,8         0,8
 Registered unemployed as %
 of the civilian labour force ( 8 ) ( 9 )                    2,2         4,7          7,8          9,3       10,3         10,8        11,1       11,0         10,8
 Current balance as % of GDP                                                       - 0,7        - 0,8          0,0          0,1        0,5         1,2         0,9
 Long-term interest rate ( 10 )                              7,1        10,5        15,1         14,3        12,7         12,0        10,8         9,0
 Money supply ( 1J )                                                    13,5        10,6         11,6        10,6           8,7        9,4         8,4         6,5
 Net lending or borrowing of general
 government as % of GDP ( 12 )                            - 0,6        - 3,8       - 5,4        - 5,6       - 5,5        - 5,4       - 5,1      - 4,7        - 4,1
Public debt as % of GDP                                                             45,0        49,8         53,5         56,0       58,9        60,3        61,8
 Public debt interest as % of GDP                                        2,9          4,1          4,6         4,9         4,9         5,1         5,1         5,0
  f 1 ) Estimates of the Commission services , October 1986 .
  ( 2 ) Forecasts of the Commission services , October 1986 , on the basis of present policies ..
  ( 3)  A : GDP deflator; B : private consumption deflator .
  (4)   Gross value added per occupied person in the whole economy , on real terms .
  (5)   Index : Average 1961 to 1973 = 100 .
  {6)   EUR 4 : D + F + I + UK ; non-agricultural business .
  ( 7) Real effective exchange rate (vis-a-vis the other nine industrial countries) on the basis of unit labour costs for the whole economy .
  ( 8 ) Eurostat definition .
  ( 9 ) Excluding Greece , Spain , Portugal .
( ,0 ) Excluding Spain , Portugal .
( u ) End of year . Broad money supply M2 or M3 according to country .
( 12 ) Excluding Greece , Spain , Ireland , Portugal .
( u ) Estimate for EUR 10 .
 ---pagebreak--- 31 . 12 . 86                                    Official Journal of the European Communities                                  No L 385 / 21
                                                                        TABLE 5
                                                    Imports of goods of the main economic zones
                                                                                                        (% change in volume)
                                                                     1982     1983     1984      1985  1986 (•)    1987 ( 2 )
              EUR 12 ( including intra-EUR )                           2,7      2,0      7,1       5,5    6,3         6,4
              USA                                                    - 2,3     12,7     23,6       4,7   10,9         6.3
             Japan                                                     0,5    - 2,8     11,0     - 1,9    8,5         6.4
              OPEC                                                     5,1   - 10,1    - 7,4    - 11,3 - 25,0      - 12,5
             Other developing countries                              - 8,2    - 1,2      5,5       3,3    1,8         3,0
             World                                                  - 0,8       1,7      8,9       3,4    3,8         4,4
             ( ] ) Forecast of Commission services ; October 1986 .
             Source : Eurostat and Commission services .
                                                                        TABLE 6
                                                 Rate of change of demand components , EUR 12
                                                                                                        (% change in volume)
                                                                              1983     1984      1985  1986 (')    1987 (>)
             Private consumption                                               1,0      0,9       2,2    3,7         3,5
             Public consumption                                                1,7      1,0       1,7    1,7         1,3
             Fixed investment                                                - 0,3      1,3       2,4    4,2         5,1
             Contribution to change in GDP of:
             Final domestic demand ( 2 ) ( 3 )                                 0,9      1,0       2,1    3,4         3,4
             change in stocks ( 2 )                                            0,5    - 0,2       0,0    0,4         0,2
             foreign balance ( 2 )                                           - 0,3      0,1       0,2  - 1,2       - 0,8
             GDP                                                               1,2      2,0       2,4    2,5         2,8
             Exports ( goods and services )                                    3,1      7,6       5,7    2,2         3,7
             Imports ( goods and services )                                    1,5      5,6       5,3    6,3         6,2
             (') Forecast of Commission services ; October 1986 .
             ( 2 ) Change as percentage of GDP of preceding period .
             ( 3 ) Excluding change in stocks .
             Source: Eurostat and Commission services .
 ---pagebreak---   No L 385 / 22                                       Official Journal of the European Communities                                                  31 . 12 . 86
                                                                              TABLE 7
                                               Forecast increase in gross domestic product in 1986 and 1987
                                                                                                                                               %)
                                                                               1986 0 )                                 1987 (')
                                                                   GDP in      GDP in         GDP         GDP in         GDP            GDP
                                                                    value      volume       deflator       value        volume        deflator
                   Belgium                                            6,7         2,0          4,6          3,1            1,3            1,8
                   Denmark                                           7,8          2,9          4,8          5,5            1,8           3,7
                   Germany                                           7,1          3,1          3,9          4,6            3,2            1,4
                   Greece                                           23,2          0,5         22,6         12,1          - 0,2          12,3
                   Spain                                            15,1          2,9         11,8          9,3            3,0           6,1
                   France                                            6,9          2,2          4,6          5,3            2,5           2,7
                   Ireland                                           7,6          1,8          5,6          6,8            3,1           3,6
                   Italy                                            12,7          2,8          9,7          9,1            3,6           5,3
                   Luxembourg                                        8,0          2,4          5,4          5,3            2,6           2,6
                   Netherlands                                       2,0          1,6          0,4          0,1            1,8         - 1,7
                   Portugal                                         23,8          3,8         19,2         14,4            3,5          10,5
                   United Kingdom                                    6,3          2,3          3,9          7,0            2,7           4,2
                   EUR 12                                            8,8          2,5          6,2          6,4            2,8           3,5 -,
                   ( l ) Forecast of Commission services , October 1986 .
                                                                              TABLE 8
                                                            Indicators of labour market developments
                                             Unemployment as a percentage of the civilian
                                                               labour force                                Annual rate of change of total employment
                                         1960      1970       1983      1985    1986    1987     1961 to 1970   1971 to 1980    1981 to 1985    1986     1987
 Belgium                                 3,1       2,1        14,3      13,7    12,9    13,4           0,6            0,3           - 0,8         0,3    - 0,6
Denmark                                  1,6        1,1       10,1        8,8    7,6      7,7          1,1            0,7             0,9         1,9      0,3
Germany                                   1,0      0,6         8,4        8,4    8,1      7,7          0,2          - 0,1           - 0,6         1,1      1,0
Greece                                                         7,8       7,8     7,6      8,3        - 0,7            0,6             1,0         0,5      0,0
Spain                                                         17,8      22,1   21,7     21,5           0,7          - 2,1           - 2,2         1,8      1,2
France                                   0,7        1,3        8,8      10,3    10,5    10,7           0,6            0,4          - 0,5          0,1      0,3
Ireland                                  4,7       5,3        14,9      18,0    18,4    18,0         - 0,0            0,9          - 0,9        - 1,1      0,7
Italy                                    7,2       4,4       10,9       12,9    13,4    12,8         - 0,5            0,5             0,5         0,5      1,3
Luxembourg                               0,1       0,0         1,6        1,6    1,3      1,2          0,6            1,3             0,1         0,8      0,7
Netherlands                              0,7       1,3       14,3       13,1    12,0    11,1           1,2            0,2          - 0,9          1,1      0,9
Portugal                                                     10,2        8,7     8,6      8,5        - 0,5         - 0,3           - 0,7          0,3      0,3
United Kingdom                           1,6       2,5       11,6       12,0    12,0    12,0           0,2            0,2          - 0,8          0,8      0,8
EUR 12                                                       11,0       12,0    11,9    11,7           0,2            0,2          - 0,6          0,8      0,8
EUR 9 (>)                                2,5       2,0       10,3       11,1    11,0    10,8
USA                                      5,5       4,9         9.6       7,2     6,9      6,9          1,9            2,0             1,6         2,2      1,7
Japan                                    1,7       1,1         2.7       2,6     2,8      2,9          1,4            0,8             1,0
( J ) Without Greece , Spain and Portugal .
NB: The unemployment rates presented here are based on the number of registered unemployed on a common Eurostat definition . Exceptions: for Greece , Spain and
       Portugal national survey results are presented .
Source: Eurostat and Commission services ( October 1986 ).
 ---pagebreak--- 31 . 12 . 86                            Official Journal of the European Communities                     No L 385 / 23
                                                         GRAPHS 2 to 5
                         Comparative evolution of the Community, US and Japanese economies, 1982 to 1986
2 . Gross domestic product, s.a .                                3 . Industrial production
                                                                     three-month moving average , s.a .
4 . Unemployment rate, s.a .                                     5 . Trade balance
                                                                     fob / cif, billions ECU ,
                                                                     three-month moving average , s.a .
 ---pagebreak---  No L 385 / 24                              Official Journal of the European Communities                     31 . 12 . 86
                                                            GRAPHS 6 to 9
                            Comparative evolution of the Community, US and Japanese economies , 1983 to 1986
6 . Consumer prices                                                     7 . Exchange rates
    six-month change , s.a ., annual rates                                  Index of SDRs per currency unit
8 . Long-term interest rates                                           9 . Short-term interest rates
 ---pagebreak--- 31 . 12 . 86                                    Official Journal of the European Communities                                                   No L 385 / 25
                                                                          GRAPH 10
                 Trend of industrial investment in the Community (business survey indicator) in the context of other
                                                                 macro-economic indicators
              1985 and 1986 : Estimation of the Commission's services with the exception of gross fixed capital formation in industry which are
              based on EC investment surveys .
              Source: Eurostat and EC investment surveys .
2.3 . Nominal and real convergence in the Community                               reaffirms and specifies the objective of 'reducing disparities
                                                                                  between the various regions and the backwardness of the
The Community's major political events of the last year —                         least-favoured regions'. It designates this objective clearly as
agreement on the internal market programme , the Single                           an objective of the coordination of economic policies of
European Act , and the accession of Spain and Portugal — all                      Member States and of the action that the Community pursues
give heightened importance to economic convergence .                              through its structural funds and financial instruments
                                                                                  ( Article 130 B ).
The notion of convergence covers essentially two distinct
objectives . The first concerns convergence on a better                           Nominal and real convergence are two goals that are not
stability of prices , but it includes also a better control of                    independent . The achievement of nominal convergence is a
monetary trends , nominal incomes and the main economic                           central condition in the pursuit of sustainable and dynamic
equilibria such as for the public finances and the balance of                     economic growth . Such a growth makes it easier for the
payments ; this may be called nominal convergence. The                            relatively poorer regions and Member States to diminish the
second objective concerns the upwards convergence of living                       gap separating them from the more prosperous ones .
standards , measured for example by real GDP per capita of                        Convergent and low inflation rates are also required to secure
the regions and Member States of the Community ; but it                           stability within the EMS and enhance the predictability of the
includes also the downwards convergence of unemployment ;                         factors determining investment and savings' decisions.
this may be called real convergence. These economic policy
objectives were already laid down in the preamble and Article                     In conjunction with the completion of the internal market ,
104 of the Treaty establishing the European Economic                              monetary stability should provide a major impetus to the
Community . The Single European Act , in its Article 130 ,                        further expansion of intra-Community trade . In addition ,
 ---pagebreak---    No L 385 / 26                             Official Journal of the European Communities                                      31 . 12 . 86
   the absence of serious public sector or external disequilibria        subdued , the cource of unit labour costs and monetary
   allows the steady pursuit of policies favouring vigorous              conditions must be compatible with price stability . The
  economic growth .                                                      forecast developments for 1986 and 1987 in this regard
                                                                         warrant some optimism for the course of European inflation
                                                                         rates in the near future . Growth rates of the money stock and
                                                                         unit labour costs are expected to continue their decline ,
. The following paragraphs review recent trends in the main              whilst the differences between the Member States will be
  economic indicators that are relevant to the assessment of             reduced further .
  convergence .
  Nominal convergence . The Community inflation rate has , in            Whereas monetary policy has become increasingly more
  line with the developments occurring elsewhere in the                  similar , the recent public finance record , both from the
  industrialized world , declined considerably since 1982 , as           viewpoint of the Community as a whole and as between the
  borne out by Graph 1 1 . The growth rate of the Community              Member States , has been less satisfactory . Differing degrees
 private consumption deflator in 1986 is expected to be                  of success in pruning public sector deficits may threaten the
  3,7% , an achievement that has not been matched for 20                 consolidation of the convergence towards monetary stability
  years . It is forecast to continue its downward course next            achieved so far. In several countries , public sector deficits
  year .
                                                                         have clearly been curbed , but in a number of others the public
                                                                         sector borrowing requirement is still excessive . Most of the
                                                                        latter countries have in recent years financed their deficit
                                                                        more and more ,by issuing interest-bearing liabilities to the
 The slowdown of the average inflation rate has gone hand in            non-bank sector . This sounder form of debt financing has
 hand with a smooth reduction in inflationary disparities               contributed to the price stability oriented monetary policy
 between the Member States , in particular since 1984 , as              referred to earlier . On the other hand , the persistence of large
 illustrated by Table 9 and Graph 1 2 . These show that for the         deficits has inevitably given rise to a corresponding sizeable
 private consumption deflator this convergence process is               expansion of public debt and has exerted an upward pressure
 expected to continue in 1986 and 1987 . The present annual             on real interest rates in capital markets . The resulting
 percentage increase of the private consumption deflator is             aggravation of the interest payments burden should be
 expected to range from over 22 % for Greece — 4 percentage             interpreted as a signal to step up efforts to correct public
 points up from last year's growth rate — to virtually nil for          finance imbalances . If general government deficits in these
 the Netherlands and Germany . Table 9 also shows that the              countries are not trimmed further , the threat of increased
                                                                        debt monetization will be rekindled .
 nominal convergence phenomenon occurring in recent years
 is even more pronounced among the countries adhering to
 the EMS . The EMS has proved a catalyst for nominal
 convergence in that countries in which inflation has been
 relatively high were subject to pressure favouring better price        The Community on aggregate has reduced its general
 stability during lengthy periods of unchanged exchange rate            government deficits from 5,6% in 1982 to 5,1 % in 1985 ,
 parities ( cf. chapter 4.1 ). The reduction in , and improved          and is expected to continue this desirable trend this year and
 convergence of, inflation rates should be seen as a success of         next to reach 4,1 % in 1987 . However , this decline has not so
 economic policy and in particular of the EMS .                         far reached the point of stopping the growth of public debt as
                                                                        a percentage of GDP for the Community as a whole . This
                                                                        ratio has risen steadily for the Community average from
                                                                        50% in 1982 and will be higher than 63% in 1987 ( more
 The foundations for the recent reduction in annual inflation          detail is provided in Chapter 4.2 ). Several countries, for
rates were laid by efforts to enhance control over their               example Belgium , Ireland , Italy , are now confronted with a
fundamental determining factors ( see Graph 13 ). Monetary             level of debt exceeding their annual GDP . The forecasts for
policy was conducted increasingly with a view towards price             1986 and 1987 suggest that these peoccupying trends are not
stability , illustrated by a decline in money growth per unit of       yet being corrected .
output . This deceleration resulted in part from the fact that
budget deficits were monetized to a lesser degree . In addition ,
nominal wages were adjusted , as reflected in a marked
slowdown in unit labour costs . The fact that , in the                 Whereas the evolution of budget deficits still leaves a lot to be
meantime , monetary conditions and unit labour costs                   desired in a number of countries , most Member States
converged between the Member States shows that most                    confronted with a serious current account problem are
Community countries adopted a similar stabilization policy             predicted to see their situation improve significantly in 1986
stance .                                                               and 1987 . Table 10 indicates that Denmark , Greece and
                                                                       Ireland will cut their current account deficits following the
                                                                       large terms of trade improvement and measures limiting
                                                                       domestic consumption .
Checking inflation rates during this year and next is being
facilitated by favourable yet reversible exogenous factors ,
such as the massive oil price fall and the large depreciation of
the dollar . These factors exert only a once-and-for-all               Real convergence . Upward convergence , in terms of real
deflationary influence . For the inflation rate to remain              gross domestic product per capita and of the employment
 ---pagebreak---   31 . 12 . 86                             Official Journal of the European Communities                                No L 385 / 27
 level , is crucial to ensuring greater economic and social            Community in GDP per capita growth . The present forecasts
 cohesion in the Community . Bringing about real convergence           for 1986 and 1987 suggest that this tendency for Member
 has clearly become a more ambitious task following the                States' real income levels to diverge is not being arrested .
 consecutive accessions to the Community in the eighties of
 relatively less prosperous but populous countries . The recent
 enlargements have rendered the Community much more
 dissimilar , both in terms of GDP per capita and of                   The    evolution   since   1975    of  the  various   national
 unemployment levels . Table 11 , which ranks the Member               unemployment rates — which admittedly pose some
 States in descending order of real income per capita                 problems of comparability — was dissimilar as well . In this
 ( expressed in purchasing power standards ), in 1985 , shows         respect , the level of dispersion between the Member States
 that the average inhabitant of the four poorest Community            trebled in a decade , as can be gauged from Graph 16 . This
 Member States ( Spain , Greece , Portugal and Ireland ),             increasing dispersion was both due to the development of
 together representing some 20 % of the current Community             employment as well as labour force growth rates , which both
 population , had a real income last year which was half that of      diverged from the middle of the 1970s onward .
 the average citizen of the four richest countries ( Germany ,
 France , Denmark and Luxembourg). The ratio of the
 extremes ( Portugal and Luxembourg ) was almost one to
 three .                                                              These negative trends , as regards real convergence , since the
                                                                      mid-seventies are also seen between the regions of the
                                                                      European Community , for which , of course , absolute
                                                                      disparities are considerably higher ( see Graph 16 ). The
                                                                      virtual constancy of the indicator of real GDP per capita
                                                                      inequalities over the 10 years or so prior to 1984 is also
 During the 1960s , when European economic growth was                 observed among the regions of each of the major Member
 dynamic , world trade liberalized and the customs union              States . None of the countries has witnessed a significant
 established , the Community made swift progress in real              reduction of regional GDP differences . The worsening of the
 convergence . Real GDP per capita as well as unemployment            unemployment convergence record between Member States
 levels converged between the Member States until about the           is also paralleled at the regional level . Whereas the weakest
 middle of the 1970s ( see Graph 14 and Graph 15 ). Graph 15.         25 regions of the Community had an average unemployment
 shows , for instance , that from 1960 up to the first oil shock ,    rate of 8 % in 1976 , relative to 2,4% for the 25 strongest , the
 the four relatively poorest countries of the Community               figures registered for 1985 stood respectively at 21,1 % and
 managed to reduce the gap separating them from the four              6,6% .
richest Member States by about one-third . At that time , the
 reduction of the Member States' dispersion around the
 European average coincided with a rapid real GDP per capita
expansion for the Community as a whole ( 4,0 % per annum ,            It appears that a more dynamic growth of the European
cf. Table 11 ).                                                       economy is an important condition for the relatively
                                                                      backward regions to catch up , and for the declining
                                                                      industrial regions to convert . The implementation of the
                                                                      cooperative strategy , as well as the completion of the
                                                                      Community internal market , would help assure this
This experience shows that the achievement of a dynamic               favourable economic climate which is indispensable .
economic growth in the Community is an important factor in            However , to reduce real income inequalities with respect to
sustaining the process of real convergence . If the Community         the relatively more prosperous areas of the Community , the
were to generate a development during the next 10 to 15               relatively poorer regions should not only share in the overall
years similar to the 1960s , the objective of real convergence        European economic expansion , but their growth should also
and greater economic cohesion would be brought much                   be faster than the European average . Therefore , besides the
nearer . However , the conditions of the 1960s are no longer          establishment of a more dynamic growth climate in the
present and the Community must take account of this                   Community in general , it is equally necessary to create in the
fact .                                                               regions in question sound conditions for a durable and stable
                                                                     economic expansion .
                                                                     The regional catch-up and reconversion process has to be
Since 1975 , when the worldwide economic crisis triggered by         based , among other factors , on fresh private and public
the first oil shock set in , and the trend rate of economic          investment , which will require the mobilization of
growth was sizeably reduced , the real convergence process in        considerable funds . The latter can in part be generated at
the Community has , however , been stalled , even reversed .         home by developing domestic savings , but investment in the
This phenomenon can be seen for both real growth and the             poorer countries and regions will also require sufficient
unemployment performance . The four relatively poorest               capital movements . Spontaneous capital inflows in these
countries together have fallen short of the aggregate                areas of the Community will gather momentum provided
European growth rate since the first oil shock , on account of       their expected profitability is adequate . To this end , the
the slow expansion experienced in Greece and particularly            authorities in these areas should pursue policies aimed at
Spain . Meanwhile , Germany and Denmark , the two                    creating an enterprise-friendly economic and political
relatively richest countries after Luxembourg , outpaced the         environment . The removal of capital controls , proposed by
 ---pagebreak--- No L 385 / 28                               Official Journal of the European Communities                                    31 . 12 . 86
the Commission , will also promote capital inflows as it                The Community has registered in the recent past significant
dispels foreign investors' fears in relation to the mobility of        progress as regards nominal convergence. Inflation rates in
their funds . However , past experience suggests that private          most countries have come down in the last few years as a
capital inflows alone are often insufficient . To this must be          result of the conduct of economic policy in general and of the
added a determined action on the part of the public                    functioning of the EMS. The correction of current account
authorities , in which the Community has an important role             imbalances is also being undertaken with success. In several
to play through its structural funds , the European Investment         countries, public sector deficits have clearly been curbed, but
Bank and its other financial instruments .                             in a number of others the public sector borrowing
                                                                       requirement is still excessive. In the period up to the
In accordance with Article 130 D of the Single European Act ,          mid-1970s, the Community witnessed both sustained and
the Commission will submit to the Council a general                    dynamic growth and an improvement of real convergence.
proposal intended to modify the structure and the operating            Since then, however, the latter process has been arrested,
rules of the structural funds .                                        even slightly reversed. For real convergence in the
                                                                       Community to resume, several complementary conditions
Its objective is to :                                                  need to be fulfilled. First, it is necessary to create a more
                                                                       dynamic growth environment in the Community as a whole,
— specify and rationalize the role of these funds so that they         which is a central objective of the Cooperative Strategy.
    contribute better to achieving the objectives of economic          Secondly, it is necessary for the business environment in the
    and social cohesion ,                                              relatively backward and in the declining industrial regions to
— reinforce their efficiency ,                                         be improved through appropriate adjustment policies that
                                                                       are the responsibility of national and regional authorities.
— permit better coordination between the operations of the              Thirdly, it is necessary that the Community, through its
    funds themselves , and in relation to the financial                financial instruments and the intervention of the European
    instruments of the Community .                                     Investment Bank on the one hand, and its structuralfunds on
                                                                       the other, complements the efforts of the authorities of the
In this way , it should be possible to assure an important             disadvantaged regions to establish the foundations of
contribution to the economic and social cohesion of the                durable economic growth . In this way, it can make an
Community . Moreover , the reinforcement of the process of             important contribution to achieving greater cohesion
real convergence will also contribute to the overall dynamics          between the regions and Member States of the
of the Community .                                                      Community.
 ---pagebreak--- 31 . 12 . 86                                      Official Journal of the European Communities                                      No L 385 / 29
                                                                          TABLE 9
                                             Private consumption prices ( deflator, % change per annum )
                                 1961 to     1970 to
                                                         1978      1979       1980  1981    1982    1983     1984       1985       1986    1987
                                   1969       1977
Belgium                            3,2         7.4         4.1       3,9       6,5    8,1    7.4     7,5      5,9        4,8         1,3    1,5
Denmark                            5,7        10,0         9.2     10.4      10,7   12,0    10,2     7,2      6,5        5.0         3,3    2,8
Germany                            2,7         5.5         2,8       4,0       5.8    6,0    4,7     3.1      2.4        2.1         0,0    1,1
Greece                             2.4        10,5       12,8      16.5      21,2   23,3   21,2     18,6     18,0       18,4       22,5    12,5
Spain                              5,9        13.4       19,2      16,2      15,6   15.1    14,2    12,2     11,1        8.4         8,6    5,3
France                             4,2          8,3        8,7     10.4      13.2   12,8    11,2     9,5      7.3        5.5        2,5     2,3
Ireland                            4,5        13.8         8,0     14,9      18,6   21.2    16,0     8.2      8.5        4.2         3,7    3,2
Italy                              3,7        12.9       12,9      15,1      20,2   19,2    17,0    15,1     11,1        9,4         6,2    4,0
Luxembourg                         2,3         6,8         3.4       5.2       7,7    8,6   10,6     8,0      6.4        4,0         0,5    1,3
Netherlands                        4,0         8,0         4.5       4.3       6.9    6,3    5,3     2,8      2.6        2.6         0,0  - 1,0
Portugal                           2,6        13,1       21,0      24,0      22.3   16,9   22,5     25,5     29,3       19,3       11,8     9,0
United Kingdom                     3,7        12.5         9,1     13.5      16.4   11,5     8.5     5,2      5,1        5.3         4,0    3,9
Averages
EUR 12                             3,7         9,8         9,0     10,6      13,2   12,1    10,4     8,4      7,0        5,8         3,7    3.0
EUR 10                             3,6         9,3         7,7       9,8     12,9   11,7     9.8     7,7      6,2        5,3         3,1    2,6
EMS                                3,6         8,5         7,2       8,7     11,6   11,5     9.9     8,1      6,2        5,0         2,4    2.1
(a) Mean deviation from
     the average
EUR 12                              1,2        3,1         3,7       4,2       4,5    3,9    4,0     4,2      3,3        2,5         2,7    1,6
EUR 10                              1,0        3,0         3,1       4,0       4,8    3,9    3,9     3,9      2,8        2,1         2,3    1,4
EMS                                 1,0        2,5         3,6       4,2       5,0   4,6     4,3     4,1      3,0        2,3        2,0     1,1
(b) Mean deviation from
     the minimum
EUR 12                             3,3         5.3         6,1       6,7       7,3    6,1    5,8     5,6      4,6        3,7         3,7    4.0
EUR 10                              1,8        4,9         4,9       5,9       6,9    5,7    5,2     4,9      3,8        3,3         3,1    3,6
EMS                                1,5         3.4         4,4       4,7       5,8    5,4    5,2     5,3      3,8        2,9         2,3    3.1
Source : Eurostat and Commission services , October 1986 .
                                                                         TABLE 10
                                          Current account of balance of payments as a percentage of GDP
I                                  1961 to
                                     1970
                                                  1971 to
                                                   1980
                                                                1981        1982    1983     1984      1985       1986
                                                                                                                             Difference
                                                                                                                           betweenl986
                                                                                                                            and - 1982
                                                                                                                                          1987
Belgium / Luxembourg                   0,9           0,6        - 3,2       - 2,0     0,5      1,1       1,8        3,5            5,5      3,8
Denmark                             - 2,2          - 2,9        - 3,0       - 4,2   - 2,2    - 3,2     - 4,4     - 4,1            0,1     - 3,6
Germany                                0,7           0,6        - 0,7       - 0,5     0,7      1,0       2,2        3,2           2,7       2,1
Greece                              - 3,1          - 2,2        - 0,2       - 3,8   - 4,7    - 4,1     - 8,4     - 5,8          - 2,0     - 3,7
Spain                                              - 0,9        - 2,4       - 2,3   - 1,4      1,3       1,7        3,5            5,9      3,7
France                                 0,2         - 0,4        - 1,4       - 3,0   - 1,7    - 0,9     - 0,8        0,1           3,1       0,4
Ireland                             - 2,3          - 6,4       - 14,8      - 10,7   - 6,9    - 5,7     - 3,2     - 1,3            9,4     - 1,3
Italy                                  1,8         - 0,2        - 2,3       - 1,6     0,2    - 0,8     - 1,1        1,2           2,8       0,9
Netherlands                            0,0           1,2          2,1          2,8    2,9      4,1       4,3        3,9            1,1      2,8
Portugal                            - 1,0          - 3,3       - 11,7        13,5   - 7,2    - 3,0       1,8        5,4          18,9       4,2
United Kingdom                         0,0         - 0,6          2,4          1,5    0,8      0,3       1,0     - 0,1         - 1,6      - 0,6
EUR 12                            0,4O             - 0,1        - 0,6       - 0,6     0,0      0,1       0,5        1,2            1,8      0,9
 1  EUR 10 .
 ---pagebreak--- No L 385 / 30                               Official Journal of the European Communities                       31 . 12 . 86
                                                               TABLE 11
                                       Real GDP per capita expressed in purchasing power standards
                                                 1960        1965          1970        1975         1980  1985
            Luxembourg                          145,4       135,5         128,8       126,9        124,4 129,3
            Denmark                             126,6       129,5         123,5       117,7        115,9 123,9
            Germany                             123,4       121,5         118,7       114,5        119,3 121,6
            France                              104,9       106,9         109,9       114,4        115,6 114,0
            Belgium                             103,4       104,7         107,1       111,0        112,2 109,8
            Netherlands                         118,3       114,9         115,6       114,7        110,9 106,1
            United Kingdom                      125,8       116,5         105,9       103,5         98,7 102,0
            Italy                                83,5        85,4          92,2        89,3         93,3  91,7
            Spain                                59,9        69,8          73,7        81,6         75,2  75,0
            Ireland                              67,3        65,9          66,7        68,5         70,4  70,7
            Greece                               39,1        46,1          52,3        57,7         59,0  57,1
            Portugal                             32,8        36,5          41,2        43,5         47,3  46,2
            EUR 12                              100,0       100,0         100,0       100,0        100,0 100,0
            USA                                 186,6       179,5         163,0       154,7        152,6 157,6
            Japan                                63,1        79,7         104,3       106,5        114,0 128,1
            EUR 12 ( 1960 = 100 )               100,0       121,8         147,7       166,4        189,0 198,2
            USA ( 1960 = 100 )                  100,0       116,9         129,5       137,7        154,4 166,9
            Japan ( 1960 = 100 )                100,0       153,5        244,0        280,1        340,6 401,4
            Source : Commission services .
 ---pagebreak--- 31 . 12 . 86                                Official Journal of the European Communities      No L 385 / 31
                                                               GRAPH 11
                                            The evolution of the private consumption deflator
             (% annual rate of growth )
             Source : Commission services .
 ---pagebreak--- No L 385 / 32                            Official Journal of the European Communities                    31 . 12 . 86
                                                             GRAPH 12
                                                    Private consumption deflator
                            Weighted average EUR 12 and Member States' highest and lowest inflation rate
      Source: Commission services .
 ---pagebreak--- 31 . 12 . 86                                Official Journal of the European Communities                             No L 385 / 33
                                                                 GRAPH 13
                      Private consumption deflator, unit labour costs , and growth of money stock per unit of output
                                              Weighted average percentage changes EUR 12
             (') Broad money supply (M2 or M3 ) divided by GDP at current prices.
             Source : Commission services .
 ---pagebreak--- No L 385 / 34                                   Official Journal of the European Communities                                              31 . 12 . 86
                                                                        GRAPH 14
                                The evolution of real GDP per capita: inequalities between Member States (')
                   Standard deviation of real GDP per capita as a ratio of the Community average in percentage terms
       (') The inequalities are measured by the weighted variation coefficient .
                                                    weighted standard deviation
           The weighted variation coefficient                                    x 100 reports the degree of relative dispersion around the
                                                               mean
           average .
           A decrease of the coefficient signifies a reduction of dispersion .
       Source: Commission services .
 ---pagebreak--- 31 . 12 . 86                                    Official Journal of the European Communities                              No L 385 / 35
                                                                     GRAPH 15
                Relationship between income (*) per person in the four poorest and four richest countries in the Community:
                                                              EUR 12 ( as a percentage)
           (') GDP per person at constant prices and purchasing power standards of 1980 .
           Source: Eurostat and Commission services .
 ---pagebreak--- No L 385 / 36                                        Official Journal of the European Communities                                                        31 . 12 . 86
                                                                           GRAPH 16
                The evolution of unemployment disparities (*) between the Member States and between the regions of the
                                                                          Community
                                                  Standard deviation from Community unemployment rate
                ( ] ) Disparities are measured by population weighted standard deviations . Regions are selected at level 'II' of disaggregation . These
                      concern , for instance , Regierungsbezirke in Germany , reggioni in Italy , regions in France , groups of counties for the UK ,
                      provinces for Belgium and the Netherlands . Neither of the aggregates includes Greece . Figures for the initial years are for
                      EUR 9 .
                Source : Commission services , Directorate-General for Regional Policy .
                                  3 . THE COOPERATIVE GROWTH STRATEGY FOR MORE EMPLOYMENT
3.1 . Objectives and methods                                                          In their medium-term analyses , the Commission services
                                                                                       make the assumption that the labour force in the Community
                                                                                       will expand in the coming five years at an annual rate of
In the shape of the Annual Economic Report 1985 / 86 , the                             0,3% . Under the circumstances , a reduction of 3 to 4
Council adopted a strategy for securing a significant and                             percentage points in unemployment by 1990 will require an
sustained reduction in the rate of unemployment in the                                 annual increase in employment of between 1 and 1 ,5 % until
Community by the end of the decade by tackling the very root                           the end of the decade .
of the problem . To illustrate this objective , a reduction of
some 30 to 40% in the number of people out of work
( representing between 4 and 5 million people ), that is to say ,                     As in the last Annual Report , medium-term scenarios are set
a decline in unemployment equivalent to between 3 and 4                                out below in order to illustrate the orders of magnitude and
percentage points was cited .                                                         the measures advocated ( see box ).
Following the accession of Spain and Portugal , the basic                             A first scenario , the baseline scenario , illustrates the
problem remains the same , as both countries are also faced                            devolopment that would take place if present patterns of
with massive unemployment ( in 1986 : 21,7% in Spain and                               behaviour and policies remained unchanged . It does , of
8,6% in Portugal ). As a result , the average unemployment                             course , take account of the changes in the international
rate for the Community of Twelve stands at 11,9% in                                   environment in recent months and of the latest forecasts
1986 ( M.                                                                              compiled for 1986 / 87 .
(') In calculating an average for the Community of Twelve , the
     figures used for Greece , Spain and Portugal are not entirely                     On average for the years 1986 to 1990 , the growth rate is
    comparable with those for the other countries , cf Table 8 .                      expected to be 2,7% ( EUR 10 ) while employment will
 ---pagebreak--- 31 . 12 . 86                                  Official Journal of the European Communities                                   No L 385 / 37
probably grow over the same period by an annual rate of                  In this context , investment, both private and public, is a key
0,7% , which would still not be sufficient to reduce                     variable .
unemployment significantly ; in 1990 , the unemployment
rate ( EUR 10 ) is thus expected to be around 9,7% of the
labour force , instead of 10,8 % in 1986 . In the Community
of Twelve , the unemployment rate would, therefore , exceed              Under the cooperative strategy , investment first of all
10% .                                                                    strengthens the dynamics of demand, without which any
                                                                         increase in the growth rate is impossible . From the point of
                                                                         view of supply, it reinforces the capital stock . For there to be
                                                                         a return to lasting , higher growth , the capital stock needs to
A more detailed analysis of 1986 and 1987 in terms of the                be increased more rapidly , and hence the proportion of
imperatives of the cooperative strategy is to be found in 3.2 of         resources going each year to public and private investment
this report . It will make it possible to assess to what extent the      increased . For the Community of Twelve , that proportion is
more favourable trend in 1986 and 1987 is the result of a                still almost 4 percentage points of GDP lower than its level in
change in behaviour patterns in the direction sought by the              the 1960s , with a good third of this decline being attributable
cooperative strategy and of the exceptional improvement this             to the falling share of GDP accounted for by public
year in the terms of trade for the European economy .                    investment .
In any event , however , it is clear that the problem of                 The data available on the market sector ( excluding housing
unemployment will not go away by itself. This is why , while             and agriculture ) in the four largest Community countries also
taking into consideration recent short-term economic                     point to the need for a significant rise in the investment ratio .
developments , this Annual Report recommends a number of                 Taking the average for those four countries , the growth of
measures that are consistent with the cooperative strategy               the capital stock is still unchanged at its lowest level since
defined last year .                                                      1980 , i . e . around 2,5% ( cf. Graph 18 ). For it to grow again
                                                                         at an underlying rate of 3,5 % and , in so doing , to underpin
                                                                         on a sustainable basis an equivalent rate of growth of
                                                                         production , investment would have to rise by between 2 and
These measures and their medium-term effect will be                      3 percentage points of value added in the market sector
discussed in detail below ( 3.3 and Chapter 4 ). Their aim               ( assuming a constant intensity of capital ). The investment
must be to reduce unemployment in two ways : first through a             drive required is therefore substantial .
return to a sustained rate of growth that should average
between 3% and 3,5% in the period 1986 to 1990 and ,
second , by maintaining and even raising the employment                  To achieve the desired reduction in the unemployment rate ,
content of each percentage point of growth . Basically , these           there is also a need for a continuing increase in the number of
measures are centred around two main objectives : the                    jobs created for each percentage point of growth . From a
macroeconomic objective aims at holding demand at an                     historical viewpoint , the relationship between growth and
appropriate level and at raising the profitability of more               employment has , in any event , shifted since the 1960s in the
employment-creating investment by maintaining a moderate                 latter's favour . This is clearly illustrated by the narrowing of
increase in real wage costs per head . The microeconomic                 the gap between economic growth and the increase in
objective aims at continuing to improve the adaptability of              employment , that is to say , by the lowering of average
the markets for goods and the factors of production , and                productivity per person employed ( see Graph 17 ). The rather
to provide the right climate for the creation of new                     favourable response of employment to the modest recovery
businesses .
                                                                         in growth since 1983 is also significant here .
Thus , for example , in the scenario illustrating the                    The fact that productivity gains per person employed in the
cooperative strategy this year, the growth rate is expected to           whole economy are still relatively modest does not , however ,
average 3,5 % in the period 1 986 to 1990 , a figure indicated           mean that Europe must be content with a defensive
in last year's Report . The unemployment rate could be cut by            employment strategy and should steer clear of technical
some 4 percentage points by 1990 , to stand at around 7 % in             progress . Quite the contrary , modernization of productive
the Community of Ten ( around 8% in the Community of                     capacities , coupled with large productivity gains wherever
Twelve ). However , growth averaging close on 3,5 % in the               this is possible , is desirable to increase economic efficiency
period 1986 to 1990 is assumed to accelerate gradually . In              and living standards , and is necessary if Europe is to be able
this situation , employment could even increase , towards the            to reinforce its competitiveness and assert its presence on
end of the decade , at a rate of above 1 ,5 % . The determined           those particularly important future-oriented markets on
application of the strategy should thus lead to a situation in           which it has lost ground during the 1970s .
1990 in which not only the rate of unemployment would be
already significantly reduced , but also the European
economy would be in a better state so that , in the following
years , an adequate growth in conditions of stability could be           It is therefore necessary to reconcile the modernization of
expected , and further rapid reduction in unemployment                   productive capacity with the creation of a sufficient number
achieved .                                                               of jobs in the economy as a whole . This is possible since the
 ---pagebreak---   No L 385 / 38                                  Official Journal of the European Communities                                         31 . 12 . 86
  relationship , at the macroeconomic level , between growth                        fall also benefits those sectors where productivity gains
  and employment is in reality the result of several factors:                       are weaker. In effect, thanks to the corresponding
                                                                                    increase in their relative prices , sectors with weak
                                                                                    productivity gains can maintain profitability and so are
                                                                                    in a position to create jobs . There is thus a transfer in
    ( i) In a situation of more dynamic growth , the rate of                       purchasing power between sectors which is related to
           utilization of the capital stock is able to rise to a higher            technical progress , and which is favourable to
           level on a durable basis, thus improving capital                        employment ( 1 ).
           productivity and so creating conditions favourable to
          extra employment.                                                        For this mechanism to function well , which is desirable
                                                                                   from the point of view of employment, two conditions
                                                                                   must, in principle , be fulfilled: moderate growth in real
                                                                                   wage costs per head must also benefit those sectors
  (ii) The reduction and reorganization of working time can                        where productivity gains are above average. In
          contribute to an increase in the employment content of                   addition , markets must play, as efficiently as possible ,
          growth . Such a reduction can take effect through an                     their role in forming prices : a strengthening of
                                                                                   competitive forces and completing the internal market
          increase in part-time working, or by a reduction in the
          length of the working week or year. However, these                       will contribute to this. A stable monetary environment
          measures will only be fully effective in terms of
                                                                                   also makes the market signals relative to price changes
                                                                                   that much clearer .
          employment if they do not put a brake on the
          mechanisms which lead , at the macroeconomic level , to
          stronger and more employment-creating growth , and if
          they are neutral for the level of costs. In this case , the       Thus, a moderate growth in real wage costs in the economy
          productivity gains distributed can also be in the form of         as a whole , modifying the relative remuneration of labour
          a reduction in working time . In addition , the increase in       and capital in a direction favourable to the latter, also works
          the number of temporary workers and workers on fixed              — at the micro- and macroeconomic level — in favour of
          contracts can be a further factor in raising the job             employment. Therefore, on a company level , it encourages a
          content of growth in particular where firms, as a result,         more extensive utilization of the capital stock . At the same
          decide not to introduce overtime working. Such                    time , however , it contributes to the creation of better
          measures coming largely within the ambit of                      conditions for the development of activities which are more
          agreements between the social partners should form the           employment-creating .
          basis for a deeper dialogue between both parties .
                                                                           An important aspect of the measures recommended by the
                                                                           cooperative strategy is thus clearly discernible , viz the close
( lii) Finally , there is a long-term trend stemming from the              complementarity that exists between them, irrespective of
         gradual restructuring of employment in favour of                  whether they are macroeconomic or microeconomic
         sectors with low productivity gains per person                    measures . An acceleration in growth will be all the more
         employed , notably the service sector, and to the                 conducive to employment if firms are able to respond flexibly
         detriment of industry, where productivity gains are               to increased demand . However , greater adaptability of the
         higher. Thus , between 1970 and 1983 , the share of               markets in goods , labour and capital is not sufficient by itself
         employment in the Community ( EUR 6 ) accounted for               to encourage firms to undertake investment the profitability
         by market and non-market services rose from 48 to                 of which is not also assured by favourable demand prospects.
         59% . At the same time , productivity in the service              In the final analysis, it is within a context of dynamic growth
         sector rose at an annual average of only 1 ,6 % during            that increased market adaptability will be fully justified, both
         the same period , and that in manufacturing by                    economically and socially. Failing that, there may be a
         3,3% .                                                            resurgence of defensive behaviour that will jeopardize the
                                                                           very foundation of the renewal of the European economy.
         The fact that trends in productivity gains between
        sectors and between firms have differed is only to be
        expected . Even so , favourable conditions must allow              Without a rapid change in attitudes and policies, the
        the productivity gains realized in the more dynamic                Community will still be faced with unemployment of over
        sectors to be enjoyed throughout the economy and, in               10% in 1 990. This is an unacceptable prospect. A significant
        the final analysis , to create jobs . Moderate growth in
        real wage costs per head in all sectors of the economy
        and the mechanism of relative prices play a key role               v ) For the relative growth of employment, productivity and prices
        here .                                                                 within the different sectors of the Community , see chapter B.3 of
                                                                               the Annual Economic Review 1986 / 87 . Table 14 of this report
                                                                               shows that this mechanism has also had a particularly strong
        In effect, when sectors with higher than average                       effect in Japan: the differences between gains in productivity, but
        productivity gains take advantage of this situation to                 in addition changes in relative prices , were particularly large
                                                                               between industry and the other sectors. The dynamism of
        lower their prices in relative terms, not only do they                 Japanese industry has also profited other sectors of the economy
        improve their competitivity and are able to increase                   which ( taken together) were the only ones to have increased their
        production in response to increased demand , but this                  employment.
 ---pagebreak---  31 . 12 . 86                                 Official Journal of the European Communities                                No L 385 / 39
 and lasting reduction in unemployment can be achieved                   consumption deflator , i.e. in terms of purchasing power , is
 through more buoyant and employment-creating growth, of                 expected to increase by 2,3 % , faster than at any time since
 the order of 3 to 3,5% on average in the years 1 986 to 1 990.          1980 .
 Investment plays a key role here . Its share of value added
 would have to increase progressively by around 3 percentage
 points in total. Furthermore, the relationship between
growth and employment must improve. This does not mean                   Furthermore , lower oil prices will have a positive direct effect
 that Europe can be content with a defensive strategy                    on the level of economically productive capacities , either
 regarding employment. On the contrary, competition from                 through more extensive use of the existing capital stock or
 outside makes it necessary to modernize production                      because firms will keep in operation longer , plant that would
 structures . The relationship that is emerging between growth           otherwise have been scrapped .
 and employment is, however, determined by other factors,
 such as a reduction and reorganization in the average
 working time of each person employed, which is neutral for
 the overall level of costs, more rapid job creation in sectors          Various indicators bear witness to the turnaround in the
 with relatively low productivity gains, and the moderate                trend of the 1970s towards deteriorating supply-side
growth of real wage costs per head in all sectors of the                 conditions . The turnaround , in fact , dates from the
 economy. In effect, when sectors with more than average                 beginning of the 1980s :
productivity gains also benefitfrom moderate growth in real
 wage costs per head, they are able to reduce their relative
prices. This improves their own competitivity and also                   — since 1980 , real labour costs per head ( wages plus social
 benefits the sectors of weaker productivity growth, who thus                security contributions ) in the Community have risen on
see their profitability improving and so are able to create                  average by only some 1 % a year compared with 2,4%
jobs . Technical progress and increasing employment can be                   between 1973 and 1980 . Major sacrifices have ,
 reconciled with each other at the macroeconomic level.                      therefore , already been made in a number of countries by
 These factors are conditioned, to a large extent, by an                     employees , especially since , in many cases , their
 increased adaptability of markets . Such adaptability will,                 disposable income has been eroded by even higher
 however, find its socialjustification only within a context of              taxation and parafiscal charges ,
more dynamic growth . This underscores the close
complementarity of the measures recommended by the
cooperative strategy, either at the macroeconomic or                     — real unit labour costs in the Community , which are a
microeconomic level.                                                         measure of the relative movements of real compensation
                                                                             of employees and labour productivity , are now back at a
                                                                             level, approaching that recorded in the 1960s ,
                                                                         — the accompanying rise in the macroeconomic profit share
3.2 . Forecasts for 1986 and 1987 seen from the viewpoint of                 ( operating surplus on value added ) has led to a further
       the cooperative strategy                                              increase in the profitability of productive capital
                                                                             ( operating surplus on the capital stock ). Even so ,
                                                                             profitability has as yet made up , on average for the
                                                                             Community , only some of the ground lost since the first
In terms of the ambitious objectives set in the cooperative                  oil shock ( see Graph 18 ),
strategy , forecasts for 1986 and 1987 are hardly satisfactory .
In both years , economic growth ( 2,5% and 2,8% ,
respectively ) and the increase in employment ( 0,8 % on                — for the first time in at least 20 years , profitability is
average ) will fall short of the underlying rate necessary . Of              outpacing real wages per head in a lasting fashion .
course , the return to a stronger growth rate can take place
only gradually . However , the slowness of the process at the
moment is worrying , especially since the Community is
enjoying the benefits of a substantial improvement in its               Nevertheless , it would seem that the development of real
terms of trade that is , in principle , influencing the conditions      labour costs per head is accelerating in 1987 . According to
of supply and demand in the manner aimed at in the                      most recent forecasts , they are expected to rise by 1,3% ,
cooperative strategy .                                                  their fastest increase since 1980 . Real unit labour costs will
                                                                        probably decline by only 0,7% , a rate slower than in any
                                                                        other year since 1981 . At the same time , the situation is also
The improvement in the terms of trade has provided the                  less encouraging as far as external competitiveness is
European economies with an opportunity to obtain a further              concerned .
improvement in profitability while permitting a relatively
sustained increase in real household income . The fall in
prices of imported goods is having a beneficial effect not only
on firms , but also on households , which consume final                 Indeed , the ECU rose by 42 % against the US dollar between
products . For example , real per capita compensation of                March 1985 and June 1986 and fell by only 7,4% against the
employees is likely to be more or less stable in terms of costs ,       yen . Of course , for each of the European economies taken
whereas real compensation per head , adjusted by the private            separately , the effect of these large exchange-rate movements
 ---pagebreak--- No L 385 / 40                               Official Journal of the European Communities                                        31 . 12 . 86
was cushioned by the relative stability between Community              However , the weakness of demand in recent years and the
currencies , notably those participating in the EMS .                  uncertainties attaching to it may work to the detriment of
Nevertheless , the average rate of appreciation against the            investment . In this connection , the more-detailed analysis of
currencies of the Community's 19 major trading partners                Graphs 18 and 19 , which compare the growth in the capital
ranges from 14,3 % for the Federal Republic of Germany to              stock in the four largest Community countries with the
1,2% for the United Kingdom . Taking the Community                     profitability and the utilization rate of the capital stock ,
countries together , and excluding intra-Community trade ,             brings to light two interesting points :
the average appreciation is 17,8% . The Community ,
therefore , no longer enjoys the advantages afforded it on a
number of third-country markets by a strong dollar .
                                                                       — although the growth in the capital stock fell in line with
                                                                           profitability after the first oil shock , the temporary
                                                                            improvement in profitability between 1976 and 1978 and
                                                                           the improvement discernible since 1982 have not yet
The changing international environment has , of course , had
                                                                           provided a sufficient stimulus to investment ,
implications for the growth and structure of total demand.
An improvement in the terms of trade on the scale enjoyed by
the Community is naturally leading to a shift of emphasis
between external demand and internal demand . Yet the                  — the quite close link that appears to have existed until 1 975
adverse affects on exports of the appreciation of European                  between the rate of capacity utilization and the growth in
currencies and the slowdown in growth in some of the                       the capital stock appears to have weakened since . As in
Community's major trading partners have not been long in                    the case of the profitability curve and the curve
making themselves felt . Since it was desirable for a number of             representing the growth of the capital stock , a large gap
other reasons , the transfer of income from outside the                     has opened up since 1981 between the growth in the
Community equivalent to around 2 % of GDP has been used                     capital stock and the utilization rate of productive
in several countries either to improve the financial situation              capacity .
of firms , in cases where nominal wages have adapted rapidly
to falling inflation , or to return to a healthier public finance
position more quickly . In these countries , the revival in
internal demand is much weaker and much more diluted over
time than would have been the case if consumers had                    In 1986 , therefore , the improvement in the terms of trade has
continued to be the ones to benefit most from the                      had a beneficial effect on both supply-side and demand-side
improvements in the terms of trade .                                   conditions . This effect will , it is true , continue with regard to
                                                                       internal demand in 1987 but it will remain insufficient and
                                                                       may rapidly diminish . Under the circumstances , an
                                                                       improvement in the unemployment Qutlook will have to
In all , total demand ( internal demand plus exports ) is              come from an effective implementation of the cooperative
                                                                       strategy .
expected to expand by only 3,6% in 1987 , and this is
insufficient , bearing in mind the response of imports , to push
GDP growth above 3 % .
                                                                       In order to achieve the cooperative strategy's objectives , the
                                                                       attitudes and policies of all those involved in economic
The growth in internal demand since 1985 is attributable , for         activity will , therefore , have to be modified , in some cases
the most part , to a rapid increase in private consumption             significantly , as of 1987 .
( 3,6% on average in 1986 and 1987 ) and investment in
equipment ( between 6 and 7% in 1986 and 1987 ). The
recovery in investment in construction is noticeable , but
growth here remains weak ( 3,2% in 1987 ).
                                                                       First , firms should respond , with even greater resolve , to the
                                                                       improvement already underway in supply-side conditions by
                                                                       increased investment . It is true that each investment decision
The share of resources in GDP devoted to investment and the            depends on economic calculations . This is why it is advisable
growth in capital stock still however remain below what is             to continue with efforts to improve profitability , to lower
required in the medium term . Some of the determinants of              long-term real interest rates , on a sound basis , and to develop
business investment are , however , displaying favourable              the market for risk-capital ; but the investment decision is also
trends . The average profitability of the capital stock is             based on confidence and risk-taking . Behaviour patterns here
increasing ( see Graph 18 ) although only in the Federal               must also be modified in a direction which is favourable to
Republic of Germany is it back to a level approaching that             employment . Firstly , a more dynamic trend in business
prior to the first oil shock . In all Community countries , the        investment would be positive as far as demand is concerned .
utilization rate of productive capacity is climbing rapidly ( see      Secondly , from the point of view of supply , it would enable a
Graph 19 for the four largest Community countries ). The               parallel development of productive capacity and output to
ebb in nominal interest rates is continuing , and is also one of       take place which would allow a slackening of inflationary
the factors shifting the pattern of returns on financial               pressures which could result from rising utilization rates . The
investment and productive investment in favour of the                  European economies would thus benefit fully from the
latter .                                                               current situation . Inflationary pressures which could result
 ---pagebreak---   31 . 12 . 86                               Official Journal of the European Communities                                 No L 385 / 41
  from this rise in capacity utilization rates at present are very      The necessary economic policy mix was spelt out in last
  largely neutralized by the moderation in import costs and             year's Annual Report . It must now be effectively applied .
  wage costs . In addition , the improved profitability resulting       This also implies that the social dialogue at present under
  from this moderation encourages a more extensive use of the           way at the Community level extends to the Member States so
  capital stock . Thirdly , an even faster rate of job creation         that the respective contributions of firms , employees and
 would also fully justify the efforts already made in many              governments can be better adapted to each other .
 countries by employees . It would improve the chances that
 real wages remain favourable to employment for a
 sufficiently long period .
 However , economic policy makers have to continue to play              At country level , the mix of policies must not only take
 their part . They must also show by their actions that they are        account of the available room for manoeuvre and that which
 determined to contribute to more buoyant supply and                    is being created but its implementation requires a broad
 demand conditions in the Community . In any event , they               acceptability on the part of the social partners and , to this
 cannot avoid their responsibility in the matter .                      end , must be the subject of an in-depth dialogue at national
                                                                        level with , and between , the two sides of industry .
 In 1986, the improvement in the terms of trade has
favourably influenced both supply-side and demand-side
 conditions . The revival in profitability, underway since the
 beginning of the 1980s, thanks also to the moderate growth
 in real wage costs, has gathered pace. However, average                Budgetary policy has a key role to play through the
 profitability in the Community has not yet returned to its             restructuring of public revenue and expenditure in favour of
 level of the 1 960s. According to the forecasts, the growth in         more employment-creating growth and through the way in
 real labour costs will speed up in 1987. In addition, the              which it underpins demand . In this respect , three types of
 growth in total demand in 1987 will remain below the level            measure may be envisaged , the implications of which are
 necessary for the purposes of the cooperative strategy. In            looked at in greater detail in Chapter 4 :
 particular, investment will not stage as strong a revival as
 could be hoped in view of the improvement in most of its
 main determinants . A stimulus could, however, come from a            — A recovery in economically profitable public investment
 better outlook for demand. Under the circumstances, an                     could add to the revival in private investment with a view
 improvement in the unemployment outlook will have to                       to modernizing productive capacities in Europe . It would
 come from effective implementation of the cooperative                      also provide a direct stimulus to growth .
 strategy by all those involved. Firms should react to the
 improvement in supply-side conditions with a more rapid
 investment and job-creation effort. This will create the
 conditions most conducive to, and will provide full                   — The moderate growth in real wages should be of the same
justification for, the continuing moderate increase in real                 order ( around 1 % per annum ) as that in the Report of
 labour costs per head that is necessary. Economic policy                   last year and could be complemented by some reduction
 makers will, however, also have a part to play.                            in social insurance contributions . From the viewpoint of
                                                                            firms , this measure , which improves supply conditions
                                                                            and favours investment , would alleviate indirect wage
                                                                            costs which , as a Community average , represent about
3.3 . Macroeconomic policy imperatives in 1987 and                          30% of the total wage bill . From the point of view of
       beyond                                                               employees , it would allow a somewhat faster rate of
                                                                            growth in purchasing power and maintain the level of
The consolidation that has taken place since the beginning of               demand .
the 1980s and the recent changes in the international
environment provide the European economies with an
outstanding opportunity . Company profitability is picking                  The financing of social security systems should , of
up . Inflationary pressures originating inside the Community               course , be kept on a sound basis . However , account must
are still weak ; the improvement in the terms of trade having              also be taken of the fact that , for social security systems ,
had a powerful disinflationary effect , and inflation , taking             the economic crisis is pushing up expenditure and adding
                                                                           to the shortfall in revenue and this will be reversed as and
the average for the Community , having fallen to its lowest
level since the 1960s . The reduction in the oil bill has eased            when the situation improves . The room for manoeuvre
                                                                           that will , therefore , become available would have to be
the external constraints and the Community is showing an
external surplus equivalent to 1 ,2 % of GDP in spite of the               used systematically to alleviate the burden on labour
depressed level of its exports .                                           costs , and thus to reverse in part the trend experienced in
                                                                           the 1970s . The budgetization of social security
                                                                           expenditure associated with the crisis could further be
The opportunity open to the Community must be seized with                  considered .
determination , not only with a view to resolving the most
pressing problem facing the European economies , but also to
ensure that Europe makes its contribution to correcting
current-account balances worldwide and to providing the                — A reduction in direct taxation paid by households and
response necessary to the problems of the developing                       firms would also help underpin demand and improve
countries .                                                                conditions on the supply side .
 ---pagebreak---  No L 385 / 42                                     Official Journal of the European Communities                                               31 . 12 . 86
 Together, these measures ( 1 )- should not jeopardize the                            could at a later stage jeopardize the headway made in the
 process of reducing the medium-term deficit . Indeed ,                               battle against inflation , while ensuring adequate financing of
 combined with other measures , improving in addition supply                          real growth . In this respect , the monetary authorities'
 conditions , they contribute to stronger and sustained growth                        headroom will be all the greater if the inflation rate pressures
 and to a reduction in unemployment . As a result , expenditure                       originating inside the Community , and in particular the trend
 linked to the crisis will diminish progressively and the tax                         of nominal wage costs , remain weak .
 base will increase more rapidly .
 However , faster growth is also necessary from 1987                                  The application of macroeconomic policies based on the
 onwards . This could , it is true , be achieved through closer                       broad lines defined above will provide full justification for
 economic policy coordination with the Community's major                              the efforts made by employees . It is also indispensible if the
 partners ( see Chapter 4.7 ). It could also be achieved if there                     necessary microeconomic measures to make markets more
 were a further acceleration in the growth rate of private                            adaptable are to be fully effective as regards their impact on
 investment stemming from increased confidence on the part                            employment .
 of business with regard to the future trend of demand and
profitability . In the case of an unfavourable trend , it could be
 necessary to envisage a limited and temporary increase in the                        The consolidation efforts made since the beginning of the
budget deficit on average for the Community , respecting                              1980s and the recent changes in the international
nevertheless the objective of medium-term consolidation of                            environment provide the European economies with an
public finances .                                                                     outstanding opportunity that must be seized resolutely, not
                                                                                      only with a view to resolving the problem of unemployment,
This does , of course , pose the problem of budgetary policy                          but also to ensure that Europe makes its contribution to
coordination in the Community . Some countries still have a                           correcting current accounts worldwide and provides the
great deal to do to achieve budgetary consolidation . Others                          response necessary to the problems of the developing
have some headroom or would have some headroom in a
                                                                                     countries . Budgetary policy has an important part to play
context of more dynamic growth .                                                      through the restructuring of public revenue and expenditure
The task of the countries in the former category would be                            in a direction favourable to the improvement in supply
considerably facilitated if growth did pick up . For the                             conditions and employment, and through the appropriate
countries in the latter category , budgetary consolidation in                        support it should provide for growth . The reduction and
other Member States , achieved against a background of                               closer alignment of inflation rates should allow the decline in
sluggish growth , may be prejudicial to their own growth .                           interest rates to continue. Even so, while taking account of
Here too , the benefits of cooperation are clear to see .                             the problems that would arisefrom a furtherfall in the dollar
                                                                                     onforeign-exchange markets and of the need to ensure sound
A continuing downward movement of interest rates in the                              financing of growth, measures should be taken to avert any
Community , which would reflect the fall and increased                               build-up of potential liquidity that might ultimately prove
alignment of inflation rates , can also make a positive                              prejudicial to stability. Implementation of the measures
contribution to demand . Moreover , the monetary                                     recommended must be the subject of close cooperation
authorities might have to accept further falls in interest rates                     between (a) Member States, with due regard being given in
in order to resist the pressures to which the dollar's exchange                      particular to the different degrees of room for manoeuvre
rate will be exposed . Internally , however , measures will have                     available in each country, and (b) between, and with, the
to be taken to avoid a build-up in potential liquidity that                          social partners at national level in the interests of assuring a
                                                                                     broad acceptance by the social groups, and so that
( ] ) These measures are illustrated in more detail in the Box .                     contributions of each can be balanced.
                                                                          TABLE 12
                                              Public investment and total investment in the Community ( ! )
                                                                                                                              (in % of GDP)
                                                                      1970     1974       1979    1984     1985 ( 2 ) 1986 ( 2 )   1990 ( 3 )
                Public gross fixed capital formation                   4,2      4,0        3,2      2,8.     2,8        2,7          3,6
                Gross fixed capital formation for the                 22,7     22,3       20,8    18,6      18,4       18,5         21,7
                total economy
                (') Excluding Greece , Ireland , Spain and Portugal .
                ( 2 ) Economic forecasts of the Commission services , October 1986 .
                ( 3 ) Cooperative scenario .
                Source : Eurostat and Commission services .
 ---pagebreak--- 31 . 12 . 86                                      Official journal of the European Communities                                                No L 385 / 43
                                                                           TABLE 13
                                                             Indicators of supply and demand
                                                                      1961 to     1974 to
                                                                       1973        1981      1982   1983   1984     1985 «    1986 (') 1987 «
                                                                    ( average ) ( average )
              (i) Indicators of demand (% changes per
                   annum):
             Domestic demand at constant prices :
                   Community index                                       5,0         1,6       0,8    0,8    1,4       2,2       3,8      3,5
                   Gap : EUR / other OECD countries                    - 0,5       - 0,6       1,0  - 1,9  - 4,2     - 1,1       0,4      0,9
             Private consumption                                         5,0         3,0       0,6    1,0    0,9       2,2       3,7      3,5
             GFCF                                                        5,6         0,0    - 1,5  - 0,3     1,3       2,4       4,2      5,1
             Exports of goods and services                               9,2         4,6       1,5    3,1    7,6       5,7       2,2      3,7
             (it) Indicators of supply conditions :
             Employment
             (% change per annum )                                       0,3       - 0,1    - 0,9  - 0,8     0,1       0,4       0,8      0,8
             Productivity
             (% change per annum )                                       4,5         2,1       1,5    2,0    1,9       2,0       1,7      2,0
             Real unit labour costs
             ( index 100 : average 1961 to 1973 )                     100,0       104,3     103,0  102,4  101,1       99,9     98,1     97,4
             Profitability ( 2 )
             ( index 100 : average 1961 to 1973 )                     100,0         68,0     61,8   59,8    64,7      68,4     77,9     82,8
             Equipment investment
             (% change per annum )                                        —           —
                                                                                               0,2    0,3    3,4       8,0       6,1      6,9
             Cost competitiveness ( 3 )
             ( index 100 : average 1961 to 1973 )                     100,0       108,8      98,9   93,2    86,7      85,6     95,1     95,9
             (') Estimates and economic forecasts of Commission services ( October 1986 ).
             ( 2 ) Estimate for the Community of Ten : gross operating surplus in the whole economy on the capital stock at replacement
                   cost .
             ( 3 ) Real effective exchange rates on the basis of unit labour costs in the whole economy with respect to other OECD countries ,
                   excluding intra-Community trade .
             Source: Eurostat and Commission services .
 ---pagebreak--- No L 385 / 44                                     Official Journal of the European Communities                        31 . 12 . 86
                                                                           TABLE 14
                                  Sectoral developments in Europe, the United States and Japan ( 1970 to 1982)
                                                                                       EUR 6 ( 3  USA           Japan
             ( 1 ) Value added at constant prices
                    (% change per annum 1970 to 1982)
             Agriculture                                                                  1,8      2,1            0,2
             Industry ( ! )                                                               1,7      2,1            7,1
             Market services                                                              3,4      3.6            5.1
             Non-market services ( 4 )                                                    2.4      1,9            4.2
             Total ( 2 )                                                                  2.5      2.7            5,2
             (2 ) Employment 1982
                   (Index = 100 in 1970)
             Agriculture                                                                 67,2     97,2           68,7
             Industry (')                                                                83,0     97,8         100,4
             Market services                                                            117,2    136,2         132,2
             Noil-market services ( 4 )                                                 124,5    121,4         133.4
             Total ( 2 )                                                                 99,9    121,7         111.5
             (3) Productivity per person employed
                   (% change per annum 1970 to 1982 )
            Agriculture                                                                   5.2      2,3            3,5
            Industry ( J )                                                                3.3      2,3            7,1
            Market services                                                               2,1      1,0            2.7
            Non-market services ( 4 )                                                     0,5      0,2            1.8
            Total ( 2 )                                                                   2,5      1,0            4,3
            (4) Relative price with respect to the
                   prices of industrial products in 1 982
                  (Index = 100 in 1970)
            Agriculture                                                                  83,5    120,7         147,9
            Industry ( J )                                                              100,0    100,0         100,0
            Market services                                                             110.3    112,4         161,3
            Non-market services ( 4 )                                                   138.4    125.3         240,8
            Total ( 2 )                                                                 110,6    116.4         147,8
            ( 1 ) Narrow definition .
            ( 2 ) Including the other sectors ; energy , building , and public works .
            ( 3 ) Belgium , Germany , France , Italy , Netherlands , United Kingdom .
            ( 4 ) Essentially general government .
            Source : Eurostat and Commission services .
 ---pagebreak--- 31 . 12 . 86                                    Official Journal of the European Communities                                           No L 385 / 45
                                                                       GRAPH 17
                          GDP and employment in the Community ( EUR 12 ) ( annual percentage growth rate) (')
             (') The horizontal lines indicate average annual rates of growth in each of the periods .
             Source: Eurostat and Commission services ( 1985 to 1987: Estimates and forecasts of Commission services , October 1986 ).
 ---pagebreak--- No L 385 / 46                                     Official Journal of the European Communities                        31 . 12 . 86
                                                                      GRAPH 18
                               Profitability (*) and growth of the capital stock ( 2) in the Community ( EUR 4) ( 3 )
            (') Net operating surplus as a percentage of gross capital stock at replacement cost .
            ( 2 ) Gross capital stock at constant prices (% changes per annum ).
            ( 3 ) Germany , France , Italy , United Kingdom .
            Source : Commission services .
 ---pagebreak--- 31 . 12 . 86                                          Official Journal of the European Communities                              No L 385 / 47
                                                                            GRAPH 19
                              Growth and utilization rate of the capital stock ( J ) (2 ) (Index : peak of last 25 years = 100)
                                  Germany                                                                             France
                                     Italy                                                                       United Kingdom
(') Growth of the gross capital stock .
( 2 ) Utilization rate on the basis of business survey data for manufacturing industry .
Source: Commission services .
 ---pagebreak--- No L 385 / 48                             Official Journal of the European Communities                                   31 . 12 . 86
               Medium-term scenarios for the cooperative strategy
              An illustration of the possible evolution of the Community economy is given, on the one hand, in a
              medium-term projection on the assumption of no change in present policies and economic behaviour
              and, on the other hand, in a highly stylized representation of the cooperative strategy. These latter
              figures are only intended to be illustrative and should not be interpreted as formal objectives of
              policy .
              These scenarios have been calculated using the Compact model for the Community of Ten. This
              model was described in detail in European Economy No 27 .
              Hypotheses regarding the international environment
              For both the baseline projection and the cooperative strategy it has been assumed that oil prices would
              continue to climb again between now and the end of the decade . This will produce a deterioration in
              the terms of trade amounting to some 7% during the period 1987 to 1990 . The exchange-rate
             hypothesis is for virtual stabilization at their average 1986 level of the dollar/ ECU and yen/ ECU
             exchange rates .
             In the United States , the general government deficit would be gradually cut back, from 3,4 % of GDP
             in 1986 to 1 % in 1990 . It would be stabilized in Japan at 0,5 % of GDP with effect from 1987 , after
             touching 1 % in 1986 . Growth would be modest in the United States ( averaging 2,7 to 2,8 % in the
             period 1986 to 1990 , depending on the scenario chosen), and fairly firm in Japan ( 3,7 to 3,8 % ) over
             the same period .
             A scenario illustrating the cooperative strategy
             The scenario used to illustrate the cooperative strategy this year leads to the same growth rate as in last
             year's Annual Report ( 3,5% for the average of the years 1986 to 1990 ). Nominal demand is
             maintained at approximately the same rate of growth in the cooperative scenario as in the baseline
             projection (6 % or slightly more). This growth rate is sufficient to generate a fall in the unemployment
             rate equivalent to 3,7 percentage points of the labour force between 1986 and 1990 and , at the end of
             the decade, brings the trend rate of increase in employment to 1 ,5 % per annum or a little higher. The
             economic policy mix is designed to bring about, under conditions of monetary stability , faster growth
             of the European economies through joint action on supply-side and demand-side conditions .
             The same hypothesis as last year was taken for the growth in real labour costs per head, that is to say
             an annual increase af 1 % ( average for the period 1986 to 1990); the gap between this increase and
            productivity gains in annual average terms being 1,3 percentage points per annum .
            This moderate growth in real labour costs is obtained in two ways: firstly , through an effort on real
            wages excluding employers social security contributions: as in the scenario for last year, they increase
            by 1,1 % on average for the years 1986 to 1990 ; secondly , through a reduction in rates of social
            security contributions which is proportionally distributed between employers and employees .
            Cumulated over four years ( 1987 to 1990 ), the fall in social contributions assumed , amounts ex-ante
            to 1 % of GDP .
            Medium-term budgetary policy is characterized by progressive reductions in direct taxation on
            household and an increasing level of public investment. These two measures , cumulated over four
            years each , amount to 1 ,2 % of GDP. Besides the endogenous reductions in certain transfer payments
            (in particular unemployment benefits), it was assumed that the progressive improvement in the
            economic situation would enable the growth of expenditure aimed at directly easing the situation on
            the labour market ( early retirement programmes etc .) to be moderated .
            The lasting reduction in inflation , the improvement in the financial situation of firms , which relieves
           pressure on the capital markets , and a monetary policy which , while remaining directed at stablility ,
           finances faster real growth , imply a reduction in long-term interest rates of about 3 percentage points
           on average in the Community between 1986 and 1990 . For the period as a whole , the real interest rate
           amounts to 3,6% on average .
 ---pagebreak--- 31 . 12 . 86                                  Official Journal of the European Communities                                                No L 385 / 49
              Between 1987 and 1990 , the medium-term tax reductions and public expenditure increases cumulate
              to a total of 3,2 % of GDP . The higher growth rate and lower expenditures on social security to a large
              degree offset measures in their impact on the budget deficit. By 1990 , the budget deficit is 1,2% of
              GDP lower than in 1986 , which nonetheless represents a slower decline than in the baseline
              projection .
              In the cooperative scenario , the current balance on average for the years 1986 to 1990 is
              0,5 percentage points of GDP below that of the baseline scenario ( 0,1 % of GDP as against 0,6 % ). A
              variant of the cooperative scenario is presented in section 4.7 . The assumption behind this variant is
              that Japan contributes more to the process of absorbing the major world imbalances . As a result , for
              the years 1 986 to 1 990 , the Community current account improves by 0,3 percentage points of GDP on
              the cooperative scenario .
                               Some principle macroeconomic aggregates illustrating the cooperative strategy
                                                                           Baseline projection                Cooperative scenario
              Annual average growth rates
              1986 to 1990 ( %)
              GDP volume                                                             2,7                                 3,5
              GDP price                                                               3,3                                2,7
              GDP value                                                               6,0                                6,2
              Employment                                                             0,7                                 1,2
              Productivity                                                            2,0                                2.3
              Private consumption                                                     3,0                                3.4
              Investment                                                              3,7                                6,8
              Real wages per head                                                     1,9                                1,1
              Real unit labour costs                                              - 0,3                                - 1,3
              Annual average levels,
              1986 to 1990 (%;
              Long-term rate of interest ( % )
              Balance of payments                                                     7,7                                6,3
              Current account (% GDP )                                               0,6                                 0,1
                                                                                                                   1990 level in
                                                                            1986 actual level
                                                                                                               cooperative scenario
              Unemployment rate ( % )                                             10,8                                  7,1
              Budget deficit (% of GDP )                                            4,7                                 3,9
              Note: The data are for EUR 10 . For EUR 12 , the main difference in the Community average would be in the rate of
                     unemployment: 1986 : 11,9 % ; 1990 : 8,2 % .
              The above figures were derived from a highly stylized model and are only given to indicate a possible range of magnitudes .
                               4 . CONTRIBUTION OF POLICIES TO THE COOPERATIVE STRATEGY
4.1 . Monetary guidelines and coordination questions                           1 5 ) . In the late 1970s , the growth of broad money was about
                                                                               15 % a year in the Community ( EMS 13 % ), while it is now
The Community's member countries have made further                             around 9,5% ( EMS under 7% ), and is not expected to
progress in converging towards a monetary policy which                         accelerate again . Thus , monetary policy has made an
provides the scope for real growth in an environment of                        important contribution to the deceleration in the Community
monetary stability . The deceleration and more convergent                      inflation rate . While inflation in the Community still
development of monetary aggregates are clear indications of                    averaged 13 % in 1980 , an average of 3,7 % is expected this
the increased coherence of national monetary policies ( Table                  year .
 ---pagebreak---  No L 385 / 50                               Official Journal of the European Communities                                     31 . 12 . 86
 One of the primary objectives of monetary policy is to                 rate of inflation , but this does not mean that the Member
 achieve and preserve a high degree of monetary stability, a             States in their monetary policy should all react to imported
 role which is in full accordance with the cooperative strategy.        price stability in the same way .
 Monetary stability is the indispensable basis for the other
 objectives of economic policy . By reducing uncertainties on
 future purchasing power , it creates favourable conditions for
 a cooperative pattern of behaviour by those involved in
 economic activity and , in particular , weakens the                    In countries where the inflation rate and inflationary
 justification for indexation mechanisms. Accordingly, it               expectations have already stabilized at a low level , there
 improves the climate for adjustments in relative prices and            should be no fundamental change in the course of monetary
 contributes to an efficient allocation of the factors of
                                                                        policy embarked upon before import prices started to fall . In
 production .                                                           this way , monetary policy underpins higher real growth . In
                                                                        other respects , a short-lived and transitory deviation from
                                                                        the targeted growth of money supply does not necessarily call
                                                                        for corrective action , since adverse effects on expectations
 A medium-term orientation of monetary policy is                        are improbable in these countries . If the presently favourable
 appropriate for influencing expectations in the desired                preconditions for growth actually lead to a higher real
 direction in a durable way , and for safeguarding the successes        growth trend in 1987 , monetary policy should take this into
 already achieved in reducing inflation .                               consideration in defining the money supply target .
 However , monetary policy must take due account of the
 scope for real growth . If, in the course of the implementation        Countries which have made significant progress in fighting
 of the cooperative strategy , the growth rate of productive            inflation , but whose level of inflation is still well above the
potential were to rise , monetary policy would have to                  Community average — e.g. Italy — should consolidate the
 accommodate this . Higher money supply would also be                   imported contribution to stability which initially represents
necessary if a permanently low level of energy prices were to           an effect only on the level of prices , and should aim to bring
 increase productive potential .                                        inflation down permanently . This aim can be achieved if it is
                                                                        made explicitly clear and credibly supported through
                                                                        monetary policy decisions . A monetary policy which
                                                                        continues to focus on reducing monetary growth would by
Quantitative money supply or credit targets continue to play            no means prevent further falls in interest rates . On the
 an important role in a monetary policy geared to the medium            contrary , as inflationary expectations stabilize at a low level ,
term and based on a high degree of price stability . However ,          nominal and real long-term interest rates will come down .
financial innovations , the increasing liberalization of capital
movements , structural changes in the money and capital
markets , and changes in money demand behaviour can in
certain circumstances have an important impact on monetary
aggregates . This has to be taken into account when monetary            Lastly , countries which are now registering a low inflation
developments are assessed . The announcement of an annual              rate , but in which inflation expectations are still higher than
money growth target makes clear the basic course that                  warranted by the actual rate of price increases ( e.g. France),
monetary policy is intended to follow . Employers , unions              should adhere to a moderate growth of money supply
and the government can adjust their decisions accordingly .            consistent with the scope for real growth in the medium term .
Money supply targets increase the level of information                  The recently observed decline and flattening of interest yield
available to economic agents ; the scope for friction is reduced       curves in France — between January and August 1986
and consultation with employers and employed is made                   long-term interest rates fell by 3 percentage points and
easier . Countries whose room for conducting an independent            short-term rates by 2 percentage points — is an indication
monetary policy is limited , and whose primary objective is to         that monetary policy has gained in credibility . Low interest
stabilize the exchange rate , would also benefit from the              rates on a lasting basis depend on inflationary expectations
medium-term oriented monetary policy of the larger                     stabilizing at a low level .
countries ; exchange-rate expectations would be stabilized
and these countries can import and sustain a high degree of
price stability .
                                                                       The stance of policy proposed here means , on the other hand ,
                                                                       that short-term cyclical considerations should play only a
At present , the cyclical situation is similar in most member          minor role . Otherwise the successes in achieving a high
countries ; most of the countries are in a phase of moderate           measure of price stability would again be put at risk . Nor
upswing and all of them (except Greece ) are importing                 should it be overlooked that a monetary policy geared to the
stability through markedly falling import prices . There is no         medium term also has stabilizing effects on the cycle . During
sign of the danger of a renewed acceleration of inflation , at         a recession , money growth is , compared with GDP growth ,
least in the short run . However , the present low rate of             relatively high . Liquidity increases but without adversely
increase in consumer prices no doubt understates the trend             affecting inflationary expectations . Conversely , the
 ---pagebreak---  31 . 12 . 86                                 Official Journal of the European Communities                                 No L 385 / 51
 reduction of liquidity in a growth phase damps down                     common stability objective . The greater stability of exchange
 inflationary expectations , but without triggering the painful           rates was therefore both the result of the greater price and
 effects of a stabilization policy .                                      cost stability in the EMS and its cause . The exchange-rate
                                                                          adjustments of April and August 1986 have changed nothing
                                                                         in this basic interdependence .
 However , in a flexible exchange rate regime monetary policy
 may be faced with a conflict between domestic and external
requirements . Thus , to avoid distortionary real disturbances           Nevertheless , the EMS remains a system of fixed but
 — which ultimately also endanger the primary objective of               adjustable exchange rates . If economic policies are not
monetary stability — a flexible response of monetary policy              perfectly coordinated , the differences which accumulate in
with respect to exchange rate developments outside the                   the fundamental factors determining exchange rates must ,
Community might be necessary . Such a response , however ,               from time to time , be corrected ; but such a policy does not in
 should not represent a fundamental change in the chosen                 principle support divergent economic trends from the
 stance .                                                                beginning . In future , financial markets will be more closely
                                                                         integrated , not least because of a desirable increase in the
                                                                         liberalization of capital movements . Interest rates within the
                                                                         EMS have already moved considerably closer together.
In recent years , nominal interest rates in Europe have                  Indeed , the difference between German and French
declined significantly . In 1981 , the level of short-term               long-term rates has narrowed from 3 percentage points ,
interest rates averaged 15% for the Community . This                     before the realignment , to 2 percentage points thereafter . In
compares with the present 8,8% , which roughly                           Belgium also , the decline in the long-term interest rates is
corresponds to the average for the 1970s ( Table 16 ). It is             spectacular .
assumed that interest rates will also fall further — though
more slowly — in the foreseeable future . Despite all the
progress made in reducing inflation , real long-term interest
rates are still felt to be relatively high at present . In assessing     The realignment thus had real consequences for interest
the present level of real interest rates , it must however be            rates . Currencies which were thought likely to be devalued
borne in mind that in some countries the current inflation               had to compensate for the pressure to adjust by means of
rate is below the medium-term rate and the level of real                 higher interest rates . This shows that , in the countries
interest rates is therefore overestimated . Real interest rates          suffering higher currency erosion , the delaying of the
which are too low , do not adequately reflect relative scarcity          realignment had an important stabilizing effect .
of capital . In the 1970s , they have led to an excessive
capital-intensity of production , denoting the macroeconomic
misallocation of relatively scarce savings , and entailing a             Because larger movements of capital are to be expected , the
deterioration in profitability . Moreover , real interest rates
                                                                         increasing liberalization of the movement of capital initially
which are too low reduce saving in the economy and thus                  poses a potential risk to the stability of the EMS , but this can
remove the basis for higher growth . As shown in Graph 20 ,              be countered by the increased convergence of monetary and
the level of real interest rates experienced for 1986 roughly            overall economic policy . Thus , continuing liberalization of
corresponds to the level of the late 1960s . On the other hand ,
                                                                         capital movements is closely associated with an increased
the rate of return on physical capital is not yet back to this           integration of the economies of the Community and with the
level .
                                                                         further sound development of the European Monetary
                                                                         System .
On the one hand , sufficiently high real interest rates are
necessary to avoid a misallocation of resources and to                   The consequence of closer monetary integration is a greater
safeguard the more employment-creating growth generated                  need for coordination . This is true of each country's
by supply . On the other hand , it is certainly desirable for both       monetary policies within the EMS , but it is also true within a
nominal and real interest rates to fall as a result of inflation        country's economy for concertation of the instruments of
expectations being stabilized at a lower level , and because of         general economic policy : the instruments of economic policy
higher total savings . A monetary strategy geared to the                must be combined in such a way as not to endanger the
medium term is the appropriate way to achieve , on a sound               system of fixed exchange rates . Above all , a monetary policy
basis , the desired 'organic' fall in real interest rates .             which is directed towards internal and external stability must
                                                                        be supported by budgetary policy and an appropriate
                                                                        evolution of incomes . Within the EMS , the need for
                                                                        coordination , in particular between the large member
The EMS has made a decisive contribution to the increasing              countries , has grown . Most importantly , agreement must be
convergence of monetary policy and to reducing inflation                further strengthened on the goals of stability policy .
by subjecting the participating countries to a clear
exchange-rate discipline . Countries in which inflation has
been relatively high imported a measure of price stability
during lengthening periods of fixed exchange rates ; this               Coordinated action on monetary policy does not , however,
supported the disinflation process . But the EMS could gain in          imply the same policy in all countries . Each country faces
stability only against the background of the strict pursuit of a        different problems . In particular , different methods are
 ---pagebreak--- No L 385 / 52                                   Official Journal of the European Communities                                            31 . 12 . 86
needed for dealing with the very unsatisfactory convergence                        Monetary policy in the Community should aim at an
of budgetary policies and the related divergence which still                       adequatefinancing of the available scopefor real growth and
exists in inflation expectations . Each country must , as far as                   should at the same time preserve and, if necessary, advance
it can , find the right policy mix to bring it closer to the                       the successes achieved in reducing the trend rate of inflation
common goal of steady , non-inflationary and more                                  on a permanent basis. Up to the present, the task ofmonetary
employment-creating growth .                                                       policy has been made easier by external developments. The
                                                                                   depreciation of the dollar, as well as the the fall in oil prices
The common course of the monetary policy of the EMS                                and in US interest rates, have increased the potential for
member countries must also take account of developments                            reductions in European interest rates without bringing the
outside the EMS area . The more closely the economies                              threat of inflationary pressure. A tendency for the dollar to
converge , and the greater the degree of liberalization of                         fall substantiallyfurther might necessitate a flexible response
capital movements , the less of a threat will be posed to the                      for European interest rates, to counteract the danger of a
stability of the EMS by external influences , because an                           renewed significant fall in the dollar exchange rate with its
integrated monetary area would reduce their relative                               negative medium-term consequences . However, attention
importance . Capital movements to and from third countries                         has to be paid to the necessity of avoiding any accumulation
would be less of a danger to EMS stability because the                             of new potentialforfuture inflation. The EMS has proved to
member countries would be equally affected . Here , the                            be a stabilizing factor. Progress towards convergence in
strengthening of the ECU's role is of special importance . In                      association with greaterfreedom of capital movements have
the event of capital moving out of the dollar , this would help                    increased the necessityfor a closer coordination of economic
assure flows into the ECU and not , as has often been the case                     policies both internally — between monetary policy, fiscal
in the past , into the German mark . In view of the uncertainty                    policy and income developments — and among Member
surrounding the future movement of the dollar , this greater                       States. The progress which has been achieved in creating a
integration of European monetary and currency policy                               zone of monetary stability reduces the impact of external
would be welcome . It would also make it easier for Europe to                      influences, and is an important condition for a greater
act in concert in solving international imbalances .                               integration of the European economies .
                                                                         TABLE 15
                                                 Deceleration and convergence in monetary growth
                                                                                                                                         (percentages)
I                                  1961 to
                                    1969
                                            1970 to
                                              1977
                                                        1978       1979      1980       1981       1982  1983    1984     1985      1986       1987
 Weighted average:
EUR                                           14,8      14,8       13,9      11,9       11,5       11,3  11,2      9,5     9,9       9,7        7,4
EMS                                 11,7      14,0      13,8       12,9        9,7        8,7       9,5  10,2      8,4     7,7       6,9        5,6
Measures of dispersion
related to average ( 1 ):
EUR                                            4,2       4,0        3,9       4,1         4,1       2,7   3,6      3.0     4,4       4,2        2,6
EMS                                  2,1       3,4       4,2        4,0        3,4        2,5       2,3   3,5      3.1     3,2       1,5        1,2
Measures of dispersion
related to lowest (' ):
EUR
                                               6,5      10,2         9.0       6,6        7.3       4,8   5,8      5,5      5,0      4,4        3,8
EMS                                  4,8       5,2       9,2         8.1      4,4         4.4       3,0   4,8      4,4      2,8      1,6        2,0
(*) The dispersion index is a weighted sum of absolute deviations from the respective reference value .
Source : Commission services .
 ---pagebreak--- 31 . 12 . 86                                         Official Journal of the European Communities                                                  No L 385 / 53
                                                                              TABLE 16
                                                                     Interest rate developments
                                                                                                                                                       fpercentages)
                                        1961 to    1970 to
                                                               1978        1979         1980       1981     1982        1983        1984         1985         1986
                                         1969       1977
Nominal short-term
interest rates :
EUR 12                                    4,8        8,5         8,8       10,9         13,7       15,0     13,7        11,9        11,2         10,5          8,8
EMS                                       4,5        7,8         6,9        9,8         12,2       14,0     11.8         8,9         9,0          8,3          6,3
USA                                       4,1        5,7         7,4       10,1         11,6       14,0     10,6         8,7         9,4        - 7,5          6,5
Japan                                                8,0         5,1        5,8         10,7        7,4      6,8         6,5         6,3          6,5          5,3
Nominal long-term
interest rates :
EUR 12                                     6.5       9,8       10,3        11,2         13,0       15,1     14,3        12.7        12,0         10,8          9.0
EMS                                        6,3       9,2         8,8       10,1         11,5       13,5     12,5        10,6        10,3          9,1          7,5
USA                                        4.6       6,5         7,9         8,7        10,8       12,9     12,2        10.8        12,0         10,8           8.1
Japan                                                7,7         6,3         8,3          8,9       8,4      8,3         7,8         7,3          6,5           5,2
Real long-term interest
 rates (adjusted for
GDP prices) C1 ):
EUR 12                                     2,4     - 0,3         0,1         0,4          0,1       4,2      3,7         4,4         5,7          4,8           2,6
EMS                                        2,3       0,4         0,6         1,3          0,8       3,5      2,1         2,7         4,5          4.1           2,1
 USA                                       1,6       0,3         0,5         0,2          1,2       4,0       5,3        7,7         8,2          7,0           3,9
Japan                                              - 1,0         1,7         5,7          6,1       5,7      6,6         7,1         6,7          5.2           3,9
 (') The definition or real interest rates poses methodological problems . These problems are accentuated when substantial changes in the terms of trade , as in 1986 ,
     bias the measurement of domestic prices with respect to the trend rate of inflation (upwards or downwards depending on the indicators). An improvement in the
     terms of trade tends to increase the price of GDP .
 Source: Commission services .
 ---pagebreak--- No L 385 / 54                                      Official Journal of the European Communities                                                       31 . 12 . 86
                                                                            GRAPH 20
                                                  The return on capital and interest rates in the Community
                (') Net operating surplus of the enterprise sector (excluding the housing sector) as a percentage of its capital stock at replacement
                      costs ( EUR 4 ). ( Index 1960 = 100 )
                ( 2 ) Yield on government securities deflated by the GDP price index ( EUR 10 ).
                Source: Commission services .
4.2 . Budgetary policy                                                              reduction of net borrowing was most marked in some
                                                                                    countries where its level was very high ( Greece , Italy ), as well
4.2.1 . Budget deficits,           public        debt,   growth        and          as in Denmark where , in 1986 , a surplus is being achieved .
        employment                                                                  Further reductions in deficits are expected to take place in
                                                                                    1987 .
Growth prospects in the Community can be improved by a
judicious balance of budget positions among Member States .                         The reduction of budget deficits mentioned is not sufficient ,
In 1986 , the reduction of budget deficits was , on the whole ,                     however , in several countries to permit a stabilization , let
somewhat more rapid than the year before . For the                                  alone a reduction of the ratio of public debt to gross domestic
Community as a whole ( EUR 12 ) net borrowing , as a                                product . Indeed , in 1986 and 1987 combined , public debt as
percentage of GDP , is being reduced from 5,1% in 1985                              a percentage of gross domestic product will increase by 4
to 4,7% in 1986 , whereas in 1985 the reduction was                                 percentage points or more in half of the Community
three-tenths of one percentage point ( Tables 17 and 18 ). The                      countries ( Belgium , Spain , Ireland , Italy , the Netherlands
 ---pagebreak--- 31 . 12 . 86                               Official Journal of the European Communities                                     No L 385 / 55
and Portugal — Table 19 ). The continuation of high budget            oriented normative budget concept , such as that of the
deficits is at the root of this development . In several              German Council of Economic Advisers ( Sachverstan­
countries , interest charges are more or less equal to overall        digenrat ), shows that a certain annual increase in
deficits . In three countries , Germany , Luxembourg , and            government debt is legitimate . The Council of Advisers
especially Denmark , the public debt ratio is instead expected        considers this 'legitimate' increase to be 1 ,5 % of potential
to fall .                                                             output for Germany , in terms of budget definitions .
                                                                      Judgement of the best budget policy strategy has always to be
Budget deficits that lead to high public debt burdens have two         based on both supply- and demand-side considerations . In
main macroeconomic consequences . Firstly , the public will           present conditions , there are good reasons to aim at a
be ready to hold an increasing fraction of its assets in              strengthening of supply conditions and sustaining demand
government bonds only at increasing real interest rates .             conditions in the economy . The main Community countries
Secondly , such budget deficits increase the risks of an              with approximately stabilized public debt situations are
inflationary monetary expansion leading to an additional              Germany , France and the United Kingdom . In Germany , the
increase in real interest rates as a premium for higher risk .        burden of the public debt is even declining . In France ,
Because of the high level of real interest rates , private            existing room for manoeuvre is being used , large tax
investment is crowded out with negative consequences for              reductions already being foreseen for 1987 and
medium-term growth .                                                  supplementary reductions announced for 1988 while the
                                                                      budget deficit would be simultaneously reduced in each of the
                                                                      two years . If expansion strengthens abroad , and above all in
                                                                      the Community , budgetary policy in France will be all the
                                                                      more facilitated . In the United Kingdom , the Government , in
Thus , since deficits and public debt are high , negative effects     its autumn statement , provided for an increase in public
predominate in the medium term , and their reduction should           expenditure of some £ 4 3/4 billion in 1987 / 88 . This will
only have beneficial effects . In the short run , negative            mean that public expenditure in 1987 / 88 is planned to be
demand effects may dominate but , where the initial                   about 2 % higher in real terms than the estimated out-turn in
condition is one of threatened financial instability , these          1 9 8 6 / 8 7 . Thus , if the cooperative strategy should become by
negative effects from corrective action may be of relatively          its application the basis for economic measures for the
short duration . Denmark has provided an example of this in           Community as a whole , some of these three countries could
recent years .                                                        reasonably envisage a further combination of tax reductions
                                                                      and public investment , the mixture of which could
                                                                      nevertheless be different from one country to the other . A
                                                                      partial compensation for these measures could be expected
On the other hand , where the danger of financial instability is      within a reasonable period of time , through the impact of
limited and the public debt GDP ratio is already declining ,          higher growth in terms of supplementary fiscal receipts and
the negative demand aspects of budgetary contraction                  lower expenditures related to the crisis .
increase in importance . If taxes are reduced and other
measures are taken which improve the supply side , the initial
deterioration of the budget balance may , at least partially , be     Budgetary policy must have a major responsibility in
compensated for after a relatively short time .                       achieving the cooperative strategy. As regards budget deficits
                                                                      and the public debt, consolidation is still a priority for about
                                                                      half the Member States of the Community. Other countries,
                                                                      whose share in Community GDP is about two-thirds, are in
                                                                      sustainable deficit situations and have some possible room
In practice , judging by the level of the public debt as well as      for manoeuvre for budgetary measures supporting growth .
the speed at which it has grown in recent years , a substantial        These countries should now consider, where this is not the
reduction of the budget deficit as a percentage of GDP should         case, a cooperative acceleration of budgetary actions to
continue to be a primary objective in Belgium , Spain , Greece ,      strengthen supply and sustain demand conditions . With a
Ireland , Italy and Portugal . If convincing medium-term              higher activity level in these national economies, the other
budgetary consolidation measures are combined with                    Member States will be able also to achieve consolidation
effective monetary stabilization then large reductions in             objectives at higher levels of activity and employment.
nominal and real interest rates will be possible , which could
ease the effort needed to limit essential budgetary
expenditure .
The reduction of budget deficits , while clearly a priority for
                                                                      4.2.2 . Public expenditure,              taxation,    growth   and
about half of the Member States , is not an objective per se                     employment
when the public finances are in a sustainable condition . In
fact , a certain government debt position in proportion
to GDP is consistent with the medium-term financial                   The concept of 'room for manoeuvre' in budgetary policy has
equilibrium of an economy , for example a supply-side                 at times focussed to an unfortunate degree on the important ,
 ---pagebreak--- No L 385 / 56                               Official Journal of the European Communities                                       31 . 12 . 86
but only partial topic of budget deficits . For questions of            in the medium term . In addition , there are other projects
medium-term growth strategy , even more important policy                which could be realized in the longer term : motorway links
issues surround the level and structure of taxation and public          with the Scandinavian countries through Denmark and the
expenditure . In these latter categories , all Community                Baltic Straits , the Venice-Munich link , tidal power
countries have , effectively , very important 'room for                 installations on the Severn , a bridge at the Straits of Messina ,
manoeuvre' in the sense of desirable policy moves that could            etc .
contribute significantly to raising the medium-term growth
rate of output , investment , savings and employment . An
important issue for the social dialogue is to establish more of
a consensus on how policy over the level and structure of               Such projects would also generate national public investment
public expenditure and taxation can contribute to the                  opportunities of an infrastructural nature . In addition , in the
objectives of the cooperative strategy .                                majority of countries , investment possibilities exist in areas
                                                                        such as urban renovation and the environment (water
                                                                       treatment , etc.). In certain regions , particularly in the new
                                                                       Member States , there still remains an urgent need to
Level and structure of public espenditure. It may be helpful           strengthen the infrastructure . All in all , a significant number
to distinguish between three broad categories of public                of investment projects are therefore available with a
expenditure .                                                          sufficient social rate of return . Progress in realizing these
                                                                       projects would provide an important and useful contribution
                                                                       to growth and employment .
( i ) A first category is infrastructural investment and other 1
investment categories including research and development ' 1
and education. Such investments , in a wide sense , can also in        Given the close links that exist between growth , employment
part be financed by the private sector . On conditions that            and technology , most governments have recognized the
these investment programmes are efficiently managed and             !  importance of a strong research and development policy for a
subject to requirements of a high or adequate social rate of           more robust economic growth . In this respect , priority is
return , there is no reason to want to cut such expenditures           being given to research on advanced technologies aimed at
per se . A high level of such investments , with good or               favouring innovation and a better link between basic
adequate rates of return , will normally be part of a dynamic          research and industry . European successes , in actions such as
economy . Public investment programmes have in particular              Airbus , Ariane , Jet , Esprit and Brite , underline the value and
been more than proportionally affected by budgetary                    effectiveness of Europe's potential for R & D. In addition
economies , falling from 4% of GDP in 1975 to 2V2 % in                 they illustrate different possibilities for financing through
1985 . Subject to efficiency criteria , such expenditures could        European programmes and financial participation in
now be expanded for a multi-year period as part of the                 precompetitive industrial research . The Community has
cooperative strategy .                                                 established framework programmes to obtain an increased
                                                                       effectiveness of the Community's research activities . Also to
                                                                       be noted is the Eureka initiative , which reflects the will of
                                                                       governments to find new financial and economic synergies in
An infrastructural investment programme , comprising                   the field of European industrial cooperation .
projects of Community interest , as set out in last year's
Annual Economic Report , fits well into the strategy . Such
projects of European interest can be undertaken and financed
by the private sector . These concern the following projects in        As far as infrastructural investment is concerned , the State
particular :                                                           has an essential role to play in the improvement of human
                                                                       capital through training and the upgrading of professional
                                                                       skills . Here also , close cooperation between public
— the establishment of a telecommunications trans-border               authorities and those concerned should enable appropriate
      backbone network ( some 3 000 million ECU ),                     forms of financing to be established , taking account of the
                                                                      possibilities available and the gains to each party of improved
                                                                      professional qualification ( see also section 4.3.2 ).
— three linking networks : road , rail and inland waterways
      ( 20 000 to 25 000 million ECU ),
                                                                       ( ii ) A second category covers normal public services, such as
— the Paris-Brussels-Cologne high-speed rail link (3 000               health care and pensions . A high level of these public services
      million ECU )                                                    is socially desirable . There are , of course , important
                                                                       management issues present here , and reasonable discipline in
                                                                      economic terms has to be maintained since the demands for
— the Channel tunnel (4 000 million ECU ).                             increased expenditures on these programmes can outstrip the
                                                                      capacity of the economy . The question of the public versus
                                                                      private mix in the organization of these programmes is also
                                                                       an important issue for reasons of management efficiency as
Overall , an investment volume of 30 000 to 35 000 million            well as social equity . However , the option of partial
ECU over a period of five to seven years can be envisaged             privatization of health care and pensions has to be assessed
 ---pagebreak---  31 . 12 . 86                                  Official Journal of the European Communities                                 No L 385 / 57
 with considerable caution . In particular , the transfer of these        falling on employees is passed on to higher labour costs .
 social charges to private insurance systems will not                     Assuming that a higher cost of labour tends to dampen the
necessarily ease their costs . It could be , for example , that           demand for labour by firms , private employment will be
lower social security taxes are offset by higher contractual              discouraged and economic growth will be lower; hence the
payments paid to private bodies and levied in the same way                importance of measures to cut social security costs and taxes
by employers . The impact on overall labour costs and wage                just discussed above .
behaviour would not then be very significant . Overall ,
reasonable economy in the management of these
programmes is required , but not their run-down .
                                                                           Taxation and supply of labour. High marginal tax rates may
                                                                          influence the incentive to work in a negative way and weaken
( iii ) A third category is social benefits that are paid because         the foundations of economic growth .
of faults in the functioning of the economic system .
Unemployment benefits are an obvous example , at least at a
level above a minimal unemployment rate . However , this
category of 'avoidable' public expenditures is in fact much                Taxation, disposable income and household savings. There
more extensive , and includes also supplementary family                   are other factors which have indirect effects on employment
benefits to unemployed persons , expanded programmes of                   by discouraging savings and hence capital accumulation .
early retirement pensions and , in several countries , disability         Higher taxes on households' income reduce disposable
pension programmes that have been expanded to include                     income and household savings . If the government spends a
people with little or no medical disability . The total of these          higher fraction of its proceeds , net of transfers , on
'avoidable' public expenditures has increased by as much as               consumption goods than do households , national savings go
5% of GDP over the course of the last 15 years in the                     down .
Community on average . In terms of increased social security
charges , this amounts to about 10 % of labour costs , which is
clearly a very large margin in relation to any debate about the
economically warranted level of labour costs .
                                                                           Taxation and resource allocation. Where many categories of
                                                                          income or expenditure benefit from tax exemptions there will
                                                                          be distortions in the allocation of resources that will reduce
Implementation of the cooperative strategy should make it                 their average productivity . In this case , higher general rates
possible to reconsider the pertinence of certain of these                 of taxation will have to be applied , leading to dampened
programmes as employment prospects improve . For                          incentives to work , employ , save and invest , as already
example , the criteria for new admissions to some special                 mentioned . Accordingly , it is desirable to verify that each
pension programmes may be reconsidered , while respecting                 existing tax exemption still has an economic or social
the acquired rights of existing pensioners , as part of a policy          justification , at the same time taking account of the fact that
to achieve a rising participation rate among those of working             its abolition would enable the tax base to be widened and
age , as well as declining unemployment . Policy initiatives of           general rates to be lowered . This is the argument behind the
this kind are envisaged in several countries , such as Italy and          recent United States' reductions in income tax rates and
the Netherlands , where special pension programmes for                    exemptions .
people of working age have expanded to the point of covering
over 10% of the labour force . In other countries too ,
analogous expenditures have led to a growth of social
security taxes that has contributed to the weak evolution of
                                                                          Within the Community at present there are several tax
employment . Economies in public expenditure and social
security taxes could in this way thus be part of a new virtuous
                                                                          reform themes which may be highlighted .
circle of employment creation and tax reduction . Greater
efficiency in these social expenditures may be obtained
through improving the employment possibilities of a
considerable proportion of the people currently benefiting                As regards corporate profits taxes , several countries are
from these programmes .                                                   reducing rates of taxation ( United Kingdom , France ,
                                                                          Netherlands , Belgium , Luxembourg), partly offset by lower
                                                                          depreciation allowances . Some countries envisage reducing
                                                                          or eliminating other business taxes which are not based on
Possibilities for tax reform . The economic policy objectives             profits , such as a wealth tax on enterprises in Germany , the
of reform in the levels and structure of taxation fall under
                                                                          'taxe professionnelle' in France and a trade tax in
four main headings , concerning ( a ) the demand for labour ,             Germany .
( b ) the supply of labour , ( c ) the level of savings and thence
capital accumulation , and ( d ) the efficiency of resource
allocation .
                                                                          As regards income taxes on persons , France , Germany and
                                                                          the United Kingdom are all engaged in a process of making
Taxation, labour costs and the demandfor labour. It is likely             successive cuts in high marginal tax rates , partly financed
that a considerable part of the tax and social security burden            with a broadening of the tax base ( United Kingdom ), partly
 ---pagebreak---   No L 385 / 58                                      Official Journal of the European Communities                                            31 . 12 . 86
  through general budgetary economies . In France , Germany                         Important contributions to the cooperative strategy should
  and the United Kingdom , further reductions in personal                           come through specific actions affecting the level and
  income tax are major governmental objectives for the next                         structure of public expenditure and taxation . Public
  few years .                                                                       investments with a sufficient social rate of return could now
                                                                                    be increased which would also support the expansion in
 In the context of the fall in the price of oil , several countries                productive potential and private investment. Social security
 have taken the opportunity to raise oil consumption taxes ,                       contributions should be reduced over a medium-term period.
 often with a view to reducing deficits ( Denmark, Spain ,                          The improvement in growth and employment and the
 Greece , Italy , Ireland and Portugal ).                                           resulting increases in public sector revenue and savings in
                                                                                    transfer payments can create a virtuous circle. Tax reforms
 The Commission's proposals for the approximation of                               should also aim at reductions in income tax rates and other
 legislation on indirect taxes could also imply changes in the                     changes in the structure helpful to employment policy and
 structure of taxation in certain countries .                                      facilitate indirect tax approximation in the Community.
                                                                            TABLE 17
                                                General government revenue and expenditure (*), EUR 12
                    *
                                                    1 000 million PPS                  Percentage of GDP                     Percentage change
I                                                    1985       1986 ( 2 )    1984      1985      1986 ( 2 ) 1987 ( 2 ) 1985      1986 ( 2 )    1987 ( 2 )
 Indirect taxes                                      517,3        568,3       13,5      13,3         13,4     13,5       7,4        9,9           6,8
 Direct taxes                                        497,0        526,9       12,7      12,8         12,5     12,4       9,7        6,0           6,2
 Social security contributions                       589,1        631,8      15,2      15,2          14,9     14,9       8,1        7,2           6,1
      received
 Total taxes and social security                 1 603,4       1 727,0       41,3      41,3        ' 40,8     40,8       8,4        7,7           6,3
      contributions
 Other current revenue                               148,4        152,4        3,7       3,8          3,6      3,3      12,3        2,7        - 3,3
 Total current revenue                           1 751,8       1 879,4       45,0      45,1          44,4     44,1       8,7        7,3           5,6
 Current transfers paid                              877,8        933,4      22,8      22,6          22,1     21,7       7,5        6,3           4,4
Actual interest payments                             198,7        217,1        4,9       5,1          5,1      5,0      12,3        9,3           2,7
Government consumption                               722,6        770,1      18,8      18,6          18,2     18,0       7,6        6,6           5,1
 Total current expenditure                       1 799,0       1 920,7       46,5      46,3          45,4     44,6       8,1        6,8           4,5
Gross saving                                        - 47,3       - 41,2     - 1,5     - 1,2        - 1,0     - 0,5       —           —            —
Net capital transfers                                 45,5         41,5        1,1       1,2          1,0      0,9      17,1      - 8,8        - 4,5
Gross capital formation                              107,3        114,8        2,8       2,8          2,7      2,7       7,7        7,0           6,0
Net lending ( + )
or borrowing ( - )                               - 200,0      - 197,5       - 5,4     - 5,1        - 4,7     - 4,1
Memorandum : nominal GDP                         3 882,2      4 225,8      100,0      100,0       100,0      100,0       8,6        8,9           6,4
(') National accounts definition , excluding loans , advances and participations .
( 2 ) Forecasts .
Source : Commission services .
 ---pagebreak--- 31 . 12 . 86                                       Official Journal of the European Communities                                                 No L 385 / 59
                                                                           TABLE 18
                                                  General government lending ( + ) and borrowing ( - )
                                                                                                                                  (as % of GDP)
                                           1970         1973         1981      1982        1983       1984    1985 (')     1986 (')    1987 (>)
              Belgium                      - 2,2        - 3,3       - 12,6    - 11,1      - 11,7     - 9,5     - 8,4       - 8,0        - 6,2
              Denmark                        4,1          5,2       - 7,1     - 9,3       - 7,3      - 4,2     - 1,9           2,8          2,8
              Germany                        0,2          1,2       - 3,9     - 3,4       - 2,5      - 1,9     - 1,1       - 0,9        - 0,7
              Greece                        —            —
                                                                    - 10,6    - 9,4       - 8,9      - 10,1    - 13,9      - 10,6       - 7,1
              Spain                          0,7          1,1       - 3,0     - 5,8       - 5,4      - 5,0     - 6,2       - 4,9        - 4,4
              France                         0,9          0,9       - 1,8     - 2,5       - 3,2      - 2,9     - 2,6       - 2,9        - 2,6
              Ireland                       —            —
                                                                    -.15,8    - 14,2      - 11,8     - 9,8     - 11,6      - 10,7       - 9,9
              Italy                        - 3,5        - 7,0       - 11,7    - 12,7      - 12,4     - 13,0    - 14,0      - 12,7       - 11,0
              Luxembourg                     2,7          3,3       - 2,3     - 1,3       - 0,8         1,5         4,1       3,7           2,6
              Netherlands                  - 1,2          1,0       - 5,2     - 7,1       - 6,5      - 6,2     - 5,1       - 5,5        — 6,6
              Portugal                      —            —
                                                                    - 10,1    - 8,8       - 7,1      - 7,7     - 11,2      - 8,0        - 7,5
              United
              Kingdom                        3,0        - 2,7       - 2,7     - 2,4       - 3,7     - 3,9      - 2,8       - 2,9        - 2,5
              EUR 12                         0,3(2 }      1,0 ( 2 ) - 5,4     - 5,6       - 5,5      - 5,4     - 5,1       - 4,7        - 4,1
              (') Estimates and economic forecasts of the Commission services ( October 1986 ).
              ( 2 ) Without Greece , Ireland and Portugal .
                                                                          TABLE 19
                                                                        Public Debt ( 2 )
                                                                                                                                 (as % of GDP)
                                              1973         1981         1982       1983          1984      1985 (')     1986 (■)      1987 (>)
              Belgium ( 3 )                  63,2         88,1          96,1      105,1         111,6       118,3        121,9         125,6
             Denmark                           5,0        43,6          52,7        62,7         67,6        66,3         62,1          57,6
             Germany                         18,6         36,4         39,5         41,7         42,0        42,7         41,9          41,7
             Greece ( 4 )                      -
                                                          33,0         36,7         41,4         49,9        56,8         58,4          61,2
             Spain                                        21,0         26,2         32,1         39,3        46,3         48,8          52,5
             France                          25,1         26,0         29,1         30,7         29,3        31,8         34,0          35,0
             Ireland ( 4 )                   65,5         89,8         96,6       107,7         113,6       115,7        119,1         124,8
             Italy                           62,5         73,2         80,0         87,6         94,5       103,0        106,3         108,1
             Luxembourg                      20,5         14,0          14,4        14,8         14,8        14,5         13,8           12,8
             Netherlands ( 3 )               43,4         50,3         55,6         62,3         67,0        70,6         76,3          82,9
             Portugal                                     59.0         62,2         70,9         75,7        81,2         81,5          85,2
             United
             Kingdom ( 5 )                   63,3         51.1         57,7         57,4         58,7        56,9         57,9          58,0
             EUR 12                          40,3 ( 6 )   45,0         49,8         53,5         56,0        58,9         60,3          61,8
             (') Estimates and forecasts of the Commission services on the basis of the October 1986 economic forecasts .
             ( 2 ) General government except Belgium , Greece , Ireland and the Netherlands .
             ( 3 ) General government without social security system .
             ( 4 ) Central government .
             ( 5 ) Debt at market prices .
             ( 6 ) Without Greece , Spain and Portugal .
             Source : Eurostat and Commission services .
 ---pagebreak--- No L 385 / 60                                  Official Journal of the European Communities                                       31 . 12 . 86
                                                                    TABLE 20
                                   Evolution or public expenditure on social programmes from 1970 to 1983
                                                                                                                          (percentages of GDP)
                                                                                                        Luxem­   Nether­   United
                                             Belgium  Denmark   Germany    France    Ireland    Italy                                EUR 8 (')
                                                                                                         bourg     lands  Kingdom
1970:
Health care , sickness                         3,8       5.6       5,7       4,9       4,1                2.7       5,7     3,9         5.0
Invalidity and work accidents                  2,2       2.7       2,6       1,8       1,3                2,9       3,1     1,2         2.1
Pensions                                       7,1       6,9       9,4       7,5       4,6       —
                                                                                                          7,8       7,7     6,7         7,9
Maternity and family                           3,5       2,7       2,1       3,1       2,3                1,8       2,6     1,5         2,3
Unemployment                                   0,6       0,4       0,1       0,3       0,4                0,0       0,6     0,3         0,3
Others                                         0,0       0,1       0,3       0,0       0,1                0,0       0,8     0,1         0,2
                                   Total      17,4      19,0      20,7     18,2      13,3        —
                                                                                                        15,4      19,0     13,8        18,0
1983 :
Health care , sickness                         6,5       7,1       7,5       6,8       8,4      5,7     11,1        8,4     4.7         6,7
Invalidity and work accidents                  3,3       2,5       3,1       2,3                5,4                 6,4     2,2         2,9
Pensions                                      11,5      10,4      12,1     11,2        7,4     11,5     12,0     10,3       9.8        11,1
Maternity and family                           3,0       3,1       2,0       3,1                 2,0      1,2       2,7     2,8         2,6
Unemployment                                   4,2       4,1       2,0       2,7                0,8       0,0       4,2     2,3         2,5
Others                                         0,5       1,1       0,6       0,2       3,1      0,0       0,8       0,0     0,3         0,4
                                   Total      29,5      30,1      27,8     27,4      23,2      25,5     25,5     32,7      23,1        27,0
Increase, 1970 to 1983 :
Health care , sickness                         2,7       1,5       1,8       1,9       4,3                8,4       2,7     0,8         1,7
Invalidity and work accidents                  1,1     - 0,1       0,5       0,5                 —
                                                                                                                    3,3     1,0         0,8
Pensions                                       4,4       3,5 .     2,7       3,7       2,8                4,2       2,6     3,1         3,1
Maternity and family                        - 0,5        0,4     - 0,1       0,0                       - 0,6        0,1     1,3         0,2
Unemployment                                   3,6       3,7       1,9       2,4                          0,0       3,6     2,0         2,3
Others                                         0,5       1,0       0,3       0,2       3,0                0,8   - 0,8       0,2         0,2
                                   Total      12,1      11,1       7,1       9,2       9,9       —
                                                                                                        10,1      13,7      9,3         9,0
(') Excluding Italy .
Source: Eurostat ( European system of social protection statistics ) data file .
Note: Figures are not comparable since the nature of benefits differ ; amounts of public versus private expenditures on some categories of
       expenditures ( e.g. health , pensions ) vary considerably between countries .
4.3 . Wages and the labour market                                            average productivity per head would be 2,3 % during the
                                                                              same period . Taking into account the fall in social
                                                                             contributions of employees and direct taxes , as well as
4.3.1 . Incomes and wage costs                                                modifications in the terms of trade , purchasing power of net
                                                                             wages would grow on average over the period 1986 to 19 90 a
                                                                             little more rapidly .
The cooperative strategy proposes that the social partners
agree on a development of labour costs which is compatible                    These developments in total labour costs and net wage
with a significant increase in employment . The scenario                      incomes thus merit the support of both employers and
illustrating the cooperative strategy accordingly envisages                  employees , since they should be conducive to a much
that real wages , in the form which is undoubtedly close to                   stronger employment performance and improved
that generally considered in the wage bargaining process ,                   profitability for enterprises as well as moderately growing
that is to say net of social contributions of employers , will               real incomes for employees .
grow , in real terms , on average for the years 1986 to 1990 at
a moderate rate , close to 1,1 % per annum . Added to the
effects of this moderate growth would be that of some                        All countries have made some progress since the early 1980s
lowering of employers' social contributions . The increase in                 in the moderation of real wage increases compared to
 ---pagebreak--- 31 . 12 . 86                                 Official Journal of the European Communities                                 No L 385 / 61
productivity growth . Profits have therefore improved .                 case of an improvement in the terms of trade , that this
Between 1981 and 1985 , progress has however been quite                 recovery is speeded up and accompanied by a satisfactory
different between countries ( cf. Table 21 ).                           development in real wages . Efforts undertaken in recent
                                                                        years to reduce the rigidity of indexation arrangements
                                                                        should also be continued . The present stable situation should
                                                                        make this easier to achieve .
However , in 1986 , a greater degree of convergence could be
attained within the Community . The improvement in the
terms of trade has enabled countries like Belgium , France and
Italy , where progress had been slower up to 1985 , to achieve
considerable improvements in the profitability of firms this            Within each country , the formation of wages at regional level
year . This is explained for example in Belgium by                      should be kept fairly pliant . Greater economic and social
index-linking arrangements , which are still fairly rigid , and         cohesion within the Community also requires convergence of
have made it possible to pass on the reduction in inflation             regional unemployment rates towards the lowest rates ,
automatically to nominal wages . In France , in the framework           without implying depopulation in the poorest regions .
of the policy of collective agreements , which aims at aligning
nominal wages ex ante on the target for prices , account has
been taken of a faster than expected decline in inflation .
                                                                        Resource transfers organized either by the Member States or
                                                                        by the Community can and must contribute to achieving this
Only in five countries , Belgium , Greece , Spain , France and          aim . To be fully effective , however , the resources must be
Italy , will the increase in real labour costs per head in 1987 be      supplemented by private capital attracted by a rate of return
lower than or close to 1 % . In Greece , Spain and France ,             at least equal to that prevailing in more favoured regions .
indeed , the weakness of the employment recovery and the
especially high level of unemployment seem to justify an
increase in real labour costs below the Community average .
The same applies to Belgium and Portugal , where real labour
costs per head are expected to increase by close on 1 % .               Lastly , the moderate rise in real wage costs per head should
                                                                        be generalized , and benefit all sectors and firms .
In the other Community countries , th'e increase in real labour
costs per head will probably be 2 to 3 % ( cf. Table 22 ). In
these countries , it is desirable that the social partners take
account of the development of employment and the level of               In this respect , productivity gains realized in the most
unemployment in pay negotiations . For example , the change             efficient sectors should be used first of all to improve the
in trend brought to labour costs could be less marked in                competitiveness and profitability of the economy , rather
Germany , where unemployment is relatively low and profits              than to ensure higher than average wage rises in those
have increased fairly rapidly . In the United Kingdom , on the          sectors . This permits an increase in the margin for
other hand , the problem of a rapid increase in real wage               manoeuvre of sectors with lower gains in productivity . This
incomes , despite a high rate of unemployment , is an                   room can then be used to increase employment .
especially acute one .
The need for wage moderation implies that both sides of                 At the level of the individual firm , it could however be useful
industry will act in a responsible manner . Wages are                   to keep rates of pay adaptable to react to the situation . This is
determined in each country on the basis of traditional                  often necessary in order to assure stability of employment in
procedures that have often stood the test of time . Although            the face of cyclical changes in demand or prices . One
they need not be called into question , they should ensure              technique which could be envisaged is possibly to divide pay
respect for some basic principles .                                     into a fixed component and a variable component linked to
                                                                        the firm's profits , which may help improve the motivation of
                                                                        the work force . Adaptability of this type can also help to give
                                                                        existing firms the margin required for restructuring while
Wage agreements should allow for rapid adjustments , in the             maintaining a particular level of employment .
direction required by the cooperative strategy , to take
account of the very marked changes — largely unpredictable
— in the terms of trade . The social partners should examine
the possibility of maintaining some flexibility in the actual
development of nominal wages in such a situation . One of               The various aspects of wage formation mentioned here
the possibilities which could be envisaged would be the                 concern first and foremost the social partners . These are thus
introduction of safeguard clauses into wage agreements                  subjects that should be examined thoroughly in the context
protecting to a certain degree both parties . This ought to             of the social dialogue , with a view to assuring an appropriate
ensure that either the recovery in profitability is not                 equilibrium between labour market adaptability and the
compromised when the terms of trade deteriorate , or , in the           protection of employees .
 ---pagebreak---  No L 385 / 62                              Official Journal of the European Communities                                     31 . 12 . 86
 The evolution of labour costs has in recent years permitted a          The reorganization and reduction of working time can make
 certain improvement of the profitability of the enterprise            growth more employment-creating , on condition that it be
 sector, and will thus help employment. The reduction of the            neutral for the level of costs . This goal can be attained in
 price of oil adds to these trends. For the medium-term future,         association with a reorganization of the production process
 a consensus needs to be formed favouring moderate real                which combines a reduction in working time with the longer
 wage increases, coupled to the extent possible to decreases           use of production facilities and a more flexible use of labour
 in social security charges, thus allowing a sustained                 within the company . This could increase capital productivity
 improvement in profitability and competitivity. To increase           which is desirable as a contribution towards boosting private
 the chances of a rapid reduction in unemployment, care                investment . The possibility of using existing plant for more
should be taken to ensure that wage formation procedures               production with a larger workforce would also help to reduce
 remain sufficiently adaptable both in relation to                     the insufficiency of the capital stock in relation to the level
 unforeseeable developments in the international context and           which would be required at a high employment level in the
in relation to regional disparities. At the level of individual        economy .
firms, some adaptability in pay could be examined in order to
improve the motivation of the workforce and to make it
possible to stabilize employment in the face of cyclical
changes in demand or prices. However, above average                    Since the uncertainties and adjustment costs associated with
productivity gains realized in the most efficient sectors and          a reorganization of the working process can be considerable ,
firms should be used mainly to improve competitiveness in              it must be incorporated in a cooperative approach . In
 the economy as a whole, and not to achieve higher than                particular , capital as well as labour cost increases have to
average pay rises in these sectors .                                   avoided . In many cases , public support is also necessary in
                                                                       the encouragement of experiments , and the exchange of
                                                                       experiences and , in some situations , in order to cover
                                                                       adjustment costs . In a number of Member States , the
                                                                       government supports this restructuring process in a variety of
                                                                       ways .
4.3.2 . Adapting        the    labour market         for   more
          employment-creating growth
                                                                       The deregulation of employment protection systems does not
                                                                       constitute an objective in itself. There are advantages in
                                                                       having a general framework of employment laws , as seen in
Apart from the major macroeconomic determinants of                     all European countries and Japan , in order to assure stability
employment already discussed — aggregate demand , pay                  and fairness in employment conditions . Employment
levels and social security costs — there exist a larger number         protection law can also form part of a wider social contract ,
of microeconomic policy instruments that can help or hinder            in which a cooperative approach to industrial relations relies
the employment propensity of the economy . Some of the                 on forward-looking employment policies .
main headings are :
— working time practices ,
                                                                       The considerable range of employment protection practices
                                                                       in the Community , all within a context of a comprehensive
— employment protection regulations ,                                  legal framework , gives some evidence of how unduly heavy
                                                                       regulatory burdens may damage the employment propensity
                                                                       of the economy . Surveys of employers made by the
— training and retraining facilities ,                                 Commission indicate that the regulations governing
                                                                       dismissals and redundancies are perceived in some countries
                                                                       as being particularly detrimental to employment . In such
— regulations affecting the start-up of small enterprises ,            cases , the severity of costs , procedures or judicial systems
     self-employment and cooperative enterprises ,                     of appeal concerning recruitment and termination
                                                                       of employment contracts should be reconsidered , without ,
— measures to help the long-term unemployed back into                  however , calling into question basic social rights . Such
     activity and to integrate the young unemployed into the           reforms should be compatible with the objectives set out in
     workforce .                                                       Article 118A of the Single European Act .
In these domains , initiatives have recently been taken or are         The rules governing part-time work and fixed-term contracts
being considered in most Member States and at the                      are also of considerable importance in determining the
Community level . Moreover , many detailed measures to                 balance struck between the quality and volume of jobs
improve the labour market have recently been the subject of a          offered . Evidence of an increasing supply of persons willing
memorandum entitled . Employment Growth into the 1990s                 to take such employment , and of the supply of jobs of this
— a Strategy for the Labour Market submitted in June 1986              type is sufficiently important in relation to the job shortage in
to the Council for Employment and Social Affairs by the                the Community that the conditions of these types of
ministers from Ireland , Italy and the United Kingdom .                employment contract should not be too restrictive . In
 ---pagebreak---   31 . 12 . 86                              Official Journal of the European Communities                                    No L 385 / 63
 particular , if the Community is to succeed in increasing its          The contribution of training and qualifications towards the
 labour force participation rate , which it needs to do in view        greater regional flexibility of the labour market within the
 of looming problems of changes in demographic structures , it          Community was effectively recognized by the Council's
 will have to rely in part on these forms of employment                decision to work towards the comparability between
 contract , which are particularly suited to the preferences of        vocational training qualifications for semi-skilled ( level 2 )
 certain groups ( for example to the needs of the second worker        workers . The decision complements the Community action
 in families and of elderly workers ). These forms of                  to accelerate the mutual recognition of professional
 employment contract also have the advantage in present                qualifications , and will benefit in the first instance workers in
 conditions of reducing the regulatory costs at the margin             those sectors in which a high level of cross-border mobility is
 for new recruitment , without questioning the secure                  already prevalent . It constitutes a step towards achieving the
 employment status of existing permanent employees ; they              human dimension of the internal market .
 would also help assure a more employment-creating growth
 process . On the other hand , precautions have to be taken to
 limit the risks from developing precarious jobs and assure the
 quality of such forms of contract . They should , for example ,
 be governed by minimal social security coverage and other             Two of the most important factors conditioning the
 labour laws such as those setting minimum wages .                     adaptability of the labour market , with a view to achieving
                                                                       more employment-creating growth , are the regulations and
                                                                       negotiated practices governing ( a ) working time , and ( b )
                                                                       employment protection . In both areas , surveys recently
                                                                       conducted by the Commission (^ suggested that there exists ,
 Education, training and retraining constitute a key variable          in the opinions of both employers and employees , a wish to
 in the economic adjustment process and must be considered             ease certain rules governing the labour market . This
 in conjunction with employment policy initiatives if major            willingness should be fully exploited by deepening the social
 bottlenecks are to be avoided and the social consequences of          dialogue on these various themes .
 industrial restructuring are to be attenuated . The central role
 that education and training is now playing in Member States
 is underlined by the increasing recognition of the links
 between training , productivity and business success , and of
                                                                       As stressed already in a Commission communication to the
the importance for enterprises to invest more heavily in
training provision . As a tool of social adjustment , retraining
                                                                       Council in 1984 ( COM(84 ) 484 final ), the long-term
                                                                       unemployed will tend to be amongst the last to benefit from
is particularly necessary to accompany business closure and
 sectoral shrinkage , and even more so in areas of industrial          any improvement in overall economic performance . Policies
decline .                                                              to promote general economic and employment growth must
                                                                       be supplemented by policy interventions targeted specifically
                                                                       at the long-term unemployed . The Commission therefore
                                                                      proposed a set of measures designed both to prevent people
                                                                       from becoming long-term unemployed and to reintegrate
                                                                      those who had already been unemployed for 12 months or
In this regard , and within the framework of the social               more . These measures formed the basis of the Council
dialogue at the Community level ( Val Duchesse ), the                 resolution of December 1984 ( 2 ) which gave a commitment
working party on training and motivation for workers in               to tackle the problem by increasing the efficiency of existing
connection with new technologies is seeking to contribute to          social and employment policies as part of an effective
a positive environment . This is especially important in              Community policy to combat unemployment . These
relation to the Euro-Tecnet programme for new information             commitments were in addition to those set out in the Council
technologies , vocational training , and to the Comett decision       resolution of January 1984 concerning youth unemployment
on cooperation between universities and enterprises on                in which the Member States agreed a series of actions to
high-level training .                                                 promote training and employment opportunities for young
                                                                      people .
A particular effort is called for to ensure effective local and
regional management of human resources , with sufficient              A range of initiatives specifically to help the long-term
investment in training from both private and public sources           unemployed has been supported through the European
to ensure the general upgrading and modernization of skills           Social Fund and through the Poverty Programme ( 3 ). Many
at all levels . Small and medium-sized businesses face                Member States have introduced new measures in favour of
particular training and retraining problems ( in terms of             the long-term unemployed or extended existing measures .
management development and advice , access to training ,
flexibility of delivery); in this connection , Member States are
being invited to respond positively to a comprehensive                ( ! ) 'Employment prospects : views of businessmen and the
package of measures proposed by the Commission . The need                   workforce' European Economy, No 27 , March 1986 .
for more manpower " flexibility within the company also               ( 2 ) Council resolution of 19 December 1984 on action to combat
stresses the importance to increase the level of training to                long-term unemployment .
facilitate this internal mobility .                                   ( 3 ) COM(83 ) 211 final , 25 April 1983 .
 ---pagebreak--- No L 385 / 64                                   Official Journal of the European Communities                                        31 . 12 . 86
However , the proportion of those registered as unemployed                        A report in the form of a communication will be submitted to
who have been without work for a year or more has                                 the Council in early 1987 with proposals for further action .
continued to increase and now stands at an average of about                       The report will be based on information obtained from
40 % across the Community . Furthermore , there has been a                        Member States and on the findings of recent reports
significant increase in the proportion of people unemployed                       undertaken by the Commission and by other organizations
for two years or more . The scale of the Community's                              with an interest in policy on long-term unemployment .
response to the problem clearly does not reflect the scale of
the problem itself; a greater political and financial
commitment to action is needed to meet the objectives set out                     Many types of regulatory policies andjob creation initiatives
in the 1984 resolution . Concrete measures , such as lower                        can help improve the employment propensity of the
social security charges for taking on the long-term                               economy. Such initiatives need to fit coherently with a
unemployed , could therefore be considered .                                     positive macroeconomic policy as envisaged in the
In addition , it is clear that , with respect to youth                            cooperative strategy. The Community should not aim at a
employment , it will be necessary to focus attention on those                    general deregulation in employment protection law, but
measures which are most likely to lead to subsequent                              Member States should, in some cases, adjust unduly onerous
employment , rather than simply delay entry into the labour                       regulations so as not to discourage the growth of various
market . Particular attention needs to be given to the                           forms of employment, :;o long as basic social security and
problems of young people over 20 , many of whom already                          other conditions are respected. The adaptation of working
risk being numbered among the long-term unemployed when                           time, on conditions which are neutral for the level of costs,
training   or temporary          job-creation      possibilities     are         can also help achieve more employment-creating growth .
exhausted .                                                                      Stronger action is required to ease the problems of the
                                                                                 long-term unemployed and of youth unemployment, and the
At the end of 1986 , the Commission will review progress in                       Community will soon be reviewing the adequacy of such
implementing the actions agreed in the Council resolution .                      measures .
                                                                       TABLE 21
              Real unit labour costs ( Ratio of real per capita labour costs to productivity) (Index 100: average 1961 to
                                                                          1973
                                          Average
                                          1961 to      1975         1981         1982       1984     1985 (')  1986 (>) 1987 (')
                                           1973
              Belgium                       100       110,0        115,0        112,9      111,9      110,2     106,1    104,6
              Denmark                       100       104,6        100,5         99,2       96,1       94,4      92,9     93,5
              Germany                       100       105,9        103,5        102,2       98,9       97,8      96,1     95,7
              Greece                        100        90,2        106,4        106,1      107,2      109,2     101,2     98,9
              Spain                         100       104,0        102,9        100,7       94,4       91,8      89,1     87,7
              France                        100       105,9        108,1       107,3       105,3      104,4     102,1    100,2
              Ireland                       100       104,6        101,3         99,5       95,2       92,9      91,4     91,3
              Italy                         100       110,9        108,6       108,6       109,4      108,5     103,2    101,7
              Luxembourg                    100       123,4        124,9       120,4       111,2      109,3     106,4    107,5
              Netherlands                   100       108,8        102,5       101,1        95,8       94,3      95,4     97,8
              Portugal                      100       136,2        116,1       108,6       100,5       96,9      92,0     90,6
              United Kingdom                100       110,1        100,3         98,5       98,8       97,9      99,9    100,3
              EUR 12                        100       107,2        104,3       103,0       101,1       99,9      98,1     97,4
              (') Estimates and forecasts of the Commission services , October 1986 .
              Source: Eurostat and Commission services .
 ---pagebreak---  31 . 12 . 86                                      Official Journal of the European Communities                                                        No L 385 / 65
                                                                             TABLE 22
                                                   Labour costs and employment forecast for 1987 (*)
                                                                                      Wage costs per employee ( 2 )
                                                                                          (annual variation in % )         Productivity      Real
                                                        Unem­      Employment                                              in the whole unit labour
                                                       ployment     (percentage                                 real ( 4 )   economy       costs ( 5 )
                                                                    change per                    real ( 3 ) on the basis    (GDP per    (percentage
                                                        rate ( 6 )                             on the basis
                                                                      annum )     nominal                     of private     occupied    change per
                                                                                                  of GDP
                                                                                                              consumer        person)      annum )
                                                                                                   prices
                                                                                                                 prices
                                                           1             2             3             4             5             6            7
                Belgium                                  13,4         - 0,6          2,2            0,4           0,7           1,9         - 1,4
                Denmark                                   7,7           0,3          5,9            2,1           3,0           1,5           0,6
                Germany                                   7,7           1,0          3,2            1,8           2,1           2,2         - 0,3
                Greece                                    8,3           0,0          9,6         - 2,4         - 2,6         - 0,2          - 2,2
                Spain                                    21,5           1,2          6,3            0,2           1,0           1,8         - 1,6
                France                                   10,7           0,3         3,0             0,3           0,7           2,2         - 1,9
                Ireland                                  18,0           0,7         6,0             2,3           2,7           2,5         - 0,1
                Italy                                    12,8           1,3         6,1             0,8           2,1           2,3         - 1,5
                Luxembourg                                1,2           0,7         5,6             2,9           4,2           1,9           1,1
                Netherlands                              11,1           0,9          1,7            3,4           2,7           0,9           2,4
                Portugal                                  8,5           0,3       12,3              1,6           3,1           3,2         - 1,5
                United Kingdom                           12,0           0,8         6,6             2,3           2,6           1,9           0,4
                EUR 12                                   11,7           0,8         4,8             1,3           1,8           2,0         - 0,7
                 ') Forecasts of October 1986 .
                 2 ) Wages and social security contributions .
                 3 ) From the point of view of costs .
                 4 ) From the point of view of purchasing power .
                 5 ) Column 4 divided by the increase in productivity .
                 6 ) Registered unemployed , Eurostat definition as a percentage of the civilian labour force: except for Greece, Spain and Portugal
                     where national survey results are presented .
               Source: Eurostat and Commission services .
4.4 . The adaptability of markets                                                       The reinforcement of the potential for growth and the
                                                                                        resulting employment performance necessarily go hand in
                                                                                      ' hand with structural adjustment , but this structural
Among the lines of action in the cooperative strategy , action                          adjustment will be that much smoother if it unfolds against a
to improve the adaptability of markets is a basic factor in the                         background of dynamic growth in which the social
process of improving the competitiveness of firms and their                             dimension of the adjustment can be more easily taken into
performance , in particular on the employment front . While it                          consideration .
is true that this improvement can be brought about by
medium-term measures that produce effects only gradually ,                              Progress towards completion of the internal market: in June
the policy that is suggested can also have more immediate                               1986 , the European Council meeting in The Hague stressed
positive effects in that it helps to guide and stabilize economic                       that if the objectives fixed not only for the current year but
expectations . The declared aim is to improve the functioning                           also for the period up to 1992 were to be attained , then the
of market mechanisms :
                                                                                        decision-making process leading to the completion of the
                                                                                        internal market would have to be substantially improved .
— by establishing a large area with no internal barriers to                             Considerable progress is needed to pass from the present
    the free circulation of goods , persons , services and                              situation of advanced customs union to an economic area
    capital ,                                                                           without frontiers in 1992 .
— by providing each country with conditions conducive to                                Among the major initiatives identified in the White Paper on
    the development of companies and the promotion of                                   the internal market , the most substantial economic results
    enterprise .                                                                        are to be expected from the following measures :
 ---pagebreak---  No L 385 / 66                              Official Journal of the European Communities                                    31 . 12 . 86
 — Removing barriers to intra-Community trade : this                   market will accelerate the process of structural change . From
     involves first of all removing barriers at frontiers , with        this viewpoint , it is necessary to ensure that the social
     the major effect of reducing the cost of intra-Community           dimension is fully take into consideration, as required by
     trade and thus encouraging its expansion , after the period       Article 118 A of the Single European Act . In addition , in
     of relative stagnation that has followed the strong               order to avoid both social resistance and injustice , it is
     expansion of 1958 to 1973 , when the share of                     important that the costs and burdens of change are not borne
     intra-Community trade in total Community trade rose               by some groups while others reap the benefits . Economic and
     from 34 to 53% .          The removal of barriers to              social policies , including current measures to assist the
     intra-Community trade also involves a move towards a              process of structural change , e.g. the Social and Regional
     common market in services , especially financial services ,       Development Funds , will need to be particularly attentive to
     with increased competition leading to a decline in the cost       ensuring a fair distribution of the costs and benefits of
     of services rendered ( financial intermediaries , prices of       integration and of promoting greater economic and social
     services ) both to business and to consumers .                    cohesion .
 — Opening up public procurement to competition : public               It is also important to give the large internal market its full
     procurement is a fairly substantial item , since general         financial dimension .
     government purchases of goods and services ( including
     gross fixed capital formation ) represented about 18 % of
     total public expenditure , or 9 % of Community GDP , in
     1985 ; this figure does not include the purchases of the          The liberalization of capital movements is a concomitant of
     numerous public sector firms in the competitive sector            the general aim of ensuring the best possible allocation of
     that come under private law . Opening up public                   resources . It should be based on close convergence of
     procurement to competition will lead to budgetary                 economic and monetary policies , which is a factor of stability
     savings that may , according to initial estimates , be            and confidence favourable to investment behaviour and to
     considerable in certain sectors . Moreover , major benefits      lasting growth in the Community as a whole .
     will be forthcoming for suppliers , who will be able to
     specialize more narrowly and take advantage of
     economies of scale .
                                                                      More specifically , liberalizing capital flows , while at the
                                                                      same time progressing towards the creation of a common
                                                                      market in financial services , will reinforce Europe's
— The development of supply effects : the most striking               attractiveness as a financial area and encourage the
    effects , those of increased competition in Europe , will be      development of a complete range of instruments based on the
    a greater specialization of firms and consequently , at least     most recent techniques . By offering savers a wider variety of
    in certain sectors , economies of scale . The effects could       investment opportunities , and firms of all sizes an
    be reinforced by such developments as more intense                international range of financing possibilities , the
    industrial cooperation in Europe , and more efficient and         liberalization of capital movements should enlarge the pool
    concentrated R&D expenditure . Very favourable effects            of European savings that can be tapped for investment and
    may also be expected from eliminating disparities                 job creation at lower cost .
    between technical specifications ( rules , standards ,
    type-approval procedures ), which are used at present
    both by the authorities and by dominant firms as
    instruments to segment markets , and thus reduce                  With this in mind , the Commission adopted a
    competitiveness in the Community economy as a                     communication to the Council on 21 May 1986 , presenting a
    whole .
                                                                      programme for the liberalization of capital movements in the
                                                                      Community . The proposed programme has two stages .
— Finally , the approximation of legislation on indirect
    taxes : this could be a major element in reinforcing              The first stage has now begun ; its aim is to achieve effective
    intra-Community competition , in particular because it
                                                                      liberalization , throughout the Community , of the capital
    will introduce greater transparency into final consumer           transactions most directly necessary for the smooth
   prices in the different countries . Moreover , in certain
                                                                      functioning of the common market and the interlinking of
    cases or countries , it could provide an opportunity to           financial markets .
    adopt a structure of compulsory levies better suited to the
   purposes of supply policy ( see point 4.2 ).
                                                                      This means first of all the gradual dismantling of existing
                                                                      exemptions from Community obligations . It is important to
                                                                      ensure that the restrictions still authorized — either under the
Although it is difficult to predict the precise effects of closer     safeguard clauses of the Treaty (Ireland , Italy , Greece) or
economic integration on output , productivity and                     under the Act of Accession ( Spain , Portugal ) — can be
employment , it is clear that the opening-up of the internal          gradually removed .
 ---pagebreak--- 31 . 12 . 86                               Official Journal of the European Communities                                  No L 385 / 67
It also means extending current liberalization obligations . A        average productivity gains achieved in the high performance
proposal for a Directive was sent to the Council in June 1986 ,       sectors can spread to the economy as a whole in the form of a
with a view to extending the liberalization obligation to             relative fall in the prices of these sectors' products . The
long-term credits related to commercial transactions , the            additional demand directed to these sectors thus reinforces
acquisition of securities not traded on a stock exchange , and        their process of growth and employment . As a result of this
the admission of transferable securities to national capital          mechanism it is also possible to improve the profitability of
markets .                                                             the less-efficient sectors and hence put them in a position to
                                                                      create jobs .
In the second stage , the principle of completely free capital
movements should be recognized , covering financial credits
and monetary investments ( deposits , money market                    Moreover , with a view to achieving greater economic
securities ). The timetable for liberalizing these transactions
                                                                      efficiency , the governments of a number of countries have
will have to make allowance for the variety of economic
                                                                      endeavoured to reduce government intervention in their
                                                                      economies . Whether it is a question of deregulation in a
situations in the Member States , and the present wide
differences in exchange controls . The Commission will be             certain number of areas ( transport , energy , etc .), by
sending further proposals to the Council during 1987 .                transferring ( or restoring) to the private sector certain
                                                                      activities previously entrusted to the public sector , or by
                                                                      announcing the intention of reducing the volume of public
                                                                      intervention in the form of subsidies , the aim is to improve
                                                                      economic efficiency . From this point of view , the completion
Ensuring more favourable conditions for the development of            of the internal market , to the extent that it implies stricter
businesses: if markets are to be more adaptable to the                control of state aids , requires greater transparency and
fluctuations of supply and demand and to external stocks ,            periodic assessments of all public intervention in favour of
firms must be able to carry out their activities in an                firms , whatever form it takes ( subsidies , interest rebates , tax
environment that is both stable and favourable to their
                                                                      expenditure , guarantees , purchase of equity ), in particular so
development .                                                         as to assess effects and efficiency in terms of the
                                                                      competitiveness of Community firms .
The improvement of the environment of firms from the
points of view of taxation, financial arrangements and legal
administrative provisions, is one of the Commission's                 The improvement of the environment of firms and the
continuing policy aims . Such an improvement — generally              reinforcement of the role of competition are liable to help
based on . recommendations for alignment on the most                  small businesses ; but the Commission also intends to develop
suitable national practices within the Community —                    a more dynamic and more specific policy towards small
contributes to increasing transparency and to harmonizing             businesses and cooperatives, because of their importance in
the conditions for the activity of firms in the Community , as        job creation . To this end , it has adopted a programme (*) of
well as discouraging discretionary measures that may well             action which , as well as establishing a favourable
distort competition . As a follow-up , in particular , to its         environment for the creation and development of small
communication of 1983 on tax and financial measures in                firms , is aimed at responding to the specific needs of these
favour of investment , the Commission has taken several steps         firms in terms of the provision of capital and adaptability to
to improve firms' tax environment ( carry-over of losses ,            the market ( flexibility ). The measures proposed in this
reduced capital duties ), financial environment (promotion of         context relate in particular to training ( retraining of staff,
Europe-wide risk-capital activities ) and legal and                   training of managers and heads of small businesses ),
administrative environment ( examination of the impact of             encouraging arrangements for 'one-stop' information offices
Community and national regulations on small businesses and            in each Member State , and organizing pilot Community
cooperatives ). This policy will be actively pursued : its impact     information centres for small businesses , helping small
will be the greater as it is relayed and reinforced at national       businesses penetrate the markets of third countries ,
level by measures taken both at central and regional level .          supporting creation and innovation , encouraging
                                                                      partnerships between large and small firms , adjusting
                                                                      Community financing to the needs of small firms , and
                                                                      developing risk-capital activity on a European scale .
The emphasis placed on greater competition as a factor in the
adaptability of Community economies has led some member
countries to take measures that increase firms' margin for
manoeuvre or improve the flexibility and effectiveness of             All these measures , which have been the subject of dialogue
their management . For example , the trend in several                 and consultations with both sides of industry ( bodies
countries — in many cases helped along by disinflation — is           representing small business and trade unions ), should make
towards restoring firms' freedom to determine prices .                for a dynamic process of development and job creation in
Indeed , most member countries consider price flexibility in
general as a particularly important factor in improving
growth and employment performance . In particular ,
through the action of competition , the above­                        (') Action programme for SME COM(86 ) 445 of 16 July 1985 .
 ---pagebreak---   No L 385 / 68                              Official Journal of the European Communities                                    31 . 12 . 86
  small firms ; they can therefore play an important part in the         pursuant to the provisions of Article 130 of the Single Act ,
  cooperative growth strategy for more employment .                      the Commission will improve the operation of the structural
                                                                         funds , the instruments of the Community's financial
                                                                         solidarity , so that they can contribute as effectively as
  Critical to the cooperative strategy are actions by the                possible to achieving economic and social cohesion and to
  Community and Member States to improve functioning of                  removing the handicaps of the less-favoured regions and the
  goods, services and capital markets. Among the major                   declining industrial regions . The decision to streamline is
  initiatives proposed by the Commission 's internal market              part of the cooperative strategy , which , by promoting
  programme are measures for (a) the removal of technical                dynamic growth , should reduce the disparities between
  barriers to trade andfrontier costs, (b) cooperation in public         standards of living in the Member countries and their
  procurement, (c) indirect tax approximation, and (d) capital           regions .
  market liberalization . Also, in this context, the social
  dimension should not be neglected. The Commission has
  also made proposals for improving the fiscal and regulatory
  environment of the enterprise sector, with special attention           Further efforts are thus now needed in favour of industry,
 given to the needs of small and medium-sized enterprises.               research and innovation thus aiding and accelerating
                                                                         structural adjustment and improving the competitiveness of
                                                                         firms . This type of expenditure is especially important to the
                                                                         success of the cooperative strategy , in that it improves the
                                                                         scientific and technological base of enterprises , provides a
                                                                        favourable educational base for the dissemination of
 4.5 . Financing Community policies : the budget and                    information technology, and reinforces the process of
        financial engineering                                           establishing the Community market by its effects on
                                                                        industrial supply .
 Structural adjustment in , and convergence of, the Member
 States' economies constitute , along with the control of the
 financing of the common agricultural policy , priorities for           The Community's 1987 budget is in the course of being
 the budget of the enlarged Community. In conformity with               established. The Commission's preliminary draft budget
 the cooperative strategy , the Community budget could make             totalled 36,6 thousand million ECU , thus remaining within
 an even greater contribution to aims such as more                      the margin of the maximum VAT rate of 1 ,4 % . The small
 employment-creating growth , stronger economic and social              expansion in expenditure for hte EAGGF-guarantee section
 cohesion , trouble-free integration of the new Community               ( 3,8% ), which still represents 62,5% of all budgetary
 Member States , and an improved internal market .                      expenditure , made it possible to propose appreciable
 Moreover , the Community's financial instruments should be             increases in structural expenditure .
 employed to serve the strategy in the most imaginative and
 efficient way possible .
                                                                        The budget adopted by the Council in its first reading
 In line with the conclusions of the Fontainebleau European             amounted to 35,9 thousand million ECU , with reductions ,
 Council , the Commission is currently considering proposing           however , in amounts allocated to structural funds and
 to the Council an increase in the VAT financing limit to take         research ,
 effect in 1988 .
 The Community budget: the precarious situation of the                 Financial engineering: although budgetary resources are
Community budget reflects the difficult balance between the            scarce , abundant private funds are available and the
financing of the common agricultural policy decided by the             Commission proposes to take advantage of this financial
Council and the development of non-obligatory spending,                situation by concentrating on the development of financial
the role of which , in the search for greater economic and             engineering . To this end , a new chapter has been inserted in
social cohesion in the Community , has grown since                     the preliminary draft budget for 1987 proposed by the
enlargement . In so far as agricultural spending is concerned ,        Commission .
the problem is accentuated by the fact that its volume also
depends on external factors . Thus , for this expenditure , the
framework for budgetary discipline adopted by the Council
has had to be revised in 1986 as a result of the increasing            This new activity would mean persuading the market to
competition with other producers on third markets .                    create or develop instruments or mechanisms to facilitate the
                                                                       financing of measures or projects which the Community
                                                                       considers of special interest . Existing instruments ( loans and
In this context , the priorities laid down by the Commission in        subsidies ) could be used to the best advantage to act as
'A Future for European Agriculture' are the progressive                catalysts , while the scope and functioning of Community
reduction of supply in sectors producing surpluses ,                   intervention should be expanded and improved , and the
qualitative improvements of products and a structural policy           relationship between Community and private financing
which more accurately reflects market realities . Moreover ,           should be organized to enable the market to offer new types
 ---pagebreak--- 31 . 12 . 86                                        Official Journal of the European Communities                                         No L 385 / 69
of financing tailored to innovation , technology and                                — Major infrastructure projects , which are particularly
enterprise .                                                                            difficult to get off the ground and feasible only if a
                                                                                        considerable volume of capital with special
In the Commission's opinion many projects exist in the                                  characteristics is available . The possible role for the
Community that could be more easily launched and                                        Community would be :
completed if suitable financing arrangements were available .
The Commission has defined , for the immediate future , three                           — for launching major projects ('declaration of
priority areas of its financial engineering activity where it is                             European utility', budgetary aid ),
studying , in close collaboration with the EIB , the possibilities                      — to improve the environment for private investors ,
for development :
                                                                                        — to mobilize the capital market by the use of a revised
— Advanced technology projects well upstream in the chain                                    form of Community aid ( e.g. financing of
    leading from research to industrial application ; in                                     projects ).
    particular , projects constituting the industrial follow-up
    to    joint       research     programmes         that    have     been
    part-financed by the Community . As such projects are                           The enlargement of the Community, the completion of the
    best financed from equity resources , the Commission has                       internal market and the need to reduce unemployment are all
    put forward some ideas ( private investment companies                          factors tending to increase the rate ofstructural change in the
    backed by a guarantee mechanism ), after consulting the                         Community. The Community budget should facilitate this
    financial community to ensure that they would be                               process through use of its various funds. In addition, in the
    appropriate .                                                                  opinion of the Commission, financial engineering activities,
                                                                                   which would encourage the market to cover the main share of
— Small and medium-sized firms , in particular innovative                          the financing of work or projects to which the Community
    firms , facing specific financing problems . This is the area                  attaches particular importance, would also make a
    with the widest scope for a variety of instruments ( risk                      contribution; current priorities for the development of these
    capital , guarantee funds , credit insurance , consultancy                     financial instruments would include high-technology
    bodies , etc .) and the Commission will be engaged in                          projects, innovation among small and medium-sized
    getting these instruments developed .                                          enterprises, and some large infrastructure projects.
                                                                           TABLE 23
                                    European Community general budget, 1985 to 1987: Payment appropriations
                                                                                                                        (millions of ECU)
                                                                          1985 (')         1986 ( 2 )        1987 ( 3 )      1987 ( 4 )
                                                                         EUR 10           EUR 12             EUR 12          EUR 12
                Expenditure :                                       I
                Agriculture -— guarantee section                        19 726           22 112            22 961            22 961
                Agriculture — structural funds                              738              802               966               983
                Fisheries                                                    82              190              221                208
                Social Fund                                              1 413            2 533             2 589              2 499
                Regional Fund                                            1 624            2 373             2 495              2 422
                Integrated Mediterranean projects                             9              133              240                175
                Transport                                                    76               27                34                21
                Energy and industry                                         129              114               173               147
                Research and innovation                                     578             648                847               744
                Food aid                                                    544             553               616                524
                Development aid                                             541             618               642                536
                Other expenditure including
                     refunds to Member States                            2 763            5 071             4 892             4 726
                                                           Total        28 223           35 174 ( 5 )      36 676 ( 6 )      35 946
                  1 ) Out-turn .
                  2 ) Budget adopted by the Parliament on 10 July 1986 .
                  3 ) Preliminary draft budget for 1987 presented by the Commission to the Council on 21 July 1986 .
                  4 ) Draft budget adopted by the Council on 9 September .
                  5 ) The correction of the budgetary imbalance for the United Kingdom which amounts to 2 685 million ECU is included in
                       receipts .
                ( 6 ) The correction of the budgetary imbalance for the United Kingdom which amounts to 2 366 million ECU is included in
                      receipts .
 ---pagebreak--- No L 385 / 70                                    Official Journal of the European Communities                                                 31 . 12 . 86
                                                                                                                           (millions of ECU)
                                                                      1985 (')          1986 ( 2 )          1987 ( 3 )          1987 (<)
                                                                      EUR 10            EUR 12              EUR 12              EUR 12
             Receipts :
             Agricultural levies                                     2 179             2 699               3 297
             Customs duties                                          8 310             9 700               9 762
             Value added tax ( VAT )                                15 218            22 468              23 130
             Special contributions                                   1 911               211                  212
             Miscellaneous                                              654                96                 275
                                                         Total      28 272 ( 7 )      35 174 ( 5 )        36 676 («)            35 946
            Maximum rate of VAT                                        1,0             1,4                 1,4
            Effective rate of VAT                                      1,0             1,39 ( 8 )          1,38 ( 9 )
            Budget total as a % of GDP                                 0,85            1,03                1,02
             (') Out-turn .
            ( 2 ) Budget adopted by the Parliament on 10 July 1986 .
            ( 3 ) Preliminary draft budget for 1987 presented by the Commission to the Council on 21 July 1986 .
            ( 4 ) Draft budget adopted by the Council on 9 September .
            ( 5 ) The correction of the budgetary imbalance for the United Kingdom which amounts to 2 685 million ECU is included in
                  receipts .
            ( 6 ) The correction of the budgetary imbalance for the United Kingdom which amounts to 2 366 million ECU is included in
                  receipts .
            ( 7 ) Including a surplus of 49 million ECU carried over to 1986 .
            ( 8 ) Except for the Federal Republic of Germany ( 1,33697 ) and the United Kingdom ( 0,67663 ).
            ( 9 ) Except for the Federal Republic of Germany ( 1,3296 ) and the United Kingdom ( 0,8176 ).
            Sources: 1985 , Management accounts ; 1986 , Budget adopted on 10 July 1986 by the European Parliament; 1987 , preliminary
                         draft budget presented by the Commission to the Council on 21 July 1986 , draft budget adopted by the Council on
                         9 September .
                                                                      TABLE 24
                        European Community investment financing through capital market borrowing and on-lending
                                                                                                                              (million ECU)
                                                                                      1984              1985                 1986
            Lending by institution or mechanism :
            European Investment Bank                                                 5 007             5 641
            Commission :
                 European Coal and Steel Community                                     825             1 010
                 Eur atom                                                              186               211
                 New Community Instrument                                            1 182               884
                                                                        Total        7 200             7 746            7 800 to 8 300
            Lending by sector or policy objective:
            Private industrial sector                                                2 709             2 830           2 500 to 2 800
                 of which : global loans to small and medium enterprises             1 719             1 735            1 400 to 1 600
            Infrastructure                                                           2 132             2 413           2 800 to 2 900
            Energy                                                                   2 359             2 503           2 500 to 2 600
                                                                        Total        7 200             7 746           7 800 to 8 300
            Source: Commission of the European Communities 'Report of the Commission to the Council and the European Parliament on the
                       borrowing and lending activities of the Community in 1985' (COM(86 ) 289 final). The figures for 1986 are forecasts by
                       the Commission .
 ---pagebreak---  31 . 12 . 86                               Official Journal of the European Communities                                    No L 385 / 71
 4.6 . Social dialogue                                                 industry represented by Unice ( Union of the Industries of the
                                                                       European Community ), CEEP ( Confederation of European
                                                                       Public Enterprises ) and the ETUC ( European Trade Union
 The success of the cooperative strategy implies changes ,             Confederation ). As a result of the work carried out in two
 sometimes marked , in behaviour and economic policies .               groups , one dealing with macroeconomic, the other with
 Rising unemployment during the 1970s and weak growth                  microeconomic themes , an agreement covering several
 have gone hand in hand with the reinforcement of defensive            points has been reached . It can be summarized as follows :
 behaviour , often as a reaction aimed at preserving legitimate
rights and positions in the face of the radical changes
wrought by the oil crisis . However , such behaviour has often
                                                                       — the need for all parties — firms employees and the
not given enough attention to the rise in unemployment and
                                                                            authorities — to apply the cooperative strategy effectively
makes a solution to this problem more difficult .                          in    order    to   obtain     the    desirable    decline    in
                                                                           unemployment ,
This applies to firms , which became more hesitant to invest
in a context which they considered uncertain . It applies to           — the need for a rapid reallocation of resources to
wage earners endeavouring to protect their purchasing                      employment-creating investment through a further
power and the stability of existing jobs , but it also now seems           improvement in business profitability resulting from a
to apply to economic policymakers , who , considering the                  moderate increase in real wages and through action to
duration and the cost of cutbacks at the beginning of the                  ensure that the lag between increases in profitability and
 1980s , may be reticent to make use of available leeway .                 investment activity is as short as possible ,
                                                                       — the need to preserve a stable monetary framework and to
Present imbalances are the result of such modes of behaviour ,
                                                                           reduce inflation where it is still too high ,
and the renewal of the European economy can only be
brought about by their simultaneous modification . The
propensity to invest can increase if the outlook for                   — the need to promote R&D and the training of the labour
profitability and demand is assured . Wage earners can be                  force ,
more ready to accept moderate real wage growth and greater
labour market adaptability if, in return , the effects on
employment are seen to be coming through , and if the social           — the need to complete rapidly the internal market , taking
consequences of measures are fully taken into account . There              full account of its social aspects ,
will be less risk of macroeconomic policies more firmly
targeted on growth leading to rekindled inflation and the
reappearance of external imbalances if domestic costs are              — the need to back up business investment by reviving
harnessed , if enterprises can increase their productive                   economically and socially profitable public investment .
capacity , and if this takes place within a more dynamic
Community context .
                                                                       Naturally , some differences in points of view have also
                                                                       emerged . These principally concern the role of the State in
The objective of social dialogue should be the simultaneous            economic activity , both in its expenditure and taxation
modification of the behaviour of all groups in economic                activities and in its market-regulating responsibilities , as well
activity .                                                             as the role of the reorganization and reduction of working
                                                                      time , neutral with respect to the level of costs , in the creation
                                                                      of employment .
It therefore seems clear that social dialogue should cover all
the themes of the cooperative strategy , both at the
macroeconomic and at the microeconomic level . Social
dialogue gathers together representatives of employers and            At the Community level , the Commission will continue for its
employees as well as governments . It should make possible a          part to intensify the social dialogue but , as the Commission
broader consensus on the contributions of each group to the           pointed out in its communication of July 1986 ( COM(86 )
cooperative strategy . By meeting at regular intervals , short        364 final ), the desire for cooperation , which the social
enough to take into account short-term economic                       partners have demonstrated at European level , has not been
developments , the participants will be able to see that the          fully utilized at the national level . Governments in all the
cooperative strategy is effectively applied and to adjust their       Member States should take practical steps , bearing national
action to recent developments . Social dialogue at all levels         traditions in mind , but perhaps breaking new ground as well ,
should therefore enable the social and employment                     to enter into dialogue at national level covering all aspects of
consequences of the necessary structural and technological            the strategy , and to create a favourable environment for
shifts to be harnessed more effectively .                             dialogue at the sectoral and enterprise level (*). In countries
                                                                      (') See Article 3 of Council Directive 74 / 121 / EEC of 18 February
The Commission has stimulated a fruitful dialogue at the                   1974 on stability , growth and full employment in the
Community level , with , and between , the two sides of                    Community , OJ No L 63 , 5 . 3 . 1974 , p. 19 .
 ---pagebreak---   No L 385 / 72                            Official Journal of the European Communities                                     31 . 12 . 86
  where governments , for particular reasons , do not see their        complemented by domestic policy adaptations in order for
  way to encourage social dialogue themselves , the social             either the United States deficit or the Japanese surplus to be
  partners are invited to take the initiative . In this way ,          reduced to acceptable dimensions . Despite the recognition in
  dialogue on the themes of the Community strategy can also            the Group of Five agreement of the need for such changes ,
  be entered into in these countries between the social partners       there has in fact been little progress in this area so far . As a
  and , as far as possible , with the participation of                 result, both the US deficit and the Japanese surplus are likely
  government .                                                         to remain excessively large in 1986 and 1987 . The surplus of
                                                                       the Community as a whole may be expected to increase
                                                                       temporarily from its 1985 level , while remaining within
  Social dialogue is an important element of the cooperative           acceptable limits . However , within the Community total , the
 strategy. By bringing together representatives of employers           distribution of surpluses and deficits between member
 and employees, as well as governments, the objective is in            countries may require more adjustment , although there is
 particular to contribute to the necessary changes in the              clearly no necessity for all member countries to run exactly
  behaviour ofall parties in economic activity and bring about         balanced current accounts .
 a broad consensus on their respective contributions . The
 themes covered should cover all economic and social aspects
 of the cooperative strategy. At the Community level, the
 Commission has stimulated a fruitful dialogue with, and              The United States has repeatedly urged surplus countries , in
 between, the social partners .        The Commission will            particular Japan and Germany , to take additional measures
 endeavour to        intensify still further this dialogue.           designed to stimulate domestic demand and thus accelerate
 Governments of all Member States should take practical               the reduction of their external surpluses and by that the
 steps in order to encourage, at national level, dialogue on all      United States' deficit . However , faster growth in these two
 the themes of the strategy, building on the desire for               countries alone , which account for only 15 % of US exports ,
 cooperation shown by both sides of industry at the European          would probably not have much effect in reducing the US
 level, and taking account of the particular circumstances in         deficit . If all industrialized countries outside the United
 individual countries .
                                                                      States took measures to accelerate the growth of domestic
                                                                      demand the impact on the US current balance would , of
                                                                      course , be much greater , because in this case the benefit
                                                                      would be extended directly to some 60 % of US exports . On
                                                                      the other hand , while faster growth in all industrialized
                                                                      countries outside the US would help to reduce the US deficit it
 4.7 . International economic policy coordination                     would do little , if anything , to reduce the Japanese and
                                                                      German surpluses . This is because additional demand for
                                                                     Japanese and German ^exports from other industrialized
 The process of correcting the major balance of payments              countries would tend to offset the increase in imports
 disequilibria , which have affected the world economy since          generated by the faster growth of their own domestic
 1982 , has now been under way for more than a year .                 demand .
 Already , with effect from March 1985 , when the dollar
 reached its peak , the exchange rates of major currencies had
 begun to move in a direction more consistent with
 fundamental economic factors . This process was given an             In order to bring down the United States' current account
 additional impetus when the Group of Five finance ministers ,       deficit to sustainable proportions, it seems necessary to
 at their meeting in New York in September last year , agreed        envisage a certain slowdown in the evolution of domestic
that a depreciation of the dollar , and a corresponding              demand there , which would imply a period of relatively
appreciation of the other major currencies , in particular the       slower growth compared to other industrialized countries .
yen , would be necessary to restore the structure of                  United States imports , unlike United States exports , are
international payments to a sustainable basis .                      highly income-elastic and could thus be expected to respond
                                                                     sharply to slower growth of domestic demand . Table 25
                                                                     shows the distribution of current surpluses and deficits that
By the end of September 1986 , the currencies of the other           might be expected to result if fiscal policy in the United States
Group of Five countries had all appreciated substantially            were more restrictive , and assuming that real exchange rates
against the dollar . In trade-weighted terms , the dollar itself     remained at their mid-1986 levels . The United States deficit
had depreciated by 22 % , and the yen had appreciated by             would be reduced to about 2 % of GDP by the late 1980s and
38% , from their average 1985 levels . The European                  the Community surplus would disappear , but the Japanese
currencies had appreciated less in trade-weighted terms ,            surplus would remain unacceptably large .
since about half of their trade is conducted between
European countries . These exchange-rate adjustments , at
least as regards the ECU in relation to the dollar , are
probably now about sufficient .                                      A determined application of the cooperative strategy over the
                                                                     next four years , would , in these circumstances , result in some
                                                                     deterioration of the current account of the Community . This
However , in view of the enormous imbalances which have              could certainly be acceptable , but would not correspond to a
built up over the years , especially in the United States and        lasting eyuilibrium . The main beneficiaries , in balance of
Japan , these exchange-rate adjustments will need to be              payments terms , would be other European and developing
 ---pagebreak--- 31 . 12 . 86                               Official Journal of the European Communities                                No L 385 / 73
countries . The impact on the United States current balance           economic policy coordination . The participants at the Tokyo
would be fairly small , and in the Japanese case progress             Summit have decided that the most promising way of
towards reducing the surplus would be delayed still further           achieving such improvement would be to develop a regime of
( see Table 26 ). This would not be the optimal option .              indicators that would enable countries' objectives to be
Therefore , an international policy mix designed to reduce            specified in fairly precise quantitative terms and their success
imbalances to sustainable levels would appear to require              in achieving these objectives to be closely monitored . It is
some further combination of yen appreciation and fiscal               envisaged that national forecasts should be checked for
stimulus in Japan , in addition to a period of relatively             internal consistency and mutual compatibility with a view to
moderate growth in the United States and faster growth in             diagnosing future sources of tension and reaching agreement
the Community . Table 27 shows the distribution of current            on what changes in policy would be most appropriate to
balances that would result from fiscal expansion equal to 1 %         forestalling them . Subsequently , the indicators would be
of GDP in Japan in 1 987 and sustained throughout the period          used to check performance in relation to objectives and to
until 1990 and a further 20% effective appreciation of the            identify appropriate remedial action where necessary .
yen during 1987 / 88 . This combination of measures ,                 Clearly a regime of this kind is no panacea for solving the
together with measures to assure the continued opening of             problems of international economic cooperation . However ,
goods and financial markets , would reduce the Japanese               to the extent that it provides a more complete quantitative
surplus substantially . This example shows that the overall           analytical framework within which the policies of the major
outcome can be significantly improved through cooperation .           countries can be examined and the likely consequences of
It would be further improved by the participation of the              those policies , both for the country concerned and for others ,
EFTA countries , which have already signaled some                     assessed , it should improve the prospects for avoiding serious
sympathy for this effort .                                            incompatibility between the policies of the participant
                                                                      countries and the tensions which such incompatibility
                                                                      provokes .
Recent developments in world output and trade have not
been helpful to developing countries . Sluggish growth in the
industrialized world has held down the rate of increase in the
volume of developing countries' exports and has depressed
commodity prices , with the result that the purchasing power
of developing countries' exports ( export earnings deflated by        The decision taken in Punta del Este in September to launch a
import prices ) is estimated to have fallen this year by 11 % ,       new round of multilateral trade under the GATT , lends
and the aggregate current deficit of this group , after four          strength to the hope that the trend towards protectionism can
years of steady improvement , has deteriorated sharply again ,        be halted and reversed . This is an essential condition to allow
in spite of the decrease in interest payments on external debts .     the development of a more open and durable multilateral
The main channel to improve the external position of the              trading system . Furthermore , these negotiations should
developing countries must be to increase their exports . More         strengthen the structures and disciplines of the GATT , at a
open markets for the developing countries' products are a             time when they are perceived as having weakened against an
precondition for some progress in restoring their                     unfavourable background . In this context , the concerted
creditworthiness . In addition , fresh capital is necessary for a     attempt to bring agricultural trade within the scope of these
successful restructuring and adjustment of the economies of           negotiations will be of particular significance . Last , but not
the indebted countries towards more economic growth as                least , GATT should adapt to new developments in the
proposed in the Baker initiative . The recent negotiations over       structure of trade . An important step in this regard is the
Mexico's external debt and domestic adjustment policies are           decision to include liberalization of trading services into the
a positive example in this regard .                                   negotiations , bringing a new major sector within the scope of
                                                                      the multilateral trading system .
The revival of growth in the developing countries is necessary
to avoid a further deterioration of the standard of living of
their populations and for progress towards solving their debt
problems . To this end , it is vital that the adjustment of
current account imbalances between the developed countries            Recent exchange-rate changes have created more favourable
does not have a contractionary overall effect on the growth of        conditionsfor correcting the large external imbalances which
the indebted developing countries . Indeed , their growth can         had built up over previous years. They will not, however,
make a significant contribution to the steady expansion of            achieve this result by themselves . The return to a sustainable
world trade .
                                                                      pattern of current payments will, above all, require
                                                                      budgetary restriction in the United States and expansionary
                                                                      budgetary measures, accompanied byfurther appreciation of
                                                                      the yen in Japan . In the event of policy adjustments along
                                                                      these lines, major corrections to the United States and
It is clear from recent experience that there is still ample room     Japanese current account imbalances could be achieved by
for improvement in the arrangements for international                 1990. The more favourable growth trend achieved in the
 ---pagebreak--- No L 385 / 74                                  Official Journal of the European Communities                                                     31 . 12 . 86
Community, by implementing the cooperative growth                              strengthen this positive tendency. This would have a
strategy for more employment, and in the EFTA countries                        favourable effect on developing countries ' exports and would
will have a beneficial impact on world trade . The new round                   increase the chances of consolidating their external
of multilateral trade negotiations within GATT could                           payments ' position in the medium term .
                                  Projected current balances as percentages of GDP 1 986 to 1 990
                                                                     TABLE 25
                                       Present policies and mid-1986 exchange rates (baseline scenario )
                                                                        1985                        1986
                                                                                                                             Average
                                                                                                                          1987 to 1990
              USA                                                       - 3,0                      - 2,5                      - 2,2
              Japan                                                     + 3,7                      + 4,5                      + 3,2
              EUR                                                       + 0,5                      + 1,2                      + 0,4
              Annual average growth rates of real GDP during 1986 to 1990 inclusive would , in this scenario , be : USA 2,7 % , Japan : 3,6 % ,
              EUR : 2,6 % .
                                                                     TABLE 26
                                   Cooperative strategy ( without specific cooperative measures in Japan)
                                                                        1985                       1986
                                                                                                                            Average
                                                                                                                          1987 to 1990
              USA                                                       - 3,0                      - 2,5                      - 2,0
              Japan                                                     + 3,7                      + 4,5                      + 3,5
              EUR                                                       + 0,5                      + 1,2                      - 0,1
              Annual average growth rates of real GDP during 1986 to 1990 inclusive would , in this scenario , be : USA 2,8 % , Japan : 3,7 % ,
              EUR : 3,5 % .
                                                                    TABLE 27
                Cooperative strategy combined with fiscal expansion and further 20 % effective yen revaluation in Japan
                                                                        1985                       1986
                                                                                                                            Average
                                                                                                                          1987 to 1990
              USA                                                       - 3,0                      - 2,5                      - 1,7
             Japan                                                      + 3,7                      + 4,5                      + 2,2
              EUR                                                       + 0,5                      + 1,2                      + 0,1
              Annual average growth rates of real GDP during 1986 to 1990 inclusive would , in this scenario , be : USA 2,9 % , Japan : 3,4 % ,
              EUR : 3,6 % .
 ---pagebreak--- 31 . 12 . 86                                 Official Journal of the European Communities                                  No L 385 / 75
                                                                 PART II
                                        ECONOMIC POLICY IN THE MEMBER STATES
                APPLICATION OF THE COOPERATIVE GROWTH STRATEGY FOR MORE EMPLOYMENT IN THE
                                                        MEMBER STATES IN 1987
The inescapable conclusion which emerges from an                        market . At the very most , transitional measures could be
examination of employment trends in recent years is that                envisaged to take account of the special problems in the
energetic action is necessary in all the Member States to               acceding countries .
reduce the level of unemployment substantially ; the single
exception is Luxembourg , where unemployment remains
low . On an annual average basis , the unemployment rate will           It is also desirable for the Member States to act largely in
fall in only four out of the 1 2 Member States in 1 986 , while in      parallel in regard to the labour markets and labour costs ( in
1987 it will fall in half of the Member States , but only two           particular through moderation of real wage increases ,
( Germany and the Netherlands ) will register a fall over the           shortening working time , provided that this is cost neutral ,
two years . In 1986 , the GDP growth of only two countries              introducing more flexible use of working time , reducing
( Germany and Portugal ) will be within the 3 to 3,5 % range            social security charges , improving the regulatory system so as
considered necessary , in the medium term , to reduce the               to stimulate the recruitment of workers , encouraging the
unemployment rate substantially . The outcome will be                   creation of small businesses ).
decidedly better in 1987 , when six Member States will be in
this situation , three of them countries whose relative share in
Community GDP is high ( Germany , Spain and Italy ) while               In the course of 1987 , when the stimulatory effects of the
the result for France and the United Kingdom is only                    terms of trade gains begin to weaken , support of domestic
one-quarter of a percentage point outside the bottom of the             demand could become necessary ; this support must
range . Thus , although progress is being made in the right             necessarily differ from country to country , in view of the
direction , it is particularly important to examine whether             requirements dictated by the situation in each Member
                                                                        State .
and how this progress can be consolidated and improved in
each of the Member States in 1987 and thereafter , and ,
similarly , how far economic and social policy should differ            From the monetary aspect , the continued fall in interest rates
from country to country to take account of the special                  is much to be desired as a source of stimulus for the expansion
features of the economic situation in each Member State .
                                                                        of investment . However , in countries such as the Federal
                                                                        Republic of Germany and the Netherlands , there has already
                                                                        been an appreciable fall in interest rates due to the sharp drop
As was already stressed in the Annual Economic Report                   in inflation . A forced reduction would be liable to imperil the
1985 / 86 , it is clearly very difficult , if not impossible , to       aim of stability inherent in a sound monetary policy . In most
implement in isolation measures to boost employment ;                   of the other Member States , and particularly in France and
consequently , the success of any action of this type also              Italy , the abatement of inflationary expectations points to a
depends on reinforcing the social dialogue , not only at                continuing downward trend in interest rates .
Community level , but also in each Member State . The
interaction of government initiatives with those of the social
partners will be an essential precondition for the success of           It will not be possible to attain these internal objectives ,
any action to increase employment .                                     however , unless the Member States turn their joint attention
                                                                        to the external aspects of these problems within the
                                                                        framework of international monetary cooperation . In all
An approach which takes account of the specific                         probability , the downward pressure on the dollar will remain
characteristics of each country's economic situation does not           appreciable throughout 1987 , given the need for a
necessarily mean a differentiation , from country to country ,          deep-seated adjustment of the United States' external
in applying all the measures recommended in Part I of the               account . It would not be in the Community's interest to
present report .                                                        tolerate an excessive depreciation of the dollar which could
                                                                        have adverse effects on its own growth . Nevertheless , the
                                                                        adjustments to domestic monetary policy , which might by
A uniform and synchronized application of the proposals                 implication be necessary in order to prevent the dollar from
made in Part I , chapter 4 , sections 4.3 to 4.6 should be              falling too far , cannot go beyond certain limits , otherwise
made .                                                                  they would become self-defeating .
Broadly comparable efforts will have to be made by the                  All these considerations indicate that , within the policy mix ,
Member States to improve the operation of the markets in                monetary policy can still have a stimulatory effect on growth
goods , services and capital , and to put into effect the               in some Member States , but that its role is very limited in
Community programme for completing the large internal                   others .
 ---pagebreak--- No L 385 / 76                              Official Journal of the European Communities                                    31 . 12 . 86
With regard to public finance , the possibilities for action          the outlook for 1987 limit the room for manoeuvre in
differ even more . In the Federal Republic of Germany and in          macroeconomic policy .
Luxembourg , the budgetary situation seems comfortable
enough to give the public authorities some room for
                                                                      Consequently , only a fairly small group of countries will be
manoeuvre . In the United Kingdom , the Government in its
                                                                      able comprehensively to influence supply and demand
autumn statement provided for an increase in public
                                                                      conditions . However , all the Member States will be able to
expenditure of some £ 4 3/4 thousand million in 1987 / 88 .
                                                                      create more favourable circumstances for the expansion of
This will mean that public expenditure in 1987 / 88 is
                                                                      employment by modifying the                structure of public
planned to be about 2% higher in real terms than the
                                                                      expenditure and revenue .
estimated out-turn in 1986 / 87 . In France , substantial tax
cuts are already planned for 1987 and further reductions
have been announced for 1988 , the intention being                    Nevertheless , an increasing number of countries can be
simultaneously to reduce the budget deficit in each of the two        expected to have more room for manoeuvre in the course of
years . By contrast , the state of the public finances , and in       1987 and , in the countries where it already exists , the
particular the high level of the public debt , means that             possibilities for action will become more evident . This would
consolidation must continue in Belgium , Greece , Ireland ,           obviously be the case if, as is likely , the improvement in the
Italy and Portugal . In a third group of countries ( Denmark ,        fundamental conditions for economic equilibrium already
Spain and the Netherlands ), the budgetary constraints are            experienced in 1986 were to be sustained in 1987 .
less       severe ,     but       certain        aspects       of
                                                                BELGIUM
In Belgium, economic growth in 1 986 is likely to be distinctly       facilitated in 1986 by the slowdown in inflation which ,
faster than the rates achieved in the period 1981 to 1985 ; the       through the working of the indexation system , has been
acceleration is due not only to the reverse oil shock but also to     rapidly reflected in a deceleration of nominal wage increases .
the delays in finalizing a new fiscal consolidation                   Wage negotiations for the years after 1986 will be subject to
programme . Real personal disposable income and private               the restriction imposed by the Government's powers to
consumption are likely to increase by over 2,5% , after               secure compliance with the general competitiveness norm .
remaining virtually static for several years . Business               Statutory powers of constraint can be invoked when sectoral
investment is likely to expand sharply because of the                 wage agreements depart too far from the general
improvement in profit margins . In 1987 , however , growth            recommendations set out in the national agreement reached ,
will inevitably be held back by the effect of the moderation of       in September 1986 , between the social partners ; these are
personal incomes following the fiscal consolidation                   geared to maintain a certain level of competitivity and to
programme decided in the spring of 1986 . Growth will                 create jobs , especially for young people . The slowdown in
therefore have to be more reliant on business investment and          wage increases has helped to reduce real unit-labour costs by
exports . Price increases are likely to remain weak after the         nearly 9% between 1981 and 1986 . This was paralleled by
sharp slowdown in inflation in 1986 ( from 4,9 to 1,3% ).             an increase in the profitability of companies and an
The current account should produce a comfortable surplus in           improvement in their financial situation . A further reduction
the two years under review . General government net                   in corporation tax was also decided , bringing the top rate
borrowing , by contrast , is likely to show no more than a            down from 45 to 43 % in 1988 . Lastly , monetary policy was
slight improvement in 1986 , but in 1987 should be reduced            centred on the reduction of short-term interest rates to the
by 1,5 to 2 percentage points of GDP . The efforts to                 maximum degree compatible with the maintenance of a
strengthen the public finances will , in the first place , have a     stable exchange rate , so that the interest rate on investment
negative effect on the employment level in the public sector ,        credit was down to 8,25 % by April 1986 , whereas it was still
which will be offset to a large extent by an increase in the          12,75% at the beginning of 1985 . It was only in 1986 ,
private sector as a result , in particular , of the agreements        however , that these improved conditions began to generate a
reached in the framework of the national negotiations . Over          significant growth in company investment , since the
the two years 1986 and 1987 , the level of total employment           implementation of new projects was held back , probably
and the unemployment rate will hardly change .                        because of uncertainty as to how personal incomes would
                                                                      evolve in the context of the fiscal consolidation measures .
Incomes in 1986 and 1987 will evolve in line with the policy          Working hours will soon become more flexible , and , as
adopted since 1982 and directed towards a moderate                    legislation enshrines the consensus between management apd
development of real wages in order to safeguard the level of          unions on the general use of flexible time , firms will be better
competitiveness achieved after 1982 and to promote                    able to react to fluctuations in demand once new wage
employment-sharing . Adherence of these objectives will be            agreements enter into force .
 ---pagebreak--- 31 . 12 . 86                                Official Journal of the European Communities                                   No L 385 / 77
On the other hand , the condition of the public finances is            The scale of the budget imbalance means that the
such that the only possible priority is for a vigorous and rapid       government's borrowing requirement target must be fully
improvement so as to break the 'interest charges-debt' spiral .        attained within the planned time-limits , especially since , in
In the spring , the Belgian government gave details of the fiscal      several respects , the international situation is relatively
consolidation programme announced in its December 1985                 favourable while , in 1986 and 1987 , cutting expenditure will
investiture declaration , which aims to reduce the Treasury            be aided by the fall in interest rates . Before the special powers
borrowing requirement to the equivalent of 8 % of GDP in               expire , it is essential to implement , if necessary , new
1987 and 7 % in 1989 , compared with 1 1 ,5 % in 1985 . The            corrective measures to ensure that the target (a Treasury
main emphasis is on cutting expenditure . The programme of             borrowing requirement equivalent to 8 % of GDP in 1987 ) is
reducing personal taxation , decided earlier , has been                attained , in order to avoid the public finances being blown
retained and heavier taxation of petroleum products has been           off course should the planned measures fall to produce the
rejected . These programmes , taken together , should                  desired results , or should exogenous factors develop less
temporarily counteract recent developments favourable to               favourably . The only room for manoeuvre available to
employment and domestic demand . Nevertheless , the reverse            budgetary policy in the short term relates to the structure of
oil shock enables the Belgian economy to maintain relatively           revenue which could be modified with a view to generating
favourable growth during the period of internal                        growth with a greater job content . One of the possibilities
adjustment .                                                           would be to compensate for a reduction in social security
                                                                       charges on wages by increasing indirect taxes in general , or
                                                                       the taxation of petroleum products in particular .
The public finance situation necessarily restricts the
possibilities for boosting demand by budgetary action . As             It is desirable to keep open the possibility of setting limits to
before , priority should be given to bringing the public               wage developments after the special powers in this respect
finances back into balance and eliminating supply-side                 expire , given the imperative need for the Belgian economy to
rigidities , since these two obstacles must be removed in order        remain competitive in meeting external demand during the
to return to steadier and more lasting growth . The                    period of internal adjustment . Nevertheless , the maintenance
implementation of a monetary policy aimed at cutting                   of a policy of wage rigidity over a long period could now
interest rates by as much as is compatible with the                    justify some limited cases of relaxation , in order to respond
maintenance of the Belgian franc's parity within the EMS is            to the signals emanating from the labour market when
also largely dependent on a reduction in the public sector's           bottle-necks appear that are difficult to deal with by
financing needs .                                                      retraining measures .
 ---pagebreak---    No L 385 / 78                                      Official Journal of the European Communities                                            31 . 12 86
                                                                             TABLE 28
                                                       Belgium : Main economic aggregates 1961 to 1987
                                                                                                                               (Annual percentage changes)
                                                          1961 to   1974 to
                                                                                  1981           1982     1983    1984    1985       1986 (')    1987 ( 2 )
                                                             1973    1980
                             r value                          9,2    10,0          3,4            8,7      6,3     6,8     6,7          6,7         3,1
  Gross domestic          J volume                            4,9      2,5       - 1,5            1,5   - 0,1      1.4     1,5         2,0          1,3
  product                   |  deflator                       4,1      7,5         5,0            7,1      6,3     5.5     5,1         4,6          1,8
  Private consumption deflator                                3,7     7.8          8,1            7,4      7,5     5,9     4,8          1,3         1,5
  Gross fixed               f private                                          - 18,1          - 0,3    - 3,6      4,4     3,8         7.0          6,9
  capital                -< public                                               - 6,3         - 8,9    - 7,6   - 8,8  - 13,2        - 6,4        - 9,8
  formation volume 1 total                                    5,1      1.9     - 16,3          - 1,7    - 3,9      1,0     1,2         5,3          5,0
      of which :               construction                                    - 22,9          - 5,4    - 5,1   - 4,2   - 0,4          2.1          2,2
                               equipment                                           3,6            8,0   - 9,5      9,9     3,6         9,5          8 4
  Domestic demand at constant prices                                             - 4,1            0,3   - 2,5      1,7     1,3         3,0          1,3
 Gap with respect to other Community
 countries ( 3 )                                                                               - 0,8    - 2,6   - 0,3   - 0,8        - 0,5       - 1,4
                           r nominal                          8,9    11,6          6,4            8,1      6,4     6,8     4,5         2,5          2,2
 Compensation
 of employees            ■< real A ( 4 )                      4,6     3,8          1,4            1,0      0,0     1,4  - 0,6        - 2,0          0,4
 per head                  1       g (4)                      5,1     3,5       - 1,5             0,7   - 1,0      0,8  - 0,3          1,2          0,7
 Productivity ( s )                                           4,3     2,4          0,5            2,9      0,9     1,4     1,0         1,7          1,9
 Real unit labour costs                                       0,3     1.4          0,9         - 1,8    - 0,9      0,0  - 1,6        - 3,6       - 1,5
 Competitiveness ( 6 )                                   - 0,2        1.5       - 8,2       - 11,5      - 2,3      0,1     1,8         2,9       - 0,6
 Employment                                                   0,6     0,1       - 2,1          - 1,3    - 1,6      0,2    0,5          0,3       - 0,6
 Registered unemployed as %
 of the civilian labour force ( 7 )                           2,2     6,8        11,1           13,0     14,3    14,4    13,7         12,9        13,4
 Current balance as % of GDP                                  1,0  - 1,4        - 4,6          - 3,3    - 0,6   - 0,4     0,4          2,3         2,8
 Long-term interest rate                                      6,5     9,4        13,8           13,5     11,8    12,0    10,6          8,0         7,2
 Money supply ( 8 )                                         10,1    11,2         10,0            7,5      7,0     6,1     6,7          5,8         4,0
 Net lending or borrowing
 requirement of general government
 as % of GDP                                             - 1,9     - 5,8       - 12,6       - 11,1    - 11,7   - 9,5    - 8,4        - 8,0       - 6,2
Public debt as % of GDP                                             64,8         88,2          95,9    105,1   110,7   117,4        120,6       125,7
Public debt interest
as % of GDP                                                           4,4         8,0            9,3      9,4     9,9    10,6         10,6        10,7
t 1 ) Estimates of the Commission services , October 1986 .
( 2 ) Forecasts of the Commission services , October 1986 , on the basis of present policies .
( 3 ) Differences in percentage points .
( 4 ) A : GDP deflator ; B : private consumption deflator .
( 5 ) Gross value added per occupied person in the whole economy .
( 6 ) Effective exchange rate (vis-àvis 19 industrial countries ) on the basis of unit labour costs for the whole economy. Positive figure = loss of
      competitiveness ,
( 7 ) Eurostat definition .
( 8 ) End of year .
 ---pagebreak---  31 . 12 . 86                               Official Journal of the European Communities                                  No L 385 / 79
                                                              DENMARK
In Denmark, economic performance in recent years has                   A decline in the private savings ratio , reflected also in
improved significantly in important respects : gross domestic          stronger borrowing by households , was a major reason for
product rose quickly both in 1984 and 1985 ( 3,9 and 3,8 % ,           this buoyancy . The external payments position deteriorated
respectively), employment expanded by 2,4 % in the former              further , although it prompted government action in
and by 3,1 % in the latter year and , although labour supply           December 1985 and in March 1986 in order to restore
rose rapidly in reaction to the increase in demand for                 external balance . However , as a result of these measures ,
manpower , the rate of unemployment was reduced from a                 consumer demand levelled off and the rate of activity in the
peak of 10,2% in 1983 to 8,2% at the end of 1985 . The                 construction sector , while at a high level , also showed signs
upturn was led by a pronounced recovery in gross fixed asset           of weakening. Nevertheless , there was a moderate rise in
formation , which responded strongly to a marked                       other business investment except in a few sectors such as
improvement in the profitability of investment resulting from          energy and shipping . Although the trade balance should
the policy of wage restraint in the early 1980s .                      improve in the course of the year , interest payments abroad
                                                                       remain high , and the deficit on current transactions may not
                                                                       improve for the year as a whole . The slowing down of GDP
                                                                       growth due to the restrictive measures , to some 3 % in 1986 ,
                                                                       reduced the rise in employment and the unemployment rate
The fast increase in employment since 1983 , of the order of           levelled off at some 7 3/4 % of the labour force . The rise in the
2% per annum, is the most spectacular result of the                    consumer price deflator should be of the order of 3V2 % in
economic policy pursued by the Danish authorities since                1986 , as against 5 % in 1985 , despite the increase in indirect
 1982 , corresponding in many respects to the cooperative              taxes .
growth strategy adopted by the Council last year . This
strategy has aimed mainly at stimulating the supply side of
the economy through real and nominal wage restraint , cuts in
public expenditure and adherence to a principle of external
and internal monetary stability within the framework of the            In October 1986 , new measures were introduced in order to
EMS . Real compensation of employees actually fell from                strengthen personal savings and discourage credit-financed
1983 to 1985 , and rose slowly from then on due to moderate            consumption . They include a shortening of the average
settlements and the ending of indexation . The consequent              redemption period of new mortgage loans , higher stamp
rise in profitability helped to stimulate private business             duties on loan documents and a special tax on interest
investment . With a severe restraint on public expenditure             payments on personal loans for consumption purposes . In
and some modest rise in receipts , the general government              addition to these measures , the main events influencing
borrowing requirement was reduced in the process from                  economic developments next year will be the implementation
9,3 % of GDP in 1982 to 1,9% in 1985 , while a surplus of              from 1 January 1987 of the tax reform adopted at the
some 3% could emerge in 1986 . Tight budgetary                         beginning of 1986 and the wage settlement of March 1987 .
management gave more room for the expansion of the                     The purpose of the tax reform is to increase private
tradeables sector . The thrust of incomes and budgetary                household savings .
policy meant that monetary policy no longer had to bear
alone the burden of stabilization , and so domestic interest
rates declined sharply .
                                                                       In 1987 it could somewhat stimulate consumer spending by
                                                                       shifting taxation from households to corporations and
Despite this strong correction in the public finances , the            certain other institutions , including some non-profit
current external deficit widened considerably between 1983             institutions , which until now were tax-exempt . This
and 1985 , partly as a result of some deterioration of the trade       stimulative effect is however counterbalanced by the increase
balance and partly due to a substantial increase in net interest       in local government taxation and by measures taken in
payments abroad . The latter was a consequence partly of the           October 1986 . As a result of the full compensation for the cut
rise in the dollar in the period up to mid- 1985 , which boosted       in working time and the planned extension of sickness
the domestic currency value of the existing debt , and also of         payment , average wage costs will have increased by more
the continued rise in the debt . Although , compared to the            than 3 % at the beginning of 1987 , reducing the room for
position of 1979 , the trade deficit by 1985 had been reduced          wage concessions during the biennial deal in March 1987 .
by 4,4 percentage points of GDP , the overall current external         Investment in plant and equipment , following its sharp rise in
deficit in 1985 , at 4,4 % of GDP , was barely lower than the          1984-1986 , will be much less buoyant in 1987 , particularly
deficit recorded in 1979 ( 4,7% ), and up from 3,3% in                 in the energy sector . Overall the growth performance will be
1984 .                                                                 considerably slower than in 1986 and will therefore become
                                                                       more dependent on the international economic environment .
                                                                       The rate of unemployment will be slightly higher than the
                                                                       likely outcome in 1986 . On average , consumer prices will
                                                                      probably increase at a rate similar to that of 1986 ( 3,5 to
In 1986 , domestic demand continued to increase markedly in            4,0% ) which includes the effects of energy tax rises to
the first half of the year , again outgrowing potential supply .       eliminate the impact of lower oil prices and of the dollar
 ---pagebreak--- No L 385 / 80                                  Official Journal of the European Communities                                     31 . 12 . 86
exchange rate on consumer spending power ( ! ). The current               There is also the need to adapt the structure of the Danish
account of the balance of payments should show a                          economy to the changing international environment . Action
considerable improvement .                                                has already been taken , and further proposals are pending, to
                                                                          extend training and research facilities in areas where their
The wage drift experienced during 1986 , as a result of                   application may be particularly effective . Opportunities to
sectoral imbalances in the labour market , together with the              reorganize existing work patterns , to deregulate and to
envisaged rise in productivity , suggests that a moderate wage            increase the adaptability of the labour market should be
settlement in line with previous experience would be                      considered and discussed with the social partners .
appropriate , particularly taking into consideration the
expected alleviation of personal taxation in 1987 .
Disregarding interest payments abroad , the current account               As a result of past current deficits , the external gross debt is
deficit appears to be essentially the result of excessive                 now close to 40 % of GDP , with private and public debt each
                                                                          accounting for about half. With an increase in nominal GDP
domestic absorption rather than the consequence of reduced
price competitiveness . The recent weakening of the Danish                of some 6 % per year on average over the coming years , the
                                                                          external debt / GDP ratio could be maintained constant with
krone within the EMS illustrates , however , that the margin
of manoeuvre of the authorities remains narrow and that                   a current external deficit of some 2,5% of GDP . With a
                                                                          lower deficit , the external debt would tend to fall in
monetary policy must take due account of the need to ensure
sufficient capital imports . Measures to raise the level of               proportion to GDP . As a first step , it would seem urgent
private savings and to reduce the debt of households - such               already in 1988 to bring the external deficit down to the level
                                                                          consistent with a constant debt / GDP ratio and , in the short
as those introduced in October - are therefore of prime
importance . In this respect , an extension of pension schemes ,          run , this can hardly be achieved without a continued tight
to cover a wider section of the population , based on personal            fiscal policy stance in line with the official objectives . A
contributions and possibly as part of the wage settlement ,               further reduction of the external deficit should take place in
might be another useful contribution . In the shorter run the             subsequent years to the extent that a lowering of the
external constraint would thus be loosened whereas , in the               debt / GDP ratio is aimed at . For 1987 , the general
longer run , increased savings would ensure the financing of              government net lending implicit in the finance bill is , at about
higher investment and improve growth potential without                    3% of GDP , approximately unchanged from 1986 and is
endangering the external balance .                                        consistent with a small surplus in the central government
                                                                          budget . In view of the existing external constraint and the
(*) The forecasts in the text seek to take into account the effects of    necessity to ensure a balanced development of the Danish
    the measures adopted in October , whereas it has not been             economy , the effective achievement of this target is desirable ,
    possible to make corresponding revisions to the figures in            implying a vigorous implementation of the policy of zero real
    Table 29 .                                                            growth in public expenditure pursued in recent years .
 ---pagebreak---  31 . 12 . 86                                        Official Journal of the European Communities                                               No L 385 / 81
                                                                           TABLE 29
                                                     Denmark : Main economic aggregates 1961 to 1987
                                                                                                                                     (Annual percentage changes)
I                                                       1961 to
                                                           1973
                                                                  1974 to
                                                                    1980
                                                                                1981       1982          1983       1984        1985       1986 (')   1987 ( 2
                           r value                        11,7      11,7         9,1       14,4          10,4        9,9         9,5          7,8       , 5,5
Gross
domestic                 ■< volume                                   1,6       - 0,9         3,0          2,0        3,4         3,8          2.9         1,8
product                       deflator                               9,9        10,1       11,3           8,1        5,8         5,4          4,8         3,7
Private consumption deflator                                6,6     10,1        12,0       10,8           7,2        6,6         5,0          3.3         2,8
                           r private                               - 5,1     - 19,7        10,9           4,0       12,4        15,9         10,7      - 1,3
Gross fixed
capital                  -< public                                 - 2,2     - 17,0       - 9,4       - 15,4          1,7        5,4          2.4         2,1
formation volume 1 total                                    6,6    - 3,1     - 19,2          7,1          0,9       11,0        14,6          9,8      - 0,9
      of which :             construction                          - 4,9     - 21,7       - 1,3           1,1        7,2        13,1          6,3      - 0,7
                             equipment                               0,7     - 15,0        20,1           0,6       15,8        16,5         13,7      - 1,2
Domestic demand at constant prices                                   0,6       - 4,1         3.5          0,9        4,0         5,3          4,1         1,8
Gap with respect to other
Community countries ( 3 )                                                                    2,7        - 0,3        2,6         3.3        - 0,7      - 1,5
                           r nominal                      10,7      11,7         9,2       12,1           7,9        5,4         4.4          4,0         5,9
Compensation
of employees             < real A (4 )                      3,4      1,6       - 0,8         1,4        - 0,2      - 0,3       - 1,0        - 0,7         2,1
per head                   1       g                        3,8      0,8       - 2,5         1.6          0,6      - 1,1       - 0,6          0,7         3,0
Productivity ( 5 )                                          3,2      1,2         0,4         2,7          1,6         1,2        0,7          0,0         1,5
Real unit labour costs                                      0,2      0,4       - 0,9      - 1,3         - 1,8      - 1,5       - 1,7        - 0,7         0,6
Competitiveness ( 6 )                                       1,7    - 0,3       - 7,5      - 3,2         - 0,5      - 3,5         0,9          3,8         0,6
Employment                                                  1,1      0,4       - 1,3         0,3          0,5        2,4         3,1          1,9         0,3
Registered unemployed as
 % of the civilian labour force ( 7 )                       1,1      5,5         8,9         9,5         10,2        9,8         8,7          7,5         7,6
Current balance as % of GDP                              - 2,1     - 3,5       - 3,0      - 4,2         - 2,2      - 3,3       - 4,4        - 4,1      — 3,6
Long-term interest rate                                     9,0     16,0        19,3       20,5          14.4       14,0        11,6         10,4       10,5
Money supply ( 8 )                                        10,6      11,7         9,1       11,4          25,5       17,0        15,8          7,7         2,9
Net lending or borrowing
requirement of general
government as % of GDP                                      2,0    - 0,6       - 7,1      - 9,3         - 7,3      - 4,2       - 1,9          2,8         2,8
Public debt as % of GDP                                             19,2       43,6        53,0          62,8       67,7        66,4         61,1       57,1
Public dept interest
as % of GDP                                                          2,2         5,3         6,0          8,1        9,6         9,8          8,8         8,0
0 ) Estimates of the Commission services , October 1986 .
(2)   Forecasts of the Commission services , October 1986 , which do not take into account the effects of the measures adopted later in that month .
(3)   Differences in percentages points.
(4)   A : GDP deflator ; B : private consumption deflator .
(5)   Gross value added per occupied person in the whole economy .
(6)   Effective exchange rate (vis-a-vis 19 industrial countries ) on the basis of unit labour costs for the whole economy . Positive figure = loss of
      competitiveness .
( 7 ) Eurostat definition .
( 8 ) End of the year .
 ---pagebreak---   No L 385 / 82                              Official Journal of the European Communities                                      31 . 12 . 86
                                                   FEDERAL REPUBLIC OF GERMANY
  1986 marks the fourth year of upswing in the Federal                  years , the two sides of industry have already taken account of
  Republic of Germany . At the beginning of the year , however ,        the changing conditions on the labour market ; the negotiated
 the growth trend was outweighed by the combined effects of             wage settlements resulted in a decline of the wage share in the
  a number of special adverse factors , such as the unusually           economy as a whole by more than 4% between 1981 and
 harsh winter , uncertainties as to future dollar and oil price          1985 . This trend has continued in 1986 , helped by the terms
 movements , and the particularly low number of working                 of trade improvement , even though the unexpectedly
 days . Despite renewed strong economic expansion from the              favourable movement of domestic prices in 1986 was ,
  second quarter onwards , the economy's growth in 1986 , at            understandably , not anticipated in wage settlements .
 some 3 % in real terms , is likely to be somewhat lower than
 was still expected at the beginning of the year . The principal
 driving forces behind growth have been private consumption
 and business investment . Consumer spending has been                   The moderate increase of real wages in recent years has
 boosted by wage increases which , in view of virtually stable          resulted in a marked improvement in enterprises' profits ,
 consumer prices , are permitting real private consumption in           with a corresponding rise in rates of return on investment .
  1986 to grow at its fastest rate since 1971 . Investment , on the     The more favourable investment climate has already led to a
 other hand , has been supported by stronger domestic sales             rise in business investment as a whole , which is now once
 and a further increase in profits related to the improvement in        again increasingly serving to expand capacity , and
 the terms of trade . The weak trend of export volumes and              investment in construction other than in dwellings has also
 strong growth of import volumes , both of which had become             risen again noticeably for the first time .
 evident at the end of 1985 , have led to a considerable
 deterioration of the real external balance ( — 1 ,4 % of GDP ).
 Nevertheless , the current account surplus has climbed to a
 new record level ( almost DM 63 thousand million ) as a result         Investment in dwellings has developed less favourably , with
 of a substantial improvement in the terms of trade .                   the declining population trend and the mismatch between
                                                                        building costs and incomes severely exacerbating the
                                                                        prevailing underlying tendency of weakening demand . Here
                                                                        much will depend in future years on building costs rising at a
 Although the special factors which supported demand in                 slower rate than the overall price trend . The change of
 1986 will weaken in 1987 , there will be further inherent              emphasis in residential investment towards maintaining the
 strength in domestic demand and export prospects                       existing housing stock and increasing its quality provides an
 ( particularly in the EMS area ) should again improve                  opportunity for increasing the employment content of
 somewhat . The upswing will therefore continue into its fifth          investment activity in this area .
year ; in 1987 real gross domestic product is likely to grow by
 3 1 /4 % . With the terms of trade remaining more or less
unchanged , prices will move in line with domestic costs and
rise only moderately . The surplus on current account is likely        The crisis in the building industry was intensified in the last
to contract considerably to around DM 44 thousand million              few years by the decline in the public investment . In the
( or 2,1% of GDP ).                                                    framework of public finance consolidation , particularly with
                                                                       respect to local authority budgets , progress was made partly
                                                                       at the expense of public investment . Since 1985 , however ,
                                                                       public investment has again been rising , in the current year
                                                                       by about 6 % in nominal terms . Investment in the
Employment is likely to increase , on an annual average , by           infrastructure , environmental protection and urban renewal
about 280 000 in 1986 and by another 250 000 in 1987 .                 has been supported by additional measures , which were also
Unlike previous phases of economic upswing , in which the              of benefit to private investment . The first stage of the tax
increase was concentrated in the services sector , employment          reform and the small reduction in social security
in manufacturing industry should also grow considerably , at           contributions for unemployment insurance ( by 0,1 % ) has
rates of 1V2 % this year and 1 % next . Despite increased use          also helped to improve supply-side conditions while at the
of measures to improve the labour market situation , the fall          same time underpinning demand . Furthermore , the
in unemployment , by 80 000 in 1986 and some 90 000 in                 medium-term financial plans of the territorial authorities
1987 , is still much smaller than the rise in employment , since       provide for annual growth of public investment of 4 to 5 %
most of the new jobs are being filled by jobseekers not                ( in nominal terms ) up to 1 990 . In contrast to recent years , the
registered as unemployed .
                                                                       increase in such investment would thus correspond to the
                                                                       growth of the economy as a whole .
Although in recent years , by comparison with its European
neighbours , the Federal Republic of Germany has enjoyed a             Monetary policy has stayed on a course of stability ,
more favourable economic situation , the unemployment                  permitting a further fall in the inflation rate and a
problem is still acute . It should therefore be a top priority to      market-induced reduction in loan interest rates to a historical
redress this state of affairs through decisive action . In past        low . So far this development has been favoured by external
 ---pagebreak---   31 . 12 . 86                             Official Journal of the European Communities                                  No L 385 / 83
  factors . In the course of 1986 , the growth of central bank        more successful , the sooner the details of the tax reform are
 money continuously overshot its target range , which led the         decided . If the associated necessary expenditure cuts were set
 Bundesbank to proceed cautiously in respect of a further             out at the same time , it would be easier for the repeatedly
 reduction in short-term interest rates .                             announced selective dismantling of subsidies to take shape .
                                                                      In addition , one could envisage , where appropriate , and
 Supply conditions of enterprises have been further improved          within the limits of available capacity , expanding
 at the microeconomic level . Even though skill-related wage          worthwhile public investment beyond the budgetary
 differentials have not been pursued extensively , shorter            provisions . Finally , consideration could also be given to the
 working hours were agreed in several more industries , and a         possibility of reducing social security contributions to the
 growing number of new types of working time arrangements             Federal Labour Office ; in recent years its budget has been in
 are being introduced , in order to improve employment                surplus , and this is likely to grow in future , given falling
 opportunities . In view of the significant shortage of skilled       unemployment .
 workers which has arisen in the Federal Republic , employers'
 endeavours to provide vocational training and retraining             Wage developments should also further contribute towards
 should be reinforced .                                               employment policy . This is all the more likely , the more
                                                                      secure the demand prospects . The rise in real per capita
 Monetary , budgetary and wages policies , in their efforts to        wages should also remain below productivity growth in the
 improve the environment for more employment-creating                 economy as a whole . Wage negotiators must therefore be
 growth , have together had an effect in the desired direction .      aware that next year , in contrast to the unique situation of
 In addition , helped by the inprovement in the terms of trade ,      1986 , there will be no additional income gains available for
 the evolution of internal demand has been buoyant . As the           distribution arising from the terms of trade , and that it is
positive impact of the oil shock slowly diminishes , future           important that export prices reflect as little as possible of the
 German economic policy , in its efforts to achieve steady           deterioration of competitiveness due to the appreciation
 economic growth at an appropriate rate and with price                against the dollar , which naturally puts pressure on the profit
 stability , faces a new test .                                      situation of enterprises .
                                                                     Monetary policy should stick to its present course , which is
With regard to the budgetary policy of recent years , the            directed towards financing sufficient growth of productive
public deficit has been reduced to such an extent that an            potential in the medium term while keeping prices stable .
easing of income tax in two stages — in 1986 and 1988 — is           Provided that wage costs do not have the effect of pushing up
possible without endangering the success of consolidation .          prices , such a policy is likely to offer some scope for further
The central government ( consolidated federal government             market-induced reductions in interest rates . On the other
and Lander ) deficit has only narrowed slightly in 1986 and ,        hand , a reduction of key interest rates , necessitated by
against the background of present growth prospects , the             external economic developments , could even have an
deficit of approximately 2% of GNP forecast for 1987                 unfavourable impact on interest rate expectations at the long
appears acceptable . Particularly in view of the risks to            end of the market , depending on the strength of monetary
economic activity which could emanate from external                  expansion .
developments , budgetary policy should be prepared to react
rapidly to any significant slackening of demand in the               In order to improve supply conditions at the microeconomic
economy as a whole . The second step of the tax cuts , which         level , numerous measures have already been taken , affecting
in 1988 will provide relief of almost DM 10 thousand                 the markets both for factors of production and for goods .
million to households , should raise incentives , by                 Administrative obstacles and , in some sectors , excessive
reducing the progressive element of taxation , and support           government influence continue to stand in the way of an
demand . The tax reform announced for the next legislative           efficient allocation of resources . Such obstacles should be
period should also contribute to raising incentives and              dismantled more energetically than has so far been the
thereby strengthen the forces for growth . This will be all the      case .
 ---pagebreak---   No L 385 / 84                                         Official Journal of the European Communities                                          31 . 12 . 86
                                                                               TABLE 30
                                           Federal Republic of Germany: Main economic aggregates 1961 to 1987
                                                                                                                               (Annual percentage changes)
                                                          1961 to      1974 to
                                                                                    1981          1982  1983    1984       1985      1986 (>)    1987 ( 2 )
                                                           1973         1980
                              value                          8,9         7.1         4,2           3.7   4,8     4,7        4,9         7,1         4,6
 Gross domestic               volume                         4,4         2.2         0,2         - 0,6   1.5     2.7        2,6         3,1         3,2
 product
                              deflator                       4.4         4,8         4,0           4.4   3,3     1,9        2,2         3,9         1.4
 Private consumption deflator                                3.5         4,8         6,2           4.8   3,2     2,5        2,1         0,0         1,1
 Gross fixed                  private                        3,7         0,9      - 3,9         - 4,5    5.1     1,2      - 0,3         7.1         5.5
 capital                      public                         5,9         0,3      - 9,7         - 9,3  - 8,6   - 2,1      - 0,4         5,0         4.8
 formation
 ( volume )                   total                          4,0         0,8      - 4,8         - 5,3    3.2     0,8      - 0,3         3,5         5,5
       of which :             construction                   3,5         0,3      - 5,1         - 4,3    1.7     1.6      - 6,2         0,7         3,5
                              equipment                      5,2         3,0      - 4,3         - 6,7    5.6   - 0,5        9.4         7.5         8,0
 Domestic demand at constant prices                         4,5          2,3      - 2,7         - 2,0    2.3     1,9        1.5         4,8         4,2
 Gap with respect to other
 Community countries ( 3 )                                                                      - 3,4    1,5     0,2     - 0,9          2,0         0,7
                              nominal                       9,2          7.4         5.2           4.1   3.8     3,4        3,0         4,0         3,2
 Compensation
 of employees                 real A ( 4 )                  4,6          2.5         1,2       - 0,3     0,5     1,4        0,8         0,1         1,8
 per head                          B(4 )                    5,5          2,5      - 0,9        - 0,7     0,6     0,9        0,9         4.0         2,1
 Productivity ( s )                                         4.1          2.5         0,9           1,1   3,0     2,6        1,9         1.9         2,2
 Real unit labour costs ( 6 )                               0,5          0,0         0,3       - 1,4   - 2,4   - 1,1     - 1,0        - 1,8       - 0,4
 Profitability ( 7 )                                                                               4.2  11,2     4,4        6,4        12,6         2.9
       idem ( 1961 to 1973 = 100 )                        100           70,9       70,9          73,9   82,2    85.8      91,3       102,8       105,8
 Competitiveness ( 8 )                                                                             2.5   1,5   - 2,0     - 2,5          5,4         1,8
 Employment                                                 0,2        - 0,3      - 0,7        - 1,7   - 1,5     0,1        0,7         1.1         1,0
 Registered unemployed as %
 of the civilian labour force ( 9 )                         0,8          3.6         4,8           6.9   8.4     8,4        8,4         8,1         7,7
 Current balance as % of GDP                                0,7          0,4      - 0,8            0,5   0,6     1,0        2,2         3.2         2,1
 Long-term interest rate                                    7.2          7,8       10,4            9,0   7,9     7.8        6,9         5.6         5,1
 Money supply ( 10 )                                       10,9          8.5         5,0           7.1   5,3     4,7        5,0         5,6         5,4
 Net lending or borrowing of general
government as % of GDP                                      0,3        - 2,9      - 3,7        - 3,3   - 2,5   - 1,9     - 1,1        - 0,9       - 0,7
Public debt as % of GDP                                    17,7         27,7       36,4          39,5  41,0     41.9      42,5        41,6        41,3
Public debt interest
 as % of GDP                                                0,9          1.6         2.3           2,8   3,0     3,0        3,0         2,9         2,9
  ( J ) Estimates of the Commission services , October 1986 .
  ( 2 ) Forecasts of the Commission services , October 1986 , on the basis of present policies .
  (3)   Differences in percentage points .
  (4)   A: GDP deflator; B : private consumption deflator .
  (5)   Gross value added per occupied person in the whole economy .
  (6)   Ratio of real wages per head to productivity .
  ( 7)  Net operating surplus relative to net capital stock at current replacement cost .
  ( 8 ) Effective exchange rate (vis-a-vis 19 industrial countries ) on the basis of unit labour costs for the whole economy , positive figure = loss of
        competitiveness .
  ( 9 ) Eurostat definition .
( 10 ) M3 ; end of year.
 ---pagebreak--- 31 . 12 . 86                                    Official Journal of the European Communities                                 No L 385 / 85
                                                                      GREECE
In Greece, the stabilization measures taken in October 1985                could be exceeded , not only because of the disappointing
to re-establish conditions for durable growth and eventual                 results of the sales of government bonds to the public, but
convergence of the economy with the rest of the Community ,                also because the margin for increasing private sector credit
represent a turning away from the economic policy that had                 was overestimated by reference to the actual trend in the
allowed the disequilibria to get worse . In 1985 , the public              public deficit .
sector net borrowing requirement had thus reached some
1 8 % of GDP , with the current balance of payments deficit at
US $ 3 300 million , or 10% of GDP . In response to this
situation , the Government , in October 1985 , finalized a                 Moreover , other factors have contributed to the delay of the
                                                                           adjustment in demand . Consumption , after many years of
rigorous stabilization plan consisting , notably , of a 15%
devaluation of the drachma and the introduction of an                      growth , responded only very slowly to the stabilization
obligatory non-interest bearing deposit on certain imports .               measures , this inherent inertia aided by the working of the
This two-year plan aims at bringing about a marked                         underground economy . On top of this , there were
                                                                           expectations in the early months of a further devaluation , the
slowdown in the rise in wage costs , a sharp reduction in the
                                                                           effects of which were amplified by the high degree of liquidity
public sector borrowing requirement , and a significant
                                                                           in the economy reflecting the excess level of domestic credit in
decrease in monetary growth . The Government was assisted
in its efforts to redress the balance of payments by a                     the first half relative to the targets set . Consequently , real
Community loan , the first instalment of which was paid                    domestic demand in 1986 as a whole showed only a relatively
immediately , with the second instalment to follow at the                  small fall , mainly because of the decline in public sector
beginning of 1987 .                                                        investment , while private consumption will have scarcely
                                                                           changed from its level of the previous year . Thus , imports did
                                                                           not slow down to the extent expected , while , on the other
                                                                           hand , exports were less buoyant than forecast . Overall , GDP
                                                                           will still have recorded some slight growth in 1986 . The
Wage policy is now based on the adjustment of wages to the                 belated improvement in the real external balance , as a result
targeted , rather than the observed , rate of inflation , which            of a temporarily unfavourable structure of exports and a
excludes the effects of import prices . Applied with                       mediocre outcome recorded for tourism , combined with the
determination , this policy will have helped to reduce real                unfavourable effect which devaluation had initially on the
wages by more than 7 % in 1986 , and to limit the rise in unit             terms of trade , has meant that , despite an appreciable
wage costs in manufacturing industry to an annual average of               improvement in the second half of the year , the current
 13 % , compared with 20,5 % in 1985 . This trend , together               balance of payments could show a deficit for 1986 as a whole
with an exchange-rate policy which is disinflationary in that              between 4,5 and 5 % of GDP , sligthly more than the planned
it offsets the differential in unit wage costs and not the                 target of US $ 1 700 million .
differential in retail prices , and a moderate adjustment in
administered prices during 1986 , will have allowed a
slowdown in the rise in consumer prices from 25 % at the end               These developments should encourage determination in the
of 1985 to 16 % at the end of 1986 . However , because of the              application of the stabilization plan in 1987 .
substantial overhang from the end of 1985 , the slowdown
will not show up in the annual average , which is likely to
reach 22,5% in 1986 , compared with 19,3% in 1985 ( J ).
                                                                           Wage policy should aim to ensure moderate growth in
                                                                           nominal wages and salaries on the basis of an inflation rate
                                                                           which will have been brought down to 10 % by mid-1987 —
                                                                           if the effects of introducing VAT are excluded — and by strict
On the public finance front , where the emphasis has been                  application of the indexation system adopted at the end of
more on boosting revenue than on curbing expenditure , the                 1985 . The disinflationary effects of wage policy in 1987 will
public sector borrowing requirement in 1986 will be down to                nevertheless be limited , so that the main focus of the
about 14% of GDP , in other words an improvement of 4                      stabilization policy should be on budgetary and monetary
points compared to 1985 , a reduction in conformity with the               management .
Council Decision granting the Community loan but
considerably below that planned at budget time . Moreover , a
significant proportion of the improvement — about 2,5 % of
                                                                           The strengthening of the public finances will have to be
GDP — will have been due to the fall in oil prices , most of
                                                                           pursued rigorously in order to bring the public sector net
which the Government decided to offset by an increase in
                                                                           borrowing requirement in 1987 down to a level compatible
taxation on petroleum products . In regard to monetary
                                                                           with the budgetary objective set in the stabilization plan .
policy , the target for aggregate domestic credit expansion
                                                                           Given the rapid rise in the interest burden , this requires very
                                                                           strict control of other expenditure , particularly that on
                                                                           public consumption . In addition , transfers to firms will have
( ! ) In November 1986 , the Government imposed a freeze on prices         to be sharply reduced by , inter alia, cutting back on export
      until the end of January 1987 in order to prevent excessive price    aids , agricultural subsidies and financial assistance to firms
      rises , following the introduction of VAT .                          in diffuculty . The necessary increase in revenue will come
 ---pagebreak--- No L 385 / 86                             Official Journal of the European Communities                                     31 . 12 . 86
from the widening of the tax base , greater efforts to combat        Implementation of the policy outlined above should allow
fraud and the extra receipts generated by the introduction of        the results achieved in the second half of 1986 to be
VAT on 1 January 1987 .                                              maintained in 1987 and , in particular , to reduce further the
                                                                     external deficit and the rate of inflation . The decline in real
Strict control of the public finances will again have to be          personal disposable income and the restrictive budget policy
accompanied by an expansion of credit to the private sector          stance will lead to a decrease in consumption , while
below the growth rate of nominal GDP , estimated at 12% .            industrial investment should pick up in response to the
To this end , policy on interest rates will have to be more          expected improvement in business profitability , though
active in 1987 : the movement towards positive real interest         without entailing an increase in equipment investment as a
rates , bearing in mind the scarcity of capital resources ,          whole , as a result of the restrictions imposed by the budget on
should be maintained and the efforts to unify lending rates ,        public enterprises . The decline which this will bring about in
already started in 1986 , continued . In addition , the sale of      domestic demand should lead to a further reduction in
medium-term government securities to the general public              imports , while exports should continue to be buoyed up by a
should be developed . Such a policy will allow more efficient •      relatively expansive environment . Overall , real GDP could ,
allocation of financial resources and will encourage saving          nevertheless , show a slight fall in 1987 as a whole . Since this
and capital inflows while at the same time exercising its own        outlook does not suggest any improvement in employment ,
disinflationary effect .                                             unemployment could very well increase . By contrast , if oil
                                                                     prices remain at their 1986 level , it will be possible to bring
Such stabilization measures are essential if macroeconomic           the current account deficit down to US $ 1 300 million , or
equilibrium is to be restored but are nevertheless insufficient      3,5% of GDP , still a relatively high level .
to ensure the economy's longer-term growth ; this can only
come from achieving the type of investment that will
strengthen and modernize the country's industrial base . The         Therefore , the stabilization plan aiming to restore major
competitiveness of the economy could thus be improved in a           equilibria will have to be applied rigorously in 1987 . In the
way which would enable the external constraint to be                 longer term , it will be necessary to pursue an adjustment
overcome for good , while at the same time increasing                policy based on efforts to restructure the economy within the
employment sufficiently to bring down unemployment . In              framework of prudent monetary and budgetary policies .
this context , there is a need to make progress in deregulating
prices and profits as well as freeing the operation of the           Only in this way will the Greek economy be able to become
labour market .                                                      competitive again and enjoy lasting growth .
 ---pagebreak---    31 . 12 . 86                                       Official Journal of the European Communities                                     No L 385 / 87
                                                                             TABLE 31
                                                        Greece: Main economic aggregates 1961 to 1987
                                                                                                                             (Annual percentage changes)
                                                          1961 to   1974 to
                                                                                  1981           1982   1983    1984    1985      1986 (')    1987 ( 2 )
                                                             1973    1980
                             r value                        12,5     19,8         19,6          24,5   20,3     23,0    19,6        23,2        12,1
  Gross domestic J volume                                     7,6     3,4        - 0,3         - 0,2     0,3     2,6     2,1         0,5       - 0,2
  product                    ] deflator                       4,5    15,8         20,0          24,7   19,9     19,9    17,1        22,6        12,3
  Private consumption deflator                                .3,6   16,0         23,3          21,2   18,6     18,0    18,4        22,5        12,5
  Gross fixed               f private
  capital                < public
  formation volume             rota]                        10,0    - 1,0        - 7,5         - 1,9  - 1,9    - 4,7     3,4       - 3,0         0,5
      of which :               construction                                      - 7,7      - 13,2       3,9   - 7,7     2,6         2,0         1,6
                               equipment                                         - 7,1          14,1  - 8,2   - 0,9      4,4       - 9,0       - 1,0
  Domestic demand at constant prices                                                              2,9 - 0,7      0,8     4,9       - 0,8       - 1,2
  GaO with respect to other
  Community countries ( 3 )                                                                       2$  - 1,4   - 1,0      2,8      - 6,1       - 4,5
                            r nominal                       10,2    21,1         23,4           25,4   21,8    22,6    20,4         13,6         9,6
  ompensation
  of employees           ■< real A ( 4 )                      5,5     4,6          2,9            0,5    1,5     2,3     2,8      - 7,3        - 2,4
 per head                  1        g (4 )                    6,5     4,5          0,1            3,4    2,7     3,9     1,7      - 7,2        - 2,6
 Productivity ( 5 )                                           8,2     2,7       - 5,0             0,9 - 0,1      2,9     1,0         0,0       - 0,2
 Real unit labour costs                                                                        - 0,3     1,6  - 0,6      1,9      - 7,3        - 2,3
 Competitiveness ( 6 )                                        2,6     0,0          3,5            9,0 - 3,4      1,4  - 2,8      - 16,0        - 2,9
 Employment                                              - 0,6        0,8          0,1         - 1,3  - 1,0   - 0,2      1,1         0,5         0,0
 Registered unemployed as %
 of the civilian labour force ( 7 )                                                                      7,9     8,1     7,8         7,6         8,3
 Current balance as % of GDP                             - 2,9     - 2,2        - 0,2          - 3,8  - 4,7   - 4,1   - 8,4       - 5,8        - 3,7
 Long-term interest rate                                            11,3         17,7           15,4   18,2    18,5    15.6        14,0         14,5
 Money supply ( 8 )                                         18,2    23,7         34,7           29,0   20,3    29,4    26.7        19,0         14,9
 Net lending or borrowing
 requirement of general
government as % Of GDP                                                         - 10,6          - 9,4  - 8,9  - 10,1  - 13,9      - 10,6       - 7,1
Public debt as % od GDP                                                          33,0          36,7   41,4     47,5    54,8        55,0        56,5
Public debt interest
as % of GDP                                                           1,7          3,2           2,6    3,4      4,6     5,5         6,0         6,1
(') Estimates of the Commission services , October 1986 .
( 2 ) Forecasts of the Commission services , October 1986 , on the basis of present policies .
( 3 ) Differences in percentage points .
( 4 ) A : GDP deflator ; B : private consumption deflator .
( 5 ) Gross value added per occupied person in the whole economy .
(6 ) Effective exchange rate (vis-a-vis 19 industrial countries) on the basis of unit labour costs for the whole economy . Positive figure = loss of
      competitiveness .
( 7 ) Eurostat definition .
( 8 ) End of year .
 ---pagebreak--- No L 385 / 88                                 Official Journal of the European Communities                                      31 . 12 . 86
                                                                   SPAIN
In Spain, there was a marked acceleration in economic                    continued to be the objective in 1985 and 1986 , under the
growth in 1986 ; GDP , underpinned by an appreciable                     Social and Economic Agreement signed in October 1984 .
upturn in domestic demand , could grow by some 3 % in                     The Agreement provided for nominal wage increases to be
volume terms . Private consumption has benefited not only                held within the limits of the target inflation rate . However ,
from a degree of improvement in real wages but also , for the            because nominal wage increases were accompanied by
first time since the first oil shock , from a appreciable recovery       considerable wage drift , the slowdown in the growth of
in employment and a reversal of the tendency of the                      nominal wages per head seen in recent years was interrupted
unemployment rate to go on rising . Gross fixed capital                   in 1986 .
formation has felt the favourable effects of the improvement
in profits , of better market prospects and of the need for
industrial modernization connected in particular with the
Community's enlargement . Because of the weakness of                     Significant progress has been recorded in restoring the
export markets and the jump in import volume , notably of                fundamental conditions necessary to achieve a balanced
manufactures , the external account's contribution to growth             development of the economy . For the first time in many
was substantially negative in real terms . Nevertheless ,                years , price increases at the consumption stage fell to a
balance of payments on current account improved sharply                  single-digit rate in 1985 . In 1986 , the decline in the inflation
because of the very large terms of trade gain resulting from             rate is being fostered by the fall in the prices of oil and other
the fall in energy and commodity prices . The acceleration               raw materials , but the introduction of VAT and the rise in
observed at the beginning of the year following the                      food prices have acted in the opposite direction . Nominal
introduction of VAT and the upsurge in food prices in the                unit labour costs have risen slightly faster as a result of a
middle of the year did not compromise the basic disinflation             slower productivity increase , contributing particularly to
trend in 1986 . However , in terms of annual averages , there is         relatively rapid price increases in the services sector . The
an appreciable inflation differential between Spain and other            current account , which was in deficit until 1983 , showed
Member countries .                                                       growing surpluses thereafter as a result mainly of the steady
                                                                         increase in the surplus on the services account and , in
                                                                         particular , tourism .
For 1987 , the real GDP growth rate should be at least of the
same order of magnitude as in 1986 , i . e . some 3 % . In view
of the expected recovery in the growth of third-country                  Because of the improvement in the economic environment ,
markets , exports should prove more dynamic and help                     corporate profits , after falling to a relatively low level at the
maintain a large external surplus . Domestic demand will                 start of the 1980s , staged a recovery reinforced by the
probably benefit from the same favourable influences as in               application of tax measures which authorized investments
1986 , but private and public consumption will probably                  for 1985 and 1986 to be fully written off. These investments
expand a little less rapidly than in the previous year . The rate        have been undertaken primarily for the purpose of
of price increase should fall quite markedly while still                 rationalization , and , until recently , in order to save energy .
remaining above the Community average . Overall                          Moreover the significant inflow of foreign direct investment ,
employment should continue to improve in 1987 , under the                which has expanded in the last few years , actually continued
impetus of a favourable economic environment .
                                                                         in 1 986 , chiefly as a result of the favourable prospects opened
Nevertheless , unemployment will remain very high ( 21,5 %               up by accession .
of the labour force ) chiefly because the active population will
go on increasing rapidly ( at a rate of over 1 % a year ).
                                                                         The efforts taken in hand to reduce the general government
The economic policy implemented since 1983 corresponds ,                 borrowing requirement , which amounted to 6,2% of GDP
in its intentions and many of its aspects , to the main lines of         in 1985 , should allow it to be brought down to below 5 % of
the 'cooperative growth strategy for more employment'                    GDP in 1986 despite the relatively rapid increase in the local
adopted by the Community in the autumn of 1985 , and the                 authorities' deficit . The effect on tax revenue of the
social dialogue is well advanced . In particular , the aim is , by       introduction of VAT seems to have been slightly positive
moderating real wages , to stimulate job-creating investment             rather than neutral , as originally forecast , while two-thirds
while ensuring that domestic demand expands sufficiently                 or so of the reduction in oil prices has been compensated by
and that the competitiveness of the Spanish economy is                   an increase in government revenue . On the expenditure side ,
maintained . In addition to the main challenge facing this               the chief factors which have helped to cut the deficit in 1986
strategy — to obtain a very significant reduction in                     have been the smaller increase in interest charges and the
unemployment , which is far higher in Spain than in the other            stabilization of capital transfers . Monetary policy will
Member States — these policies are also aimed at meeting the             probably achieve during 1986 the planned slowdown in the
challenge presented by accession to the Community .                      growth of the monetary aggregate ( ALP ). The overshooting
                                                                         recorded in the first half implied a tightening of monetary
                                                                         policy and a rise in interest rates , which only resumed their
The severe overshooting of labour costs , observed after the             downward movement after July . Even though relatively high
first oil shock , was followed by a more moderate evolution in           in nominal terms , interest rates have remained considerably
recent years . Maintaining the purchasing power of wages has             lower in real terms than the Community average .
 ---pagebreak--- 31 . 12 . 86                                 Official Journal of the European Communities                                 No L 385 / 89
Exchange-rate policy is aimed at stabilizing the effective              pursued when renewing the Social and Economic Agreement
nominal exchange rate of the peseta against the trading                 should be the strict control of real labour costs per head . This
partners in the Community ; because of a relatively strong rise         is the path which must be followed by a highly protected
in domestic prices , this has entailed a slight competitivity loss      economy , which is now being liberalized and which has a
in 1986 .                                                               large number of vulnerable small and medium-sized
                                                                        enterprises , if it wishes to maintain its competitiveness while
On the supply side , the adjustment policy has been                     continuing the process of reducing inflation and ensuring its
strengthened since 1983 and again reinforced in March 1986              smooth integration into the large common market .
by provisions designed particularly to stimulate saving and             With regard to macroeconomic policy , budgetary policy for
investment , to reduce the impact of bureaucracy on the                 1987 should continue to conform with the medium-term
economy , and to increase labour-market flexibility .                   objectives set by the authorities . Further progress in the
                                                                        collection of VAT and in combating tax evasion should result
If employment is to stage a lasting recovery and                        in a relatively buoyant evolution of budget resources . On the
unemployment is to be gradually scaled down , it is essential           other hand , the policy of moderating operating expenditure
to consolidate the results already achieved in restoring the            should continue , the main aim being to create some margin
major equilibria and pursuing an energetic adjustment                   for the more sustained evolution of public investment . It
policy . The options adopted by the Government formed after             seems advisable to reduce the general government borrowing
the last elections are in line with this aim .
                                                                        requirement to some 4% of GDP in 1987 . This will ,
                                                                        moreover , ease the task of monetary policy and , in
Because of the particularly severe imbalance between the                particular , will help interest rates to come down while
supply of, and the demand for , jobs , the objective to be              permitting a further reduction in external indebtedness .
 ---pagebreak---   No L 385 / 90                                       Official Journal of the European Communities                                          31 . 12 . 86
                                                                             TABLE 32
                                                        Spain : Main economic aggregates 1961 to 1987
                                                                                                                              (Annual percentage changes)
                                                         1961 to ;  1974 to
                                                                                  1981          1982    1983  1984      1985       1986 (>)    1987 ( 2 )
                                                            1973     1980
                             r value                        14,8     20,0        14,1           14,7    14,6  13,9     11,3          15,1         9,3
  Gross domestic         J volume                            7,2        1,8        0,4           0,9     2,5   2,3        2,1         2,9         3.0
  product                    |
                             ^ deflator                      7,1     17,8        13,6           13,7    11,9  11,3        9,0        11,8         6.1
  Private consumption deflator                               6,7     18,2        14,9           13,9    12,5  19,8        8,4         8,6         5,3
  Gross fixed               f
  capital                I pub'":
  formation volume             total                                - 2,0          1,2         - 2,5   - 1,0 - 3,0        5,4         7,2         7,0
      of which :               construction                         - 2,2       - 2,0            1,5                      1,5         6,0         5,8
                               equipment                            - 1,7          5,2         - 7,1                   12,0           9,0         8,8
  Domestic demand at constant prices                         7,8       2,2      - 1,5            0,5     0,8 - 0,9        2,4         4,9   ■     3,9
 Gap with respect to other
 Community countries ( 3 )
                           r nominal                        14,7     22,3        16,3           12,8  . 13,5  13,0        9,5         9,7         6,3
 Compensation
 of employees            -j real A (4)                       7,2       3,9         2,3         - 0,7     1,5   1,2      - 0,5       - 1,9         0,2
 per head                  1        g (4)                    7,6       3,9         1,0         - 1,2     1,1   1,7        1,1         1,0         0,9
 Productivity ( s )                                          6,4       3,9         3,3           1,4     2,9   6,6        3,4         1,0         1,8
 Real unit labour costs                                      0,8       0,0      - 1,0          - 2,1   - 1,4 - 5,1    - 2,8        - 2,9        - 1,6
 Competitiveness ( 6 )                                                                         - 0,5 - 10,9    3,1        0,3      - 0,2        - 0,5
 Employment                                                        (- 1,9 )    (- 2,8 )        - 1,0   - 0,7 - 2,9    - 1,2           1,8         1,2
 Registered unemployed as %
 of the civilian labour force ( 7 )                                  ( 7,1 )     14,4           16,2    17,7  20,7     22,1         21,7        21,5
 Current balance as % of GDP                                        - 1,7       - 2,4          - 2,3   - 1,4   1,3        1,7         3,5         3,7
 Long-term interest rate                                                         15,8           16,0    16,9  16,5     13,4         11,6         10,6
 Money supply ( 8 )                                                  17,6        17,0           16,6    16,0  13,2     12,9         11,0          8,0
 Net lending or borrowing
 requirement of general
 government as % of GDP                                             - 0,9       - 3,0          - 5,3  - 5,3  - 5,0    - 6,2        - 4,9        - 4,4
Public debt as % of GDP                                              13,8        21,0          26,2    32,1  39,3     46,3          49,0        52,7
Public debt interest as % of GDP                                       0,6         0,7           1,0     1,3   2,1        3,5         3,4         3,3
(') Estimates of the Commission services , October 1986 .
( 2 ) Forecasts of the Commission services , October 1986 , on the basis of present policies .
( 3 ) Differences in percentage points .
( 4 ) A : GDP deflator ; B : private consumption deflator .
( 5 ) Gross value added per occupied person in the whole economy .
(6 ) Effective exchange rate (vis-a-vis 19 industrial countries) on the basis of unit labour costs for the whole economy . Positive figure = loss of
      competitiveness .
( 7 ) Eurostat definition .
( 8 ) End of year .
 ---pagebreak---  31 . 12 . 86                               Official Journal of the European Communities                                 No L 385 / 91
                                                                FRANCE
 In France, private consumption has held up better in 1986             in addition to the adjustments made to the rules and
 than in 1985 thanks to the appreciably faster growth in               regulations governing working hours at the end of the last
 spending power , due , inter alia , to the progress made in           parliament , the new Government has introduced provisions
 reducing inflation . Helped by the improvement in firms'              designed to ease the conditions governing redundancies , thus
 financial situations , the upturn in investment has also been         removing , with effect from 1 January 1987 , the obligation to
 maintained and has continued to spread to the distributive            obtain prior administrative authorization . New redundancy
 trades and services . Domestic demand has thus been much              procedures are at present under negotiation between the two
 more buoyant than in previous years . This has resulted in a          sides of industry . A further series of measures introduced by
 high level of imports ; exports , however , have grown only           decree are intended to extend the use of fixed-period
 slightly , implying further losses of market shares . Given the       employment contracts , part-time working and casual labour .
 normal reaction lags , the April exchange-rates adjustment            Finally , in addition to the measures already taken by the
 has only very partially checked the trend towards                     previous government regarding the social security treatment
 deterioration of the       real  external  balance in     1986 .      of unemployment , provisions were incorporated in the June
 Nevertheless , the terms of trade gains will have been                1986 amending budget to give direct ecouragement to firms
 sufficient to bring about a marked improvement in the trade           to take on young people between the ages of 16 and 25
 balance in value terms . Moreover , considerable progress has         through temporary reductions in social security
 been made in reducing inflation , as a result of moderating           contributions ; other measures to boost employment are
 wage costs and the sharp fall in energy and raw material              being prepared .
 costs , with consumer prices rising at an annual rate of 2,4 % .
 In this situation , real GDP should grow by 2,3% and
 employment in the enterprise sector should increase very
 slightly , though not enough to reverse the upward trend in
 unemployment .                                                        Nevertheless , any upturn in employment depends more
                                                                       fundamentally on the competitiveness of the economy and
                                                                       on the profitability of enterprises . These are the two
                                                                       determinants of the increased pick-up of investment required
                                                                       to expand production capacities . The inadequacy of
In 1987 , the trend of domestic demand should be similar to            investment in the competitive sector over a period of many
that in 1986 if, as the continuing improvement in firms'              years , its unsatisfactory distribution across industries , its
 financial positions would suggest , the level of investment           belated recovery , and the fact that it has been predominantly
increases . Furthermore , the lagged impact of improved               directed towards rationalization , have prevented the
competitiveness following the 1986 currency adjustment is             productive system from responding satisfactorily to changing
likely to reduce the restraining effect of external trade on           and potentially accelerating demand . The Government is
growth . All in all , GDP growth should reach 2,5% ; this             therefore aiming to give direct or indirect support to the
should permit a slightly greater increase in employment but           effort that firms still have to make to meet this priority
still no fall in unemployment . The rise in consumer prices           need .
should again tend to fall somewhat and the trade balance
should continue to improve .
                                                                      Thus , the new Government has resolutely continued the
                                                                      liberalization policy intended to restore firms' pricing
The stabilizing measures taken since 1983 and the improved            freedom , removing the restrictions on their foreign exchange
terms of trade have therefore brought about a marked                  transactions and making it easier for them to obtain finance .
acceleration in growth , but the hoped-for recovery in the            On the prices front , a number of measures have been taken
employment situation has not yet begun . Although there has           since the autumn of 1985 , which will have led , by the end of
been a slight increase in the numbers employed , the measures          1986 , to the virtually complete liberalization of industrial
taken in connection with the social security treatment of             prices and trade margins and to a total freeing of prices and
unemployment have been insufficient to compensate for the             margins in the service sector . Exchange controls have , for the
natural increase of the labour force , so that unemployment           most part , been abolished for firms and for private
has again risen slightly .                                            individuals . Finally , major reforms have been made to the
                                                                      operation of the financial market ; these include the
                                                                      opening-up of the money market to non-financial operators ,
                                                                      and a set of measures to restore competition between
                                                                      financial intermediaries through the abolition of certain
Concerned by the inadequate achievements on the                       privileges regarding deposit-taking , through the replacement
employment front , the Government elected on 16 March                 of ceiling controls on credit by liquidity regulation based on
1986 has taken , or is preparing to take , a number of                interest rates and through the gradual liberalization of
social measures intended to stimulate recruitment . It has            interest rates in banking . This package of measures is
made a series of amendments to labour legislation , which             intended to create a climate more propitious to enterprise ,
are designed , by making employment conditions more                   enabling businesses to adapt more readily to market
flexible , to encourage firms to take on more staff. Thus ,           trends .
 ---pagebreak--- No L 385 / 92                               Official Journal of the European Communities                                     31 . 12 . 86
In the wages field , the policy followed in the public sector and      bring interest rates down . In attempting, in the manner
behaviour in the private sector should continue to exhibit             described , to reduce the central government's borrowing
considerable restraint , implying only a limited rise in the           requirement and the general government net borrowing to
purchasing power of earnings . These developments should               approximately 2,6% of GDP , budgetary policy in 1987
allow firms' competitiveness to be strengthened and enable             is committed to public finance consolidation while
them to invest sufficiently to make possible a gradual                 encouraging the growth of productive capacity and
acceleration in capacity expansion .                                   employment .
Public finance policy should also help to achieve this goal as it
seeks to reduce the burden on the economy of taxation and              The monetary policy stance has continued to be one of great
social security contributions and of the public deficit . While        caution , but has , nevertheless , permitted an appreciable fall
it is true that the direct tax concessions already made or             in nominal interest rates . The capital inflows which followed
planned will be partially offset by the increase in certain            the April 1986 currency adjustment have made possible the
social security contributions intended to forestall a social           early repayment of certain external debts . Together with
security deficit , the measures adopted should generally be            other neutralizing factors , this has helped to keep "the growth
neutral in regard to households , but favourable to firms , not        in the money supply at around the 5% target , which is
only because of the direct benefits but also because they              appreciably lower than the growth rate of nominal GDP . The
should promote a flow of funds to the financial market .               same caution should prevail in 1987 in order to consolidate
Furthermore , although the need to maintain the public                 the substantial progress already made in reducing inflation .
finances in equilibrium is bound to lead to further                    Provided that the international environment is favourable , it
expenditure cuts and therefore to the abolition of certain             should not prevent a further fall in interest rates , the normal
subsidies , firms should nevertheless derive greater benefit           outcome of the improved financial equilibrium of firms and
from the fact that the contraction in the deficit is likely to help    of central government .
 ---pagebreak--- 31 . 12 . 86                                         Official Journal of the European Communities                                          No L 385 / 93
                                                                            TABLE 33
                                                      France : Main economic aggregates 1961 to 1987
                                                                                                                                (Annual percentage changes)
                                                        1961 to     1974 to
                                                                                   1981         1982  1983       1984       1985      1986 (')   1987 ( 2 )
                                                           1973      1980
                          r value                         10,7       13,9          12,3         14,7  10,3        8,7        7,2         6,9        5,3
Gross domestic           J volume                           5,6       2,8           0,5          1,8   0,7        1,3        1,4         2,2        2,5
product                  ]
                          1^ deflator                       4,9      10,8          11,8         12,6   9,5        7,3        5,8         4,6        2,7
Private consumption deflator                                4,7      10,8          12,8         11,2   9,5        7,3        5,5         2,5        2,3
                          r private                         7,7        1,5      - 1,0          - 0,4 - 2,2      - 2,0        2,8         5.7        6,2
Gross fixed
capital                 ■< public                           3,2       0,3       - 1,4            9,7 - 3,0        2,3        2,2         2.8        2,4
formation volume 1 total                                    7,6        1,3      - 1,1            0,7 - 2,3      - 2,2        3,1         5,3        5,7
     of which :              construction                             0,3       - 2,1          - 3,5 - 3,5      - 4,4     - 0,6          1,0        3,0
                             equipment                                 1,8      - 1,6            6,7   1,6      - 1,5        5,1         6,9        6,0
Domestic demand at constant prices                          5,8       2,9       - 0,4            3,8 - 0,2        0,6        2,1         3,6        2,9
Gap with respect to other
Community countries ( 3 )                                   1,1       0,8           1,4          3,0 - 1,1      - 1,2        0,1         0,2        0,6
                          r nominal                         9,9      14,7          14,3         13,7  10,7        7,8        6,7         4,5        3,0
Compensation
of employees            \ real A (4 )                       4,8       3,6           2,2          1,0   1,1        0,5        0,9       - 0,1        0,3
per head              .1          B (4 )                    5,1       3,5           1,3          2,3   1,1        0,5        1,2         2,0        0,7
Productivity ( 5 )                                          4,8       2,5           1,0          1,7   1,2        2,4        1,7         2,1        2,2
Real unit labour costs                                      0,0        1,1          1,6        - 0,7 - 0,1      - 1,8     - 0,6        - 2,2      - 1,9
Rates of return ( s )                                                                          - 1,5   5,5        5,0        5,7        14,0        9,9
     idem ( 1961 to 1973 = 100 )                       100           57,8        46,3           45,6  48,1       50,5      53,4         60,9       66,9
Competitiveness ( 7 )                                   - 0,8         0,9       - 5,3          - 2,2 — 1 ,0     - 0,1        3,0       - 0,2      - 2,3
Employment                                                  0,6       0,2       - 0,7            0,1 - 0,6     - 1,0      - 0,3          0,1        0,3
Registered unemployed as %
of the civilian labour force ( 8 )                          1,1       5,0           7,7          8,7   8,8        9,9      10,3         10,5       10,7
Current balance as % of GDP                                 0,2     - 0,7       - 1,4          - 3,0 - 1,7     - 0,9      - 0,8          0,1        0,4
Long-term interest rate                                     7,0      11,1          16,3         16,0  14,4       13,4      11,9          9,5        7,5
Money supply ( 9 )                                        13,7       13,6         10,4          10,8  11,2        8,3        5,6         4,8        4,5
Net lending or borrowing
requirement of general
government as % of GDP                                      0,5     - 0,8       - 1,8          - 2,5 - 3,2     - 2,9      - 2,6        - 2,9      - 2,6
Public debt as % of GDP                                              25,4        26,0          29,1   30,7      32,9       35,2         36,9       39,2
Public debt interest
as % of GDP                                                           1,3           2,1          2,2   2,6        2,8        2,8         2,9        2,9
 *) Estimates of the Commission services , October 1986 .
 2)   Forecasts of the Commission services , October 1986 , on the basis of present policies .
 3)   Differences in percentage points .
 4)   A: GDP deflator ; B : private consumption deflator .
 s)   Gross value added per occupied person in the whole economy .
 6)   Net operating surplus on the net capital stock of current replacement cost .
 7)   Effective exchange rate (vis-a-vis 19 industrial countries ) on the basis of unit labour costs for the whole economy . Positive figure = loss of the
    'competitiveness .
 8 ) Eurostat definition .
 9 ) End of year .
 ---pagebreak---  No L 385 / 94                                 Official Journal of the European Communities                                     31 . 12 . 86
                                                                   IRELAND
 In Ireland, the immediate economic outlook has brightened .               Scheme , which subsidizes incremental employment , have
 Favourable external factors have powerfully reinforced the                also been successful , at least in terms of participation .
 gradual recovery already under way . Private consumption
 regained an upward path in 1985 / 86 , but this has to be seen
 in the light of the steep fall in the first half of the decade .
 Aggregate investment has not yet stabilized , but is likely
 to strengthen gradually next year , particularly as the
 contraction in public sector activity slows . As yet , building          The very open nature of the Irish economy means that wages
 and construction activity shows little sign of renewed vitality ;        policy must be designed not only to improve the profitability
 on the other hand , private sector investment in capital goods ,         of investment, and to reduce the share of labour-saving
 which had fallen back following a peak in the replacement                investment , but also to maintain international
 cycle in 1984 / 85 , is likely to return to a more positive trend        competitiveness . Recently , competitiveness pressures have
 in 1987 . Export volumes are no longer increasing at the very            intensified , in particular as a result of the weakness of
 high levels of recent years , but continue to grow , though at           sterling , and have prompted an 8 % devaluation of the Irish
 more modest rates . Import movements have tended to be                   pound within the EMS in August 1986 . Viewed under all
 volatile but are expected to respond to stronger final                   these aspects , recent wage trends in Ireland have not been
 demand . In 1987 therefore , when the beneficial effects of the          appropriate . Real per capita wages for the total economy ,
 fall in the price of crude oil earlier this year are more fully felt     measured using the private consumption deflator , fell
 in the economy , and on the basis of existing policies , real            somewhat in the early 1980s after a period of sharp increase ;
 GDP should grow by over 3 % , with inflation , at about 3 % ,            they recovered thereafter and in both 1986 and 1987 are
 the lowest since 1966 and the current account in small deficit .         expected to grow by 3% ( and by 1 V4 and 2 3/4 % ,
 On the negative side , relatively slow progress is being made in         respectively , measured using the GDP deflator ); the relatively
 reducing the large public deficits while the situation in the            high 1987 figure is partly due to the current public-service
 labour market remains very serious . In 1986 , the fall in               wage agreement , which will give public servants a 3 % real
 employment slowed while the unemployment rate                            wage increase in that year . Real wage increases in
 steadied .
                                                                          manufacturing industry have tended to exceed those for the
                                                                          total economy . Moreover , while the dispersion in the level
                                                                          and timing of wage settlements has allowed greater wage
                                                                          flexibility in weaker firms , it has not protected them from the
An acceleration in net emigration and a decline in                        impact on their costs of developments in the sheltered sector
participation rates have , at least temporarily , checked                 of the economy , where a policy of moderation in real wages
growth in the labour supply and allowed the unemployment                 has been less rigorously pursued .
rate to stabilize at around 1 8 % . In the year to April 1986 , net
emigration reached 30 000 , causing a small population fall
for the first time in a quarter of a century . Nevertheless , the
interplay of demographic influences over the medium term is
still likely to produce an average annual labour force growth
of l /z °/o . Thus , if unemployment is to be reduced                    A specific feature of the Irish economy is the leading role of
substantially , employment must rise at a much faster rate .             branches of foreign-owned firms in the export base ; these are
Ultimately , the level of employment growth required can                 established mainly in a few 'high-tech' sectors . Current policy
only be achieved if the capacity of the economy itself to                recognizes the continuing importance of direct foreign
generate significant numbers of new jobs is considerably                 investment , but aims at securing a better balance of output
enhanced .                                                               and employment through encouraging native-owned firms to
                                                                         compete more successfully in exporting and related activities .
                                                                         This will require major investment . In this regard , adequate
                                                                         levels of corporate profitability have become a more
                                                                         important determinant for investment , given current
This will require appropriate macroeconomic policies , in                constraints on public spending and , in particular , a more
particular a loosening of the constraints imposed on the                 selective use of investment incentives . In addition , high real
economy by the high public deficits , more moderate increases            interest rates have reversed a trend towards tax-based capital
in real wages , and more attention to the efficient and flexible         borrowing by companies from the banks . While global profit
functioning of markets . The recently expanded training and              levels in recent years have improved , the relatively more
marginal employment schemes have an important                            dynamic performance of the foreign-owned sector implies
contribution to make in the shorter term . A social                      that many native firms have been doing badly . The general
employment scheme , introduced in early 1985 , offering                  boost to profits imparted by the oil price fall may thus be
10 000 longer-term unemployed part-time work for one                     directed initially to consolidating balance sheet positions and
year , mainly on local authority projects , reached its                  only later to new investment . Bearing in mind also that recent
participation target by mid-1986 after an initially slow                 trends in investment in capital goods reflect replacement or
response . Other schemes , particularly the Enterprise                   capital deepening activity to a greater extent than the desired
Allowance Scheme , designed to help unemployed persons                   capital widening among native firms , investment in
start their own business , and the Employment Incentive                  manufacturing seems likely to fall considerably short of the
 ---pagebreak--- 31 . 12 . 86                             Official Journal of the European Communities                                 No L 385 / 95
level required to meet the target of 7% annual growth in            budget and the current public-service wage agreement , imply
output set in the 1984 White Paper on Industrial Policy .           a substantial commitment of resources already and therefore
                                                                    a correspondingly limited scope for the authorities to achieve
                                                                    the planned level of adjustment in 1987 . In these
If the improvement in the economy now in train is to                circumstances , the authorities should make every effort to
stimulate better balanced investment and output and a               reach their declared target , but in any event should reduce the
resumption of growth in employment , increased efforts are          Exchequer deficit by some 1V2 percentage points of GDP
necessary to secure moderate increases in incomes . In this         relative to the expected out-turn of nearly 12 % for 1986 . It is
context , the Government's recent guidelines on new pay             equally important however , that they take adequate account
settlements are to be welcomed . It is equally essential to         of the medium-term dimension in framing budgetary policy
correct the imbalances in the public accounts at a faster pace .    for 1987 . In particular , it is essential to avoid budgetary
An appreciable reduction in the Exchequer deficit over the          commitments which reduce the scope for a substantial degree
medium term is the only way of arresting growth in the public       of adjustment in 1988 and thereafter ; it is equally important
debt , and would also contribute to lower real interest rates ,     to decide on appropriate expenditure cuts to set spending on
more moderate levels of taxation and , in general , an              a firm downward trend in the near future , even if not having
environment more favourable to the healthy growth of                their major impact in 1987 . These expenditure cuts must be
output and employment . Declared official policy ( ! ) is to        correspondingly larger to the extent that any adjustments in
reduce the Exchequer deficit to just under 10% of GNP               tax rates or allowances and any modest expansion of public
( 8V2 % of GDP ) by 1987 . In 1986 , however , it now appears       investment are      accommodated within overall resource
likely that the planned budget target for the deficit , 10 3/4 %    constraints .
of GDP , will be exceeded by 1 percentage point . While part
of the excess is due to circumstances of a non-recurring
nature , a number of factors , principally the full year            (') Set out in the medium-term macroeconomic plan 'Building on
incidence of the income tax reductions made in the 1986                 Reality'.
 ---pagebreak--- No L 385 / 96                                          Official Journal of the European Communities                                          31 . 12 . 86
                                                                              TABLE 34
                                                        Ireland : Main economic aggregates 1961 to 1987
                                                                                                                               (Annual percentage changes)
                                                          1961 to     1974 to
                                                           1973    •   1980
                                                                                  1981           1982   1983    1984     - 1985     1986 (')     1987 ( 2 )
                           r value                         12,0        19,4       21,3           17,3    9,1    10,8        7,1        7,6          6,8
Gross domestic            J volume                            5,4       2,7        3,4            1,4  - 1,9     4.2        2,0         1,8         3,1
product ( 3 )              |
                           { deflator                         6,4      16,2       17,4           15,7   11,3     6.3        5,0        5,6          3,6
Private consumption deflator                                  6,3      16,2       19,6           15,9   10,0     7,5        4,2        3,7          3,2
                            r private                                                                                       4,7        4,0          8,3
Gross fixed
capital                   1 public                                                                                        - 5,2      - 7,6        - 3,7
formation volume 1 total                                      9,3       4,1        7,3        - 5,5    - 9,3   - 2,7      - 0,3      - 1,6          2,9
      of which :              construction                    8,0       3,6        6,6        - 4,8   - 12,2  - 13,5      - 7,5      - 4,5          1,3
                              equipment                    11,2         4,6        8,1        - 6,3    - 6,1     8,1        5,5        0,5          4,0
Domestic demand at constant prices                            5,4       2,2        3,0        - 2,9    - 4,1     1,0      - 0,4         1,5         2,5
Gap with respect to other
Community countries ( 4 )                                                                                                                      I
                            r nominal                      11,5        19,6       18,3           15,3   11,1    12,3        7,3         6,9         6,0
Compensation
of employees              < real A ( s )                      4.1       3,8        0,8        - 0,3    - 0,2     5,7        2,2         1,3         2,3
per head                    1       g (5)                     5,2       3,0      - 1,1        - 0,5      1,0     4,5        3,0         3,1         2,7
Productivity ( 6 )                                            4,1       2,5        4,0            1,9    0,0     6,2        4,6        2,9          2,5
Real unit labour costs ( 7 )                                  1,0       2,0      - 3,1        - 2,2    - 0,2   - 0,5      - 2,3      - 1,6        - 0,1
Competitiveness ( 8 )                                                                                                                          \
Employment                                                    0,2       1,1      - 0,7            0,5  - 2,0   - 1,9      - 2,5      - 1,1          0,7
Registered unemployed as %
of the civilian labour force ( 9 )                            4,7       8,1       10,2           12,2   15,0    16,6       18,0       18,4         18,0
Current balance as % of GDP                               - 4,7       - 7,4     - 14,0        - 9,9    - 6,4   - 5,5      - 3,2      - 1,3        - 1,3
Long-term interest rate                                       7,2      14,2       17,3           17,0   13,9    14,6       12,7         9,8         8,8
Money supply ( 10 )                                        12,1        19,5       17,4           13,0    5,6    10,1        5,3         5,4         7,3
Net lending or borrowing of general
government as % of GDP                                               - 10,1     - 13,2      - 13,8    - 11,8   - 9,8    - 11,6      - 10,7        - 9,8
Public debt as % of GDP ( n )                                          76,2       89,8           96,2  108,3   114,9     118,2       121,5       125,1
Public debt interest
as % of GDP ( n )                                                       5,4        7,0            8,6    9,1     9,7       10,6       10,0          9,6
  (') Estimates of the Commission services , October 1986 .
  (2)   Forecasts of the Commission services , October 1986 , on the basis of present policies .
  (3)   Expenditure measure at market prices .
  (4)   Differences in percentages points .
  (5)   A : GDP deflator ; B : private consumption deflator .
  (6)   Gross value added per occupied person in the whole economy .
  (7)   Ratio of real wages per head to productivity .
  ( 8 ) Effective exchange rate (vis-a-vis 19 industrial countries ) on the basis of unit labour costs for the whole economy . Positive figure = loss of
        competitiveness .
  ( 9 ) Eurostat definition .
( 10 ) M3 ; end of year .
( n ) Refers to Exchequer debt .
 ---pagebreak---   31 . 12 . 86                               Official Journal of the European Communities                                       No L 385 / 97
                                                                     ITALY
  In Italy, measures tending to reduce the automatic nature of             companies have been authorized to recruit part of their
  wage and salary adjustments , and fiscal changes designed                workforce from the persons appearing on the employment
  partly to achieve a better balance of direct taxation as                 office lists , solely on the basis of their professional skills ,
  between wage and salary earners and the self-employed , had              rather than being constrained to follow the order of
  the effect of curbing private consumption at the beginning of            inscription on the lists . Attempts have also been made to
  the year. This factor, tending to slow activity temporarily ,            develop fixed-term employment contracts and training
  was offset by thestrength of exports . Subsequently , domestic           contracts for young workers , but with limited success . The
  demand as a whole grew faster , helped by the effects of the             Ministry of Labour has also produced an important
  marked fall in import prices on households' purchasing                   medium-term programme for reforming the labour market ,
 power and on enterprises' profits , while exports have                    intended to modify its structure and increase its flexibility .
  remained on an upward trend . Overall , real GDP is likely to            This programme has led to the adoption of an emergency
 expand by 2,6% in 1986 , inducing employment growth of                    plan for the recruitment , over two years , of 40 000 young
  0,5% . This faster growth is coupled with a substantial                  people into the public and semi-public sectors , with the help
  slowing of inflation , the private consumption deflator , on an          of financial contributions from the central government .
  annual average basis , falling from 9,4 % in 1985 to 6,2 % in            Finally , at the end of September , the Government provided
  1986 . At the same time , despite the high import elasticity , the       for   the    allocation    of  funds   for    infrastructure    and
 trade balance has recovered sharply under the influence of                reconstruction work in the south of Italy , which should allow
 the considerable terms of trade improvement . The current                 an estimated 200 000 temporary jobs to be created .
 balance should thus register a surplus amounting to some
  1,2% of GDP in 1986 , compared with a deficit of 1 % in
  1985 .
                                                                           Also , at the end of 1985 , as a result of conciliation by the
                                                                           Government , the wage-indexation system was substantially
 In 1987 , consumer demand will be stimulated by the                       modified , by tacit agreement , for a four-year period ;
 application of the new collective wage settlements , agreed               indexation now compensates for only about half of inflation .
 towards the end of 1986 , and by the continued rapid rise of              In a more relaxed climate of labour relations , a framework
 non-wage incomes , while enterprises' propensity to invest                agreement was signed in industry in May 1986 , settling the
 should strengthen further . Moreover , the momentum of                    dispute concerning the decimal point increases on the sliding
 external demand should be maintained . Demand as a whole                  scale which were not paid in 1985 ( J ), and setting out the
 is therefore likely to be strong , so that real GDP could                 principle of measures to help the recruitment of young
 increase by about 3,5 % , which , however , in all probability            people , among whom the unemployment rate is particularly
 implies a significant reduction of the external surplus . The             high in Italy . The conclusion of three-year collective
 rate of inflation could drop below 4 % , and thus to a level not          agreements in industry should ratify the framework
 seen since the end of the 1960s .                                         agreement signed in May in a more relaxed climate than
                                                                           usual ; the only serious problem remaining is the reduction of
                                                                          working hours .
 Against this background , the authorities should continue
 their efforts to reduce the structural imbalances on the labour
 market and in the public finances and thus restore conditions            The social dialogue has thus helped towards an appreciable
for lasting and balanced growth . The two problem areas are               easing of production costs , which is being reinforced by the
not unconnected , since the still excessively high level of               large fall in import prices , and which is bound to spread
absorption of resources by the public sector hinders the                  progressively from the sectors which are closely linked to oil
progress of the productive system towards greater efficiency              imports towards those less directly linked .
and a higher level of employment .
Even though the economic background described above                       In 1987 , the progress made in reducing inflation and the
should , in the short term , be conducive to a progressive                foreseeable acceleration of economic activity will tend to
improvement in the labour market and to bringing down the                 stabilize the pressure of the public deficit on the financial
unemployment rate , this has not ' yet been evidenced during              markets ; this will still be excessive , however , and will
1986 . In fact , companies have begun by taking back workers              continue to be a major problem , thus justifying the stated
who were temporarily laid off and using the authorized scope              intention of the Government to eliminate gradually the part
for overtime before taking on new recruits . Furthermore , the            of the deficit in excess of interest charges . The economic
improved employment prospects have had a positive impact                  outlook for 1987 offers an exceptional opportunity to make
on the activity rate . As a result , the unemployment rate has
not fallen as hoped , remaining at 10,6% .
                                                                          (*) The Italian industrial confederation and the trades unions
                                                                              differed on the interpretation of one point of their collective
                                                                              agreements of 1983 , which had for the first time modified the
This unsatisfactory evolution does not reflect the efforts                    indexation system but had not set out clearly whether fractions
already made by the public authorities in the last three years                of a point of the index would be cancalled or taken into account
to improve the functioning of the labour market . Since 1 984 ,               at a later date .
 ---pagebreak--- No L 385 / 98                               Official Journal of the European Communities                                    31 . 12 . 86
definite progress in the direction indicated by the Treasury           interest rates . A further decline could come about as a result
Minister's consolidation plan . In order to ensure that this           of the effective implementation of the announced budgetary
comes about , a new budgetary procedure was adopted in                 policy . While reaffirming its determination to defend the
June . Each year , by the end of July , Parliament is to approve       lira's position on the foreign exchanges , the Government has
a three-year economic and financial planning document                  also embarked on a cautious but resolute policy of
comprising the chief macroeconomic objectives and the                  liberalization of capital movements .
major budget aggregates . The autumn discussion in
Parliament would thus take place within an agreed                      Now that these economic policies are in the course of
framework , and a safeguard clause would freeze                        implementation there are already signs that the fundamental
appropriations to the extent of the spending cuts set out in           equilibria can be durably restored as mainly evidenced
legislation yet to be adopted . The document , Oproduced by the        in the return to stability of the lira exchange rate within
three responsible ministers ( Treasury , Financial Affairs and         the EMS . This course , and , in particular , the policy
Budget ), and adopted by Parliament with a lengthy delay               of budgetary austerity , should be pursued , taking all
following the government crisis , sets a macroeconomic                 necessary measures to limit the Treasury deficit to the
framework for 1987 which is close to the Commission's
                                                                       target of Lit 100 000 000 000 000 set for 1987 .
forecasts . It reflects the Government's intention to bring the
Treasury borrowing requirement down to below the target
set for 1986 and to reduce it to Lit 100 000 000 000 000 or            The disappointing evolution of employment is evidence that
12,2% of GDP , compared with Lit 110 000 000 000 000 ,                 the adjustment of real wage rates in relation to productivity
or 14,6% of GDP , in 1986 . The achievement of this                    does not yet appear adequate , and that the productive base
objective , with taxes and social security contributions as a          has not developed at the desired pace . These deficiencies ,
whole unchanged as a percentage of GDP compared to 1986 ,              while being reduced in the north and centre , are still very
                                                                       evident in the south . Whilst this situation calls for further
depends on implementing , as is the Government's declared
intention , a further shift of emphasis in taxation towards            prudence in wage trends , it could also be improved by
indirect taxes , together with a strict limitation of current          adjusting government receipts , without impairing the overall
expenditure , in line with inflation , and of capital spending , in    equilibrium of the public finances , in order to ease to a
line with nominal GDP growth .                                         greater extent social security contributions in the southern
                                                                       regions . With the same goal in view , the improvement of the
                                                                       financial structure of enterprises , achieved notably through
Monetary policy is set on a course of progressively easing             directing savings into investment in shares , and the continued
interest rates as inflationary forces moderate . The three             strengthening of deficit areas of the public sector would help
successive cuts in the discount rate which were made in                to strengthen the competitiveness of the economy and , in
March , April and May 1986 , nevertheless , slightly exceeded          consequence , promote employment on a more stable
the decline in inflation because of the easing of international        basis .
 ---pagebreak---   31 . 12 . 86                                        Official Journal of the European Communities                                     No L 385 / 99
                                                                              TABLE 35
                                                          Italy: Main economic aggregates 1961 to 1987
                                                                                                                             (Annual percentage changes)
                                                         1961 to      1974 to
                                                                                     1981       1982    1983    1984    1985      1986 - 0 )  1987 ( 2 )
                                                            1973       1980
                             r value                        11,0       20,9         18,5        17,2    14,6   13.6     11,3        12,7         9,1
 Gross domestic          J volume                            5.3        2,8           0,2      - 0,5   - 0,4     2,6     2,3         2,8         3,6
 product                   |
                             ^ deflator                      5.4       17,6         18,3        17,8    15,0   10.7      8,8         9,7         5,3
 Private consumption , deflator                              4,9       17,3         19,2        17,0    15,1   11,1      9,4         6,2         4,0
 Gross fixed                f^
 capital
 formation volume I total
                         ^ public
                                                             5,7        0,9           0,6      - 5,2   - 3,8     4,1     4,1         4,6         7,2
      of which :               construction                  6,6      - 0,2           0,5      - 3,2   - 2,0  - 0,4    - 1,7         1,9         2,4
                               equipment                     5,0        2,2           1,8      - 6,8   - 5,7   10,1      9,9         7,1        11,3
 Domestic demand at constant prices                          5,3        2,5       - 2,2        - 0,3  - 2,0      3,3     2,4         3,6         5,1
 Gap with respect to other
 Community countries ( 3 )                                   0,6        0,4           0,4      - 1,0  - 3,2      1,9     0,2       - 2,0         1,6
                           r nominal                        11,6       20,2         21,9        17,2    16,5   12,0     10,0         6,7         6,1
 Compensation
 of employees            ■< real A ( 4 )                     5,9        2,2           3,0      - 0,4     1,2     1,1     1,1       - 2,7         0,8
 per head                  1       g (4)                     6,5        2,3           2,3        0,2     1,2     0,8     0,5         0,4         2,1
 Productivity ( 5 )                                          5,7        2,2      - 0,3         - 0,4  - 0,5      2,2     1,8         2,3         2,3
 Real unit labour costs                                                                          0,0     1,8  - 1,0    - 0,8       - 4,9       - 1,5
 Rates of return ( 6 )                                                                         - 8,6 - 28,5    21,0      7,9       40,8         10,4
      idem ( 1961 to 1973 = 100 )                        100          51,7          51,1        46,7   33,4    40,4    43,6         61,4        67,8
 Competitiveness ( 7 )                                   - 0,3       - 0,1       - 0,7           2,2   11,3      3,7   - 0,5         0,8         1,9
 Employment                                              - 0,4          0,8           0,5      - 0,1     0,1     0,4     0,5         0,5         1,3
 Registered unemployed as %
 of the civilian labour force ( 8 )                          5,2        5,9           8,0        9,7   10,9    11,9     12,9        13,4        12,8
 Current balance as % of GDP                                 1,5     - 0,5       - 2,3         - 1,6     0,2  - 0,8   - 1,1          1,2         0,9
 Long-term interest rate                                     6,9      13,3          20,6        20,9   18,0    14,9    13,0        10,6          8,7
 Money supply ( 9 )                                        14,7       21,5          15,9        17,2   13,2    12,1    11,1          7,5         7,5
 Net lending or borrowing
requirement of general
government as % of GDP                                   - 3,3       - 9,0     - 11,7       - 12,7   - 12,4  - 13,0  - 14,0      - 12,7      - 11,0
Public debt as % of GDP                                   44,8        67,7         70,2        76,8    84,3    91,1    99,5       103,1       106,8
Public debt interest as % of GDP                             1,8        4,9           7,2        8,5     9,0     9,6     9,3         9,6         8,8
(') Estimates of the Commission services , October 1986 .
( 2 ) Forecasts of the Commission services , October 1986 , on the basis of present policies .
(3)    Differences in percentage points .
(4)    A : GDP deflator; B : private consumption deflator .
(5)    Gross value added per occupied person in the whole economy .
(6)    Net operating surplus on the net capital stock of current replacement cost .
( 7 ) Effective exchange rate (vis-a-vis 19 industrial countries) on the basis of unit labour costs for the whole economy. Positive figure = loss of
       competitiveness .
( 8 ) Eurostat definition .
( ? ) End of year .
 ---pagebreak--- No L 385 / 100                                Official Journal of the European Communities                                      31 . 12 . 86
                                                                 LUXEMBOURG
In Luxembourg, economic activity has remained at a high                  The trend of wages and salaries started to pick up speed at the
level in 1986 , due to the increase in domestic demand ; its             end of 1984 , leading to rises in 1986 and 1987 which are
driving force , private consumption , has benefited from the             making up for earlier losses . In real terms , compensation of
big rise in personal disposable income . Total exports have              employees per head will probably increase by more than the
advanced less rapidly than last year because of a slight dip in          growth of labour productivity . Even if this has positive
the sales of steel products . All in all , gross domestic product        effects on domestic demand in the short term , the risk is that
should grow by about 2,5% . Inflation has abated sharply                 competitiveness of enterprises will be damaged while
and the unemployment rate has fallen slighty .                           rationalization investment — unsuited to the creation of
                                                                         more     jobs   —     will  be    encouraged     and    industrial
In 1987 , gross domestic product should grow at a rate similar
                                                                         diversification held back . As a result , the next wage
to that recorded in 1 9 8 6 . A stabilization in the level of sales of
                                                                         negotiations will be particularly important .
steel products and the continuing vigorous increase in
deliveries of other products will underpin the faster growth of
total exports . However , the expansion of business                      The integration of young people into the labour market will
investment could run out of steam . The upward movement of               require an additional effort to adapt vocational training to
consumer prices is liable to pick up speed because of a sharper          enterprises' skilled labour requirements , in order to eliminate
increase in wage costs in the services sector , and because an           the existence of a hard core of young unemployed , although
open economy is very exposed to externally induced                       it is also necessary to recruit non-resident workers for new
inflationary risks . On the labour market , the increase in              jobs . Against the background of international competition , it
numbers employed will be accompanied , as in the preceding               is becoming increasingly desirable to modify working hours
year , by a fall in the number of unemployed and a sharp cut in          in line with the needs of companies . Less rigid legislation
the number of persons covered by special employment                      would enable management and unions to negotiate , at the
schemes .                                                                level of the firms , more flexible systems of work
                                                                         organization .
In most respects , the economic policy pursued by the
Government is compatible with the guidelines of the
cooperative strategy for growth and employment . Budgetary               As a result of the slow rise in tax receipts , partly due to a cut
policy has also contributed by measures underpinning                     in direct taxes , and a steady rise in expenditure , in particular
demand : part of the room for manoeuvre which became                     on salaries and transfers , general government net lending will
available after the steel industry was restructured was used to          fall in 1986 and 1987 . Although the investment fund reserves
reduce personal income tax in 1986 , and in 1987 it will again           are sufficient to finance projects for the provision of adequate
be possible to reduce personal and company taxation . There              infrastructure in the fields of both traditional public
will also be scope for supplementing the public investment               investment and of telecommunications and electronic data
funds in order to guarantee the financing of their                       processing , a certain amount of prudence will have to be
medium-term programmes . The efforts to diversify the                    exercised in the management of other expenditure , in order
structure of the Luxembourg economy have been continued                  to maintain equilibrium in the central government budget
by selective action to assist new enterprises .                          and thus ensure some room for manoeuvre for the future .
 ---pagebreak---   31 . 12 . 86                                       Official Journal of the European Communities                                No L 385 / 101
                                                                             TABLE 36
                                                   Luxembourg: Main economic aggregates 1961 to 1987
                                                                                                                        (Annual percentage changes)
                                                        1961 to    1974 to
                                                                                 1981           1982  1983   1984  1985      1986 (')    1987 ( 2 )
                                                          1973      1980
                           r value                         8,6        8,5         9.8           10,3   9,4   12,4   7,7         8,0         5,3
 Gross domestic         J volume                           4,1        1.5       - 0,1            0,9   1,6    5,3   2,2         2,4         2,6
 product                  |
                           ^ deflator                      4,4        6.6         9.9            9,4   7,7    6,7   5,4         5,4         2,6
 Private consumption deflator                              3,1        7,5         8,6           10,6   8,0    6,4   4,0         0,5         1,3
                           r private                                            - 7,7          - 0,7 - 5,2  - 0,2   2,5         3,0         2,1
 Gross fixed
 capital                4 public                                                - 1,4            0,6   2,3  - 4,9 - 0,5         3,0         1,1
 formation volume 1 total                                  5,1     - 0,3        - 6,2          - 0,4 - 3,3  - 1,4   1,7         3,0         1,9
      of which :             construction                                       - 2,5            1,1 - 1,4  - 3,1   0,7         2,1         0,8
                             equipment                                         - 13,2          - 3,7 - 7,5    2,5   4,0         5,0         4,0
 Domestic demand at constant prices                                               1,8          - 0,2   0,4    0,2   1,8         3,0         3,0
 Gap with respect to other
 Community countries ( 3 )                                                                       0,4   0,4  - 0,9   0,2       - 0,8       - 0,4
                          r nominal                        7,3      11,1          8,8            7,2   7,6    6,8   4,5         4,2         5,6
 Compensation
 of employees           ■< real A ( 4 )                    3,0       4,3 '        0,6          - 2,5 - 0,6    0,2 - 0,8       - 1,2         2,9
 per head                 1       g (4 )                   4,2       3,5          0,1          - 3,1   0,4    0,4   0,5         3,7         4,2
 Productivity ( 5 )                                        3,1       0,9        - 1,7            1,1   2,8    4,9   0,8         1,6         1,9
 Real unit labour costs                                 - 0,1        3,4          2,3          - 3,6 - 3,3 - 4,5  - 1,6       - 2,8         1,0
 Employment                                                1,0       0,8          0,4          - 0,4 - 0,1    0,6   1,4         0,8         0,7
 Registered unemployed as % of the
civilian labour force ( 6 )                                0,0       0,4          1,0            1,3   1,6    1,7   1,6         1,3         1,2
 Current balance as % .of GDP                              6,7      20,1         19,0           25,0  28,2  30,2  29,6        31,5        30,7
Long-term interest rate                                                                                    .I
Money supply ( 7 )
Net lending or borrowing requirement
of general government as % of GDP                          2,0       2,9        - 3,1          - 2,3 - 0,6    1,5   4,1         3,7         2,6
Public debt as % of GDP                                             15,9         14,0           14,4  14,8  14,7  14,3         14,0       14,0
Public debt interest as % of GDP                                     0,8          1,0            1,0   1,1    1,2   1,3         1,3         1,3
(') Estimates of the Commission services , October 1986 .
( 2 ) Forecasts of the Commission services , October 1986 , on the basis of present policies .
( 3 ) Differences in percentage points .
( 4 ) A: GDP deflator ; B : private consumption deflator.
( s ) Gross value added per occupied person in the whole economy .
( 6 ) Eurostat definition .
( 7 ) End of year .
 ---pagebreak---  No L 385 / 102                              Official Journal of the European Communities                                    31 . 12 . 86
                                                           THE NETHERLANDS
In the Netherlands, economic performance in 1986 has been               moderation and better balance for the budget . The measures
marked by a less rapid growth in export volume due to the               taken to increase the adaptability of the labour market
fall in sales of natural gas . By contrast , the rise in the            have concentrated mainly on the decentralizing wage
purchasing power of households - resulting from the                     negotiations , freezing minimum wages , reducing working
reduction in social security contributions and the fall in              hours and extending opportunities for part-time employment
inflation , due to an improvement in the terms of trade when            and early retirement . Supply conditions have also been
money wages had already been fixed to a large extent - has              helped by the two-stage reduction in corporation tax . Real
led to a sharp increase in private consumption . Business               wage rises have been moderate in recent years ; the policy of
investment has again been buoyant , whereas investment in               decentralized negotiations has worked satisfactorily , and the
residential construction and public sector investment have              Government has not participated directly in the framing of
remained sluggish . Overall , at 1,6 % , GDP will have grown            agreements . In the public sector , a freeze on nominal salary
almost as much as last year , while the output of the corporate         levels was introduced and the Government is currently
sector , excluding the energy sector , is likely to have increased      imposing very strict limits on pay negotiations in this sector ,
by 2,7 % . The rate of inflation is down to zero , and interest         which will have to take account of budgetary policy
rates have fallen by almost a percentage point . The less               constraints and developments in the market sector . In
favourable movement of the trade balance and of transfers               1984 / 85 , this wage policy caused private demand to slacken ;
has led to a slight reduction in the surplus on current account ,       in 1986 , however , the reduction in employees' social security
in spite of the 2,6 % improvement in the terms of trade , due           contributions is boosting the real spending power of
to the fact that the fall in the export price of natural gas has        households , who are also benefiting from the decline in
lagged behind the fall in oil prices .                                  inflation . Falling interest rates have reinforced the
                                                                        stimulatory effect that the improvement in business
                                                                        profitability has had upon investment .
In 1987 , GDP growth is not likely to accelerate greatly ,              The policy pursued by the Central Bank , based mainly on
probably reaching a rate of approximately 1,8% . Exports                maintaining the guilder's parity against the German mark
are likely to grow more rapidly overall , as the volume of sales        within the EMS , has helped to reduce inflation to a very low
of natural gas will show a less marked fall than in 1986 . The          level , and has allowed interest rates to be brought down in
1986 oil price fall will cause a redistribution of income in            line with the international trend . Liberalization measures
1987 , taking into account its lagged effect on the price               have been taken on the financial and money markets to
of natural gas ( of the order of 3% of GDP ), from                      facilitate access by foreign banking institutions to the Dutch
the government budget to companies , households and                     market and the use of new financing instruments by Dutch
abroad . Notwithstanding Government measures , affecting                companies . Priority has had to be given in budgetary policy
expenditure and current receipts , to prevent a too-strong              to reducing the medium-term public sector deficit in order to
deterioration of its deficit , which will slow down private             reinforce budget management and to underpin the structural
consumption , internal demand should increase at a rate                 adjustment of the economy ; this has left little scope for
comparable with that of 1986 . The improvement in                       supporting economic growth in the short-term . Despite the
corporate profitability and the increase in capacity utilization        substantial reduction made in the deficit in 1985 ,
rates will stimulate business investment further , residential          developments on the energy markets have worsened the
construction will probably increase slightly but public sector          budget problem . In order to forestall too serious a
investment is likely to slow down . The general level of prices         deterioration in the deficit in 1987 , decisions have had to be
may well be lower than in 1986 . The deterioration in the               taken to cut expenditure and to increase indirect taxes ; thus ,
terms of trade by more than 1 % should reduce the surplus on            active measures to sustain demand through the budget will be
current account . Thanks to the growth in manufacturing                 virtually impossible .
output , employment will increase and , in addition , because
of the reorganization of working time , the unemployment
rate will decline , though still remaining very high
( 11,1% ).
                                                                        The new Government's econdmic policy objectives are to
                                                                        reduce the budget deficit , to stabilize or lower the burden of
                                                                       taxes and social security contributions , to maintain
                                                                       purchasing power and to reduce unemployment . Because of
                                                                       the high level of unemployment , continued priority will need
                                                                       to be given to exploring all possible means of increasing
The economic policy which the Government has pursued in                employment , and the measures already taken will need to be
recent years on the basis of its autumn 1982 programme has             extended , even though some of them , such as the reduction in
already been broadly in line with certain principles and ideas         working hours , have not yet produced the expected
now underlying the cooperative strategy for growth and                 equivalent increase in recruitment . It is therefore highly
employment . This has been true , for example , of the                 important to ensure that the agreement between employers
improvement in the working of the labour market , wage                  and unions and the Government's programme for providing
 ---pagebreak--- 31 . 12 . 86                                Official Journal of the European Communities                            No L 385 / 103
the young unemployed with vocational training or work                  Government's programme , should be cut to 5 1 /4 % of net
experience are implemented as soon as possible . The                   national income in 1990 compared with 6,7% in 1986 .
emergence of bottlenecks in some sectors of the labour                 Some deterioration in the general government borrowing
market demonstrates how urgent it is to improve skills .               requirement (excluding early repayment of social housing
                                                                       loans ), which is expected to exceed 8% of net national
The results of the decentralized wage negotiations appear to           income in 1987 , with a central government deficit of
allow the competitive position of firms to be maintained .             7,9% , is thus unavoidable . This outcome presumes the
Similarly, the Government's policy of standing back from               implementation of an extensive programme for making up
wage negotiations is unlikely to affect the trend of public            the shortfall due to changes in hydrocarbon prices , both
expenditure , since the link between adjustments to pay and            through cuts in expenditure and through the raising of new
transfer payments in the public sector and adjustments to              revenue . In 1987 , government debt increases further , by
wages and salaries in the private sector has been severed and          more than 7 percentage points of GDP , and it is therefore
there are no plans to restore it . The public sector will              important to pursue a tight budgetary stance in order to
probably not escape entirely from some adjustment to wage              contain the central government net borrowing requirement
and salary levels , at least for certain categories , since it will    within the limits implicit in the budget , and to create the
otherwise be impossible to recruit qualified staff, the lack of        necessary conditions for subsequent reductions .
which is already beginning to be felt .
                                                                       This guideline in no way detracts from a policy of
                                                                       restructuring public expenditure and , as far as possible ,
The appreciable fall in natural gas revenue from 1987 will             revenue , intended to stimulate the growth of the private
make it considerably more difficult to reduce the central              sector and including direct employment measures which have
government budget deficit , which , according to the                   already produced satisfactory results .
 ---pagebreak---  No L 385 / 104                                      Official Journal of the European Communities                                           31 . 12 . 86
                                                                            TABLE 37
                                                    Netherlands : Main economic aggregates 1961 to 1987
                                                                                                                            (Annual percentage changes)
I                                                        1961 to
                                                            1973
                                                                   1974 to
                                                                    1980
                                                                                 1981           1982  1983    1984      1985       1986 (')     1987 ( 2 )
                           r value                          11,3     9,6          4,8            4,5   3,0     4,9       4,2          2,0         0,1
 Gross domestic          J volume                            5,3     2,4        - 0,7          - 1,4   1,4     2.4       1,7          1,6         1,8
 product                   |
                           { deflator                         6,0    7,1          5,5            6,0   1,6     2.5       2,4          0,4       - 1,7
 Private consumption deflator                                .5,2    7,3          6,3            5,3   2,7     2,5       2,6          0,0       - 1,0
                           r private                                           - 11,5          - 3,5   3,3     3,7       5,2          6,2         3.7
 Gross fixed
 capital                 -< public                                              - 4,6          - 7,1 - 4,6     7,6     - 4,3          0,4       - 3,1
 formation volume 1 total                                    6,3   - 0,2       - 10,4          - 4,1   2,1     4,3       3,7          5,4         2.8
      of which :              construction                                     - 10,8          - 6,4 - 3,4     2,5     - 3,3          4,1         2,4
                              equipment                                         - 9,6            0,2  10,0     7,0      13,7          7,0         3,3
 Domestic demand at constant prices                                             - 4,6          - 0,9   1,5     1,4       2,2          2,3         2,4
 Gap with respect to other
 Community countries ( 3 )                                                                     - 1,2 - 0,2   - 0,7       0,7        - 1,5       - 1,4
                           r nominal                        11,4     9,5          3,5            5,8   3,2     0,8       1,4          2,1         1,7
 Compensation
 of employees            -< real ^ ( 4 )                     5,0     2,2        - 1,9          - 0,3   1,5   - 1,7     - 1,0          1,7         3,4
 per head                  1       g (4 )                    6,0     2,0        - 2,7            0,5   0,4   - 1,7     - 1,2          2,1         2,7
 Productivity ( 5 )                                          .3,9    2,1          0,8            1,1   3,0     2,2       0,6          0,5         0,9
 Real unit labour costs                                       1,1    0,1        - 2,7          - 1,4 - 1,5   - 3,8     - 2,6          1,2         2,5
 Competitiveness ( 6 )                                       2,7     0,7        - 9,7            2,5 - 2,7   - 6,2     - 3,9          4,4         0,6
 Employment                                                  0,9     0,3        - 1,5          - 2,5 - 1,9   - 0,4       1,1          1,1         0,8
 Registered unemployed as %
 of the civilian labour force ( 7 )                           1,3    5,3          8,6           11,6  14,0    14,3      13,1         12,0        11,1
 Current balance as % of GDP                                 0,5     0,8          2,2            3,2   2,9     4,1       4,3          3,9         2,8
 Long-term interest rate                                     5,9     9,4         12,2           10,5   8,8     8,6       7,8          6,8         6,1
Money supply ( 8 )                                          10,3     9,6          5,3            7,6  10,5     7,7      10,5          5,1         3,5
Net lending or borrowing
requirement of general
government as % of GDP                                   - 0,4     - 2,5        - 5,5          — 6,6 - 5,9   - 6,2     - 5,1        - 5,5       - 6,6
Public debt as % of GDP                                             41,7         50,3           55,6  62,3    66,3      70,0        75,5         82,6
Public debt interest
 as % of GDP                                                         3,1          4,4            4,7   5,3     5,6       6,0          6,4         6,4
(') Estimates of the Commission services , October 1986 .
(2)   Forecasts of the Commission services , October 1986 , on the basis of present policies .
(3)   Differences in percentage points .
(4)   A : GDP deflator ; B : private consumption deflator .
(5)   Gross value added per occupied person in the whole economy .
( 6 ) Effective exchange rate (vis-a-vis 19 industrial countries ) on the basis of unit labour costs for the whole economy . Positive figure = loss of
      competitiveness .
( 7 ) Eurostat definition .
( 8 ) End of year .
 ---pagebreak---     31 . 12 . 86                              Official Journal of the European Communities                                 No L 385 / 105
                                                                PORTUGAL
   Because of its heavy dependence on imported energy, the                preceding years, investment increased by some 8% in
   Portuguese economy derived particular benefit from the                  volume terms during 1986 , and a comparable, or even
   reverse oil shock, and continued its expansion at a rate above          higher, rate is anticipated for 1987 .
   the Community average in 1986 . The rate of growth of GDP
   ( in volume), estimated at near 4% , was close to the one
   recorded in 1985 . At the same time , the main source or
   buoyancy shifted from exports to domestic demand. After                The size of the public debt and its rapid expansion (47,4 % of
   declining for some years , real wages embarked on a stronger­          GDP in 1980 and 81,2% in 1985 ) have, in particular,
  than-forecast catching-up process mainly because the                    prompted the authorities to aim at a sharp reduction in the
  inflation rate , though remaining well above the Community              general government borrowing requirement in 1986 . In the
  average , turned out to be appreciably below the initial                past , budgetary policy had been conducted on a short-term
  forecasts . This provided a lively stimulus for private                 perspective ; this caused distortions in resource allocation , in
  consumption . Fixed investment , which had fallen back                  particular by supporting unprofitable public enterprises and
  markedly until 1985 , recovered as a result of the                      exercising a crowding-out effect to the detriment of private
  improvement in companies' financial positions, the growing              enterprises . From now on , the authorities intend to pursue
  support provided by the measures to promote productive                  the objective of medium-term consolidation based , in
  investment and investment in dwellings as well as the public            particular, on the greater transparency of central government
  investment programme. There was a slowdown in export                    accounts , bringing public expenditure under control ,
  growth , mainly because third country markets contracted .              establishing a new system of tax incentives for investment ,
  Due , however , to the substantial improvement in the terms of          and financing the borrowing requirement by greater resort to
  trade , the balance of payments surplus climbed to a record             the market .
  level ( 5,4% of GDP). The decline in employment was halted,
  and the unemployment rate fell slightly for the first time in
  many years .
                                                                         Despite some progress observed in the modernization of
                                                                         financial channels , these are still inadequate to sustain the
 In 1987 , private consumption will be slightly less buoyant,            proper development of long-term saving and risk capital . In
 but the increase in gross fixed capital formation could                 particular, interest rates are still at very high levels, mainly
 accelerate under the impetus of lower interest rates and the            because of the strong demand for finance from government
 sharp expansion of public investment . The growth of GDP in             departments and public enterprises, the instability of the
 volume terms should be slightly slower than in 1986 ( in the            escudo's exchange rate and expectations of high inflation .
 region of 3,5% ). Developments on Portugal's external
 markets should permit a moderate export recovery; even
 though it will deteriorate slightly, the balance of payments on
 current account should remain comfortably in surplus.                   The main challenge facing Portugal is to find a way out of the
 Inflation should continue to fall , but the consumer price rise         vicious circle of a 'stop-go' cycle which has severely hampered
 ( + 9% ) remains markedly above the Community average .                 its development in the last decade, so that it can grapple with
 Employment will benefit from the favourable economic                    its fundamental problems, particularly that of modernizing
 situation . However , the recorded unemployment rate will be            the system of production . This has become more urgent
 slow to fall ( from 8,6 % of the labour force in 1986 to 8,5 %          because of the country's accession to the Community. As a
in 1987 ), mainly because of a further increase in the                   result of insufficient investment , the export structure has
population working age .                                                 hardly been diversified, while any upturn in domestic
                                                                        demand is rapidly blocked by the external constraint . The
                                                                        government which took office in the autumn of 1985 has
With regard to the evolution of wages in 1986 , the                     chosen as its priority objective to bring about the recovery of
Government granted a 16,5 % increase to civil servants and              investment and to improve the conditions conducive to
recommended increases of 17% to the private sector . The                economic growth by putting the public finances on a sounder
collective negotiations produced sometimes even larger                  footing , eliminating the inflation differential with the rest of
increases initially , particularly in the public enterprises.           the Community and , at a microeconomic level , making
However , when the prospect of lower inflation was                      markets more flexible .
confirmed ( an annualized rate of 12 instead of 14% ), the
authorities took a somewhat tighter line on pay and nominal
wage increases per head have decelerated . Overall the
increase in nominal labour costs has been notably higher than           In 1987, significant progress should be made in eliminating
the Community average . However , the share of wages in                 the underlying imbalances in the economy. To achieve this ,
national income has declined , although in terms of                     the public sector borrowing requirement , which is a crucial
purchasing power (deflated by the consumer price index) the             strategic variable , should be considerably reduced . The drive
real wage level increased .                                             to moderate operating expenditure and to limit subsidies to
                                                                        public enterprises will have to be kept up , as will the action to
                                                                        combat tax evasion and avoidance . As a result , it should be
Gross fixed capital formation has grown satisfactorily . After          possible to bring the central government borrowing
a cumulative fall of 25,5% in real terms in the three                   requirement down to under 8 to 8,5 % of GDP . This policy
 ---pagebreak---  No L 385 / 106                                        Official Journal of the European Communities                                                      31 . 12 . 86
 would , in particular , permit the required deceleration in                               wages , in conformity with the spirit of the tripartite
 domestic credit expansion , while strengthening the tendency                              agreement concluded last June , to follow a course compatible
 for the escudo's exchange rate to stabilize . These are the                               with an improvement in the competitiveness of the
 essential conditions for the country to realize the ambitious                             Portuguese economy and hence with its participation , in
 objective of keeping price increases under 10 % , and for real                            favourable circumstances , in the wider common market .
                                                                                TABLE 38
                                                       Portugal : Main economic aggregates 1961 to 1987
                                                                                                                                          (Annual percentage changes)
                                                         1961 to       1974 to
                                                                                     1981        1982         1983       1984         1985      1986 (')    1987 ( 2 )
                                                            1973        1980
                             C value                       11,2         23,2         18,7        26,1         23,7       23,4         25,9        23,8        14.4
Gross domestic J volume                                      6,9         3,3          0,4         3,5        - 0,3      - 1,7          3,7         3,8         3,5
product
                            L deflator                       4,0        19,8         18,2        21,8         24,1       25,6         21,3        19,2        10.5
Private consumption deflator                                 3,4        21,4         20,0        22,5         25,5       29,3         19,3        11,8         9,0
Gross fixed                f private
 capital                  < public
formation volume               total                         8,0         5,4          4,6         2,9        - 7,5     - 18,0        - 1,8         7,8         8,5
      Of which :               construction                                           4,4         2,0        - 3,0     - 13,5        - 4,0         6,1         8.5
                               equipment                                              4.8         4,0       - 13,1     - 23,0          1,0        10,0         8.6
 Domestic demand at constant prices                          7,5         2,9          2.9         3,4        - 7,0      - 7,0          0,6         6,7         4,8
Gap with respect to other
Community countries ( 3 )
                           r nominal                       12,0         25,2        20,6         18,5         21,6       19,8        22,0         17,1        12,3
Compensation
of employees             •< real A (4 )                      7,8         4,5          3,5       - 2,7        - 2,0      - 4,6          0,5       - 1,8         1,6
per head                   1        g (4)                    8,4         2,8          3,2       - 3,3        - 3,1      - 7,4          2,2         4,7         3,0
Productivity ( 5 )                                           7,4         3,4        - 0,2         4,0          1,4      - 0,4          4,2         3,5         3,2
Real unit labour costs                                       0,4         1,1          3,7         6,4        - 3,4      - 4,2        - 3,6       - 5,1       - 1,6
Competitiveness ( s )                                                                           - 5,7        - 8,4      - 1,5          0,4       - 1,1       - 2,9
Employment                                               - 0,5         - 0,1          0,6       - 0,5        - 1,7      - 1,3        - 0,5         0,5         0,6
Registered unemployed as %
of the civilian labour force ( 7 )                                                                             7,9        8,5          8.7         8,6         8,5
Current balance as % of GDP                                  0,7       - 6,2      - 11,7      - 13,5         - 7,2      - 3,0          1.8         5,4         4,2
Long-term interest rate                                      6,5        16,4        22,6         25,2         30,3       32,5         25.4        19,5        16,5
Money supply ( 8 )                                                                  23,8        24,6          16,3       24,5        28.5        26,0         16,0
Net lending or borrowing
requirement of general
government as % of GDP                                                            - 10,1        - 8,8        - 7,1      - 7,7      - 11,2        - 8,0       - 7,5
Public debt as % of GDP                                                             59,0        62,2          70,9       75,7        81,2         83,5        88,0
Public debt interest as % of GDP                                                      5,4         5,5          6,4        7,1          7,7         9,7         9,3
( ! ) Estimates of the Commission services , October 1986 .
(2)   Forecasts of the Commission services , October 1986 , on the basis of present policies .
(3)   Differences in percentage points .
(4)   A : GDP deflator ; B : private consumption deflator .
(5)   Gross value added per occupied person in the whole economy .
( 6 ) Effective exchange rate (vis-a-vis 19 industrial countries ) on the basis of unit labour costs for the whole economy . Positive figure = loss of competitivenes .
( 7 ) Eurostat definition .
( 8 ) End of year .
 ---pagebreak---    31 . 12 . 86                                Official Journal of the European Communities                                No L 385 / 107
                                                             UNITED KINGDOM
   In the United Kingdom, economic activity is again expanding             The moderation of wage increases , both in nominal and real
   at a moderate pace , after a period of slower growth during             terms , is one of the key issues in improving employment
   the latter part of 1985 and the first half of 1986 . GDPis likely       prospects in the United Kingdom . The growth of nominal
  to rise by 2V4 % in real terms in 1986 and to accelerate                 earnings decelerated sharply at the beginning of the 1980s
  somewhat in 1987 , with an expected growth rate of 2 3/4 % .             but , since mid-1982 , the underlying annual rate of increase
  The main contribution to growth in both years is coming                  has been roughly stable at about 7V2 % , while       consumer
  from private consumption , the strength of which is explained           price inflation ( private consumption deflator)        has been
  by steady growth of earnings combined with a renewed                     around or below the 5% per annum mark .               In 1986 ,
  slowing of inflation in 1986 , and a further easing of the              particularly under the influence of lower energy      and other
  personal income tax burden . Other elements of demand have              commodity prices , inflation should turn out to be about 4 %
  been relatively subdued , although exports and investment               ( or , as measured by the retail price index , some 3 % ), but as
  activity are expected to grow somewhat faster in 1987 .                 yet this has had little impact on wage settlements . Given the
                                                                          faster progress on inflation achieved by other industrialized
                                                                          countries , this implies a further erosion of the United
                                                                          Kingdom's competitive position ; this process was more than
  The forecast rate of GDP growth is sufficient to permit a               offset by the exchange-rate movements during 1986 , but the
  continuing expansion of employment but , with much of the               underlying weakness remains a threat to employment.
  increase accounted for by new entrants to the labour force
  going into self-employment or part-time jobs , it is not enough
  to make serious inroads into the unemployment level . Over
  the period from March 1983 to March 1986 total
  employment rose by about one million , while the numbers                Despite the steady rise in real wages , profitability has also
  unemployed still grew by more than 150 000 ; this represents            been improving significantly in recent years . This was made
  a rise in the activity rate of some three percentage points , a         possible initially by a more rapid expansion of labour
  trend which can be expected to taper off. The rise in                   productivity than of real wages during the first three years of
  employment was made up of increases of half a million in                the recovery , and subsequently by the weakness of non-wage
  self-employed people and of more than 550 000 women                     input costs . A Bank of England study concluded that the
 in part-time employment , while full-time dependent                      pre-tax real rate of return of United Kingdom industrial and
 employment fell .                                                        commercial companies rose from 6 % in 1980 to 12V2 % in
                                                                          1985 . This figure will have fallen in 1986 , because of the
                                                                          setback to oil companies' profits , but there will have been a
                                                                          further improvement in the profitability of companies in
 The effects of the sharp fall in the oil price ori the United            other sectors taken as a whole , their rate of return having
 Kingdom , as a major oil producer , are different from those             already risen from the trough of 3% in 1981 to 8% in
                                                                          1985 .
 on most of the other Community economies . While
 industrial and domestic energy input costs have been lowered
 ( as in other countries ), the economy as a whole has suffered a
 terms-of-trade loss and , associated with this , there was a
 downward adjustment to the sterling exchange rate in early              Despite the improvement in profitability , the growth of
 1986 and again in the summer , particularly against other
                                                                         private investment has slowed down over the last two years .
European currencies . The financial position of non-oil
                                                                         This may be a reaction to the relatively rapid expansion of
companies has improved substantially , although profits of               capital spending in 1982 to 1984 and to the higher level of
the whole economy have fallen because of the deterioration
in the oil sector .                                                      real interest rates in the recent period. Another important
                                                                         influence on the pattern of investment has been a change in
                                                                         the corporation tax system , intended to reduce the
                                                                         distortions between different types of investment and sources
                                                                         of finance , and between capital as a whole and labour . This
Because of the lower oil export prices , the current-account             consisted of a reduction of the tax rate ( in three steps, from
surplus has shrunk and a deficit ( 0,6 % of GDP) is expected             50 to 35 % ), accompanied by the gradual removal of initial
for 1987 . There has also been a sharp fall in government oil            investment allowances . In recent years , the strong investment
revenues ( roughly halving to an estimated £ 5 000 million in
                                                                         performance in the service industries has been paralleled by a
the 1986 / 87 financial year), but greater than expected                 substantial rise in employment in these sectors , even if many
buoyancy of other tax revenues has limited the impact on the             of the additional jobs are part time , while the more modest
fiscal position . The different measures of money supply have            recovery of investment in manufacturing has been
been growing at strikingly different rates , with broad money            insufficient to reverse the continuing decline in jobs .
expanding at a rate well above its target range . United
Kingdom interest rates , however, while following the
international downward trend , have remained high in real
terms , perhaps partly because a risk premium arises from the
uncertainty associated with              future    inflation   and       The area in which progress is most urgently needed in the
exchange-rate movements .                                                United Kingdom is that of a slower increase in wages . Lower
 ---pagebreak--- No L 385 / 108                             Official Journal of the European Communities                                    31 . 12 . 86
wage settlements would open the way for slower inflation , an         announcement in the Government's autumn statement of an
improvement in the United Kingdom's competitiveness , a               increase in the provision for public expenditure in 1987 / 88
further strengthening of profitability , and lower interest rates     of some £ 4 750 million . This will mean that public
( both nominal and real ), which would increase the                   expenditure in 1987 / 88 is planned to be about 2% higher in
attractiveness of investment in new capacity and augment the          real terms than the estimated out-turn in 1986 / 87 . If output
employment content of growth . It is however clear that ,             were to grow less rapidly than productive potential ( about
despite the high unemployment level , the present functioning         2V4 % ), it may be appropriate to allow some increase in the
of the labour market is resulting in little slowing of wage           PSBR above the figure of £ 7 000 million ( 1,7% of GDP )
settlements . The Government has taken steps intended to              included in the MTFS , providing that there is no upsurge of
improve flexibility of the labour market and , in particular , of     inflation . However , there can be no automatic relationship
the wage determination process by measures such as the                between the appropriate PSBR and the state of the economic
reduction of the scope of wages councils to set minimum               cycle . Any fiscal relaxation beyond that foreseen in the
wages for young people and has also introduced proposals              MTFS would need to be accompanied by the maintenance of
for a form of profit-sharing , in which a part of gross wages         downward pressure on the increase in real wages and the
could be linked to corporate profit perfomance . Against the          maintenance of a firm monetary stance so as to avoid an
background of the declared aim of government policy to                exacerbation of the vicious circle of wage and price increases ,
guard against any shortfall of demand in the economy ,                and the associated risk of further exchange-rate depreciation .
contact between government and the representatives of                 It should also be seen within the framework of action decided
employers and employees can contribute to a greater                   at Community level .
awareness on all sides of the importance of lower wage
increases for employment creation .                                   The Government is committed to using the fiscal room for
                                                                      manoeuvre , at least in part , for a further easing of the
In recent years , the emphasis of fiscal policy in the United         personal income tax burden , so as to increase incentive and
Kingdom has been on reducing the budget deficit as a                  boost after-tax incomes . In view of the likely continued
proportion of GDP , containing the growth of public                   strong growth of real personal incomes in 1987 , however,
expenditure , and introducing a number of tax reductions and          there would be a more balanced pattern of growth if some of
changes intended to encourage enterprise and to promote               the room were used to support demand components other
market flexibility . The public sector borrowing requirement          than private consumption . The scope for additional public
( PSBR ) in the financial year ending March 1986 , at 1 ,7 % of       sector infrastructure investment offering an acceptable rate
GDP , turned out to be slightly lower than planned , while            of return should be examined . Such investment might have a
general government expenditure as a proportion of GDP was             greater short-term impact on employment than income tax
( at 44,5% ) two points lower than in 1984 / 85 . The fiscal          cuts and , like such cuts , would tend to strengthen productive
stance for the current year , set in the March 1986 budget , is       potential .
broadly unchanged , with only a slight widening ( to 1 ,9 % of
GDP ) of the forecast PSBR . In spite of the substantial loss of      The Government has continued its programme of
oil revenue , the Government , in this year's budget , was still      microeconomic measures aimed at improving supply
able to implement a further cut in personal income tax                conditions and increasing incentives for enterprise . The
amounting to one percentage point off the basic tax rate , thus       programme of privatizing public-sector business has
helping to reduce the taxation 'wedge' between what an                continued , and a number of developments are contributing
employee costs to the employer and what the employee                  to the creation of a more competitive market in financial
receives as net-of-tax income . As in the past , there has been       services . In the summer , new proposals were introduced as
some upward slippage of successive plans for public                   part of the continuing deregulation programme to lift the
expenditure , although the impact on the PSBR is largely              burdens on businesses . Proposals include simplifying tax and
offset by the accelerated programme of privatization .                accounting procedures for small businesses , easing
                                                                      requirements for permission to change the use of buildings ,
Before the autumn statement , the outlook for fiscal                  and modification of employment rights in certain
developments in 1987 suggested that the Government would              circumstances . The deregulation programme complements
again have at its disposal some room for manoeuvre to reduce          other measures intended to stimulate business start-ups and
the tax burden or to raise public spending in the 1987 / 88           expansion , with particular benefits to the self-employed and
financial year , within the framework of its medium-term              small businesses which have an important influence on job
financial strategy . This position is now overtaken by the            creation .
 ---pagebreak---   31 . 12 . 86                                          Official Journal of the European Communities                                    No L 385 / 109
                                                                                TABLE 39
                                                   United Kingdom : Main economic aggregates 1961 to 1987
                                                                                                                               (Annual percentage changes)
                                                           1961 to     1974 to
                                                                                     1981         1982   1983   1984      1985       1986 (>)   1987 ( 2 )
                                                            1973         1980
                              r value                         8,4        17,7        10,2          8,8    9,0    6,3       9,8          6,3         7,0
  Gross domestic           J volume                           3,1          1,0     - 1,2           1,0    3.8    2,2       3.7         2,3         2,7
  product ( 3)             1
                              ^ deflator                      5,1        16,5        11,5          7,9    4.9    4,1       5.8          3,9        4,2
  Private consumption deflator                                4,8       15,7         11,4          8,7    5,0    4,8       5,3         4,0         3,9
                                                                          1,6      - 7,0           5,6    2,4    8,7       2,5         0,8         4,1
  Gross fixed                f
  capital                 < public                                    - 10,6      - 26,2         — 6,6  36,6   11,8      - 2,8        10,2       - 0,8
  formation volume 1 total                                    4,6      - 0,6       - 9,5           4,3    5,7    9,1       1,8          1,9        3,5
       of which :               construction                           - 2,0       - 8,4           6,4    6,7    8,3     - 3,1         2,8         3,0
                                equipment                                 1,6     - 10,7           1,8    4,5  10,1        7,8         0,9         4,0
  Domestic demand at constant prices                          3,2         0,3      - 1,7           2,2    4,7    2,8       2,8         3,2         3,2
 Gap with respect to other
 Community countries ( 4 )                                                                         2,6    4,4    0,8       0,4       - 0,8       - 0,3
                            r nominal                         8,3       17,5        13,2           9,1    9,2    5,5       7,3         7,5         6,6
 Compensation
 of employees             ■< real A ( 5 ) -                   3,1         0,9         1,2          1,5    4,0    1,1       1,3         3,5         2,3
 per head                   1       g^                        3,3         1,5         1,5          0,5    3,9    0,4       2,0         3,4         2,6
 Productivity ( 6 )                                                                                3,3    4,7    0,2       2,4         1,4         1,9
 Real unit labour costs                                                                         - 1,7  - 0,6     1,0     - 1,1         2,1         0,4
 Profitability ( 7 )                                                   - 4,4          1,5          4,8    9,4 - 3,8        3,2       - 7,1       - 0,6
       idem ( 1961 to 1973 = 100 )                        100           69,0        62,1         65,1   71,2   68,5      70,7         65,7        65,3
 Competitiveness ( 8 )                                     - 1,5          4,0         2,1      - 3,7   - 5,4     1,4       1,7       - 9,2       - 2,1
 Employment                                                   0,2         0,1      - 3,9       - 1,4   - 0,8     1,5       1,3         0,8         0,8
 Registered unemployed as %
 of the civilian labour force ( 9 )                           2,1         4,5         9,2        10,6   11,6   11,8       12,0        12,0        12,0
 Current balance as % of GDP                              - 0,0        - 0,8          2,4          1,4    1,0    0,4       1,0       - 0,1      - 0,6
 Long-term interest rate                                      7,6       13,7        14,8         12,7   10,8   10,7      10,6          9,5         9,5
 Money supply ( 10 )                                          9,4       11,9        13,7           8,9  10,3     9,8     13,4         15,4         8,0
 Net lending or borrowing
of general government as % of GDP                         - 0,7        - 3,9       - 2,8       - 2,3   - 3,7  - 3,9     - 2,8        - 2,9      - 2,5
Public debt as % of GDP ( n )                                           56,6        51,1         57,8   57,5   59,2      57,8         59,0       57,8
Public debt interest as % of GDP                                         4,4          5,0         5,1    4,7    4,9        5,0         4,8         4,6
  (') Estimates of the Commission services , October 1986 .
  ( 2 ) Forecasts of the Commission services , October 1986 , on the basis of present policies .
  ( 3 ) Expenditure measure at market prices .
  ( 4 ) Differences in percentage points .
  ( 5 ) A : GDP deflator ; B : private consumption deflator .
  ( 6 ) Gross value added per occupied person in the whole economy .
  ( 7 ) Net operating surplus relative to the net capital stock at current replacement cost .
  ( 8 ) Effective exchange rate (vis-a-vis 19 industrial countries) on the basis of unit labour costs for the whole economy . Positive figure = loss of
        competitiveness .
  ( 9 ) Eurostat definition .
( 10 ) Sterling M3 ; end of year.
( n ) General government gross debt at market values .