CELEX: 31977D0340
Language: en
Date: 1977-04-25 00:00:00
Title: Council Decision of 25 April 1977 concerning the adjustment of the economic policy guidelines for 1977

12 . 5 . 77                       Official Journal of the European Communities                     No L 119 / 21
                                                           II
                                     (Acts whose publication is not obligatory)
                                                   COUNCIL
                                                 COUNCIL DECISION
                                                   of 25 April 1977
                 concerning the adjustment of the economic policy guidelines for 1977
                                                     (77/340/ EEC)
            THE COUNCIL OF THE EUROPEAN COMMUNITIES,
            Having regard to the Treaty establishing the European Economic Community,
            Having regard to Council Decision 74/ 120/ EEC of 18 February 1977 on the attainment
            of a high degree of convergence of the economic policies of the Member States of the
            European Economic Community ('), and in particular Articles 1 and 2 thereof,
            Having regard to the proposal from the Commission,
            Whereas the Council agrees with the analysis of the economic situation contained in the
            Commission communication of 4 March 1977, concerning the adjustment of the
            economic policy guidelines for 1977,
            HAS ADOPTED THIS DECISION :
                                                       Article 1
            Member States shall pursue economic policies which conform to the guidelines set out in
            the Annex hereto .
                                                       Article 2
            This Decision is addressed to the Member States.
            Done at Luxembourg, 25 April 1977 .
                                                                       For the Council
                                                                         The President
                                                                           J. SILKIN
            (') OJ No L 63, 5. 3 . 1974, p. 16 .
 ---pagebreak--- No L 119 / 22                               Official Journal of the European Communities                                   2 . 5 . 77
                                                                ANNEX
                                       ECONOMIC POLICY GUIDELINES FOR 1977
                    1 . General guidelines                            — economic policy must be as restrictive as possible
                                                                             in the countries where the balance of payments is
                                                                             in deficit and the inflation rate is still high, so as
 1.1 . The objectives adopted for 1977 in the last                           to reduce the pressure of costs and break the
Annual Report on the economic situation in the                               sequence of currency depreciation and price
Community (') were, for the first time, in keeping                           increases. In particular, the Community must see
with a jointly-agreed medium-term strategy, as esta­                         that Italy, Ireland and the United Kingdom bring
blished at the second Tripartite Conference (2) and                          their annual inflation rates down to under 15 % in
given in the fourth medium-term economic policy                              the second half of 1977 .
programme (3 ). For the Community as a whole, they
embodied an economic growth rate of 4 % , an infla­
tion rate limited to 7 to 8 % , improvement of the
                                                                       1.4. The Community s development and cohesion
labour market and a reduction in external disequili­
bria .                                                                are endangered by the persistence of inflationary
                                                                      strains created by an excessive and disordered surge of
                                                                      internal costs ; this danger still points to the need, in
                                                                      several Member States , for a social consensus on
 1.2.      The trends observed in recent months , and the
conclusions drawn from a fresh examination of the
                                                                      action aimed at moderating the rise in private
                                                                      incomes and at increasing productivity gains.
outlook for 1977 suggest that, assuming there is no
change in economic policy, these objectives can be
attained only with difficulty. The Community must
consequently make a further effort. It will have to                   It is incumbent on the Member States to promote this
bring about as rapid a return to internal and external                consensus by appropriate measures, particularly as
equilibrium as is possible in 1977, so as to improve                  regards price trends, taxation , working conditions, the
 the basic conditions for lasting growth and a reduc­                 accumulation of assets and workers' participation in ,
 tion in unemployment in the years to come and to                     the decision-making process. The problem of the
 make up for the time lost in reaching the medium­                    convergence of the price and incomes trends within
term goals .                                                          the Community, and that of allocating, at national
                                                                      level , the fruits of expansion satisfactorily between
                                                                      collective needs and private incomes, must be the
 1.3 . Taking into account the insufficient progress                  subject of regular information and consultation .
 made in reducing disequilibria — both internal and
external — and the present disparities between
 Member States, a large-scale and simultaneous boost
                                                                       1.5 .     Unemployment cannot be reduced more
 to the economy throughout the Community is out of
                                                                      rapidly nor structural disparities within the Commu­
 the question . The fundamental guidelines for
                                                                      nity reduced unless an active investment and employ­
 economic policy set out in the Annual Report must
                                                                      ment policy is implemented on a coordinated basis .
 remain differentiated according to the circumstances
 of the Member States . However, since it has not
                                                                      Such coordination at Community level would help to
                                                                      avoid inconsistencies in national policies for sectoral
 hitherto been possible to implement with the neces­                  adjustments which would reduce their effectiveness.
sary vigour the measures advocated in this connection                 But it would also lead to a more rational use of
by the Council , additional efforts are essential :
                                                                      Community instruments for structural change (the
                                                                      Social Fund, the Regional Fund, ECSC and European
— the revival of demand and production must be                         Investment Bank loans) in the interests of the
       firmly sustained in the Member States with a favou­            Community as such .
       rable balance of payments and a relatively low rate
       of inflation . Given the uncertainty as to the
       economic outlook, both internationally and inter­
       nally, the Community must in particular see to it               In all the Member States, economic policy must be
       that the Federal Republic of Germany and the                   designed to ensure that the willingness to invest is
       Netherlands achieve an economic growth rate of                 sustained in the medium term and to improve the
       5 % and 4 % respectively in 1977 .                             general conditions for the growth of fixed invest­
                                                                      ments . The scale of investments in 1977 will , however,
( 1 ) OJ No L 358 , 29 . 12 . 1976 , p . 2 .                          remain subject to constraints which vary from one
(-') OJ No C 173 , 28 . 7 . 1976 , p . 1 .                            country to another and are determined by the persist­
( 3 ) OJ No L 101 , 25 . 4 . 1977 , p . 1 .                           ence of unemployment and substantial budget defi
 ---pagebreak---  12 . 5 . 77                      Official Journal of the European Communities                               No L 119/23
cits, and by the fear of renewed bouts of inflation . The    1.7.      The    diversity   of    constraints,    particularly
need to improve the economic structure is also an            external constraints, to which the Member States are
important consideration in the formulation of invest­        subject means that monetary policies must be framed
ment policy. In order to reconcile conflicting require­      in accordance with these differing circumstances.
ments, it seems advisable to expedite the solution of        Nevertheless, the Member States must jointly establish
priority problems such as the energy problem and the         a coherent framework for the growth of their principal
fight against pollution . The Member States facing           monetary aggregates. In accordance with the task
balance of payments difficulties must step up their          already assigned by the Council, work aimed at setting
efforts to reduce their, dependence on imported              intermediate objectives is proceeding and it is neces­
energy and to speed up the reallocation of resources         sary that it come up with effective solutions ('). In the
to the export sector. This action is in the common           meantime, several Member States (Federal Republic of
interest and is essential if the structural deficit vis-     Germany, France, United Kingdom and Italy) have
à-vis the OPEC countries is to be reduced in the years       already introduced monetary targets which comply
to come . The issue of increasing the opportunities for      with the guidelines set out, in a medium-term frame­
financial assistance by the Community by raising             work in the last Annual Report on the economic situa­
loans on international capital markets to finance the        tion in the Community : provided that these targets
necessary investment programmes should be discussed          are observed, this factor will result in progress towards
again and resolved in terms of a medium-term                 aligning monetary policies within the Community.
Community structural programme.
                                                            At the same time control of the expansion of liquidity
                                                             provides a general framework for the movement of
                                                             interest rates . Within this framework, interest rate
                                                             policy should be used to further the stability of the
In the employment field, obstacles of every kind             foreign exchange markets . It is particularly important
(administrative, fiscal and with regard to social secu­      for differences in interest rates within the Commu­
rity) liable to discourage firms planning to take on         nity, as between the Member States and the major
workers must be identified and overcome, and deci­           non-member countries, to remain compatible with the
sions on official investment incentives and on the           individual situation of each currency.
authorization of price increases must reflect more
closely the need to create new jobs . However, in order
not to delay the elimination of outmoded economic
structures, aid designed purely to keep alive firms that
cannot pay their way must be avoided . Specific              1.8 .     In the medium term , the Community has to
measures to combat the problem of unemployment              bring about a better distribution of balance of
among young people must be strengthened, in parti­           payment surpluses and deficits and progressively
cular by speeding up the creation , on a temporary           reduce the overall deficit with respect to the oil
basis, of additional training posts.                        exporting countries . A future effort to expand exports
                                                            depends as much on commercial policy vis-a-vis
                                                            industrialized third countries (particularly Japan and
                                                            the United States) as on the development of new
                                                            markets in the developing countries which produce
                                                             raw materials. The Community must continue to
                                                            oppose energetically protectionist tendencies both at
                                                            the international level and within the Member States .
1.6.      In all the Member States, budgetary policy
should be designed to reduce the public sector
borrowing requirement as a proportion of gross
domestic product. However, the countries with a favou­
rable balance of payments should not follow this             1.9 . The urgent problems regarding employment
trend with the same strictness as those which must          policy, professional training and investment, structural
give high priority to combating the inflation which is      change as regards regions and industrial sectors,
jeopardizing their external equilibrium . The former        stronger measures to economize on energy and
should reconcile their effort to reduce public              develop new sources and export promotion in the
                                                            deficit countries must all be tackled within the frame­
spending with the urgent need to remedy the inade­
quacy of private and public investment. The latter, on      work of the Community's Fourth Medium-Term
the other hand, should stand firm in their determina­       Programme. However, in most countries, the diffi
tion to restrain their expenditure as much as possible
and also — in some cases — to bring their tax               ( 1 ) See the general considerations on this subject outlined in
                                                                  the Annual Report on the economic situation in the
revenue more closely into line with the scale of their            Community and the economic policy guidelines for 1977,
budget commitments.                                               point 4.6 (OJ No L 358 , 29 . 12. 1976, p. 10).
 ---pagebreak--- No L 119/24                        Official Journal of the European Communities                             12 . 5 . 77
culties on both the conjunctural and structural side         Annual Report and should be aimed at containing
require immediate decisions. If these are delayed, the       internal monetary creation within those limits compat­
problems of restoring the conjunctural situation and         ible with the necessity of financing the deficit on the
of structural change will become even more difficult.        current balance of payments. Interest rate policy
                                                             should be directed towards the same objective.
      2 . Guidelines (or the individual countries            2.5. In the Federal Republic of Germany, the
                                                             factors behind economic expansion have again made
                                                             themselves felt, after a fairly long lull : the final
2.1 .     In Denmark, the more restrictive slant which       months of 1976 saw more rapid growth of output ;
has been given to economic policy since the summer           exports and investment in capital equipment being
of 1976 has been reflected , as was foreseen , in a          the main beneficiaries .
slowing down of private consumption in recent
months. The level of imports has, nevertheless,
remained buoyant and exports have only progressed
slowly. Thus, the trade deficit has remained very high       2.6. The prospects for a continuation of the
reaching about Dkr 5 600 million ($ 950 million) in          recovery are now better. It is, however, hard to say
the final quarter. Given in particular the outlook for a     how far German exports will be inhibited by the weak­
moderate development in external demand, growth in           ness of import demand in the Community's major
1977 is likely to be slow (+ 2 % in real terms) and          trading partners . It is also by no means certain that
insufficient to prevent some worsening in the unem­          the improvement in the propensity to invest in the
ployment position .                                          private sector will be a lasting one .
2.2.      In these circumstances, the general guidelines
outlined in the Annual Report remain valid and a             2.7.    In 1977, the growth rate of gross domestic
cautious economic policy is still required . The restric­    product should reach 5 % in real terms, this goal
tive nature of budgetary policy in particular should be      being the same as that fixed in the Federal Govern­
maintained . Due to the importance of the external           ment's annual economic report. The tendency for
constraint, budgetary measures to stimulate consump­         prices to rise should therefore continue to weaken and
tion , which would result in growth of imports and           it is foreseeable that the tendency towards a reduction
compromise the chances of an improvement in the              in the current balance of payments surplus will
balance of payments, should be avoided . On the other        continue in 1977. Moreover, achievement of this goal
hand , measures to support investment in certain             is necessary, both to support the recovery in the rest
sectors may prove necessary during the year. The net         of the Community and to cut down unemployment.
borrowing requirement for the 1977 budget should             Nonetheless , even if this result were achieved, the
not exceed the relative level attained in the preceding      number of unemployed would still be 850 000 to
year ; in all events it should remain below the norm of      900 000, or 3.3 % to 3.5 % of the working popula­
Dkr 1 1 500 million (4.5 % of GDP) set out in the            tion .
Annual Report on the economic situation in the
Community. If deficiencies in tax receipts result from
developments in the short-term economic situation
they should be compensated for by a reduction in             2.8 . With a view to attaining the growth objective
certain discretionary expenditure, to the extent that        fixed, economic policy should now be more expan­
further progress towards an improvement in the               sionary than suggested in the Annual Report on the
balance of payments is possible at the same time .           economic situation in the Community. The prime
                                                             objective of current economic policy should be to
                                                             improve the basic conditions for the achievement of
2.3 .     As far as incomes are concerned , the restrictive  vigorous medium-term growth , accompanied by
guideline fixed last year should be maintained . In this     further progress towards stabilization . If growth is to
respect, if is appropriate to keep to the norms adopted      be lasting and inflation free, additional short-term
by the European Parliament in August 1976 for the            measures to stimulate private consumption do not
renewal of the pay agreement in March . This condi­          appear to be appropriate : about DM 25 000 million
tion appears essential in order to achieve the moderate      — or DM        15 000 million more than in      1976 —
development ir. costs needed to improve the competi­         charged against savings built up under asset-formation
tive position o * Danish products and bring about a          legislation (premium saving, ' DM 624 Law') will be
transfer of resources to the export sector.                  released in the course of the year, and part of this will
                                                             boost private consumption expenditure. In these
                                                             circumstances, it would be preferable to base
2.4 .     As for monetary policy, this should remain in      economic policy more on medium-term support of
conformity with the guidelines fixed in the last             private and public investment.
 ---pagebreak--- 12. 5. 77                           Official Journal of the European Communities                          No L 119/ 25
2.9. Account must be taken, in any action needed              increase in unemployment could be offset by volun­
to scale down the budget deficit (which was running           tary withdrawals from the labour market.
in 1976 at DM 47 300 million, or 4.2 % of the gross
domestic product, for the public sector taken as a
whole) of needs dictated by general economic trends.
                                                              2.15. The principle of gradual return to budgetary
Policy with regard to the expenditure of the public           equilibrium must continue to govern the actions of
authorities should be designed to bring to a halt the
                                                              the public authorities . If the level of economic activity
decline in public investment. This means that the             proves clearly insufficient, specific measures aimed at
budgets should be executed in full .                          promoting job creation could be taken in the poten­
                                                              tially most dynamic sectors or where the needs are
                                                              most urgent. If there is a budget deficit, it must as a
2.10. The public investment programme planned                 matter of priority be financed through borrowing. The
by the Federal Government for the coming years in             extent and basis of each selective support measure
order to sustain economic growth, should include for          must, however, be made dependent on clear progress
 1977 a volume of investment sufficient to boost
                                                              in reducing inflation .
activity substantially, particularly in building and
construction . The placing of major orders should be
accelerated, so as to spur on the economy without
encroaching on the implementation of other invest­             2.16. The present stance in monetary policy will
ment projects sponsored by the Länder and the muni­            provide solid backing for the measures being pursued
cipalities. There is a case for certain tax reliefs to give    to stabilize the economy. The official targets for the
durable incentives to private investment.                     growth of total lending and the money supply have
                                                               certainly helped to reduce inflationary expectations.
                                                              As far as interest rates are concerned, the easing of the
2.11 .    The framework for monetary policy has been           situation on the money market since the beginning of
set by the Bundesbank's 8 % target for the annual              the year could continue, thus bringing about a reduc­
average expansion in central bank money. In these              tion in costs in the non-financial sector. This easing
circumstances, the liquidity available should suffice to       of interest rates must not, however, jeopardize the vital
ensure financing of the foreseeable growth in real             objective of maintaining the stability of the franc, an
terms, without hampering efforts to slow down the              objective which is closely linked to the fight against
 rise in prices. This policy should, however, be imple­        inflation . Overall the general stance of monetary
mented flexibly, as has in fact been the case so far,          policy outlined in the Annual Report needs to be
                                                               maintained .
and should be properly related to current economic
 trends.
                                                               2.17.    During the present process of gradually
 2.12. Action undertaken to improve the general                reducing inflation , the continuity necessary in the
 conditions of economic growth and of employment               short-term economic measures already introduced will
 should be supplemented by selective measures with             have to be reinforced by pushing ahead with imple­
 regard to employment. In particular, schemes now              mentation of the structural reforms announced earlier.
 being implemented to develop the mobility of labour,          The aim of these reforms is to develop potential
 to improve occupational training and further training,        growth industries, to limit the French economy's
 and to help the groups of the population placed most          dependence on energy imports, to abolish economic
 at a disadvantage in the economy should be streng­            rent situations which restrict competition and produc­
 thened .                                                      tivity gains, and to ensure greater cooperation from
                                                               both sides of industry.
 2.13. In France, the economy is at present going
 through a period of adjustment. The measures intro­           2.18 .    In Ireland, the outlook for 1977 appears
 duced last autumn are beginning to show positive              more    favourable  than   that foreseen   in the  latest
 results, with a gradual easing in cost, salary and price      Annual Report on the economic situation in the
 rises and in the balance of trade deficit. However, the       Community. Despite a downward revision in forecasts
 long-term success of the stabilization programme              for world trade, Irish exports could benefit from some
 depends on both the readiness of the two sides of             gains in market share, due to more satisfactory deve­
 industry to respect the wage and price guidelines and         lopments in costs. In addition , the growth in private
 strong and sustained foreign demand (including more           consumption and investment will very likely be more
 stable conditions on the international scene).                buoyant than expected . While there will be an
                                                               improvement in the employment situation , the unem­
                                                               ployment rate will, nonetheless remain high . On the
 2.14. The growth rate of the economy in 1977 will             other hand , the inflation rate could slow down in the
 probably be moderate. However, to some extent, the            second half of the year.
 ---pagebreak--- No L 119/ 26                        Official Journal of the European Communities                              12 . 5 . 77
2.19 . The budget presented on 26 January fits well           — to hold down households purchasing power by
into the framework of the guidelines set out in the                about Lit 5 000 000 million (3.5 % of GDP in
Annual Report. The net borrowing requirement repre­                1976) through increases in taxation , public service
sents 1 1 % of gross domestic product, as against                  charges and controlled prices ;
11.5 % in 1976. The measures taken improve, as a
result of structural modifications , the chances of better    — to scale down sharply the heavy Treasury deficit
balanced growth and thus create the economic condi­                (to Lit 9 800 000 million) ;
tions appropriate to further reductions in the deficit in
coming years. The budget includes a supplementary             — to moderate the rapid growth in wage costs ;
effort in the area of employment generating invest­
ment, a marked slowing down in the increase of                — to slow down the inflation rate, then gathering
current expenditure commitments, fiscal reliefs for                momentum again , to limit the increase to 16 %
incentive purposes, higher social transfers, the continu­          over the 1976 figure ; and
ation of food subsidies, as well as a transfer to the
State of proportion of local authority rates. In view of      — to achieve a small surplus in the balance of
the fact that the borrowing requirement, despite the               payments on current account in 1977.
sharp fall recorded in 1976, still represents a substan­
tial proportion of gross domestic product, it will be
necessary to ensure that the level of receipts expected
is actually attained.                                         2.24. The surprisingly vigorous expansion in
                                                              production at the end of the year points to a positive,
                                                              though smaller, GDP growth rate for 1977 (around
                                                              2 % ). This also means, however, that the objectives set
2.20 .   On the incomes front, the recently concluded         with regard to balance of payments and prices policy
national pay agreement will improve Ireland's compet­         are more likely to prove out of reach . The restrictive
itive position and ensure a better outlook for employ­        course of economic policy which corresponds broadly
ment developments . It is necessary that this progress        to the guidelines in the latest Annual Report must
is capitalized on towards the middle of the year and          therefore be maintained and even intensified . It is
that a smooth transition to a more moderate agree­            necessary above all that the Government and the
ment for 1978 is assured . In this respect it would be        unions and employers should strive to narrow substan­
useful if the pay negotiations were linked to overall         tially the gap — now widening at an ominous pace —
economic strategy, as has been the case until now. It         between Italian cost and price trends and those in the
will be appropriate also to limit as far as possible any      partner countries.
increases above the norms so that the more long-term
favourable impact of the moderation in costs on
employment and prices is not jeopardized .
                                                              2.25 .    In view of the rapid growth in the tax receipts
                                                              in recent months , a cutback in the rate of increase of
                                                              public expenditure should be one of the methods
                                                              used to achieve the necessary reduction in the Trea­
2.21 . As far as monetary policy is concerned , the           sury's and public authorities' deficit, which is one of
limit adopted in the annual report for the growth rate        the main sources of inflation . Measures to reduce the
of the money supply remains valid .                           structural deficits of the health insurance authorities ,
                                                              of the hospitals and of the municipalities must be
                                                              implemented more rapidly.
2.22.    In Italy, the growth of overall activity in 1976
proved far more vigorous than was originally to be
expected and than was consistent with efforts to elimi­       2.26.     Even if, as was the case until the end of
nate the main disequilibria . The gross domestic              March 1977, bank lending remains largely subject to
product in fact increased by more than 5.5 % in real          ceilings, careful attention will have to be paid to the
terms . The consequences included a more rapid                level of liquidity of the banking sector and the extraor­
increase in wholesale and consumer prices (23 % and           dinary high level of the banks' short-term external
 16.5 % respectively) a substantial decline in the value      indebtedness . The increase in total lending, as defined
of the lira (trade-weighted : — 16 % as compared with         by Article 6 ( 1 ) of Council Directive 74/637/ EEC of
1975) and a current account deficit of about Lit               17 December 1974 granting medium-term financial
2 500 000 million (almost 2 % of GDP in value).               assistance to the Italian Republic ('), should be smaller
                                                               in   1977 than in    1976 . The maintenance of bank
                                                              lending ceilings beyond the end of March could facili­
                                                              tate the achievement of this objective . It is also a
2.23 .   Since September, the Government has intro­            matter of urgency, given the economic policy commit
duced, in various stages, a stabilization programme
having the following objectives :                             (') OJ No L 341 , 20 . 12 . 1974, p. 51 .
 ---pagebreak--- 12. 5 . 77                         Official Journal of the European Communities                          No L 119/ 27
ments to which Italy subscribed for the purposes of          costing as much . Budgetary policy should therefore
the Community loan last March, to cut down substan­          strictly observe the limits set in the budget as
tially the monetary financing of the Treasury deficit,       adopted ; any excess expenditure should be offset by
this method having been used far too much in 1976.           retrenchment on other items, so as to avoid jeopar­
Real interest rates should be maintained at a higher         dizing the goal, agreed by the Community authorities,
level than corresponding levels in other countries.          to limit the net borrowing requirement to not more
                                                             than F1 12 000 million . Such a policy would be
                                                             compatible with a relative contraction , in the medium
2.27. The recent agreements between unions and
                                                             term , of general government financing requirements.
employers on wage costs and improved productivity
conditions point to a better social climate in industry,
but are not sufficient alone to bring the rise in unit
                                                             2.31 . Since the current account surplus must once
wage costs to a rate which is comparable with those in       again be offset by capital outflows sufficient to avoid
principal partner countries . The international competi­     an appreciation of the guilder within the 'snake',
tiveness of the Italian economy can be assured, in the
                                                             interest rates should be maintained below those being
medium term, only if, due in particular to the
                                                             charged elsewhere .
combined efforts of unions and employers, the infla­
tion rate at the end of 1977 is lower than that for the
preceding year.
                                                             2.32. In Belgium, where economic trends are still
                                                             hesitant, the gross domestic product is expected to
2.28 . Supporting structural measures — particularly         grow by between 3 to 3.5 % in real terms in 1 977, a
in the areas of energy, industry and agricultural policy,    rate slightly lower than the 1976 outturn . The upward
and with regard to distribution — should help to esta­       movement in consumer prices, which has gathered
blish   the   basic  situation  needed   to  enable   the    momentum in recent months, is expected to be a
economy to be brought back eventually to a phase of          good deal stronger than in the Federal Republic of
more rapid but balanced growth .                             Germany. Unemployment could well continue to
                                                             grow for several months. Because of the weakness of
2.29 .    In the Netherlands, efforts to slow down the
                                                             domestic demand, and in particular because industrial
                                                             investment is sluggish, the expansion of imports in
upward price movement seem to have achieved initial          terms of volume could remain relatively small . The
success. The relative appreciation of the guilder has
                                                             current balance of payments may, as a consequence,
been a factor here, because of its impact on import
                                                             show again a small surplus.
prices, but the upward movement of wage costs has
also lost momentum , and this should be reflected in
 1977 in a further slowing down in price inflation . On
the other hand, on the labour market, where some              2.33 .  The change which has taken place in the
                                                             economic outlook for 1977, in the sense of a slower
improvement had been recorded in recent months,
                                                             growth of output and incomes, means that forecasts
mainly as a result of a decline in unemployment,
                                                             with regard to budget revenue must be reviewed
there is little reason to expect any substantial streng­
thening of the demand for manpower in 1977 ; the
                                                             downwards. In order to comply more closely with the
                                                             guideline concerning the budget deficit fixed in the
foreseeable growth rate for gross domestic product
                                                             Annual Report on the economic situation in the
should be about 4 % . In 1977, unemployment on
average could decline somewhat from the figure of            Community, while still giving some support to
                                                             economic activity, the Government announced in
225 000 (4.7 % of the active population) recorded in
                                                             February 1977 a number of measures : these included
1976. In view of the prospects of relatively slow
growth in world trade and the deterioration in the           an increase in the VAT rate for certain goods and
competitive position of Dutch industry, the expansion        services, tax and financing incentives in respect of
of exports will be much less vigorous than in 1976.          investment, faster implementation of the public invest­
The external surplus on current account will diminish        ment programme for 1977, extension of the require­
slightly.                                                    ment that firms employ young trainees, early retire­
                                                              ment for the elderly unemployed and increased
                                                             employment by the public authorities of unemployed
2.30 . Although it will fall a little short of the 1976      workers . This    set of measures     should  enable  the
figure, the support for aggregate demand provided by          Belgian Government to keep the budget deficit
budgetary policy will remain substantial . In addition ,      roughly at the level originally planned, whilst avoiding
measures taken in the context of the central-govern­         any undue slowing down in economic growth . On the
ment budget for 1977 to slow down the increase in            other hand, failing a change in present arrangements
costs (including social security contributions) and to        for indexing incomes, the increase in indirect taxation
encourage productive investment should improve the           threatens to aggravate the danger of cumulative price
profitability of firms and reduce their financing diffi­     and wage increases. To remedy this situation, the
culties. The contribution to economic activity               Government      has   made    a  careful  choice  of  the
generated by these selective measures could well prove       products and services for which the rates of VAT will
stronger than that provided by general measures              be increased . Notwithstanding this, it is desirable to
 ---pagebreak--- No L 119/28                       Official Journal of the European Communities                               12. 5 . 77
maintain a budgetary policy orientation which will          2.38 .    The    aims of the Governments economic
make it possible in the medium term to reduce, in           strategy remain the reduction of the rate of inflation,
relative terms, the net borrowing requirement of the        the strengthening of the balance of payments and the
public sector, by energetic action with regard to           establishment of conditions for sustainable growth of
current expenditure and especially the increase in          output and employment. In pursuit of these objec­
transfer payments. This is the only way in which a          tives, the Government laid down a policy for reducing
further increase in the tax burden can be avoided .         future levels of public sector expenditure and
                                                            borrowing, and for maintaining a firm grip on mone­
                                                            tary expansion .
2.34.     In present economic conditions, and in view
of the persistent weakness of industrial investment,
general government borrowing should hardly exceed           2.39 .    This policy was strengthened when the
                                                            Government announced :
financing possibilities. Nonetheless, a cautious mone­
tary and financial policy should be pursued, in order
to encourage the establishment of exchange market           — on 15 December 1976, targets for the public sector
equilibrium and lower interest rates, whilst avoiding            borrowing requirement and for domestic credit
stimulation of a further bout of inflation through the           expansion ; these targets are in line with the guide­
excessive creation of liquidity.                                 lines for economic policy contained in the Annual
                                                                 Report on the economic situation in the Commu­
                                                                 nity and adopted by the Council ;
2.35.     In Luxembourg, the slowdown in economic           — the decision of the International Monetary Fund
activity noted in the Annual Report on the economic              to make available, to the United Kingdom, a
situation in the Community persisted throughout the              stand-by credit of £ 3.9 billion ;
second half of 1976 . The main reason was a fall in
new orders in the steel industry, since only some           — an arrangement with certain central banks and the
other industries , such as chemicals, had succeeded in           Bank of International Settlements for a $ 3 billion
emerging from the cyclical trough . The performance              credit facility designed to protect the United King­
of the economy for 1976 fell short of what had been              dom 's official reserves .
expected, and this also entailed a review of previous
forecasts for 1977. Thus, while the upward movement
in consumer prices should probably slow down                2.40 .    In early 1977, following the measures, the
further, the growth of the gross domestic product is        sterling exchange rate strengthened, there was a
now likely to exceed 3 % .                                  substantial movement of funds into the reserves, and
                                                            interest rates fell, suggesting a return of confidence in
                                                            the British economy.
2.36. In comparison with the draft budget for 1977,
prepared when economic conditions were expected to
be more vigorous, the present outlook points to a
                                                            2.41 . Because of the fall in the sterling exchange
                                                            rate in 1976, the present outlook is for no significant
slower growth in revenue. It would, nevertheless, be
                                                            change in the underlying rate of inflation (at present
preferable to maintain the level of budget expenditure
                                                            about 15 % ) until the middle of the year when a
as planned as well as selective measures implemented
previously to boost economic activity and employ­
                                                            marked slowing down should occur, resulting from
ment, especially as it looks very much as if employ­
                                                            the combined effect of the present voluntary incomes
ment problems in the steel industry will become more         policy and tight Government control of the money
and more structural in character.                           supply. To make further progress towards reducing
                                                            the rate of inflation, the Government should not only
                                                            maintain its present posture on public expenditure,
                                                            public sector borrowing and the expansion of
2.37. In the United Kingdom, after strong growth            domestic credit but should reinforce it with a satisfac­
in the first quarter of 1976, output stagnated for the      tory arrangement for the next round of incomes
remainder of the year and unemployment continued             policy, to begin in August 1977. The level of pay
to rise . The deterioration in the balance of visible        increases permitted in a new round of the policy
trade was offset by increased earnings from invisibles,     should aim to avoid a rapid increase in average earn­
enabling a modest reduction in the deficit of the            ings although its form should help to alleviate the
current account of the balance of payments to be            anomalies in the structure of relative wages that have
recorded . Despite the success of the voluntary             occurred in the past two years . As part of the general
incomes policy, the rate of inflation has hardly             framework for such a policy the Government may
declined, the depreciation of the pound sterling             need to reduce direct personal taxation and should
adding substantially to rising import prices. Public         consider the possibility of allowing the exchange rate
expenditure came under firm control, in terms of both        to strengthen as a way of reducing domestic infla­
cash and volume, during 1976 .                               tionary pressures and inflationary expectations .
 ---pagebreak--- 12. 5 . 77                         Official Journal of the European Communities                          No L 119 / 29
2.42. The present outlook for growth in 1 977 is for         — to ensure a progressive reduction in the rate of
a modest rate of expansion of perhaps 1.5 % . Factors              inflation ;
contributing to the growth in output are a recovery in
stockbuilding, an improvement in the non-oil trade           — to re-establish, on a long-term basis, a high level
balance and, in particular, North Sea oil production .             of employment.
The contribution of North Sea oil to the balance of
payments in 1977 will be considerable and this,
together with increased earnings from invisibles,            3.4.      In order to achieve such results and ensure
should lead to a reduction in the current account            their permanence, it is essential that the growth of
deficit to a figure below £ 1 000 million for the year       demand and output takes place over a wide area, so
as a whole (0.7 % of GDP). However, given the low            that it becomes self-sustaining and thus leads to a
labour content of North Sea oil production, the              continuous increase in job-creating investment.
growth of gross domestic product foreseen suggests
further increases in unemployment through the year.
In tackling the unemployment problem, the Govern­            3.5 .     Those   member    countries  with   balance   of
ment should avoid measures that expand private
                                                             payments deficits will still not have, in 1977, any
consumption, but should rather extend its specific
                                                             appreciable degree of freedom in the conduct of their
employment support policies and continue to tackle
                                                             economic policy. The size of their balance of
the structural rigidities in the employment market.
                                                             payments deficits and their continued high rates of
                                                             inflation force them to pursue their stabilization
                                                              programmes, even if the necessary period of adjust­
                                                              ment proves to be longer than at first thought. A long­
                     3 . Conclusions                          lasting success, of a type to instil confidence, in
                                                              restoring price stability and reducing balance of
                                                              payments disequilibria is a pre-condition for strong
3.1 .    Economic developments over the last few             growth and an improvement in the employment situa­
months underline the need to apply strictly, and even         tion during the next few years.
to tighten further, the guidelines for economic policy
which were laid down for the Community and, in
particular, for the various Member States in the last
Annual Report.                                                3.6. In the absence of a vigorous recovery in
                                                              foreign demand, the efforts of the deficit countries
                                                              will be in vain and can only lead to heavy losses as far
3.2. The economic recovery after more or less                 as growth and employment are concerned. The task of
marking time in the summer months, strengthened               the surplus countries in the adjustment process, there­
again, particularly in the United States. The plans to        fore, will be to underpin the upturn in economic
stimulate economic activity announced both in the             activity by increasing their domestic demand and
United States and in Japan have increased the                 their imports. In particular, this must be the priority
chances of an upswing in world trade, although it is          objective of the Federal Republic of Germany which
unlikely to be as marked as in 1976. In addition, the         should not rely too heavily on exogenous growth
various factors which contribute to economic growth           factors arising from third countries, but should contri­
strengthened, towards the end of last year, in the            bute to the expansion of total demand within the
Netherlands and in the Federal Republic of Germany.           Community itself. The Federal Republic of Germany
However, the results of the latest enquiries concerning       accounts for almost 25 % of intra-Community trade
the economic situation indicate that industrialists are       and, therefore, its importance as a trading partner in
still very cautious as far as the short-term outlook for      the Community is greater than that of the United
demand and production is concerned. The uncer­                States and Japan together within the OECD area
tainties and dangers which surround the improvement           (20 %).
in the short-term economic situation and the move­
ment towards equilibrium in the medium term , have
by no means been completely removed.                          3.7.     The surplus on the balance of payments
                                                              current account of OPEC countries, which will
                                                              continue for several years, means that the Community
3.3 . For industrialized countries, the problems to           must accept its share of the combined deficit of oil­
which economic policy must be directed, in 1977 and           importing countries, if it wishes to contain within reas­
beyond, are essentially three :                               onable limits the growth of the foreign indebtedness
                                                              of the non-oil producing underdeveloped countries.
— to make a serious effort to begin, with the help of         As long as surpluses and deficits are still as unevenly
      instruments of demand regulation, the process of        distributed between the Member States as they are at
      adjustment which will lead to a more stable             present, the Community would be advised to help —
      balance of payments situation , both within the         either directly or by international action — its weakest
      Community and at an international level ;               members on condition that they take action to help
 ---pagebreak--- No L 119 / 30                       Official Journal of the European Communities                            12 . 5 . 77
themselves, to finance that part of their balance of          3.9 . The lowering of inflation rates can only be
payments deficits that their efforts do not allow them        achieved gradually, and should be supported by
to absorb, in order to limit losses of potential growth .     coherent budgetary, monetary and incomes policies.
To this end possibilities for increasing the financial        The same is true for the return to a high level of
role of the Community, as regards raising loans on the        employment, which is currently an essential priority
international capital market, in order to contribute          objective common to all industrialized countries. The
both to an improvement in the economic situation              policy to combat unemployment must at least be
and the solution of structural problems, should be            based on the following three factors :
investigated.                                                 — an employment policy which encourages job­
                                                                   creating investment and which would be comple­
3.8 .   Similarly, at international level, it is in the            mented by traditional policy instruments (assis­
Community's interest that the import capacity of the               tance to increase mobility, training and profes­
developing countries should be increased in a reaso­               sional readjustment) and selective measures ;
nable manner. Conversely, the Community, which is             — a growth rate in incomes which is consistent with
the leading trading group in the world, must firmly                reducing inflation ;
oppose any moves towards protectionism with regard            — an industrial policy which encourages the reorgani­
to trade . It will be able to escape these dangers within          zation of our economies rather than the mainte­
the Member States so much the easier when a real                   nance of jobs at any price in industries which are
financial solidarity is established .                              no longer competitive .