CELEX: 31985D0619
Language: en
Date: 1985-12-20 00:00:00
Title: 85/619/EEC: Council Decision of 20 December 1985 adopting the annual report on the economic situation in the Community and laying down economic policy guidelines for 1986

31 . 12 . 85                                   Official Journal of the European Communities                                  No L 377 / 1
                                                                        II
                                                  (Acts whose publication is not obligatory)
                                                             COUNCIL
                                                           COUNCIL DECISION
                                                            of 20 December 1985
                   adopting the annual report on the economic situation in the Community and laying down
                                                    economic policy guidelines for 1986
                                                               ( 85 / 619 / 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                          attached report , 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 I 1 ), as amended by                         Part II of the attached report .
Decision 75 / 787 / EEC ( 2 ), and in particular Article 4
thereof,
                                                                                                       Article 2
Having regard to the proposal from the Commission ,                          This Decision is addressed to the Member States .
Having     regard      to     the     opinion  of   the   European           Done at Brussels , 20 December 1985 .
Parliament ( 3 ),
                                                                                                                 For the Council
                                                                                                                   The President
Having regard to the opinion of the Economic and Social
Committee ( 4 ),                                                                                                    R. KRIEPS
(») OJ No  L 63 , 5 . 3 . 1974 , p. 16 .
(2) OJ No  L 330 , 24 .   12 . 1975 , p . 52 .
(3) OJ No  C 345 , 31 .   12 . 1985 .
(4) OJ No  C 344 , 31 .   12 . 1985 .
 ---pagebreak--- No L 377 / 2                               Official Journal of the European Communities                    31 . 12 . 85
                                                ANNUAL ECONOMIC REPORT 1985 / 86
                                                              CONTENTS
                                                    Part I — The Community economy
                                                                                                      Page
                           Introduction and summary                                                      3
             I.            Evolution of the economy and convergence                                      7
             1.1 .         The current situation and outlook for Europe                                  7
             1.2 .         Imbalances and convergence in the Community                                  12
             1.3 .         Some risk factors in the medium-term outlook                                 13
             II .          A cooperative strategy for more employment-creating growth                   14
             II . 1 .      The background and orders of magnitude                                       14
             11 . 2 .      The need for more employment-creating growth                                 16
             11 . 3 .      Labour , capital and technology                                              18
             II.4 .        Pay , profits and jobs                                                      20
             11 . 5 .      A cooperative medium-term growth strategy                                   22
             III .         Economic policy in the framework of a cooperative growth strategy           26
             III . 1 .     Public finances                                                             26
             III . 1.1 .   The public sector                                                           26
             III . 1.2 .   Taxation policy for economic growth                                         27
             III . 1.3 .   The role of public debt                                                      28
             III . 1.4 .   The European Community budget                                               29
             III . 2 .     Monetary policy and the European Monetary System                            31
             III . 3 .     Market and sectoral policies                                            ">  35
             III . 3.1 .   Improving the internal market                                                35
             III . 3 . 2 . Infrastructure projects of European interest and infrastructure financing   37
             III . 3 . 3 . Adaptability of the labour market                                            38
             III . 3 . 4 . Specific employment programmes                                              40
             III . 3 . 5 . Education , training and technology                                          41
             III . 3 . 6 . Sectoral policies , technology and enterprise                               42
             IV .          European interests in the international economy                              43
             IV . 1 .      The world trading system                                                    43
             IV . 2 .      Improving the international monetary system                                 44
             IV . 3 .      European economic space                                                      45
             IV . 4 .      International cooperation for world economic adjustments                     46
             V.            Conclusions : objective , instruments and method                            47
                                            Part II — Economic policy in the Member States
             Belgium                                                                                    50
             Denmark                                                                                    51
             Federal Republic of Germany                                                                53
             Greece                                                                                    56
             France                                                                                     58
             Ireland                                                                                    60
             Italy                                                                                     62
             Luxembourg                                                                                65
             Netherlands                                                                               66
             United Kingdom                                                                             68
 ---pagebreak--- 31 . 12 . 85                              Official Journal of the European Communities                                 No L 377 / 3
                                                               ANNEX
                                                               PART I
                                                THE COMMUNITY ECONOMY
                                                 INTRODUCTION AND SUMMARY
1.     The present Annual Economic Report for 1985 to                     unemployment problem can only be solved if there is a
       1986 , here submitted to the Community institutions                distinct improvement in the relationship between
       in accordance with regular procedures , builds on the              growth and employment .
       report which the Council adopted last year , the
       principal theme of which was the need to achieve a
       substantial and durable improvement in the
       employment situation . Its potential is increased by          4.   We should not , however , ignore the fact that the
       proposals for a cooperative strategy calling for                   process of moderation of real wage increases
       balanced contributions from the Community ,
                                                                           established since the end of the 1970s has already
       Governments of Member States as well as from the                    helped to make growth potentially more
       social partners . This strategy will be even more                  employment-creating . The growth rates of recent
       effective if it can rely on international cooperation .             years , however, were not sufficient to permit the
                                                                           necessary rise in employment . It is therefore necessary
                                                                           to strengthen growth in Europe further and to make it
                                                                           more employment-creating .
2.     In 1984 / 85 the Community countries have achieved
       some progress in respect of economic policy :
                                                                     5.    In order to achieve this objective , a series of macro­
       — the moderate economic recovery , which has been                   and micro-economic conditions need to be fulfilled to
            under way for 2V2 years , is continuing ,                      the greatest possible extent .
       — considerable progress has been made towards
            restoring price stability ,                              5.1  At the macro-economic level, it depends in particular
                                                                           on a higher level of job-creating investment in the
       — there has been further improvement with respect                   coming years . This is first of all the task of
            to the budgetary and external imbalances .                     entrepreneurs . It is , however , also necessary that the
                                                                          profitability of job-creating investment should
                                                                           continue to improve , and that there is a sufficiently
                                                                           strong outlook for demand . Job-creating investment is
3.     These successes are grounds neither for complacency                 mostly capital-widening investment, requiring
       nor for hoping that the major problem of the                        favourable prospects for demand and the
       Community — unemployment — will be resolved if                      continuation for a certain period of moderation of real
       current trends continue . Indeed , all medium- and                 wage increases at a rate lagging behind productivity
       long-term forecasts of growth and employment agree                 growth . If wages were to rise too fast , profitability
       that, on the basis of present policies and behaviour ,             would suffer and rationalization (capital-deepening
       there is no prospect in the medium term of raising the              investment ), which destroys jobs , would be
       growth rate in the Community above some 2,5 % .                     unnecessarily encouraged . Avoiding such an
       This would not lead to a significant decline in                     eventuality in no way implies that technological
       unemployment in this decade . A disorderly                         progress should be relinquished ; job-creating
       adjustment process in the USA , a further rise in real             investment also incorporates technological progress .
       interest rates and a worsening of the debt problem in              But because of the inadequate capital stock and the
       developing countries could make the outlook even                    high unemployment rate , Europe needs for some years
       more gloomy .                                                       a new balance between capital-widening and
                                                                          capital-deepening investment .
       The apparent inevitability of the prospect of
       persistently high unemployment has led to widespread
       pessimism with regard to economic policy . If the             5.2  The combination of moderate real wage increases and
       relationship between growth and employment                          safeguarding an appropriate development of demand
       observed in the 1960s still applied , medium-term                   is also an important element in improving
       growth rates above 6 % would be necessary to achieve               profitability , strengthening growth and making it
       the increase in employment (1 -1 ,5 % per year) that is            more employment-creating . Wage moderation alone
       needed in order to bring down unemployment                         would not , or only very slowly , lead to the required
       gradually but significantly . Such rates of growth are             employment effects . Simply expanding demand
       at present quite unattainable . Consequently , the                 would , given the inadequate level of productive
 ---pagebreak--- No L 377 / 4                             Official Journal of the European Communities                                     31 . 12 . 85
     capacity , run the risk of producing higher inflation          6.    The strategy proposed in this Annual Economic
     and / or public debt without having the desired effect               Report , however , consists not only of macro­
     on employment . A combination of both is therefore                   economic elements . Employment-creating growth
     necessary .                                                          also depends upon important micro-economic
                                                                          conditions . Action , with the aim of improving the
                                                                          adaptability of markets , and not only the labour
                                                                         market , should be reinforced . With regard to the
5.3  With respect to the maintenance of moderate real                    labour market , the extent to which greater wage
     wage increases , which has been achieved in many                    differentiation and reorganization and reductions of
     countries in recent years , the cooperation of the social           working time , without raising costs , could benefit
     partners, and in particular of the unions, is required.             employment should be studied in the light of results
     Moderate wage development should continue until                      already achieved . The national governments and the
     there is a clear and lasting fall in the unemployment               Community should also examine whether existing
     rate , after which real wage increases could again                  rules and regulations impede the functioning of
     become close to productivity growth .                               markets and the setting up of new, and in particular
                                                                          small and medium-sized businesses .
5.4  The safeguarding of an adequate level of demand is                  The spirit in which the debate about market
     the task of government, to be carried out until the                  adaptability is held is important for its success . The
     process becomes self-sustaining by means of strong                  objective behind efforts to increase flexibility is not to
     investment and an appropriate rise in private                       destroy achievements made on the social front but to
     consumption .                                                       create more jobs . As far as at all possible , therefore ,
                                                                         economic efficiency should be reconciled with the
                                                                         maintenance and further development of social
                                                                          achievements .
5.5  What Europe needs is a dual strategy of moderation of
     real wage increases and support for demand . Indeed ,
     the accompanying measures to underpin demand hold
     the key to the success of the strategy and social
                                                                    7.   The central strategy of moderate growth of real wages
     acceptance of wage moderation . This is , at any event ,
     true in a transitional phase during which consumer
                                                                          accompanied by the maintenance of an adequate level
                                                                          of demand requires the monetary and budgetary
     purchasing power will , to begin with , inevitably grow
                                                                          policies of the Member States to be based on the
     more slowly and aggregate demand will not rise at a
                                                                          following principles :
     sufficiently rapid pace as a result of extra business
     investment to expand capacity .
                                                                    7.1   Monetary policy must continue to provide the
     Only if wage moderation is accompanied by a                          framework for stability . The proposed dual strategy
     sufficient level of aggregate demand can one have                    must thus not lead to an acceleration of inflation . On
     confidence that the process of improving profitability               the contrary , in most Community countries , the rates
     and restructuring demand ( relatively more investment                of inflation need to be brought down further .
     and relatively less consumption ) will be rapid enough               Monetary policy can best safeguard this , within the
     and not involve drastic deflation that would place                   EMS framework , by continuing to set a nominal
     social consensus under considerable strain . Only in                 framework which is orientated towards economic
     this way can wage moderation fulfil its employment                   stability . Such a monetary policy offers considerable
     function .
                                                                          potential for cuts in interest rates in the Community
                                                                          on a sound basis , particularly if the dollar falls further .
                                                                          If this could be achieved , with the necessary caution
                                                                          and coordinated within the EMS framework , it would
5.6  As a result , the long-term tendency for capital                     add an additional , not inconsiderable stimulus to
     productivity to decline would also be arrested .                     business investment and significantly reduce pressure
     Together with rising employment , growing demand                     on government budgets . This is a positive effect
     and mounting confidence in future trends , this would                benefiting all countries .
     provide the most effective stimulus to the propensity
     to invest . As investment rises , more rapid
     technological progress would at the same time be
     incorporated into the productive apparatus , and this          7.2   Budgetary policy must underpin the strategy of
     would in turn have a beneficial effect on the                        employment-creating growth in the following ways:
     productivity of labour and capital . Profitability and
     the propensity to invest would therefore continue to
     increase . This would create a 'virtuous circle' of                  Macro-economically , it must continue to safeguard
     technological      progress ,    capital    productivity ,           the consolidation objective , i.e. deficits must be
     profitability , investment and renewed embodiment of                 further reduced in those countries which still have a
     technological progress .                                             level of indebtedness which is either excessive or rising
 ---pagebreak--- 31 . 12 . 85                               Official Journal of the European Communities                                 No L 377 / 5
        too fast . At the same time , it must sustain demand                Finally , given the importance of a favourable
        where there is room for manoeuvre , the more so since               international    environment       for    growth     and
        wage moderation leads temporarily to a fall-off in                  employment , the Community should at the same time
        demand . In addition , budgetary policy should                      continue its efforts to improve the international
        continue to restructure the expenditure side of the                 trading and monetary systems . It should also , together
        public budgets to reduce subsidies more strongly and                with other countries , attempt to mitigate the debt
        in a selective way and to increase public investment ;              problem of developing countries , and to work
        particularly     in    respect     of infrastructure ,              towards maintaining the growth in world trade as the
        environmental protection and urban renewal , a                      inevitable adjustments in the USA are made .
        considerable backlog of needs has built up in recent
       years, which could be met with the spare capacity in
       the construction sector .                                            The contributions of the Community referred to here
                                                                           correspond to numerous resolutions of the European
                                                                           Parliament .
       Budgetary policy should also provide for further
       measures to strengthen supply , which generally have
       an impact on demand at the same time , and safeguard           9.   Whatever the international environment , the policies
       the improvement in relative factor prices by reducing               set out above are necessary . It is evident that the
       taxes and social security contributions — wherever                  international environment would be considerably
       possible , at the expense of the central government                 reinforced by the success of the Communiy strategy .
       budget . In addition , micro-economic measures to                   Given a plausible margin of uncertainty as far as world
       promote employment ( job-creation schemes and                       developments are concerned , such a policy should
       promotion of vocational training ) should be taken                  make possible the achievement of an increase in the
       wherever possible .                                                 economic growth rate in the Community from its
                                                                           present level of 2,5 % to an average of 3-3,5 % over
                                                                           the next few years , and at the same time make growth
                                                                           much more employment-creating . This would
                                                                           produce an average annual increase of 1-1,5% in
                                                                           employment , opening up the prospect of
8.     The success of the proposed strategy depends on a                   unemployment being brought down to around 7 % by
       coordinated application of policies between Member                   1990 .
       States within a Community framework .
       The economic potential of the Community will be                10 . Such a development is only possible , however, when
       considerably reinforced by the accelerated completion               all concerned — the Community , national
       of the large internal market , including the                        governments , employers and unions — work fully
       liberalization of national financial markets , and by the           together to implement the proposed strategy .
       promotion of technical progress , as the Commission
       has proposed . The completion of the internal market
       lies at the heart of the Community ; by generating             10.1 This overall strategy 'offers' governments and the
       supply dynamism and by permitting , at the same time ,              social partners an opportunity to achieve a joint
       a more sustained growth in demand , it ties in directly             solution to the major problem confronting the
       to the cooperative macro-economic strategy . The                    Community , namely unemployment . However , the
       promotion of technical progress is essential to                     strategy provides only a general framework within
       safeguard and promote the Community's position                      which much of the debate should be held with the
       among the most developed economies of the world . In                governments and with and between the social
       addition , in those sectors for which the Community is              partners . This general framework should also incite
       directly responsible , a greater weight should be given             those concerned at least to reflect upon their respective
       to the operation of the market . In all these areas , the           positions . For the present , there is no political
       social dimension should be taken fully into                         approach in sight other than this strategy providing
       account .
                                                                           any prospect of significantly reducing unemployment
                                                                           by the end of the decade . It is therefore an urgent task
                                                                           to proceed via a wide debate to the implementation of
       The realization of major infrastructure projects in the             this cooperative strategy .
       transport , telecommunications and environmental
       fields , as well as exploitation of technological
       potential , would substantially improve the                   10.2 Exploratory discussions which the Commission has
       functioning of the internal market . The accelerated                had with the European Trade Union Confederation
       implementation of numerous projects , which are                     ( ETUC ) and with the Union of Industries of
       already available and have an adequate social rate of               the European Community ( UNICE ) have been
       return , would reinforce economic dynamism and                      encouraging . They have shown that there is interest
       contribute to the success of the proposed strategy .                and a willingness to talk about such an approach . This
 ---pagebreak--- No L 377 / 6                                Official Journal of the European Communities                                   31.12 . 85
         dialogue should be continued ( 2 ). It is evident that              Even in Germany it is necessary to have a growth rate
         social dialogue should also be reinforced at national               of some 3,5% and a rise in employment of about
         level . The more progress is made in such dialogue at               1 ,5 % per annum for several years in order to achieve a
         all levels , the easier it will be for the national                 lasting decline in unemployment . This is in both the
         governments and the Community itself to make their                 national and the Community interest .
         own contributions .
                                                                       11.1 In the other countries such room for manoeuvre is not
10.3 The strategy should gradually be transformed into
                                                                            yet available . In some of the countries, however , it is
         reality. This applies to the cooperation in each
                                                                            possible that , with a certain time-lag as compared to
         country between governments , unions and employers .
                                                                            Germany , similar positive chain reaction could
         Each should make their contribution and at yearly
                                                                            develop from more growth and employment to greater
         intervals the progress should be examined in order to              room for manoeuvre on the fiscal and external fronts .
         determine the next steps . This approach should
                                                                            Such a development seems possible in Denmark , the
         continue over several years . This also applies ,                  Netherlands , the United Kingdom and France . Its
         however , to cooperation between the Community
                                                                            speed will depend upon how favourably developments
         countries and at an international level . Each partner
                                                                            proceed in Germany and upon appropriate behaviour
         should act according to their available room for
         manoeuvre .
                                                                            of the social partners in relation to the requirements of
                                                                            the strategy . Every effort should be made to extend the
                                                                            positive chain reaction as quickly as possible to this
11 .     The coordinated application of the strategy in the
                                                                            group of countries . This would also considerably
         Member States should engage and foster a mutually
                                                                            improve the situation in the third group of countries
         reinforcing process of supply , demand and
                                                                            where room for manoeuvre is not yet in view .
         employment . In this respect an analysis of
         developments forecast for Germany in 1986 is of
         considerable interest . Economic growth could exceed          11.2 The differing situations in the Member States
         3 % and employment rise by more than 1 % , so that                 naturally restrict a rapid implementation of the
         unemployment declines , albeit slowly at first . The               proposed cooperative strategy. In this respect , the
         price outlook continues to be favourable . A                       Community's contribution could provide a certain
         considerable current account surplus and , despite the             compensating factor . This refers not only to the
         tax reform , a further significant decline in the                  accelerated completion of the internal market but
         government deficit is expected . Thus , a positive chain            above all to the large projects of the Community
         reaction is developing between price stability , more              interest in the fields of transport and
         growth and employment and more room for                            telecommunications          infrastructure     and     of
         manoeuvre in the fiscal and externalfields . This room             environmental protection . The stronger the
         should be used for higher public investment in 1986                commitment of governments and the social partners
         and bringing forward to 1987 the tax reform planned                to the implementation of the overall strategy , the
         for 1988 . This appears necessary so that the                      greater the chance that the Community's contribution
         favourable economic development continues in and                   will succeed in being of significant macro-economic
         beyond 1987 .                                                       importance .
(*) The Commission will thus ask the ETUC and UNICE for written
     opinions on the draft Annual Economic Report . These opinions
     will be transmitted to the Council , the Parliament and the
     Economic and Social Committee so that they can be borne in
     mind in the future discussion .
 ---pagebreak--- 31 . 12 . 85                                Official Journal of the European Communities                                   No L 377 / 7
                                      I. EVOLUTION OF THE ECONOMY AND CONVERGENCE
1.1 . The current situation and outlook for Europe                     such terms , it is clear that the situation reached remains
                                                                       fragile and this report acknowledges that future progress will
                                                                       be difficult if both policy and behaviour are not changed .
The present European recovery so far has lasted about 2V2
years . From a starting point dominated by structural
imbalances accumulated over a long period as evidenced by
large budget deficits , high and continuing inflation , poor           In some contrast to the relatively subdued growth in Europe ,
growth performance and a highly unsatisfactory labour                  the international economy has been undergoing a much more
market situation , policy management has relied heavily                marked cyclical development . For the United States , 1984
on supply-side considerations . Moreover , the degree of               was a year of exceptionally strong output growth ( + 6,8 % )
imbalance as between member countries has varied greatly               and even more so of imports (+ 30% ). With Japanese
across the Community .                                                 imports also growing fast in that year ( 4- 10,7% ), total
                                                                       world trade grew by as much as 9,3 % . For 1985 world trade
                                                                       growth is estimated to slow to a more normal rate ( 4,8% )
                                                                       and on present forecasts a similar result is expected in 1986 .
By mid-1985 gross domestic product in the EC had risen to              This is subject , however , to a number of uncertainties which
nearly 5 percentage points above the previous cyclical peak of         are discussed briefly in a later Section . The forecast includes a
1980 . Industrial production , which suffered a deeper
                                                                       more moderate but still positive rate of output growth in the
recession than the rest of the economy , also returned to the
                                                                       United States economy ( + 2,3 % in 1985 , + 2,5 % in 1986 )
1980 peak level in June 1985 . The Commission's recent
                                                                       and a sustained growth rate of 4-5 % in Japan in both
forecasts (*) point to a continuation of this trend , with a
                                                                       years .
growth rate of about 2,5 % for the Community as a whole
being forecast for 1986 , which is marginally more than that
expected for 1985 .
                                                                       It may be questioned why the European economy did not
                                                                       respond more strongly to the acceleration of world trade that
The outlook for growth , therefore , remains one of modest             occured in 1984 . It is indeed striking that while Community
proportions . Even so , in a number of respects , there have           exports grew by 7,7 % in 1984 , imports grew almost as much
been positive signs of progress in some areas . There has been         by 7,1 % compared to the modest 2% growth of domestic
a general awareness that , starting from a position of acute           demand . As a result , the net impact of export and import
imbalance coupled with a world recession , the adjustment              trade volume growth was negligible . However , special
necessary would be a slow one . Moreover , the degree of               factors such as strikes in the UK coal industry and German
imbalance in Member States is by no means the same . The               metal industries , together with a relatively high rate of
fundamental approach suggested by the Commission in the                stockbuilding of high import content help to explain why this
last two Annual Reports has been to stress the need for                happened . For 1986 the forecasts suggest a continued
improvements to supply conditions in member countries set              gradual strengthening of domestic demand .
within a framework of control over national budgets . A
component judged necessary in this approach has been to
ensure that the evolution of real employment costs continues
to be maintained below the growth or productivity .                    This view is supported by evidence from surveys of both
                                                                       business and consumer opinion . The industrial confidence
                                                                       indicator for the EC as a whole has improved only very
Experience across Member States has varied a good deal but ,           slightly over the 12 months to September 1985 . Confidence
looking at average Community performance over the past                 in the construction sector remains very depressed . Consumer
year , there are some encouraging signs . To a degree , there          confidence recovered only a little in 1983 measured from the
has been real wage moderation . Of significance is the fact            low points reached in preceding recession years but since then
that after a decade in which the creation of new jobs has been         has remained stable . The remaining component of the
negative , the Community is beginning to experience some               Commission's composite economic sentiment indicator , and
growth in employment . Table I shows that for 1985                     the only one to have risen at all significantly over the last
employment growth is estimated to be 0,4 % with an increase            year , is the share price index .
to 0,5 % for 1986 .
                                                                       The rise in the share price index may be associated with the
By far the greater part of this growth , however , has come            welcome rise in private industrial investment , which in
from increases in activity rates , particularly of women , and         Europe as a whole is now the fastest growing demand
new entrants to the labour force . To begin to have an effect          component . After three years of decline in 1981 to 1983 a
on the current and widespread unemployment problem
                                                                       recovery began in 1984 , with a 7 % volume rise in industrial
therefore , it is necessary that this progress be improved upon        investment . First indications for 1985 from business survey
and continued into the medium term . When appraised in                 sources pointed to a 9% volume rise , and more recent
                                                                       surveys have revised this up to 11% . Within these EC
(') Commission of the EEC , European Economy, Supplement A ,           average figures there are some examples of a much stronger
     October 1985 .                                                    private industrial investment upswing . In Denmark , for
 ---pagebreak---  No L 377 / 8                                 Official Journal of the European Communities                                                       31 . 12 . 85
 example , the growth rate is estimated to be nearly 40 % and                       of high unemployment, the European economy is already
for the Netherlands over 20 % in both 1984 and 1985 . In                            beginning to experience production capacity constraints .
 1985 German industrial investment is expected to rise by
 13 % in volume .                                                                   As already noted , in the meantime , total employment has
                                                                                    increased modestly. Indeed , employment growth of over 1 %
Of considerable significance , however , is the fact that the                       is expected in 1985 in Denmark and the United Kingdom ,
level of investment is still low . In 1985 the volume of                            but even this is clearly insufficient given the growth of labour
investment is only that attained in 1980 . It is still some 14 %                    supply and the high unemployment level at the beginning of
below the level in 1973 . Sustained and substantial rises in                        the recovery .
investment are now required if the economy's potential
growth rate is to be improved . Additional evidence is                              After a long period in which Europe has demonstrated a
provided by the behaviour of capacity utilization . Despite                         remarkable incapacity to create new jobs , these signs are
slow output growth , capacity utilization in industry rose to                       indeed welcome . They do , however , underline the need to
82 % in July 1985 , which is close to the 84 % level recorded                       strengthen further those conditions necessary to secure
at the cyclical peak in 1 979 / 80 . Thus in spite of the existence                 sustained growth embodying employment creation .
                                                                          TABLE 1
                                                 Main economic aggregates , EC ( 2 ), 1961 - 1986
                                                                                                                General
                                                                          Private    Compensa­     Current                   Money
                                                                                                                                       Unemploy­
                                   GDP        GDP                                                               govern­                   ment
                                  current      real
                                                            GDP          consump­       tion      account of     ment        supply      (% of      Employ­
                                                           deflator         tion         per      balance of  net lending   (M 2 / 3 )                ment
                                   prices     terms                                                                                     labour
                                                                          deflator    employee    payments     or borro­       (3)
                                                                                                                                          force)
                                                                                                                 wing
                                                          % change                                       % of GDP          % change         %      % change
 1961 - 1970                          9,0        4,6           4,2            3.7         8,8          0,4       - 0,4        10,2          2,1         0,2
 1971-1980                         13,4          2,9        10,2           10,1         13,6         - 0,1       - 2,8        14,4          4,2         0,2
1981                               10,4       - 0,2         10,6           11,7         12,6         - 0,5       - 5,4        10,9          7,6       - 1,3
 1982                              10,7          0,5        10,1              9.8       10,6         - 0,6       - 5,6        10,7          9,2       - 1,4
 1983                                 8,9        1,0           7,8            7,6         8,7          0,1       - 5,5         9,7         10,3       - 0,5
 1984                                 8,0        2,2           5,7            6,2         6,7          0,1       - 5,4         8,7         10,8         0,2
1985
Last report                         ( 7,5 )      2,3         ( 5,0 )        ( 5,2 )     ( 6,7 )        0,3       - 4,8         7,2      ( 11,5 )        0,0
This report ( ! )                     7.6        2,3           5,1            5,2         6.3          0,5       - 5,2         8,4         11,2         0,4
1986 H                                6.7        2,5           4,1            3.9         5.4          0,6       - 4,8         6,7         11,1         0,5
( 1 ) Forecast of the Commission services , on the basis of present policies , September 1985 .
( 2 ) EC average calculated with current GDP weights at purchasing power parities .
( 3 ) End of year ( annual growth rate ).
Note: Percentage changes are given as annual rates .
                                                                          TABLE 2
                                                                World imports of goods
                                                                                                                   (% increase in volumej
                                                    1981             1982           1983        ,  1984           1985          1986
                     EUR                            - 2,9              2.4            2,3            7,1             5,0           5,3
                     US                               6,6              0,1           11,8           29,9           10,0            6,6
                     Japan                          - 2,4            - 0,6            0,3           10,7             3,0           4,7
                     OPEC                            27,4              5.5          - 8,2          - 9,0         - 10,9         - 4,0
                     Other
                     developing countries             3,5            - 5,2          - 1,2            6,0            4,0            4,5
                     World                            2,5            - 0,1            2,2            9,3            4,8            4,8
                     Source : Commission services .
 ---pagebreak--- 31 . 12 . 85                             Official Journal of the European Communities                             No L 377 / 9
                                                                 TABLE 3
                                               Rate of change of demand components, EC
                                                                                                           (In %)
                                                            1982        1983       1984         1985   1986
             Private consumption                               0,5         1,1      1,0          1,7      2,7
             Public consumption                                1,1         1,6      1,2          1,2      1,1
             Fixed investment                               - 1,6         0,0       2,3          1,6      3,7
             Contribution to change
             in GDP of:
                  Final domestic demand ( ] ) ( 2 )           0,2         1,0       1,3          1,6      2,5
                  change in stocks (')                        0,5       - 0,2      0,5           0,2      0,1
                  foreign balance (\)                       - 0,3         0,1      0,2           0,4   - 0,2
             GDP                                              0,5         1,0      2,2           2,3      2,5
             Exports                                          1.5         1,9      7,2           6,4     4,6
             Imports                                          2.6         1,5      6,6          5,0      5,3
             ( J ) Change as percentage of GDP of preceding period .
             ( 2 ) Excluding change in stocks .
             Source : Commission services .
                                                                 TABLE 4
                                Forecast increase in gross domestic product in 1985 and 1986 , in %
                                                            1985                                1986
                                                            GDP         GDP                     GDP    GDP
                                            Nominal                              Nominal
                                               GDP         output       price      GDP         output  price
                                                          volume      deflator                 volume deflator
             Belgium                              6,7        1,9         4,7        6,2          1,7    4,4
             Denmark                              6.3       2,3          3,9        5,4         3.2     2,2
             Germany                              4.4       2.3          2,1        5.4         3,5      1,9
             Greece                            19,3          1,9        17,1       16,8          1,0   15,7
             France                               7.0        1,2         5,7        5,8          1,9     3,9
             Ireland                              8,7       2,5          6,1        7,5 ,       2.3      5,0
             Italy                             11,0         2,7          8,1        9.5          2,7     6,6
             Luxembourg                           6,0        1,7         4.2        6,4          1,3     5,0
             Netherlands                          4.5        2,1         2.3        3,0          2,0     1,0
             United Kingdom                       9.1        3.4         5,5        7,0          2,0     4,8
             European
             Community                            7,6       2,3          5,1        6,7         2,5      4,1
             Source : Commission services .
 ---pagebreak--- No L 377 / 10                           Official Journal of the European Communities                       31 . 12 . 85
                                                         GRAPHS 1 to 4
                            Comparative evolution of the EC , US and Japanese economies, 1980 to 1985 .
 1 . Gross domestic product, s.a .                                      2 . Industrial production
                                                                            3-month moving average , s.a .
     1975 = 100
                                                                            1975 = 100
 3 . Unemployment rate                                                 4 . Trade balance
                                                                           fob / cif, '000 million ECU
                                                                           3-month moving average , s.a .
 ---pagebreak--- 31 . 12 . 85                               Official Journal of the European Communities                        No L 377 / 11
                                                             GRAPHS 5 to 8
                                Comparative evolution of the EC , US and Japanese economies, 1980 to 1985
  5 . Consumer prices                                                     6 . Exchange rates
      6-month change , s.a ., annual rates                                     Index of SDRs per currency unit
                                                                               March 1979 = 100
 7 . Long-term interest rates                                              8 . Short-term interest rates
 ---pagebreak--- No L 377 / 12                                Official Journal of the European Communities                                          31 . 12 . 85
 The present European recovery, so far of2V2 years duration,                Netherlands have reduced their already below-average
is expected to continue through 1 986 at a growth rate around               inflation rates to a very low level . The United Kingdom ,
2,5 % . Although private industrial investment is showing a                 Ireland and Italy have reduced their inflation rates from 1980
significant upturn, this is from a very low base. More recently             to 1985 by well over 10 percentage points , and France by
employment has also begun to increase. However, there are                   over 6 points . Denmark has also made notable progress in
indications that in some countries, despite the presence of                 achieving a measure of price stabilization . Greece has not
continuing, unacceptably high unemployment, the economy                     progressed in this respect.
is beginning to experience capacity constraints . This
emphasizes the need for sustained growth of investment in                   On the balance of payments the Communiy as a whole has
new capacity.                                                               moved from substantial current account deficit in 1980 to a
                                                                            surplus in 1985 , but divergences in individual performance
                                                                            remain considerable . In addition , when seen against the very
1.2 . Imbalances and convergence in the EC economy                          large current account deficit of the United States , the
                                                                            Community retains a degree of vulnerability in this respect .
The situation in 1985 may be compared with that in 1980 , a                 The most impressive adjustments have been those of Belgium
period which conveniently spans a business cycle . In 1980 as               and Ireland which improved their current account positions
in 1985 , a moderate economic recovery had been under way                   by 5 % and 9 % of GDP respectively over the five-year
for about 2 V2 years , and capacity utilization rates in industry           period , thus eliminating or very much reducing their
were similar . Some of the more important macro-economic                    previously alarming deficit levels . France and Italy have also
indicators are set out in Table 5 .                                         made substantial progress in reducing their deficits , even if
                                                                            more recently in the Italian case the deficit has begun to grow
In the labour market , the four larger Member States have                   again . Germany and the Netherlands on the other hand have
experienced a rise in the rate of unemployment of between 4                 moved into situations of widening surplus .
and 6 percentage points . Among the smaller countries
Belgium , the Netherlands and Ireland have suffered higher                  In spite of the severity of budget consolidation efforts , EC
than average increases . In so far as a convergence process is at           government deficits in 1985 are , on average , significantly
work here the similarity of the growth in unemployment                      higher than in 1980(5,2% ofGDP versus 3,5 % ). Moreover ,
is striking and this development remains wholly                             in this area also , the degree of divergence continues to be
unacceptable .                                                              relatively wide . Four countries ( Belgium , Greece , Ireland and
                                                                            Italy ) have deficits of nearly 10 % of GDP or more . Belgium
Although employment growth has become positive in the last                  and Ireland despite considerable efforts have not been able to
year, in no country except Denmark is the level of                          reduce substantially the deficit level over the five-year period ,
employment currently higher than it was at the beginning of                 even if over a more recent period some improvement has been
the decade . Thus virtually the whole of the Community is                   made . The Greek and Italian deficits have become more
facing a labour market problem of comparable gravity .                      serious still . Germany has reduced its deficit to 1,2% of
                                                                            GDP , whilst Luxembourg has moved into surplus . France ,
As regards price stabilization , on the whole there has been a              the UK and Denmark are now in an intermediary category
striking and positive convergence process . Germany and the                 with deficits of around 3% of GDP .
                                                                    TABLE 5
                                          Indicators of disequilibria and divergence, 1980 and 1985
                                                                                                                                 Gross
                                  Unemployment             GDP deflator         Current account          Budget deficit
                                       in %                   in %                  % of GDP              % of GDP            public dept
                                                                                                                               % of GDP
                                 1980        1985        1980        1985       1980        1985       1980        1985    1980         1985
Belgium                          9.1         13,8         3,9         4,7      - 4,5          0,6     -  9,9      - 8,6    76,1        116,0
Denmark                          6,7          9,1         8,2         3,9      - 3,7       - 3,4      -  3,3      - 2,9    33.5          68,6
Germany                          3.3          8,4         4,3         2,1      - 1,8          2,1     -  3,1      - 1,2    32.6         42,6
Greece                                        8,3        17.7        17,1          0,3     - 5,2      -  5,4      - 12,5   27.7          54.5
France                           6.4         10,7        12,2         5,7      - 1,4       - 0,5         0,3 '    - 3,2    25,0          35,9
Ireland                           8.2        17.1        14,2         6,1      - 12,0      - 3,3      - 11,8      - 11,5   85,9        124.3
Italy                            7.1         12,6        20,6         8,1      - 2,5       - 1,7      - 8,4       - 13,6   93,9        120.4
Luxembourg                       0,7          1,7         7,8         4.2                             - 0,8            2,1 13.6          15.6
Netherlands                      6.2         13.2         5,7         2.3      - 1,5          4,5     - 4,0       - 5,9    45,9         72,3
United Kingdom                   6,0         12,0        19.8         5,5          1,8        1,1     - 3,4       - 3,3    59.7          59.7
EUR 10                            5,8        11,2        12,6         5,1      - 1,3       - 0,5      - 3,5       - 5,2    50,5          64,3
Source : Commission services .
 ---pagebreak--- 31 . 12 . 85                               Official Journal of the European Communities                                No L 377 / 13
Over the five-year period , virtually all countries have seen a       sensitivity of the European economy to possible international
substantial build up in their stock of public debt . The levels       events . Indeed the past decade has seen a sequence of massive
however are very different . The gross stock of public debt in        world economic shocks : oil price rises , large exchange and
Germany , France and the UK appears to be of relatively               interest rate movements , debt crises . For the next few years
moderate size ( 40% , 30% and 60% of GDP respectively ).              potential external sources of disturbance would lie primarily
The debt levels of Belgium , Ireland and Italy are much larger        in the manner in which the process of correction of the US
(well over 100% of GDP ), and the interest rate burden in             external deficit and related budget deficit and exchange rate
these countries is now in the region of 20 to 25% of total            imbalance takes place , and a resurgence of the debt crisis . A
current public expenditure and some 10 % of GDP .                     large fall in the price of oilwould have positive and negative
                                                                      effects .
Virtually no country has avoided a very large rise in
unemployment which has thus become the most serious
imbalance in the European economy. As regards the other               Some very approximate orders of magnitude are given in
imbalances :                                                          Table 6 . It should be stressed , however , that in principle , a
                                                                      wide range of different estimates could be discussed ,
                                                                      depending on assumptions about particular circumstances
                                                                      and on different reactions in private markets as well as
— Germany has achieved a broadly satisfactory position,               official policies .
     but is accumulating an increasing current account
     surplus ,
— France and the United Kingdom have succeeded in                     The broad picture which emerges is that , as regards the level
     reducing these imbalance to more moderate                        of output in the EC , there are both negative and positive risks
     proportions,                                                     inherent in the potential disturbances considered , although
                                                                      the negative risks look on balance to be greater . As regards
                                                                      the rate of inflation there are possibilities for significant
— Italy has made considerable progress on inflation and               disinflationary impacts but none that appear likely to
     until recently on the balance of payments, but still has a       increase inflation significantly .
     grave public finance problem to overcome,
     the other countries are mostly in rather hetereogeneous
     situations, with success on some scores but problems on          The actual position in the United States and what
     others . Denmark has the most generally improved                 developments are likely over the medium term remain
     situation . Greece has problems on most accounts .               debatable . On this score it must be admitted that the degree
                                                                      of uncertainty on such matters as future US growth , its
                                                                      budget and external deficits , and the behaviour of interest
                                                                      rates and the dollar exchange rate is large . In the absence of
                                                                      any firm view , one can only resort to some stylized
                                                                      assumptions . Thus , for illustrative purposes , what might be
                                                                      judged to be a substantial budgetary contraction , or a
                                                                      substantial exchange rate depreciation would ( in the
                                                                      amounts specified in Table 6 ) lower the level of output in the
1.3 . Some risk factors in the medium-term outlook
                                                                      EC by amounts in the range of 0,75 to 1 ,25 percentage points
                                                                      for three years taken cumulatively.
Under the assumption of an approximately stable influence
from the rest of the world on the European economy , and
with broadly unchanged policies and economic behaviour in             Each element on its own would therefore represent a small
the Community , the Commission would except a rather                  but not trivial set-back to the European recovery . Taken
steady medium-term economic growth rate of about 2,5%                 together , however , the impact becomes considerable .
per annum in the EC on average for the rest of the present
decade . Inflation might stabilize at around 4% on average ,
with nominal GDP therefore growing by nearly 7% per
annum . Unemployment would not fall significantly , and
thus the central employment problem internal to the                   These estimates already take into account some decoupling
European economy would remain . There is little hope that it          of European interest rates from those in the United States (in
could be alleviated by the end of the decade .                        the sense of relatively lower European rates). The magnitude
                                                                      of such changes is hard to judge . However , if one supposed
                                                                      that an extra margin of 2 percentage points' reduction in
                                                                      European interest rates became possible , for example as a
However the assumption of a stable international economy              reaction to a very sharp weakening of the dollar , there might
may well not hold and before turning to the Community's               be a compensating boost to activity in Europe of around 0,66
domestic objectives and policies it is necessary to consider the      of a percentage point cumulatively over three years .
 ---pagebreak---  No L 377 / 14                                      Official Journal of the European Communities                                      31 . 12 . 85
                                   TABLE 6
                                                                                 Real incomes of companies and househoulds would gain on
                                                                                 the terms of trade , which would stimulate investment and
Sensitivity of the EC economy to changes in the world economic
                                  environment                                    consumption . However , oil and gas producers would lose
                                                                                 incomes . Western Europe produces a substantial part of its
                                                                        (In % )
                                                                                 own oil and gas ( taking production of the UK , the
                                         Impact on EC , cumulative total for     Netherlands and Norway as a share of EC and EFTA
                                              three years on levels of:          demand ). Exports to OPEC countries would surely
                                                                   nominal      weaken .
                                          output       prices        GDP
                                                                                The disinflationary impact would be considerable in the
US budget restriction in three
successive years of 1 % of GDP
                                                                                event of a substantial dollar exchange rate fall ( 2,5 % off the
per annum , cumulatively                   - V4        -   V2       - iv4       EC price level after three years with a 20% depreciation
                                                                                 againt the ECU ). The 20 % fall in the price of oil would also
US exchange rate depreciation
of 20% H                                   - 1V4       - 2V 2       - 3V4
                                                                                have a significant but smaller disinflationary impact .
US budget restriction and
exchange rate depreciation                                                       One of the main issues arising from these scenarios is how to
combined                                   -2          -3           -5          judge reactions to a simultaneous weakening in the EC of
                                                                                both output and inflation . In some of the hypotheses
Monetary conditions permitting
                                                                                discussed there would remain a significant reduction in
a 2% fall in European real
interest rates                             + 2/3                    +
                                                                                 aggregate nominal demand . Compensatory policy reactions
                                                                                would then need to be considered , especially in countries
Fall in oil price of 20% with                                                   which have already made good progress in reducing inflation
respect to the 1985 level                  +  2/,      -i           - v,
                                                                                ( see further below in relevant policy sections of this
(') With respect to the ECU and yen .                                           report ).
Source: Estimates of the Commission services .
                                                                                Potential disturbances in the international economy over the
                                                                                foreseeable future (adjustments in the US, a possible fall in
                                                                                the price of oil) point to the possibility offurther reductions
                                                                                in inflation in the EC. As regards the level of output there are
                                                                                different risks arising from negative and positive impacts
A substantial fall ( 20% ) in the price of oil would have a                     from the rest of the world; the negative risks seem to be
beneficial impact on conjunctural trends in the EC . ( The                      greater. In the event of external conditions transmitting
fiscal aspects of such a development are treated in Section                     disinflation and real contractionary influences to the EC at
III . 1.2 .) This is estimated at cumulating to 0,66% of GDP                    the same time, the question of the adequacy of nominal
over three years , but the margin of uncertainty here is wide .                 demand would arise .
                            II . A COOPERATIVE STRATEGY FOR MORE EMPLOYMENT CREATING GROWTH
II . 1 . The background and orders of magnitude                                 Recognizing the well-known limitations of model-based
                                                                                scenarios , present policies and trends are represented in the
                                                                                first column of Table 7 by a baseline assumption . In this
The principal theme of this report is focused on the prime
                                                                                initial entirely illustrative case GDP growth in the EC as a
necessity of renewed economic growth but of a character
                                                                                whole is seen to be stabilizing at around 2,5 % until the end
which will begin to create a significant number of new jobs
                                                                                of the decade , with inflation decelerating further to a little
and thus represent a step towards solving the problem of
                                                                                over 4 % and nominal GDP thus growing between 6,5 %
unemployment ('). Initially therefore , it is useful to outline
                                                                                and 7 % a year . Budget deficits would be further reduced ,
the medium-term prospect for Europe in the absence of any
                                                                                and money supply kept to near its present growth rate .
significant changes to international trends and to existing
                                                                                Labour productivity might increase by about as much as that
policy and behaviour . In other words how might the output ,
                                                                                observed during the last decade , at a little over 2 % per year .
employment and unemployment situations in Europe unfold
                                                                                Real wages might grow a little below 2 % , thus allowing for
if, at the broad macro-economic level , recent trends were
                                                                                some modest improvement in the share of profits in national
maintained . Projections of this nature , whilst difficult to
                                                                                income . Investment would be growing faster than GDP,
make , nevertheless are necessary as a means of assisting in the
                                                                                perhaps 5 % per year , reflecting some response to the more
policy judgement process .
                                                                                recent slowdown in the rate of technological advance and to
                                                                                the restructuring needs of the economy .
(*) Apart from the Programme for European economic recovery ,
      adopted in March 1984 , the European Parliament has advocated
      on many occasions an employment-generating investment effort              In these conditions the rate of return on invested capital
      ( see resolution of 16 April 1985 , OJ No C 122 , 20 . 5 . 1985 , p.      would not increase very substantially . In particular the cost
      57 , point 4 ).                                                           of labour relative to the rate of return on fixed capital would
 ---pagebreak--- 31 . 12 . 85                                      Official Journal of the European Communities                                             No L 377 / 15
not change markedly. Employment growth would be quite                             Given the improved situation with respect to budget deficits
modest, perhaps not quite 0,5 % per year, albeit better,                          shown in the baseline projection , a more obvious suggestion
however, than the recent record of stagnant or declining                          might be to adopt a policy of pronounced budgetary
employment . Unemployment might then decline only very                            expansion . Although this particular course is not the
slightly, maybe to 10,5 % by 1990 .                                               judgement of the Commission or the Council , it is
                                                                                  nevertheless useful to outline what this kind of policy might
The characteristics of this assumed baseline projection ,                         imply over the medium term .
although disappointing , are not unreasonable given the fact
that currently in Europe it remains questionable as to                            The second column of T able 7 illustrates the economic effects
whether the unemployment level has stabilized when the                            of a straightforward fiscal reflation option in which the target
economic growth rate is around 2,5 % . What the baseline                          for a significant reduction in the level of unemployment is set
projection underlines is the strong likelihood that it will                       at 8,5 % by 1990 . In this simple case , the instrument for
require a set of policy changes and behavioural changes to be                     achieving this is assumed to be a fiscal expansion with no
introduced and maintained if the growth path for output and                       other      constraints       observed       and      the international
employment is to be improved in a significant way .                               environment as in the baseline projection .
                                                                          TABLE 7
                  Some illustrative orders of magnitude in a baseline scenario and alternative policy scenarios , EC , 1986 to
                                                                             1990
                                                                                                           (annual average growth rates)
                                                                                      Fiscal                             ( EC scenario
                                                                    Baseline                          Cooperative           without
                                                                                     reflation          growth
                                                                    scenario                                             international
                                                                                     scenario           scenario
                                                                                                                         cooperation )
                  GDP , volume growth                                   2,5               3,4                3.5               ( 3,2 )
                  GDP deflator                                          4,2               5.4                3.7               ( 4,0 )
                  GDP , nominal                                         6,7               8,8                7.2               ( 7.2 )
                  Investment                                            5.0               5,1                6.6               ( 5,9 )
                  Employment                                            0,4               0,8                1,1               ( 1,0 )
                  Unemployment rate (')                                10,4               8.5                7,0               ( 7,4 )
                  Labour productivity                                   2,2               2.6                2,4               ( 2,2 )
                  Real wage cost                                        1,7               2,5                1,0               ( 1,0 )
                  Profit share in national income                       1.1           - 0,8                  3.8               ( 3.3 )
                  Budget balance ( 2 )                               - 3,8            - 7,1              - 4,0              (- 4,4 )
                  Rate of interest ( 3 )                               10,9              12,5                8.3               ( 9.4 )
                  (*) Percentage of total labour force at end of period .
                  ( 2 ) Percentage of GDP at end of period .
                  ( 3 ) Long-term rate of interest at end of period .
                  Source : Estimates of the Commission services .
                  Note :
                  — The 'baseline scenario' supposes the maintenance of present budgetary and monetary policies in the
                        Community , the absence of budgetary adjustment in the United States and normal growth of world
                        trade .
                  — The 'fiscal reflation scenario' comprises , for the budget deficit in the EC increased by as much as is
                        necessary to reach 8,5% unemployment by 1990 , other variables reacting endogenously ; the
                        international environment is the same as in the 'baseline scenario '.
                  — The 'cooperation growth scenario' comprises , for the Community , a moderate growth in real wages
                        until there is a significant fall in the unemployment rate ( 1988 / 89 ). The development of real wages then
                        moves gradually towards that of productivity per person occupied . Budgetary and monetary policies
                        maintain GDP at a level close to the baseline scenario ; while , outside the EC , the US reduces its budget
                        deficit , offset by expansionary action in Japan and some other countries , the dollar depreciates against
                        the ECU and , more substantially , against the yen . This scenario is explained in Section II . 5
                        below .
                  — The 'EC scenario without international cooperation' assumes the same economic policy measures in the
                        Community as the 'cooperative growth scenario'. On the other hand , the international environment
                        remains the same in the ' baseline scenario'.
 ---pagebreak--- No L 377 / 16                             Official Journal of the European Communities                                    31 . 12 . 85
What the projection shows is that to realize the employment          After the crisis years of 1974 to 1975 and the recovery in
target ( 8,5 % unemployment), the European economy                   1976 — years which were excluded from the estimating
would experience a continuously mounting increase in the             periods because of the extreme instability which they
budget deficit , which , for the EC as a whole , rises from          introduced into the results — a new relation was established
4,8 % of GDP in 1985 to 7,1 % in 1990 . Growth is increased          over the period 1977 to 1985 (R 2 ). This shows a shift of the
but so also is inflation which accelerates from 4,5 % in 1985        curve towards the left , i.e. a given economic growth rate is
to 7,1 % in 1990 . The projection period ends therefore with         paralleled by a larger increase in employment . However ,
a combination of accelerating inflation and public debt              because economic growth remained low during this period
burdens , after only a rather moderate reduction in                  ( increasing by an average of 1,8 % a year ), no growth in
unemployment . The momentum of accelerating inflation                employment resulted . The increase in the labour force was
and public debt burdens at the end of the period points to the       therefore reflected in an increase in unemployment . If the
prospect of further harmful interaction between the two . In         new relation established between growth and employment
short the policy would be unsustainable and have to be               were to prove stable , growth rates of 3,5 to 4,5 % a year
reversed . The introduction of an accompanying and                   would be sufficient to obtain the increase in employment
unavoidable stabilization policy would result in a renewed           necessary to reduce unemployment .
rise in the rate of unemployment .
                                                                     Graph 9 also illustrates the relation between employment
These two scenarios can be interpreted as useful reference           and growth resulting from the three scenarios presented in
points in the development of a feasible stragey . Neither a          Table 7 . Thus , annual average growth rates of GDP and
continuation of the existing state of affairs nor an isolated        employment over the period 1986 to 1990 are , in the case of
demand-based reflationary policy embody the ingredients              the basic scenario , situated virtually on the straight line R 2 .
necessary to secure the improvement in economic                      This means that , with no change in policies and behaviour,
performance desired .                                                the low economic growth rate associated with a fairly modest
                                                                     rate of increase in employment ( point D ) would be entirely
                                                                     consistent with the relation recorded in the last few years .
Model-based simulations for the medium term confirm that             The isolated fiscal reflation scenario would be reflected in
neither a scenario based on unchanged policies and                   faster economic growth and employment would increase
behaviour nor a simple fiscal reflation will lead to a               more or less according to the relation R 2 ( point E ). Lastly
sustainable acceleration of output growth and job creation .         the point corresponding to the cooperative growth scenario
They corroborate the results of other analyses which show            ( point F ) would be situated above the present relation : it
that neither a spontaneous development nor budgetary                 would clearly represent growth which was faster and which is
reflation would resolve the problem .                                more employment-creating . This third case is treated in more
                                                                     detail in Section II . 5 .
                                                                     Several elements can contri bute to the achievement of growth
11.2 . The need for more employment-creating growth                  which creates more jobs :
Current demographic fends and participation rates                    ( 1 ) a slower increase in real per capita labour costs
demonstrate that in order to bring the unemployment rate                   associated with an appropriate growth in demand ;
down from its present level of around 1 1 % to a level of some
7 % of the labour force between now and 190 , employment             ( 2 ) a continuing effort to improve the adaptability of all
growth iates of between 1 and 1,5 % a year would be                        markets ( labour , goods and services , capital );
necessary .
                                                                     ( 3 ) on the labour market , changes in working time and
                                                                           arrangements for introducing shorter working hours
Graph 9 provides a simple illustration of the relation between             which have no effect on production costs ;
the growth rates of employment and output in the
Community and the United States .                                    (4 ) wage differentials which give a more appropriate picture
                                                                           of the requirements for labour in different industries and
The relationship observed in the Community over the period                 regions , and with different skills.
1961 to 1973 (R 1 ) shows that , despite rapid economic
growth averaging 4,6 % per annum , the rise in employment            An adjustment process guided by these principles is capable
was very modest ( an average increase of 0,2 % ). If the             both of permitting growth which creates more jobs , but also
relation established for this period were still valid at the         of laying the foundations for a more satisfactory growth
present time , growth rates averaging over 6 % a year would          dynamic for the future , to the extent that it restores the
be needed in order to achieve the desired increase in
                                                                     economic conditions of supply .
employment . Such a growth rate would appear to be quite
out of reach in present circumstances . It should be noted ,
however , that the capital-intensive type of growth of the           Here it should be stressed that another essential feature is
1960s suggested by the graph was perfectly compatible with           markedly more sustained investment growth . The report has
the very modest growth in the labour force at . that time and        shown that , while growth performance remained modest,
permitted the maintenance of a very low unemployment rate            the economy was already beginning to run into capacity
(2 to 2,5 % of the labour force ).                                   constraints . Irrespective of the inadequacy of the level of
 ---pagebreak---  31 . 12 . 85                                     Official Journal of the European Communities                                         No L 377 / 17
 investment ( the investment share fell by 5 percentage points                      more generally to spend if they expect their markets to
between 1970 and 1985 ), it is probable that , following the                       expand and to be profitable . The trade unions will on the
shocks caused by energy prices , part of the existing stock is                     whole be much more receptive to calls for wage moderation if
obsolete and less efficient . Hence , if the adjustment process is                 they consider that such moderation will permit more growth
to create new jobs , it must be based on conditions propitious                     and employment . Governments will be more ready to cut
to new investment expenditure .                                                    taxes if they can see companies and trade unions working
Lastly , it is at least as important to create and maintain a                      together to improve productive capacity and hence the tax
social framework within which the changes deemed                                   base .
necessary are accepted and in which their implementation is
encouraged . Here , companies , governments , employees and                        After the re-examination of these questions in Sections II . 3
their trade unions have an essential role to play . Companies                      and II . 4 of this report , suggestions are made in Section II . 5 as
must carry out the job-creating investment which is                                to how to implement an integrated approach to the problems
necessary . They will be all the more inclined to invest and                       posed .
                                                                        GRAPH 9
                                                  Relationships between growth and employment (')
                    ( 1 ) The lines R 1 , R 2 and R 3 summarize the observed association between the growth of employment and
                          the growth of real output . The length of each line is restricted to the extreme observations . R 2 only has
                          been extended as a dotted line in order to indicate how , on the basis of more recent experience ,
                          employment in the European economy might evolve if growth performance were to improve .
                          A = Average of 1961-1973                        +  4,6   %  GDP ;     +  0,2 % employment
                          B = Average of 1977-1985                        +  1,8   %  GDP ;     -  0,03 % employment
                          C = Average of 1966-1985                        +  2,9   %  GDP ;     +  1 ,9 % employment
                          D = Basic scenario :                            +  2,5   %  GDP ;     +  0,4 % employment
                          E = Fiscal reflation scenario :                 +  3,4   %  GDP ;     +  0,8 % employment
                          F = Cooperative growth scenario :               +  3,5   %  GDP ;     +   1,1 % employment
                          The coordinates of points D , E and F are taken from Table 7 .
                          For the United States the apparently favourable positioning of the line R 3 is influenced by specific
                          demographic considerations . The active population has been growing at a rate of more than 2% per
                          annum . Between 1 960 and 1970 , however , the unemployment rate was always higher than in Europe .
                          It is only since 1980 that unemployment in Europe has constantly exceeded that in the United
                          States .
 ---pagebreak---  No L 377 / 18                                 Official Journal of the European Communities                                        31 . 12 . 85
 Performance in creating jobs in the Community has been                       noting that there is a corroboration of evidence from
generally poor for 25 years. However the model of                             statistical estimates for the industrial and manufacturing
 capital-intensive growth developed in the 1960s was                          sectors , as well as from surveys of industrialists' opinions .
appropriate for that period, because the low increase in                      The argument is also supported in comparisons with the
 employment was paralleled by the small growth of the labour                  United States , where the use of labour and capital has been
force, so that unemployment could be kept at a low level.                    rather more even-handed than in Europe .
 Times have changed and in response to the poor growth
outlook, it is urgent for the unemployment curve to be                       Much of the more conventional analysis of productivity
reversed. The problem is to achieve economic growth which                    appears deceptively comfortable from a European point of
is both faster and also creates more jobs . The main points of               view . As Graph 10 shows , labour productivity in Europe has
the economic policy to be implemented in order to attain this                risen much more strongly than in the United States . The
objective have been clearly identified. Essentially they                     graph also provides information on the trend in capital
combine a moderate growth of wages with the right degree of                  productivity ( output per unit of capital stock ). This
support for demand and must be accompanied by improved                       progressed during the 1960s at a moderate rate in the United
adaptability on all markets . It is therefore the conditions for             States and weakened thereafter . In Europe capital
the cooperative implementation of this policy which must                     productivity declined markedly all through the period 1960
now be considered.
                                                                             to 1985 . In other words capital intensity ( i.e. the amount of
                                                                             capital used per person employed ), appears to have risen
                                                                             steeply in Europe alongside the trend in labour productivity ,
II . 3 . Labour, capital and technology                                      whereas both have grown less strongly in the United States .
                                                                             Thus a comparison of labour cost increases with labour
There is now a strong suspicion that the mix of capital and                  productivity growth will be misleading in a period when a
labour used in the European productive process has become                    major part of labour productivity growth is the result of an
biased too much against the use of labour . The stagnation of                increasing labour-saving bias in investment. If increased
employment as we have observed is an uncontested fact .                      productivity growth results from a decline in employment , or
Evidence has also built up showing an increasingly distorted                 an insufficient increase in employment with respect to the
use of capital for labour-saving rather than for capacity                    growth of the labour force , the labour force as a whole is not
expansion . Whilst there are many data problems , it is worth                reaping the benefits of these apparent productivity gains .
                                                                   GRAPH 10
                   Labour productivity , capital productivity and capital intensity in the four main Member States and the
                                                           United States , 1960 to 1985
                                                              Indices 1960 = 100
                   Labour productivity : real GDP per head of occupied population .
                   Capital productivity : real GDP per unit of capital stock .
                   Capital intensity : capital stock per head of occupied population .
                   Source : Commission services .
 ---pagebreak---  31 . 12 . 85                               Official Journal of the European Communities                                 No L 377 / 19
 Increases in capital per employee are regarded naturally as a
desirable thing and experience through the 1960s suggests              in the efficiency of its investment , perhaps for some
that the growth of capital per employee did yield a reasonably         considerable time . The implication is that new investment
acceptable growth of GDP and output per employee. A                    has not provided the contribution to production capacity
                                                                       needed .
question which arises , therefore , is why capital accumulation
in Europe , particularly from the 1970s onwards , has not
                                                                       In summary , the position reached in Europe , therefore , is one
generated more employment . There is little doubt that energy          where there has been too much emphasis on labour-saving
price increases reduced the net worth of the existing capital          investment ; but , induced by poor profitability , the economy
stock . Action by governments to control inflation with
                                                                       is faced with a shortage of investment for new capacity . In the
restrictive policies also led to under-utilization of capacity .       low efficiency situation , the gap between the marginal
Looked at over the longer term , however , another important           product of capital and the real interest rate is too large .
part of the answer is that these trends have been accompanied
by a sustained deterioration in the profitability of or return to      Since the early 1980s there has been some correction of these
investment and , related to this , a marked increase in the real       trends . The trend growth of real wage costs has moderated to
reward to labour relative to that of capital ( see Graph               1 .0 % per annum over the period 1983 to 1985 compared to
11 ).                                                                  2.1 % for 1974 to 1982 and 4,4 % for 1961 to 1979 . The
                                                                       rate of return on the gross capital stock is estimated to have
Three other factors which may help in an explanation are ,             increased somewhat from its low point at the beginning of the
firstly , the existence of labour market rigidities which may          1980s following the second oil shock , but this is still a long
have impeded the effective working of the labour market in             way below the level observed in the 1960s when there was a
the face of rising employment costs . Secondly , the conscious         faster rate of growth of the capital stock ( see Graph 12 ).
policy on the part of governments to increase taxes on
labour , particularly social security contributions . Non-wage
costs in the Community have risen by around 0,5 of a                   Investment has begun to pick up in 1984 and 1985 , but from
percentage point per annum over the past two decades .                 a very low base . As noted , however , the increase in the rate of
Thirdly , the need to exercise control over inflation and the          capacity utilization in industry has continued through the last
necessary non-monetary financing of budget deficits has led            12 months , rising from 79 % in the middle of 1984 to 82 %
to a high real interest rate in the Community . Taken                  in 1985 . Given this supply constraint , if the potential rate of
together , these factors have produced a sustained                     growth of the European economy is to be significantly
deterioration in the profitability of investment . Reference to        increased , there will have to be a major investment effort and
Graphs 11 and 12 indicates that there is a strong association          one orientated away from labour saving and more towards
between rates of return and growth of the stock of                     capacity extension . This in turn implies that the recent
capital .                                                              improvement in the relative reward to capital as compared to
                                                                       labour will have to be continued for a considerable number of
The increased relative real costs of employment and                    years . Such a trend would , of course , be more readily
weakened profitability of fixed capital has tended to make             accepted as part of a social consensus if the economy were
labour-using or capital-widening investment increasingly less          seen to be moving onto a more favourable growth path and at
attractive relative to the more capital intensive methods of           the same time creating more employment . This raises a
production . Overall , the decline in capital productivity and         question of an appropriate demand development which must
fall in rates of return in Europe point to a pronounced decline        go on in parallel with small increases in real wages .
 ---pagebreak--- No L 377 / 20                                  Official Journal of the European Communities                                             31 . 12 . 85
                                                                GRAPHS 11 and 12
1 1 . Relative rewards of labour and capital                                          12 . Rates of return and growth of the capital stock
      Constant prices — indices I960 = 100 )                                               Constant prices
                    ( u) Compensation of employees per wage and salary earner , including an estimated labour income of the
                         self-employed , assumed to be equal to the compensation of employees per wage and salary earner .
                   ( 2 ) Net operating surplus , excluding estimated labour income of the self-employed , as a % of the gross
                         capita ! stock .
                   ( 3 ) Relative reward of labour and capital = Labour income per head of the occupied population / Net rate
                         of return on the gross capital stock .
                   ( 4 ) Three-year moving average .
In this context , the role of technological innovation and the                The structure of the economy has become biased too much in
growth of technical progress more generally is particularly                  favour of capital-deepening and labour-saving investment,
important . There is some evidence now that the pace of                      so that there has been insufficient capacity expanding
technical advance in Europe weakened during the 1970s .                      investment.        This seems due in           no small measure to
Contrary to some beliefs , this will have weakened rather than               inappropriate relative factor price trends, with declining
helped the employment situation . Whilst the process of                      profitability matching weak overall investment and rising
technical advance necessarily involves the elimination of                     labour costs matching stagnant employment. More
obsolete jobs , it also creates new jobs in industries that make             appropriate relative factor prices could see advanced
and use the technologies . Some of the more important recent                  technology help achieve higher potential output and
technological improvements , information technology for                      employment growth .
example , have a strong capital-saving and labour-using
dimension . The pace and nature of technical progress ,
however , is not invariant to relative prices in markets for                 II . 4 . Pay, profits and jobs
labour and capital . If real wages rise too much relative to the
rate of return on fixed capital , this might be expected to                  During the course of the last year , the Economic Policy
induce more innovations of a labour-saving kind . A more                      Committee of the EC concluded an examination concerned
appropriate structure of real employment costs and rewards                   with the adequacy of the return on fixed capital in the
to fixed capital will help to avoid this kind of bias . So long as            Community ( 1 ).
advances in technical knowledge improve the efficiency of
investment and working methods there will be less need to                     (•) Economic Policy Committee of the EC , 'Profitability and the
slow down real wage growth in order to achieve a given                             rate of return in the Community', report to the Council and
employment objective .                                                             Commission ( Doc . II / 02 / 85-E final ) May 1985 .
 ---pagebreak--- 31 . 12 . 85                                 Official Journal of the European Communities                                No L 377 / 21
The Committee observed that the rate of return on invested              employment . This issue of course poses considerable
capital , which is the most significant indicator of                    problems in the context of centralized wage bargaining;
profitability , declined in the 1960s and the 1970s in the              the appropriate balance between centralized versus
Community . In 1984 the net rate of return on the net capital           decentralized negotiation is an important topic of dialogue
stock in the EC is estimated on average to have been 4,2%               between the social partners . Some evidence on the
( see Graph 14 ), which compares with 11 % in the 1960s ( on            significance of inter-sectoral real wage flexibility for the
the basis of the definitions used in Graph 14 ). This decline in        employment-creating performance of the economy is
the rate of return , however , appears to have been arrested in         suggested in a recent work ( J ). While interpretation of this
the more recent past , as the rate of increase of real wages            kind of evidence must be made with caution , it does appear
moderated to an annual average growth of 1 % in the period              to be the case that EC countries have shown a relatively low
1983 to 1985 ( compared with 2,1 % in the period 1974 to                real wage flexibility , both inter-sectorally and at the
1982 and 4,4% in the period 1961 to 1973 ). Nonetheless ,               macro-economic level , this running alongside increasing
the recovery of the rate of return , while variable across              unemployment .
countries , has on average been very modest when compared
with the levels observed during periods of faster growth in
Europe .
                                                                        It is crucial importance that a greater consensus be reached
                                                                        over how these several difficult issues of pay , profits
The wage share in national income in Europe has fallen back
                                                                        and employment performance should be handled in the
closer to the levels observed at the beginning of the 1970s ,
                                                                        Community in the years ahead . European countries must no
and the profits share has increased correspondingly .
                                                                        doubt find solutions which can be adapted to the particular
However , this change in income distribution has merely
                                                                        political and social traditions , whilst taking full notice of
matched the change in capital-labour mix . This explains why
                                                                        the ingredients of successful employment performance
the rate of return on fixed capital has hardly increased , and          elsewhere . In this connection the role of more novel modes of
why therefore there remains a problem of insufficient
                                                                        pay determination could be examined , including for example
profitability in Europe .
                                                                        a larger component of profit , bonus or performance-related
                                                                        pay . In pay systems which embody some of these
                                                                        characteristics , employees could have some measure of
While    there   are  serious   statistical   difficulties   in the
                                                                        guarantee against excessive swings of the pendulum in favour
measurement of profitability of fixed capital , there exist also        of returns to shareholders . Moreover , the employer would be
other criteria for judging the level of profits and wages ,             more prepared to recruit extra staff in the knowledge that
notably in the investment and employment performance of                 labour costs were more flexible . In view of the need for a
the economy . High real wage growth through the 1970s has               period of faster investment and higher profitability , it could
contributed to a weak investment performance accompanied                also be helpful to foster a climate of wider participation
by an unfavourable investment mix .                                     on the part of employees in schemes for capital
                                                                        accumulation .
In the judgement of the Economic Policy Committee , the
great majority of Member States do still experience a level of
profitability on fixed capital that is , in most sectors , probably
too low from the standpoint of fostering sufficient                     Wage moderation in recent years has allowed the decline in
investment and employment growth . Sustained moderate                   profitability of fixed capital to be arrested. However,
increases in real wages coupled to adequate demand growth               profitability is still too low for the purpose of achieving
would , of course , lead to the desired overall increase in the         higher investment and employment growth . Real wage
rate of profitability of fixed capital . An example of the very        flexibility in the EC, both at macro-economic and sectoral
positive response of employment and investment to real wage             levels, is also rather low and apparently related to the
moderation and improved profitability is being seen                     weak employment propensity in the European economy.
currently in Denmark where , in a small open economy , the              Therefore real wage moderation, ofa kind actually witnessed
increase in exports has provided the necessary demand                   in most Member States in the last four years or so, needs to
stimulus .                                                              be sustained for a period of years ahead until a substantial
                                                                        and continuing reduction of unemployment is achieved.
                                                                        Employers for their part must ensure that the necessary
The case exists therefore for an adjustment to be sustained             investment is forthcoming. Within a broad framework of
for several years . Indeed , it may well be necessary for real          concertation between the social partners there are three
wage growth to remain very modest and below the growth of               particular areas of concern: (i) how governments might
labour productivity , as long as unemployment has not fallen           formulate the necessary demand policies to accompany wage
significantly . However , this would need to be accompanied             moderation agreements; (ii) the adjustment of relative factor
by an appropriate evolution of demand sustained                         prices and attainment of employment objectives; (iii) the
progressively in part by spending on new private                        scope for new modes of wage determination designed to
investment .                                                            attain more readily the objectives of high employment.
The issue of wage differentials , and flexibility in real wage          (*) OECD , 'Labour market flexibility and external price shocks',
evolution is also relevant in the pursuit of a higher level of               ESD working paper No 24 , September 1985 .
 ---pagebreak--- No L 377 / 22                              Official Journal of the European Communities                                      31 . 12 , 85
II. 5 . A cooperative medium-term growth strategy                     It is envisaged that the implementation of a growth strategy
                                                                      of the above kind would require an undertaking by both
                                                                      employers and trade unions to hold the evolution of real
The earlier parts of this section of the report have attempted        wages to the course of moderation witnessed in recent years
to provide what are in effect building blocks for a suggested         for a further period until a sufficient reduction in
strategy aimed at securing a substantial and employment­              unemployment is achieved . It should be examined in the
creating growth . Given this earlier discussion , the judgement       wage-profit-investment-employment nexus whether there
in this report is that the possibility of realizing such an           could be a role for wages having a larger flexible and more
outcome will depend heavily on a small number of                      profit-related component . This could help boost
particularly important conditions but set within a                    employment by making labour less of a fixed cost . In present
cooperative framework . Particular emphasis is placed on the          conditions , such an initiative would serve also to assist an
contribution required from the different actors for the               investment upswing , by enabling companies to rely less on
purposes of improving the profitability of capital , providing        external sources of finance .
aggregate demand support and thus generating the
investment necessary for growth of a more
employment-creating kind .
                                                                      The Community could give a boost to a cooperative strategy
                                                                      by initiating measures to improve the supply side of the
                                                                      economy which , at the same time , have demand effects .
Within this cooperative framework , the recent moderation in          These could consist of initiatives to accelerate completion of
most countries in the rise of real employment costs, after a          the internal market , develop a programme of European
period of strong increases , must be maintained . It is clear that    infrastructure and environmental projects , rapid advance of
those countries which have not yet achieved the degree of             the proposed European technological community , and
moderation required must make efforts to do so . Associated           agreement with other countries to launch the new GATT
with this is the need to encourage a more even-handed                 round of trade liberalization . A rapid run-down in
evolution of the relative rewards to labour and capital . Over        sector-specific subsidies and intra-Community protective
the medium term , a reduction in the costs of employment              practices by governments would open up the way for
relative to those of new investment will begin to change the          reductions in taxes . Employers ' organizations would be
investment mix and hence reverse what is now thought to be            expected to react favourably to these measures . Employers'
an excessive amount of capital deepening and shedding of              organizations could also promote support in the private
labour .
                                                                      sector for a set of important European infrastructural
                                                                      projects and for an accelerated opening of the European
                                                                      internal market . They could give more urgent attention to the
Over the shorter period , a more moderate growth of real              adaptation of investment and employment plans in the light
wages will tend to increase the profitability of firms .              of the expected change in wage-profit relations and the
However , since wage incomes form such a large part of total          opening of market opportunities .
domestic income , to a degree there is likely to be an adverse
effect on demand . Given the starting point which is one
where there is some evidence of capacity constraints already ,
the link between expected future profitability of investment          As regards demand-side policies , governments would be
and spending on new investment for capacity expansion is              expected to ensure the maintenance of sufficient demand
important . To the extent that total demand is reduced more           over the medium-term in order that the supply-side
by wage moderation than investment is increased because of            responses , particularly new jobs , be realized . In the event of a
improved profits , it will be necessary for some aggregate            weakening of demand , for example because of the wage
demand-sustaining measures on the part of governments to              moderation proposed or international price or demand
be effected if the desired employment response is to be               shocks , governments would be able to exploit room for
realized .                                                            manoeuvre thereby created for economic policy . In 1986
                                                                      initiating contributions to a cooperative strategy could take
                                                                      the form of advancing public infrastructure programmes and
The way in which the market for labour is able to respond             tax reductions where possible , leaving further fiscal measures
occupies a central place and in this respect the adaptability         open for 1987 and 1988 depending upon progress in the
and functioning of labour markets has been identified as a            overall strategy .
problem area in Europe . Factors such as job tenure and
severance conditions , more flexible use of working time , the
adequacy of professional training , the relation of wage              The macro-economic effects expected if a policy stance of the
differentials to labour needs in different sectors , regions          kind outlined can be summarized briefly in terms of a stylized
and skills and the growth of non-wage costs should be                 model-based simulation exercise of the kind described in
re-examined in order to improve market efficiency without             Section II . 1 .
jeopardizing social protection .
The elements noted above constitute the essential core of the         A Cooperative growth scenario is constructed whereby it is
approach , a characteristic of which is that total demand has         assumed that Community countries pursue jointly a policy of
an important supporting role rather than one of leading in the        sustained wage moderation . In the simulation it is assumed
growth process .                                                      that both monetary and fiscal policy operate so as to
 ---pagebreak--- 31 . 12 . 85                                 Official Journal of the European Communities                                No L 377 / 23
maintain aggregate nominal demand close to its baseline                 Labour productivity grows on average only a little faster than
growth path . Declining inflation and wage costs contribute             in the baseline assumption in spite of the much more
to a faster increase in real money stock . Outside of the               substantial acceleration of growth from 2,5 to 3,5 % . This is
Community , it is assumed that the United States reduces its            the result of a gradual but widely diffused shift in the
budget deficit with some offsetting expansionary action                 labour / capital mix in the economy . Faster growth and a
being taken by Japan and the rest of the world . Action in the          gradual change in the labour / capital mix combine to give the
United States makes it possible in particular for Europe to             favourable results for employment and unemployment .
reduce nominal and real interest rates which stimulate
private investment directly and help to reduce public                   The macro-economic model simulation cannot take account
expenditure for debt-servicing purposes . In this context ,             of,   or describe ,    the  detailed    sectoral  evolution   of
some moderate expansion of public investment and                        productivity . However , such productivity growth might be
reductions in taxation are compatible with the desired                  expected to have some of the following characteristics . For
control of budget deficits , largely because of the impact of           those who are already in employment , one can assume a
higher growth on budget revenues and the lower interest                 reasonable high skill level , that their productivity
rates . In the case of a less favourable assumption about the           performance will also be high and , when combined with the
international environment , some additional demand support              anticipated new investment , may well increase . Of those
would be necessary to obtain the desired reduction in                   entering employment , the younger entrants will be largely
unemployment .                                                          unskilled and require a period of training. Over this time ,
                                                                        their productivity contribution will certainly be low . The
The results of a simulation of a cooperative strategy of this           same will be true for people who have been unemployed for a
kind , on an internal and international level , are illustrated in      long time .
the third column of Table 7 and Graph 13 .
                                                                        In summary , the simulation as constructed implies that a
The major feature is that the initiatives proposed , if                 fulfillment of the conditions outlined could lead the
implemented , offer the prospect of a growth rate of 3,5%               European economy on to a growth path which has some
between 1986 and 1990 being associated with an average                  characteristics of a 'virtuous circle'. Higher profitability and
employment growth of 1 ,1 % . Indeed , in the final year of the         demand support generate the investment and output growth
projection , output grows by 3,5% and employment                        sufficient to absorb new jobs on a scale which reduces the
increases by 1 ,5 % . This reduces the unemployment rate in             pool of unemployed . Stronger growth , increased
1990 to 7% . This development could be sustained after                  employment and lower unemployment in turn , improve
1990 and therefore opens up the perspective of a further                public sector deficits by more revenues and less crisis-related
substantial reduction in unemployment .                                 expenditure , and this contributes , with increased
                                                                        self-financing of enterprises , to produce lower interest
The assumed policy of wage moderation with demand                       rates .
support reduces the rate of inflation and increases company
profitability . This induces a rise in private investment of over       Even so , there are some factors which are not modelled in the
6,5% which , over the simulation period , is sufficient to              scenario and which could generate further improvements in
overcome capacity constraints at the macro level .                      the economy's performance . These include various
Significantly , the public sector deficit measured as a                 supply-side improving measures that have been taken in
percentage of GDP is on average little different from that in           recent years in many countries , but which take a long time to
the baseline projection .                                               bear fruit . Improved market adaptability with cost neutral
                                                                        reorganization and reduction of working time and the
It should be noted that the growth rate of 3,5 % on average as          accelerated realization of the EC internal market , as now
simulated is not to be judged as excessive when seen against            proposed , would add to growth and employment . Lower oil
the background of a considerable increase in productive                 prices also ( as mentioned in Section 1.3 ) could help boost
capacity during this adjustment phase .                                 activity in the world economy more generally .
 ---pagebreak--- No L 377 / 24                            Official Journal of the European Communities                                 31 . 12 . 85
                                                             GRAPH 13
                Some illustrative orders of magnitude in a baseline assumption and alternative policy strategies, EC,
                                                            1985 to 1990
            GDP volume                                                             GDP deflator
            GDP nominal                                                           Unemployment rate
 ---pagebreak---  31 . 12 . 85                            Official Journal of the European Communities                                No L 377 / 25
                                                      GRAPH 13 (continued)
                       Budget deficit                                                     Long-term rate of interest
                                                Investment share ( gross ) ('j
                                             Real wage per head ( yearly rate of change )
(*) As a % of GDP market prices .
Source: Eurostat , Commission Services .
 ---pagebreak---  No L 377 / 26                             Official Journal of the European Communities                                     31 . 12 . 85
 The strategy thus depends heavily on the mutual supporting           event, the gains to real output would also be significant. The
 action of the major partners — employers , trade unions and          core elements, namely a temporary moderation of real
 governments . There must be a conscious will to both ensure          employment costs, relative factor price flexibility, and
 the desired supply response on the one hand , and to ensure           nominal demand support are highly interdependent.
 that the nominal demand is sufficient to absorb this supply on       However, an important contribution will also be provided by
the other .                                                           extensive improvements in the functioning of labour, goods,
                                                                      services and capital markets and notably in the EC internal
A policy strategy is suggested, for discussion by the social          market in many fields . The implementation, success and
partners and government, designed to raise employment                 credibility of the adjustment strategy rests, however, on a
growth and reduce unemployment very substantially over               joint willingness by all parties to ensure that the necessary
the medium term . If pursued, it is conceivable that                  conditions are met with a step-by-step implementation
unemployment could fall to about 7% by 1990 and, in this              starting in 1986, extending over several years.
                          III . ECONOMIC POLICY IN THE FRAMEWORK OF A COOPERATIVE GROWTH
                                                               STRATEGY
III . 1 . Public finances                                             The reasons why the scale of both public expenditure and
                                                                      taxation can influence economic growth and employment
                                                                      over the longer term are extremely complex . However, three
III . 1.1 . The public sector                                         channels of influence can be identified which create the
                                                                      possibility of risks to the achievement of an efficient
                                                                      economic performance .
Last year's Annual Report advocated a reversal of the
mounting share of public expenditure and taxation in the              As the taxation on labour income rises , so also does the
gross domestic product of the European Community . Recent             difference or 'wedge' between what an employee costs to the
estimates by the Commission suggest that the previous trend           employer , and what the employee receives as net-of-tax
is now being checked if not reversed . The volume of public           income . Higher labour costs tend to reduce the demand for
expenditure is expected to grow by under 1 % in 1986 . Total          labour and therefore private employment . Further , in so far
public expenditure in the EC as a share of GDP is estimated to        as lower net-of-tax incomes induce wage earners to claim
decline slightly from 51,9 % in 1984 to 51,5 % in 1985 , and          higher wages in compensation , this will create inflationary
then more substantially to 50,8% in 1986 . Similarly , the            pressure and worsen employment prospects again when this
total tax burden is estimated to be declining , although by a         inflation has to be reversed . Higher taxation on wage income
somewhat smaller margin , because of budgetary                        helps also to account for the increase in the price of labour
consolidation . Total taxes amounted to 46,4% in 1984 , are           relative to capital and hence the increase in the capital-labour
expected to be 46,3% in 1985 and 46,0% in 1986 .                      ratio observed in the 1970s , and noted earlier in this report .
                                                                      The increase in this taxation 'wedge' has been pronounced in
                                                                      most European countries over the last two decades , as
Given institutional differences in the organization and extent        compared with experience in the United States and Japan .
of the public sector , such highly aggregated data must be used       For example , between 1960 and 1983 , the difference
with caution , especially in inter-country comparisons . Some         between gross and net wages expressed as a percentage of net
summary comparisons between the EC and US are shown in                wages grew on average in the four larger EC countries from
Table 8 which point to similarities as well as differences            36 to 60% . In the United States over this same period , the
between the two economies . Government consumption                    increase was from 29 to 37% .
expenditures , for example , stand in both cases at about 19 %
of GDP , and the weight of direct income taxation is also
similar at about 13,5% of GDP . The higher level df                   A second channel concerns the efficiency and value of public
government capital formation in Europe no doubt reflects              services . If wage earners perceive public services and
the wider extent of public intervention in certain services , for     transfers to be giving good and fair value , there will be a more
example transport and health . Striking differences arise in          ready consensus over accepting the tax burden implied .
the magnitude of government current transfer payments                 Inefficient and unduly extensive transfer payment systems on
                                                                      the other hand will tend to undermine such a consensus and
which reflect the greater involvement of government in the
provision of health and social security . Social security             thus lead to higher wage pressure with detrimental effects on
contributions in Europe as a percentage of GDP are                    growth and employment.
correspondingly higher than those in the United States . The
EC average tax and social security burden , however , covers a       A third channel of influence occurs when public borrowing
considerable range ; in 1985 for example , from around 55 %           rather than taxation is used to finance current public
in Denmark and the Netherlands to 41 % in the United                  expenditure . Here , given the need to pursue anti-inflationary
Kingdom and 35 % in Greece .                                          policies , the deficits should not be financed by money
 ---pagebreak--- 31 . 12 . 85                                       Official Journal of the European Communities                                     No L 377 / 27
creation . The impact on performance will thus operate                          is a presumption that in Europe the rapid growth of public
primarily through a higher rate of interest . In so far as this                 expenditure and changes in its composition together with the
reduces private investment it will harm the growth of                           evolution of the tax burden has had detrimental effects on
productive potential .                                                          economic performance when measured over the longer term .
                                                                                The fact that the Community is beginning to reverse some of
Although the timing and nature of the final incidence of these                  the trends observed indicates an awareness of these
effects on economic performance are highly uncertain , there                    possibilities and this is to be encouraged .
                                                                       TABLE 8
                       Level and structure of public expenditure , receipts and public debt in the United States and the EC
                                                                                                                    (% or % of GDP)
                                                                         United States                        Europe
                                                                      1970           1982        1970          1982         1985
                   A. General government expenditure,
                         total                                         32,8           37,6        37,9          51,2         51,5
                         ( 1 ) General government capital
                               formation                                2,5             1,5        4,2           3,0          2,8
                         ( 2 ) Net capital transfers                 - 0,5         - 0,3           0,8            1,0         1,1
                         ( 3 ) Government final consumption
                               expenditure , total                     19,2            18,7       15,3          19,3         19,2
                         ( 4 ) Subsidies                                0,5             0,5        1,8           2,3          2,4
                         ( 5 ) Interest payments                        2,3             4,5        2,0           4,7          5,3
                         ( 6 ) Current transfers                         8,3           12,4       13,8          20,9         23,1
                   B. General government receipts, total               31,0           33,6        38,2          45,8         46,3
                         ( 1 ) Indirect taxes                            9,5            8,5       13,9          13,5         13,8
                         ( 2 ) Direct taxes                            13,9            13,6       10,3          13,0         13,2
                         ( 3 ) Social security contributions *          4,7             6,8       11,0          15,4         15,5
                         ( 4 ) Other current receipts                   2,9             4,7        2,9           3,8          3,8
                                                                      1971           1982        1971          1982         1985
                   C. Public debt
                         ( 1 ) Gross public debt                       26 , in        28,5 ( 1 )  47,8          57,5         64,3
                         ( 2 ) Net public debt                                                    14 ,7 ( 2 )   26,3 ( 2 )   33,4
                   D. General government share
                         in total employment, %                        18,1            16,7       13,7          17,5
                   E. General government financial
                         balance (in % of GDP) ( 3 )                 - 1,8         - 3,9           0,3        - 5,6        - 5,2
                   (*) Federal government .
                   ( 2 ) Average for EUR 5 ( D , F , I , UK , DK ).
                   ( 3 ) Projected financial balance for 1985 for the United States : - 3,7% of GDP .
It is highly unlikely that economic performance is invariant to                 III . 1.2 . Taxation policy for economic growth
both the weight and shape of the public sector. Undesirable
consequences can follow from the difference between gross                       There are a number of ways in which taxation policy can
and net incomes, a weakening of social acceptance of the tax                    contribute to a strategy aimed at higher growth of a more
burden and the effects of public debt on capital formation .                    employment-creating nature .
There are signs of increasing awareness in the Community
that these are real problems, and the observed tendency to                      One question is whether such a strategy could be furthered by
begin a reversal of earlier trends is to be welcomed.                           means of increased incentives and subsidies for investment .
 ---pagebreak--- No L 377 / 28                              Official Journal of the European Communities                                      31 . 12 . 85
This has been discussed extensively in the relevant                   There are several ways in which taxation policy can
Community bodies during the last year. The predominant                contribute to a strategy for higher growth and more
judgement is that the experience of trying to stimulate growth        employment-creating growth: (i) a switch in emphasis away
through increased specific investment subsidies has been             from specific fiscal incentivesfor investment, which will help
rather disappointing . Although a sustained increase in               to foster employment and enterprise profitability; (ii)
investment spending is needed now as part of a growth                 reduction of industry-specific subsidies coupled with general
strategy , it is felt that inducement of this through the             tax reductions; (Hi) reduction of other specific tax offsets
introduction of specific investment incentives creates the risk       accompanied by lower tax rates; and (iv) in the event of an
of worsening any trend in the direction of capital-deepening          energy pricefall, the raising ofduties or taxes on energy could
and labour-saving activities . Given the present condition of         provide room for manoeuvre for employment creation.
the European economy , with its notably poor employment
record , it may be desirable to create conditions which are
more even-handed with respect to business expansion . Any
feasible tax concessions should therefore be used primarily to
cut labour costs , so improving the profitability of private          III . 1.3 . The role of public debt
enterprise in order to initiate a more balanced mix of
labour-using and labour-saving investment .
                                                                      Fluctuations is budget deficits and public debt can have
                                                                      important effects on both supply and demand conditions in
A related issue is whether public deficit considerations              the economy . However , these are not easy to define in a
permitting faster progress in the reduction of both subsidies         simple way . Rising public debt burdens tend to increase the
and taxes in various sectors of the economy could be made .           rate of interest and , other things being equal , depress private
There are some persuasive reasons for doing this. Notably , it        capital formation . This interest rate effect , however , need
will help to re-allocate resources from the more stagnant or          not necessarily be a dominant factor since , under certain
declining sectors to the more productive and growing sectors          conditions , budget deficit movements can contribute
of the economy . This is an area of policy where the                  positively to economic growth . If an appropriate policy
responsibilities of the European Community itself are                 succeeds in raising the potential output of the economy, a
considerable , in competition policy in general and in some           temporary rise in borrowing may increase demand , in a way
specific sectors ( see further below on agriculture , steel , and     which matches broadly the increased potential tax base of the
shipbuilding). A mutually reinforcing action by the                   economy . The structural public debt burden , as measured ,
Community and Member States is needed to effect a more                for example , by the medium-term value of public debt as a
rapid series of tax cuts and of subsidies , so adding a further       percentage of GDP , may then not rise .
dynamic element to the economic strategy .
                                                                      What level of the public debt burden might be judged
                                                                      appropriate depends very much on specific economic
In the same class of ideas , but this is clearly a matter of          circumstances . However , at very high levels of the public
national competences , is a detectable notion of tax reform .         debt burden , such as around 100% of GDP or more , as
Examples are seen currently in the United Kingdom ,                   currently is the case in Belgium , Ireland and Italy , the serious
Denmark and other countries . What is envisaged is that a             economic problems caused by excessive borrowing and the
simplification of existing tax systems , through the                  resulting debt burden become quite obvious . Interest
elimination of the numerous tax offsets and advantages for            payments on the public debt can reach 10 % or more of GDP ,
special purposes especially in the income taxation of persons         and account for 20 to 25 % of public expenditure . The rate of
and companies , will enable basic rates of taxation to be             interest itself is , under conditions of non-inflationary
reduced within existing revenue constraints . This encourages         monetary policy , subject to strong upward pressure . If the
the market to allocate resources in response to more                  risk associated with a rise in the debt burden becomes
appropriate price signals and thus helps to avoid the kind of         important , a country's domestic interest rate eventually will
bias which have become all too obvious over the past                  incorporate a substantial risk premium . This is a direct
decade .                                                              reflection of markets' view of the financial problem . There
                                                                      may also develop income distribution problems between
                                                                      bond-holders and salary earners . A combination of
                                                                      arguments , concerned with economic growth , monetary
Finally, the possibility of a substantial fall in the price of oil    stability and income distribution therefore , all plead in
raises issues concerned with the taxation of energy , labour          favour of action to reverse what can easily become an
and capital . The objective of a more employment-creating             unsustainable trend situation .
growth is easier to attain in the presence of reductions in the
taxation of employment income . A pronounced fall in the
price of oil over a few years could endanger progress being           As for the adjustment process required , examples show that
made towards securing a situation whereby the economy is              comprehensive stabilization programmes need not
less vulnerable to imported price or supply shocks . It is , of       necessarily be excessively costly or disruptive even in the
course , difficult to judge what the long-term equilibrium            short run . Denmark , in particular, has been reducing its
price of energy might be . Nevertheless , the raising of duties       government borrowing requirement massively, from 9 % of
or taxes on oil products would contribute to budget                   GDP as recently as 1982 ( which is comparable or lower than
flexibility and thus provide more room for manoeuvre in the           the present deficits of Belgium , Greece , Ireland and Italy ) to
job-creation investment strategy proposed here .                      under 2% of GDP forecast for 1986 . In the meantime , the
 ---pagebreak---  31 . 12 . 85                                 Official Journal of the European Communities                                 No L 377 / 29
Danish economy will have grown by 15% ( from 1981 to                            profitability and high unemployment , wage
 1986 ), whereas in the same period the EC on average grew                      moderation helps create and increase profitable
only by 8% . Danish employment growth was also much                             productive capacity . It increases the potential tax base ,
faster than in any other EC economy during this period .                        and in a situation where public finances are in
                                                                                reasonable balance , justifies tax rate reductions . Wage
In other EC countries the debt burden currently is not so                       moderation itself, however , may create a transitional
great . The gross public debt burden in Germany presently                       problem of demand weakness , and this is another case
appears to be stabilizing at around 42,5 % of GDP . That of                     where accompanying support from demand policy is
France is currently rising but remains at a lower level of 36 %                 desirable .
of GDP . That of the United Kingdom is higher , at 60% of
GDP in 1985 , but has been decreasing since 1983 . Thus these            Public debt strategy is an important ingredient of both supply
countries perhaps have some margin within which the                      and demand policy. Such a strategy cannot always be defined
evolution of the public debt burden as a share of GDP could              in simple terms . There are cases in the Community where the
vary , depending upon their economic policy strategy . If some           growth of the public debt burden is clearly alarming and must
temporary rise in the public debt burden were to be accepted             now be put onto a corrected trend (Italy, Belgium, Ireland).
in the next few years , great care should be taken to ensure             Elsewhere public debt burdens are generally lower and, in
that ( a ) this formed part of a combined supply and demand              some cases, approximately stabilized. Whether there is a
strategy that effectively raised the profile of actual and               sound case for using room for manoeuvre here for some
potential production and ( b ) remained within the constraints           increase in the public debt burden during an adjustment
of a sound medium-term financial stratgegy . These                       period to help the economy onto a higher growth trajectory,
conditions should be easier to satisfy if the following criteria         depends upon a specific set ofsupply and demand conditions.
are observed :                                                           If supply potential is improved by wage moderation and
                                                                         micro-economic policies to improve markets, and if demand
   ( i ) On the supply side , the counterpart to increased public        is temporarily weak because of, for example, wage
         debt where possible , should represent investment in            moderation or international influences, then some transitory
         productive potential , either in the form of public             increase in the public debt may contribute a valuable element
         investments offering acceptable social rates of return ,        to the wider growth strategy.
         or , in the case of tax reductions , in a stimulation of
         private investment which will lead to a widening of the
         future tax base of the economy . Such tax reductions
                                                                         HI . 1.4 . The European Community budget
         might be expected to have beneficial incentive effects in
         the markets for labour and capital . In this way a
         virtuous circle of interrelated movements can be                An additional level of public finance is developing in Europe .
                                                                         With a revenue or expenditure volume of around 1 % of
         possible . With enhanced productive capacity the tax
         base is increased ; thus tax rates can be reduced which
                                                                         Community GDP the Community budget , admittedly , has
         further stimulates growth , even within the constraint of
                                                                         not a major macro-economic impact but is playing a greater
                                                                         role in structural adaptation . With the enlargement of the
         given budget deficit levels .
                                                                         Community the total own resources of the budget are being
  ( ii ) On the demand side , expansionary measures in the               increased , as from 1986 , with revision in the maximum rate
         budget should be justified by the need to correct any           of value added tax call from 1 ,0 to 1 ,4 % . At the same time ,
         inadequacy in the growth of demand . In the event of            an increased effort is being made to contain the large share of
         further disinflationary effects on the European                 agricultural price support expenditure in the Community
         economy resulting from dollar depreciation or falls in          budget .
         commodity prices , it may be desirable to sustain
         demand , in particular to prevent excessive deflation of        The policy priorities for the enlarged Community budget are
         the tax base . In these conditions it makes little sense to     to facilitate the structural improvement and convergence of
         raise taxes or cut expenditure to offset such                   the Community economy . This comes out clearly in Table 9 .
         shortfalls .                                                    The 1986 figures are taken from the preliminary draft
                                                                         budget . In several of its faster growing functions , the budget
( iii ) The evolution of wage incomes has important                      is contributing aids to compensate for the effects of the
         implications for both supply and demand sides of the            opening of the Community's markets and help to restructure
         economy . Starting from a situation of inadequate               regions or sectors in difficulty .
 ---pagebreak---  No L 377 / 30                               Official Journal of the European Communities                                  31 . 12 . 85
                                                                 TABLE 9
                       European Community budget, 1984 to 1986 — Preliminary draft proposed by the Commission
                                                                                                         (million ECU)
                                                                              1984           1985          1986
                                       Expenditures                        EUR 10         EUR 10          EUR 12
                 Policy functions
                 Agriculture — guarantee section                           18 126         19 691          20 688
                 Agriculture — structural funds                                 667            687           946
                 Fisheries                                                       87            105           236
                 Social Fund                                                  1 212         1 410          2 399
                 Regional Fund                                                1 413         1 610          2 600
                 Integrated Mediterranean projects                               10             10           151
                 Transport                                                      505 (0          36             74
                 Energy and industry                                            659 ( 2 )      130           105
                 Research and innovation                                    .   533            570           673
                 Food aid                                                       737           772            954
                 Development aid                                                527            531           697
                 Other expenditures including refunds
                 to Member States                                             2 733         2 881          5 527
                                                             Total         27 208         28 433          35 050
                                                                              1984          1985           1986
                                         Revenues
                                                                          EUR 10          EUR 10         EUR 12
                 Agriculture levies                                           2 435         2 106          2 699
                 Customs duties                                               7 961         8 596          9 700
                 Value added tax ( VAT )                                   14 594         15 198          22 184
                 Special contributions                                          596         2 247            204
                 Miscellaneous                                                  466           286            263
                                                             Total         26 052         28 433          35 050
                 p.m .
                 Maximum rate of VAT                                          1,00          1,00           1,40
                 Effective rate of VAT                                        1,00          1,00           1,34(3 )
                 Budget total as share of GDP                                 0,94          0,85           1,10
                 (') Includes 471 million ECU of special measures in the United Kingdom and Germany .
                 ( 2 ) Includes 456 million ECU of special measures in the United Kingdom and Germany .
                 ( 3 ) Except for Germany 1,31 and United Kingdom 0,82 .
                 Source 1984 — Management accounts ; 1985 / 86 preliminary draft budget 1986 adopted by the
                                    Commission on 14 June 1985 .
The increase in expenditure in 1986 is partly due to the                 Expenditure on integrated Mediterranean projects, aimed at
accession of Spain and Portugal , but also reflects an increase          helping mediterranean regions adapt to the consequences of
in respect of the other Member States . This is particularly             the Community's enlargement , becomes significant for the
true of the Regional Fund which , under the new Regulation               first time in 1986 . Expenditure on transport infrastructure
applicable from 1985 , increases the share of expenditure                projects, the Social Fund ( retraining and job-creation
going to more selectively defined regions with the most severe           projects ), and R & D and innovation and development aid
problems .                                                               also becomes more important in 1986 . About 50 % of new
 ---pagebreak--- 31 . 12 . 85                                Official Journal of the European Communities                                    No L 377 / 31
expenditure in 1986 can be attributed to the accession of              Finally , the level of the real return on capital is a key factor in
Spain and Portugal . This part , however , will be covered by          the investment Decision . Present distortions between the cost
own resources paid in by the new members . The remaining               of capital and the profitability of productive fixed capital
part of the increase takes place because of the substantial rise       originate , as illustrated in Graph 14 , in the decline in
in payments to finance commitments incurred before 1986                profitability which occurred in the 1970s , rather than in the
and also because of new commitments .                                  more recent rise in real interest rates . Thus , whilst a fall in
                                                                       real interest rates of, say , one or two percentage points from
                                                                       their present level would certainly help to stimulate
Priorities for the Community budget, endowed from 1 986                investment , it would come nowhere near to restoring the
with increased own resources are (i) to contain agricultural           differential which prevailed between real interest rates and
expenditures more effectively and (ii) to devote increasing            the profitability of productive capital in the 1960s , a period ,
resources to structural improvement and convergence of the             of full employment , and existed again during part of the
Community economy.                                                     second half of the 1970s .
                                                                       As is evidenced by the downward convergence of inflation
III . 2 . Monetary policy and the European Monetary                    rates in the Community , considerable progress has been
          System                                                       made towards the creation in Europe of an internal and
                                                                       external zone of monetary stability ( see Table 5 of this
                                                                       report ). Since March 1983 there has been no change in the
In recent years , a consensus has gradually emerged on the             central rates of almost all the currencies participating in the
need to create a stable monetary environment and on the                EMS . The adjustment of the Italian lira's parity , which took
contributory role of monetary policy . This consensus                  place in July 1985 by unanimous decision of the partner
contrasts with the marked differences in the management of             countries , remained limited in scale . The stability of nominal
national monetary policies in the 1970s . By imposing                  and real exchange rates between the currencies participating
exchange rate discipline on the participating countries , the          in the EMS exchange rate mechanism provides a striking
European Monetary System has shown itself to be an                     contrast with the often sharp variations recorded before the
essential factor in the cohesion of monetary policies with a           establishment of the EMS and those which are today still
common objective of stability . Such consensus is an                   affecting other currencies . This stability is naturally reflected
important achievement which must be preserved : monetary               in small exchange rate variations between the ECU and its
stability must , for several reasons , be an essential part of any     chief component currencies . It satisfies a need felt by private
strategy which aims at restoring lasting growth , capable of
                                                                       operators , as can be seen from the development of the private
creating more jobs .
                                                                       ECU as a borrowing and investment currency and its
                                                                       growing use for commercial transactions . Monetary policies ,
First of all , monetary stability creates an environment which         pursuing the common objective of stability , but which have
encourages those involved in the economic process to                   to be differently framed to take account of the progress still
cooperate with each other and in particular reduces the                necessary in each country , are a guarantee that these
justification for indexation mechanisms . Some of these                achievements will be consolidated and improved .
mechanisms , a relic of periods of high inflation , both
obscured and held back the necessary adjustment of relative
prices and costs and so contributed to present
macro-economic imbalances .                                            A number of countries — in particular the Federal Republic
                                                                       of Germany , France , Italy and the United Kingdom — are
                                                                       pursuing normative targets for the growth of monetary
Secondly , expectations of a permanently low inflation rate            aggregates or domestic credit expansion . For countries where
enable interest rates to play more efficiently their role in           the inflation rate is still too high , the aim should continue to
establishing the balance between supply and demand on the              be a progressive reduction in the growth rates of monetary
capital market . An artificially low or even negative real cost        aggregates of domestic credit expansion , so as to underpin
of capital , such as that which obtained in certain countries in       the stabilization process . Where the rate of inflation and
the 1970s , gives a distorted indication of the scarcity of            inflationary expectations are sufficiently low , monetary
capital , encourages the waste of scarce resources formed              growth should release a margin for real growth in line with
from savings and leads to a pattern of growth which creates            the medium-term trend of productive capacity while
fewer jobs . Of course , excessive real interest rates ( for           preserving what has been achieved in terms of stability . This
example greater than the underlying growth rate of the                 would provide lasting support for economic activity . In these
economy ) accompanying budget deficits which are too high ,            countries the setting of the target for monetary growth must ,
have considerable structural consequences . But now the level          however , be largely influenced by the judgement made on the
of real interest rates must make it possible to attract the funds      growth of productive potential , notably with regard to the
needed to finance not only public deficits , still excessive in        effects of supply policies carried out in other areas and the
certain cases inside and outside the Community , but also to           increase in capacity utilization rates which can be achieved
finance the required investment drive . Furthermore , an               without creating inflationary strains . To the extent that
essential justification for the policy indicated for certain           supply-side policies speed the growth of the productive
countries of a continued reduction in the public deficit is that       potential , such a strategy goes hand in hand with the sound
it contributes to lower real interest rates in the medium              financing of the increase in demand which then becomes
term .                                                                 desirable .
 ---pagebreak---  No L 377 / 32                             Official Journal of the European Communities                                     31 . 12 . 85
It is true that the present changes on financial markets ,            associated with external factors would in itself release an
especially the spread of financial innovations which are              additional real margin for growth . But given the present
tending to make the demand for money more unstable,                   instability of the International Monetary System, lasting
sometimes complicate the implementation of policies based             stability can be guaranteed only by the continuing control of
on monetary aggregates or credit targets . But experience has         monetary growth . However , following the recent
shown that , where the authorities of the EMS countries are           declaration by the Ministers of Finance of the five major
determined to pursue a policy which conforms with                     industrialized countries , it is to be hoped that a solution to
guidelines based on the above criteria , the exchange rate            this instability will be found which , at the same time, will
mechanism is stabilized and its macro-economic effects                help to relax even further the external constraints which may
reinforced . For EMS countries , the quantitative intermediate        stop interest rates from falling in Europe .
objectives of monetary policy and the exchange rate objective
thus mutually reinforce one another . Furthermore , the
United Kingdom authorities are tending to attribute more              In the convergence process , the stability of bilateral exchange
importance to the sterling exchange rate alongside their              rates within the EMS is of prime importance . For one thing,
quantitative intermediate objectives .                                in the countries where inflation is highest, such stability
                                                                      reinforces internal efforts to bring down inflation . In these
In the other EMS countries , which are even more open to the          countries , because of the greater covergence of inflation rates
outside world , the chief intermediate objective remains their        and allowing for the lira parity adjustment in July 1985 , the
currencies' central rates within the system , and the domestic        rise in nominal effective exchange rates weighted by inflation
intermediate objectives are , perhaps , less binding in nature .      differentials against partner countries (real exchange rates) is
The authorities must , however , ensure that domestic money           still moderate , but nevertheless illustrates the stabilizing
creation continues to be compatible with price stability and a        effect of an exchange rate mechanism which provides for
sustainable external position .                                       fixed but adjustable parities . Secondly , the competitiveness
                                                                      gains obtained by the more stable countries help them to
A marked fall in the dollar , and the improvement in the terms        acquire a comfortable external position and contribute to the
of trade which could result , would ease the monetary policy         release of a real margin for growth . But these considerations
burden in pursuing the final objective of price stability . With      do not exclude a realignment of central rates in the event of
the same rate of monetary growth , a faster fall in inflation         fundamental disequilibria .
 ---pagebreak---  31 . 12 . 85                                    Official Journal of the European Communities                                          No L 377 / 33
                                                                      GRAPH 14
                                  Rewards of labour, fixed capital and financial capital in the Community ( J ) ( 2 )
                 (') The above graph has taken from the report of Economic Policy Committee concerning 'Profitability
                       and the rate of return in the Community'. The graph provides an illustration , on the basis of different
                       definitions , of the development of profitability as presented in Graphs 11 and 12 above .
                 ( 2 ) Community average weighted with GDP of 1975 and 1975 purchasing power parities .
                 ( 3 ) Deflated by GDP-prices .
                 ( 4 ) Net operating surplus of enterprises ( excluding housing ) as % of corresponding net capital stock
                       ( left-hand scale ). Because of well known statistical problems , the level of this curve has to be interpreted
                       with caution and it is its evolution which is of greater relevance .
                       Source : Deutsches Institut fur Wirtschaftsforschung ( Berlin ) on behalf of the Bundesministerium fur
                       Wirtschaft ( Bonn ). Recent years and the Community average have been calculated by the Commission
                       services .
                 ( s ) Interest rate on government bond yields . Deflated by consumer price index (left-hand scale ).
In the last few years , the internal cohesiveness of the EMS ,                   the stabilization process . The greater growth is in the
which admittedly has at certain times also benefited from                        Community , the more rapidly will these efforts be crowned
favourable external factors , has above all been guaranteed by                   with success .
the stronger consensus on the priorities to be adopted and the
methods to be used in all areas of economic policy , the                         The room for manoeuvre available to the authorities for
increased convergence of performances and the close                              influencing interest rates is largely determined by interest rate
coordination of monetary policies both internal and                              levels on international markets and by the pursuit of the
external . However , major progress is still necessary to                        intermediate and final objectives of monetary policy . As
achieve a satisfying degree of convergence . In this respect ,                   regards the external constraint , European short-term interest
some countries must , in any event , still make substantial                      rates did not completely follow the upward movement of
efforts with regard to budgets and incomes so as to reduce the                   United States short-term rates in the first six months of 1984 ,
sometimes excessive burden borne by monetary policy in                           and then their marked fall in the following 12 months . As an
 ---pagebreak---  No L 377 / 34                               Official Journal of the European Communities                                     31 . 12 . 85
 average for the Community countries , the fall in short-term           formation of nominal interest rates more rational and creates
rates between December 1983 and July 1985 was steadier but              a suitable environment for their steady and lasting
slightly less marked than in the United States ( 1,1 percentage         reduction .
points for Europe compared with 1 ,7 percentage points in
the United States ). The prudent management of short-term
interest rates in Europe , tailored to the needs which still exist
as regards internal stabilization and to the severity of the            Within the Community , the upward convergence of real
                                                                        interest rates is evidence of the now common course of
external constraint , and a more favourable trend of
fundamentals ( external and budget deficits ) reinforces , on           monetary policies in a context of generally high public
                                                                        deficits and severe strains on international capital markets ,
this side of the Atlantic , the credibility of the policies
                                                                        particularly in the United States . Their progressive fall ,
implemented . This has contributed to a notable fall in
                                                                        which is desirable , will have to be soundly based and will
nominal long-term rates ( 1,7 percentage points ) which ,
                                                                        depend mainly on both the satisfactory progress and the
between December 1983 and July 1 9 8 5 , was more marked in
                                                                        credibility of the disinflation process and on the absorption
Europe than in the United States .
                                                                        of financial imbalances , particularly of the public deficits
                                                                        inside and outside the Community .
Until March 1985 , the strength of the dollar impeded the fall
of short-term interest rates in Europe , but the situation has          The effective liberalization of capital movements inside the
since changed , and some room for manoeuvre has appeared .              Community and , at the same time , efforts towards a greater
It is already being utilized in the Community countries with            convergence of economic policies for higher growth , will
the lowest inflation rates . In Germany , the money market              make possible the completion of the European Monetary
rate has thus been cut by around 1 ,6 percentage points since           System , which is necessary in order to create a European
March 1985 and now stands at 4,5 % , its lowest level since             monetary and financial area . Liberalization would favour the
the end of 1978 . A favourable international context would              development in Europe of a dynamic and attractive financial
make it possible to make even more use of this margin . In              market and would thus contribute to the better allocation of
countries where there is still a major need for stabilization ,         savings .
and where monetary policy must go on contributing to the
convergence process , nominal interest rates could , however ,
continue to fall in line with the reduction in the inflation rate .
                                                                        Since the establishment of the EMS in March 1979 , the
To the extent that this difference in managing interest rates ,
                                                                        objective of liberalizing capital movements has become even
in line with the internal monetary policy objectives in the
                                                                        more important . To the extent that the restrictions placed on
different countries , leads to the maintenance of the right
                                                                        capital movements artificially increase the autonomy of
interest rate differential within the EMS , it also reinforces the
                                                                        monetary policies , they reduce the disciplinary effect of the
stability of the exchange rate mechanism and its internal
                                                                        exchange rate mechanism and are thus liable to hold back the
cohesiveness in response to external shocks , despite the
                                                                        convergence process . However the convergence of monetary
divergences which still exist in certain fundamentals .
                                                                        policies and the gradual fading of money illusion among
                                                                        economic agents mean that this room for manoeuvre is not
                                                                        utilized or even non-existent — as can be seen from the
                                                                        upward equalization of real interest rates in the Community .
In the Community countries real long-term interest rates ,
                                                                        As and when divergences narrow , the restrictions on the
measured as a first approximation by the differential between
nominal interest rates and the rate of increase in consumer             freedom of capital movements gradually lose their
                                                                        usefulness . This underpins the argument for a progressive
prices , rose by an average of 4,5 percentage points between
                                                                        dismantling of the restrictions placed on capital movements
1981 and 1984 . The rise was particularly marked in
                                                                        while not undermining the stability of the exchange rate
countries where they had been close to zero or even negative
at the start of the 1980s , while the rise was only some two
                                                                        mechanism during the adjustment phase .
percentage points in the more stable countries . When
disinflation is rapid or when the inflation rate is historically
low , the real interest rate , measured by the differential             A climate which favours the strengthening of the exchange
between the nominal interest rate and the current rate of price         rate system has gradually grown up since the start of 1984 .
increase , is probably overestimated in relation to a measure           A variety of factors have contributed : the satisfactory
which would take account of the inflation rate expected in              convergence of monetary policies , the credibility gained by
the medium term , which is probably then higher than current            the general process of bringing down inflation , a more open
inflation . Conversely , in countries where the inflation rate is       and more evenly spread attitude as to the advisability of
still high but where the disinflation process is well under way         resuming the liberalization of capital movements in the
and credible , the real interest rate expected in the medium            interests of the EMS itself and , the strength of the parity grid
term is higher than that measured by the current inflation              agreed in March 1983 in withstanding external currency
rate . In any event , inflationary expectations play a key role in      movements . This state of mind was demonstrated by the
the formation of nominal interest rates which increases the             adoption in 1 9 8 5 , by the Council and by the Central Banks of
importance which should be attached to the conduct of                   the Community , of preliminary technical measures which
monetary policies writh the lasting and credible aim of price           will slightly widen the use of the ECU in the effective
stability . Such policies help to bring the current inflation rate      operation of the exchange rate system . The possibility has
and the expected inflation rate closer to one another and to            even been mentioned of giving third country holders access to
stabilize them at the lowest level and this makes the                   the ECU in the European Monetary Cooperation Fund .
 ---pagebreak---  31 . 12 . 85                                Official Journal of the European Communities                                 No L 377 / 35
 The Community bodies concerned have agreed to keep under               1985 , provides strong support for the successful achievement
 review the possibilities of fresh progress in the monetary             of a cooperative growth strategy for more employment in so
 area , and the conditions for achieving this . The Council of          far as it supports a growth in supply , which is both profitable
 Finance Ministers has confirmed the ultimate objective of              and efficient . A wider market provides the opportunity for
Economic and Monetary Union . The development of the                    firms to expand production and exploit economies of scale .
EMS , reinforcement of which is doubtless an objective in               The resulting cost reductions lead to lower prices and hence
 itself, must also be seen in this perspective . Of special interest    demand will be strengthened . A faster growth of both
 here are questions relating to the expansion of the                    demand and output will be reflected in productivity growth
 international role of the ECU , both in its public and private         and this in turn will feed into the exploitation of new
uses , and to the participation , on an equal footing , of the          investment opportunities and employment creation . The
 component currencies in the exchange rate mechanism .                  benefits of improved efficiency and competitivity will be
                                                                        affected also through an increase in the economy's longer
                                                                        term equilibrium exchange rate and more beneficial terms of
 The creation ofa zone ofmonetary stability is an integral part         trade . A lower trend evolution of both domestic and import
 of the strategy for lasting growth, capable of creating more           prices will in turn mean that a given expansion of nominal
jobs . By reducing uncertainties as to the future real value of         demand will result in a higher real demand . Again , there will
 the currency, an environment is created which encourages               be beneficial effects on output and employment . Thus , the
 those involved in the economic process to cooperate with               economy enters what can be called a virtuous circle of
 each other. The stabilization of inflation expectations also           economic growth which is not unlike Community experience
 makes the determination of interest rates on capital markets,          in the 1960s .
 which have an essential rule in the optimal allocation of the
scarce resources formed by savings, more rational. As
 regards stability, achievements in recent years have been
 encouraging. Monetary policies, designed to achieve the
 common objective of stability, but framed accordingly to               At the same time promoting better competition on markets
 take account of the progress still necessary, are the guarantee        would be ineffective if structural and social inequalities
 that these achievements will be consolidated. In some
                                                                        prevented the completion of the internal market . If the
 countries monetary policy must still underpin the                      internal market is realized in the context of more dynamic
 stabilization process, by reducing the rate of monetary                and harmonious growth , imbalances at the regional and
growth and by lowering short-term interest rates in line with           sectoral level will be more easily overcome . This is also the
 the progress made in bringing down inflation . The internal            best way to take account of the Community 'social
 cohesiveness of the European Monetary System should,                   dimension' and structural problems . In addition , this
 however, be strengthened by additional progress in all areas           requires the development of more coherent European-wide
 of economic policy in order to reduce the, sometimes still             social policies and the strengthening of existing national and
 excessive, burden borne by monetary policy in the                      Community instruments , the European Social Fund and the
 stabilization process. In other countries, monetary policy             European Fund for Regional Development for example .
 should continue to use the margin available for bringing               Success in overcoming adjustment problems and in achieving
 down interest rates and, while preserving what has been                the full employment and social benefits of improvement of
 achieved in terms of stability, provide the liquidity necessary        the internal market will require considerable cooperation
for the establishment of a growth rate in line with the                 between the social partners and Governments in the
 medium-term improvement in productive capacity. Here it is             development of these actions and in encouraging the
 to be hoped that recent progress in international monetary             attitudes consistent with the growing integration of the
 cooperation will further relax the external constraints and            European economy .
 thus make a fall in real interest rates possible . This would
 encourage investment infixed capital rather than in financial
 assets. Within Europe the adoption of the abovementioned
 monetary policy guidelines would, in addition to reinforcing
 the Community's internal monetary cohesiveness, increase
 interest in further progress in the construction of the EMS,           Consensus on the importance of improving the Community s
 and in particular in measures to liberalize capital movements          internal market has strengthened greatly at the political level
 and to develop the role of the ECU.                                    and amongst industrialists and trade unionists . At its meeting
                                                                        in Brussels in March 1985 the European Council called for
                                                                        'action to achieve a single large market by 1992 thereby
                                                                        creating a more favourable environment for stimulating
                                                                        enterprise , competition and trade'. The Commission
                                                                        responded to this call with publication of a White Paper
                                                                        addressed to the European Council meeting in Milan in June
 III . 3 . Market and sectoral policies                                  1985 , entitled 'Completing the Internal Market'^). The
                                                                        White Paper sets out a detailed programme , calling for over
                                                                        300 legislative acts , most of them before 1990 .
 III . 3.1 . Improving the internal market
 The completion of a large internal market , as has been                (') Commission of the EC , 'Completing the Internal Market'
 proposed by the Commission in its White Paper of June                      ( Com(85 ) 310 ), June 1985 .
 ---pagebreak--- No L 377 / 36                               Official Journal of the European Communities                                     31 . 12 . 85
Given the extremely complex and extensive nature of the                between the Member States and for the creation of a unified
proposals in total , the Commission has given particular               network of financial services in the areas of credit , insurance ,
attention to ways to lighten the administrative and legislative        and stock exchanges .
burdens of achieving the objective . An integrated and
balanced set of proposals made to this end are : ( i ) to
maximize use of the principle of mutual recognition of                 Such integration gives rise to direct and indirect benefits . The
national technical standards and minimize the amount of                direct advantages come through a reduction in financial costs
harmonization legislation at the EC level , ( ii ) to maximize the     for borrowers and through helping assure access for savers to
off-loading of technical matters from the Council , by making          higher yielding investments . An increase in the effective size
more use of the institutional powers of delegation that                of the market induced by financial integration encourages
exist , and ( iii ) to increase recourse to majority-voting in         financial institutions to specialize more , creates additional
Community decision-making processes concerning the                     competition and effects a more efficient transfer of savings
internal market . Although the various elements interact and           into real investment .
should be considered as a whole , some individual examples
serve to illustrate the substance of the proposals .
                                                                       As regards indirect benefits , the greater liberalization of
                                                                       financial markets enhances discipline in the conduct of
                                                                       economic policies and thus contributes to price stability and
As regards technical standards for industrial goods , food             to the strengthening of the EMS . A second indirect benefit
products and construction , it is proposed that legislative            would relate to reducing dependence of European economies
harmonization ( Council directives bases on Article 1 00 of the        on the US dollar , which is likely to occur if European capital
Treaty of Rome ) will in future be restricted to essential health      markets become more integrated . This would insulate
and safety requirements .                                              Europe to some extent from external shocks . Thirdly ,
                                                                       controls on capital flows interfere to some extent with the
                                                                       free movement of goods , services and persons , by increasing
                                                                       the cost of related financial transfers whose legality has to be
Public procurement competition will be enhanced for sectors            checked . Fourthly , the utility of capital controls in terms of
already covered by EC Directives by more prior information             greater independence of monetary policy has been greatly
and publication of contracts . Existing restrictions on public         reduced through commitments to monetary policy
procurement of services , compared to goods , should be                coordination implicit in EMS membership .
removed . Four major sectors — energy , transport , water and
telecommunications — not yet covered by public
procurement Directives are to be made the subject of further           Financial integration should be sought in a balanced way on
proposals .                                                            four fronts : ( i ) gradual removal of the remaining capital
                                                                       controls , ( ii ) free flow of financial services , ( iii )
                                                                       rationalization of domestic financial markets , and ( iv ) the
                                                                       promotion of the ECU in the credit and capital markets .
In the transport sector important actions to ensure the
freedom to provide transport services are proposed .
                                                                       At present two Council Directives classify capital flows
                                                                       in four lists (A to D ). Member States are obliged
Service branches of the more conventional kind such as                 unconditionally to free transactions contained in list A
                                                                       ( including direct and real estate investment ) and in list B
banking and insurance together with newer forms such as
                                                                       ( operations in listed securities ). Transactions in list C
information and data processing , computerised marketing
and distribution services , audiovisual services including
                                                                       ( including other types of portfolio investments and long-term
                                                                       credits ) are conditionally liberalized . There is no obligation
broadcasting by satellite are undergoing unprecedented
                                                                       to free transactions in fist D ( deposits with financial
technological development . Many of these fastest growing
                                                                       intermediaries and other short-term monetary operations ).
branches of the economy have little chance of being
                                                                       The actual degree of capital freedom varies considerably
internationally competitive without being given a large open
                                                                       in the Community . A number of Member States have
market in which to develop .
                                                                       liberalized virtually all transactions contained in lists C and
                                                                       D. On the other hand , three Member States ( France , Italy
                                                                       and Ireland ) have had to make use of the protective clauses
Turning to financial market , the improvement of the internal          provided for in the Treaty in order to apply restrictions
market for financial services links directly to the policy             on transactions which are unconditionally liberalized . In
objectives of improving the functioning of domestic financial          December 1984 the Commission reviewed these derogations
markets , the convergence of macro-economic policies and               and renewed them for a limited scope and period ( Official
strengthening of the European Monetary System . In this                Journal of the European Communities L 8 , 10 January
context , in April 1983 the Commission submitted to the                1985 ). In addition , the Commission is studying proposals
Council a communication on financial integration (*) which             with the Monetary Committee for a new Directive which
stressed the need for more freedom of capital movements                would extend the obligations of Member States to liberalize
                                                                       certain transactions contained at present in list C.
( 1 } Commission of the EC , 'Communication of 20 April 1983 on
      Financial Integration', European Economy No 18 , November        The creation of an efficient network of financial services in
      1983 .                                                           the areas of credit , non-life insurance , and stock exchange
 ---pagebreak---  31 . 12 . 85                                    Official Journal of the European Communities                                 No L 377 / 37
 services can be aided through assuring the right of                        industry , and national telecommunications administrations .
 establishment and the provision of financial services on a                 The work and reflection carried out so far have identified the
 non-discriminatory basis across frontiers .                                common prospects for the evolution of telecommunications
                                                                            networks and services and the strategic objectives upon
 The rationalization of domestic financial markets should go                which a consensus at Community level could be reached , in
 in parallel with the removal of controls on the circulation of             order to define infrastructure projects of European interest in
                                                                            this field .
 capital and services . Although there has been some action
 towards harmonizing national provisions governing the
 activities of financial intermediaries , the regulatory and
 allocative aspects of the domestic financial markets should be             This is in particular the case for the establishment of a
given more attention .                                                      telecommunication transborder backbone network which
                                                                            could set up the base of future integrated broadband ( IBC )
                                                                            communications to be operational by 1995 .
Community companies and institutions have used the
Euromarkets in order to avoid the disadvantages of narrow
national markets . More recently , as the risk in the use of the
                                                                            According to available estimates , the total investment related
dollar has become large , the market has increasingly turned
                                                                            to the project could amount to some 3 000 million ECUs .
to the use of the ECU which exhibits small variability
                                                                            Currently , studies are carried out to specify the project
vis-a-vis member currencies and is free of purely national
                                                                            further . The project will , however , depend on prior
controls . It is , therefore , well placed to be a vehicle for capital
                                                                            agreement between the public authorities and the
transfer within the Community .                                             telecommunications administrations concerned .
 The Milan European Council in June 198S welcomed the
 Commission 's White Paper for improving the internal                       The Commission will make proposals on the use of the ERDF
market, and charged the Council to elaborate a work                         to help improve modernization of telecommunications
programme to achieve the single market objective by 1992 .                  networks in the less favoured regions of the Community .
 Ways of achieving this objective are identified as (i)
suppression of physical barriers; (ii) the removal of fiscal
frontiers; (Hi) suppression of technical barriers (especiallyfor            In the area of transport, the Commission's proposed medium
 new technologies); (iv) creation of a free market in financial             term infrastructure programme already provides a
and transport services; (v) complete freedom of                             framework for the development of three linking networks of
establishment for the professions and (vi) liberalization of                Community interest: road , rail and inland waterways . The
capital movements . The integration and modernization of                    investment in question would exceed 20 000 million ECU .
European financial markets should be pursued further                        This programme contains a range of small and medium sized
through rationalization of domestic financial markets and                   projects some of which have already been started and receive
promotion of the ECU in credit and capital markets. This                    Community finance from the ERDF and the EIB and specific
process will be facilitated by the more dynamic growth                      credits for the support of transport infrastructure of
fostered by the overall economic strategy, and thus enhance                 Community interest (line 581 ); as well as some major
with other more specific measures the social dimension .                    projects . The financing of these projects will naturally differ
                                                                            according to their relative size and character . A large number
                                                                            of smaller projects will have been included already in
                                                                            national public investment programmes and will have
III . 3 . 2 . Infrastructure projects of European interest and              received Community financial support . However , the
              infrastructure financing                                      financing of the larger projects has yet to be arranged .
Improving the internal market needs also the provision of an
adequate infrastructure . In the programme for 1985 , the                   Two major projects should be added , the Paris—Cologne
Commission identified the benefits to be obtained from a                    high speed rail link , the cost of which has been put at some
coordinated infrastructure strategy . Such an approach would                3 000 million ECU . An 'intergovernmental group' has been
contribute significantly to the aim of unifying the internal                set up to work out the general specification of requirements ,
market ,          strengthening      industrial       competitiveness ,     each party's responsibilities and the possible financial
integration of the peripheral regions and stimulating new                   package . The final report is expected in March 1986 . Also
technologies ( J ). It could also become , progressively , an               the fixed Channel link which , depending on the type of link ,
important element in the development of demand and                          varies widely in cost from 3 000 to 9 000 million ECU . In
economic activity .                                                         April 1985 the French and United Kingdom governments
                                                                            published the guidelines enabling those promoters interested
In the area of telecommunication concertation mechanisms
                                                                            to prepare by 31 October 1985 a proposal for financing ,
                                                                            executing and exploiting the project . Work could thus start
have been set up between the Commission , Member States ,
                                                                            by the end of 1986 , completion being planned for
                                                                            1992 / 93 .
( ] ) The necessity for investment in employment-creating
      infrastructural projects in transport , telecommunications and
      environmental protection was stressed in parliamentary
      resolutions ( OJ No C 122 / 59 , 20 . 5 . 1985 , point f and Doc .    In the longer term other projects are envisaged in the area of
      B 2-103 / 85 , point la ).                                            road and rail transport , in particular the motorway link with
 ---pagebreak---    No L 377 / 38                            Official Journal of the European Communities                                    31 . 12 . 85
  the Scandinavian countries through Denmark and the Baltic            guarantees required from the promoters or to base these
  straits , the Venice-Munich link with its passages through the       guarantees on the assets of the project rather than on those of
  Alps , etc.                                                          the promoter ( formula of the project financing type or
                                                                       preferential claim on receipts ). Because the financial package
  In the area of environmental protection , a programme of             required for this type of investment needs to combine in
  investment is necessary to improve the quality of life and           variable proportions, capital formation , bond market
  protect the basis for future economic growth . The damage            flotations and bank loans , Community intervention should
  caused by air pollution can only be reversed by investment in        bring together new and traditional financing techniques .
  large combustion installations , while in many Member States
  investment in effluent treatment is essential to improve water       There exists a considerable economic potential in a number
  quality . The treatment of waste and its recycling would both        of large infrastructure projects of Community interest,
  improve environmental quality and reduce the Community's             notably in the areas of cross-frontier transport,
  raw material dependence . Such investment , leading to the           telecommunications and environmental protection. At the
                                                                       macro-economic level these would make a modest but
  development of new products , will not only improve the
  quality of life but also create markets for new products in          nevertheless useful contribution to growth. The Community
  third countries .                                                    should facilitate the advancement of the projects, inter alia
                                                                       through the easing of administrative and fiscal conditions,
  Thus all in all , the infrastructure programme which can be          through the development of its own financial instruments,
  envisaged in the medium term would represent an investment           and thus contribute over the nextfive years a useful dynamic
  volume of 30 to 45 000 million ECU over a period of five to          element in the Community 's economic development.
  seven years .
                                                                       III . 3 . 3 . Adaptability of the labour market
  All these infrastructure projects are not , of course , at the
  same stage of development . The Community can facilitate             Given the urgent need to improve the conditions for
  the advancement of the larger projects in several different          employment growth in the economy , increasing attention is
  ways . By giving its support to the proposals already made ,         being given currently by governments and the social partners
  easing administration and fiscal conditions , taking the             to the task of making the labour market work more
  initiative in bringing together interested parties , and by          efficiently . This involves improving the adaptability of the
  financing the necessary feasibility studies .                        European labour market to structural change , especially to
                                                                       the introduction of new technologies and to competition
  At the same time the Commission has undertaken to study              from the United States and Japan as well as the newly
  the scope for using or adapting the range of financial               industrialized countries .
  instruments at its disposal as well as ways in which the
  Community could improve and simplify the administrative              In the last Annual Economic Report , the Commission
  and legal framework in which infrastructure projects can be          identified examples of labour market Regulations which had
  carried out .                                                        turned out to be designed inefficiently or in ways that serve to
                                                                       deter employment. It called for a re-examination of labour
  Apart from continuing with the traditional types of                  market regulations in order to ensure both greater equality of
  infrastructure financing , the use of new financing formulae         access to employment and greater efficiency in the use of
1 can be envisaged , which aim in particular to reduce the             labour within enterprises .
 ---pagebreak---  31 . 12 . 85                                Official Journal of the European Communities                                    No L 377 / 39
                                                                 TABLE 10
                       European Community investment financing through capital market borrowing and on-lending
                                                                                                        (in millions of ECU)
                  I                                                         1983           1984              ( 1985 )
                                                                                                            estimate
                  Lending by institution or mechanism :
                  European Investment Bank                                 4 256          5 013
                  Commission :
                     European Coal and Steel Community                       778            825
                     Euratom                                                 366            186
                     New Community Instrument                              1 212          1 181
                                                              Total        6 612          7 206        7 400 to 7 700
                  Lending by sector or policy objective:
                  Private industrial sector                                1 938          2 850        2 700 to 2 900
                     of which : global loans to small and medium
                     enterprises                                          (1 263 )       (1 860 )     (1 900 to 2 100)
                  Infrastructure                                           2 241          2 344        2 250 to 2 300
                  Energy                                                   2 433          2 012        2 450 to 2 500
                                                              Total        6 612          7 206        7 400 to 7 700
                  Source : Commission of the EC , 'Report of the Commission to the Council and the European Parliament
                           on the borrowing and lending activities of the Community in 1984' ( COM(85 ) 213 final ), May
                           1985 .
The Economic Policy Committee is in the process of                        promote part-time employment . In France , regulations
examining this question in relation to labour and other                   governing fixed-term contracts have been relaxed to promote
markets . In addition to the question of wages and non-wage               the recruitment of the long-term unemployed , and measures
labour costs discussed above , the Committee has paid                     have been taken to promote part-time employment . In Italy ,
attention also to the question of labour market regulation ,              rules restricting the choice of employers on whom to recruit
mobility , training and more flexible use of working time .               have been relaxed .
In conjunction with the Member States and the social                      Another important factor inhibiting adaptability of the
partners , the Commission is currently carrying out a                     labour market are weaknesses in employment and training
comprehensive review of the legislation and collective                    services geared to current and future labour market needs .
agreements in these fields . A group of experts is studying also          To make good these weaknesses will require the cooperation
the attitudes of social partners and governments to the                   of representatives of governments , and social partners at
problem of labour market flexibility . A communication will               local , regional and national levels . The Commission is
be sent to the Council .                                                  currently pursuing a programme of consultations designed to
                                                                          promote this kind of forward-looking labour market
                                                                          management in the Community .
The social partners are principally responsible for the
adaptability of the labour market . Where government
regulations are important , any specific proposals to change              For their part , governments should continue to examine
them — particularly those concerning job tenure or                        whether the structure and organization of their employment
dismissals — should be fully discussed with the social                    services are adequate to meet the demands of a rapidly
partners . Governments should also review to what extent                  changing market .
they themselves are inhibiting the workings of the labour
market by the complexity of administrative regulations they
impose on employers .
                                                                          Improving the adaptability of the labour market also
                                                                          encompasses the need to reorganize existing work patterns ,
                                                                          and in particular working time but in ways which would be
Some actions have recently been taken by Member                           broadly neutral with respect to costs . The reorganization and
Governments with the intention of improving the                           reduction of working hours can be designed to maximize
adaptability of the labour market . For example , in Germany ,            employment effects while maintaining competitiveness and
new measures allow limited term employment contracts and                  the basic social rights of the employees . Collectively , agreed
 ---pagebreak--- No L 377 / 40                               Official Journal of the European Communities                                     31 . 12 . 85
working time reductions in France , Belgium , Netherlands              Thus , in the meantime , specific employment measures will
and the Federal Republic of Germany have often been                    still be required . The high level of unemployment is
accompanied by a rearrangement of working hours , so that              particularly serious in old industrialized areas of declining
productive equipment , especially advanced machinery in                employment and the under-developed areas which had never
high growth markets , is utilized more efficiently . Traditional       achieved self-sustaining industrialization . Its effects can also
barriers between daily full-time work , shift work in its              be seen in the very high rates of youth unemployment ( three
various forms , part-time work over periods of time , overtime         times the adult rate) and in the increasing number of
working , etc . have become less pronounced . The traditional          long-term unemployed ( 39 % of the total unemployed have
full-time work in a standard working week , which continues            been unemployed for more than one year).
to apply to the majority of those in work , coexists with an
increasing number of more differentiated work contracts
which can meet both the aspirations of the employees and the
requirements of production . Such measures in the industrial           The Commission proposed guidelines for temporary work
                                                                       measures already in its Communication on Long-Term
sector have helped to save jobs which would otherwise have
been lost . In the service sector an increase in employment has        Unemployment in 1984 (*). At that time , it stressed the need
been reinforced by these measures . In some branches , e . g .         for temporary work programmes to be prepared in
retail trade , the number of employees may rise despite a              collaboration with local and regional governments, and so be
declining volume of work , due to the growing importance of            suitably adapted to local needs . Temporary work measures
part-time work .                                                       of this kind need to be publicly funded but often involve the
                                                                       voluntary sector or non-profit enterprises as well . The net
                                                                       financial costs to public budgets is generally small since a
                                                                       high proportion of the unemployed who would be engaged
Within the framework of the collective agreement in the                on temporary employment programmes are already in
German metal-working industry which reduced average                    receipt of unemployment benefit or other forms of social
weekly working hours from 40 to 38,5 , about 70 % of the               support .
companies have reached agreements to maintain operation
time . The company agreements take various forms . In France
more than 500 enterprises , usually in the context of solidarity
contract , have re-organized working and production time in            Many Member States have been developing such temporary
agreement with the unions . These have often led to a                  work schemes specifically aimed at particular groups of
substantial increase in the utilization of capital equipment . In      unemployed . For example , in Germany , the public interest
Belgium and the Netherlands innovations in working-time                jobs ('ABM' — Arbeitsbeschaffungsmajinahmen ) for up to
arrangements have also been numerous . A recent survey                 one year are aimed at 'difficult to place' unemployed who are
carried out for the Commission indicated that a large                  in receipt of unemployment benefit . The government pays 60
proportion of the labour force would be prepared to consider           to 100 % of the cost . In France , young people aged 18—21
the possibility of new working time arrangements .                     can be given jobs in the 'TUC' schemes (Travaux d'Utilite
                                                                       Collective — jobs of benefit to the Community) and through­
                                                                       'solidarity contracts' between local authorities and
Improved adaptability of the labour market is an important             non-profit organizations . The jobs include vocational
component of a strategy for more employment creating                   training and the government contributes to the cost . In the
growth . This broad concept has in practice many detailed              United Kingdom , the Community Programme is aimed at
aspects, including the various conditions of employment in             adult long-term unemployed . The government pays a wage
addition to pay, the organization and reduction of working             subsidy . These various schemes are in 1985 reaching around
time and the adaptation of working skills and patterns to new          100 000 people in each of the three countries mentioned .
technologies . These, however, should be appraised within
the general constraint of avoiding cost increases . While
governments have to consider whether legal regulations                 In general , these types of programmes have several
inhibit the workings 'of the labour market, the social partners        advantages over alternative public job creation schemes
have often the major role in negotiating together conditions           ( limited substitution effects , more precise demographic
that will be helpful for an employment creating growth                 and geographical targeting , lower budgetary costs ).
strategy. The general objective must be to seek improvements           Nevertheless , as a solution to the problem of unemployment ,
to the functioning of the labour market that reconcile to the          they can only play a relatively minor role . The productivity of
maximum degree the objectives of economic efficiency and               these jobs may be relatively low , and the slight amount of
an enhanced employment propensity with social values of                associated training does little to enhance the long-term job
equity and security.                                                   prospects of participants .
                                                                       Another specific measure adopted by a number of Member
                                                                       States is the provision of assistance to help the unemployed
                                                                       set up their own business . In general , such measures allow the
III . 3 .4 . Specific employment programmes
                                                                       unemployed , under certain conditions , to capitalize their
The process of reducing unemployment by means of                       ( J ) Commission of the EC , 'Action to combat long-term
macro-economic policy measures will take several years .                     unemployment', ( COM(84) 484 final ), 1984.
 ---pagebreak---  31 . 12 . 85                                      Official Journal of the European Communities                                     No L 377 / 41
 unemployment benefit into a lump sum , or to continue                         Training Scheme has over 300 000 participants at any one
 receiving unemployment benefit at the same time as they are                   time ; and in France the number of training places supported
 self-employed , or a combination of the two . In France , for                 under the Government's special measures is approaching
 example , the government gives a subsidy to unemployed                        500 000 . Member States are also making major efforts to
 people who set up their own business . In the United Kingdom                 ensure that young people acquire a basic understanding of
 and Ireland , a weekly allowance is granted to unemployed                    the new information technologies before they leave school ,
persons who can also put up a certain amount of their own                     and to improve the vocational relevance of the curriculum —
 resources . In the Netherlands , people can receive a loan and               even in non-technical subjects . Policies on the youth
 an income supplement up to the level of social assistance                    employment and training problems have been recently
during the start-up period . In most cases , eligibility for the              reviewed in a Commission Memorandum ( 2 ).
 allowance is conditional upon having been unemployed for a
certain period or is limited to the maximum period of
qualification for unemployment benefit ( usually 12
months ).
                                                                              Through its work programme on 'new information
                                                                              technologies and the school systems' ( 3 ) the Commission is
                                                                              offering technical support in the areas of new information
The role of local government and non-government                               technologies and the school curriculum , the training of
organizations in the development of small local-level                         teachers , and educational software and hardware .
enterprises is crucial . In a recent Communication (*) the
Commission highlights the key role of local support
structures which are able to offer encouragement ,
information , guidance and assistance to those involved in
enterprise and employment creation .                                          A parallel programme is under way in the field of vocational
                                                                              training ( 4 ). Under the new guidelines for the management of
                                                                              the European Social Fund issued in April , the Commission is
 While fundamental solutions to the unemployment problem                      giving priority to training programmes linked with the
will take many years, quicker solutions have to be found to                   introduction of new technologies .
alleviate the heaviest concentrations of unemployment, for
example among young people and depresses regions. Several
countries have developed schemes for relatively low-cost
employment on activities of public interest, targeted on such
                                                                              In July 1985 the Commission published proposals for a new
groups and areas . There are also example of incentive
                                                                              Community programme in education and training for
schemes for unemployed persons to set up their own
                                                                              technology ( COMETT ) ( 5 ). This is designed to encourage
businesses . Rapid experimentation and development of such
                                                                              university-industry cooperation , within a Community
schemes is calledfor, drawing on local organization in public
                                                                              framework , on advanced training in the new technologies . It
and private (profit and non-profit) sectors .
                                                                              will help ensure that the competitiveness of the Community's
                                                                              industries is not inhibited by shortages of highly skilled
                                                                              manpower , and encourage economies of scale by facilitating
                                                                              joint training programmes in specialist skills . The
                                                                              programme , which is due to start in 1986 , includes : ( i)
                                                                              funding for a Community network of university-industry
III . 3 . 5 . Education, training and technology                              training partnerships ; ( ii ) grants to enable students ,
                                                                              academics , managers , trade unionists and others to be
                                                                              seconded to universities or enterprises in other Member
The speed and scale of technological change is creating new                   States ; ( iii ) joint training projects involving enterprises and
and urgent needs , particularly for considerable numbers of                   universities from different Member States, designed to meet
technical specialists , and for the retraining of adults whose                specific manpower shortages ; ( iv ) the feasibility of
jobs are affected by technological change . These pressures ,                 establishing a European technological open university
combined with the demographic bulge in the numbers of                         system will also be examined . The Commission intends to
young people , persistent high unemployment and the                           submit a communication , before the end of 1985 , proposing
continuing restructuring of industry in the Community , are                   Community action in the field of education technology
leading already to major changes in the education and                         ( especially through the use of information technology) in
training policies of the Member States .                                      order to improve the access and the cost / efficiency of
                                                                              education and training .
For example , a striking development has been the rapid
expansion in youth training provision in recent years . Some                  ( 2 ) Commission of the EC , 'International Youth Year' ( COM(85 )
700 000 apprentice places are now available annually under                          247 final ), July 1985 .
the German dual system ; the United Kingdom's Youth                           ( 3 ) Commission of the EC , 'New information technologies and the
                                                                                    school systems in the EC' ( COM(84 ) 722 final ), June 1984 .
                                                                              ( 4 ) Commission of the EC 'Vocational training and the new
(*) Commission of the EC , 'Community action to combat                              information technology' ( COM(85 ) 167 final ), April 1985 .
      unemployment — the contribution of local employment                     ( 5 ) Commission of the EC , 'Community programme in education
      initiatives : ( COM(83 ) 662 final ), 1983 .                                  and training for technology' ( COM(85 ) 431 final ), July 1985 .
 ---pagebreak---  No L 377 / 42                                  Official Journal of the European Communities                                      31 . 12 . 85
 The speed and scale of technological change is creating new               Steel, shipbuilding and energy policies: Community policy
 and urgent needs to develop a technological awareness                     for steel and shipbuilding is aimed at restructuring in line
 among the working population at all levels . Combined with                with a more market-orientated approach , together with
 the problem of high unemployment, especially among young                  concern for the social consequences of the rapid decline in
 people, major changes are being made in the education and                  size that these industries have been experiencing .
 training policies of the Member States . The Community can
add to this process, as illustrated by recent Commission
proposals for giving a Community dimension to
university-industry cooperation on training in new                         The Commission's recent decisions bearing on the steel
technologies.                                                              industry clearly illustrate this general approach ( 2 ). Their
                                                                           aim is to achieve further cuts in capacity within a much more
                                                                           market-orientated framework while increasing the provision
                                                                           to handle the social effects of restructuring . Thus all
                                                                           investment and operating aids are to be suspended after the
                                                                           end of 1985 , the present minimum price system for steel
III . 3 . 6 . Sectoral policies , technology and enterprise                products will be ended , and production quotas will be phased
                                                                           out over a three-year period . Special state subsidies will
                                                                           continue to be permitted only for environmental protection
The adjustment and improvement of industrial structures ,                  programmes , research and development and plant
                                                                           closures .
technological development and the creation of new
enterprises constitute some of the main objectives of
Community policies . With regard to sectors suffering from
excess capacity , the Commission has adopted policy
proposals in several areas .                                               At the same time , increased and better coordinated spending
                                                                           on regional and social programmes in areas affected by the
                                                                           continued rundown of the industry are envisaged .
Agriculture: the problems which occurred in the markets of
certain agricultural products — especially the problem of
surplus production — have led to substantial changes of the                In 1985 the Commission published a study of energy
mechanisms of the common agricultural policy ( CAP ) in                   prospects to the end of the century , and then followed this by
recent years .                                                             proposing new Community energy objectives for the year
                                                                           1995 ( 3 ). These objectives are designed to ensure that the
                                                                           Community's economic performance is not undermined by
'Guarantee thresholds' were introduced for main agricultural               renewed energy problems in the longer term . The
commodities together with quotas in the milk sector , thereby              Commission also published an analysis of restructuring in the
limiting the previously open-ended support guarantees . In so              Community's oil refining sector which paid particular
far as the decisions on agriculture prices for 1985 to 1986 are            attention to the impact of exports of refined products from
concerned , the Commission proposed a continuation of its                  the Middle East and North Africa .
restrictive price policy ; to a large extent the Council did not
follow these proposals , in particular for cereals and rape
seed . The Commission proposed a reduction in prices of
3,6 % but the Council did not reach an agreement . As a                    Technology: Europe has traditionally looked to
result the Commission has been obliged to t&ke special                     knowledge-intensive , high value-added industry as the basis
measures for this product under its own authority . The new                for its economic prosperity . But Europe's leadership in many
structural policy , which was decided upon in 1984 and 1985 ,              fields of technology has been increasingly eroded as new
avoids encouraging the production of surplus products . In                 competitors have managed to diffuse many significant
line with these measures to adjust supply to demand for                    innovations faster . The share of the Community of Ten in
agricultural goods , the Commission has recently published a               total industrial world ( OECD ) high-tech manufactured
Green Paper on the perspectives for the CAP ( J ) in which it              export fell from 58 % in 1963 to 43 % in 1983 ; those of the
proposes various options and insists on the need for a price               US from 27 % to 21 % , while those in Japan rose from 5 %
policy which is more related to market conditions . The                    to 23 % during this period .
income-support function which has so far been ensured by
the price policy could in future be met increasingly by
production-neutral income aids .
                                                                           The organization of a European effort to reverse these trends
                                                                           has in the last year been progressively taking shape , especially
To support the necessary adaptation of the European                       through the definition and implementation of Community
agricultural sector , the Green Paper opts for measures to                 strategic R&D programmes such as ESPRIT or BRITE . In
facilitate structural adjustments , to change to efficient                the sector of telecommunications , which is to play a major
alternative productions and to create additional income , or
alternative employment for farmers .
                                                                           ( 2 ) Commission of the EC , 'The organization of the steel market
                                                                                 after 1985 ' ( COM(85 ) 382 final ), July 1985 .
(') Commission of the EC , 'Perspectives for the Common                   ( 3 ) Commission of the EC , 'Energy policy objectives for 1995'
      Agricultural Policy' ( COM(85 ) 333 final ), July 1985 .                   COM(85 ) 245 , July 1985 .
 ---pagebreak---  31 . 12 . 85                               Official Journal of the European Communities                                   No L 377 / 43
 role in the reinforcement of the competitivity in the world           that the manner in which they are applied does not constitute
 economy , the Council has approved in July 1985 the                   a handicap for employment .
 definition phase of the programme RACE ( Research in
Advanced Communication for Europe ).
                                                                       At a Community level , the Economic Policy Committee , in
                                                                       parallel with its work on flexibility in the labour market , is
The actions undertaken in the technology field are                     examining the flexibility of product markets including the
complemented by measures aimed at creating the European                impact of regulations on companies as well as other aspects
wide market necessary to recoup the R&D and production                 of government intervention . The Commission intends to
investments required by the high technology products and               submit a communication before the end of 1985 on the
services      ( common     standards ,    opening     of    public     reform of business regulation and the promotion of a
procurement , etc .).                                               t  dynamic small and medium-sized enterprise sector .
The European Council , meeting in Milan in June 1985 , gave            Small and medium-sized enterprises are dependent to an
a new impulse to these efforts , approving a Communication             important extent on the general conditions in which they
of the Commission on the strengthening of technological                operate , in particular those relating to taxes and social
cooperation ( J ) and supporting the EUREKA initiative                 security contributions . For such enterprises the access to
proposed by the French Government .                                    capital markets is generally narrower than for large public
                                                                       companies ; their investment plans therefore depend
                                                                       particularly on their capacity for self-financing . In most
The Commission's Communication to the European Council                 member        countries   the   characteristics   of  small  and
'Towards a European Technological Community' sketches                  medium-sized enterprises are not given due consideration in
out the range of organizational techniques , as well as the            income tax legislation , which thus tends to impede the setting
possible substantive domains of technological advances , that          up of new enterprises and to slow the growth of existing
the Community should now pursue . The general objectives               enterprises . It is therefore appropriate to examine income tax
are to : ( a ) exploit to the maximum the Community                    legislation in the Member States for its effects on small and
dimension of a continental market and network of research              medium-sized enterprises , and if necessary change the
institutes and facilities ; ( b ) promote the greatest possible        provisions relating to the definition of taxable income and
synergetic effects from the interactions of national and               the structure of tax rates in order to strengthen the
Community efforts , possibly with an additional Community              employment potential of such enterprises .
contribution and participation of non-member countries .
                                                                       As regards the frontiers between private and public sectors ,
Creation of new enterprises and simplification of existing             one of the interesting consequences of technological advance
regulations : A number of measures have recently been                  is that , in some sectors , traditional 'natural' monopolies may
proposed or adopted in several countries of the Community              no longer exist . One example is in telecommunications
with the intention of reducing regulation and thereby the              networks , where privatization and de-regulation have taken
costs imposed on small companies , particularly in their               place in the United Kingdom (with parallel or similar
creation . It is to be noted that the biggest increases in             developments in the USA and Japan ) and where discussion is
employment in the Community in recent years have occurred              also underway on the role of the Bundespost in the
in new enterprises . Small and medium-sized enterprises are            telecommunications market in Germany .
thus seen to be an important source of new employment
creation for the future .
                                                                       The Commission has adopted specific proposals either to
                                                                       reduce production capacity in sectors such as steel and
The examination of existing regulations does not mean that             shipbuilding, or to reinforce control on production in
all rules should necessarily be called into question . It is more      agriculture. It also made proposals for the organization of a
a question of simplifying existing regulations and ensuring            'technological community'. Allied to these sectoral objectives
                                                                       are the many detailed initiatives which are being undertaken
0 ) Commission of the EC , 'Towards a European Technological           to make the European business environment more conducive
     Community' ( COM(85 ) 350 final ), June 1985 .                    to the creation and expansion of enterprises.
                                  IV . EUROPEAN INTERESTS IN THE INTERNATIONAL ECONOMY
IV . 1 . The world trading system                                     protectionism does not pay as an instrument of general
                                                                       economic policy . The protection of limited producer interest
The prosperity of the European economy depends greatly                 groups does provide income and employment protection to
upon an open world trading system . There is strong                    those groups in the short-run . However other adverse effects
evidence , in economic theory and practice , to show that              of protectionism are present even in the short-run , while the
 ---pagebreak--- No L 377 / 44                                  Official Journal of the European Communities                                     31 . 12 . 85
negative long-run effects are even more disadvantageous .                 protectionist measures ( e.g. steel products ) were taken by the
Protection has the effect of increasing consumer prices,                  United States after the Williamsburg Summit . In addition ,
cutting real incomes and real consumer demand and hence                   some disquieting protectionist trends have appeared in
output and employment in the economy as a whole . Where                   Congress, although these have in general been opposed by
the protected goods or services are inputs into the production            the Administration . Japan could be supportive in helping to
of other branches of the economy , as is often the case , then            alleviate protectionist pressures in both the US and the EC by
those branches themselves lose in competitiveness in world                rapidly and substantially giving effect to its declared
markets . They then lose orders and have to cut employment ,              objective of facilitating access for imports , especially of
unless the exchange rate is devalued to compensate . With                 manufactured goods . The US deficit and Japanese surplus
devaluation , standards of living are reduced and the problem             cannot , however , be sufficiently rectified by trade policy
of inflation is worsened . Macro-economic policy has to                   measures alone , which is why the Community argues in
become more restrictive , thus again weakening real demand                favour of a more concerted approach to exchange rate and
and output. Alternatively , branches of industry faced with               macro-economic policy internationally. This point of view is
uncompetitive inputs from protected sectors are forced to try             reinforced by the outcome of the September 1985 meeting of
to evade this disadvantage by substituting these inputs with              the Group of Five ministers of finance and central bank
alternatives ( e.g. plastic for steel components ), or by                 governors which underlined the importance of maintaining
relocating their investments in other countries where the                 an adequate level of world demand and the joint
inputs are competitive ( e.g. some EC biotechnology firms are             responsibility to reduce world current account imbalances
investing outside the EC to gain access to cheaper agriculture            and resist protectionist pressures .
inputs ). These general arguments have been set out in greater
detail in official documents of the EC ( 1 ) , as well as elsewhere
such as the OECD ( 2 ).                                                   The Community also favours the participation in a new
                                                                          GATT round of the largest possible number of newly
                                                                          industrialized countries . Several of these countries have
                                                                          achieved impressive penetration of export markets while
                                                                          maintaining extremely high protective barriers to their own
                                                                          markets . Further liberalization by these countries is a
For these reasons the EC is in favour of a new round of
                                                                          necessary counterpart to their expressed desire to see their
multilateral trade negotiations . Preliminary discussions have            own conditions of access to world markets improved in a new
been under way in the course of 1985 , and the decision in                round . Finally the EC has indicated its willingness to include
principle to begin the negotiation process is expected to be              trade in services in a new round , and is actively seeking a
taken shortly .                                                           basis for agreement on this point with developing countries ,
                                                                          some of whom remain sceptical or even opposed to
                                                                          negotiations in GATT on this subject .
Trade liberalization and the unwinding of protectionism can               The Community is strongly in favour of a new round
of course be a difficult process for the industries concerned ,           of multilateral trade negotiations . This, together with
and for working people when their existing jobs may be                    improvements in the functioning of the international
threatened in the absence of encouraging prospects of                     monetary system, will offer the most appropriate framework
alternative jobs . Therefore there has to be agreement over a            for a global review of trade policy options which must be
balanced set of trade liberalizing measures , otherwise the               addressed if the threats confronting the multilateral trading
adjustment costs may be unfairly distributed across the world             system are to be averted.
trading community .
                                                                          IV . 2 . Improving the international monetary system
The Community's attitude towards a new GATT
multilateral trade round is expressed in the Council's
declaration on 19 March 1985 ; and it has subsequently set                The international monetary scene has continued to be
out its ideas on the subject matter of such a negotiation and             characterized by a high degree of exchange rate instability .
the Community's principal objectives in a written submission              Both the US dollar and the pound sterling have recorded very
to GATT on 8 July . Commitments undertaken in the OECD                    sharp fluctuations during the first half of this year in both
and GATT to halt protectionism and roll back protectionist                nominal and real terms . However , what is probably more
measures should be implemented , without waiting for the                  damaging to the performance of the world economy as a
new round . In this regard it is important to note that some              whole is the tendency for the exchange rates of major
                                                                          currencies to move progressively further out of line from
                                                                          what might be considered their 'equilibrium' levels over long
                                                                          periods of time . Over the six years from the first quarter of
(0 Economic Policy Committee of the EC , 'Opinion on                      1979 to the first quarter of 1985 the US dollar appreciated in
      protectionism ', European Economy No 19 , March 1984 .              real terms on a trade weighted basis by 63 % , admittedly
( 2 ) OECD , 'Costs of Protectionism ', 1985 .                            from an undervalued starting position .
 ---pagebreak---  31 . 12 . 85                                Official Journal of the European Communities                               No L 377 / 45
 These prolonged shifts have produced a pattern of exchange             Community would welcome more effective multilateral
 rates which is incompatible with a stable structure of                 surveillance of the exchange rate and of monetary and
 international trade and capital flows and thus is clearly              economic policies of major countries such as the United
 unsustainable over the medium or longer term . Moreover ,              States and Japan ( as well as the Community's own Member
 import penetration in the United States , resulting from the           States ) with a view to achieving more compatible policies . As
 overvaluation of the dollar , is producing a formidable                noted , there are serious problems created for the world
 accumulation of protectionist pressure , which now threatens           trading system due to a major misalignment of exchange
 seriously to undermine the liberal system of international             rates which in turn result from poor internal and
 trade that was established under the GATT and promoted                 international coordination of monetary and fiscal policies .
 further over the post-war period .
                                                                        International exchange rate instability and misalignment has
                                                                        led to a clearly unsustainable pattern of trade and capital
Against a background such as this it is regrettable that the           flows. The Group of Ten has so far only been able to agree on
Group of Ten ( leading industrialized countries ), which                modest procedural proposals improving the system . It is
received a mandate from the Williamsburg Summit in 1983                 extremely difficult for trade policy alone to absorb the
to examine ways of improving the working of the                         problems caused by exchange rate disorders . This is why the
international monetary system , has been unable to reach                Community is pressingfor parallel progress in improving the
 agreement on a concrete and more comprehensive                         international monetary system alongside the new GATT
programme of action designed effectively to tackle the                  round. The September 1985 meeting of the Group of Five
problem of exchange rate instability . However , following the          represents a certain advance in the approach to exchange rate
agreement of 22 September between the Group of Five                     and macro-economic policy coordination .
countries , there now appears to be some measure of accord
concerning both the dampening effects of currency
misalignments and the scope for concerted action to
influence exchange rates and other key economic variables
with a view to correcting major imbalance in the world
economy .                                                               IV . 3 . European economic space
                                                                        The EC exports more to the rest of Western Europe ( 26 % of
The main focus of the Group of Ten 's report , published in             total EC exports , excluding inter EC trade) than it does to
April ( J ), has been on the need to improve multilateral               any other region of the world . At the beginning of 1984 the
surveillance procedures , with a view to achieving better               EC and EFTA completed the removal of all tariffs and
coordination and mutual consistency between the policies of             quantitative restrictions between the two blocs . In April of
the major industrial countries . Whether the procedural                 last year they followed this up with a joint declaration
changes recommended in the Group's report will lead to                  expressing the political will to extend Community-EFTA
significant improvement in this respect remains to be seen .            cooperation 'with the aim of creating a dynamic European
The time may not be ripe to establish a regime of target zones          economic space'. In 1985 a joint communique of the
for exchange rates , entailing an obligation to intervene when          Commission and EFTA countries set out the domains of
the limits of such zones are attained . It might nevertheless be       policy which should in the future contribute to developing
fruitful to examine seriously the possibility of an                     this relationship . The Commission for its part published a
intermediate stage , involving indicative zones , whereby               Communication detailing how , in its view , this might be
consultation , rather than central bank intervention , would           done ( 2 ).
be triggered when the limits were breached . The meeting of
the Group of Five in September 1985 marked a certain
advance with agreement for the first time in recent years on           First priority should be given to abolishing a series of
the desirable direction of movement of the dollar's exchange           technical and administrative obstacles to deepen trade
rate and readiness to cooperate to this end when this would            relations through simplification of border facilities and
be helpful .                                                           origin rules , reciprocal cooperation in technical standards
                                                                       and rules , mutual recognition of test results and
                                                                       certificates .
The Community for its part has found that the existence of an
exchange rate constraint , as embodied within the EMS rules ,
                                                                       Other areas where cooperation should be enhanced are in
has undoubtedly contributed to the achievement of more
                                                                       research and development , trade in processed agricultural
convergent policies and performance among its members .                products , public procurement , border controls on travellers ,
The institutions which are appropriate and effective within a
                                                                       transport projects and policies , environmental policy and
closely integrated economic region such as the European                economic and monetary consultations . On several of these
Community are not necessarily applicable to a wider and
                                                                       topics the Community has recently taken initiatives . It has ,
more diversified group of countries . However , the
                                                                       for example , been suggested that new programmes to create a
                                                                       European technological community should be open for other
0 ) International Monetary Fund , Supplement on the Group of Ten
    Deputies Report 'The Functioning of the International Monetary     ( 2 ) Commission of the EC , 'The Community and EFTA Countries'
    System', IMF Survey, July 1985 .                                         ( COM(85 ) 206 final ), May 1985 .
 ---pagebreak---  No L 377 / 46                               Official Journal of the European Communities                                      31 . 12 . 85
 West European countries to participate . The Council is in the         case there would also be the question of whether the EC
 process of authorizing the European Monetary Cooperation               would be acting on its own or in concert with a larger number
 Fund to designate certain non-Community central banks to               of countries .
 become holders of official ECU reserves , and this
 arrangement could be used by some EFTA countries .
Already some of these countries have begun to hold privately
traded ECU assets as part of their foreign exchange                     In the hypothesis that the European Community alone tried
reserves .
                                                                        to sustain its growth trajectory , while other regions in the
                                                                        world passively allowed a US slow-down to depress their
                                                                        growth rates , the EC could move into substantial current
                                                                        account deficit . To a certain extent the Community can
Good progress has been made in opening trade between the                afford a reduction in its surplus and even a temporary current
EC and EFTA countries . On both sides it is now agreed to               account deficit . But it cannot aim to have a deficit on the scale
build further on these achievements. The Community is                   of that in the United States . The United States' massive
seeking, in the light of its own efforts to complete the internal       external deficit is not an example for the EC to copy .
market and deepen economic cooperation, to make it
possible for EFTA countries to participate closely in the
European economy's integration process . These efforts
should of course continue to respect the distinct institutional         There would , on the other hand , be a case for the EC to urge
identities and objectives of the EC and EFTA . The EFTA                 that the largest possible number of countries participate in a
countries     could   be     invited  to    contribute    to  the       world economic adjustment . In this context Japan is in a
implementation of the cooperative growth strategy. Current              position of particular importance . It has the largest single
negotiations to adapt the existing free trade arrangements              counterpart to the United States deficit , as well as serious
between the Community and EFTA countries, necessary                     problems of an unbalanced trade structure in relation to the
because of the accession of Spain and Portugal, aim at a                EC . An international cooperative action to sustain the world
further consolidation and extension of the free trade system            business cycle should see an above average contribution by
in Western Europe .                                                     Japan as regards both exchange rate appreciation and
                                                                        domestic demand expansion . If this contribution were
                                                                        assured , then it might well be possible to extend further a
                                                                        world cooperative action . The European Community could
                                                                        suggest to EFTA countries that they join the EC's initiative.
                                                                        Japan and the newly industrializing countries of the Pacific
                                                                        region could contribute a useful counterpart to the reduction
IV . 4 . International cooperation for world economic                   of the US external deficit . The United States could most
         adjustments                                                    usefully help by actions to lower its interest rates , which are a
                                                                        particularly heavy constraint on the growth possibilities of
                                                                        the heavily indebted developing countries , especially in Latin
As already noted , in the medium-term the United States                 America .
economy must move into a phase of major correction of its
still mounting external current account deficit . What is still
uncertain is the timing and amplitude of this correction , and          Avoiding a situation where the US economic adjustment
how it will be induced . Contributing to the adjustment                 process leads to a pronounced and generalized slow-down in
process there will no doubt be elements of both budgetary               world trade is essential to the continuation of an orderly
restriction and cyclical slow-down and of dollar exchange               adjustment process in the indebted developing countries , as
rate depreciation .                                                     pointed out by the IBRD in its recent World Development
                                                                        Report ( 1 ).
The prospect of some adjustment by the United States and its
possible effects poses important issues for international
                                                                        The IBRD sets out in particular 'High' and 'Low' case
economic cooperation . The objective would clearly be to
                                                                        scenarios for the developing and industrialized countries
 achieve the necessary adjustments with the smallest possible
                                                                        which are quite in line with the conclusions drawn above ( in
cyclical reverse in the United States itself ( obviously the
                                                                        Section II . 2 ) about the potential gains from a cooperative
United States' own interest ) and , equally also , in the growth
of the world economy as a whole . A disorderly adjustment               growth strategy . Depending upon whether developing
                                                                        countries find themselves operating in favourable or
 entailing trade restrictions would , of course , be very
                                                                        unfavourable conditions as regards the growth of world
damaging to the world economy .
                                                                        trade , the terms of trade and the level of interest rates , their
                                                                        capacity to import is substantially affected . For the years
                                                                        1985 to 1990 the annual average growth rate of developing
 From the United States' point of view a given balance of               countries' imports is projected to range from 9,3 % in the
payments correction can be achieved at a higher level of                high case to 2,5 % in the low case . The debt service burden
 internal economic activity , the higher the level of activity in       of developing countries would rise in the low case to 28 % ;
 the rest of the world economy . For the Community it is                thus the range here is between the debt problem being
 necessary to achieve more dynamic economic growth and the
 question arises of how to maintain this in the case of an
 adjustment to growth in the United States . If such were the           ( J ) IBRD , 'World Development Report 1985', July 1985 .
 ---pagebreak--- 31 . 12 . 85                               Official Journal of the European Communities                                 No L 377 / 47
brought under control to it being aggravated to even more             European Community should be prepared to take up its
acute crisis proportions than so far experienced . In the latter      responsibilities as a large economic region to sustain its own
case the threat to world economic stability would be                  internally generated growth during this period. However, it
considerable .                                                        is equally important that Japan lends its support to a
                                                                      wide-scale international adjustment of this kind, without
The prospect of an important internal and external                    which the EC might face unacceptable risks as regards its
adjustment by the United States economy for a period of               own external account. Without an adequate global
years ahead poses the question of how the rest of the world's         cooperation the risks of upsetting the fragile recovery of the
economy will be kept on an adequate growth path . The                 indebted developing countries would be very great.
                                 V. CONCLUSIONS : OBJECTIVE , INSTRUMENTS AND METHOD
In the present report , the Commission offers to the Council ,            allowing room for faster real growth . Faster growth will
Parliament and Social Partners the outline of a cooperative               be possible also by exploiting opportunities which are
growth strategy which aims at a decisive improvement in the               likely to arise as international monetary conditions serve
Community's economic performance between now and                          to accentuate the reduction of European interest rates ,
1990 . The application of this strategy is necessary if a
reduction in unemployment , without a rekindling of
inflation , is desired . It will produce positive results             — budgetary policies which , at a micro-economic level ,
irrespective of the international environment . Clearly , a               favour more employment-creating growth . At the
favourable environment will facilitate a successful outcome .             macro-economic level a first aim would be to correct
However , in the uncertain conditions which exist today for               present imbalances but at the same time exploiting,
the world economy because of the persistent financial                     where room exists , opportunities for improving supply
imbalances in the United States and the critical problem in               and demand together and moving the European economy
some large and highly indebted developing countries , the                 on to a 'virtuous circle' of investment , output growth and
signal which would emerge from the Community embarking                    new job creation and thereby to a better equilibrium of
on a cooperative growth strategy would be far reaching . The              public finance . Within the framework of the cooperative
proposal may be summarized as follows :                                   growth strategy tax cuts and increased infrastructural
                                                                          investment would be some of the principal measures
                                                                          envisaged ,
Objective
The Community should set clear aims for economic policy .             — a moderate increase in real wages to increase the
In this report , the Commission proposes a cooperative                    profitability of fixed capital . Together with demand
strategy designed to realize a sustainable growth rate of                 support , this will create a climate at the macro level
3,5 % over the period 1986 to 1990 . This will make possible              favourable to fostering an upsurge in investments which
a growth of employment rising to 1 ,5 % per annum and will                at the same time will be more employment-creating ,
provide the means by which unemployment can be reduced
to 7 % by the final year . The pattern of growth will thus
become more employment creating and can take place within             — initiatives designed to improve labour market
a framework consistent with stability of national budgets and             adaptability , the reorganization and reduction of
the reduction of inflation . Such results will only be possible if        working time , under cost-neutral conditions , should also
all participants furnish the contribution required from them              contribute to making growth richer in terms of
by the strategy and if international cooperation progresses               employment ,
satisfactorily .
Instruments                                                           — improved and integrated market policies designed to
                                                                          open up the Community's internal market ; liberalize
No single instrument suffices to achieve this objective .                 domestic financial markets , and to give a better market
However , a number of recent policy initiatives fit well into             orientation to interventionist policies of the Community
the cooperative growth strategy , but their implementation                with due regard to the 'social dimension',
needs to be accelerated and accompanied by a further
dynamic element in order to secure a sufficient change in the
economy's growth trajectory . The main elements may be                — greater investment in Europe's economic potential in the
itemized as follows :                                                     widest sense , ranging from major transport and
                                                                          communication projects of Community interest , through
— monetary policy implemented so as to continue further                   environmental investment , to the better use of Europe's
    the progress made already in reducing inflation but also              technological potential ,
 ---pagebreak--- No L 377 / 48                            Official Journal of the European Communities                                   31 . 12 . 85
 — international policies whereby the Community strives to          measures , pledges by the social partners on incomes and
    improve continually the GATT trade system and                   labour market adjustments , expanded public investment at
    international monetary system , and , with other                national and EC level , and proposals for international
    countries , acting so as to sustain the growth of world         coordinated action in order to reinforce the dynamics of the
    trade and to mitigate the LDC debt problem while                movement . In addition , significant progress in the
    inevitable adjustments occur in the US .                        implementation of Commission proposals , contained in its
                                                                    White Paper on the internal market , is necessary .
Method                                                              Step 3 — after an appraisal of the results of Step 2 , a second
                                                                    set of actions will be implemented in 1987 to confirm and
The Commission considers that it would be appropriate to            deepen the employment-creating growth movement . Some of
adopt a step-by-step approach , so as to assure sufficiently        these actions will be contingent , however , upon evolution of
clear initial commitments to give a credible launch to the          the EC and international economy , and the adequacy of
strategy and establish dialogue between the parties involved ,      contributions on the part of all concerned to the cooperative
while allowing for later steps to be adapted in view of an          growth strategy . The 1986 / 87 Annual Economic Report
assessment of the results , the evolution of economic events        will contain an evaluation of progress in this respect .
and the validity of each parties' contribution :
                                                                    This outline has been deliberately set out in a very schematic
                                                                    form and much must remain for discussion between the
Step 1 — before the end of 1 985 Community institutions and
                                                                    parties involved . However , the principal point is that this
the social partners will seek to achieve consensus on the
                                                                    should provide a basisfor reflection on their own positions of
objectives of the Cooperative Growth Strategy and initiating
                                                                    each of the major actors concerned — governments,
action judged to be necessary .
                                                                    employers and trade unions . Each actor is , in particular ,
                                                                    invited to consider how his existing position might envolve in
Step 2 — a first set of actions will be put into operation          the direction of the common interest if it was evident that the
in 1986 , including in particular macro-economic policy             other actors were prepared also to adapt their positions .
 ---pagebreak---  31 . 12 . 85                               Official Journal of the European Communities                                  No L 377 / 49
Part II of this report contains specific guidelines for economic       events . Elsewhere , the German case is particularly
policy in the Member States . As emphasized earlier , the              interesting . As is indicated in the forecast presented below in
strategy cannot be implemented at a stroke but should be               the German chapter , growth of 3,5 % and an increase in
introduced gradually . To achieve this , close cooperation             employment of 1,3 % are expected in 1986 . The price
between governments , unions and employers will be                     outlook continues to be favourable . The surplus on the
necessary .                                                            balance of payments current account should remain very
                                                                       high (2 % of GDP ). The budgetary deficit will decline more
As far as the demand-side aspect of the strategy is concerned ,        strongly than was earlier expected ( from 1,2 % of GDP in
the room" for manoeuvre in the two main areas of                       1985 to 0,8 %.of GDP in 1986 ). In Germany , therefore , a
macro-economic policy differs considerably . The situation             positive chain reaction is developing between price stability ,
regarding monetary policy is relatively satisfactory . Within          more growth and employment and expansion of room for
the context of a monetary policy geared towards stability ,            manoeuvre in the fiscal and external fields . This room for
which is largely determined by the EMS , significant potential         manoeuvre should be exploited in order to ensure beyond
exists for bringing down interest rates , particularly if the          1986 the steady growth ( annual average increase of some
dollar continues to weaken against the ECU .                           3,5 % ) necessary for a continuing reduction in
                                                                       unemployment . Such a development is in the interests both of
As far as a possible demand support through government                 Germany and the Community . By acting in this way ,
budgets is concerned , implementing the strategy of                    Germany would not repeat the 'locomotive policy'
employment-creating growth presents specific problems in               experience of 1 978 . Monetary policy would remain geared to
individual Member States . Since the strategy cannot be                stability ; the cooperative dimension of the strategy between
implemented at a stroke , the recommendations addressed to             governments and social partners , applied in the Community ,
the various countries must remain realistic and capable of             would facilitate the transposition of the positive chain
                                                                       reaction to other Member States .
being coordinated . Simultaneously with the moderate
increase in wages and the widening room for manoeuvre in
fiscal policy — more growth and employment boost revenue ,             In the other Member States budgetary and / or external room
while expenditure caused by the crisis is reduced — demand             for manoeuvre has not yet been re-established . In some of
support should occur step by step , until the process becomes          these countries ( Denmark , France , the Netherlands and the
self-sustaining through private investment and an                      United Kingdom ) it is possible that a similar positive chain
appropriate development of private consumption .                       reaction to that being experienced in Germany will arise in
                                                                       the near future . Such a progress will appear all the more
In some Community countries ( Italy , Belgium , Ireland and            rapidly in so far as there is a positive contribution from the
Greece ), the relative level , or the growth , of public debt is       social partners to the realization of the strategy and as
such that the consolidation process must be continued at all           developments proceed favourably in Germany .
 ---pagebreak--- No L 377 / 50                               Official Journal of the European Communities                                    31 . 12 . 85
                                                                PART II
                                        ECONOMIC POLICY IN THE MEMBER STATES
                                                               BELGIUM
In Belgium , despite the fairly weak private consumption ,             Afer assessing the statutory norm for the first time early in
economic activity accelerated slightly in 1985 because of the          July , the government concluded that it was being respected in
vigorous growth of investment and the greater contribution             1985 .
of foreign trade to growth . Inflation continued to slacken .
The unemployment rate fell somewhat in the course of the
year and the general government borrowing requirement was              Although the merit of setting a norm for the maintenance of
cut by slightly over one percentage point of gross domestic            competitiveness is that an economic policy priority is clearly
product . The Belgian franc remained firm even though                  defined , the fact should not be overlooked that this reduces
interest rates fell more sharply than in the other EMS                 the problem of competitiveness to a single measure with all its
countries .
                                                                       limitations and imperfections . Other approaches , which
                                                                       place greater emphasis on the 1985 to 1986 collective
                                                                       agreements or on other indicators , tend to suggest that the
In 1986 , growth is again likely to be modest . The current            competitive advantage achieved in 1982 and 1983 began to
account surplus will probably grow rapidly , mainly because            be eroded in 1984 . When the statutory norm is assessed for
of the improvement in the terms of trade but the gain in               the second time early in 1986 , the situation ought to be
competitivity experienced after the 1982 devaluation will              reexamined with all the requisite caution , and taking account
continue to diminish . Consumer price rises will again slow            of the progress relating to elements other than the trend of
down under the moderating effect of world prices . In view of          compensation per employee achieved or planned by
these prospects , an improvement in unemployment will be               competing countries , such as the evolution of labour
difficult to achieve .
                                                                       productivity and effective exchange rates .
Although expansion remains moderate in 1985 and 1986 , it
is encouraging to note that it is based primarily on exports           It is especially important to safeguard competitiveness
and investment : this proves that the two priority objectives          because the improvement of employment and public finance
attained after the first phase of the economic recovery policy         hinges on this in the immediate future . The new collective
(the restoration of the economy's competitiveness and of               wage agreements covering 1985 and 1986 were signed in the
company finances ) are bearing fruit in terms of growth .              spring . Because the social recovery law, by prohibiting all
Nevertheless , given the scale of the imbalances which were            new advantages , has obliged management and labour to
created in the 1970s , the recovery remains incomplete and             translate productivity gains into work sharing , these
fragile ; efforts cannot be relaxed if existent achievements are        agreements open up the prospect that jobs will be created
to be consolidated .                                                   equivalent to some 1,5 % of the number of wage and salary
                                                                       earners concerned by the agreements . The scope within the
                                                                       country for underpinning activity is limited by the constraints
In the 1970s , a gap between the growth rate of labour costs            imposed by the still precarious public finance situation and
and productivity was accompanied by an important                       current efforts to improve it are closely bound up with the
destruction of jobs in manufacturing industry . At the end of           measures designed to maintain competitiveness . The
the period , in 1981 , the rate of return had plummeted from            decisions of March 1984 , imposing a three-year moderation
the early 1970s level , the remuneration of capital in                  of disposable incomes by requiring a 2 % slice of wages to be
comparison with that of labour had deteriorated appreciably            paid to the Treasury , introduce a wider split between the
and investment activity had dropped . Since then certain                growth of wages as costs and wages as income without
profitability indicators point to a recovery , but the                  alleviating the former . A correction of indirect labour costs ,
remuneration of capital relative to labour has scarcely                 which is likely to prove necessary in order to restore
improved , apart from a revival in 1982 and 1983 .                      competitiveness , would immediately interfere with the
                                                                        programme of improving the public finance situation or
                                                                        would have a moderation effect on domestic demand because
Therefore the conditions underlying a lasting expansion of              of the budget spending cuts necessary to prevent a widening
capital-widening investment are not sufficiently satisfied ,            of the deficit . Yet , even though the general government net
whereas the capacity utilization rate is approaching the                borrowing has already been pruned by almost four
maximum value of the previous cycle . This is the background            percentage points of gross domestic product , from 12,8 % of
against which government efforts to increase competitive                gross domestic product in 1981 to 8,9 % in 1985 , it is still too
capacity should be assessed . In the social recovery law of             high . To measure the fragility of what has been achieved ,
 22 January 1985 , the Government set a norm , valid for 1985           suffice it to say that although non-interest expenditure was
 and 1986 , designed to maintain competitiveness at the 1982            markedly reduced , it was barely possible to stabilize total
to 1984 average level . This norm is based on the                       expenditure because of the debt interest burden which
remuneration per head in a common currency relative to the              climbed from 7,3 % to 10,9 % of gross domestic product in
 weighted average for Belgium's seven main trading partners .           the same period . It should be stressed that the increase in
 ---pagebreak---  31 . 12 . 85                                 Official Journal of the European Communities                                         No L 377 / 51
 revenue includes a greater yield from company taxation ,                   indexation mechanism . On the expenditure side , virtually
 although from 1982 on , companies benefited from a variety                 the only stimulus which the public sector can provide in the
 of tax cuts ( the top rate of tax on company profits was                   short-term is to shift expenditure more firmly into areas
 brought down from 48 % to 45 % , the additional 'solidarity'               which favour employment .
tax was abolished , tax exemptions were introduced in
 exchange for investment ).                                                 Until now , the chief weapon in the fight against
                                                                            unemployment has been wage moderation as a means of
 Despite the efforts made , the vicious circle of deficit-interest          improving the economy's competitiveness and company
payments-larger deficit means that the borrowing                            profitability and financial structure . It has been
requirement is still too high . Therefore for 1986 the last                 supplemented by a revival , from 1984 on , of public-sector
 section of the 15 March 1984 programme must be                             programmes to absorb unemployment - programmes which
implemented in full and all overspending and any fall in                    employ 2,1% of the labour force in 1985 compared with
 revenue , notably as a result of the programme for cutting                  1 ,4 % in 1983 - and by measures to help people to be taken
taxation from 1986 to 1989 which was voted in July , must be                on in their first job , to encourage the unemployed to start
offset within the budgetary ceiling . If all these conditions are           their own businesses , and to promote work sharing .
met , and given the automatic growth of revenue , the central
government Treasury financing requirement should be                         Given the existing measures to reduce taxation and to
limited to 9,6 % of gross domestic product in 1986 compared                 support employment directly , and the need to go on
with 10,4% in 1985 . Because of the tax cuts voted , from                   trimming the public deficit , external trade must provide most
which disposable income will , from 1989 , benefit by the                   opportunities for raising the growth rate and expanding the
 equivalent of 1,5% , even tighter management of public                     volume of employment . Here , the economic policy priority
finance will be required . However , the structure of revenue ,             must continue to be the maintenance of the right level of
 and notably the high level of social security charges                      competitiveness . Cooperative action at Community level
compared with an average level of indirect taxation , gives                 would also help to cut the public-sector deficit more quickly
 some margin for cutting the cost of labour , provided that the             and would allow the more rapid creation of the room for
effect of this change in structure is not wiped out by the                  manoeuvre which is now missing .
                                                                   TABLE 11
                                               Belgium : Main economic aggregates 1961 to 1986
                                                                                              General
                                                          Private   Compen­       Current     govern­
                         GDP       GDP
                                               GDP                   sation        trans­     ment net
                                                                                                        Money       Unemployment       Employ­
                                                         consump­                                                      in labour
                        current    real
                                              deflator      tion                  actions     lending    supply                          ment
                                                                       per                                             force ( 4 )
                         prices   terms
                                                          deflator
                                                                                                       ( M2 ) ( 3 )
                                                                    employee      account        or
                                                                                             borrowing
                                                                                                           %                              %
                                             % change                                    % GDP                             %
                                                                                                        change                          change
 1961 to 1970              8,5       4,9        3,4         3,1        7,8            0,6      "  1,5      8,6        2,2                  0,6
1971 to 1980             10,5        3,1        7,1         7,1       11,9         - 0,2       -  5,0     10,3        5,5                  0,3
1981                       4,2    - 1,2         5,4         8,6        7,7         " 4,5       - 12,8      5,8       11,2   ( 10,3 )     - 2,0
1982                       8,3       1,1        7,1         7,6        7,9         - 3,4       - 11,0      5,7       13,1   ( 12,1 )     - 1,3
1983                       6,3       0,4        5,9         7,5        6,7         - 0,7       - 11,7      7,0       14,4   ( 13,3 )     - 1,6
1984 (!)                   7,0       1,7        5,3         6,2        6,2         - 0,3       -  9,9      6,1       14,5   ( 13,3 )       0,4
1985 ( 2 )                 6,7       1,9        4,7         4,9        5,7            0,6      -  8,6      6,0       13,8   ( 12,4 )       0,4
1986 ( 2 )                 6,2       1,7        4,4         3,2        4,2            2,0      -  7,4      5,5       13,4   ( 12,2 )       0,3
(*) Estimates of the Commission services , October 1985 .
( 2 ) Forecast of the Commission services , October 1985 , on the basis of present policies .
( 3 ) End of the year .
(4 ) Eurostat concept ; between parenthesis : national concept .
                                                                   DENMARK
In Denmark economic activity continued to expand during                     corresponding to the average annual medium-term trend .
1985 ; estimated real GDP growth was close to 2,5 % , down                  Whereas the excellent harvest bolstered total output in 1984
from the almost 4% recorded the year before , but                           a number of factors combined to slow the rate of increase
 ---pagebreak--- No L 377 / 52                             Official Journal of the European Communities                                   31 . 12 . 85
during 1985 . In particular , domestic demand was less               with a cut in indirect labour costs equivalent to 1 ,5 % of the
buoyant with the sluggish development of private                     wage bill as from October 1985 and limitations on other
consumption and residential construction offsetting the              forms of income increase this should bring about a slowdown
continued rapid rise in private business investment . Imports        in inflation and improve profitability . There will also be a
of capital investment goods as well as specific consumer items       favourable impact on employment not only as result of
remained strong . Despite the reinforced industrial                  greater potential output due to higher industrial investment ,
competitiveness resulting from tight incomes policies ,              but also due to an improved mix of capital and labour inputs .
exports , which triggered the present phase of economic              However , relatively rapid changes in the product mix and
expansion , performed less strongly against the background           market conditions require a high degree of adaptability in the
of slower growth in the country's markets . Consequently , the       labour market. It has become increasingly important to
deficit on the current balance of payments , which includes a        update skills acquired in the past in view of current
large amount of interest payments abroad , remained large .          technological progress and to review labour market
More positively , however , inflation continued to level off as      regulations in order to remove possible obstacles to the
domestic costs declined , while private sector employment            potential of the economy to generate jobs . Various measures
rose faster than total labour force growth so that the               have been taken to reintegrate long-term unemployed and
unemployment rate fell by almost one percentage point . In           other groups hit by unemployment .
addition , the general government deficit narrowed to some
3 % of GDP as real expenditure remained unchanged with
current receipts growing in line with GDP .                          The pressing need for further improvement in the balance of
                                                                     payments remains a decisive element for the stance of
                                                                     monetary and budgetary policy . Adjustments might be
In 1986 , gross domestic product is expected to grow by more         necessary if domestic demand , particularly private
than 3 % . Although domestic demand is due to rise at a rate         consumption , should deviate from the trend compatible with
close to that for 1985 , changes in the structure of demand          improved external equilibrium . Restoration of external
reinforced by import substitution are likely to produce a            equilibrium must remain an essential policy-objective but the
smaller increase in imports . Private consumption should             authorities room for manoeuvre in this respect would be
grow , underpinned particularly by a rise in employment , but        enlarged if foreign demand was supported through
public consumption will reflect the tight budgetary stance           cooperative Community action .
pursued by the authorities . The cyclically sensitive
investment categories should benefit from lower financial
costs and improved profitability , while discretionary               The growth in money supply fell during 1984 and continued
components , particularly in the energy area , are expected to       to level off in 1985 as did bank lending . Interest rates
begin to wind down . The relative fall in domestic costs ,           declined considerably in response both to the anticipated
reflected in lower inflation , should contribute to a further        slowdown in inflation and to a rise in private capital inflows .
gain in market shares for manufactured goods .                       The differential between domestic and foreign interest rates
Unemployment should show a further improvement                       narrowed consequently ; this should reduce the propensity of
compared with the year before .                                      industry to contract foreign debt . In order to allow a more
                                                                     market-orientated control of domestic liquidity , the
                                                                     National Bank modified at mid year the domestic credit
External constraints and tight budgetary management may              monitoring system by establishing a new system of marginal
mean that realized growth in the period 1984 to 1986 will            reserve requirement . A more flexible management of
emerge at slightly below potential . The economic policy             liquidity and short-term interest rates based on short-term
pursued by the authorities since 1982 aims at a return to            deposit certificates issued by the National Bank and traded
external balance and equilibrium on the central government           only among banks was implemented in August replacing the
budget by 1988 and 1990 respectively , and , though the              existing tranche division of banks' borrowing facilities with
achievement of these objectives also depends to a                    the National Bank .
considerable extent on the continuation of sufficiently
vigorous growth in world demand , appreciable progress has
been made . The wage restraint pursued in recent years has           A lower share of public expenditure in gross domestic
altered the relative costs of labour and capital and                 product would help alleviate monetary constraints and
strengthened profitability . At the same time , tight budgetary      stimulate the growth potential of the economy . The draft
control has reduced the general government borrowing                 budget for 1986 remains in line with the medium term
requirement . Lower inflationary expectations helped to              strategy adopted by the government and corresponds to what
bring down nominal interest rates . Against this background ,        appears to be an appropriate guideline from the Community
improved business confidence favoured a rise in the stock of         point of view . The level of expenditure will stabilize at the
productive capital with private employment growing                   ceiling fixed for 1985 , whereby it declines as percentage of
simultaneously . The result has been the achievement of a            GDP , whereas taxation should grow more or less in
much improved equilibrium in domestic macro-economic                 proportion to nominal GDP . The outcome will therefore be a
conditions with the external balance still lagging however           further reduction in the central government deficit to some
behind the desired objective .                                       3 % of GDP and 1 % for general government . The relative
                                                                     cutback in total expenditure , in terms of GDP , necessitates a
                                                                     continuous reappraisal of existing schemes with a view to
The incomes policy measures adopted in March imply a rise            reallocating resources on a priority basis among various
in nominal wages of the order of 2% per annum . Together             expenditure categories . Total taxation will remain
 ---pagebreak--- 31 . 12 . 85                                  Official Journal of the European Communities                                      No L 377 / 53
approximately unchanged in relative terms as the cut in                     diseconomies as marginal rates are reduced and the fiscal
indirect labour costs is financed by a rise in corporate taxes ,            disincentives to save are diminished . In budgetary terms the
which , due to improved competitiveness , should leave                      envisaged changes in taxation should balance , but they may
profitability unaffected . In addition , a reform of income tax             very well have an expansionary impact on domestic demand .
is planned for 1987 . Its aim is to discourage tax induced                  It will be necessary not to lose sight of such likely effects .
                                                                   TABLE 12
                                              Denmark : Main economic aggregates 1961 to 1986
                                                                                             General
                                                          Private   Compen­      Current     govern­
                         GDP       GDP
                                               GDP                   sation       trans­     ment net
                                                                                                         Money   Unemployment       Employ­
                                                        consump­                                                    in labour
                        current     real                                                                  supply
                                              deflator     tion        per       actions     lending    ( M2 ) H    force ( 3 )
                                                                                                                                      ment
                         prices    terms
                                                         deflator   employee     account        or
                                                                                            borrowing
                                                                                                            %                          %
                                             % change                                   % GDP
                                                                                                          change
                                                                                                                        %
                                                                                                                                     change
1961 to 1970             11,2         4,5        6,4        5,8       10,6        - 2,2          1,3       10,2         1,1             1,1
1971 to 1980             12,2         2,3        9,6       10,1       11,5        - 2,9          0,9       11,3         3,8             0,7
1981                       9,1     - 0,9       10,1        12,0        9,2        - 3,0       - 6,9         9,6         9,2           - 1,3
1982                     14,6         3,0      11,3        11,0       11,5        - 4,1       - 9,3        11,8         9,8             0,3
1983                     10,3 .       2,0        8,1        7.1        6,4        - 2,2       - 7,4        25,5       10,4              0,5
1984                       9,9        3,9        5.8        6,6        4,9        - 3,2       - 4,6        17,0       10,0              2,2
1985 0 )                   6,4        2,3        3.9        4.2        3,7        - 3,4       - 2,9        11,0         9,1             2,0
1986 0 )                   5,4        3,2        2,2         1,7       2,4        - 2,7       - 0,7         7,5         8,6             1,6
(') Forecast of the Commission services , October 1985 , on the basis of present policies .
( 2 ) End of the year .
( 3 ) National concept .
                                                     FEDERAL REPUBLIC OF GERMANY
Economic conditions in the Federal Republic of Germany                      employment rose in the year to mid-1985 by about 155 000 .
have improved significantly during 1985 : economic growth                   The reductions in working time contributed somewhat to
strengthened through the year , the rise in consumer prices                 this rise . The increase in employment in industry and services
slowed further and employment rose more strongly than was                   has thus more than compensated for redundancies in the
generally expected . There was another considerable                         construction sector . Unemployment, however , rose over the
reduction in the financial deficit of the territorial authorities           same period by 55 000 , reflecting demographic factors and ,
while the surplus on the current account of the balance of                  above all , a renewed rise in participation rates ; the
payments , however , has reached a new record level .                       unemployment rate in 1985 is thus at the same high level as in
                                                                            1984 ( 8,4% ).
The rate of growth of gross domestic product in 1985 is likely
to be only 2,25% , remaining therefore slightly below the                   The slowdown in inflation was due to competition and , to a
rate of growrth forecast by the Government in its latest annual             considerable extent , to a favourable development of unit
economic report ( 2,5 % ). This must be seen however in the                 labour costs ; the moderate increase more than offset the
light of the fall in output in the first quarter , mainly due to the        inflationary pressure resulting from higher import prices in
effect of extremely harsh weather conditions on construction                the opening months of the year . The rise in consumer prices
activity . From the second quarter onwards , real GDP has                   in 1985 ( annual average) is expected to measure some 2% ,
risen appreciably . External demand has continued to provide                compared to 2,5% in 1984 .
expansionary pressure but domestic demand , especially for
capital goods , has increasingly contributed to growth . The
expansion in the economy has been reflected in the labour                   The surplus on the current account of the balance of
market . According to the latest employment data , which                    payments in 1985 is estimated at 2,1 % of GDP , more than
incorporate substantial upward revisions , aggregate                        twice as high as in 1984 , reflecting a much higher trade
 ---pagebreak--- No L 377 / 54                                Official Journal of the European Communities                                    31 . 12 . 85
surplus and a broadly unchanged deficit on services and                 0,5 % of GDP, is thus to be welcomed . Despite these tax cuts ,
transfers .                                                             the increase in tax revenue in 1986 is expected to be only
                                                                        marginally slower than in 1985 . Total revenue of general
                                                                        government will grow even somewhat faster than in 1985
In 1986 the momentum of economic expansion should                       because of a significant rise in social security contributions
continue and real GDP growth is expected to reach 3,5% .                resulting mainly from the increase in employment . The
This year-on-year growth rate — relatively high by European             government deficit is thus falling more quickly than was
standards — is , however , strongly influenced by the expected          earlier expected . In the Commission's current forecast the
rapid recovery in activity during the second half of 1985 .             budget deficit is estimated to narrow , despite the tax reform ,
Indeed , GDP growth between the fourth quarters of 1985                 from 1 ,2 % of GDP in 1985 to 0,8 % in 1986 . In the absence
and 1986 is not expected to be more than 2,5% .                         of additional expenditure , the out-turn for the central
                                                                        government ( Federation and Lander) deficit in 1986 is likely
Growth in 1986 will result mainly from the increase in                  to be several thousand million DM below the level of some
domestic demand , where private consumption will play an                DM 40 000 million considered to be appropriate by the
essential role . Real disposable income is expected to rise             Commission .
appreciably in 1 986 in view of a further reduction in inflation
due principally to falling DM import prices . Moreover , the
introduction on 1 January 1986 of the first stage of the tax            The stronger growth and rising employment are opening up
cuts , which should benefit families with children in                   room for manoeuvre at the level of general government
particular , will contribute substantially to improving the             which in 1986 should be used essentially to raise public
financial position of households . Finally, disposable income           investment . The improved depreciation provisions for
is expected to be boosted by a rise in employment in 1986 ,             industrial buildings already decided upon by the government
estimated at 330 000 persons , compared with the average for            represents an initial step in this direction .
1985 . Nevertheless , the unemployment rate will fall only
slightly , from 8,4% to 8,0% .
                                                                        In addition , the urban renewal programme , for which federal
                                                                        assistance has already been increased from DM 300 million
Investment in equipment in 1986 is likely to lose only a little         to DM 1 000 million in both 1986 and 1987 , must be
of its momentum ( growing by almost 9 % , as compared to                supplemented by a proportional increase in the financial
11% in F985 ). After the downturn in housing in 1985 ,                  contributions of the Lander and local authorities . In
investment in construction should again show a slight real              addition , the urban renewal programme , for which federal
increase in 1986 . Total fixed investment is thus expected to           assistance has already been increased from DM 300 million
rise by almost 5 % , following a decline by more than 1 % in            to DM 1 000 million in both 1986 and 1987 , must be
1985 .                                                                  supplemented by a proportional increase in the financial
                                                                        contributions of the Lander and the local authorities . There
The growth of exports is expected to slow down in 1986 . On             is evidence that there is a large number of worthwhile
account of the present favourable competitive position , in             projects in the field of environmental improvement and
                                                                        urban renewal on which decisions could now be taken . As
terms of prices and technology , the volume of German
exports is nevertheless expected to continue rising somewhat            such funds are provided in the form of partial grants , their
faster than the increase in world trade . Imports , however , are       overall effect is considerably greater . There is also scope for
likely to rise much more strongly . The faster economic                 graduating the grants from the point of view of structural and
growth rate expected in the Federal Republic indicates that             regional policy ( e.g. according to regional unemployment
there is a widening difference in the relative cyclical position        rates ) so as to achieve greater employment effects in problem
                                                                        areas . A further increase in ERP funds in order to encourage
as compared to other Member States , and to the USA.
Experience from earlier cycles suggests that , with a relatively        investment in environmental protection ( e.g. sewage works)
short lag , this will lead to a strong upturn in German imports .       also seems advisable in 1987 . These specific measures to
The Federal Republic would thus also provide an appreciable             create employment and to support the building industry seem
contribution to growth in other countries . Nevertheless , the          appropriate in a wider macro-economic context , since they
current account surplus will remain almost unchanged , at               would help to meet needs which have been neglected in recent
around 2% of GDP .                                                      years , but which are important both for the present and for
                                                                        the future . Because of existing spare capacity in the building
                                                                        industry , there is no danger that such measures would
During the last three years , considerable progress has been            impede the process of structural adjustment in this industry .
made in the consolidation of the public finances . The deficit          A restructuring of resources away from the declining sector
of the territorial authorities , which amounted to about DM             of new house building into the direction indicated above
60 000 million in 1982 ( on national accounts definitions ),            therefore also appears justified from a medium-term
will probably be less than half that figure in 1985 . It is true        viewpoint .
that , initially , consolidation had a negative impact on
demand ; expectations were stabilized , however , and the
positive effects of the strategy have subsequently come to the          In addition , supply conditions should be improved as soon as
fore . Restraint on public expenditure and borrowing has                possible through changes in the tax system directed towards
opened up wider scope for reducing taxes and interest rates             specific objectives . This should also cover taxes which , while
than would otherwise have been the case . This room for                 contributing insignificantly to total government revenue ,
manoeuvre should now be used . The introduction in 1986 of              restrict the efficiency of the capital market , such as taxes
the first stage of the tax reductions , corresponding to about          relating to share transactions and issues ( Borsenumsatzsteuer
 ---pagebreak--- 31 . 12 . 85                               Ofticial Journal of the European Communities                                  No L 377 / 55
and Gesellschaftssteuer - together contributing barely                capital in many areas is , however , still too low . This
0,5% of the Federation's total tax revenue ). The                     underlines the need to use the capital stock more efficiently
Commission has already submitted proposals in this                    and in such a way as to generate more employment .
respect .
                                                                      Now that productivity is again rising more strongly , real
After the entry into force of the law on the alleviation of           wage increases are clearly possible in 1986 . The increase in
taxation (Steuerentlastungsgesetz) providing for a two-stage          real per capita incomes should however continue to lie below
( 1986 and 1988 ) reduction in taxation , it is important for the     overall productivity growth . Thanks to the first stage of the
broad outlines of the tax reform envisaged over and above             tax reform and to the further success in combating inflation
this to be proposed as soon as possible . In this regard , further    ( achieved mainly through a fall in import prices in 1985 ),
steps that should be taken are an increase in the fiscal room         there will be a further appreciable improvement in real
for manoeuvre and further improvement of supply                       incomes despite a moderate wage round . Given the economic
conditions through a compulsory and specific reduction in             situation in 1986 , a rise in real per capita income is not only
subsidies . Such a prospect could help to underpin the                possible but within limits also desirable , since private
expectations of enterprises and consumers and to boost the            consumption should compensate for the slow growth of
rate of investment . If, contrary to all expectations , the           exports in order to support the overall level of activity , as
economic situation were to deteriorate appreciably , the              long as it does not impede investment growth .
conditions within which supply and demand operate would
have to be improved according to the requirements of the
situation .                                                           In negotiations between employers and unions in 1986 it
                                                                      might be considered whether , as a direct counterpart to
                                                                      continued moderation of wage settlements , additional jobs
The development of the public finances is an impressive               could be created . This form of arrangement could signal an
example of a positive chain reaction resulting from more              increase in employment .
growth and employment . The interlocking effects of faster
growth and greater room for manoeuvre for financial policy
provide the basis for a virtuous circle which will eventually         More employment-creating growth could also be promoted
bring the economy onto a steady growth path with rising               if working hours were made more flexible than is currently
employment .                                                          the case in most firms . This would also facilitate reductions
                                                                      in working hours . The experience gained so far in the metal
Over the last three years monetary policy has managed to              and printing industries , where employers and unions last
achieve a marked reduction in the inflation rate and - what           years agreed on a cut in working time combined with more
is equally important - in inflationary expectations . The             flexible arrangement of the hours worked , is certainly
confidence which this has created in the German mark has              encouraging . A recent survey carried out on behalf of the
made it possible to decouple interest rates to a considerable         Commission among a representative cross-section of
extent from US levels . Since the spring of 1985 , the room for       European employees has shown that there is a high degree of
manoeuvre in monetary policy has grown even further , since           readiness in the Federal Republic of Germany ( and in most
the dollar has been falling since then , albeit irregularly .         other member countries ) to accept new working time
Monetary policy should continue to exploit fully the                  arrangements . For example , a third of the employees
developing potential for interest rate reductions in the              surveyed favour working irregular and , in some cases ,
framework of the price stability objective . To the extent that       inconvenient hours (e.g. in the evening until 22.00 and once a
growth potential rises as a result of higher investment and           month on a Saturday ) if this is matched by a reduction of
                                                                      some 5% in annual working hours . Furthermore ,
more flexible use of the capital stock , additional scope will
develop for monetary growth which is still consistent with            approximately one in every six of those currently employed
                                                                      on a full time basis would welcome a working week reduced
price stability .
                                                                      to some 30 hours on the same hourly wage . These
                                                                      preferences regarding working hours can generally be
The dynamic recovery in investment must continue . As the             reconciled with business reality only if the whole pattern of
capital stock in many areas is obsolete , gross fixed                 working is made more flexible . Only in this way could
investment must expand appreciably in real terms for a                shorter working hours for the individual be consistent with
number of years in order to permit both adequate                      the current length , or even an extension , of operating hours ,
modernization and the extension of the capital stock                  while at the same time creating additional employment
necessary to generate additional jobs . The growing need for          opportunities . The new legislation governing limited-period
capital-widening investment is demonstrated by the high               contracts and part-time working should be used more
level of capacity utilization recorded in mid- 1 985 ; the level of   actively by employers and workers so that the evident large
utilization in industry was only one percentage point lower           potential for flexibility among workers can be better
than at the previous cyclical peak at the beginning of                exploited for the benefit of both sides . In the services sector in
1980 .                                                                particular , a considerable increase in employment might be
                                                                      achieved if more flexible working hours were accompanied
                                                                      by changes in operating hours . Such measures are no less
In recent years wage moderation has made a considerable               appropriate for the fact that more attractive working hours
contribution to the recovery of companies' financial                  have the effect of bringing persons from outside the labour
situation . While the profit share in value added has again           force onto the labour market and that the number of
reached the level of the early 1970s , the yield on physical          registered unemployed falls less sharply as a result .
 ---pagebreak--- No L 377 / 56                                 Official Journal of the European Communities                                      31 . 12 . 85
A particularly important task in the next few years is to                   current account surplus and , above all , unemployment . The
further improve the vocational training opportunities for                   regained room for manoeuvre for financial policy should be
school leavers and to guarantee them employment after their                 fully used , not only to counteract in time a possible cyclical
training , even if this initially has to be in some form of                 weakening of the economy in 1987 , but also to maintain the
part-time working . One way of doing this is to make early                  momentum of the positive chain reaction between growth ,
retirement more attractive financially — at least for a limited             employment and the room for manoeuvre . A medium-term
period up to 1 9 8 8 — in order to boost the numbers opting for             growth rate similar to that expected for 1986 and an increase
early retirement during the next few years , which will still see           in employment of about 1 ,5 % per year are pre-conditions
an appreciable increase in the potential labour force .                     for a significant reduction in unemployment . Because of the
                                                                            resulting higher import requirement , the Federal Republic
The economic outlook for 1986 is generally favourable .                     would also help to ease the employment problem in its
Nevertheless , there are still two appreciable imbalances , the             partner countries .
                                                                  TABLE 13
                                   Federal Republic of Germany : Main economic aggregates 1961 to 1986
                                                                                              General
                                                         Private   Compen­                    govern­
                        GDP       GDP
                                               GDP                   sation     Current       ment net
                                                                                                        Money    Unemployment     Employ­
                                                        consump­
                       current     real
                                              deflator     tion                  balance      lending
                                                                                                         supply     in labour
                                                                                                                                     ment
                                                                      per                                             force
                        prices    terms
                                                         deflator                                      ( M.3 ) n
                                                                   employee                      or
                                                                                            borrowing
                                                                                                           %                          %
                                             % change                                   % GDP                           %
                                                                                                        change                      change
1961 to 1970             8.4         4.5        3,7        2.7        8,5           0,7           0,4     10,4         0,8             0,2
1971 to 1980             8,2         2,7        5.3        5.1        8,5           0,6           2,0      9,8         2,7           - 0,1
1981                     4,2         0,2        4.0        6.2        5,2         - 1,0        - 3,7       5.0         4.7           - 0,7
1982                     3,7      - 0,6         4.4        4.8        4,2           0,5        - 3,3       7.1         6.8           - 1,7
1983                     4,6         1,2        3,3        3,2        3,9           0,7        - 2,5       5,3         8,4           - 1,5
1984                     4.5         2.6        1,9        2,5        3,2            1,0       - 1,9       4.7         8,4             0,0
1985 (M                  4,4         2,3        2.1        2,1        3,2           2,1        - 1,2       5,0         8,4             0,6
1986 ( 2 )               5,4         3,5        1,9         1,5       3,8           2,0        - 0,8       4.8         8,0             1,3
(*) Estimates of the Commission services , October 1985 .
( 2 ) Forecast of the Commission services , October 1985 , on the basis of present policies .
(') End of the year .
                                                                   GREECE
In Greece domestic demand in 1985 has continued to be                       Faced by these developments , which represented a lasting
substained by the still vigorous expansion of public                        change in the competitiveness of the economy , the authorities
expenditure and by a further increase in the number of                      decided on 1 1 October 1985 to devalue the drachma by 15 %
tourists . However , the contribution of the real foreign trade             and to introduce a compulsory deposit on a large proportion
balance has deteriorated sharply due to the combined effects                of imports . At the same time a series of complementary
of a marked slowdown in the rate of growth of exports                       measures was announced , which demonstrates a will to get
( exceptionally high in 1984 ) and an appreciable upturn in                 the economy onto the adjustment path necessary for the
imports . The growth rate for 1985 is thus likely to fall to                recovery of growth on a sounder basis . The fact that external
around 2% . Moreover , major disequilibria have continued                   indebtedness was continuing to increase rapidly , whereas the
to affect the economy . The rise in consumer prices has slowed              share of business investment in domestic demand was
down only temporarily and , on a year-on-year basis , could                 declining steadily , was among other factors particularly
climb to 19 % again . Business investment has continued at a                disturbing . The economy was in effect tending to become
very low level , showing no tendency to recover . Lastly, the               trapped in a vicious circle , so that it was liable to become
sharp increase in the tourism surplus has not been sufficient               increasingly difficult to restore external equilibrium as a
to offset the deterioration in other current account items ; the            result of inadequate investment to increase production
deficit on current account ( on Bank of Greece definitions)                 capacity and to improve competitiveness . The priority aim of
could be as much as 8,5 % of gross domestic product .                       economic policy had therefore to be to break this circle as
 ---pagebreak--- 31 . 12 . 85                                 Official Journal of the European Communities                                  No L 377 / 57
soon as possible . This means not only gradually adjusting              adjustment of public utility charges and other administered
domestic demand as a whole to the external constraint , but             prices , which have been kept at artificially low levels relative
also increasing as rapidly as possible the share of productive          to the rise in the general price level . To this end , an initial
investment in domestic demand , in order to bring it to the             series of measures has already been taken . It will be no less
level required to ensure growth in the future .                         necessary , as foreseen in the government programme , to
                                                                        increase the pressure of taxation not only by means of the
The precondition for attaining these results was to bring               steps taken to intensify the fight against evasion , but also by
about as quickly as possible a disinflation of the economy .            deliberate tax increases , which appear unavoidable .
The lasting re-establishment of competitiveness depends on
this , and so does the return to normal of investment and               This two-pronged effort to reduce inflation should
savings behaviour . Fulfilling this objective implied major             considerably reduce the pace at which the demand for credit
efforts - on which the authorities have now decided as                  increases ; yet , monetary policy will still have to exercise
shown by the measures announced - to curb spiralling costs              restrictive action , confirming the current trend for positive
and the public deficit , the two essential factors which                real interest rates , with a view to encouraging the
perpetuate inflation .                                                  development of a stable pattern of saving and , in particular ,
                                                                        to extend the public placement of government securities
                                                                        which was started in 1985 .
The first step was to seek to obtain a substantial moderation
in the nominal increase in earnings , as compared with the
rate of 20% or so still evident in 1985 . This aim was not              These measures should make it possible to point the economy
compatible with the continuation of the old system of                   more resolutely in the direction of sounder management
indexation , which had the disadvantages not only of feeding            which is essential for its subsequent recovery . It will
automatically into costs , whether directly or indirectly , a           nevertheless be necessary to supplement them by new
large proportion of earlier price rises and of thus permitting          measures designed to hasten the recovery of business
only very slow disinflation , but also of making wage                   investment . Inter alia, prices policy will have to contribute by
adjustment too independent of changes in productivity in the            becoming more flexible , provided that there is no danger of
various sectors of the economy . It has been decided to make a          vigilance being relaxed with regard to dominant positions .
fundamental change to this system , by linking wage increases
from now on to the targeted , rather than the observed , rate of        As early as 1986 , the policy described above could begin to
inflation , excluding the impact of import price rises . It has         bear fruit . Domestic demand should slow down to the
also been decided to freeze incomes above a certain level for a         advantage of the external account but , on balance , it will not
period of four months . These decisions should make possible            be possible to avoid an appreciable check on in growth .
a faster deceleration of prices , as well as a start in the process     Private investment should also pick up ; this is likely to be
of improving the substantially deteriorated financial position          reflected in a gradual climb in the share of investment in
of enterprises . The reduction in inflation and the recovery of         domestic demand . The year-on-year increase in consumer
business profitability aimed for by these measures are an               prices could be around 21% , which would mean a rate
essential condition for the re-establishment of balanced                through the year much lower than this figure . Lastly , given
growth .                                                                favourable prospects for the international environment , the
                                                                        balance of payments on current account , expressed as a
A start should also be made on reducing the public deficit ,            percentage of gross domestic product , should show a marked
which , partly because of the insufficient yield from the tax           recovery . These results however will be merely a first step
system , will in 1985 again have overshot the very high level of        towards the necessary adjustments . They will imply the
previous years . The effort to be made should help , in 1986 ,          maintenance of a policy of consolidation for several years ,
to reduce public sector net borrowing by 4 % of GDP and to              which should contribute after an unavoidable phase of
bring the central government budget deficit down to 9% of               slower growth to more rapid expansion .
GDP . Given the momentum of interest charges - which will
however be held back by the decline in inflation - and the              This outlook      does not hold out any hope of a rapid
need to maintain adequate investment in the public sector ,             improvement       in the employment situation . Long-term
these aims imply very rigorous management of                            recovery on       this front will depend on the gradual
administrative expenditure , including wages , and a                    strengthening    of the upturn in investment , the primary
considerable reduction in the burden of subsidies . This                condition for    which is the maintenance of the policy of
reduction , among other things , will require an appropriate            consolidation .
 ---pagebreak--- No L 377 / 58                                 Official Journal of the European Communities                                         31 . 12. 85
                                                                  TABLE 14
                                               Greece : Main economic aggregates 1961 to 1986
                                                                                              General
                                                         Private    Compen­                   govern­
                         GDP      GDP                                                                   Money         Unemployment
                                               GDP      consump­     sation      Current      ment net
                                                                                                                        in labour    Employ
                        current    real
                                              deflator     tion                  balance      lending    supply                         ment
                                                                       per                                                force
                         prices   terms
                                                         deflator                                      ( M2 ) ( 3 )
                                                                    employee                     or
                                                                                            borrowing
                                                                                                           %        ;                    %
                                             % change                                  % GDP                                %
                                                                                                        change                         change
1961 to 1970             11,0        7.6         3,1        2,5        9,8        - 3,1                   17,6                          - 0,7
1971 to 1980             19.1        4.7       13,8       13,6        18,3        - 2,7                   23,8                            0,6
1981                     18,9     - 0,3        19,3       23.4        21,8        - 0,2       - 11,1      34,3             4,1            4,8
1982                     24,4     - 0,1        24,6       20.5        26,8        - 3,9       - 8,5       29,1             5.8          - 1,0
1983                     20.2        0,3       19.8       19,5        19.7        - 4,7       - 8,9       20.3             7.9          - 1,0
1984                     23.0        2,6       19.9       18,1        21,3        - 4,0       - 9,9       29.4             8,1          - 0,2
1985 (»)                 20,9        1,7       18,9       19,1        20,0        — 6,6        - 13,4     27,0             8,3            0,8
1986 ( 2 )               18.1        0,1       18,0       21,5        13.8        - 4,5        - 11,0     20,0             9,3          - 0,1
( ! ) Estimates of the Commission services , October 1985 .
( 2 ) Forecast of the Commission services , October 1985 , on the basis of present policies .
( 3 ) End of the year .
                                                                   FRANCE
In France , domestic demand has been kept under strict                      gradual reduction of external indebtedness . Moreover , in the
control in 1985 ; even though it has accelerated slightly                   case of manufactures , the rapid rise in import penetration
during the year , it will have grown nearly as slowly as in                 and the renewed contraction in export market shares , after
 1984 . Private consumption has been slightly more buoyant                  the improvement of 1983 to 1984 , are indeed clear signs that
overall , while there has been evidence of a vigorous upturn in             the economy's competitive position is still weak . Restraint
industrial investment , which after several years of                        must therefore continue to be the watchword of economic
uninterrupted decline , has been sufficient to bring about a                policy . It is also the prerequisite for a return to the more
positive , though tiny , change in aggregate investment .                   sustained growth rate which is the aim of the Community
Export growth has been distinctly slower than in 1984                       strategy , since the effort now being made to improve the
because of the weaker expansion of world trade , while                      health of the economy is also directed towards the lasting
imports remain on a moderate upward trend . This has                        improvement of its competitiveness by stimulating the
produced a further slight improvement in the real foreign                   recovery of investment through a return to profitability . This
trade balance and gross domestic product growth in the                      is a long-term strategy , in which economic policy has been
region of 1% , despite a zero , or even slightly negative ,                 involved since 1983 . It implies not only appropriate wage
contribution from agricultural production . The trade deficit               developments , but also sometimes major adjustments in
is likely to narrow further helped by the weakness of energy                manning levels . Nevertheless , as the rate of capital formation
and imported raw material prices and the reversal of the                    gradually becomes more sustained again , the time is
upward trend of the dollar from the second quarter on . The                 probably approaching when a reversal of the downward
current account should thus be roughly in balance , despite                 trend of employment will begin . The strategy has in any case
the smaller surplus on invisible transactions . Lastly , the rise            already brought some results in that a significant recovery in
in consumer prices has started to slow again after an                       the trend of investment has occured right in the crucial area of
interruption in the early part of the year , and the annual drift           competitive industry. Under the strategy, any stimulation of
should be under 5 % .                                                       private consumer demand is of course out of the question so
                                                                            long as production capacity has not been reinforced to the
Thanks to the pursuit since 1983 of efforts to achieve                      point of being able to cope with this acceleration without
sounder economic management , the economy has made                           damaging the balance of payments . Caution is all the more
further progress in returning to balance . This progress ,                   essential here because the upturn in industrial investment is
however , still requires to be consolidated . It is indeed                   liable to boost import penetration , at least temporarily .
necessary to go further than simply eliminating the inflation
differential between France and the average of its trading                  Persistence with a pay policy based both on economic
partners , which is about to be achieved , and to obtain a                   stability and on employment creation is therefore the first
lasting significant current account surplus which allow the                  requirement of the continued emphasis on restraint . This
 ---pagebreak--- 31 . 12 . 85                                Official Journal of the European Communities                                No L 377 / 59
means that the increase in per capita earnings must still not          continue to reinforce the reduction of inflation in the
exceed the target inflation rate by the end of the year , and          economy by lowering interest rates as progress is achieved
must therefore be well below 1 % a quarter . Based on the              and by aiming at an increase in the money supply M 2 in 1986
experience of the last two years , this norm will probably be          below that of 1985 .
respected in both the public and private sectors . Such
moderation seems all the more reasonable because price rises
will have decelerated sharply by the time the 1986 pay round           In these circumstances , domestic demand might well be able
opens at the end of 1 985 . As the pressure of costs , and with it     to grow slightly more , pushing the growth of gross domestic
inflationary expectations , gradually slackens , it should also        product to about 2 % , despite the expected smaller
be possible to contemplate further relaxation of the price             contribution of the real foreign balance resulting from the
code , but without jeopardizing the objective of reducing              probable acceleration of imports . The terms of trade should ,
inflation . Relaxation could go at least as far as the complete        however , move favourably , so that the trade balance is likely
de-control of industrial prices , which are sufficiently               to return to equilibrium and the current account should
constrained by external competition for them to be in no               remain roughly in balance . At the same time , consumer price
danger of moving out of line .                                         increases are again likely to slow down , helped by the
                                                                       weakening of the dollar exchange rate , and should average
Public finance will have to be kept within the strict                  under 4 % for the year .
framework laid down in 1983 in order to avoid excess
pressure from the deficit on the financial markets . As                The inevitable counterpart of this effort to achieve sounder
provided in the draft budget for 1986 , adopted on 18                  economic management is the temporary persistence of a
September L 985 , the net balance to be financed in the central        downward trend in employment and of an accompanying
government budget and the general government net                       slight increase in unemployment . This problem could ,
borrowing must still be kept very close to 3 % of gross                however , start to ease in 1986 with the completion of the
domestic product . The danger is , however , that there will be        principal industrial restructuring operations , the progress
some difficulty in combining this constraint of keeping                achieved in real wage adjustment , the upturn in investment
borrowing stable with the reduction , however limited , in the         and the simultaneous slowdown in the increase in the labour
level of tax and social security deductions implied by the             force . In fact , the rate of increase in unemployment has
newly announced cuts in personal income tax . There is an              already fallen significantly in 1985 , for reasons due partly , it
essential need for balance in the social security system , in          is true , to the success encountered by the part-time work
which certain schemes , particularly for retirement and                programme mounted by the local authorities and other
unemployment insurance , are affected by the progressive               public agencies , as part of the public authority drive to
change in the ratio of beneficiaries to contributors . It is           promote employment , notably among young people . The
therefore not certain that social security contributions will          introduction of community work schemes marks the last
not have to be increased sooner or later to prevent these              stage in this drive and might also be the starting point for a
schemes from again moving into deficit . In any event ,                more general trend towards the easing of conditions for
extremely tight control of expenditure must be continued at            integrating the young into working life . More generally still ,
all levels in order to keep the volume increase of total               employment as a whole should benefit from the new
expenditure slightly below the real growth rate , even though          initiatives agreed in the area of training as well as from
interest charges and the cost of social transfer payments are          certain proposed changes in labour legislation and working
bound to increase much more sharply . Consequently , the               hours .
management of central government spending must leave no
room for a real increase in expenditure exclusive of debt
interest . This means that the growth margin required in order         Economic policy must continue to give priority to restoring
to press ahead with the priority measures in the fields of             the conditions making for balanced growth , and endeavour
security , employment , training and research must be                  to mitigate , by specific measures , the temporarily adverse
obtained by diminishing the real burden of the other                   consequences for employment of this necessary approach ; in
spending areas . It also means that overall public service             so doing it will best be able to fulfil the objectives of the
manning levels should stop rising and that , taking all the            cooperative strategy for growth devised for the Community
components of increases together , pay rises cannot                    as a whole . If the international environment continues to
accomodate any improvement in purchasing power .                       develop favourably domestic demand should again be given a
                                                                       larger margin for growth from 1987 on . Nevertheless the
Lastly , if the rise in earnings and the public sector deficit are     bulk of this margin should be utilized by corporate
kept within the projected limits , monetary policy can                 investment , which still has much ground to make up .
 ---pagebreak--- No L 377 / 60                                Official Journal of the European Communities                                          31 . 12 . 85
                                                                  TABLE 15
                                               France : Mam economic aggregates 1961 to 1986
                                                                                             General
                                                         Private   Compen­      Current      govern­
                        GDP
                                   GDP                              sation       trans­      ment net
                                                                                                       Money      Unemployment       Employ
                                              GDP       consump­                                                     in labour
                       current
                                    real                                                                supply
                        prices               deflator      tion       per       actions      lending  ( M2 )( 3 )    force ( 4 )
                                                                                                                                        ment
                                   terms                 deflator  employee     account         or
                                                                                           borrowing
                                                                                                          %                              %
                                            % change                                    % GDP
                                                                                                        change
                                                                                                                         %
                                                                                                                                       change
1961 to 1970            10,2        5,6         4,4         4,3       9,4           0,2         0,4      12,7       0,9                   0,6
1971 to 1980            13,4        3,6         9,5         9,5      13,8        - 0,4        - 0,1      14,8       3,8                   0,4
1981                    12,1        0,2       11,9        12,9       14,5        - 1,4        - 1,8      11,4       7,8     -           - 0,7
1982                    14,8        1,8       12,8        10,9       14,5        - 2,9        - 2,7      10,8       8,7    ( 8,8 )      - 0,8
1983                    10,9        1,0         9,8         9,4      10,9        - 1,7        - 3,1      11,2       8,8    ( 9,0 )      - 0,6
1984                      8,7       1,6         7,0         7,3       8,1        - 0,7        - 2,8       8,3       9,9    ( 9,9 )      - 1,0
1985 ( ] )                7,0       1,2         5,7         5,8       5,9        - 0,5        - 3,2       5,8      10,7 ( 10,7 )        - 1,0
1986 ( 2 )                5,8       1,9         3,9         4,0       4,5        - 0,3        - 3,3       4,9      11,0 ( 10,9 )        - 0,7
(')  Estimates of the Commission services , October 1,985 .
(2)  Forecast of the Commission services , October 1985 , on the basis of present policies .
H    End of the year . Up to 1980 : M2 .
(4 ) Eurostat definition in parenthesis .
                                                                  IRELAND
In Ireland the pattern of vivid contrasts , which has                      modest surplus for the first time in many years . The small
characterized macro-economic performance since recovery                    overrun expected on the planned budgetary target of 1 1 ,5 %
began in 1983 , remained marked in 1985 . Exports continued                of GDP for the Exchequer Borrowing Requirement ( EBR)
to expand vigorously despite slower growth in external                     should be seen in the light of the approximately equivalent
markets ; domestic demand , on the other hand , remained at a              saving recorded in the previous year . However , fiscal
low level , reflecting factors whose cumulative influence is               adjustment has effectively marked time for the past two years
likely to dampen aggregate activity for some time to come —                so that the size of the national debt continues to grow by
in particular , a still relatively modest amount of domestic               further substantial annual increments and may indeed
sourcing for important export categories , the implications of             approach 120% of GDP by end-year of which close to half
further fiscal adjustment , and the impact on global                       will be owed abroad . Moreover , the deficit on the current
investment as work on major projects in the public sector                  balance of payments is still rather high in view of the
comes to an end , offsetting the strong resurgence in private              relatively low level of domestic demand .
investment in capital goods . The benefits of rapid export
expansion are also weakened by the high level of net factor                Growth prospects for 1986 , with real GDP expected to rise
income outflows , 1 1 % of GDP in 1985 , mainly attributable
                                                                           by nearly 2,5% on the assumption that progress in fiscal
to interest charges on the external public debt and profit                 adjustment will resume as provided for in the Government's
repatriations by Irish branches of foreign owned firms . As a              medium-term economic plan 'Building on Realitiy', are
consequence , growth in real GNP , the appropriate measure
                                                                           similar to those in the current year although the balance of
of the resources actually available to the economy , is a full
                                                                           growth should shift somewhat towards stronger domestic
percentage point below the comparative GDP figure ,                        demand . Nonetheless , some further reduction is likely in the
estimated at about 2,5% . Against this background ,
                                                                           deficit on the current balance of payments while the
unemployment continued to rise during the year to the
                                                                           underlying rate of inflation should continue to improve .
unprecedented rate of 17% . In other respects however ,                    Employment is likely to grow at a modest pace but
adjustment has proceeded much faster . A significant degree
                                                                           unemployment will probably remain at around 17 % during
of wage moderation has been achieved . The rate of inflation               the year .
( CPI), as high as 20 % in 1 981 , is expected to come down to
almost 5 % in 1985 . The deficit on the current account of the
balance of payments as a percentage of GDP has also been                   The considerable success achieved by the authorities in some
reduced dramatically by an estimated 1 1 percentage points in              areas of the economy throws into sharper focus the relatively
the same period . Indeed , the trade balance has moved into                 slow progress being made in improving labour market
 ---pagebreak---  31 . 12 . 85                               Official Journal of the European Communities                                    No L 377 / 61
 conditions . In Ireland , particular demographic influences           improvement in the external current account deficit is
 have been superimposed on more commonly experienced                   reducing the role played by external financing of the public
 cyclical and structural factors . The labour supply is likely to      sector. Despite subdued demand for private sector credit ,
 increase by about 1 % per annum in the next few years even            which has facilitated the recent reduction in the role of
 allowing for significant net emigration . The problem                 quantitative credit controls , the continuance of Exchequer
 therefore , if any inroad into the level of unemployment is to        external borrowing at the high level of 1985 could contribute
 be made , is to raise employment by a much faster rate each           to excessively fast growth in the money supply . In regard to
 year . To this effect , the authorities should endeavour to           interest rate policy , the authorities must strike a balance
 make simultaneous progress in three areas , namely , restoring        between ensuring that the economy benefits proportionately
 order to the public finances , improving labour market                from the easing in international rates and maintaining a
 management and making industrial policy more effective in             strong flow of savings from the non-bank public to the
terms of retaining more value added in the economy and                 Exchequer . Avoidance of short-run volatility in domestic
 generating more employment .                                          interest rates is obviously essential .
The persistence of high public deficits entailed not only a            The prospect of high levels of unemployment over the
rapid accumulation of external debt ( almost 50 % of GDP at            medium-term has been the main stimulus behind initiatives
end 1984 ) and resultant interest charges ( 1981 , 2 % of GDP ;        taken by the authorities in labour market management .
 1985 , 4,5 % ) but also , bearing in mind the relatively narrow       Training schemes , particularly for young people , are now
tax base , exceptionally high levels of personal taxation . Over       being greatly expanded . A social employment scheme has
40 % of income tax payers fall into the two higher tax bands           been introduced , offering 10 000 longer-term unemployed
(48 % and 60 % ). 'Building on Reality' proposes to reduce             part-time work for one year mainly on Local Authority
the EBR and Current Budget Deficit ( CBD ) to 9,8 % and                projects . The scope for this type of scheme is limited
5 % of GNP respectively by 1 987 ( that is , a reduction of over       however , both by the cost , and by the rather slow take up of
3 percentage points in each relative to 1985 ) while holding           job opportunities linked partly to limited trade uni . n
taxation constant as a percentage of GNP , at the 1984 level .         acceptance . However , the Enterprise Allowance Scheme ,
Substantial imbalances will thus persist in the period after           designed to help unemployed persons start their own
 1987 .                                                                business , has been much more successful in terms of demand
                                                                       for the scheme combined with a relatively low degree of
                                                                       initial failure . The Employment Incentive Scheme , which
                                                                       subsidizes incremental employment , is also attracting
                                                                       growing demand , but to "evaluate its success is more difficult
These targets must be regarded as a minimum .                          because some employers may have hired more labour
Consequently , the authorities should in 1986 aim to make as           anyway . Overall , there is now need for greater coordination
much progress as possible in the direction of the 1987 targets .       in administering manpower policy , given the recent rapid
A half-way step towards those targets would entail a                   expansion of schemes and the number of bodies involved .
reduction in the EBR of the order of 1 ,5 percentage points of
GDF on the 1985 out-turn , which is an ambitious target
given the sluggish revenue buoyancy . While the expected
moderation of international interest rates and the dollar
exchange rate will ease the debt interest burden somewhat in           An important development to date in promoting labour
1986 , a significant reduction in the EBR , given tax revenue          market adaptability has been the increasing dispersion , in
constraints , will be feasible only if there are substantial           terms of timing and size , of wage settlements . In regard to the
volume reductions in non-interest expenditure including the            replacement ratio ( level of unemployment benefit relative to
maintenance of strict limits on the rise in public service pay         net income after tax ), a more emphatic stress on reducing
and the second and final phase of the abolition of consumer            personal taxation , particularly for those on lower incomes ,
subsidies . It would be appropriate to continue the reform of          could encourage a greater take-up of less well paid job
the tax system initiated in the January 1985 Budget with a             opportunities especially since there is little scope for
view to promote incentive and enterprise . While more                  increasing the value of social transfers . The correction of the
emphasis on reducing the income tax burden would appear                longer term trend towards excessive capital deepening is
desirable , progress in this direction must depend on how far          more problematic but there is evidence that generous levels of
expenditure can be reduced . Resources could be freed by               investment incentives , which have attracted many capital
restructuring the system of transfers to households so as to           intensive production operations , have had an important
reflect priorities and direct expenditure to areas of real need .      effect . Since Ireland is likely to require foreign inward
It is questionable , in the context of overall budgetary targets ,     investment for some time to come , it may be difficult to
whether the real value of social transfers can be maintained           reduce the level of these incentives , but , in line with the White
— these have risen by as much as 4 percentage points since             Paper on Industrial Policy , they can be used more selectively
1981 to an estimated 19 % of GNP in 1985 .                             to ensure the creation of more jobs . At present, it makes sense
                                                                       to put a strong emphasis in industrial policy on improving
                                                                       supply linkages between the foreign and domestic sectors in
                                                                       manufacturing. Ultimately however , the best prospects for a
                                                                       wider basis of output and employment growth in
Monetary policy will have to mitigate the strains arising from         manufacturing lie with the recovery and expansion of
the pressures exerted by large public deficits . The                   domestic firms : this will not come about in the absence of
 ---pagebreak--- No L 377 / 62                                 Official Journal of the European Communities                                         31 . 12 . 85
sustained wage moderation , to generate profits and                           budgetary restraint , is not only imperative solely from the
investment and protect competitiveness , and of an                            point of view of Ireland , but would be in harmony with a
appropriate business climate in terms of taxation and interest                consistent , more employment intensive , growth strategy in
rate levels . Wage moderation , in combination with                           the Community as a whole .
                                                                   TABLE 16
                                               Ireland: Main economic aggregates 1961 to 1986
                                                                                              General
                                                         Private     Compen­                  govern­
                         GDP      GDP
                                               GDP                     sation      Current    ment net
                                                                                                         Money       Unemployment    Employ­
                                                        consump­                                                       in labour
                        current    real
                                              deflator     tion                    balance    lending     supply                        ment
                                                                         per                                             force
                         prices   terms
                                                         deflator                                       ( M3 ) ( 3 )
                                                                    employee                     or
                                                                                             borrowing
                                                                                                            %                            %
                                             % change                                    % GDP                             %
                                                                                                          change                       change
 1961 to 1970               9,9    4,2           5,5        4,6                    - 2,3       - 2,7       10,4            4,5            0,0
                                                                         9,9
 1971 to 1980            19,5      4,6         14,2       13,8          18,0       - 4,6       - 8,1       18,5            7,4            1,0
 1981                    21,2      1,8         18,2       21,2                     - 14,1      - 13,2      21,5          10,6           - 0,9
                                                                        19,6
 1982                    16,9      0,8         15,9       15,9          15,7       - 9,9       - 13,8      13,5          12,8             0,2
 1983                    10,4      0,8         10,4         8,3          9,3       - 6,3       - 11,8       5,6          14,6           - 2,0
 1984                     1 1 ,3   4,4           6,6        8,5          9,6       - 5,1       - 10,1      10,1          16,1           - 0,9
 1985                       8,7    2,5           6,1        5,7          7,0       - 3,3       - 11,5       6,6          17,1           - 0,3
 L 986 ( 2 )                7,5    2,3           5,0        5,3          5,7       - 2,0       - 10,4       9,8          17,4             0,6
(') Estimates of the Commission services , October 1985 .
( 2 ) Forecast of the Commission services , October 1985 , on the basis of present policies .
( 3 ) End of the year .
                                                                      ITALY
In Italy , the absence of arrangements for containing the                     the European Monetary System on 20 July was the
in-built momentum of earnings , the insufficient control of                   consequence of these major imbalances .
the public deficit and the consequent accelerated growth in
the monetary aggregates have provided a further boost to
private consumer demand in the first quarter of 1985 while                    Italy's improved competitiveness vis-a-vis the countries of
business demand was still stimulated by the favourable trend                  the European Monetary System , and the simultaneous
of profits . All these factors increased the extent to which the              improvement in her terms of trade linked with the decline of
economic situation was out of step with that in the rest of the               both the dollar and the oil price brought about some recovery
Community . The momentum of domestic demand , coupled                         in the balance of payments in the second quarter . It will not ,
with worsened competitiveness , has tended to pull in                         however , be possible to confirm this recovery unless the
appreciably more imports and to curb the rise in exports ,                    causes of the present disequilibrium are corrected rapidly.
which has nevertheless remained strong . Despite the strongly                 There is even the danger that the persistence of relatively high
negative influence of the real balance of foreign trade , the                 inflation will wipe out the exchange rate advantage obtained
growth of gross domestic product will , however , be similar                  before it can be fully exploited in respect of real flows .
to that in 1984 . But the maintenance of demand at a                          Fundamental measures must therefore be taken not only to
relatively high level and the rise in the dollar in the first half of         curb domestic demand to the appropriate extent but also to
the year temporarily interrupted the slowdown in the                          break the inflationary spiral itself, which tends to perpetuate
inflation rate , which should settle at about 9 % instead of the              economic instability and , by so doing, impede the expansion
7% aimed at on average in 1985 . Above all , no favourable                    of productive capacity . Over and above the chronic
factor reduced the impact on the current account of the                       precariousness of external equilibrium , the most serious
deterioration in the real external balance : the current account              medium-term consequence of this situation has been the
deficit for the year is therefore likely to reach 1,7 % of gross              decline in the rate of formation of productive capital
domestic product . Following two successive slides in the                     connected with the fall in its profitability and the resultant
exchange rate of the lira , in February / March , and again in                severe crowding out of labour in the sectors exposed to
July , the new downward adjustment of its central rate within                 competition which continued during the 1984 to 1985
 ---pagebreak--- 31 . 12 . 85                                  Official Journal of the European Communities                                  No L 377 / 63
investment recovery phase . It is therefore essential for                receipts as a percentage of GDP as well as the real share of
economic policy to attack the very roots of this problem by              current expenditure , excluding debt interest , at levels very
calling into question certain automatic institutional                    close to their present ones . If these two objectives were
procedures which deprive labour costs and public                         achieved , and assuming that growth averages close on 3 % a
expenditure of the flexibility needed to restore the key                 year until the end of the decade , and that inflation tends
equilibria on a lasting basis . Unless there is resolute action          rapidly towards an annual rate of 4% , the government
along these lines , the monetary authorities will inevitably be          deficit , expressed as a proportion of gross domestic product ,
faced with contradictory policy options , permitting neither             could be cut from 15,7 % in 1985 to 7 to 8 % in 1990 and the
the necessary progress towards re-establishing equilibrium ,             current deficit to be almost completely eliminated .
nor a lasting return of productive investment to a level
compatible with a gradual reduction in unemployment .
                                                                         The major difficulty of this strategy is the stabilization of the
                                                                         growth in real terms of current expenditure excluding debt
In this context , the revision of wage adjustment procedures is          interest , especially since much of this expenditure is
of key importance : on it depends the control not only of the            controlled by decentralized departments . The objective
evolution of costs in the competitive sector but also to a large         means that the volume of total public service pay must be
extent that of public expenditure . Even when it was                     lastingly stabilized , i.e. that the mechanism for its adjustment
alleviated down in 1983 , the undifferentiated indexation                — notably indexation and automatic career increases — be
system introduced in 1975 retained most of its                           amended accordingly , and that the numbers employed in
disadvantages : it impedes disinflation by automatically                 government and public departments should only be increased
feeding into the wage bill much of the impact of any past rise           when strictly necessary . It also means that in order to
in prices ; its effects of squeezing wage differentials is bound         compensate for the inevitable increase in the real cost of
to be offset by differentiated pay increases , the addition of           pensions , the costs to the budget of public services must be
which is incompatible with the desirable slowing down of                 reduced by an appropriate increase in the user contribution
nominal pay rises ; and in the end it implies a trend of real            to their operating costs . Lastly it requires the introduction of
wage increases which until 1983 was higher than that of                  provisions designed to limit the increase in the burden of
productivity growth .                                                    pensions as much as possible . The 1986 budget proposal ,
                                                                         presented to the Parliament on 30 September 1985 , includes
                                                                         a collection of fundamental changes which already seem to
                                                                         meet some of these requirements and make it possible to
Management and unions seem to be working out an                          move towards the goal of stabilizing real non-interest
agreement to abandon this mechanism , already rejected by                expenditure .
private industry employers , with effect from the start of
 1986 , although there is no question of abandoning all idea of
automatically protecting wages against the decline in the
value of money . It might thus be possible to move towards a             The revenue measures adopted in the budget proposal
method of wage-fixing which would retain some indexation ,               provide for a reduction in personal income tax , adjusting the
but in the diluted form of a half-yearly adjustment of an                tax bands so as to neutralize inflation effects , for the
amount of salary limited to a level far lower than the current           abolition with affect from 1987 of the tax on invested profits ,
rate of coverage , with the other elements of the increase being         and also a reduction in the taxation of inheritances . They
no longer determined at branch and company level three                   also comprise , on the other hand , substantial increases in
years at a time , but for shorter periods . Generalization of            social security contributions . In total , revenue as a
such a system might go a long way towards reducing the                   percentage of GDP should be broadly maintained at its 1985
rigidities of the former system and should do away with most             level , which might not be sufficient to keep the Treasury
of its disadvantages . As a result , it should be possible to make       deficit for 1986 within the limit set earlier of 1 10 million Lit
much faster progress in reducing inflation and also to reduce ,          ( 14,8% of GDP). This target figure , which shows an
by leaving more room for negotiation , the risk of rises in real         improvement of one percentage point compared to the
wages beyond the increase of productivity and even , where               probable 1985 out-turn , should be considered as a ceiling ,
necessary , to make appropriate corrections to the distortions           taking into account the absolute need to stabilize the relative
which occurred in the past .                                             level of the debt by 1990 . It is essential , in these
                                                                         circumstances , to ensure that it is not exceeded , by making
                                                                         additional cuts in spending unless there is a spontaneous rise
                                                                         in tax yields .
But the expected results will not be achieved unless the shift in
the system of wage formation is matched by an extremely
energetic effort to reduce , and not just contain , the enormous
inflationary pressure emanating from public finance .                    These guidelines with respect to pay and fiscal policy should
Contrary to the initial forecasts , the Treasury deficit shows           be coupled with a monetary policy which continues the
no sign of falling in 1985 . Its underlying trend is even tending        present efforts to slow down the growth in the money supply
to rise from levels which already imply a rapid increase in the          in order to stabilize the economy's M 2 liquidity ratio by the
burden of indebtedness , already close to 100% of gross                  end of 1986 , after its rise in 1985 . This measure would
national product . The strategy necessary has been outlined in           produce some slowdown in domestic demand , which should
a plan for the reform of public finance in 1990 , the aim of             bear more heavily on consumption than on investment . The
which is the gradual reduction of the public finance burden              real external balance would again make a positive
on the productive system , by stabilizing overall government             contribution to growth permitting gross domestic product
 ---pagebreak--- No L 377 / 64                                 Official Journal of the European Communities                                         31 . 12 . 85
growth for the year of the order of 2,5 % , and the current                  as possible, be supplemented by direct and immediate
account could begin to improve helped by the favourable                      measures to bring down unemployment . Even if the problem
movement of the terms of trade . At the same time , the rise in              is today no longer growing appreciably worse , because the
consumer prices should slow down very sharply to settle at an                increase in the labour force is tending to slow down , it is
annual average of around 6,5% , approaching the                              sufficiently worrying to require intensification in scale of the
Community average by the end of the year .                                   specific efforts undertaken to reduce it , be they to increase
                                                                             labour market adaptability , to adjust vocational training and
If pursued with sufficient vigour , the twofold drive to control             re-training schemes , or to promote directly jobs in the
costs and the public deficit , on which substantially depends                southern regions . As far as budgetary constraints permit,
the ulitmate return to more stable growth , leading to an                    these efforts must also be extended to include measures to
expansion of productive capacity which would allow                           stimulate research , technological advance and the
employment to increase , is likely to be fully in keeping with a             redeployment of energy so as to improve production
cooperative strategy for growth . In order to fulfil its                     structures and consequently growth and employment
objectives completely , this drive must nevertheless , and as far            prospects in the medium term .
                                                                    TABLE 17
                                                 Italy : Main economic aggregates 1961 to 1986
                                                                                              General
                         GDP
                                                           Private   Compen­                  govern­
                                  GDP
                                               GDP                    sation      Current     ment net
                                                                                                        Money       Unemployment     Employ­
                                                          consump­                                                     in labour
                        current    real
                                              deflator       tion                 balance     lending    supply                         ment
                                                                        per
                         prices   terms                                                                ( M2 ) ( 3 )    force ( 4 )
                                                           deflator  employee                    or
                                                                                             borrowing
                                                                                                           %                             %
                                             % change                                   % GDP                              %
                                                                                                                                       change
                                                                                                         change
1961 to 1970             10,5        5,7        4,5           3,8      10,7          1,8      - 2,3       13,3        5,2               - 0,4
1971 to 1980             18,3        3,1       14,7         14,6       18,4        - 0,2       - 8,0      19,5        6,0                 0,5
1981                     18,5        0,2       18,3         19,2       21,9        - 2,3       - 11,7     10,0        8,8                 0,5
 1982                    17,2     - 0,5        17,8         17,1       17,3        - 1,6      - 12,7      18,0        8,7 ( 10,5 )      - 0,2
1983                     13,6     - 1,2        15,0         14,9       16,0          0,2       - 12,4     12,3        9,9 ( 10,8 )        0,1
 1984                    13,6        2,6       10,7         11,1       12,1        - 0,9       - 13,5     12,1       10,4 ( 12,0 )        0,4
 1985 i 1 )              11,0        2,7         8,1          8,6      10,2        - 1,7       - 13,6     12,1       10,9 ( 12,6 )        0,2
1986 ( 2 )                  9,5      2,7         6,6          6,5     . 7,6        - 1,1       - 12,8      8,5       11,2 ( 13,1 )        0,3
i 1 ) Estimates of the Commission services , October 1985 .
( 2 ) Forecast of the Commission services , October 1985 , on the basis of present policies .
( ') End of the year .
f 4 ) Eurostat definition .
 ---pagebreak--- 31 . 12 . 85                                  Official Journal of the European Communities                                No L 377 / 65
                                                              LUXEMBOURG
In Luxembourg, economic activity contracted in 1985 ,                    competition , reducing the country's attractiveness for new
because of the slowdown of steel production after the very               enterprises and impeding industrial diversification ,
sharp increase recorded last year . Nevertheless , because               especially since wage moderation will continue in the
demand for other products remained buoyant , total exports               neighbouring countries . If the efforts made so far in the
again advanced slightly . Domestic demand improved                       Grand Duchy were relaxed , the competitive position of
markedly as a result of the upturn in private consumption                companies would suffer . Participation in a cooperative
and business investment , but investment by the public sector            strategy for growth and income moderation would , by
and in housing fell in real terms . Overall , gross domestic             contrast , have favourable effects on export prospects .
product will grow by around 1 ,7 % . The rise in consumer
prices ( of 3,2% on average ) weakened perceptibly .                     In comparison with the other Community countries ,
                                                                         unemployment has remained relatively limited owing among
In 1986 , the growth of gross domestic product is likely to              other things to specific programmes to provide employment
remain fairly modest and should not go much above 1 ,5 % . A             for workers in the steel industry . However , imbalances
stabilization of activity in the steel industry is likely to be          persist in relation to the qualifications of manual workers ,
more than offset by the continuing vigorous advance in the               and these could be remedied by looking for suitable methods
other sectors . The greater dynamism of private consumption              of youth guidance and vocational training . By increasing the
and the continuing buoyancy of investment , mainly by                    attractiveness of various training arrangements in industry
companies , is likely to underpin domestic demand so that its            and by making working hours more flexible , company
growth rate will compare with this year's . The rate of                  requirements could also be better served .
increase of consumer prices is likely to weaken further during
the year .
                                                                         As a result of the spontaneous increase in revenue , combined
                                                                         with a continuing strict hold on central government
The financial position of steel enterprises has improved at              expenditure , it should be possible to keep the 1986 net
the end of three years of considerable efforts . Consolidation           budget surplus at the 1985 level (2 % of GDP ). If this budget
of profitability in this sector is likely to involve further             guideline is respected in 1986 , it will again give some room
substantial costs for the central government budget in 1986 ,            for manoeuvre which would permit the rebuilding of
but this is not likely to hold back efforts to diversify the             investment fund reserves and , over the next few years , a
Luxembourg economy by developing and modernizing                         further reduction in the burden of taxation and parafiscal
existing enterprises and introducing new industries .                    charges on top of those proposed in the draft budget for
                                                                         1986 . It would also immediately give the authorities the
Restructuring must take place in an economic climate which               finance needed for the planned capital expenditure , notably
favours investment , and this implies adequate corporate                 on roads and telecommunications infrastructure . Apart from
profitability . In this context , the wages trend plays a key role .     the intrinsic advantages of such investment , in particular for
The ending of specific measures to hold down wages in the                the industrial restructuring policy , execution of these
steel industry , the restoration of indexation and the granting          programmes would give appreciable support to the
of benefits outside the collective agreements could have an              construction industry which is now facing a contraction in
effect in other sectors very sensitive to international                  demand .
 ---pagebreak--- No L 377 / 66                                 Official Journal of the European Communities                                              31 . 12 . 85
                                                                  TABLE 18
                                            Luxembourg : Main economic aggregates 1961 to 1986
                                                                                              General
                                                         Private   Compen­        Current     govern­
                         GDP      GDP                                                                      Money        Unemployment
                        current    real
                                               GDP      consump­     sation        trans­     ment net
                                                                                                            supply         in labour      Employ
                                              deflator     tion        per        actions      lending    ( M2 ) ( 3 )     force ( 4 )
                                                                                                                                             ment
                         prices   terms
                                                         deflator  employee       account         or
                                                                                             borrowing
                                                                                                              %                               %
                                             % change                                    % GDP                                 %
                                                                                                            change                          change
1961 to 1970              7,6        3.6        3,8         2,5        6,7           7,4           1,8                        0,1              0,6
1971 to 1980              9,6        3.1        6,3         6.7       10,5         21,5            2,2                        0,3              1,3
1981                      4,2     - 2,6         7,0         7.8        9,0         32,0         - 2,3                         1,0            - 0,6
1982                      9,9        0,3        9,6       10,5         6,0         40,8         - 1,4                         1,2              0,6
1983                      6,1     - 2,2         8,5         9,1        6,6          31.0           0,0                        1.5            - 0,3
1984 ( J )                9,2        3.2        5,8         6,7        4,2          33,2           1,5                        1,7              0,5
1985 ( 2 )                6,0        1.7        4,2         3,7        4,9          32.1           2,1                        1,7              0,6
1986 ( 2 )                6,4        1.3        5,0         3,5        5,6          30,8           1,9                        1.6              0,4
i 1 ) Estimates of the Commission services , October 1985 .
( 2 ) Forecast of the Commission services , October 1985 , on the basis of present policies .
( ') End of the year .
( 4 ) Eurostat concept .
                                                             THE NETHERLANDS
In the Netherlands , the rate of increase of economic activity              are likely to favour the expansion of capital-widening
in 1985 was comparable with that in 1984 . Real gross                       investment , particularly by companies in the exporting
domestic product grew by around 2% , mainly due to the                      industries . But residential construction and public
fairly buoyant expansion of exports . However , despite the                 investment will again dip slightly . Inflation will fall to a very
upturn in private consumption , domestic demand grew less                   low rate , with lower import prices largely offsetting the effect
sharply , mainly because of the weakness of demand for                      of the somewhat faster rise in unit labour costs . The
housing and the decline in public-sector investment . The                   favourable movement of the terms of trade will produce a
moderation of labour costs in earlier years made it possible to             sharp rise in the current account surplus which could exceed
improve the level of corporate profits . This was a favourable              5% of gross domestic product in 1986 . Employment in
influence on the sharp upturn in corporate investment in                    manufacturing industry could well increase slightly for the
plant and machinery , which started early in 1984 ; but the                 second year in succession .
increase in building investment is still small . Overall ,
corporate investment remains below the late 1970s level ,                   In recent years , economic policy has chiefly concentrated on
expressed as a percentage of gross domestic product ( 10,0 %                reducing the budget deficit and the level of taxation and
from 1983 to 1985 compared with 11,3% from 1977 to                          social security contributions , improving company
1979 ). The number of unemployed fell , as an annual                        profitability and making changes in working hours and
average , and the unemployment rate declined from 14,2%                     employment opportunities ; but the results obtained so far are
of the labour force in 1984 to 13,5 % . Consumer price rises                still    insufficient     in view      of  the    seriousness    of   the
remained very moderate . The current account surplus                        problems .
increased further , to 4,4 % of gross domestic product . The
resultant increase in the liquidity ratio has not been entirely             Industrial companies have been able to increase their
offset by monetary policy , given the low inflation rate , and              profitability appreciably , and subsequently , their
the still high general government borrowing requirement -                   investment . Company finances and competitiveness were
8 % of net national income .
                                                                            improved by holding down the rise in labour costs , partly as a
                                                                            result of a cut in social security contributions . However , the
In 1986 , the rate of increase of gross domestic product is not             level of profitability now reached is still an argument in
likely to accelerate greatly and will probably reach almost                 favour of a moderate increase in real wages .
2 % . Exports will go on expanding but at a somewhat lower
rate . Domestic demand will , on the whole , become more                    The prospects for 1986 are fairly encouraging in this respect .
buoyant . Private consumption will be boosted slightly by the               The 1982 agreements between labour and management
rise in wages resulting from the new collective agreements                  severly limited the rise in earnings , but the current
and the increase in employment . The improvement in                         decentralized negotiations at industry and company level will
company profitability and the higher capacity utilization                   bring about a more substantial rise in wages overall . A
 ---pagebreak--- 31 . 12 . 85                                 Official Journal of the European Communities                                       No L 377 / 67
general consensus should be sought and maintained on the                   reduced markedly between 1982 and 1985 and the general
priorities of collective agreements , in order to prevent them             government net cash deficit was cut from 10 to 8 % of net
from deviating too sharply from productivity gains and                     national income . In the same period the burden of taxes and
so becoming incompatible with the maintenance of                           social security contributions was reduced by some 1 % of net
competitiveness .                                                          national income . The reduction of the deficit is not only due
                                                                           to the major effort in controlling expenditure , partly
The result of decentralizing wage negotiations is likely to be             nullified , moreover , by overshoots on social security costs
greater pay differentiation between sectors , and this could               and debt interest charges but it stems also from the rise in
promote greater labour mobility , which would favour even                  natural gas revenue . The marked drop forecast in gas revenue
more the wages structure and would curb the tendency for                   from 1986 is likely to make it even more difficult to trim the
excessive rationalization investment . In the 1980s , many                 budget deficit . So even by making the savings provided for by
selective measures have been taken with the view to hold                   the government agreement , there is limited room in the draft
back the rise in unemployment : lower minimum wages ,                      1986 budget for any further appreciable reduction in the
reduced parafiscal pressure , restricted unemployment                      borrowing requirement , although , care should be taken to
compensation , more part-time jobs , shorter working hours ,               bring the general government cash deficit down to under 8 %
and compensatory recruitment with no increase in labour                    of net national income in 1986 . Nevertheless , a temporary
costs . The greater flexibility of demand on the labour                    slowdown in the rate of reducing the general government
market , and the wage differentiation which may become                     borrowing requirement , is in present circumstances
possible under negotiations at industry and company level ,                advisable in order to avoid the necessity of deliberate increase
are further improving the favourable recruitment climate .                 in the tax burden or the introduction of additional measures
Until recently this policy had not had the expected effects                which might hamper the recovery of corporate investment
on the level of employment , but there are signs of an                     and private consumption . Faster growth stemming from the
improvement in 1985 . Because of the upturn in activity                    improved investment and export performance appears to be
and all the measures mentioned , employment has risen                      a necessary condition to create the financial room for
sufficiently to reduce unemployment in 1985 somewhat .                     manoeuvre so that purchasing power of the private
However , programmes to provide employment for young                       households could be increased , notably by reducing social
people should be expanded so as to give them easier access to              security contributions or direct taxes , without in the long run
the labour market from which they are often debarred by                    jeopardizing the desirable stabilization of the rapidly
inadequate vocational training .                                           increasing debt interest charges . This could provide a
                                                                           solution to the external surplus dilemma which cannot be
Progress has been made in achieving a healthier public                     solved in the present circumstances by simply relaxing the
finance situation : the size of the public sector has been                 management of public finance .
                                                                 TABLE 19
                                         The Netherlands : Main economic aggregates 1961 to 1986
                                                                                             General
                                                        Private    Compen­      Current      govern­
                         GDP     GDP
                                              GDP                   sation       trans­      ment net
                                                                                                       Money    Unemployment        Employ­
                                  real                 consump­                                                     in labour
                        current
                                             deflator     tion                  actions      lending    supply                        ment
                                                                      per
                         prices  terms
                                                        deflator                                      ( M2 )(*)     force ( 4 )
                                                                  employee      account         or
                                                                                            borrowing
                                                                                                          %                            %
                                            % change                                   % GDP                            %
                                                                                                        change                       change
1961 to 1970             10,6       5,2        5,2        4,1        10,6         0,0         - 0,8       9,1           1,0             1,2
1971 to 1980             10,8       2,9        7,7        7,8        10,7          1,3        - 1,5      10,8           4,5             0,2
1981                       4,8   - 0,6         5,4        6,3         3,6         2,1         - 5,5       5,3           8,8           - 1,5
1982                       4,5   - 1,8         6,5        5,3         5,6         2,8         - 7,1       7,6         11,7            - 2,5
1983                       2,5      0,6        1,9        2,8         3,4         2,9         - 6,5      10,5         14,0            - 2,0
1984 t 1 )                 4,3      1,7        2,6        2,6         0,6         4,1         - 6,3       7,7         14,2            - 0,5
1985 ( 2 )                 4,5      2,1        2,3        2,4          1,4        4,5         - 5,9       8,0         13,2              0,4
1986 ( 2 )                 3,0      2,0        1,0         1,1        2,5         4,5         - 6,5       6,5         13,0              0,6
(') Estimates of the Commission services , October 1985 .
(2 ) Forecast of the Commission services , October 1985 , on the basis of present policies .
( 3 ) End of the year .
( 4 ) Eurostat concept .
 ---pagebreak--- No L 377 / 68                               Official Journal of the European Communities                                      31 . 12 . 85
                                                            UNITED KINGDOM
The upturn in the United Kingdom economy , which started               possible fall in the saving ratio , will lead to faster growth of
in 1981 , has lasted longer and been somewhat stronger than            private consumers' expenditure in real terms . This could be
in the rest of the Community . Economic expansion has been             further reinforced by a cut in personal taxation , as the
accompanied since early 1983 by a rise in employment , but             outlook for the public finances suggests that , on the basis of
this has not been sufficient to allow any decline in the number        the lastest version of the medium-term financial strategy
of unemployed . The annual inflation rate appeared to have             ( MTFS ), there will be some room for easing of taxation or
stabilized at around 5% in 1983 and 1984 , but inflation               increase in public expenditure ('fiscal adjustment'). Stronger
performance was threatened at the beginning of 1985 by a               consumer demand is likely to be offset , however , by weak
steep depreciation in the sterling exchange rate ( caused              public consumption and slower growth of exports resulting
mainly by worries about the miners' strike , about oil prices          from the loss of competitiveness . Overall real GDP growth is
and about the Government's resolve to contain public                   expected to slow to a rate of about 2 % . There may be some
spending and borrowing). The authorities reacted by raising            slight improvement in the outlook for the unemployment
interest rates sharply and by reaffirming a tight budgetary            count , particularly in view of measures already announced in
stance . Sterling subsequently strengthened , and the outlook          the 1985 Budget to extend youth training and community
for inflation over the next year is now improved . The higher          work for the long-term unemployed .
sterling exchange rate , however , especially against other
European currencies , together with unit wage costs rising
noticeably faster in the United Kingdom than in the main
competitor countries , has led to a deterioration in the               Budgetary policy is aiming to bring general government
international competitiveness of UK manufacturers ,                    expenditure and the public sector borrowing requirement
worsening prospects for exports in 1986 . This factor                  ( PSBR ) back on to declining paths in relation to GDP , after
contributes to the slower growth in real GDP expected for              the overshooting in 1984 / 85 mainly caused by the extra
                                                                       costs associated with the miners' strike . There are certain
 1986 , when the pattern of growth is likely to be strongly
weighted towards private consumption .                                 risks to the MTFS objectives in the form of upward pressure
                                                                       on spending from public sector pay awards and from
                                                                       increases in social security benefits and of a possible shortfall
                                                                       on revenue associated with North Sea oil output . These risks
A rise in real GDP of almost 3 ,5 % is likely to be recorded for       appear at present , however , to be largely covered for the
1985 , but adjusted for the distortions caused by the coal             current and next financial years by the contingency reserves ,
strike , which ended in March of this year , the growth rate is        the level of which was increased in the 1985 Budget. On
between 2,5 % and 3 % . Fuel imports have fallen back since            balance it is still expected that the official projection for the
the end of the strike and other imports have also grown at a           PSBR of £ 7 500 million in 1986 / 87 will allow some room
slower rate than in 1984 , while exports have gained a market          for a fiscal adjustment to be introduced in the Budget next
share in buoyant world trade , so that the external balance has        spring , though the size of this adjustment is uncertain and
contributed strongly to GDP growth . While real disposable             could be below the latest official estimate of £ 3 500
incomes have been growing fairly fast , as a result of a               million .
sustained increase in average earnings and boosted by tax
cuts in the March 1985 Budget and the recovery of miners'
earnings , growth of private consumption has been
moderated by a higher saving ratio probably induced by                 In view of the emerging weaker export and investment
somewhat faster inflation and higher interest rates . In spite of      trends , which may well be prolonged , particularly if
continued strength in investment by the enterprise sector              expansion of the world economy slows down , there is a
( particularly in the first quarter ,- as some expenditure was         danger that slower growth could persist in the United
brought forward to take advantage of tax arrangements ),               Kingdom for two or three years , making any significant
lower capital expenditure by the public sector and for                 reduction of unemployment unlikely . In these circumstances ,
residential purposes is likely to result in the slowest                any margin of manoeuvre for supporting the economy via
expansion of total fixed investment since the 1980 to 1981             fiscal and interest rate policy should be fully used . In this
recession . Employment has continued to rise . Until recently ,        respect it is important to note that the overall budgetary and
this led only to a slowing in the increase of unemployment             public debt position of the United Kingdom now appears to
because many of those entering new jobs were not previously            be comparatively robust . Flowever , the extent to which fiscal
recorded as unemployed , but since the summer the level of             policy can be used to strengthen activity depends also on
unemployment appears to have stopped rising .                          inflation performance . The acceleration of retail prices in the
                                                                       early months of this year was a temporary movement ,
                                                                       resulting from a weakening of the exchange rate and the
                                                                       associated rise of interest rates , and has since been clearly
In 1986 there is likely to be a significant shift in the pattern of    reversed . Although the outlook is for an improved inflation
demand from net exports towards private consumption .                  performance in 1986 , helped by falling import prices ,
With average earnings in nominal terms likely to continue              domestic cost pressures are such that , in the absence of wage
rising appreciably ( by some 7% ), the slowing expected in             moderation bringing the increase in average earnings down
consumer prices , mainly as a result of weak import prices             from its present rate of 7 to 8 % , it will be difficult to bring
following the appreciation this year of the sterling exchange          the annual inflation rate below 5 % (the average rate since
rate , will boost real household incomes and , together with a         1983 ) on a lasting basis .
 ---pagebreak--- 31 . 12 . 85                                Official Journal of the European Communities                                  No L 377 / 69
In using the available room for manoeuvre afforded for fiscal          resource allocation and generate uncertainties . In both the
policy , priority should be given to those measures which are          previous and current financial years , this has been
most beneficial to the supply side of the economy and the              particularly evident with respect to the level of tax revenue
creation of employment . The main emphasis of the present              linked to oil output , which depends upon both the dollar
government in respect of fiscal changes has been to lower the          price of oil and the sterling-dollar exchange rate . Such
burden of personal income tax in order to increase incentives          experience illustrates the potential benefits of avoiding
to work and for enterprise . While reflecting a long-term              exchange rate overshooting that might be gained from full
approach , this may already be in part responsible for the             participation in the EMS . Given the greater convergence now
increase in employment since 1983 , much of which has been             existing in the economic policies of member countries , such a
accounted for by people newly entering or re-entering the              step should be given renewed consideration .
labour force . A further easing of income tax would be
welcome , particularly if it were again used to raise
substantially the tax threshold , since the provisions of the tax
and social security systems still combine in some
                                                                       1985 and 1986 are thought to be the years of peak output of
circumstances to set high effective marginal tax rates for
                                                                       North Sea oil and gas , this sector accounting for some 6 to
those on low incomes . It is to be hoped that such anomalies
                                                                       7 % of total GDP and more than 20 % of visible exports .
will be eliminated in the reform of the social security system
                                                                       Even though the decline of oil output will occur at a much
which is under discussion . Proposals for wide-ranging
                                                                       slower pace than its expansion (ten years ago , output was
reform , published in a Green Paper in June this year ,
                                                                       negligible ), the economy will have to adapt to this important
emphasized the need to integrate the different social benefits
and to concentrate benefits on those most in need .
                                                                       change . The most direct impact on economic policy may be
                                                                       with respect to tax revenue associated with oil , which is
                                                                       estimated to account for 9 % of general government receipts
In 1986 , when private consumption is in any case likely to be         in the present financial year . Official projections indicate that
growing at a rapid rate (3 to 4% ), it would as usual be               this share will be roughly halved by 1988 / 89 . The decline of
appropriate to consider other ways , in addition to income tax         the oil surplus in the balance of payments will also need to be
reduction , of using the fiscal room for manoeuvre . For               offset by improvements in other areas . The continuing
instance , there would also be direct benefits to employment           strengthening of the invisible account will contribute
and inflation from reducing the cost of employment to                  towards this , but any further worsening of the non-oil trade
enterprises , by lowering social contributions . There is also         account (which has moved from small surplus in 1981 to
increasing evidence to support the argument that some of the           sizeable deficit in 1985 , estimated at almost 3% of GDP )
room for manoeuvre should be used to finance public sector             could lead to considerable imbalance . It is therefore essential
infrastructure investment , some of which is relatively                that the performance of the non-oil economy , which has been
labour-intensive . The state of some of the infrastructure was         growing since the recovery began in 1981 by less than 2,5 %
described earlier this year in a series of reports submitted by        per annum on average , should strengthen .
government departments for discussion in the framework of
the National Economic Development Council . In view of
these apparent deficiencies the situation should be carefully
reviewed when spending plans are reformulated .                        The series of supply-side measures taken in recent years , such
                                                                       as the changes relating to personal taxation have , together
Monetary developments over the last year have been a source            with the improved growth performance , contributed to the
of some concern . The various indicators of monetary                   substantial increase in the employed labour force ( by more
conditions , in particular the monetary aggregates and the             than 600 000 , or almost 3 % , from the first quarter of 1983
exchange rate have often provided divergent information . In           to the first quarter of 1985 ). Further measures with regard to
January , at a time when monetary growth was largely                   the labour market are being prepared . It is to be hoped that , if
satisfactory , the sterling exchange rate came under                   employment growth can be maintained , jobs will be filled
considerable pressure and bank base rates which had fallen to          increasingly from the pool of unemployed and to a lesser
below 10% in late 1984 were raised to 14% . In recent                  extent than has so far been the case from new entrants to the
months , however , despite high ( nominal and real ) interest          labour force . The substantial productivity gains of the early
rates , the rate of growth of the broad measure of money               1980's have now slowed down , leading to an acceleration of
supply , sterling M 3 , has been well above the 5 to 9 % target        unit labour costs , which is weakening the international
range for 1985 / 86 set out in the latest MTFS . Since March           competitive position of enterprises and threatening to reverse
interest rates have declined slightly , but it is to be hoped that     the improving trend of company profitability . In order to
further reductions consistent with the maintenance of                  sustain the growth of investment and thus expand the
monetary conditions conducive to less inflation can be                 capacity of the economy (particularly as the role of oil
achieved .                                                             declines ), and hence potential employment , a further shift in
                                                                       relative factor remuneration towards returns on capital is
                                                                       needed . In consequence , the growth of real wages , which for
In spite of the downward movement in interest rates during             several years has been notably stronger than in other Member
1985 , differentials with other countries have remained high           States , now needs to become much slower. Indeed , a better
and movements in sterling have at times been volatile . Within         understanding between both sides of industry on this and
a period of 12 months from July 1984 , the composite sterling          other matters and better functioning of the labour market
exchange rate index first fell by more than 10% and                    would greatly facilitate the implementation of an overall
subsequently appreciated by more than 15% . Such                       strategy conducive to a significant reduction on
movements can have undesirable effects on prices and                   unemployment in the medium term .
 ---pagebreak---  No L 377 / 70                                  Official Journal of the European Communities                                 31 . 12 . 85
                                                                    TABLE 20
                                             United Kingdom : Main economic aggregates 1961 to 1986
                                                                                              General
                         GDP           GDP                 Private   Compen­                  govern­
                        current        real      GDP                  sation    Current       ment net
                                                                                                       Money  Unemployment     Employ­
                                                          consump­
                                                deflator                                      lending  supply   in labour
                         prices       terms                  tion       per     balance                   4
                                                                                                                 force ( 5 )
                                                                                                                                  ment
                            (3)         (3)                deflator  employee                    or
                                                                                             borrowing
                                                                                                         %                         %
                                               % change                                % GDP                        %
                                                                                                       change                    change
 1961 to 1970               7,1.         2,8      4,2         3,9       7,1        0,0         - 0,6     5,9        1,9             0,2
 1971 to 1980            16,2            1,9     14,0       13,3       16,0      - 0,6         - 3,1    14.5        4,0             0,2
 1981                    10,4         - 1,1      11,7       11,2       13,5        2,7         - 3,1    14.6        9,2           - 3,9
1982                        9,1          1,9      7,1         8,3       8,8         1,7        - 2,3    10,6       10,6           - 1,4
1983                        8,6          3,3       5,1        5,1       8,8         1,1        - 3,6    10,3       11,6           - 0,8
1984                        6,2          1,8      4,4         5,1       5,5        0,3         - 3,8     9,6       11,8             1,5
 1985 H                     9,1          3,4      5,5         5,3       7,7         1,1        - 3,3    11,3       12,0             1,1
 1986 ( 2 )                 7,0          2,0      4,8         4,3       7,1        0,9         - 2,8     8,6       11,7             0,9
(x)   Estimates of the Commission services , October 1985 .
(2)   Forecast of the Commission services , October 1985 , on the basis of present policies .
( 3)  Expenditure measure at market prices .
(4)   Sterling M 3 , end of the year .
( s ) Eurostat definition .