CELEX: 51996DC0211
Language: en
Date: 1996-05-15 00:00:00
Title: Commission' s Recommendation for the Broad Guidelines of the Economic Policies of the Member States and the Community

COMMISSION OF THE EUROPEAN COMMUNITIES
                                        Brussels, 15.05.1996
                                        COM(96)211 final
          Commission's Recommendation
for the Broad Guidelines of the Economic Policies
     of the Member States and the Community
          drawn up in conformity with article 103 (2) of the
            Treaty establishing the European Community
 ---pagebreak---  ---pagebreak---           EUROPEAN COMMISSION
           Commission's Recommendation
for the Broad Guidelines of the Economic Policies
     of the Member States and the Community
           drawn up in conformity with article 103 (2) of the
               Treaty establishing the European Community
      I.  BROAD ECONOMIC POLICY GUIDELINES FOR THE COMMUNITY
          AND THE MEMBER STATES
      II. EXPLANATORY MEMORANDUM
          11.1. PROGRESS REPORT ON THE 1995 BROAD ECONOMIC POLICY GUIDELINES
          11.2. ECONOMIC OUTLOOK
                                                                          A&-
 ---pagebreak---                                                 - Il -
                                    Table of contents
I.    BROAD ECONOMIC POLICY GUIDELINES FOR THE COMMUNITY
      AND THE MEMBER STATES                                                    1
1.1.  Main objectives and general guidelines                                   1
1.2.  Macroeconomic policy mix conducive to growth, employment and convergence 2
1.3.  Price and exchange rate stability                                        3
1.4.  Sound public finances                                                    5
1.5.  Better functioning of product and service markets                        7
1.6.  Fostering employment and labour market reforms                           8
II.   EXPLANATORY MEMORANDUM                                                  10
11.1  Progress report on the implementation
      of the 1995 Broad Economic Policy Guidelines                            10
      11.1.1. Introduction                                                    10
      11.1.2. Price and exchange rate stability                               13
      11.1.3. Sound public finances                                           16
      11.1.4. Competitiveness                                                 21
      11.1.5. Employment and the labour market                                23
11.2. Economic outlook                                                        26
      11.2.1. Growth prospects                                                26
      tl.2.2. Employment trends                                               28
      H.2.3. Convergence                                                      29
                                                                                 4i>
 ---pagebreak---             I. Broad Economic Policy Guidelines for the
                   Community and the Member States
1.1. Main objectives and general guidelines
Contrary to expectations prevailing at the time of the adoption of the 1995 Broad
Economic Policy Guidelines, the Community's economy experienced a marked slowdown
in economic activity over the last twelve months and a renewed rise in unemployment.
Whereas inflation declined broadly as anticipated and price convergence strengthened,
progress towards sounder public finances proceeded at an insufficient pace and was made
more difficult by the economic downturn.
As a result, the Community did not succeed in making significant progress towards
realising important economic objectives such as those stipulated in Article 2 of the Treaty,
namely the promotion of sustainable, non-inflationary growth and a high level of
employment. This failure to reduce the gap between aspirations for and the realisation of
economic and social well-being is the major cause of the present less confident mood in the
Community.
Nonetheless, the Community enjoys quite favourable economic fundamentals. Inflation is
historically low and contained, interest rates are falling, exchange rates are progressively
being brought into line with underlying conditions, world trade is expanding at a healthy
pace and investment profitability has been improving and, in overall terms, is noticeably
higher than in the second half of the 1980s. However, rising long-term interest rates in
1994, the currency turmoil in the spring of 1995, persistent structural weaknesses and
deteriorating confidence have prevented these fundamentals from asserting themselves
during 1995 and early 1996. With the impact of the first two factors progressively fading
out, allied with an end to destocking, expectations centre on a rebound in economic activity
in the second half of this year.      The pace of the expected recovery will mainly be
determined by the extent to which the policy mix becomes more conducive to growth and
succeeds in restoring confidence.     The opportunities offered by the expected recovery
should be fully seized upon to accomplish the necessary degree of convergence in order to
ensure a successful transition to Economic and Monetary Union on 1 January 1999.
Meeting these challenges will primarily require a macroeconomic policy strategy geared
towards growth and stability.     Appropriate structural initiatives in both the goods and
                                                                                   A L
 ---pagebreak--- services markets and in the area of labour market reform should accompany and reinforce a
durable rebalancing of the macroeconomic policy-mix.
In essence, therefore, the present Guidelines corroborate and augment the policy
recommendations outlined in previous exercises. If this strategy does not yet seem to
deliver satisfactory results in the Community at large, this is because it has been
implemented with insufficient vigour and credibility. All actors are therefore encouraged
to conduct their economic policies with a view to contributing to the achievement of the
objectives of the Community (Article 102a of the Treaty), to demonstrate with action what
has been promised since more than two years and to co-ordinate better their economic
policies.    The latter is not only a Treaty obligation (Article la) but also a practical
obligation made all the more critical by the increased integration of the economies of the
Member States.
It should be underlined that the present guidelines constitute not only the logical
dénouement of the analyses undertaken in the context of the Commission's 1996 Annual
Economic Report but also take into account the opinions prepared by the European
Parliament and the Economic and Social Committee on the latter report.
1.2. Macroeconomic policy mix conducive to growth, employment and
       convergence
Achieving the Community objectives in terms of growth, employment and convergence
will continue to require the establishment of a stable, investment-enhancing, short and
medium-term macroeconomic policy mix, characterised by:
(i) a stability-oriented monetary policy;
(ii) sustained efforts to consolidate the public finances in most Member States consistent
      with the timetable and the objectives of the Treaty; and
(iii) nominal wage trends consistent with the price stability objective as well as real wage
      developments consistent with the conditions for strengthening employment-creating
      investment.
To relaunch the recovery process and to strengthen medium-term growth and job-creation,
a durable détente of the macroeconomic policy mix is essential. The more the stability task
of monetary policy is facilitated         by appropriate budgetary measures and wage
developments, the more monetary conditions, including exchange rates and long-term
interest rates, will be favourable to growth and employment. In such a context, monetary
policy can contribute substantially, in accordance with the spirit of Article 105(1) of the
 ---pagebreak---                                                -3 -
Treaty, to the achievement of the Community's objectives as laid down in Article 2 of the
Treaty.
High and sustained economic growth over the medium term, driven by capacity-expanding
investment is essential:
(i) to reduce significantly and durably the Community's unacceptably high level of
      unemployment and to combat the spread of social exclusion;
(ii) to make the necessary improvement in the competitiveness, and in particular the
      productivity, of the Community economy compatible with the safeguarding, in the
      context of an open market economy, of the basic social values which characterise the
      Union; and
(iii) to ensure the lasting success of Economic and Monetary Union in which stability,
      competitiveness and employment must be assured concurrently.
Responsibility for bringing about the desired détente of the macroeconomic policy mix is
assumed by three different groups of actors (central banks, national governments and the
social partners). Efficient co-ordination between actors and between countries is essential
in order to ensure policy consistency. The Commission will intensify its dialogue with the
social partners on macroeconomic issues and invite the EMI to participate in these
meetings.     The social dialogue itself should also be intensified, where possible and
according to prevailing traditions, at the national level.
To reinforce both the credibility of the macro-economic policy framework and the
efficiency of the co-ordination process within the Community, Member States should
present updated and politically strengthened convergence programmes. These programmes
should clearly demonstrate that the planned policy measures to improve convergence go
hand in hand with the promotion of growth and employment in the medium term. The
Commission and the Council will assess their consistency at the Community level with a
view to a tightening-up of the surveillance of economic policies under Article 103(3) of the
Treaty.
1.3. Price and exchange-rate stability
The achievement and maintenance of a stable macroeconomic environment is a
precondition for achieving sustained medium-term growth. For this purpose, and given
that inflation in the Community on average is expected to fall to 2XA per cent this year, the
Community should aim to keep it at this low level and to make further progress towards
reaching 2 per cent.
 ---pagebreak---                                                        -4-
At present, ten of the Member States already respect the objective established in previous
guidelines exercises of a rate of inflation1 of no more than 2 to 3 percent as a step towards
price stability and in the United Kingdom inflation is close to 3 per cent. In the seven
countries (Belgium, Germany, France, Luxembourg, the Netherlands, Austria and Finland)
where inflation is below 2 per cent and in Denmark and Ireland, where it is just above 2 per
cent, the anti-inflation credibility of the monetary policy framework is generally firmly
established and the task is to consolidate this performance over the medium term. In
Sweden, where inflation has recently come down significantly, and the United Kingdom,
policies should aim at maintaining and, where appropriate, reinforcing anti-inflationary
policies.
Those countries where inflation is expected to be between 3 and 5 per cent in 1996 (Spain,
Portugal and Italy), should endeavour to reduce inflation further to below 3 per cent by
1997. Spain and Portugal should persevere with their existing policies with a view to
achieving the desired inflation range in the near future. In Italy, the conduct of fiscal
policy will in essence dictate the pace of progress with regard to the establishment of
exchange rate credibility and in anchoring low inflation expectations.
Despite visible progress in Greece over recent years, it is evident that efforts must be
continued and enhanced. In this regard, emphasis should be placed in particular on the
maintenance of the corrective fiscal policy stance operated over the last two years as well
as continuing with the prudent monetary and exchange rate policies evident since the early
1990s.
As stressed in the previous Guidelines, all Member States must continue to treat their
exchange-rate policies as a matter of common interest within the framework of the
European Monetary System and, where appropriate, its exchange rate mechanism. The
exchange rate movements in early 1995 pointed to the need for several Member States to
put their overall policy framework on a more credible footing. Policies credibly and
resolutely geared towards a rebalancing of the policy mix and achieving price stability, as
recommended in the present Guidelines, will not only be conducive to an appropriate
alignment of exchange rates within the Community but also at the world level. For
countries which are not currently participating in the exchange rate mechanism, these
policies would also contribute to creating the conditions, where appropriate, for such
participation.
   As measured by the 12 month average of the annual change in the interim indices of consumer prices
 ---pagebreak---  1.4. Sound public finances
Some, but only limited, progress towards fiscal consolidation was made last year in the
Community. Slippages relative to announced budgetary targets only partially reflected the
adverse impact of the growth slowdown.          Insufficient credibility of budgetary policies
contributed importantly to the currency turbulence in the spring of 1995, sapped economic
confidence and led to doubts in financial markets regarding the likelihood of a successful
realisation of the Community's single currency goal.
Meanwhile, a large number of countries have taken significant steps to consolidate their
public finances in 1996 and, in many cases, also in 1997.               Nevertheless, the still
unsatisfactory state of the public finances in the Community should lead Member States to
review and, where necessary, to strengthen their fiscal consolidation plans. Credible, pre-
announced and socially balanced efforts to reduce high budgetary imbalances will allow for
a revival in confidence, for the transformation of the expected recovery into a durable, job-
creating, medium-term, growth process and for a sound transition to EMU on 1 January
1999.
While the economic conditions are presently less favourable than anticipated at the time of
the adoption of the 1995 Guidelines, a further delay in the inevitable consolidation process
is not a justifiable option. Any postponement risks provoking an adverse financial market
reaction and would aggravate the consolidation task in future years.           In the present
circumstances, a policy of allowing the automatic stabilisers to work is therefore largely
inappropriate in the vast majority of Member States. Progress made in reducing structural
budget deficits this year will of course persist and reinforce consolidation when cyclical
conditions improve. Moreover, the adverse near-term growth impact of credible reductions
in budget deficits is likely to be limited provided that the appropriate Hanking conditions,
in both the monetary and structural area, are set in place.
On the basis of the adjustment measures decided up until early-May 1996, the net
borrowing of general government in the Community as a whole is likely to fall to just
below VA per cent of GDP in 1997, which compares with a deficit of 5 per cent in 1995.
Virtually all Member States should aim at lowering the budget deficit to, at most, 3 per
cent of GDP in 1997, as a step towards the objective of close to balance in the medium
term. In this respect, it is encouraging that several countries have recently announced and
are implementing substantial measures to redress budgetary imbalances.
As regards the individual Member States, 12 of the 14 Member States with convergence
programmes (the exception being Luxembourg) are committed to reducing their deficits to
3 per cent of GDP or below by 1996 or 1997 at the latest.              Two of these countries
 ---pagebreak---                                                -6-
(Denmark and Ireland) already respect the 3 per cent budget deficit reference value and
they should consequently move towards the achievement of more ambitious medium-term
targets.
As regards the remaining ten countries, the additional effort needed to respect the 3 per
cent reference value is undoubtedly feasible and should be pursued vigorously. Within this
group, several countries (Germany, France, Austria, Finland, Sweden) have this year
announced substantial measures or reinforcements with a view to achieving a reduction in
their budget deficits to 3 per cent of GDP or less in 1997. These countries, as with the
Netherlands, should resolutely implement their programmes of fiscal consolidation and, if
necessary, strengthen them in order to ensure that their objectives are fully met.
In Belgium both the impact of weaker-than-anticipated output growth on tax revenues and
social transfers and the non-recurrent nature of some of the measures previously taken
require supplementary efforts to respect the 3 per cent reference value in 1997. The
Belgian government is firmly committed to specifying the necessary measures during the
preparation of its 1997 budget in June-July of 1996. In the United Kingdom, substantial
reductions in the budget deficit are expected to continue over the next two years mainly as
a result of planned expenditure restraint. But to respect the convergence programme
targets, further action is needed both to compensate for the fiscal slippage in 1995 and an
expected less rapid budgetary improvement in the short run which is partly due to lower
growth than previously predicted. Finally, in Spain and Portugal, a determined
implementation of the budgetary component of the convergence programmes is required,
with special attention to be given in Spain to a re-evaluation of the social security system.
With regard to the two remaining Member States, Italy needs to introduce significant
measures to achieve and improve upon the planned budgetary consolidation which remains
the central policy priority in terms of restoring market confidence. Action should primarily
focus on the fight against tax evasion, on greater budgetary discipline of local authorities
and on improved efficiency of the public administration. As regards Greece, sustained
efforts on a wide range of fronts, most notably a continuation of the existing privatisation
initiatives, an expansion of the tax base and current expenditure reductions, are all required.
Although the extent, timing and design of consolidation measures need to be tailored to
country-specific conditions, some general principles have been identified in previous
Guidelines exercises. These include:
(i) restraining expenditure increases, as opposed to further increases in the overall tax
     burden, is widely regarded as a more credible and efficient option. Among the issues
     which should be addressed are the need to place pension provisions on a sustainable
 ---pagebreak---                                                  -7-
      footing, to curb the rise in health care costs and to reduce distortionary and costly
      subsidies,
 (ii) re-directing, to the greatest extent possible, government spending towards productive
      activities such as investment in infrastructure, human capital and active labour market
      measures, while not endangering the necessary reduction in budget deficits;
(iii) improving the efficiency of public services through inter alia more flexible
      management practices, better incentives for public employees, and in some cases
      increased use of privatisation and user-fees to the extent that Member States judge it
      compatible with their objectives;
(iv) ensuring that a reduction in the overall tax burden, which is desirable in most Member
      States, is conditional upon initially putting the budget deficit on a firm downward path.
      In the interim, however, Member States stand to gain from a broadening of the tax
      base and a modification in tax structures so as to reduce the tax burden on labour. In
      particular, reductions in non-wage labour costs at the lower-end of the wage scale
      should be considered.
1.5. Better functioning of product and service markets
To foster growth, and thus employment, whilst maintaining low inflation, it is essential that
action on the macro side is added to by measures aimed at ameliorating the functioning of
product and service markets in general and at generating higher competition and a more
flexible functioning of the price mechanism in particular. This will essentially require a
further reinforcement of competition policies and a curbing of state aids in full respect of
the objectives of Article 130a of the Treaty concerning economic and social cohesion.
It is also crucial to fully exploit the internal market potential in an open and competitive
environment through the transposition into national law and effective enforcement of single
market legislation.     In sectors where transposition is lagging behind, a particular effort is
needed to present all necessary proposals to national parliaments before the end of 1996.
To enhance the Community's competitiveness, measures aimed at promoting innovation, at
favouring the emergence of the information society and at achieving a working
environment more conducive to initiative and to the development of SMEs should be
swiftly implemented. ' Of course, in these areas the individual Member States largely hold
the key. However, the potency and effectiveness of national actions, which are essential,
can be significantly added to via co-ordination and appropriate actions at the Community
level. At this level, among the wide range of activities currently being pursued, specific
attention should be given to a number of recent proposals of the Commission. Action to
remove the remaining obstacles to the effective implementation of the TENs projects
 ---pagebreak---                                              -8-
 should be initiated.   Further work is also needed to ease the impediments currently
 hampering the development of the SME sector. A more co-ordinated R & D effort is
 required both at the level of the Member States themselves and between the latter and
 specific EC-funded research programmes. The Commission will also pursue its policy to
 improve competition in EU-markets.       Finally, to increase the job-creating potential of
environmental policies, these policies should - to a greater extent than at present - rely on
 market-based instruments, including fiscal ones, both at the national and Community
 levels.
1.6. Fostering employment and labour market reforms
More than 2'/2 years after the publication of the Commission's While Paper on Growth,
Competitiveness and Employment and with the Essen employment strategy set in place for
some time, the Community finds itself with a dismal employment record over the period in
question.   Although the expected recovery will lead to renewed job creation and will
reverse the current upward trend in unemployment, it is likely that more than 17 million
people will still be unemployed in 1997 in the Community.          Assuring a sustained and
significant improvement in employment and unemployment requires not only durable,
high, economic growth and efficient product and service markets, but also a broad range of
labour market reforms.
Eliminating existing rigidities as well as ensuring a more efficient operation of labour
markets is at the heart of national efforts to ensure both a tension-free and stronger
medium-term expansion and a more employment-creating growth pattern. Member States
have been making efforts to reform their labour markets. They are encouraged to intensify
their actions while ensuring both equity and efficiency in the social protection system. The
implementation of policies aimed at improving the occupational and regional mobility of
the labour force and at enhancing the efficiency of employment services should reduce
bottlenecks which could lead to an early end to the growth process.
Suitable policies should be conducted in order to adapt the whole educational system —
including vocational training ~ both to the needs of markets and to the improvement of
human capital, thereby fostering the growth potential of the economy.          In this respect,
priority should be given to enhancing the employability of young people, women and the
unemployed, in particular low skilled, inexperienced labour, and to reducing skill
mismatchs on the labour market by providing training better fitted to the changing needs of
the labour market.
 ---pagebreak--- A higher labour-content of growth should be favoured by the maintenance of appropriate
average wage trends and in some cases by a larger wage differentiation according to
qualifications, regions and, to some extent, sectors and firms. A reduction in the labour
costs of low-productivity jobs, either through direct wage developments (e.g. by
introducing entry wages in appropriate cases) or through a targeted reduction in non-wage
labour costs, should increase the incentives to the employment of low-skilled labour. Such
measures should be compatible with Community competition policy. Adaptations, at the
firm level, of working-time and work organisation will also act in this direction. Finally,
the promotion of local and regional initiatives in the field of new services containing a high
labour-intensive dimension, such as those identified in the Communication from the
Commission on a European strategy for encouraging local development and employment
initiatives, should also be encouraged.
All the above elements are featured in the Community's common employment strategy,
initiated at the Essen European Council and refined subsequently at both the Cannes and
Madrid Councils. The procedures adopted at these European Councils need to be made
more efficient.    In this respect, Member States' multi-annual employment programmes
must be developed further, to make them more effective instruments in the area of labour
market policy. Furthermore, the Commission's initiative to mobilise all actors around the
top priority of fighting unemployment is aimed at making maximum use of the existing
instruments at the level of the Union.
 ---pagebreak---                                                             •10-
                            IL EXPLANATORY MEMORANDUM
11.1 Progress report on the implementation of the
       1995 Broad Economic Policy Guidelines
II. 1.1. Introduction
In conformity with the Maastricht Treaty, Broad Economic Policy Guidelines were adopted
in December 1993, July 1994 and again in July 1995. Following mandates from the
European Council, the implementation of the 1993 Guidelines was assessed in December
1994. The execution of the 1994 Guidelines was examined on two separate occasions,
once in December, and again in June 1995.
This document reviews, following a request from the Cannes-European Council, the
progress made in implementing the 1995 Broad Economic Policy Guidelines2 since their
adoption by the EcoFin Council in July of last year. In an attempt both to streamline the
surveillance procedures and to present the necessary information and analysis for the
adoption of the new guidelines, an assessment of the past guidelines will henceforth form
an integral part of the Commission's explanatory memorandum.             Such an assessment
constitutes a valid test of the degree of commitment of the individual Member States to
shared policy responsibilities. Because of the medium-term orientation of economic
policies, this report examines trends evident since the adoption of the first guidelines
Recommendation in 1993.
The policy issues raised in the 1995 Guidelines were addressed against a background
where the economic recovery process, which commenced towards the second half of 1993,
had apparently become firmly established. The pace and composition of the economic
expansion in 1994 had given rise to optimism that growth rates of the order of 3 per cent
could be realised in both 1995 and 1996.
Since then, however, there has been a marked slowdown in growth. An extended analysis
of the factors behind the slowdown was presented in the Commission's 1996 Annual
Economic Report with only the key points of that analysis being summarised here. The
quarterly rates of GDP growth of the order of VA to 4 percent (annualised rate) witnessed
throughout most of 1994 decelerated to around 2 percent in the second and third quarters of
 1995 culminating in virtual stagnation in the last quarter of last year. This lower than
expected output performance was reflected in adverse labour market developments. The
   An initial review of the 1995 guidelines took place in December 1995.
 ---pagebreak---                                                             11 -
moderate rise in overall employment in the Community since the middle of 1994 came to a
standstill towards the end of 1995. Particularly in the countries which were hardest hit by a
worsening in their competitive position following the exchange rate crisis of spring 1995,
employment trends turned markedly negative.                         But also in several other countries, the
economic slowdown brought employment gains to a halt.                                    In sum, employment is
estimated to have grown by only Vi a per cent last year in the Community as a whole.
Apart from the fading of the initial impulse from stockbuilding, the significant slowdown
during 1995 essentially reflected two adverse developments in financial markets. Firstly,
the marked rise in long-term interest rates on world and Community financial markets
during 1994 appear to have exerted a stronger-than-expected restraining influence on
companies' and households' spending decisions in 1995.                                The rise in yields varied
considerably across EC Member States, reflecting inter alia their economic performance,
policy stance and credibility. In particular, long-term interest rates rose significantly more
in countries whose public finances were not yet perceived by the'markets as having been
put on a clearly sustainable downward path.
                Table 1
                                               Nominal interest rates
                                                         (per cent)
                           Dec.    Dec.    April    Jan.    April   Dec.  Dec.     April    Jan.  April
                           1993    1994    1995     1996    1996    1993  1994     1995     1996  1996
                                        Short-term1                             Long-term 2
                B           7.2     5.4     5.3      3.6     3.3     6.6    8.3      7.9     6.5    6.7
                DK          7.3     6.2     6.9      4.4     4.0     6.2    8.8      8.8     7.0    7.3
                D           6.1     5.3     4.6      3.5     3.3      5.7   7.5      7.1     5.9    6.4
                GR         19.9    17.9    17.2     14.6    14.1
                E           8.9     8.2     9.4      8.9     7.8     8.3   11.5    12.1      9.5    9.3
                F           6.5     5.9     7.7      4.7     3.9     5.8    8.1      7.8     6.5    6.5
                IRL         6.3     6.3     6.8      5.4     5.1            8.6      8.7     7.2    7.6
                I           8.6     9.0    10.8      9.9     9.4     8.8   11.9    13.0     10.2   10.1
                NL          5.6     5.4     4.7      3.3     2.9      5.7   7.6      7.2     5.9    6.4
                A           5.8     4.8     4.5      3.7     3.0            7.6      7.4     6.2    6.5
                P          11.7    10.5    10.8      8.5     7.6     9.0   11.5    12.1      9.4    9.2
                FIN         5.9     5.7     6.0      4.2     3.9           10.3      9.4     7.0    7.5
                S           7.7     8.2     8.9      8.4     6.6           10.7     11.5     8.3    8.4
                UK          5.3     6.4     6.7      6.4     6.0      6.3   8.5      8.4     7.4    8.1
                EUR         6.9     6.6     7.2      5.8     5.3    (6.8)  (90)    (8.9)     7.3    7.6
                 ' Three-month money market rate.
                2
                   Yield on benchmark 10 year bonds, unless for EUR until April 1995 where data refer to
                    yields on government bonds..
                Source: Commission's Spring 1996 forecasts.
Secondly, and perhaps more importantly, the currency turmoil in the spring of 1995 had a
significant impact on the economies of the appreciating as well as the depreciating
countries. It was triggered by a marked weakening of the US-dollar in the wake of the
Mexican Peso crisis.           But the subsequent sizeable and abrupt movements between EC
currencies seem to reflect the deeper, underlying, problem of the lack of credibility of
 ---pagebreak---                                             -12
national budgetary consolidation plans and structural reforms and/or perceived risks of
renewed inflationary tensions in a number of individual Member States. In Germany and
the countries whose currencies are closely linked to the DM, the appreciation of the
exchange rate implied a considerable tightening of overall monetary conditions, in spite of
an easing in short-term interest rates, and a         Table 2
                                                         Nominal effective exchange rates
worsening of competitiveness and         industry                Index, August 1992 = 100
profitability. This in turn had knock-on effects                Dec.     Dec.   April   Jan.  April.
                                                               1993      1994   1995   1996   1996
on investment and led to a marked deterioration
                                                       B         99.9     103.3 107.9   105.9 104.6
in business confidence. On the other hand, in          DK       100.5     102.2 107.2  106.8  105.4
countries      whose     currencies   depreciated      D        100.8     103.1 109.3   106.7 104.9
significantly, the short-term boost to export          GR        87.5      82.9  82.9    80.2  80.9
                                                       E         78.4      78.2  77.1    80.6  80.2
market shares was to some extent offset by             F        100.9     102.4 106.3  106.7  106.0
lower growth on export markets, and by rising          IRL       92.8      94.5  93.3    94.3  94.6
interest rates and the erosion of consumer             1         75.1      72.7  63.2    71.8  73.9
                                                       NL       102.6    "Î04.3 109.0   107.0 105.8
purchasing power from higher inflation on the
                                                       A        101.5     102.8 107.3   105.5 104.2
home market. Furthermore, at the level of the          P         8/7       88.3  90.2    89.6  89.3
Community as a whole, si/.eable and abrupt             FIN       8?.5      915   96.8    95.8  91.1
intra-Community      exchange rate movements           S         74 6      77.5  73.0    83.2  84.8
                                                       UK        887       87.1  83.2    82.1  82.4
jeopardise the proper functioning of the internal      EUR       78.2      80.2  80.4    84.6  83.6
market,     leading   inevitably   to suboptimal
                                                     Source: Commission.
resource allocation.
The above developments point to the need for increased policy co-ordination at the
international level. They also clearly highlight the adverse impact on growth, employment
and confidence of insufficient actions in those policy areas, directly under Member States'
own responsibility, needed to further rebalance the policy-mix as recommended in the 1995
 Broad Economic Policy Guidelines.
 The progress review given below follows the four broad headings used in the Council
 Recommendation namely: price and exchange rate stability; sound public finances;
 competitiveness and employment and the labour market.
 ---pagebreak---                                                                                          -13-
  //. 1.2. Price and exchange rate stability
  stability           ~ The 1995 Guidelines reaffirmed the objective, set in the 1993 and 1994
  exercises, of a rate of inflation of no more than 2 to 3 percent, as a step towards price
  stability, adding that this target was likely to be achieved in the majority of Member States
  in 1996.
     Chart 1                                   INFLATION
                                                                                                        Indation has been on a steady
                               Interim indices of consumer prices*                                      downward       Irend    in     (he
                                (March 1996 - average over 12 months)
       10                                                                                               Community since 1991 with
                                                                                                        the rate of increase of the
                                                                 Range indicated j n the                deflator of private consumption
                                                                             Guidelines
                                                                                                        falling from around 5/4 percent
                                                                                                        to a little over 3 percent last
                                                                                                        year, with most Member States
        o                                                                                             . achieving       the      inflation
              B     DK      D GR       E      F IRL        I       L    NL      A     P FIN S UK
        " Interim Indices of Consumer Prices represent the first stage of a process towards
        Community harmonisation of national CPI calculations
                                                                                                        objective already in 1995. As
                                                                                              ItMt. M
                                                                                                        regards developments so far in
  1996, consumer price inflation in the Community in March of this year, as measured by the
  12 month average of the annual change in the interim indices of consumer prices (IICPs)3,
  stood at 2.9 percent. In ten of the Member States, inflation was within the range indicated
  by the Guidelines and in the majority of them the rate of inflation even stood at below 2 per
  cent. In the United Kingdom, inflation was close to 3 per cent. Of the remaining Member
  States, Portugal has come relatively close to the range in recent months. In Spain and Italy,
  inflation is falling visibly following last year's blip which reflected the combined impact of
  their currency depreciations and increases in indirect taxes.                                                 Finally, further marked
  progress was achieved last year in Greece but the disinflation process seems to have lost
  momentum in recent months. However, this development is related to exogenous factors.
  This relatively encouraging inflation performance since the adoption of the Guidelines
  reflects the combined impact of several forces. It incorporates not only influences such as
  a persistent, and even widening, negative output gap and subdued raw material price
   developments but also structural improvements in such areas as central bank independence,
   wage behaviour and competition.                                            The notable success in bringing inflation down in
   several Member States and appropriate actions by the monetary authorities in countries
   whose currencies depreciated, has led to an enhanced credibility of anti-inflationary
   policies. Wage developments were fairly moderate last year broadly moving in line with
3
      These IICPs represent the first stage of a process towards harmonisation of CPI calculations The IICPs and the
      subsequent HICPs (Harmonised Indices of Consumer Prices), which will commence in January 1997, will be used in
      the context of the evaluation of compliance with the Maastricht inflation criterion
 ---pagebreak---                                                              -14
price increases in most Member States, with nominal compensation of employees per head
accelerating mildly to 3lA percent in the Community as a whole. This figure compares with
an annual average rate of increase of close to 6 percent over the period 1991-93. Real unit
labour costs contributed to improved profitability by declining by about I pel cenl or more
in many Member States and by 1.3 per cent in the Community as whole, thereby respecting
the Guidelines recommendation.
                  Table 3
                                              Inflation developments
                                                       (% change     pa.)
                           Private consumption           Nominal compensation
                                                                                   Real unit labour costs
                                    deflator              of employees per head
                          1993       1994     1995      1993       1994     1995 1993       1994      1995
               B           3.1         3.0     1.5         3.3      4.8      1.9  -0.4        -0.7     -15'
               DK          0.3         1.7     1.8         1.6      3.6      3.3  -1.5        -3.0      0.5
               D           3.9         2.7     2.0         4.3      3.2      3.8  -0.1        -2.6     -0.7
               GR         13.7        10.8     9.3       10.1      11.9     12.5  -0.4         1.3      1.9
               E           5.5         4.9     4.6         6.5      3.1      2.4  -0.5   "* -3.4       -2.6
               F           2.2         1.8     1.6         2.2      2.1      2.4   0.1        -1.9     -0.3
               IRL         1.7         2.7     2.5         4.9      3.2      3.1  -1.7        -2.0     -2.6
               1           5.4         4.6     5.7         3.7      3.0      5.2  -24         -40      -3.1
               L           7.0         24      20          5.2      3.4      3.9  -?{•>       -0.9      08
               NL          2.3         2.4     1.1         3.1      2.3      3.0   06         -2.5     -0 1
               A           3.4         3.0     2.2         4.6      3.1      3.8   03          0.6     -0.3
               P           7.1         5.2     4.2         9.1      5.2      4.6   0.8        -1.4     -3.5
               FIN         4.2         1.3     1.1         1.0      3.5      5.3  -6.6        -2.9     -0.4
               S           5.7         3.-1    27          4.4      5.4      3.0  -1.4        -1.1     -2.4
               UK          3.5         2.5     2.6         4.3      3.5      3.1  -2.6        -2.4     -1.0
               EUR         4.1         3.2     3.0         4.0      3.2      3.5  -1.0        -2.5     -1.3
               Source: Commission's Spring 1996 forecasts.
Nevertheless, in some countries wage trends were disappointing; not only in those where
the disinflation process has not yet been completed but also for instance in Germany where
wage settlements were relatively high compared with the stated inflation objective of the
monetary authorities. Together with the appreciation of the DM, these wage agreements
contributed to the erosion of competitiveness and profitability in the internationally
exposed sectors. In Italy, wage costs accelerated in 1995 but the rate of increase remained
slightly below inflation. Continued vigilance is necessary to avoid the development of a
wage-price spiral which, if it were allowed to get hold, would raise the future costs of
achieving price stability. In Finland, wages rose significantly in both nominal and real
terms in 1995. However, due to the moderate two-year incomes policy agreement, the rise
in wages and salaries will decelerate substantially in 1996 and 1997.
Exchange rate stability            — Following the exchange rate turmoil of Spring 1995, a broad
degree of stability slowly began to re-emerge over the months to September 1995. Among
the factors contributing to this process was a strengthening of the US dollar in the months
 ---pagebreak---                                              -15-
through to August, a monetary easing by the Bundesbank in March and reinforced efforts
at budgetary consolidation in several Member States. This benign situation was to some
extent interrupted in September with a renewal in exchange rate volatility amongst
European currencies. The factors responsible for this re-emergence of tensions included a
renewed weakening of the dollar and specific economic and political factors in a number of
Community countries allied to a resumption of concerns with regard to the prospects for
EMU.      However, despite this interruption, calm has returned to the markets with the
currency movements in the period 1994-95 having been largely reversed in the early
months of this'year.
The currencies of Greece, Italy and the United Kingdom have continued to be outside the
ERM. Of the three new Member States, only Austria entered the ERM at the beginning of
 1995.
Developments in relation to short- and long-term interest rates in 1-995 in part reflected the
tensions on the foreign exchange markets. The Bundesbank cut the discount rate on four
occasions since March 1995 against the background of slow money supply growth and
better inflation prospects in Germany, thereby providing most other Member States with
the necessary room to follow suit.      Having widened sharply amid the exchange rate
tensions in the spring, short-term interest rate differentials with respect to corresponding
rates in Germany narrowed in most Member States in the course of 1995. The pace of
narrowing in differentials has varied among Member States and has in most cases reflected
developments in their exchange rates against the DM. Significant differentials remain in
several Member States where financial markets remain concerned at the credibility of anti-
inflation and/or budgetary policies.
At the long end of the market, the sustained decline in interest rates in 1995 (following the
increase in 1994) was sharply reversed in the early months of this year. The recent rise
across the Community largely reflects spillover effects from developments in the United
States, where evidence of buoyancy in the economy has been seen as heightening the
possibility of a monetary tightening by the Federal Reserve. As with short-term interest
rates, the trend in differentials between Germany and other Member States has been
generally downward, although substantial differentials persist in some Member States
where exchange rate credibility remains closely tied to inflation and/or budgetary
developments.
 ---pagebreak---                                                -16-
II. 1.3. Sound public finances
Many countries came out of recession in 1993 with serious budgetary imbalances. The
need for urgent action in this area was recognised in the earlier Guidelines exercises.
Unfortunately, many Member States, despite the relatively good economic conditions
prevailing in 1994 and early 1995, had not made substantial inroads into their budgetary
problems at the time of last year's Guidelines exercise.
The public finance objectives of the 1995 Guidelines were that in the short run Member
States should not only rely on the positive benefits which were expected from the workings
of the automatic stabilisers to improve their budgetary positions but that they must also
take full advantage of all the growth opportunities to step up fiscal consolidation by
reducing structural deficits. Member States were urged to reduce their budget deficits to
below 3 percent of GDP as soon as possible. Any additional room for manoeuvre provided
by stronger than expected growth or a more favourable interest rate evolution was
recommended to be used to accelerate the process of budgetary consolidation.
Developments     in 1995 ~ In overall terms, the budgetary position of a large majority of
the Member States registered some progress in 1995. However, the degree of improvement
was insufficient given both the extent of the fiscal difficulties to be surmounted and the
official commitments to do more. The sharp cyclical slowdown experienced in some
Member States over the course of the year, and especially in the last quarter of 1995,
obviously made progress towards sounder public finances more difficult. However, fiscal
slippages in several countries were a clear factor behind the overall               insufficient
improvement in the underlying budgetary positions, as measured by the Commission
services estimates of the cyclically-adjusted budget balances.
In fact, general government net borrowing in the Community in 1995 came down by only
half of a percentage point to a still unacceptably high level of 5 percent of GDP, which is
substantially higher than the figure anticipated at the time of the drafting of the Guidelines
in May of last year. Of the budgetary adjustment which took place, roughly half of the
improvement was due to non-cyclical factors; the estimated reduction in the cyclically-
adjusted budget deficit (lA of a percentage point ) was smaller than expected earlier.
At the level of actual budget deficits, ten of the fifteen Member States have registered some
progress in 1995, varying from gains of lA a percentage point m the case of Portugal to
nearly 3 percentage points in Greece.        Nine of these ten countries also registered an
improvement in their structural deficits. The exception was Finland where the widening in
the adjusted deficit was mainly explained by the timing of tax repayments. Four countries,
namely Denmark, Greece, Italy and Sweden, achieved improvements in their cyclically-
 ---pagebreak---                                                                             •17-
adjusted deficits of between 1 and 3 percentage points. All the latter four Member States,
with the exception of Denmark, still have deficits well above the 3 per cent of GDP
reference value at the start of 1996. Belgium, Spain, France and the United Kingdom
achieved discretionary reductions of the order of a XA to VA of a percentage point.
  Table 4
                     Actual and cyclically-adjusted general government budget balances
                                                             (per cent of GDP)
                           Actual budget balance                            Change in actual                           Change in cyclically-
                                   (level)                                   budget balance*                            adjusted balance'
                    1993            1994           1995             1993           1994           1995          1993           1994           1995
    B                 -6.7            -5.3           -4.5              0.4            1.4           0.8            2.6            1.2            0.5
    DK                -3.9            -3.5           -1.4             -1.0            0.4           2.1           -0.7           -1.3            1.6
    D                -3.5             -2.5           -3.5             -0.7            1.0          -1.0            1.0            0.8           -0.9
    GR              -14.2            -12.1           -9.2             -1.9            2.1           2.9           -0.9            2.2            2.6
    E                 -7.5            -6.9(2)        ^.2(2)           -3.3            0.6           0.7           -1.1            0.7            0.4
    F                -6.1             -5.8           -5.0             -2.0            0.3           0.8           -0.4           -0.4            0.5
    IRL              -2.4             -2.0           -2.4              0.1            0.4          -0.4            1.3           -0.5           -2.0
    1                -9.6             -9.0           -7.1              0.0            0.6           1.9            1.4            0.4            1.3
    L                  1.8             2.2            0.3              1.0            0.4          -1.9                           0.1           -2.0
    NL               -3.2             -3.2           -3.4              0.7           -0.0          -0.2            2.3           -0.3           -0.2
    A                -4.3             -4.5           -6.2             -2.2           -0.2          -1.7           -1.4           -0.5           -1.6
    P                -7.1             -5.8           -5.4             -3.7            1.3           0.4           -2.2            1.8            0.2
    FIN                80             -6.3           -5.6             -2.2            17            0.7            0.7            03             12
    S               -123              108            -8.1             -4.5            1b            2.7           -1.7            03             1.1
    UK                -7.8             6.8            6.0             -1.5            1.0           0.8           -1.5            0 1            0.6
    EUR              -6.2             -5.5           -5.0             -1.1            0.8           0.5            0.2            0.3            0.3
  1) Commission services estimates. A "+" indicates an improvement; a "-" indicates a deterioration in the budget balance.
  2) This time series includes social security contributions still on a cash basis. Preliminary accounting on an accruals basis by national sources
     shows figures of -6.2 per cent of GDP for 1994 and -5.8 per cent of GDP for 1995. The time series will be updated on an accruals basis
     once certain issues concerning the correct application of statistical definitions have been clarified.
  Source: Commission's Spring 1996 forecasts.
The five remaining countries experienced a worsening in both their actual and cyclically-
adjusted budget deficits. As regards cyclically-adjusted budget balances, deteriorations of
around a VA of a percentage point were registered in the Netherlands, VA of a percentage
point in Germany and between VA and 2/4 percentage points in Ireland, Luxembourg and
Austria.         In the case of Germany, the overrun was partly due to unexpected revenue
weakness. In Ireland, against a background of strong growth, policy appears to have been
pro-cyclical although special factors, such as the social security settlement were also at
play. Despite some slippage, Luxembourg, as with Ireland, still respects the Maastricht
budgetary reference value. Finally, in Austria although the new government is tackling the
problem, it is clear that there was a serious budgetary deterioration in 1995. Efforts to
reverse the structural deterioration which occurred last year are appropriate in all these five
Member States but are especially necessary in those countries with cyclically-adjusted
deficits in excess of 3 per cent of GDP.
 ---pagebreak---                                                     -18-
 On a more positive note, the bulk of the fiscal adjustmeni which took place over (he hist
 two years was centred on the spending side, with the share of government expenditure in
 GDP falling by about 1% percentage points in the Community as a whole, though
 remaining above 50 per cent of GDP. A drop in the government spending ratio was a
 common trend amongst a large majority of Member States. Furthermore, in all countries,
 with the exception of Portugal, there was a decline in non-interest expenditure.
   Table 5
             Receipts, expenditures and interest payments of general government
                                               (in % of GDP)
         1            Receipts                      Expenditure        (of which) Interest payments
         I 1993        1994         1995    1993         1994   1995   1993         1994       1995
B          49.6        50.4         499     56.3         556    544    10.5         10?         9?
DK         58.3        588          583     62.2         62 3   59.7     78          71         67
D          465         46.8         463     50.0         493    49.8    33           34         3.8
GR         34.4        35.8         36.8    48.5         48.0   46.0   12.8         142        12.9
E          42.0        41.0         39.9    49.5         47.9   46.0    5.2          51         5.4
F          49.3        48.9         49.3    55.5         54.7   54.3    3.7          3.8        3.7
IRL        38.9        39.5         37.3    41.3         41.6   39.7    6.7          5.9        5.2
1          47.4        45.2         44.8    57.0         54.2   51.8   12.1         10.7       11.2
L          45.0        44.6         41.6    43.2        42.4    41.3    0.4          0.4        0.3
NL         53.1        50.8         48.6    56.3         54 1   51.9    6.4          6 1        5.8
A          49.4        48.1         46.9    53.7         52.6   53.1    4.3          41         4.3
P          36.3        38.0         39.4    43.4         43.8   44.8    6.7          5.8        5.8
FIN        53.8        54.6         52.8    61.9         60.9   58.4    4.6          5.1        5.4
S          60.3        59.6         59.5    72.6         70.4   67.6    6.2          68         7.1
UK         35.9        36.4         37.6    43.7        43.2    43.6    2.9          3.3        3.7
EUR        46.2        45.9         45.7    52.5         51.4   50.8    5.5          5.3        5.4
Source: Commission's Spring 1996 forecasts.
As regards government receipts, a moderate decline was noticeable in the Community as a
whole and in several Member States.                 A rather marked drop in the proportion of
government receipts to GDP occurred in the Netherlands, Austria and Luxembourg over
the last two years. Conversely, the tax burden showed a rising tendency in Greece, France,
 Portugal and the United Kingdom.
 ---pagebreak---                                                         Table 6
 The insufficient degree of progress in                                Gross government debt
reducing the Community's government                                           (pot cent of GOP)
                                                                    1993             1994                   1995
budget deficits       was reilccted        in the                  Level      Level        Annual      Level    Annual
                                                                                          Change                Change
average debt/GDP ratio figures for the
                                                        B           137.9      136.0         -1.9      1337       -2.3
Community which increased in 1995 by                    DK           80.1       76.0         -4.1       71.9      -4.1
                                                        D            48.2       50.4        +2.2        58.1     +7.7
three percentage points to over 71 percent.
                                                        GR          111.8      110.4         -1.4      111.5     + 1.1
While the inclusion in the German figure                E            60.5       63.1        +2.6        657      +26
                                                        F            45.4       48.3        +29         524      +4.1
of the unification-related debt take-over
                                                        IRL          97.5       91.1         -6.4       85.5      -5.6
by    the   Gerrrian    federal    government,          1          119.4       125.6        +6.2       1248       -08
                                                        L             62         5.9         -0.3        59        0.0
essentially    the    Treuhand-anstalt,       was
                                                        NIL          81.1       77.6         -3.5       790      +1 4
clearly an important factor in explaining              A             628        65.0        +22         694      +4.4
                                                        P            672        70.0        +28         71 6     +1 6
the increase for the Community as a                    FIN           57.3       59.5        +2.2      ' 59.6       0.0
whole, it should be noted that the debt-to-            S             76.0       79.3        +3.3        799      +06
                                                        UK           48.5       50.2        + 17        540      +3.8
GDP ratio continued to worsen in a total
                                                        EUR          66.2       682'        +2.0        71 2     +3.0
o(   9 Member       States   in     1995.      In
                                                        Source: Commission's Spring 1996 forecasts.
Luxembourg and Finland the debt ratio
did not change, whereas Denmark, Belgium, Ireland and Italy managed to reduce their debt
ratios by between almost 1 and 6 percentage points. Finally, it should be stressed that
rising debt ratios in a majority of Member States at a time of overall budgetary
improvement demonstrates the need for an intensification of fiscal retrenchment efforts.
In   overall    terms    therefore,      the   Table 7
contribution of discretionary fiscal                          Government deficits in 1995:
                                                    Convergence programme (CP) projections
consolidation has been less than had                  and latest Commission (COM) forecasts
been hoped for in 1995. This failure
                                                                   Date                  CP(a)              COM
to fully realise earlier expectations is
disappointing       given      that      the   B                6/92 (6/94)             3.8(4.3)             45
                                               DK              11/94                    3.0                  1.4
importance       of    making        steady    D               11/93                  2 to 3                 3.5
                                               GR               6/94                   107                   9.2
progress towards meeting the fiscal                             7/94                    5.9                  6.1
                                               E
convergence       criteria    has      been    F               11/93 (7/95)            4.2/4.1 (5.0)         5.0
                                               IRL              6/94                     <3                  2.4
publicly acknowledged by Member                I                9/92 (6/95)            4.7(7.5)              7.2
                                               NL              10/94                     3.7                 34
States in their national convergence
                                               A                5/95                   4%                    6.2
programmes.       It is also disappoint-       P               11/93 (10/94)            3 V. (b) 5.8)        5.4
                                               FIN              9/95                     5.3                 5.6
ing given the extent of the fiscal
                                               S                6/95                     9.0                 8.1
divergence      which      continues       to  UK               3/95                    3 V   (C)            6.0
persist, as reflected in the LcoFin            a) Figures in brackets are revised official targets, not submitted
                                                  as convergence programmes at Community level
Council decisions with regard to the           b) Average for 1995-97
                                               c) Financial year 1995/96
existence        of        Treaty-defined       Source Commission's Spring 1996 forecasts
 ---pagebreak---                                               -20-
excessive deficits.
Budgetary outlook — The crucial task facing a large number of countries is to continue to
make progress towards putting their public finance positions onto a firmer footing. With
regard to actual budget deficits, the vast majority of countries are forecast to reduce their
deficits in 1996. Nevertheless, on the basis of concrete measures announced so far and the
more prolonged than expected pause in the recovery, progress would appear insufficient
when compared with the targets set both in the Guidelines and in national convergence
programmes. Only 3 Member States (Denmark, Ireland and Luxembourg) are now likely
to have deficits below the 3 percent reference value this year compared with an expectation
of 7 countries at the time of the adoption of the 1995 Guidelines.
Since the adoption of the Guidelines in July 1995, almost all the Member States have
announced new budget proposals for 1996 and, in some cases, for 1997. These proposals
all aim for further reductions in government deficits this year and next, to 3 per cent of
GDP or below by 1997 at the latest in all countries except Greece and Italy. Particularly
sizeable packages of adjustment measures were announced by the governments in Belgium
in September 1995 (tax increases and expenditure cuts), Finland in September 1995
(expenditure cuts in 1996 and 1997, Italy        in September 1995 (measures to fight tax
evasion, increases in social security contributions and cuts in transfers to non-government
institutions), France in August 1995 (fiscal measures to reduce the central government
deficit), in November 1995 (fundamental reform of the social security system) and in May
1996 (expenditure cuts and restoration of social security account), by the newly formed
government in Austria in April 1996 (expenditure cuts, tax increases and reform measures
aimed at the pension system) and by the German government also in April 1996
(expenditure cuts).
Slower economic growth, on average in 1996, than expected when most of these budget
plans were drawn up is making deficit reduction more difficult this year. Several Member
States have already announced additional measures (e.g. freezes on certain expenditure
items in Germany and France ) to offset some of the slippage caused by the impact of the
weaker growth on tax revenues and social transfers, and others are likely to do so in the
coming months.
Provided that all the measures which have been decided are fully implemented by the
respective Member States then a substantial correction of underlying budgetary positions is
in prospect. However, it must be reiterated that, while these measures are clearly welcome,
 ---pagebreak---                                               -21 -
in a number of cases they are still insufficient in relation to both the size of the problem to
be addressed and the targets set in national convergence programmes.
11.1.4. Competitiveness
The 1995 Guidelines reiterated the importance of implementing reforms aimed at
strengthening      the underlying   growth    forces   and   enhancing    the dynamism      and
competitiveness of the Community economies.
It is clear that'the major onus is on the individual Member States to provide the conditions
in which a truly competitive environment can be established and sustained. This can only
be done by correctly focusing economic, fiscal and social policies in order to ensure that
they continue to remain consistent with the Member States objectives in this area. These
national efforts need however to be complemented and reinforced by action at the
Community level.
At the Community level, the importance of fully exploiting the opportunities provided by
the internal market needs to be continuously stressed. As of April 1996, the global rate of
transposition of internal market Directives was 89.7 percent. Denmark has the highest rate
of transposition (96.6 %) followed by the Netherlands, the United Kingdom, Luxembourg
and Spain.     The sectors which continue to present the most problems in terms of the
implementation of White Paper directives are public procurement, insurance and
intellectual and industrial property.
Action on the competitiveness front is being intensified in the context of the Commission's
recent proposal for a Confidence Pact for Employment to reinforce efforts in the particular
areas of research and development, Trans-European networks and in encouraging dynamic
small and medium-sized enterprises (SMEs).
This initiative by the Commission reinforces the actions already taken in the Community
in a large number of areas dealing with competitiveness. The Community has continued its
efforts over the last number of years to complement the single market initiative by setting
in place an effective competition framework to ensure the successful operation and
efficiency of Member State enterprises.             The following are the most important
developments:
 • The Commission presented important initiatives in the area of telecommunications last
    year with the objective to ensure a greater liberalisation of the regulatory framework.
    Such liberalisation is crucial to the Community's ambitions in relation to the
     Information Society. The implementation of full competition in telecommunications
 ---pagebreak---                                             -22
markets affects the competitiveness of the whole Community economy.                    The
Commission also presented initiatives concerning the Community's postal services.
Competition policy has also been taking on growing importance in boosting the
competitiveness of the Community's industries. In 1995, the Commission has reviewed
the Community frameworks for aids to SMEs, to shipbuilding and to R&D.
Action has been undertaken in the area of legislative and administrative simplification
The Competitiveness            Advisory Group, consisting  of high    level experts and
industrialists, presided over by Mr Ciampi, was nominated by the Commission and
presented a report to the Madrid European Council in December 1995.
The Madrid European Council took note of a Commission report on the key role that
could be played by SMEs as a potentially important sector for generating growth and
employment opportunities. The Commission's report, however, pointed out that these
SMEs needed support through specific measures and a business-environment favourable
for the development of SMEs. The Council therefore asked the Commission to make
proposals to realise SMEs potential, to improve their competitive position and to
encourage them in their business activities both in Europe and internationally.       The
Commission, in response, approved on 20 March 1996 a proposal for a new Multi-
annual Programme for SMEs for 1997-20004 which has been submitted to the Council.
Some progress was also achieved last year with regard to Trans-European networks
(TENs) in the transport, telecommunications and energy sectors. The Madrid European
Council urged Member States to give top priority to the effective implementation of
TEN projects and asked the EcoFin Council to take the necessary decisions to
complement the financial resources currently earmarked for these networks.
Community actions in the context of the Structural and Cohesion Funds, aimed at
bolstering the physical and human capital of the weaker Community regions, continue
to make an important contribution to the balanced development of all areas.
Finally, environmental protection initiatives are being actively pursued by the
Community internally and at the level of international fora. To increase the job-creating
potential of environmental policies, the Madrid European Council emphasised that such
policies should be based upon market instruments, including fiscal instruments.
Document COM(96) 98 final of 20 March 1996.
 ---pagebreak---                                                           -23
//. 1.5. Employment and the labour market
 The 1995 Guidelines emphasised the crucial role to be played by more active and more
efficient labour market policies in achieving both a high rale of economic growth over
many years and in increasing the capacity of that growth to generate jobs. As discussed in
section 1, growth trends in 1995 were generally disappointing, with the pace of output
expansion being insufficiently high to generate a substantial increase in employment. But
provided that resolute progress will be made in further rebalancing the macro-economic
policy framework, the Community could progressively move towards a sustained,
employment-creating, growth path.
One vital element of the Community's strategy for job creation is the importance of
increasing the number of jobs associated with a given level of output ("the employment
content of growth"). It should be noted, however, that it is difficult to assess whether
underlying progress is being made in this area on the basis of observations for only a short
period of lime. This is because measured labour productivity varies considerably over the
economic cycle, reflecting the lagged response of employment to changes in economic
growth. Nevertheless, the available evidence seems to indicate that there has been some
improvement in the employment content of growth in a few countries, but no significant
change in the majority of countries or for the Community average.
  Table 8
                                         Growth, employment and productivity
                 Real GDP growth (% pa.)                 Employment (% p.a.)       Labour productivity (% pa.)
                                              Memo                          Memo                          Memo
             74-85      86-90      91-95           74-85    86-90  91-95          74-85   86-90   91-95
                                              f995                           1995                          1995
  B           1.8        3.0         1.3       1.9 -0.3      1.1   -0.4       0.4  2.1     1.9     1.7     1.6
  DK          2.0        1.4        2.0        2.6  0.5      0.3   -0.4       1.5  1.5     1.2     2.4      1.1
  D           1.7        3.4         18        1.9 -0.2      1.5    0.0      -0.3  19      19      26      22
  GR          25         19          13        20   10       0.9    0.9       0.9  16      10      0.7      1 1
  E           1.9        4.5         1.4       3.0 -1.4      3.3   -0.4       2.7  3.4     1.2     1.8     03
  F           2.2        3.2         1.1       2.2  0.1      0.8   -0.1       1.2  2.1     2.4     12       1.0
  IRL         3.8        4.6        4.8        8.6  0.1      1.0    1.5       3.8  3.7     3.6     3.3     4.6
              2.8        3.0         1.1       3.0  0.9      0.6   -1.0      -0.4  1.8     2.4     2.3     3.4
              1.8        4.6        2.4        3.2  0.5      3.1    2.7       2.5  1.2     1.5    -0.3     0.7
  NL          1.9        3.1         1.9       2.4 -0.1      1.9    0.7       1.4  2.0     1.2     1.2      1.0
  A           2.2        3.0        2.0        1.8  0.7      0.7    1.1      -0.1  1.6     2.2     0.9      1.9
  P           2.2        5.1         1.1       2.5 -0.4      1.1   -0.4      -0.6  26      3.9     1.5     3.1
  FIN         2.7        3.4       -0.8        4.2  0.3      0.2   -3.6       2.2  2.4     3.2     29      2.0
  S           1.8        2.3        0.1        3.0  0.8      1.0   -2.2       1.6  1.0     1.2     2.3      1.4
  UK          1.4        3.3         1.2       2.4 -0.2      1.8   -1.2       0.6  1.6     1.5     2.4      1.8
  EUR         2.0        33          1.3       2.5  0.0      13    -0.5       0.6  20      1.9     20       1.9
  USA         2.3        2.8         2.2       2.0  18       2.1    1.0       15   0.5     0.6     1.1     06
  JAP         3.6        4.5         1.3       0.9  0.7      1.5    08        0.3  3.0     3.0     0.5     0.6
  Source: Commission's Spring 1996 forecasts.
 ---pagebreak---                                               -24-
In Spain, labour market reforms introduced in the most recent years seem to have
contributed to a very strong employment growth in 1995 (2.7 per cent against a background
of 3 per cent GDP growth) and this is expected to continue in 1996. Also in France, the
Netherlands and to a lesser extent Belgium, recent measures seem to have contributed to a
somewhat more favourable employment response to growth in 1995 than would have been
expected on the basis of historical trends.        For Denmark the favourable employment
response may be partially due to the active labour market policies pursued.       Essentially
reflecting buoyant economic activity, Ireland experienced very strong employment growth
in 1995 for the second consecutive year.        In contrast, the employment performance in
Germany has been hampered by a continuing shake-out in the country's large
manufacturing industries under the pressure of a deterioration in international cost
competitiveness, while significant job losses have been experienced in Italy in those
service sectors increasingly exposed to competitive pressures and hurt by several years of
very weak domestic consumption growth.
The Guidelines also underlined the importance of both the 5 priority areas identified by the
Essen European Council and of the latter's call to Member States to implement this strategy
by preparing multi-annual programmes spelling out their policy intentions in this area. By
providing a coherent presentation of the existing or planned national measures for the
implementation of the strategy, these programmes should become an important instrument
for monitoring and assessing progress in implementing labour market policies. To ensure
their effectiveness, they should be better coordinated with the convergence programmes,
indicating that the achievement of convergence, growth and employment is inextricably
linked. Some changes in their present content and format will also be required, including
national targets for specific measures and greater emphasis on medium and longer-term
issues.
The first assessment of the progress achieved in implementing the Community's
employment strategy was presented in a joint report from the EcoFin and Social Affairs
Councils and the Commission to the Madrid European Council. The report highlighted and
commended the major efforts deployed by the Member States since Essen, in particular the
acceptance by countries of the necessity of adopting an integrated approach based on the
link between macroeconomic and structural employment policies.            However, it also
stressed that if a decisive improvement in the Community's employment situation was to be
realised then an additional impetus would have to be given to labour market reforms in the
Member States. A range of measures were singled out in the report as being essential to
the strengthening of national initiatives in relation to employment reforms. On the basis of
the recommendations contained in the joint report, the Madrid European Council urged
Member States to prioritise a number of areas of action in their multi-annual employment
 ---pagebreak---                                             -25-
programmes. On the basis of the programmes and a set of indicators, the joint effort to
improve both the employment situation and the effectiveness of measures will be assessed
at the Community level.
Finally, since Madrid the debate on labour market reform has centred on, and is
encapsulated in, the proposal of the Commission President for a Confidence Pact for
Employment.      The Pact is intended to give substance to the Madrid Council's affirmation
that the objective of job creation remains the key policy priority for the European Union
over the coming years. The macroeconomic and structural policy framework of the pact
will be based on the strategy developed in the present and previous Guidelines with the
relevant Community instruments also being used to engender dynamism, growth and
employment.     The Pact aims at arriving at concrete policy commitments involving the
Social Partners with measures specifically related to employment creation.
 ---pagebreak---                                                 26-
11.2. Economie outlook
The worsening economic climate in late 1995 and early 1996 has complicated the task of
making progress towards the objectives of reducing unemployment and restoring sound
public finances in the Community. However, a recovery in economic activity is expected
to take place in the second half of 1996 and in 1997. This will lead to renewed job creation
and reverse the current upward trend in unemployment.               But in order to achieve a
significant and durable reduction of unemployment, it is necessary to maintain strong
growth of economic activity over a sustained period and to make further progress in the
area of structural reform.
11.2.1. Growth prospects
The recent economic slowdown, job insecurity and uncertain income prospects have
sapped confidence among consumers.            Business confidence has suffered from large
unwarranted shifts in exchange rates, from the absence of clear signs of a pick-up in final
demand and from persistent structural weaknesses. Nevertheless, signs are emerging that
the decline in confidence has come to a halt and demand may be picking up again in a
number of countries. Consequently, economic activity in the Community is expected to
bottom out in the course of the first half of this year.
On the basis of sound supply-side fundamentals (in       Table 9
particular low inflation and relatively strong average                    Real G D P
                                                               (Real annual percentage change)
investment      profitability) and  more     favourable
                                                                 1993    1994   1995    1996    1997
monetary and financial conditions, the Community         B       -1.6     2.2     1.9     1.1     2.3
                                                         DK        1.5    4.4     2.6     1.3     2.7
economy is expected to see a recovery in the second      D       -1.2     2.9     1.9     0.5     1.8
half of 1996, reinforced by the end of the ongoing       GR      -1.0   - 1.5     2.0     2.0     2.5
                                                         E        -1.2    2.1     3.0     2.0     2.9
stock adjustment.       The expansion is expected to     F        -1.5    2.7     2.2     1.0     2.1
gradually strengthen in 1997. In the Commission          IRL       3.1    6.7     8.6     5.6     4.9
                                                         1        -1.2    2.1     3.0     1.8     2.7
services'   latest    Economic   Forecasts,    economic  L         0.0    3.3     3.2     2.6     3.0
growth in the Community as a whole is expected to        NL        0.2    2.7     2.4     1.8     2.5
              l                                          A         0.4    3.0      1.8    0.7     1.1
be around 1 A per cent this year followed by growth      P        -1.2    1.0     2.5     2.3     2.8
of around 2'/2 per cent in 1997. The upswing is          FIN      -1.2    4.0     4.2     3.0     3.6
                                                         S        -2.2    2.6     3.0     1.2     2.0
expected to be driven by relatively strong extra-        UK        2.2    3.8      2.4    2.4     3.0
 Community exports, a renewed strengthening of           EUR       0.6    2.8      2.5    1.5     2.4
                                                         Source: Commission's Spring 1996 Forecasts.
 capital  formation     and continued    moderate    but
 gradually accelerating private consumption.
 ---pagebreak---                                              - 27 -
In Germany, France and a number of neighbouring countries, the adverse effects of the
strong currency appreciation in spring 1995 will gradually subside, partly due to a
significant reversal of the initial currency overshooting.         Aided furthermore by a
considerable reduction in interest rates and an expected restoration of confidence, activity
is expected to pick up during 1996, strengthening into 1997. In Italy, Sweden, Spain and
other countries, a continued rebalancing of the macroeconomic policy-mix, which has
helped their currencies regain, to varying degrees, lost ground, is likely to help lower short-
and long-term interest rates and spur confidence, thereby supporting a recovery in domestic
demand no later than the second half of 1996 while reducing the reliance on exports for
growth. In the United Kingdom, the recent easing of monetary conditions, improvements
in the housing market and a favourable competitive position should sustain continued, non-
inflationary growth.
Nevertheless, the economic outlook remains subject to substantial uncertainties.            In
countries whose currencies appreciated in 1995 the effects of competitiveness losses have
not yet been fully overcome, and in most countries whose currencies depreciated in 1994-
95 interest rate differentials relative to the DM remain relatively high.       In the current
apprehensive climate and given high unemployment, the positive response of business and
consumer spending to improved monetary and financial conditions and to the reduction in
fiscal imbalances could be weaker or take place later than normal.
Furthermore, if progress towards sounder public finances and structural reform were to be
hampered by rising social and political resistance, this would undermine the credibility of
stated economic policy objectives and might add to doubts amongst some observers as to
whether a sufficient number of Member States would be ready to participate in EMU at the
starting date of 1 January 1999. Such developments would likely lead to an increase in
long-term interest rates and could create a risk of tensions in foreign exchange markets.
This would have severe implications for the chances of a renewed and sustained recovery
and job creation.
However, some of the uncertainties surrounding the outlook may also point in a positive
direction.   Since the Community is currently enjoying favourable underlying economic
 fundamentals and the rebalancing of the policy-mix is expected to continue, the revival in
economic activity could surprise in a positive manner once confidence is restored.
 ---pagebreak---                                                28
11.2.2. Employment trends
Employment -- Given the anticipated weak expansion of economic activity in early 1996,
employment trends are expected to remain weak in the months ahead. However, provided
economic growth picks up as forecast, job creation should turn positive again in the course
of the second half of 1996 and gain momentum in 1997. Overall employment is forecast to
grow by a meagre lA of a per cent this year and by V* of a per cent next year.
Not all Member States are expected to share in Table 10
this modest pick-up in job creation in 1996. In              Labour market prospects
Germany and Austria, employment is expected
                                                             Employment        Unemployment rate
to fall considerably. If this prediction holds                  growth
                                                                                (% of labour force)
                                                           (percent per year)
true, 1996 will be the fifth consecutive year of
                                                         1995 1996 1997 1995 1996 1997
job losses in Germany where the economy is B              0.4    -0.1      0.7   9.9   10.1     9.8
beset by a high relative cost level. In most        DK    1.5     0.0      0.7   6.8    6.1     5.8
                                                    D    -0.3    -0.8     -0.1   8.3    9.3     9.4
other Member States, the expectations of job GR           0.9     1.0      1.2   9.1    9.1     9.0
                                                                           1.5
growth have likewise been revised E                       2.7     1.4          22.9    22.5   22.1
                                                    F     1.2     0.0      0.6 11.5    11.7    11.7
downwards. In Belgium, Denmark, France IRL                3.8     2.3      1.7 14.4    13.4    12.8
                                                                           0.4
and Portugal, employment is now expected to I            -0.4     0.2
                                                                           2.6
                                                                               11.8    11.8    11.7
                                                    L     2.5     1.7            2.9    3.0     2.9
stagnate or fall this year. On the other hand, NL         1.4     1.0      1.4   7.3    7.2     7.0
                                                                          -0.4          4.6
employment creation is expected to remain AP             -0.1
                                                         -0.6
                                                                 -1.0
                                                                 -0.1      0.5
                                                                                 4.0
                                                                                 7.2    7.4
                                                                                                5.1
                                                                                                7.2
relatively strong (1 per cent or more) in FIN             2.2     1.7      2.1 17.2    16.3    15.0
                                                                           1.0   9.2    8.8
Greece, Spain, Ireland, Luxembourg, the SUK               1.6
                                                          0.6
                                                                  0.6
                                                                  0.9      1.0   8.8    8.4
                                                                                                8.3
                                                                                                8,0
Netherlands, Finland and the United Kingdom. EUR 0.6 0.2 0.6 10.9 10.9 10.8
On current growth assumptions, employment Source: Commission's Spring 1996 Forecasts.
is forecast to pick up more widely in 1997.
 But with significant job shake-outs expected to continue in the manufacturing sector,
employment growth is expected to remain negative in Germany and, due to low economic
 growth, also in Austria.
 Unemployment trends — Against the background of sluggish job growth in the
 Community in 1996-97, unemployment is expected to rise further in the coming months,
 before starting to head downwards slowly in the course of the second half of 1996. For the
 year as a whole, the unemployment rate is expected to remain unchanged at last year's level
 of almost 11 per cent of the civilian labour force. Next year, it may decline slowly to \(?A
 per cent on average, possibly reaching WA per cent by the end of the year.
 The trends in unemployment in the individual Member States are largely a reflection of the
 expected employment trends. This year, the jobless rate is expected to rise significantly
 ---pagebreak---                                                -29-
(by Vi a percentage point or more) in Germany and Austria although relative to the
Community average joblessness remains relatively low in the latter country.         Belgium,
France and Portugal may also see a deterioration and the slow growth of employment is
sufficient only to stabilise unemployment in Italy.
On the other hand, unemployment is likely to continue falling in six Member States. This
includes the three countries which are hardest hit by high unemployment (Ireland, Finland
and Spain) although the level of joblessness continues to be extremely high in these
countries. In all three, the impact of strong employment growth on the jobless figures is
partly off-set by a significant increase in the labour force. The most positive developments
are expected in the United Kingdom and Denmark where a further reduction of around Vj a
percentage point is expected to bring the unemployment rate to a level significantly below
the Community average. In 1997, the level of unemployment is forecast to fall to varying
degrees in all Member States except three countries. In Germany and France, the jobless
rate is likely to stabilise and in Austria it may rise further.
For the Community at large, recent growth and unemployment trends have been
disappointing. Progress towards the objectives stated in Article 2 of the Treaty, namely the
promotion of sustainable, non-inflationary growth and a high level of employment, have
not been adequate. And recent as well as prospective developments has cast doubts on the
feasibility of achieving the objectives set out in the Commission's 1993 White Paper on
Growth, Competitiveness and Employment of creating 15 million additional jobs and
cutting unemployment by half (relative to its 1994 level) by the year 2000. Therefore,
resolute efforts in both the macroeconomic and the structural fields aimed at strengthening
sustainable job creation must be undertaken.
11.2.3. Convergence
Price stability — Progress in reducing inflation in the Community and in the Member
 States is expected to continue this year and next. Average inflation in the Community, as
 measured by the deflator of private consumption, is expected to fall to some 2!/2 per cent
 this year and stay slightly below that level in 1997.
  The outlook for low and falling inflation is due not only to the recent widening and the
 expected persistence of a negative output gap in the Community economy, but also to the
 reinforced anti-inflation credibility of the economic policy framework. This credibility is
 well established in Germany and in the countries whose currencies are closely linked to the
 ---pagebreak---                                                30-
DM. In a number of other countries, monetary Table 11                                          1
                                                                     Price and w a g e trends
policy has been conducted with considerable                         (Annual percentage change)
success with the aim of bringing inflation down                        Prices              Nominal wages
                                                                                             per head
to a pre-set target. In Italy, Sweden, Spain and              1995 1 9 9 6 1997 1995 1996 1997
Portugal, anti-inflation credibility has been B                TT To* _ , "TT 1.7 TT
                                                     DK         1.8      1.8    2.4      3.3     3.9    3.6
enhanced by the establishment of central bank D                 2.0      1.6     1.6     3.8     2.6    2.4
independence and in Finland by significant GR                   9.3      8.3    7.0    12.5     11.1    9.6
                                                     E          4.6      3.6    3.2      2.4     3.8    3.6
moves towards that goal. In these countries, the F              1.6      1.8    1.6      2.4     2.3    2.5
conduct of fiscal policy has a particularly IRL                 2.5      2.3    2.4      3.1     4.0    5.0
                                                                5.7      4.1    3.5      5.2     5.4   4.8
important role to play in anchoring low                         2.0      1.7    2.1      3.9     3.5    3.8
inflation expectations and in maintaining the NL                1.1      1.9    2.0      3.0     1.9    2.5
                                                     A          2.2      2.1    1.6      3.8     3.0    2.9
credibility of the currency. In all of them, a P                4.2      3.1    3.0     4.6'     4.6   4.0
determined anti-inflationary stance of monetary FIN             1.1      1.0    1.5      5.3     4.0   4.0
                                                     S          2.7      1.7    2.5      3.0     5.2   4.5
policy combined with more credible efforts to UK                2.6      2.7    2.5      3.1     3.6    3.6
place the public finances on a sound footing EUR 3.0 2.6 2.4 3.5 3.4 3.2
                                                     ' Private consumption deflator and nominal compensation
has, at various times, led to a significant            per employeo, respectively.
                                                     Source: Commission's Spring 1996 Forecasts.
appreciation of their currencies from previous
lows. This is likely to further help the process
of disinflation and, in turn, should facilitate a gradual relaxation of the monetary policies
which have been restraining domestic demand in these countries.
In the Community as a whole and in the majority of Member States the rise in nominal
compensation per employee is expected to remain compatible with the need to lock in low
inflation and promote job creation. On average, nominal wages are expected to increase by
about VA per cent this year and slightly less next year, against the background of an
expected inflation rate of around 2]A per cent per year. Real wage costs arc likely to
continue expanding at a rate below productivity growth, thereby contributing to a further
rise in overall business profitability.
In some low-inflation countries, particularly in Germany, relatively subdued demand and
the competitiveness losses associated with currency appreciation have limited the extent to
which labour costs can be passed on to prices, implying a significant squeeze on profit
margins in the exposed sectors. Obviously, wage trends cannot adjust instantaneously to
movements in exchange rates and in cases of clear overshooting, a market-induced
correction of exchange rates is certainly the most desirable option. Still, in order to
 safeguard the country's competitive position and its attractiveness for private sector
 investment, it is essential to contain pay settlements whilst at the same time implementing
 measures to enhance productivity and employment.
 ---pagebreak---                                              -31 -
Conversely, in some depreciating countries, especially Italy, real wages are expected to
recover some of the ground lost over previous years. In these countries, there is a risk that
workers will seek to catch up too rapidly on previous years' losses in purchasing power
through higher pay claims thereby fuelling a price/wage spiral.             Instead, continuing
adequate wage behaviour in combination with credible fiscal rectitude should engender an
appreciation of these currencies, thereby lessening (imported) inflationary pressures. Such
a policy mix was successfully implemented in Sweden last year. But in 1996, the rate of
nominal wage increases in Sweden is forecast to rise significantly despite the expected
deceleration in consumer prices. This wage behaviour risks being in conflict with the
stability objective and docs not appear to adequately reflect the need to maintain and create
jobs. Moreover, allied with the considerable appreciation of the Krona, it may threaten its
external competitive position.
Inflation (deflator of private consumption) is expected to stay below 3 per cent in 1996-97
in the countries which already satisfy this goal. And in the seven countries where inflation
did not exceed 2 percent last year (Belgium, Denmark, Germany, France, Luxembourg,
Netherlands and Finland) it is expected to remain below that value this year and next (with
the possible exceptions of Denmark and Luxembourg).               The 1995 Broad Guidelines
contained a recommendation that countries with an inflation rate in the range of 2 to 3 per
cent should aim at progressing towards or below 2 per cent. In this regard, some progress
 is expected to take place in 1996 (Ireland, Austria and Sweden) but, at least on current
 forecast assumptions, less so in 1997 (due to a possible upward movement in Denmark,
 Ireland, Luxembourg and Sweden).
 Visible progress is expected to take place in the four countries where inflation currently
 exceeds 3 percent. Assuming continued efforts, inflation in Spain and Portugal is likely to
 approach the upper limit of the Guidelines objective (3 per cent) by 1997. Against the
 background of a marked slowing in import price increases and no further indirect tax
 increases, consumer price inflation in Italy is expected to decelerate to VA per cent in 1997.
 In Greece, with more determined efforts, especially on the budgetary front, it should be
 possible to reduce inflation further than the 7 per cent currently anticipated for 1997.
 Budgetary     outlook   for 1996-97 — A large number of Member States have taken
  significant steps to consolidate their public finances in 1996 and, in many cases, also in
  1997.    According to the Commission services' estimates of cyclically-adjusted fiscal
  balances, present budget plans imply a reduction in the underlying fiscal deficit of the order
  of % of a percentage point of Community GDP in 1996 and, on currently known policies, a
  further VA a percentage point in 1997.         Nevertheless, in the latest forecasts of the
 ---pagebreak---                                                                  32-
Commission services, which take into account slower growth than previously foreseen, the
outlook is for a considerably smaller reduction in the general government net borrowing in
the Community in 1996 than had previously been envisaged. The average fiscal deficit is
expected to be reduced by lA a percentage point to just below 4!/2 per cent of Community
GDP in 1996 (versus VA per cent of GDP forecast in Autumn 1995).
The Economic Forecasts include a scenario for 1997 on the basis of measures which have
already been adopted or announced in sufficient detail.                              This does not include general
policy intentions for which specific measures are not yet known. The forecasts take into
account the economic policy packages announced in detail during April and early May by
the German, French, Austrian and Swedish governments.                                          However, they do not
incorporate the planned adjustment measures recently announced by the Belgian
government for 1997 because the measures to be taken were not known in sufficient detail
at the time of the elaboration of the forecasts. In addition to those mentioned, a number of
other Member countries are expected to take measures to improve their budgetary position
between now and 1997. On the basis of currently known measures, and aided by
improving cyclical conditions and low interest rates, the scenario for 1997 points to a
reduction in the average actual budget deficit to VA per cent of GDP next year.
   Table 12                                                          Table 13
               A c t u a l a n d cyclically-adjusted                      - General g o v e r n m e n t gross debt
           general g o v e r n m e n t budget balances                                 (percent of GDP)
                            (percent of GDP)
                                                                                          Level                Annua!
                 Actual balance            Cycl. adj. balance                                                  change
                         Level              Annual change1
                                                                               1995        1996     1997'    1996  19971
              1995        1996    1997    1995    1996     19971
                                                                     B         133.7       132.2     130.6    -1.5  -1.6
   B          -4.5        -3.2    -3.7     0.5     1.8     -0.9      DK          71.9       71.0       687    -0.9  -2.3
   DK         -1.4        -0.9    -0.6     1.6     1.0     -0.2      D           58.1       61.5       62.4    3.4   0.9
   D          -3.5        -3.9    -2.9    -0.9     0.3      1.2      GR        111.5       111.8     111.4     0.3  -0.4
   GR         -9.2        -8.1    -6.9     2.6     1.0      0.8      E           65.7       67.8       68.0    2.1   0.2
   E          6.2 3       -4.8    -3.7     0.4     1.5      0.7      F           52.4       56.1       57.8    3.7   1.7
   F          -5.0        -4.2    -3.0     0.5     1.1      0.9      IRL         85.5       81.3       77 3   -4.2  -4.0
   IRL        -2.4        -2.0    -1.6    -2.0     0.3      0.6      I         124.8       124.5     122.8    -0.3  -1.7
              -7.1        -6.3    -5.2     1.3     0.8      0.8      L            5.9         6.2       6.8    0.3   0.9
               0.3         0.7     0.3    -2.0     0.4     -0.6      NL          79.0       79.4       787     0.4  -07
   NL         -3.4        -3.5    -2.9    -0.2     0.2      0.4      A           69.4       72.4       739     3.0   1.5
   A          -6.2        -4.6    -3.1    -1.6     2.2      2.0      P           71.6       72.2       718     0.6  -0.4
   P          -5.4        -4.4    -3.7     0.2     0.9      0.5      FIN         59.6       62.5       632     2.9   0.7
   FIN        -5.6        -3.3    -1.6    -1.2      1.5     0.7      S           799        80.8       796     09   -1.2
   S          -8.1         5.2    -3.1     1.1     2.8      1.5      UK          54.0       555        562     1.5   0 7
    UK        -6.0        -4.4    -3.7     0.6      1.5     0.3      EUR         71.2        73.9      74 3          0.4
                                                                                                               2/
    EUR       -5.0        -4.4    -3.4     0.3     0.9      0.8       ' Based on currently announced measures.
    ' Based on currently announced measures.                         Source: Commission's Spring 1996 Forecasts.
    1
       A positive number denotes an improvement in the
      cyclically-adjusted balance.
    3
      This time series includes social security contributions
      still on a cash basis. Preliminary accounting on an
      accruals basis by national sources shows figures of •
      5 . 8 % of GDP for 1 9 9 5 .     The time series will be
      updated on an accruals basis once certain issues
      concerning the correct application of statistical
      definitions have bet::i clarified.
    Source: Commission's Spring 1 996 Forecasts.
 ---pagebreak---                                                33
The expected degree of budgetary improvement is insufficient to halt (he rise in the average
gross debt-to-GDP ratio in the Community, which is projected to increase by almost 3
percentage points to 74 per cent of GDP this year before roughly stabilising at that level in
 1997. In 1996, debt ratios are expected to rise in all Member Slates except four (Belgium,
Denmark, Ireland and Italy) but in 1997 debt ratios are expected to stabilise or fall in about
two thirds of the Member States.
All countries except Germany and the Netherlands are forecast to reduce their actual
deficits in 1996, but progress is generally expected to fall short of the targets set both in
national convergence programmes and in the 1995 Guidelines. Only 3 Member States
(Denmark, Ireland and Luxembourg) are expected to have actual deficits below the 3
percent reference value this year. Particularly large reductions in the budget deficit (close
to 1 percentage of GDP or more) are expected this year in Belgium, France, Greece, Spain,
Italy, Austria, Portugal, Finland, Sweden and the United Kingdom.
In the "unchanged policy" scenario for 1997, Germany, France, the Netherlands and
Finland would join the group of countries with deficits below the Maastricht reference
value and Austria and Sweden are expected to come very close to this value. In a number
of countries, where further measures have not yet been disclosed in sufficient detail the
additional effort required to reach the 3 per cent reference value would be of the order of VA
percent of GDP (Belgium, Spain, Portugal, and the UK). Only in Italy and in Greece is the
deficit expected to exceed the reference value by a wider margin in the current scenario
with the deficit forecast at 5lA and 7 percent of GDP, respectively.
                                             *    *
Faced with an unsatisfactory growth and employment performance, there is an urgent need
to relaunch the recovery process in the Community. The challenge facing policy-makers is
to generate a renewed strengthening of confidence and job creation over the short-run while
enhancing the conditions for stronger growth and employment over the medium term. This
requires both the provision of a supportive macroeconomic policy framework, entailing a
sound rebalancing of the macroeconomic policy mix, and intensified efforts in structural
policies to reduce unemployment and enhance the Community's competitiveness.              The
Commission's 1996 Annual Economic Report gave a detailed analysis of the available
policy options in the current situation. Furthermore, the Commission has received opinions
of the European Parliament and the Social and Economic Committee on this report and
 ---pagebreak---                                            34
discussed it with the Social Partners. Against this background, the Recommendation for
the 1996 Broad Economic Policy Guidelines sets out the policies which are necessary for
achieving the Community's objectives in terms of growth, employment and convergence.
 ---pagebreak---  ---pagebreak---                                               31)
                                                                  ISSN 0254-1475
                                                            COM(96) 211 final
                                              DOCUMENTS
EN                                                                            10
                                     Catalogue number : CB-CO-96-237-EN-C
                                                             ISBN 92-78-04429-6
Office for Official Publications of the European Communities
L-2985 Luxembourg