CELEX: 51997DC0168
Language: en
Date: 1997-04-23 00:00:00
Title: 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

COMMISSION OF THE EUROPEAN COMMUNITIES
                                          Brussels, 23.04.1997
                                          COM(97) 168 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---                                    Table of contents
1. Main objectives: growth, employment and convergence                1
2. Growth and stability-oriented macroeconomic policy mix             2
3. Price and exchange rate stability                                  3
4. Sound and efficient public finances                                4
5. Structural reforms to promote growth and employment                7
   5.1.   Better functioning product and services markets             8
   5.2.   Fostering labour market reforms and investment in knowledge 8
                                                                        /**-
 ---pagebreak---         Broad Guidelines of the Econome Policies
         of the Member States and the Community
 1. Main objectives: growth, employment and convergence
Since the summer of 1996, when the previous Guidelines were adopted, a moderate recovery in
economic activity has taken hold in the Community. Supply-side fundamentals continue to
improve whereas demand prospects are brightening. These developments in combination with
an increasingly well-balanced macroeconomic policy mix and the emerging improvement in
confidence should allow for a gradual strengthening in output growth to about its trend rate this
year and to well-above-trend next year.
ïn the present environment, two fundamental policy concerns should be given prominence, with
success on both fronts being mutually reinforcing. Firstly, although employment is expected to
 increase moderately in the short run, there is a need to raise the Community's low employment
rate and to reduce unemployment significantly. Secondly, despite appreciable strides in recent
years towards the goals of price stability and sustainable public finances, further progress is
required in achieving and maintaining a high degree of nominal convergence so that a significant
number of Member States will be in a position to participate in EMU as from 1 January, 1999.
In the coming quarters, it is of crucial importance ~ also for growth and employment — to
 avoid any doubt about the fulfilment of the Maastricht criteria and the 1999 launch date for the
 single currency so as to reassure European citizens and businesses that the opportunities brought
 by EMU will indeed be seized. Since the pursuit of sounder budgetary positions will bring
 important growth and employment benefits over the medium term, continuing budgetary
consolidation efforts are in the interest of all Member States.
With the Single Market and EMU, the Community is becoming one of the most important
economic entities in the world. Its medium to longer term potential in terms of technological
progress, labour and wealth creation is considerable. In order to exploit fully this potential for
raising the standard of living, the Community must progressively achieve a high employment
rate. Such a performance would also help to safeguard the sustainability of pension schemes, in
a reformed manner, which form an integral part of the social protection systems in the Member
States.
Restoring a sustained, high rate of non-inflationary growth is the most favourable way, both
from a political and social point of view, of achieving a long-lasting solution to the
Community's unemployment problem and of making further headway towards sound public
finances. Furthermore, since structural deficiencies continue to restrain both growth and the
degree to which growth can be translated into additional employment, most Member States need
to implement structural reforms. However, policies to improve competitiveness and the
functioning of product, services and labour markets will bear full fruit when the economy is
expanding rapidly and is generating a high number of jobs.
                                                                                                   /lb
 ---pagebreak---  An employment-friendly growth must be supported by higher investment, both private and
 public. Due to the relatively weak private investment trends since the early 1990s and the
 squeeze on public investment, the current investment rate in the Community is rather low. The
 current investment ratio, if maintained over the medium term, would sustain a rate of growth of
 only a little over 2 per cent per year. It is essential therefore that the currently favourable
 investment conditions, in terms of high profitability and lower interest rates, are fully exploited.
In addition, the realisation of the transeuropean transport, energy and communication networks
should be actively pursued, with the Community financial instruments and the EIB playing a key
role and with a greater involvement of the private sector. Moreover, investment in human
resources, knowledge and skills should also be stepped up.
Against this background, the Member States and the Community institutions are urged, in
conformity with Article 102(a) of the Treaty, to conduct their economic policies with a view to
making significant progress towards sustainable, non-inflationary growth and a high level of
employment, which are among the objectives stipulated in Article 2 of the Treaty. To this end,
they are also called upon to co-ordinate their policies (Articles 3a, 102a and 103) within the
context of increased integration of the Member States' economies.
2. Growth and stability-oriented macroeconomic policy mix
The present Guidelines reaffirm that the achievement of sustained, investment-supported output
growth and job creation over the medium term without inflationary tensions continues to require
a common macroeconomic policy strategy which builds further on the following three elements,
as formulated in the 1996 Guidelines:
     "A stability-oriented monetary policy whose task is not undermined by inappropriate
     budgetary and wage developments;
     sustained efforts to consolidate the public finances in most Member States consistent with
     the objectives of their convergence programmes;
     nominal wage trends consistent with the price stability objective; at the same time, real
     wage developments should be below the increase in productivity in order to strengthen the
     profitability of employment-creating investment.
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."
With regard to medium-term prospects, it is important that policy-makers, the social partners and
economic agents take fully into account the fact that EMU will imply a genuine regime change,
fundamentally affecting the way macroeconomic policies and wage trends are set.
(i) A common monetary policy under the responsibility of an independent European Central
     Bank will have price stability as its primary objective while, without prejudice to this
     objective, supporting the general economic policies in the Community so as to contribute to
     the achievement of the objectives laid down in Article 2 of the Treaty.
 ---pagebreak--- (ii) The Treaty provisions in the field of budgetary policy (Articles 104 to 104c) and the
      Stability and Growth Pact will work in the direction of sound and disciplined budgetary
      policies. Subject to these legal provisions, responsibility for budgetary policies will reside
      with the sovereign national governments which will have to co-ordinate theiF budgetary
      policies in the framework of the Broad Economic Policy Guidelines.
(iii) As regards wages, which are determined by autonomous social partners according to
      individual countries' practices, stability-oriented monetary and budgetary policies and the
      impossibility of exchange rate movements within the euro area will reinforce both the
      conditions and the incentives for an adequate evolution. These incentives should also be
      strengthened by an intensified social dialogue, where possible and according to prevailing
      traditions, at the national level. Àt the Community level, the Commission, in conformity
      with Article 118B, will continue to develop the social dialogue, notably en macroeconomic
      policy issues, with a view tc building on the common understanding on the economic policy
      strategy !aid down it: the Guidelines. The European social partners' contribution on the
      macioeconomic framework transmitted to the Dublin European Council constitutes an
      important step in the right direction which should be encouraged.
If all actors involved live up to the new exigencies, the macroeconomic policy mix will continue to
favour sustained high and employment-creating growth in the Community. The achievement of
EMU will thus be conducive to 'locking in' the fundamental change in the macroeconomic policy
mix which has been progressively established in the Community.
3.      Price and exchange rate stability
Price stability ~ The Community has made considerable headway towards price stability and
inflation convergence which is an essential requirement both for achieving sustained medium-
term growth and for adopting a single currency. Inflation in the Community on average is
expected to fall to VA per cent in 1997, the lowest rate since the Community's inception. In the
EMU perspective, the Community should aim at bringing down its average inflation rate to 2 per
cent and to target such a level over the medium term.
In February 1997, nine Member States (Belgium, Denmark, Germany, France, Luxembourg, the
Netherlands. Austria, Finland and Sweden) had an inflation rate1 of two per cent or less. Having
already achieved a satisfactory degree of price stability, these countries will need to sustain this
performance over the medium term. Against the background of a sustained recovery, Ireland
and the United Kingdom2 will need to maintain a policy aimed at preventing any resurgence of
underlying inflationary pressures and, where adequate, progressing towards lower inflation.
In Spain, Italy and Portugal, the average rate of inflation' has edged down to the 3 to 3.5 per cent
range in February 1997, but in this month the inflation rate on a year earlier reached about 2.5
per
     As measured by the arithmetic average of the latest twelve monthly harmonised indices (HICP)
     relative to the arithmetic average of the twelve monthly harmonised indices of the previous period.
     Ireland and the United Kingdom have not yet published HICP data in a manner which allows the
     calculation of the measure referred to in footnote Î. However, the Commission's own estimates, on
     the basis of available information, suggest that the inflation performance (HICP) in these two
     countries is in the 2 to 3 per cent range.
 ---pagebreak---   cent. In these three countries, it is essential to persevere with stability-oriented policies with a
  view to achieving an average rate of inflation of 2.5 per cent or less for the year 1997 and to
  ensure that the disinflation gains are preserved, and even improved upon, as the recovery gathers
  strength.
 In Greece, where progress in reducing inflation has been made over recent years, reinforced
 efforts are needed in order to bring inflation down to the official inflation targets of 4.5 per cent
 by the end of 1997 and to below 3 per cent by the end of 1998.
 Exchange rate stability — In conformity with Article 109m, all Member States must continue to
 treat their exchange-rate policies as a matter of common interest. Sounder and more credible
 economic policies and favourable developments relative to the US dollar have contributed to a
 more appropriate alignment of exchange rates within the Community. Financial market
 optimism on the prospects for a relatively wide participation in EMU from the outset has also
 helped in this regard. Finland and Italy entered the ERM in the autumn of last year and the vast
 majority of ERM currencies are now within or close to the former narrow bands of the
 mechanism. In this context, as well as with a view to participation in EMU, it is imperative that
 Member States maintain ~ and where appropriate intensify ~ their commitments to stability-
oriented macroeconomic policies. For countries which are not currently participating in the
ERM, these policies would also contribute to creating the conditions for making such
participation possible. Sound macroeconomic policy management creates the conditions for
stable exchange rates and low long-term interest rates within the Community and contributes to
a stable international monetary system.
4.      Sound and efficient public finances
In the Community as a whole, the actual budget deficit declined from 5 per cent of GDP in 1995
to 4.3 per cent of GDP in 1996. Slow economic growth in 1996 made efforts at budgetary
consolidation more difficult and masked the underlying improvement which was achieved. On
the basis of the budget measures decided upon until mid-April 1997, the net borrowing of
general government in the Community as a whole is likely to fall to just below 3 per cent of
GDP in 1997, declining further to 2.5 per cent of GDP in 1998.
In their budgets for 1997, a large majority of Member States have taken significant measures to
reduce their budget deficits to 3 per cent of GDP or less. It is of paramount importance that
Member States rigorously implement these budgets and take immediate corrective action in the
event of slippage from budgetary targets. As regards the budgets for 1998, an enactment of
additional deficit-reducing measures is required in most Member States. This would serve to
provide die needed confidence about the sustainability of the budgetary adjustment, especially in
those countries where the budget deficit is not expected to be clearly below 3 per cent of GDP in
1997 or where the 1997 budget contained temporary measures. This resolve is needed not only
to comply with the Maastricht budgetary criteria but also to make further progress towards the
attainment, over the medium-term, of the objective of a budgetary position close to balance or in
surplus in normal circumstances as stipulated in previous Guidelines and the Stability and
Growth Pact, thereby safeguarding a growth and stability-oriented macroeconomic policy mix.
 ---pagebreak--- It is necessary that budgetary adjustment programmes are credible and socially balanced. To be
credible, it is important that programmes are transparent and sustainable. Transparency requires
that commonly agreed accounting rules and economic principles are strictly applied. It also
requires that, in the presentation of their budgets, Member States clearly characterise the nature
of the announced deficit-reducing measures, indicating which «measures are one-off.
Furthermore, annual budgets and medium-term budgetary projections should clearly indicate the
underlying economic assumptions. To be sustainable, it is essential that deficit-reducing
measures are of a structural kind. Reliance on one-off measures and actions which have to be
reversed in subsequent years have in some cases been instrumental in heightening the pace of
budgetary consolidation. They do not, however, reduce the need for fundamental budgetary
adjustments and should therefore be complemented by lasting budgetary improvements.
Realising the economic rewards of budgetary consolidation crucial!}' hinges upon the quality of
the measures taken. ïn this respect, the present Guidelines reaffirm the general principles which
have been stipulated in previous Guidelines, Firstly, prominence should be given to restraining
expenditure as opposed to further increases in the overall tax burden. In this respect, action
needs to focus on structural measures to better control spending on public consumption, public
pension provisions, health care, unemployment compensation and subsidies. If tax increases are
unavoidable, care should be taken to minimise the adverse effects on growth and employment
and to avoid a revival of inflationary pressures. Secondly, action to permanently reduce the
share in GDP of public expenditure should be accompanied, to the extent possible and without
threatening the necessary reduction in budget deficits, by a shift in government spending
priorities towards productive activities such as investment in infrastructure, human capital and
active labour market initiatives. Thirdly, the desired reduction in the tax burden in most
Member States, especially on labour, should be enacted to the extent that tight expenditure
control makes tax reductions consistent with the achievement and maintenance of sound budget
balances. The Community policies in the area of taxation should be consistent with these
guidelines.
Given the interrelationship between taxation policy on the one hand and the Single Market,
EMU and the fight against unemployment on the other, Member States stand to gain from
increased co-operation in tax measures. Harmful competition between the tax regimes of the
different Member States should be avoided. In this respect, Member States are called upon to
examine the possibility of establishing a code of conduct.
As regards individual Member States, five ~ Denmark, Ireland, Luxembourg, the Netherlands
and Finland ~ already respected the 3 per cent reference value in 1996. In Denmark where the
budget balance is expected to turn slightly positive this year, it is important to consolidate this
performance over the business cycle, to keep the public debt-to-GDP ratio on a steady downward
trajectory and to reduce the growth in public expenditure, including in social transfers. Ireland
should take advantage of the current strong growth phase to intensify efforts to restrain public
expenditure, thereby making final progress towards a balanced budgetary position. A
continuation of the restrained expenditure policy is also essential in the Netherlands and Finland,
with a particular focus needed on social security transfers, offering the opportunity to lower
further non-wage labour costs or other employment-impeding taxes.
 ---pagebreak--- In Belgium, the budget deficit is expected to reach 3 per cent of GDP or less in 1997. On the
basis of current policies, the deficit is likely to fall further in 1998. To put the public finances on
a sustainable footing, the Belgian government should strictly adhere to its new convergence
programme. Particular attention should be given to ensuring sound social security accounts,
with key elements being the introduction of effective mechanisms to better control health care
spending and the continued pursuit of pension reforms.
In Germany, the budget deficit is expected to reach 3 per cent of GDP or less in 1997. On the
basis of current policies, the deficit is likely to fall slightly further in 1998. The German
government has made a firm commitment to take all the necessary measures to respect the 3 per
cent reference value in 1997 and should take the necessary action to arrest the upward trend of
the public debt-to-GDP ratio already in the current year. The pace of budgetary consolidation
should be maintained in 1998 in line with the new convergence programme. Continued
budgetary consolidation should focus on a permanent reduction in the share of government
spending in the economy which would facilitate the introduction of structural reforms in the tax
and social security systems without threatening a strict adherence to the budgetary objectives of
the new convergence programme.
In Spain, the budget deficit is expected to reach 3 per cent of GDP or less in 1997. On the basis
of current policies, the deficit is likely to fall slightly further in 1998. In their 1998 budget, the
Spanish authorities, which are fully committed to reaching the deficit target of 3 per cent of GDP
in 1997, should pursue further budgetary consolidation as envisaged in the new convergence
programme. It is important to continue the implementation of structural deficit-reducing
measures, particularly to curb current expenditure and improve the efficiency in budgetary
management.
In France, the budget deficit is expected to reach 3 per cent of GDP or less in 1997. On the basis
of current policies, the deficit might not fall further in 1998, reflecting in part the expiration of
one-off measures. It is essential that budgetary consolidation is sustained over the medium term
by implementing its recently agreed convergence programme without fail. In particular, it is
necessary to contain health spending and to balance the social security accounts and to ensure
that the envisaged tax reductions, in themselves supportive to growth and employment, will not
slow down the pace of deficit reduction.
In Italy, the budget deficit may reach 3 per cent of GDP in 1997, if the measures already taken in
the 1997 budget and in March of this year have a full effectiveness, and, if necessary, further
measures are taken by the Italian government. On the basis of current policies, the deficit might
increase again in 1998, reflecting the expiration of one-off measures. A further reduction should
be envisaged in the 1998 budget to provide assurance regarding the continuity of adjustment and
to place public finances on a sound medium-term footing. Measures taken in 1997 which had a
temporary nature should be replaced by structural measures with a permanent impact on the
budget. The conditions for a durable consolidation of the Italian budget should be specified in
the convergence programme which the Italian authorities are invited to present as soon as
possible.
 ---pagebreak--- In Austrias the budget deficit is expected to reach 3 per cent of GDP or less in 1997. On the
basis of current policies, the deficit is likely to fall slightly further in 1998. The Austrian
government is urged to take all the necessary measures to meet its budget deficit target of 3 per
cent of GDP in 1997 and to secure the sustainability of its budgetary consolidation efforts in
subsequent years through a programme of ongoing and, where necessary, reinforced structural
adjustments.
In Portugal, the budget deficit is expected to reach 3 per cent of GDP or less in 1997. On the
basis of current policies, the deficit is likely to fall slightly further in 1998. The new strategic
agreement between the government and the social partners should be strictly complied with in
order to achieve significant progress in reforming public administration and the social security
and taxation systems.
In Sweden, the budget deficit is expected to reach 3 per cent of GDP or less in 1997. On the
basis of current policies, the deficit is likely to fall considerably further in 1998. Budgetary
adjustment should concentrate on curbing the growth of expenditure, especially social transfers,
and on reducing, as far as possible, taxation on households and firms so as to improve incentives
to economic activity and work.
In the United Kingdom, the budget deficit is expected to reach 3 per cent of GDP or less in 1997.
On the basis of current policies, the deficit is likely to fall considerably further in 1998. It is
 recommended to adhere firmly to the path of deficit reduction envisaged in the budget for
 1997/98.
 As regards Greece, where announced measures are expected to lead to a further reduction in the
government budget deficit in 1997, sustained efforts on a wide range of fronts are required in
order to meet the targets of the convergence programme, including reinforced efforts to widen
the tax base, to increase the efficiency of the tax administration and of the tax collection system,
to curb government spending and to pursue and extend privatisation plans.
In some of the above Member States, further progress in reducing the government deficit ratio in
 1998 is likely to be limited or indeed absent, in part reflecting the expiration of one-off
measures. Consequently, in their budgets for next year, these Member States should take this
fact into account.
5. Structural reforms to promote growth and employment
In order to safeguard and promote the EC's competitiveness and employment in a world of free
trade and constant technological change, it is essential that Member States and the Community,
in line wkh the Broad Guidelines for Economic Policies, intensify their efforts to modernise
their markets for goods, services and labour. In order to augment the ability of the Member
States' economies to adapt to changing conditions and to enhance the growth potential, there is
also a need to promote innovation, research and development and to improve education and
training                                                                                   systems.
 ---pagebreak---  To increase the efficiency of environmental policies, they should rely on more market-based
 instruments, including fiscal ones, both at the national level and — if EU-wide action appears
 necessary — at the level ofti^eCommunity.
 5.1. Better functioning product and services markets
 As part of the strategy to foster growth and employment, while maintaining low inflation, it is
 essential to improve the operation of product and service markets, to stimulate competition and to
 ensure efficient price setting. This was the rationale for the Single Market Programme (SMP), the
 importance of which has clearly been highlighted in the Commission's recent evaluation3. The
 conclusion of that evaluation was that on the one hand Member States' product markets are now
generally highly integrated; on the other hand, the markets for services are less integrated, although
the situation has improved significantly since the start of the SMP. Particular problems clearly
remain. Services, especially construction, insurance and banking, should become the subject of
more attention, particularly on the need to fully implement Single Market legislation.
Furthermore, product markets associated with public procurement continue to escape the full force
of competition; other product markets, notably pharmaceuticals, continue to be excessively
regulated by the Member States. Consumers face higher prices as a result. State aids continue to
distort markets and blunt competition without any sign of improvement. Taxation around the
Community is continuing to segment markets and to increase price differentiation. Product
standards, especially the concept of "mutual recognition" is another area where progress has been
too slow. The business environment for SMEs should be improved.
Competition in, and the efficiency of, product and service markets will be improved by making the
Single Market work better, with additional Member State commitment to: (i) implement fully and
ensure proper enforcement of the existing legislative framework, in particularly in the telecom
sector; (ii) complete the legal framework in areas such as taxation and company law and the
liberalisation of the energy markets; (iii) reduce the burden of over-regulation and to revise or
remove national, market fragmenting measures; and (iv) avoid using state aids to postpone
essential restructuring. The Commission's Action Plan on the Single Market proposes a number
of concrete actions that should be in place before 1 January 1999 to redynamise the Single Market.
5.2. Fostering labour market reforms and investment in knowledge
The positive experience of a number of Member States permits some important policy conclusions
to be drawn both on the content and on the implementation of reforms. Firstly, structural reforms
need to be comprehensive in scope, as opposed to limited or occasional measures, so as to address
in a coherent manner the complex issue of incentives in creating and taking up a job. This
     See Commission Communication on "The impact and effectiveness of the Single Market"
     (COM(96)520, October 1996) and "Economic Evaluation of the Internal Market" (European
     Economy, Reports and Studies, No. 4, 1996).
                                                       8
 ---pagebreak--- approach allows policy complementarities to be exploited, thereby increasing the overall
effectiveness of reforms and, by enhancing their social and political acceptability, reducing the
likelihood of policy reversal. Secondly, mechanisms to monitor the impact of reforms on the
labour market and on employment help assess the effectiveness of the reforms and indicate the
need for possible changes in priorities or implementation. As a result, the multi-annual
employment programmes need to focus more on the interplay between the Guidelines and
specific labour market measures whereas the Joint Employment Reports, which monitor their
application, need to pay particular attention to the identification of good practices arising from
the Member States policies.
A wide array of measures aimed at reinforcing labour market efficiency have been adopted in
recent years at the national level and important reforms are currently under discussion in a
number of Member States. This process should continue and, where necessary, be intensified.
In this context priority should usefully be given to actions aimed at increasing the employment-
intensity of growth through the implementation of pragmatic measures which would reconcile
the attachment of EU citizens to high social standards and the need to open, to a certain degree,
the relatively compressed wage cost structure in most Member States. These measures include:
(i) more differentiation in wage agreements according to qualifications and regions in order to
      reflect adequately differences in productivity levels as well as the introduction of temporary
      entry wages for the young, inexperienced or long-term unemployed. This is an important
      task for the social partners;
(ii) soundly-financed reductions in non-wage labour costs or lower income taxes at the lower
      end of the wage scale;
(iii) new patterns of work organisation, including more flexible working-time arrangements,
      tailored to the specific needs of firms and workers; greater use of voluntary part-time work;
      and the promotion of local employment initiatives.
Moreover, measures to increase the employment-intensity of growth should be linked with the
necessary re-orientation of government spending in favour of inter alia education, vocational
training and research and development.
The shift towards active labour market policies should be closely linked to the reform of taxation
and social protection systems so as to ensure incentives, as well as possibilities, for job-seekers
to take up a job or to participate in other employment-enhancing activities. In addition, these
reforms need to be supported by a stronger employment orientation in other policies. In
particular, measures undertaken with the assistance of the Community's structural funds should
also fit into the global employment strategy and the multi-annual employment programmes of
the Member States.
 ---pagebreak---  ---pagebreak---                                                                   ISSN 0254-1475
                                                           COM(97) 168 final
                                             DOCUMENTS
EN                                                                       10 01
                                    Catalogue number : CB-CO-97-165-EN-C
                                                             ISBN 92-78-18925-1
Office for Official Publications of the European Communities
L-2985 Luxembourg