Article 1 
The Annual Economic Report 1991/92, attached to this Decision, is hereby adopted, and the economic policy orientations for the Community for 1992 put forward in that report are adopted. Article 2 This Decision is addressed to the Member States. Done at Brussels, 25 February 1992. For the Council The President Vitor MARTINS (1) OJ No L 78, 24. 3. 1990, p. 23. (2) OJ No C 39, 17. 2. 1992. (3) Opinion delivered on 29 January 1992 (not yet published in the Official Journal). ANNUAL ECONOMIC REPORT 1991/92 INTRODUCTION AND SUMMARY 1991 to 1992: Two years of slower growth World economic growth practically ground to a halt in 1991: + 0,2 % in real terms. Cyclical factors, reinforced by the negative effects of the Gulf crisis, have pushed into recession the economies of many important industrialized countries: United States, Canada, some EFTA countries and the United Kingdom. In addition, the far-reaching transformation occurring in central and eastern Europe is inevitably provoking a temporary, but substantial, decline in output in those countries: the impact on the Community remains limited though. The end of the recessionary phase in output in some countries and a certain improvement in world trade lead to the expectation of a recovery to growth rates of about 2 % in 1992. The economy of the European Community has also been affected by these factors, but it has withstood them much better than many other world regions. The fundamental improvement in the functioning of the Community economy which took place during the 1980s and the strong positive growth impulses stemming from German unification have ensured the continuation of growth, albeit at a reduced rate. The rate of growth in the Community is estimated to drop in 1991 to about 1,25 % from the 2,8 % recorded in 1990. 1992 should see a slight improvement of growth, about 2,25 % for the Community as a whole, as the expected recovery in the United Kingdom is offset by a slow-down in Germany once the effects of unification peter out. The current economic slow-down must be seen against the backdrop of the strong growth which preceded it. The Community economy has been growing at a satisfactory pace since 1984. The last few years have been characterized by unusually high rates of growth of investment which were difficult to sustain: In 1990 the amount of investment in equipment made by Community firms was about 50 % higher in real terms than that of 1984. The expectations created by the internal market programme may, in 1987 to 1989, have led firms to bring investment forward in anticipation of the actual internal market effects. These effects will be felt in the years to come as the political and legislative decisions already taken are implemented and lead to an actual dismantling of the residual internal barriers. The Community economy - Key indicators Average 1983-1987 1988-1989 (**) Real GDP (annual % increase) 2,43,7 2,8 1,3 21/4 21/2 Inflation (a) (increase) 5,94,3 5,2 5,0 41/2 41/4 Real compensation per head 1,31,6 2,3 2,0 11/4 11/4 Employment (increase) 0,11,6 1,4 0,5 1/4 1/2 Unemployment (% of active population)10,59,3 8,4 8,6 9 91/4 Budget deficit (b) (% of GDP) 4,93,3 4,1 4,4 41/2 41/4 Current account balance (% of GDP) 0,70 -0,2-0,8-1 - 3/4 (**) Forecast (a) Private consumption deflator (b) General government net borrowing requirement Slower growth contains risks for the major Community projects The current economic slow-down carries a double economic policy message for the Community. (i) On the one hand, it represents an unwelcome development which is reducing the margin for manoeuvre for economic policy in many countries. The lower rates of growth are leading, already in 1991, to an increase in unemployment, thus bringing to a halt the continuous downward trend evident since 1986. Social resistance to change risks increasing as the positive consequences of the present structural adjustment take more time to materialize and become thus less visible than the temporary negative ones. Convergence is interrupted in the run up to economic and monetary union (EMU) and slower growth further complicates the task of budgetary consolidation where this is still necessary and creates less favourable conditions for a rapid catching-up process. (ii) On the other hand, it constitutes a powerful reminder that the economic policy adjustment which took place during the 1980s, although substantial, was not sufficient or complete. Wage moderation helped improve the profitability of investment which had deteriorated substantially in the wake of the two oil shocks and of the unsettled conditions which followed them. This positive trend, however, came to a halt in 1990 when the correction was not yet complete. Further efforts are necessary to bring investment profitability back at least to its level of the 1960s. The strong growth of 1988 to 1990 was not exploited to further the adjustment process where this was necessary. In some Member States the rates of inflation, even if substantially reduced by comparison with the beginning of the 1980s, were at the end of the decade still too high for the stated ambition of moving rapidly towards economic and monetary union. Insufficient structural adjustment had taken place. The strong employment growth of 1988 to 1990 led to unwarranted wage increases in 1990 notwithstanding still high unemployment. Equally worrying is the situation in the budgetary area. The strong rates of growth offered a golden opportunity, which was not seized, to take bold steps to consolidate the budgetary position at little cost. In many cases, strong consolidation would have helped in preventing overheating with positive consequences on inflationary pressures. In some countries there remained problems of external competitiveness as shown by continuing fragile external positions. Very often efforts were interrupted too soon in this area as well. The policies which have brought about the turn-around in the performance of the Community economy during the 1980s must be implemented again with more determination. In an interdependent world economy, healthy fundamentals and a flexible economy go a long way towards ensuring that the effects of adverse external developments do not jeopardize the pursuits of fundamental Community economic policy objectives. With appropriate policies medium-term perspectives remain good The rate of growth of the Community economy is currently expected to pick up to about 2,5 % in 1993. The slow pace of the recovery constitutes a reflection of the fact that many Member States are expected to embark on policies aimed at resuming adjustment efforts. Under these conditions the Community economy could return to stronger rates of growth sustainable in both economic and environmental terms. The processes launched with the major Community programmes - completion of the internal market, transition to economic and monetary union, reinforcement of economic and social cohesion - are irreversible. Bold decisions and determined actions would have a substantial positive effect on the confidence of economic agents and give an immediate impulse to economic growth. The efforts to complete the internal market have resulted in the most wide-ranging supply side initiative in the history of the Community. Most of the required decisions have been taken. Their transposition into national law, however, is lagging behind and a number of difficult issues have still to be solved. The recent agreement on the setting up of a European economic area will extend and reinforce the effects of the internal market programme. Economic and monetary union will result in an amplification of the type of economic benefits that follow from the 1992 programme. Indeed only a single currency will allow the full potential benefits of the Single Market to be achieved. The primary aim of EMU is therefore to strengthen the integration of the Community and improve its economic performance. After many years of remarkable progress, the trend towards the degree of nominal convergence necessary for a smooth transition to EMU has come to a halt in 1989/90. Few Member States are yet in a position to make the transition to EMU without considerable adjustment. Recognizing the need to resume the movement towards greater convergence, Member States have agreed to embark upon ambitious convergence programmes. It is important that these programmes be implemented in a resolute way. The Member States, in which the adjustment needs are still large, will be reinforced in their determination by a successful and clear outcome of the Maastricht meetings, by the results already achieved by their partners and by enhanced coordination procedures at the Community level. The Community policy priorities require a consistent implementation of appropriate macroeconomic policies and policies for structural adjustment Continued efforts are required in all countries to improve the flexibility of the economy. The coexistence of very high overall levels of unemployment and bottle-necks in certain sectors of the labour market suggest that greater efforts must be developed to improve training and reduce skill mismatches. At the same time, greater flexibility will be needed both in wage determination and the wage structure. It is important to review wage setting procedures so as to make them more responsive to macroeconomic considerations and to the need of furthering structural adjustment. The Community, and the whole world, is facing a shortage of savings which risks becoming more acute in the years to come. Notwithstanding a subdued demand for investment in the industrialized world, real long-term interest rates in 1991 are high, which points to the fact that available savings are insufficient to meet the demand for capital. This situation risks becoming even less favourable once investment activity picks up again and the huge pent-up capital demand from central and eastern Europe translates into actual demand for funds. Authorities should embark on a systematic review of all structural impediments to saving. The single most important contribution to increased national saving, however, would be a significant reduction in public deficits in most countries. Various Member States (Greece, Italy, Portugal, Belgium, the Netherlands, Ireland and Germany) present, to different degrees, unsatisfactory budgetary positions. These positions must be corrected to improve macroeconomic conditions in the countries concerned and to allow for a smooth transition to EMU. The necessary progress towards these goals would also help to reduce the overall shortage of savings and would ease the burden presently carried by monetary policy. The success of monetary authorities in preserving price stability and exchange rate stability within the Community has been acknowledged by the markets and interest rate differentials among the EMS (European Monetary System) currencies have come down substantially. They have all but disappeared at the short end of the market between the currencies of the initial narrow band participants. Under these conditions the room for manoeuvre at the national level is extremely reduced. It is therefore all the more urgent to move to full EMU. Given the continued strength of inflationary pressures in the vast majority of Member States, however, overall monetary policies should remain cautious. Given the constraints that the high degree of economic integration and exchange rate stability now prevailing in the Community exert on monetary and budgetary policy, the task of creating conditions conducive to an harmonious development of all Community countries and regions falls more on policies for structural adjustment. Such policies need to be supported by appropriate policy measures in key sectors of the economy to facilitate the required adjustment. Member States and the Community must ensure that supply conditions improve everywhere to create additional employment. Conditions must be created which will attract job-creating investment where unemployment is high. Such conditions would also contribute to the catching-up process, that could be further reinforced by a strengthening of the Community's cohesion policies. Better infrastructure, closer cooperation, less rigid labour markets and tax structures which do not penalize entrepreneurial activities are all particularly important factors. Member States should give the improvement of supply policies a prominent place in their economic policy concept. Cooperation at the Community level and supply side policies in Member States are a necessary complement to macroeconomic strategies. Improvement of supply conditions must go hand in hand with maintaining open and undistorted competition. Public subsidies can threaten the functioning of a competitive market process by confining specific advantages to competing companies. In the run-up to EMU State aids should come under closer scrutiny to improve convergence. The Commission strives to limit subsidization and to incorporate it in a context of restructuring. A commitment to more discipline on subsidies would also contribute to the achievement of a more open international trading system. A timely conclusion of the Uruguay Round would not only ensure market access and reduced protection in the traditional areas of trade negotiation but also allow the extension of multilaterally agreed rules to new areas of great relevance for the Community: services, intellectual property rights and international investment. It is important to improve access to our trade markets for those products with which central and eastern European countries can compete effectively on the world stage: agriculture, textiles, coal and steel. This improvement in market access will not be carried out at the expense of existing commercial relations with other partners, in particular developing countries. Only a strong, competitive and open Community economy will be able to satisfactorily assist the developing world and central and eastern Europe in their development. I. ECONOMIC SITUATION AND OUTLOOK 1. 1991, a phase of slower growth A. A less dynamic world economy Over the last two years the Community has had to operate in an increasingly unfavourable economic climate. After peaking in 1988 at around 4 %, the growth of world output excluding the Community has been slowing continuously and was near zero in 1991, the weakest rate since 1982. The growth in the volume of world trade (again excluding the Community) has declined even more from a rate in excess of 7 % in 1988 to less than 2 % in 1991 (Table 1). The decline in activity has been more pronounced than assumed at the beginning of the year with the expected recovery less forthcoming. The previous assessment of the economic outlook has been clearly too optimistic. B. A diversified growth pattern in the Community The picture of the Community is rather differentiated: relatively weak activity in France, Italy and a recession in the United Kingdom, which seems to have bottomed out, contrast sharply with continued though declining rates of expansion in Germany, Luxembourg and Spain, while the other countries hover between these extremes. Table 1 Real GDP, domestic demand and world trade (% change) 1981- 19851986- 198919901991 (*)1992 (*)1993 (*)GDP World (excluding the Community)2,63,81,8-0,22,13,1 USA2,93,50,9-0,42,12,2 Japan3,94,45,64,63,53,5 Community1,53,22,81,32,22,4 Domestic demand USA3,73,00,5-1,02,12,1 Japan2,95,65,83,43,73,7 Community0,94,22,91,12,22,6 World trade World imports (excluding the Community)3,06,03,01,85,16,1 German imports1,66,111,412,85,04,7 Community imports (**)2,08,84,72,55,25,5 Current account (% of GDP) USA-1,2-2,8-1,6-0,1-0,7-0,6 Japan1,93,21,21,51,61,7 Community (***)-0,10,5-0,2-0,8-0,9-0,8 (*) Forecast (**) Community excluding Germany (***) Community including unified Germany from 1991 onwards Source: Commission Services (a) Expansion continued, particularly in Germany, but at a slowing rate Germany continued its buoyant growth path under the impact of the significant expansionary impulse of fiscal policy stemming from unification. Fiscal policy gave a strong boost to private consumption, while the investment performance was underpinned by investors' intentions to widen production capacities in order to serve the market of the five new Laender. These demand pressures could not be met by domestic supply, resulting in a strong spill-over to foreign suppliers implying a swing in the current account position from a surplus of 4,7 % of GDP (West Germany) in 1989 to a deficit of 1,1 % of GDP (unified Germany) in 1991. But even this strong external leakage of domestic demand was not sufficient to prevent internal pressures from developing. A number of factors, including indirect tax increases, have contributed to an upward movement of the price level. Core inflation crept up and inflation in West Germany is now above 4 %. Wage agreements have been concluded that granted pay rises of 6 to 7 %. With productivity growth declining, this resulted in an increase of unit labour costs of almost 6 % with profit margins declining, although from high levels. Of account of the strong rise of transfer payments in the context of unification, the fiscal balance has shifted from equilibrium in 1989 to a deficit of 3,6 % of GDP in 1991, despite revenue increasing and expenditure dampening measures of about 2 % of GDP adopted in early 1991. Since about mid-1991 the growth process has been losing momentum as the expansionary impulse from unification is petering out and as it had to be flanked with a restrictive monetary policy intended to dampen down inflationary expectations. Furthermore the outlook for profitability has deteriorated following the increase in unit labour costs. At the same time, the capacity-widening effect of the investment of recent years has led to some fall in the high rate of capacity utilization since the spring of this year. Although the danger of a demand-led inflation has eased somewhat, there are considerable risks of tax and cost-push inflation implied in the present fiscal policy choices, which have unduly relied on the revenue side. (b) Slower growth in the rest of the Community The United Kingdom registered a deep recession in 1991, with GDP declining by close to 2 %. Private consumption and particularly investment declined significantly under the delayed influence of the restrictive monetary policy pursued in 1989 and 1990 to cool off the overheating of the economy in the previous consumer boom. The rest of the Community registered a more subdued rate of growth of 1,5 % compared to 2,7 % in 1990. Overall, it was, in particular, the growth of private consumption and exports that retreated, while investment even stagnated. Confidence of consumers and industry has been low since the outbreak of the Gulf crisis and has shown a limited recovery since (Graph 1). Investment stagnated for the first time after a particularly strong investment boom during the last five years, in the course of which the European capital stock grew by close to 15 % in real terms. Such a pause for breath was almost unavoidable after the first wave of investment in anticipation of the completion of the internal market. The effects of the internal market measures will be felt in the years to come as the political and legislative decisions already taken are implemented and lead to an actual dismantling of the residual internal barriers (Table 2). However, the dent in growth would have been more pronounced in the absence of German unification. Indeed the growth performance of the Community countries was strongly sustained by the demand effects coming from the German economic expansion. The total impact of German unification on the other Community countries is estimated at 0,5 of a percentage point per year on average over the period 1990 to 1991 (see box). Table 2 Key indicators of the Community economy 1983- 19871988- 198919901991 (*)1992 (*)1993 (*)GDP growth2,43,72,81,32,22,4 Employment0,31,61,40,50,30,5 Real compensation (**)1,31,62,32,01,31,4 Inflation (***)5,84,35,25,04,54,2 Real unit labour costs-1,1-1,00,50,6-0,7-0,7 Investment2,67,94,1-0,52,23,7 of which: equipment4,99,94,7-0,42,64,8 (**) Real compensation of employees per head (private consumtion deflator) (***) Private consumption deflator The slow-down in growth was largely cyclical in countries such as Spain, Portugal, the Netherlands, Belgium, Luxembourg, Ireland, Italy and France. The cyclical downswing has brought out underlying structural weakness in some countries who would have had difficulty in maintaining a more sustained pace of economic activity relative to their trading partners in view of the fragility of their external accounts. Price competitiveness has significantly deteriorated in Italy. In France, the sectoral composition of the trade balance gives reason for concern: while the surplus on agricultural products is growing, its surplus on manufactured goods of the mid-1980s has turned into a significant deficit, although some improvement could be noticed in 1991. The lower growth performance has had, of course, significant consequences for the employment situation in the Community, which has developed favourably over the 1980s with a net addition of 9 million jobs since 1984 (Table 3). Despite the fact that growth became more employment intensive, employment growth slowed down markedly for the first time since 1982, resulting in a significant increase in the unacceptable high level of unemployment. Table 3 Employment in the Community Total employment in millions % change Unemployment rate (**) 1980128 6,0 1984124,8-0,6 (***)10,7 1990133,6 1,4 8,4 1991 (*)134,2 0,5 8,6 1992 (*)134,6 0,3 9,1 1993 (*)135,3 0,5 9,2 (*) Forecast (**) In percent of the civilian labour force (***) Average 1980-1984 Source: Commission Services Nonetheless, despite the greater slack in the labour market, wage pressures abated only marginally: nominal compensation per employee rose by 7 % in 1991, a rate only marginally below the one in 1990 (7,6 %). With the cyclical slowdown in productivity growth this resulted in a new increase in nominal unit labour cost and, due to the inability to raise prices sufficiently, in a further rise in real unit labour costs with a consequent negative impact on profitability and international competitiveness. Despite this decline, profitability remains at a high level. But if unit profit rates per value added have recovered to levels prevailing in the period 1961 to 1973, the profitability of the capital stock has not yet. The productivity of capital declined sharply from 1970 to 1983 and only recovered slowly from 1985 onwards. As a consequence, the profitability of fixed capital is still below its 1961 to 1973 level so that further efforts are needed to achieve a full restoration of profitability (Graph 2). The deterioration of profitability in 1990 and 1991 is certainly not dramatic (Table 4). However, while relative factor prices and profitability have only a limited impact over the short term on investment, their impact becomes stronger in the longer run. A continuation of this tendency of faltering profitability would therefore be detrimental for a recovery in investment and employment. Since 1985 investment has strongly recovered on the basis of significantly improved profitability: real investment is now about one third higher than in 1985. Nevertheless the investment GDP ratio is still more than a full percentage point below the average level of the 1961 to 1973 period. Further progress in this ratio is still warranted to reduce the high level of unemployment in the Community. Sustained wage pressures and increases in taxation in some countries did not allow price increases to abate despite the cyclical slow-down. Consumption prices and the GDP deflator increased at the same pace as in 1990 at around 5 %. Table 4 Supply-side factors in the Community (annual % change, unless otherwise stated) 1981- 19861987- 19891990- 19911991 (*)1992 (*)Total investment0,17,11,8-0,52,2 of which: equipment1,79,42,2-0,42,6 construction-1,04,91,7-0,51,8 capital stock2,32,72,92,82,8 capital productivity-0,60,7-0,8-1,5-0,6 real compensation per employee (**)0,91,72,12,01,3 real unit labour costs-1,0-0,70,50,6-0,7 profitability (***)73,890,292,591,692,9 real i.t. interest rate (****)4,35,05,35,1: (**) Adjusted by the private consumption deflator (***) Net return on net capital stock (1961 to 1973 = 100) (****) Adjusted by the GDP deflator 2. The outlook for 1992 and 1993: a gradual recovery After bottoming out in the second half of 1991, activity is expected to pick up moderately in 1992 mainly because of domestic factors. Although the external environment is expected to improve as a result of a take off of world output and trade, the Member States of the Community may only benefit to a limited degree from this recovery, since this positive development would be compensated by the petering-out of the demand-pull effect of German unification. The foreign balance therefore is not expected to significantly support GDP growth in most countries. Still, extra Community markets are expected to play a more important part in the growth of Community exports than in the last few years. The preservation of external competitiveness is therefore crucial. Confidence is expected to be restored gradually leading to a modest recovery in private consumption and investment in 1992. With the pursuit of sound policies, the price and cost performance is expected to improve, reversing the deterioration in profitability during the period 1990 to 1991. As a result of slower activity, employment growth is expected to slow down further from 1,5 % on average over the period 1988 to 1990 to 0,5 % in 1991 and to 0,3 % in 1992. Combined with the sustained growth of the labour force in the Community, this slower employment growth will lead to a further increase in the unemployment rate from 8,6 % in 1991 to 9,1 % in 1992. For 1993 a further strengthening of the recovery is anticipated with real GDP growth rising to around 2,5 %. Still the higher level of activity is not yet expected to result in sufficient job creation to match the rise in the labour force resulting in a further, but marginal, rise in the unemployment rate. The risk factors surrounding the outlook lie clearly more within the Community than outside it, although external uncertainties could still affect significantly the outcome in the Community. The outlook for a gradually strengthening recovery is closely linked to the maintenance of adequate policies. An improvement in the cost performance after the deterioration in 1990 to 1991 is likely to support a gradual pick up of investment. But if this improvement were not to materialize, it is uncertain how investors would respond. Stronger growth is, however, needed to reduce the still high level of unemployment and to facilitate the structural adjustment in relation to the completion of the internal market and the transition towards economic and monetary union. II. PROGRESS IN ECONOMIC CONVERGENCE IS STALLING 1. Nominal convergence is slipping, but fundamentals remain positive After deteriorating significantly in 1990, price convergence (measured by the dispersion of private consumption deflators(1) ) has improved somewhat in 1991 but on a less favourable inflation average than in the period 1987 to 1989 (Graph 3). This was mainly due to an increase of the average inflation in the original narrow-band countries (EUR 7) attributable essentially to special developments in Germany and the Netherlands, while price performance generally improved in the other ERM countries. In the countries not originally belonging to the narrow-band price increases declined and particularly in the United Kingdom. Price developments in the Community are, however, still a matter of concern, because the average level of inflation is still near 5 % at a moment of slowing down of economic activity. Wage developments and tax increases seem to be the main factors responsible for the slippage in price performance. Among the original narrow-band countries wage developments have been unsatisfactory in 1991 (Graph 4) and in Germany, in particular, there is a potential risk of the development of cost-push inflation. The growing tendency to rely more on the revenue side to correct budget deficits is not without danger for price performance, as it may reignite the struggle over the distribution of income. In the framework of EMU, the Community's price and cost performance is still unsatisfactory. For EMU it would be desirable to have average price inflation down to the 2 to 3 % range, while divergence is being reduced at the same time. In the budgetary area the lack of improvement in convergence, as in the field of prices and costs, is due mainly to a less favourable situation in countries that performed well in the years before. In 1990, the budget situation worsened in most countries, despite a still sustained level of activity, but the deterioration was particularly marked in Germany and the United Kingdom (Table 5). In 1991 again, the less favourable budget position in the Community as a whole is mainly due to the widening deficit in the UK and in Germany. In most other countries the deficit more or less stabilized in terms of GDP, in a context of slower activity. Hence, even automatic stabilizers have not been allowed to exert their full effect. This was needed to prevent a further increase of the budget deficits. German unification has also contributed to a significant change in the external position of the Community. The Community current account position has deteriorated continuously since 1986 from a surplus of 1,4 % of GDP to an expected deficit of close to 1 % of GDP in 1991 (Table 6). This is due to a weakening of the current account in most countries, except Denmark, Ireland and the Netherlands. The deterioration was particularly marked in the United Kingdom (from 1986 to 1989), Spain (from 1987 to 1989) and Germany (from 1989 to 1991). But also in France and Italy the external accounts weakened significantly, but to a lesser degree. The trade deficit of France stabilized in 1990 and was reduced in 1991. This deterioration resulted in most countries from high domestic demand in relation to production potential. The most outstanding development of recent years in the external accounts is the complete disappearance of the German current account surplus. The counterpart of the disappearance of this surplus is not to be fully found within the Community. About half of the demand impact of German unification seems to have leaked outside the Community more or less in line with the market shares of Germany's trade partners outside the Community. The deterioration in the external accounts is particularly marked in the trade of manufactured goods: extra-Community Table 5 General government net lending (+) or borrowing (-) (**) (in % of GDP) (***)198119851989199019911992 (*)Community- 5,3- 5,2- 2,9- 4,1- 4,4- 4,4 Greece-11,0-13,8-18,3-19,8-17,3-14,0 Italy-11,4-12,5-10,1-10,6- 9,9- 9,3 (***) Belgium-12,8- 8,5- 6,7- 5,6- 6,3- 6,2 Portugal- 9,3-10,1- 3,4- 5,8- 5,4- 4,6 Netherlands- 5,5- 4,8- 5,2- 5,3- 4,4- 4,1 Germany- 3,6- 0,9- 0,2- 1,9- 3,6- 3,4 Ireland-13,4-11,2- 3,5- 3,6- 4,1- 4,1 Spain- 3,9- 6,9- 2,7- 4,0- 3,9- 3,6 United Kingdom- 2,6- 2,8- 1,3- 0,7- 1,9- 3,6 Denmark- 6,9- 2,0- 0,5- 1,5- 1,7- 1,5 France- 1,9- 2,9- 1,2- 1,6- 1,5- 1,7 Luxembourg- 3,5- 5,3- 4,3- 4,7- 1,9- 2,0 (*) Forecast on the basis of unchanged policies. (**) Countries are ranked by size of deficit in 1991. (***) Does not fully incorporate the effect of the measures of the convergence programme. Source: Commission Services Table 6 Balance on current transactions (in % of GDP) 1991 (*) Community-1,21,4-0,2-0,8-0,9 Belgium-4,32,11,01,01,1 Denmark-3,7-5,40,81,42,2 Germany-1,74,43,2-1,1-0,9 Greece0,5-5,3-6,1-4,1-3,4 Spain-2,41,6-3,5-3,1-3,2 France-0,60,5-1,0-0,7-0,8 Ireland-11,8-2,93,42,32,0 Italy-2,20,5-1,4-1,3-1,5 Luxembourg18,739,431,228,126,1 Netherlands-1,52,73,84,14,4 Portugal-5,92,4-0,3-1,1-1,5 United Kingdom1,5-0,9-2,6-1,1-1,4 (*) Forecast imports of manufactured goods have grown on average more rapidly than intra-Community imports; among high-tech products more specifically, Community producers seem to have conceded some ground to extra-Community producers. Also on the export side the growth of export of manufactures has been modest, well below the rate of growth of intra-Community export volumes. This trend points to a reorientation of trade flows to a particularly dynamic internal market. However, of great concern is the fact that this deterioration in the external account also signals a reduced level of competitiveness, particularly in third markets and, even more disquieting, in the high-tech segment of the market. The Community's currencies have, on balance, continuously appreciated in real terms since 1984, leading to a loss of market shares. This development raises questions about the strength of the economy in some Member States, and its capacity to compete effectively with the outside world. Wage competitiveness is therefore an issue that certainly warrants closer scrutiny in countries where the external position remains fragile, particularly if growth of domestic demand were to accelerate relative to outisde markets. In order to improve convergence during stage one of EMU, Member States have therefore been called upon to draw up so-called convergence programmes that are to be discussed and agreed upon at the Community level in the context of multilateral surveillance. Such programmes have been presented or are in the process of being formulated by most Member States, with a view to achieving lasting progress on convergence. 2. Real convergence is slowing down Over recent years, the countries which are in the process of catching up, with the exception of Greece, have succeeded in reducing their income gap with the Community average (Table 7). Appropriate domestic policies and the doubling of resources made available through the Structural Funds, have contributed to this outcome. Table 7 The catching up process in the Community (GDP per head of population, Community = 100) Spain Greece Ireland (**) Portugal 197581,957,362,752,2 198074,258,164,055,0 198672,855,963,452,5 1991 (*)79,052,568,956,3 1992 (*)79,952,168,956,3 Differences 1986-1980-1,4-2,2-0,6-2,5 1991-19866,2-3,45,53,8 (**) Reference to GDP may overstate progress to the extent that income transfers to abroad may have outpaced nominal GDP growth. Source: Commission Services In Spain and Portugal, catching-up was led by investment as a result of strongly improved profitability and the opening up of the Community market. The share of investment in GDP expanded by almost a quarter between 1986 and 1990 (Table 8). Domestic savings were inadequate to support such expansion so that the current account of the balance of payments moved to a deficit which was significant in the case of Spain. The continuation of the catching-up process in these countries will therefore rely, among other important factors, on the generation of adequate domestic savings resulting mainly from further reductions in public dissaving. In Ireland, however, the acceleration of growth was mainly export-led. Budget consolidation efforts and moderate wage developments dampened domestic demand while at the same time Table 8 Investment and export shares and real unit labour costs in the catching-up countries GR EUR 4 EUR 8 Investment shares (in % of GDP) 1986 18,519,518,122,119,618,9 1990 18,924,418,626,723,720,3 1992 (*) 18,524,118,726,023,419,6 Export shares (in % of GDP) 1986 22,419,955,233,223,828,0 1990 22,617,262,136,422,828,9 1992 (*) 21,217,365,030,022,029,9 Real unit labour costs (1961-73 = 100) 1986102,391,192,898,494,298,1 1990102,487,588,993,890,896,8 1992 (*) 95,086,392,597,690,096,9 (*) Forecast improved competitiveness boosted exports. This export-led expansion made Ireland more vulnerable than Spain and Portugal to the deterioration in the international economic climate. Now that Ireland has established a sound basis for further catching-up, more emphasis should be given to the development of domestic production potential. The investment ratio is still relatively low and has not increased much. The supply side of the economy, in particular, needs further improvement. In Greece, the catching-up process has receded over recent years as a result of inadequate policies. The 1991 stabilization and structural adjustment programme adopted by the government is a serious effort to reverse the country's macroeconomic decline and restore its production potential. The broad aims of the programme are fiscal reform and structural renewal. The measures for fiscal adjustment and structural reform are interdependent and if applied effectively should allow Greece to exploit the gains from the process of European integration. Recent developments indicate, however, that the implementation of the programme has encountered serious difficulties and delays. Failure to fully implement the programme will further delay the resumption of the catching-up process. III. PRIORITIES OF ECONOMIC POLICY IN THE COMMUNITY With the international environment likely to improve only moderately in the year ahead, it is particularly important for the Community to reinforce its internal potential. Economic policies should therefore contribute to the swift realization of the major Community projects. The completion of the internal market remains an immediate priority for the Community and the remaining work is still considerable: of the 282 White Paper measures, 69 still require a Council decision. The transposition of directives into national law needs to be speeded up. 166 White Paper measures have entered into force of which 134 require national implementing measures. Of these national measures on average 71 % have already been taken (Graph 5). Member States seem to have recognized their responsibilities and the need for greater haste. The internal market programme has already been a decisive driving force in adding to Community growth prospects and prosperity: economic agents have already to some extent anticipated the highly competitive environment and the new operating conditions and opportunities that will prevail by 1993. This has resulted in a strong expansion of investment in the period 1986 to 1990. The real effects of the internal market measures will be felt in the years to come, especially as residual internal barriers are actually dismantled. Determined actions and decisions would have a substantial positive effect on the confidence of economic agents and give a new impulse to economic growth. An economic and monetary union in the Community will result in an amplification of the economic benefits that will follow from the 1992 programme. Indeed only a single currency will allow the full potential benefits of a Single Market to be achieved. The primary aim of EMU is to strengthen the integration of the Community and improve its economic performance. EMU will ensure a climate of stability so that the process of self-sustaining growth would be strengthened. The experience of the 1980s has clearly confirmed that there is no long-term trade-off between higher inflation and lower unemployment. On the contrary a climate of stability is increasingly perceived as an essential prerequisite for an improved real economic performance. The income gap between the catching-up countries and the Community average remains sizable and it will therefore take many years to bridge the gap. This process can only be built on the basis of sound growth, which increases domestic production potential. Policies at the national and Community level have to provide the basis for a continuous relative stronger growth of real GDP, without inflationary pressures and unsustainable internal and external imbalances. First and foremost, responsibility for rapid economic and social convergence lies for the most part in the least favoured countries themselves. Recent developments have confirmed that sound macroeconomic policies are an essential condition to improve their internal growth conditions by all available means. The economically stronger countries must also contribute to this process by supporting dynamic medium-term growth. The Community shall take into account the objective of strengthening economic and social cohesion in the implementation of its common policies and of the internal market. The economic policy actions at Community level must act in a synergetic way to national policies to strengthen economic performance in the least favoured Member countries. The Structural Funds and other financial instruments, provided they are efficiently used in a conducive national framework, will considerably improve both supply and demand conditions in the recipent countries. These instruments should be reinforced to take account of previous developments and the stronger integration in the Community. The environment and its importance in the overall context of the quality of life is increasingly becoming a matter for Community preoccupation. The Commission has recently outlined a coherent Community strategy aiming to stabilize CO2 emissions in the Community by the year 2000 at their 1990 level. The strategy consists of a range of regulatory, voluntary and possible fiscal measures taken at the Community level in combination with complementary national programmes. The envisaged reliance on fiscal instruments, notably a new combined CO2/energy tax, which respects fiscal neutrality, is considered an important condition for reaching the Community's CO2 emission stabilization objective in the most cost effective way. By giving the right price signals all economic agents will be induced to adopt environmentally sound behaviour. It is in the interest of long-term economic sustainability and prosperity, as well as of the environment, that environmental considerations are satisfactorily integrated into the Community's other policies, notably in the fields of energy, transport and agriculture. IV. MACROECONOMIC POLICIES AND POLICIES FOR STRUCTURAL ADJUSTMENT 1. Monetary policy and the EMS The aim of the EMS is to contribute to achieving price stability and nominal convergence in the Community through exchange rate stability and an appropriate monetary policy. The conditions for attaining this have become more difficult over the past year. In the autumn of 1990, monetary conditions in the Community were tightened in response to rising oil prices. But during the course of 1991, market interest rates were on average lower than the previous year. This occured against a background in which inflationary pressures in several countries of the Community persisted or even strengthened despite the fall in oil prices after the Gulf war. In the second half of the year, however, short-term interest rates rose again. With the Community economy slowing in 1991, a certain easing of monetary conditions was welcome and does not appear to have adversely affected long-term inflation expectations: yield curves have tended to shift downwards this year rather than simply to steepen, as long rates in most markets were lower than a year ago. With rising short term interest rates in the second half of the year, monetary policies remained tight. It is indeed essential to ensure that nominal convergence goes together with an absolute, not a relative, standard of price stability and that the functioning of the EMS remains a powerful force for preserving price stability up to a full EMU. In this respect, the mechanism through which monetary policy in the Community appears to have eased this year presents some difficulties. During the 1980s the deflation process in the Community was determined by Germany and transmitted through the exchange rate discipline of the EMS to other ERM narrow-band countries. This link was reinforced after the last realignment in January 1987, when anticipation of further realignments gradually dissappeared. The German strategy was based on fiscal consolidation and the successful targeting of monetary aggregates. This strategy left underlying inflation at low, if gradually rising, levels even when monetary targets were applied with greater flexibility in response to external circumstances. The progressive disappearance of realignment expectations have significantly altered this configuration. The considerable expansionary swing in fiscal policy in Germany as a result of unification coupled with the pursuit of a stability oriented monetary policy in theory leads to a real appreciation of the currency as real demand exceeds real domestic supply. Indeed the excessive demand pressures have had a strong influence on the wage-bargaining process, feeding creeping price rises. This process has been exacerbated by the heavy reliance on revenue measures to limit the fiscal impact of unification. This policy mix and the impossibility to allow the ensuing real appreciation to take place through a nominal exchange-rate adjustment in the ERM, put considerable additional pressure on interest rates in Germany and consequently in other ERM countries. Uncertainty over the extent to which the Bundesbank will be able to preserve the same policy strategy as in the past has at times surfaced in the markets. These uncertainties and the expectations of stable exchange rates and decreasing inflation differences have resulted in a significant reduction within the ERM in interest rate differentials vis-à-vis the Mark, where the exchange risk premium has more or less disappeared. Given that inflationary pressures remain significant in the Community as a whole, any further loosening of the stance of overall monetary policy is at present not warranted. The necessary collective character of the EMS implies that other members of the ERM than Germany, and in particular the bigger countries must accept a share of responsibility for achieving a monetary policy in the Community consistent with the lowest level of price increases and with continued downward convergence by the high-inflation countries. In the two countries not yet participating in the ERM, Portugal and Greece, inflation is [...] well above the levels consistent with nominal convergence, although it has recently decelerated in both countries. In Portugal, where inflation, measured by the consumption price index, fell in the last quarter of 1991 to under 10 %, the immediate priority is to maintain monetary policy tight enough to reduce overheating in the labour market. Given the scale of capital inflows, this will probably have to involve some continued upward flexibility, for a time, of the real exchange rate. The aim should to be adhere to the ERM at a time when sufficient steam had already been taken out of the economy to ensure that the ERM constraint did not lead to an inappropriate loosening of monetary policy. In Greece, monetary policy must continue to try to contain the inflationary pressures created by a clearly excessive budget deficit. But monetary policy cannot cope indefinitely with the consequences of the public finance problem. Only adherence to the budget ceilings laid down in the stabilization programme can hope to ensure early and lasting nominal convergence in Greece. 2. Budgetary policy Since budgetary authority will remain at the level of the Member State, progress towards EMU necessitates increased coordination by reference to principles or rules that ensure that fiscal policy will not undermine stability in the Community. A first group of countries (Greece and Italy) have been showing excessive budget deficits for many years and steadily increasing public debt burdens (Table 5 and Graph 6). In Greece, budgetary developments in 1991 show a departure from previous trends as a result of the implementation of the new three-year convergence programme. Budgetary adjustment and reform will, however, fall short of the targets. The programme needs to be implemented more vigorously to ensure a significant reduction of the budget deficit and a stabilization of the public debt ratio. The budgetary performance of Italy continues to diverge from the other narrow-band members of the ERM. The budget deficit has remained persistently around 10 % of GDP despite repeated attempts to correct it. As a result the public debt/GDP ratio passed the 100 % mark in 1990 and has continued to increase since then. There has clearly been no lack of adjustment programmes but rather of forceful implementation. More emphasis should be laid on the instruments that will be used to meet the targets and on structural measures to improve the public finances. Even if forcefully implemented, the present programme still risks falling short of the announced targets as it rests on a very positive growth scenario. Moreover, this programme is markedly tax-centred. The forward shifting of increase in direct taxation, on the part of tax payers, on to higher wage claims could contribute to inflationary pressure. It is encouraging, though, that the Italian Government has confirmed its willingness to take corrective measures should targets not be met. A second group of countries (Belgium, Netherlands, Portugal and Ireland) still has sizable deficits and excessively high public debt ratios. In Belgium, consolidation efforts undertaken during the period of strong growth (1988 to 1990) were not sufficient to prevent a new rise of the public debt ratio in 1991, when economic activity slowed down. The double government norm, aimed at freezing real non-interest expenditures and keeping the central government deficit constant in nominal terms, is clearly insufficient and needs to be extended to all levels of government, including social security. A significant reduction of the deficit is needed to bring the public debt ratio, which is still double the Community average, on to a clearly declining trend. Consolidation efforts in the Netherlands have also been inadequate during the period of strong growth (1988 to 1990). Additional measures have been taken in 1991 so that public finance targest will be reached. The persistence of public dissaving, however, would warrant a strict implementation of government medium term targets (a deficit of 3 % of GDP in 1994) in order to reduce the public debt ratio. The reduction in public finance imbalance in Portugal in recent years reflects the complete overhaul of the tax system which increased its efficiency, an effort of expenditure restraint, the cyclical upturn of the economy and the privatization process. However, the relative size of both the general government deficit and public debt are above the Community average. Consequently and also in order to assist the disinflationary process, fiscal adjustment remains one of the main priorities of economic policy and should continue to be vigorously implemented. Ireland has been remarkably successful in consolidating its public finances in the late eighties. Further consolidation has since been slowed because of the effects of weaker growth on revenue and pressures on public expenditure from rising unemployment and increases in public sector pay. Consolidation efforts should be maintained over the medium term to keep the public debt ratio in a firm downward path. Germany and the United Kingdom are separate cases. In Germany, as a direct consequence of the large financing needs arising from unification, the swing in the public sector accounts has been significantly close to 4 % of GDP between 1989 to 1991 despite a sustained level of activity. Even if the present deficit is less a matter of concern, apart from contributing to a biased policy mix, the medium-term prospects for bringing the deficit under control are rather disquieting. Even if consumption supporting outlays will be reduced, they will gradually be replaced by large scale infrastructural investment; the dynamics between a steeply rising public sector indebtedness and interest charges will put further pressure on outlays. Fiscal consolidation will therefore be a major policy challenge for the years to come. Moreover, considerable emphasis has recently been laid on increasing revenues. Higher direct or indirect taxes are, however, very likely to be reflected in higher wage demands to compensate for the income loss. In these conditions, excessive reliance on tax increases may initiate a new cycle of ever-rising claims on income distribution. There is still considerable scope on the expenditure side to reduce the budget deficit. In addition income support schemes should be designed in such a way as to ensure their temporary character. In the United Kingdom, deterioration in the budget balance is primarily due to the working of the automatic stabilizers during the severe recession. The authorities' medium-term objective remains that of attaining broad budget balance on a cyclically adjusted basis. A cautious policy stance remains appropriate to maintain compliance with the medium-term objective of a balanced budget and continued positive public saving. In the last group of countries (Denmark, Spain, France and Luxembourg) budget balances and public debt burdens are broadly under control. These countries have positive public savings and have a public debt ratio below the Community average. There is still a need to maintain a cautious policy stance in these countries since some of them have strong inflationary pressures and large external deficits (Spain) or a high foreign debt (Denmark). The insistence on budget consolidation is motivated by several considerations: first it is intended to redress the presently lopsided policy mix of a relatively loose fiscal policy combined with a relatively restrictive monetary policy. Even when budget deficits are justifiable by temporary and exceptional factors, it would still be appropriate to reduce them as fast as possible to achieve a more balanced policy mix. Second, there is a need for higher saving within the Community for which the reduction of public deficits should provide a significant contribution. Finally, a more restrained fiscal policy is likely to result in more balanced wage developments, which would contribute to better convergence. A desired additional increase in the investment ratio to increase growth and employment raises the issue of the adequacy of saving. Although there are few signs that the low level of saving has had major repercussions on economic performance so far, it has contributed to keeping real long interest rates high. The inadequacy of saving, however, risks becoming a more decisive constraint on growth in the future, particularly for the newly liberalizing countries in Eastern and Central Europe and the developing world. A saving surplus can only be realized if the considerable public dissaving in the Community and in the other major Western countries is reversed. The generation of sufficient public saving is therefore also an essential precondition for a successful take-off of market economies in central and eastern Europe. Finally, in a fully fledged EMU, fiscal policy and particularly monetary policy will have less room for manoeuvre. Therefore more emphasis will have to be laid on structural measures to bring about the necessary adjustment in the Community economies. 3. Policies for structural adjustment The efforts to establish an internal market have resulted in the most wide-ranging supply side initiative in the history of the Community. The dynamic of the internal market has, however, not only increased the growth potential of the Community, it has also highlighted the still sizable rigidities present in markets. Such rigidities become more visible when competition increases. In the present less supportive international environment it is also important for the Community to reinforce its own domestic growth. Policies of structural adjustment, supported by adequate industrial policies, improve the adaptability and efficiency of the Community economies. In line with the implementation of the 1992 programme, the Commission has emphasized the need for industrial policy measures in various important sectors and has put forward proposals to this effect. Policies of structural adjustment must accompany the completion of the internal market in order to ensure that its full benefits are actually forthcoming. Furthermore in EMU the nominal exchange rate will no longer be available between full participants as an instrument for adjustment. Increased flexibility in all markets will therefore be necessary to ensure a balanced development of all areas of the union. In EMU, adaptability of the labour market will be an important element for adjustment if one wants to avoid further increases in unemployment. Both national and Community policies for structural adjustment will have to play an even more important role. Together with prudent macroeconomic policies and the Community policy on economic and social cohesion which will have to be reinforced, this must constitute the Community's response to restore sustainable growth rates above 3,5 % a year in order to reduce the still high level of unemployment. Four areas in particular deserve further structural improvements: cooperation, the labour market, competition policy and international trade. Cooperation can improve the underlying conditions within which companies operate and strengthen the Community's international competition by mustering energies and innovation. A policy to improve infrastructure, and especially transportation, is an indispensable element in the creation of the internal market. It is equally an element in the cohesion process in the sense that a better working infrastructure lowers transportation and communications costs and brings the peripheral regions closer to the centre of the Community. Further efforts will also have to be undertaken in the area of innovation, research and development. Research and development policies will stimulate the competitiveness of the Communtiy companies, but, in a period of intense technological change often involving massive development costs, the results of such efforts must be spread more widely through increased cooperation. This will hasten the adjustment of our economies to new technological advances. Also in the area of industrial restructuring and the environment, increased cooperation is likely to facilitate adjustment. Cooperation in these areas should allow the Community to better face international competition. The Community can play an important stimulating role in bringing enterprises together. Labour markets in the Community have been showing greater adaptability, but this improvement is still insufficient. Rising wage pressures at a time when more than 9 % of the civilian labour force is still unemployed suggest that significant structural problems persist in labour markets. The completion of the internal market at a time of reduced growth in the Community economy and increased competition from abroad means that companies and workers have to adapt working methods and practices to these new circumstances. Flexibility in companies' responses to the new operating environment have to be matched by flexibility in the labour market in terms of training and skills as well as in the employment conditions and practices. In most countries, the adjustment of wage costs is still insufficient to ensure full employment. If increased unemployment is to be avoided, the social partners must take the need for adjustment more into account in their negotiations. Member States' authorities should therefore make their policy objectives more visible so that macroeconomic prospects can be better taken into consideration in wage negotiations. Credible commitment to convergence by Member Governments provides one such approach. Rigid wage structures, employment practices and lack of training have accentuated the problems of those outside the work force. The large number of untrained unemployed illustrates the problem of cost and adequate skills in relation to their productive potential. Member States should examine labour market regulations and social security provisions in order to rectify features that impede entry or re-entry into the labour market. Finally, there seems to be a good case for encouraging a more active labour market policy with greater emphasis on retraining than on the provision of unemployment support. Competition is bound to intensify with the completion of the internal market as barriers are systematically reduced. European companies must be prepared for this greater competition, that has already generated a wave of merger activities within the Community. To avoid dominant positions that reduce competition and lessen overall welfare, the Community pursues an active competition policy. Increased competition may also lead to calls for more aid to defend companies or industries that are coming under pressure from such competition. State subsidies can threaten, however, the functioning of the market process by confining specific advantages to competing companies. They also risk preventing the necessary restructuring of industry. Therefore the Commission strives to limit subsidization and to incorporate it in a context of restructuring. The economically stronger countries in the Community should resist the temptation to compensate by domestic subsidies the greater competition resulting from the opening of markets. Indeed such subsidies risk cancelling out the competitive advantages gained by the least favoured countries in specific sectors. Free and undistorted competition in the Community requires efficient surveillance of State aids. The Commission undertook two surveys on public aids in the European Community in 1988 and in 1990 and is consistently striving for greater transparency in this field. Public aids still absorb a significant share of public resources in Member States (Table 9). The second survey identified total national public aids amounting to 2,2 % of Community GDP, or more than twice the Community budget. The differences between Member States are considerable, with Denmark and the United Kingdom spending just 1 % of their GDP, but Belgium, Greece, Italy and Luxembourg spending 3 % and more. Table 9 State aids in the Community (*) (average 1986-1988) in % of in % of public expenditure Granted in the form of (%) Belgium3,25,8 8911 Denmark1,01,7100 0 Germany2,55,3 3664 Greece3,16,5100 0 Spain2,35,5100 0 France2,03,8 8218 Ireland2,75,2 6337 Italy3,16,2 6436 Luxembourg4,17,6 91 9 Netherlands1,32,1 7030 Portugal2,35,3 4160 United Kingdom1,12,6 94 6 (*) Refers to subsidies that are subject to Community rules. The total of subsidies granted is difficult to establish due to the various forms subsidies can take and the lack of comprehensive national data. Source: Commission survey on State aids. State aids are heavily concentrated: the manufacturing sector took 41 %, the transport sector 30 %, the coal industry 16 % and agriculture (national aids) 13 %. In the run-up to EMU, national expenditures on subsidies should come under closer scrutiny to improve convergence. A commitment to more discipline on subsidies would also contribute to the achievement of a more open international trading system. The resurgence of protectionist tendencies in international trade is a worrisome development. Friction among trading partners has been intense, particularly with regard to the subsidization of agriculture and some declining industries. The use of non-tariff measures to protect domestic products has intensified in various parts of the world. The Community is committed to achieving an ambitious, global and balanced result to the Uruguay Round, which is presently in a crucial phase. This is necessary in order to strengthen the multilateral trading system and to reverse the trend towards protectionism. Further delays could undermine the adjustment strategy of many developing and central and eastern European countries which have adopted an outward-looking market-oriented approach to growth and development. The major industrial countries carry a large responsibility in this area and should strive for an early conclusion of the Uruguay Round. A successful outcome of the Round would not only serve the interests of the Community by ensuring market access and reduced protection in the traditional areas of trade negotiations. It would also allow the extension of multilaterally agreed rules to new areas of great relevance for the Community: services, intellectual property rights and international investment. The negotations between the Community and EFTA countries with the aim of erecting an European economic area are being concluded and will increase the benefits of the internal market to an even greater area. By facilitating the flow of goods, services, capital and labour between the Community and EFTA, the agreement will make a further contribution to more competition and the improvement of the supply side of the economy. The Community is actively involved in assisting central and eastern European countries to advance political and economic reforms. The Commission not only manages the Community's own programmes of assistance, but is also coordinator for the G-24, a group comprising all major industrialized countries. Assistance takes a variety of forms, including support for economic reconstruction, food-aid and emergency assistance, technical assistance, balance of payments support, investment finance and export credits. The Community has become the main source of funds for central and eastern European countries, providing about half of the total aid they receive. Moreover, the Community has completed negotiation for Europe agreements establishing relations of association with Hungary, Poland and Czechoslovakia. These agreements will enable central and eastern European countries to participate in the process of European integration. They are of an overriding political and economic importance, at a time when these countries' reforms are at a crucial stage and their main traditional export market (the USSR) has collapsed. The establishment of free trade will encourage private investment in these countries, which is one of the main conditions for the economic reforms to be successful. The Community is ready to negotiate similar agreements with other central and eastern European countries which satisfy the necessary political and economic conditions. The Community has shown its willingness to improve access to its markets to central and eastern Europe for products with which these countries can compete effectively on world markets including, agriculture, textiles, coal and steel. Account should be taken of the implications and difficulties of this improved access for the sectors and regions concerned in the Community. This improvement in market access will not be carried out at the expense of existing commercial relations with other partners, in particular developing countries with which the Community has cooperation agreements. Such market access is critical for successful development of these economies. MAIN ECONOMIC INDICATORS 1989 to 1993 COMMUNITY, USA AND JAPAN (a) GDP at constant prices (1) (annual % change) 198919901991 (*)1992 (*)1993 (*)B3,9 3,7 1,32 1/42 1/2 DK1,2 2,1 1,833 1/4 D3,3 4,7 3,32 1/41 3/4 GR2,8 -0,3 0,71 1/42 E4,8 3,7 2,533 1/4 F3,6 2,8 1,32 1/42 1/2 IRL5,9 5,7 1,32 1/42 3/4 I3,2 2,0 1,122 1/2 L6,1 2,3 3,03 1/23 1/4 NL4,0 3,9 2,31 1/42 P5,4 4,0 2,01 3/42 UK2,2 0,8 -1,822 3/4 EC3,3 2,8 1,32 1/42 1/2 USA2,8 0,9 -0,422 1/4 JAP4,9 5,6 4,63 1/23 1/2 (c) Deflator of private consumption r?Ps>B 3,5 3,5 3,2 3 1/2 3 1/2 DK 5,1 2,5 2,4 2 1/4 2 1/2 D 3,1 2,6 3,5 4 1/4 4 GR14,720,218,314 1/411 E 6,6 6,4 5,8 5 1/2 5 1<IdFA-1ij>/4 F 3,5 2,9 3,0 3 2 3/4 IRL 3,9 2,6 3,0 3 2 3/4 I 5,8 6,2 6,4 5 1/4 5 1/4 L 3,4 4,2 3,4 3 3/4 3 1/4 NL 2,9 2,5 3,2 3 1/2 3 1/4 P12,813,611,7 9 1/2 7 3/4 UK 5,9 8,4 6,5 4 1/2 4 EC 4,9 5,2 5,0 4 1/2 4 1/4 USA 4,5 5,0 4,4 4 3/4 5 JAP 1,7 2,4 2,8 2 1/2 2 1/2 (b) Domestic demand at constant prices (annual % change) B4,9 3,4 1,22 1/42 1/4 DK0,3 -0,7 0,423 1/4 D2,7 5,0 3,02 1/42 GR3,3 3,3 -0,312 1/4 E7,8 4,6 3,13 1/23 1/2 F3,2 3,2 1,122 1/4 IRL6,0 5,4 0,61 1/41 3/4 I3,6 1,9 1,52 1/42 3/4 L7,8 3,4 4,33 3/43 3/4 NL4,9 3,6 2,1 1/41 1/2 P4,0 5,8 4,63 1/43 1/4 UK3,1 -0,1 -3,02 1/43 EC3,7 2,9 1,12 1/42 1/2 USA2,2 0,5 -1,022 JAP5,7 5,8 3,43 3/43 3/4 (d) Balance on current transactions (as a % of GDP) 198919901991 (*)1992 (*)1993 (*)B 1,1 1,0 1,0 1 1 1/4 DK -1,2 0,8 1,4 2 1/4 2 1 /2 D (2) 4,7 3,2 -1,1 -1 - 3/4 GR -4,8 -6,1 -4,1 -3 1/4 -2 3 /4 E -3,2 -3,5 -3,1 -3 1/4 -3 1 /4 F 0,1 -1,0 -0,7 - 3/4 - 3 /4 IRL 1,3 3,4 2,3 2 1 3 /4 I -1,4 -1,4 -1,3 -1 1/2 -1 3 /4 L 34,4 31,2 28,1 26 1/4 25 1/2 NL 3,3 3,8 4,1 4 1/2 4 3 /4 P -2,9 -0,3 -1,1 -1 1/2 -2 1 /2 UK -4,8 -2,6 -1,1 -1 1/2 -1 1 /4 EC -0,1 -0,2 -0,8 -1 - 3 /4 USA -1,9 -1,6 -0,1 - 3/4 - 3 /4 JAP 2,1 1,2 1,5 1 1/2 1 3 /4 (*)Based on the forecasts of October 1991. (1)GNP for USA and Japan from 1990 onwards. (2)Current account balance of unified Germany as percentage of GDP of unified Germany from 1991 onwards. Source: Commission services. (e) Number of unemployed as % of the civilian labour force B 8,5 8,1 8,6 8 1/2 8 1/2 DK 7,8 8,2 9,5 9 1/2 9 D 5,5 5,1 4,6 5 5 1/2 GR 7,5 7,5 8,8 9 1/4 9 3/4 E17,116,115,815 1/215 1/4 F 9,4 9,0 9,51010 1/4 IRL16,015,616,81818 1/2 I10,7 9,8 9,4 9 1/2 9 1/4 L 1,8 1,7 1,6 1 1/2 1 1/2 NL 8,7 8,1 7,2 7 3/4 7 3/4 P 4,8 4,6 4,0 4 1/4 4 3/4 UK 7,0 6,4 8,4 9 3/410 EC 8,9 8,4 8,6 9 9 1/4 USA 5,3 5,5 6,7 7 6 3/4 JAP 2,3 2,1 2,2 2 1/4 2 1/4 (g) Total employment (annual % change) B 1,6 0,9 -0,3 0 1/4 DK -0,6 -0,4 -1,0 0 1 D 1,4 2,8 2,8 1 1/4 GR 0,4 0,2 0,8 -0 1/4 E 3,6 2,6 0,7 1 1/4 1 1/2 F 1,1 1,2 0,4-0 1/2 IRL -0,1 1,3 0,0 1/4 3 /4 I 0,2 1,0 0,9 1/2 3/4 L 4,0 4,2 1,9 1 1/2 1 1/2 NL 1,6 2,1 1,0 - 1/4 0 P 1,0 1,1 1,1 0- 1 /2 UK 2,8 0,4 -2,3 - 3/4 1/2 EC 1,5 1,4 0,5 1/4 1/2 USA 2,3 0,5 0,8 1 1 1/2 JAP 1,9 2,0 1,6 1 1/2 1 1/2 (f) General government lending and borrowing (as a % of GDP) B- 6,7- 5,6- 6,3- 6 1/4- 5 3/4 DK- 0,5- 1,5- 1,7- 1 1/2- 1/2 D (1) 0,2- 1,9- 3,6- 3 1/4- 3 3/4 GR-18,3-19,8-17,3-14-10 1/4 E- 2,7- 4,0- 3,9- 3 1/2- 3 1/4 F- 1,2- 1,6- 1,5- 1 3/4- 1 1/2 IRL- 3,5- 3,6- 4,1- 4- 4 I (2)-10,1-10,6- 9,9- 9 1/4- 9 1/2 L- 4,3 4,7 1,9 2 2 NL- 5,2- 5,3- 4,4- 4- 3 3/4 P- 3,4- 5,8- 5,4- 4 1/2- 4 UK 1,3- 0,7- 1,9- 3 1/2- 3 1/4 EC- 2,9- 4,0- 4,4- 4 1/2- 4 1/4 USA- 1,7- 2,4- 2,3- 2- 1 1/2 JAP 2,5 2,2 1,8 2 2 (h) Real compensation of employees per head (3) (annual % change) B 0,1 2,8 1,9 2 1/4 2 DK-1,6 1,0 1,1 1 1/4 1 1/2 D-0,2 1,5 2,6 1 1/2 1 1/2 GR 2,9 0,0 -1,7-2 1/4- 3/4 E -0,5 1,2 1,8 1 1/4 1 1/4 F 1,2 1,9 1,5 1 1 IRL 2,2 5,9 3,5 3 2 1/4 I 3,0 3,9 1,7 1 1/2 1 1/2 L 3,0 1,0 1,3 1 1/2 1 3/4 NL -2,4 1,1 1,5 1 1/2 2 P 0,8 3,7 6,6 4 1/2 2 UK 2,8 2,7 1,7 1 1/4 1 1/2 EC 1,1 2,3 2,0 1 1/4 1 1/4 USA -1,0 -0,1 0,3 -0- 1/4 JAP 2,5 1,8 1,0 1 1 (*)Based on the forecast of October 1991. (1)Including current transfers to the five new Laender and the deficit of the territorial authorities of these Laender as a percentage of GDP of unified Germany from 1991 onwards. (2)1992 and 1993: This forecast, made in October 1991, could not incorporate the effects of the measures of the convergence programme. (3)Deflated by the deflator of private consumption. Source: Commission services. (i) Investment in construction at constant prices B 8,9 6,7 - 1,4 3 1/42 3/4 DK - 4,6 - 6,1 - 6,5 -14 D 5,1 5,3 3,5 2 1/21 3/4 GR 2,0 2,1- 5,0 2 1/25 E 14,9 10,7 5,3 44 F 5,3 2,3 1,2 23 IRL 9,8 8,4 - 2,9 44 I 3,6 2,5 0,4 1 1/41 1/4 L 4,4 5,9 5,9 4 1/23 NL 1,6 1,3- 0,6 -11 1/4 P 3,5 6,5 4,5 34 UK 2,5 - 1,1 -12,9 - 3/44 3/4 EC 5,3 3,6 - 0,5 1 3/42 3/4 (k) Gross fixed capital formation at constant prices (annual % change) B 13,6 8,3 0,6 32 3/4 DK 0,2 - 1,9 - 1,9 27 1/4 D 7,1 8,8 6,6 3 3/43 GR 8,6 4,8 - 1,2 3 1/25 1/2 E 13,7 6,7 2,2 3 3/44 F 5,8 3,8 - 0,6 1 3/43 1/4 IRL 11,3 7,5 - 0,4 3 3/44 1/4 I 5,1 3,0 - 0,4 2 1/23 L 13,4 3,3 6,2 4 3/44 NL 3,0 4,2 - 1,1 -12 P 7,5 7,5 4,5 33 3/4 UK 4,8 - 2,4 -12,8 - 3/46 1/2 EC 6,7 4,1 - 0,5 2 1/43 3/4 USA 2,7 0,9 - 4,4 4 1/25 1/2 JAP 11,0 10,9 4,6 3 1/24 (j) Investment in equipment at constant prices B18,2 10,3 3,0 2 3/4 2 3/4 DK 6,3 3,0 3,0 510 D10,0 12,9 10,0 5 4 1/2 GR17,4 7,9 3,0 4 1/2 6 E13,0 1,2 - 2,5 3 4 F 5,8 5,0 - 1,8 1 1/2 3 1/2 IRL15,3 6,8 1,8 3 3/4 4 1/2 I 6,2 3,5 - 1,1 3 1/2 4 1/2 L26,3 13,7 6,4 4 3/4 4 3/4 NL 4,5 7,7 3,0 -1 1/4 2 1/2 P10,0 8,5 4,5 3 3 1/2 UK 8,3 - 3,6 -12,8 -1 8 EC 8,5 4,7 - 0,4 2 1/2 4 3/4 (l)GDP per head (EC=100) at current prices and current PPS B 95,4101,2100,6103,4103,8 DK118,3113,1117,0110,2111,4 D117,9111,1114,0113,6112,3 GR 38,6 56,8 55,9 52,1 52,0 E 60,3 79,0 72,8 79,9 80,7 F105,8110,4110,1108,8108,8 IRL 60,8 58,9 63,4 68,9 69,2 I 86,5 93,3103,0103,2103,4 L158,5141,9126,2131,7134,3 NL118,6113,1106,0102,7102,0 P 38,7 56,4 52,2 56,3 56,2 UK128,6108,5105,4102,1102,5 EC100,0100,0100,0100,0100,0 USA189,6161,6155,7145,9148,1 JAP 55,8 96,2110,6124,3125,6 (*)Based on the forecasts of October 1991. Source: Commission services. (1) Dispersion is measured as the unweighted mean of the absolute deviation from the weighted mean of all the countries considered.
Article 2 
This Decision is addressed to the Member States. Done at Brussels, 25 February 1992