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 Table of contents 1. Main objectives: growth, employment and convergence 2. Growth and stability-oriented macroeconomic policy mix 3. Price and exchange rate stability 4. Sound and efficient public finances 5. Structural reforms to promote growth and employment 5. 1. Better functioning product and services markets 5. 2. Fostering labour market reforms and investment in knowledge 1 2 3 4 7 8 8 /**- 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 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 It is essential therefore that the currently favourable only a little over 2 per cent per year. 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. (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. 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. the announced deficit-reducing measures, 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 indicating which «measures are one-off. of 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. 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. 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 systems. training 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 of ti^e Community. 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 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 In reforms need to be supported by a stronger employment orientation in other policies. 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. 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