98/454/EC: Council Recommendation of 6 July 1998 on the broad guidelines of the economic policies of the Member States and of the Community
L 200/34 ‹ EN ‹ Official Journal of the European Communities 16. 7. 98 II (Acts whose publication is not obligatory) COUNCIL COUNCIL RECOMMENDATION of 6 July 1998 on the broad guidelines of the economic policies of the Member States and of the Community (98/454/EC) THE COUNCIL OF THE EUROPEAN UNION, Having regard to the Treaty establishing the European Community, and in particular Article 103(2) thereof, Having regard to the recommendation from the Commis- sion, Having regard to the conclusions of Council in Cardiff of 15 and 16 June 1998, the European Whereas a resolution on the recommendation from the Commission was adopted by the European Parliament, HEREBY RECOMMENDS: 1. MAIN PRIORITIES: A SUCCESSFUL EMU, PROS- PERITY AND JOBS The introduction of the euro on 1 January 1999 marks a new phase in the process of European inte- gration and in the conduct of the economic policies of the Member States and of the Community. The vigorous and credible implementation by the Member States, especially over the last two years, of policies aimed at achieving a high degree of sus- tainable economic convergence in the Community has yielded tangible results. remarkable the Council of reflecting these convergence Firstly, efforts and results, the European Union, meeting in the composition of Heads of State or Government, decided on 3 May 1998 that eleven Member States fulfilled the necessary conditions for the adoption of the euro. Secondly, these efforts are fostering the development of a macroeconomic policy mix conducive to growth and employment. However, until now, insufficient progress has been made in reducing unemployment in many Member States. robust broadly adopted, and more Since the summer of 1997, when the previous Broad an Economic Policy Guidelines were increasingly based economic recovery has taken hold in the Com- munity, in a context of historically low inflation. With spare capacity currently available in most Member States and with prospects for subsequent healthy growth in investment, especially in equip- ment, solid growth should be able to take place without encountering capacity constraints or generat- ing inflationary tensions, if, as expected, wage devel- opments continue to be appropriate. In addition, the underlying economic fundamentals are sound and are improving brightening and confidence is strengthening further. The impact on Community growth prospects from the financial and economic events in Asia appears limited, provided that the crisis neither deepens nor spreads to other countries in the region. continuously, demand prospects Against the background of a further strengthening recovery, employment could increase moderately, leading to a slight reduction in the unemployment rate up to 1999 in the Community as a whole. This would constitute a first, albeit modest, step in the direction of the objective of a high level of employ- ment aimed for the Treaty of Amsterdam. in Article 2 of The present level of employment in the Community is the result not only of high unemployment (about 18 million people in 1997) but also of poor employ- 16. 7. 98 ‹ EN ‹ Official Journal of the European Communities L 200/35 ment prospects over long periods which have dis- couraged many people from seeking a job, many of whom are beneficiaries of other social security provi- sions. Thus, the creation of new jobs will have to absorb not only the unemployed but also a rising participation rate some demographic and still increase in the population of working age. The increase in employment over the medium and longer term would greatly alleviate the burden on Member States’ public finances and social security systems. Moreover, it would help to fight efficiently against poverty and social exclusion. For economic policy, the tasks are to set the condi- tions for (i) a further strengthening of the recovery, and (ii) its extension into a self-sustaining, non-infla- tionary economic growth process over the medium and longer term — a pre-requisite for substantially and durably higher employment. This will require a strengthened programme of macroeconomic and structural policies and a determined implementation the 1998 employment guidelines to address a of number of key challenges while allowing the Community’s economies to adapt better to changing circumstances in the years ahead. The introduction of the euro will not in itself solve the Community’s unemployment problem. But in fulfilling the abovementioned tasks, the stability framework of economic and monetary union (EMU) will contribute to the maintenance of a policy mix that is favourable to growth and employment. In the macroeconomic area, governments and, in their respective field, the social partners should each make all the required efforts to support the stability objective of the single monetary policy. Simultaneously, structural policies and reforms of the product, service and labour markets are required to facilitate a tension-free growth process, to reinforce competitiveness, to translate growth into employ- ment and to make growth more respectful of the environment. More generally, there is a need for a better func- tioning of the single market for which all Member States are responsible. Only if this policy strategy is pursued with resolve by all actors and if its implementation is well coord- inated in line with the Luxembourg European Council resolution, will EMU — as called for in Article 2 of the Treaty — reap its full benefits and contribute to achieving the overall objectives of the Community, including the promotion of sustained and non-inflationary growth respectful of the en- vironment, a high level of employment and rising living standards. 2. GROWTH- AND STABILITY-ORIENTED MACRO- ECONOMIC POLICY MIX that, is essential In order to achieve the objectives mentioned above, it in the macroeconomic area, Member States remain committed to pursuing the growth- and stability-oriented strategy recommended in the previous guidelines, which has started to bear fruit. The strategy contains three essential ingredients: — a monetary policy oriented to price stability, — sustained efforts to achieve and maintain sound budgetary positions consistent with the Stability and Growth Pact, — nominal wage trends consistent with the price stability objective; at the same time, real wage developments should be consistent with increases in productivity and should take into account the need to strengthen the profitability of investment in order to create more jobs. The more the task of monetary policy to maintain price stability is supported by appropriate budgetary policies and wage developments, the more likely it is that monetary conditions will be favourable to growth and employment. The overall macroeconomic policy mix of the euro- area will result essentially from the interaction of the single monetary policy on the one hand and the specific budgetary developments and wage trends in the participating countries on the other. The latter will be subject to the closer surveillance and coord- ination of economic policies in order to achieve an appropriate policy mix in the whole euro area as well as in each participating country. currency, initially adopt the For the countries that do not single stability-oriented the need for macroeconomic policies will be equally strong. The close and deep economic and monetary interdepen- dence between the euro-area countries and the non- euro area Member States and the need to ensure further convergence and a smooth functioning of the single market will require that all Member States are included in the coordination of economic policies. L 200/36 ‹ EN ‹ Official Journal of the European Communities 16. 7. 98 3. PRICE STABILITY Price stability is an essential requirement for real- ising sustained medium-term economic growth. Following impressive progress in recent years, the Community as a whole has achieved a high degree of price stability. It is necessary that all policies aim at credibility and consistency with durable price stab- ility. In the prospective euro-area, where the average infla- tion rate, measured by the harmonised index of consumer prices, has fallen below 2 %, all parti- cipating Member States need to conduct their economic policies with a view to maintaining price stability, thereby allowing for monetary conditions favourable to growth. They also need to avoid too wide create competitiveness problems. inflation differentials that would Average inflation has also fallen to below 2 % in Denmark, Sweden and the United Kingdom. The task is to maintain monetary and economic policies which continue to deliver price stability. Greece has made substantial progress towards price stability in recent years. Together with the budgetary consolidation efforts implemented over recent years, this facilitated the entry of the drachma into the exchange rate mechanism (ERM) in March 1998. ERM membership will help to improve further its inflation performance. Reinforced efforts are needed, however, to contain the inflationary consequences of the devaluation of the drachma upon entry in the ERM and to achieve price stability as soon as possible. 4. THE TRANSITION TO THE EURO A smooth transition to the euro on 1 January 1999 is required to ensure that EMU is launched in the most favourable circumstances. The primary objective of the monetary policies of the national central banks of participating Member States in the remaining months of 1998, during which they retain the responsibility for monetary policy, is to ensure that the current environment of a high degree of price stability is maintained at national level and thus for the euro area as a whole. Official interest rates will have converged to the common euro-area rate by the end of 1998. This will be consistent with a situation in which market exchange rates are equal to the pre-announced rates, i. e. the current ERM bilateral central rates. From 1 January 1999, the single monetary policy in the euro area will be the responsibility of the inde- pendent European Central Bank (ECB) and Euro- pean System of Central Banks (ESCB). the Treaty, The Member States not adopting the single currency from the outset retain competence for their national also committed to and are monetary policies pursuing stability-oriented monetary policy. Under Article 109m of these Member States shall treat their exchange-rate policies as a matter of common interest. The ERM 2 will provide the framework for monetary relations between Member States participating in the mechanism and the euro area from 1999 onwards and will support their convergence efforts. While participation in the ERM 2 will be voluntary, it can be expected that Member States with a derogation will join. 5. SOUND PUBLIC FINANCES 5. 1. General guidelines Despite considerable consolidation efforts in virtually all Member States, additional progress is required in most countries in order to ensure compliance with the Stability and Growth Pact’s medium-term objec- tive of budgetary positions close to balance or in surplus. That will allow all Member States to deal with normal cyclical situations while keeping the government deficit within the reference value of 3 % of gross domestic product (GDP). In accordance with the Treaty, consolidation is also required in order to ensure that debt ratios above 60 % continue to dim- inish sufficiently and to approach the reference value at a satisfactory pace. These requirements hold for all Member States for the following reasons: (i) sound budgetary policies, by fostering low and stable inflationary expectations, will facilitate the the single monetary policy and the task of the non-euro Member monetary policies of States In the in maintaining price stability. present conjuncture, a further scaling back of government deficits will contribute to the sus- tainability of the economic recovery and might allow for continued favourable monetary condi- tions, thereby supporting investment; (ii) sound budgetary positions will help to keep long-term interest rates at a low level, thereby generating a crowding-in of private investment. If governments absorb a smaller part of private saving, or if they make a positive contribution to savings in the economy, an increase in the investment rate can — other things being equal — take place without pressures on the balance of payments and long-term interest rates; 16. 7. 98 ‹ EN ‹ Official Journal of the European Communities L 200/37 (iii) in many countries, public finances have not yet regained the necessary room for manoeuvre to cope with adverse economic developments. Since, after the introduction of a single currency, the adjustment to adverse cyclical developments and country-specific disturbances will to an important extent rest with budgetary policy, it will be of paramount importance to ensure that the automatic stabilisers will be able fully to play their role. Furthermore, sound budgetary policies will in all likelihood also increase the effective- ness of those stabilisers. Proven budgetary dis- cipline will of strengthen the economic agents that a rising deficit during a recession will not permanently disrupt the public finances, thereby avoiding any adverse effects emanating from the financial markets; confidence (iv) finally, budgets close to balance or in surplus will allow a speedy reduction in the still relatively high public debt ratios in many coun- tries. This will reduce the debt service burden and so facilitate the restructuring of government spending. It could also facilitate the lowering of the tax burden and make it possible to address all aspects of social security systems in view of ageing populations. management strategy with a view to reducing the vulnerability of the public finances. The timing, scale and composition of budgetary adjustments are important in determining whether they will be successful in having a durable impact on the government’s budgetary position and in im- proving economic dynamism, competitiveness and employment. Although they will need to be tailored to country-specific conditions, previous guidelines exercises identified a number of general principles. The present guidelines reaffirm and build upon these principles while respecting the competence of the Member States for the conduct of their budgetary policies: (i) budget deficit reductions in most Member States should be achieved through expenditure restraint rather than through tax increases; (ii) in order to improve economic efficiency and to promote economic dynamism, a reduction in the overall tax burden is desirable in most Member States. Tax reforms also enable markets to func- tion more efficiently and by strengthening investment promote lastingly competitive jobs; Against this background, it is essential that Member States provide assurances regarding the continuity of budgetary adjustment. To this end, Member States have committed themselves: (iii) in cases where government deficits or govern- ment debt-to-GDP ratios are still high, is necessary that any tax reduction should not slow down the pace of deficit reduction; it (i) to ensure that the national budget objectives set for 1998 are fully met, if necessary by taking timely corrective action; (ii) if economic conditions develop better than expected, to use the opportunity to reinforce budgetary consolidation so as to reach the me- dium-term objective of government financial positions close to balance or in surplus, as embodied in the commitments of the Stability and Growth Pact; (iii) to submit their and convergence stability programmes at the latest by the end of 1998 with a view to enabling the Commission and the Council in- cluding the overall budgetary stance and the policy mix in the euro area, at the start of stage 3 of EMU; these programmes, to assess all (iv) to ensure, where appropriate, a further steady decline in public debt and an appropriate debt (iv) budgetary consolidation should be implemented in a fair and just way. It must be directed towards increasing the effectiveness and effi- thereby also ciency of government spending, enhancing the supply side of the economy. In this respect, measures should focus on control- ling better or on reforming public consumption, public pension provision, health care, labour market measures and subsidies. Furthermore, in recent years, there has been a tendency for government investment to be reduced relative to GDP, although part of reflects a shift towards the private financing and operation of public infrastructure investment. To the extent possible, and without threatening the necessary further reduction in government deficits, spend- ing on productive investment as well as on other productive activities such as on human capital and active labour market initiatives should be favoured. Such a restructuring is likely to lead, through its positive effects on growth and employability, to an increase in the employment rate and/or to a reduction in the number of people of working age receiving social transfers, thereby helping to improve budgetary positions over the medium term. this L 200/38 ‹ EN ‹ Official Journal of the European Communities 16. 7. 98 the same way as the Member States, In just the Community also is called upon to continue to main- tain strict budgetary discipline. Strict budgetary dis- cipline must be applied to all categories of the fin- inter- ancial perspectives, while institutional Agreement on budget discipline and the improvement of the budget procedure. respecting the 5. 2. Country-specific guidelines (i) Euro-area Member States In Belgium, favourable economic growth condi- tions have contributed to bringing forward by one year the budgetary targets set in its conver- gence programme. It is important to ensure that the government’s commitment to maintain the primary surplus at 6 % of GDP over the medium term is realised, thereby securing a fast decline in the debt ratio, which is still at a very high level. A tighter control needs to be exerted on transfers to households and especially on health care spending. to and households Germany needs to continue its government deficit reduction in the coming years. Subsidies, government transfers consumption need to be restrained further. Continued efforts to restrict spending are also needed if the government’s aim of reducing the expenditure ratio by the year 2000 to its pre- unification level of 46 % of GDP is to be realised. Germany needs to step up its budgetary adjustment to put its debt ratio firmly on a de- clining path and to bring it back swiftly below the 60 % of GDP reference value in the near future. growth conditions. In Spain, maintaining the current budgetary stance would allow the deficit to come down in the coming years, partially due to the favourable economic Spain would, however, still need to undertake efforts to accel- erate the achievement of the medium-term target of a budget close to balance or in surplus. Indeed, the present cyclical position of the Spanish economy and the sustainability of the present expansion would call for the quick attainment of this objective. Spending needs to be controlled further if the government’s aim of reducing the expenditure-to-GDP ratio to just below 42 % of GDP by the year 2000 is to be realised. In France, further budgetary adjustment efforts should be pursued in 1999 and in particular beyond 1999, in order to respect the obligations of the Stability and Growth Pact. These consoli- dation efforts are also needed to stabilise the debt ratio and to put it on a downward path. The control of transfers to households and govern- ment consumption should contribute to bringing about the deficit reduction. In Ireland, the government budget is expected to show increasing surpluses in the coming years and the debt ratio is expected to fall below 60 % of GDP in 1998 and to continue declining thereafter. In view of the present strong growth of the economy and the possibility of overheating, any revenues received over and above those anti- cipated in the 1998 budget should be used to raise the budget surplus. Moreover, a tight fiscal stance is required in Ireland to reduce the risk of overheating. It is noted that the authorities are resolved to propose a budget for 1999 having as its primary objective the continuation of low inflation in Ireland. After having successfully reduced its government deficit to below the 3 % of GDP reference value in 1997, Italy needs to step up further its budge- tary consolidation efforts in order to respect the obligations of the Stability and Growth Pact. In order to secure a fast reduction in the debt ratio, it to ensure that high levels of primary surplus of 5,5 % of GDP should be kept, over the medium term as envisaged in the three- year plan approved by the Italian Parliament. This, reinforced by privatisation revenues, should secure a continued decline in the debt ratio. is important Luxembourg is expected to keep a budget surplus in the coming years, while its debt ratio will remain at a very low level. the deficit The Netherlands must not allow its present budgetary position to deteriorate. Given the favourable economic growth conditions expected should be in the coming years, brought down further in order to respect the obligations of the Stability and Growth Pact. The budgetary stance should therefore not be relaxed and the government deficit should not be allowed to start increasing again. Budgetary adjustment should be maintained to ensure a further continuous decline in the debt ratio. Austria should continue its consolidation efforts in the coming years in order to achieve the target of a budgetary position close to balance or in surplus. Austria needs to exert a tight budget control and should obviate additional pressures on the budget. Due to the recent reform of 16. 7. 98 ‹ EN ‹ Official Journal of the European Communities L 200/39 family taxation, which originated from a ruling of the Constitutional Court, and within the context of the envisaged tax reform, substantial additional budgetary consolidation efforts will be required. It is also recalled that the debt ratio has to be kept on a downward path. Portugal should seize the opportunity presented by the favourable economic growth conditions in the coming years to improve its budgetary posi- tion further in order to respect the obligations under the Stability and Growth Pact. This would also help to prevent any risk of overheating. Budgetary adjustment should increasingly focus on primary expenditure. The debt ratio is expected to fall to 60 per cent of GDP in 1998 and to continue declining in the coming years. In Finland, the government budget is expected to in 1998 and increasing turn into surplus surpluses are aimed for in the coming years. Finland plans to introduce an income tax reduc- tion in 1999. This measure should be imple- mented in such a way that the process of further budgetary adjustment is continued. (ii) Member States not adopting the euro as of January 1999 Denmark is expected to tighten its budgetary stance further and to increase its budget surpluses in the coming years. Tax revenues will remain buoyant, while government investment will be reduced further. Given the increasing budget surpluses the debt ratio is expected to fall below 60 % of GDP in 1998 and to continue declining in the coming years. Greece has made substantial progress in reducing the large imbalances in its public finances over recent years. Its deficit declined to 4,0 % of GDP in 1997 and is projected to decline to below the Treaty reference value in 1998, while the govern- ment debt ratio, after remaining practically stable since 1993, started to decline in 1997. Greece should continue consolidation efforts, notably through the rigorous implementa- tion of the measures announced by the govern- ment when the drachma joined the ERM, in order to secure its smooth and orderly participa- tion and to realise the government’s intention to join the euro area by 2001. These measures include a further reduction in primary expend- its budgetary iture, extended privatisation plans, the extensive the public sector, and the rationalisation of reform of security system in the medium term. the social In Sweden the government budget is expected to turn into surplus in 1998 and increasing surpluses are expected thereafter. Sweden is aiming for a budget surplus of 2 % of GDP over the should continue to be controlled tightly. cycle. Government expenditure In the United Kingdom, the budget is projected to reach a position that is close to balance by the end of the decade. To achieve this position, the United Kingdom should rigorously implement the announced budgetary measures. Government expenditure should continue to be controlled tightly. The conduct of budgetary policy in the United Kingdom should also take into account the need to bring about the envisaged overall stability conditions for the UK economy. 6. WAGE DEVELOPMENTS for substantial implications The evolution of aggregate wages and wage differen- tials has inflation, growth, employment and the employment-content of growth. In EMU, with the single monetary regime, the link between wages and employment will become more evident and stringent. On the other hand, the credible and stability-oriented macroeco- nomic framework will foster adequate wage be- haviour. traditions. As Wage setting will remain the responsibility of the social partners at the national, regional, sectoral or even at a more decentralised level following their the respective Amsterdam resolution on growth and employment, the social partners are responsible for reconciling high employment with appropriate wage settlements and for setting up a suitable institutional framework for the wage formation process. underlined in For wage developments to contribute to an employ- ment-friendly policy mix, the social partners should continue to pursue a responsible policy course and conclude wage agreements in Member States in line with the following general rules: L 200/40 ‹ EN ‹ Official Journal of the European Communities 16. 7. 98 (i) aggregate nominal wage increases must be consistent with price stability. Wage increases in the whole euro area that are incompatible with price stability will inevitably lead to a tightening of monetary conditions in the euro zone, with adverse effects on growth and employment. Excessive nominal wage increases in a country or region will not necessarily exert a significant impact on inflation in the entire monetary union but, through their effect on unit labour costs, they will worsen competitiveness and employ- ment conditions in this country or region; (ii) real wage increases with respect to labour productivity growth should take into account the need to strengthen, where necessary, and subse- quently maintain, the profitability of capacity- enhancing and employment-creating investment. This implies that in countries where overall labour productivity growth is slowing down, the scope for real wage increases will be reduced. More specifically, a reduction in working time should not lead to an increase in real unit labour in costs. For is higher essential to forge an investment-supportive en- vironment in terms of demand developments, labour market conditions, taxation and the regu- latory framework; improved profitability to result it in the Community, investment (iii) wage agreements should better take into account differentials in productivity levels according to qualifications, skills and geographical areas. In this context, and where appropriate, entry wage costs for the young, low-skilled or long-term unemployed should be such as to enhance their employability; lower entry wage costs could be enhanced further by measures to promote the adaptability of the labour force; the beneficial effects of (iv) ‘wage imitation effects’ need to be avoided, implying that labour cost differences between Member States should continue to reflect discre- pancies in labour productivity. Due to the exis- tence of a single currency, differences in wage levels between Member States will become more transparent. This may lead to a certain increase in labour mobility but may also give rise to wage claims in lower-wage countries to close the gap with higher-wage countries. An increase in than warranted by productivity wages levels in a country would lead to a deterioration in competitiveness and investment profitability and therefore to reduced attractiveness as a faster production location. The country’s trade perfor- mance would suffer, investment would be deterred and unemployment would increase. Compliance with these requirements does not imply that wage developments should be uniform across the euro-area. There are likely to be differences in productivity growth and thus in the available room for real wage developments. Moreover, differences in labour market situations and economic conditions need to be taken into account. In EMU, wage adjust- ment will need to play a more important role in the adjustment to changing economic circumstances, especially in the case of country-specific disturb- ances, of requiring adaptability in the wage formation process. a higher degree thereby it Since, in general, the social partners are responsible for achieving wage developments compatible with the achievement and maintenance of high employ- ment, thereby playing an important role in achieving an appropriate macroeconomic policy mix, is essential to strengthen the social dialogue at all the appropriate levels. At the national level, governments may have to take a stronger interest in fostering dialogue and in promoting understanding of the policy strategy developed in the broad economic policy guidelines. At the Commission will continue to develop the social dialogue, notably on macroeconomic policy issues. Furthermore, in the framework of the strengthened economic policy coordination, there is a need to establish credibility and a climate of confidence between the major policy actors which could be rein- forced by a regular dialogue between the social part- ners on the one hand and the authorities responsible for economic policies on the other. the Community level, 7. STRUCTURAL POLICIES FOR GROWTH AND EMPLOYMENT Structural policies have a primary role to play in promoting economic welfare, improving productivity and raising employment levels. Their key role is to help ensure a tension-free macroeconomic growth process, to reinforce the Community’s competitive- ness, to increase the employment content of growth and to make growth more respectful of the environ- ment. To reach their full effectiveness, structural policies must be coherent with the pursuit of sound macroeconomic policies. 16. 7. 98 ‹ EN ‹ Official Journal of the European Communities L 200/41 Structural policies are about improving the func- tioning of markets; where they involve budgetary costs, it is essential that they are kept under control and do not jeopardise the achievement of sound budgetary positions. Their economic benefits also emerge only gradually over time. Given insufficient progress in the implementation of structural reforms in product, service and, especially, labour markets in most Member States, continued and intensified efforts are required to remove often deeply seated structural deficiencies. Member States’ adjustment to country-specific economic disturb- ances will have to rely to a considerable extent on the flexibility and adaptability of their markets for products, services and factors of production. EMU will also intensify competitive pressures on enter- prises because of the elimination of exchange rate changes within the euro zone and of increased price transparency. 7. 1. Product, service and capital markets In order to safeguard and promote competitiveness, employment and living standards in a world of free trade and constant technological change, it is essen- tial that Member States and the Community intensify their efforts to improve the efficiency of product, service and capital markets. These efforts should focus on four major areas: (i) Reforms to perfect the Single Market for importance framework of is of paramount Improvement in the functioning of the Single Market a successful EMU. Despite considerable progress, a number of significant problems remain. The the Single Market legislative remains incomplete, mainly due to the lack of full implementation of Community directives at national level. Efforts to reduce the degree of non-implementation of Single Market directives should be pursued forcefully in most Member States as identified by the Single Market score- board established by the Commission. Recog- nising this challenge, the Commission and the Member States agreed an action plan for the in June 1997 committing the Single Market Member States to clear away the most serious remaining legislative gaps by 1 January 1999. Among the areas requiring further action, public procurement and mutual particular attention. recognition deserve Efforts should now focus on ensuring the prompt implementation of the Action Plan and on monitoring the progress towards an effective Single Market. To this end, the Single Market scoreboard is being developed for regular six- monthly publication. Furthermore, in its conclu- sions, the Luxembourg European Council stressed both the importance of paying full attention to those national economic develop- ments and policies which may hinder the smooth functioning of the Single Market and the need for policy coordination to aim also at fost- ering tax reform in order to raise efficiency and to discourage harmful tax competition. In this area, the treatment of tax incentives should be consistent with Community rules for State aids and Member States compliance with principles fair tax competition should be monitored. of This is one of the main tasks of the follow-up group, which was established on 1 December 1997. the the latter and, notably, The Single Market and overall globalisation exert a strong pressure to improve competitiveness, is also linked to national or but Community policies in the field of research and development information society. To this end, it is essential to implement swiftly those actions programmed in the action plan which promote innovation and a wide diffusion of new technologies. The environment of firms in terms of communications also calls for a strengthening of efforts in infrastructure projects, both in keeping an adequate level of public investment and by searching for joint ventures with the private sector where appro- priate. Efforts should also focus on encouraging an enterprise culture and promoting entrepre- neurship, a key factor in stimulating growth, employment the Community. competitiveness and in (ii) Reforms to enhance competition In the area of competition policy, the Commis- sion has recognised the need to streamline and decentralise anti-trust enforcement in order to enhance its effectiveness and reduce the costs imposed on enterprises. Member States should also make an important contribution towards L 200/42 ‹ EN ‹ Official Journal of the European Communities 16. 7. 98 achieving the objective of a more efficient en- forcement of anti-trust rules by revising their laws so that the national competition authorities can apply anti-trust policy effectively. For State there is a need for the Commission to aids, control them strictly and for the Member States to exercise rigorous self-discipline. spillover effect both in terms of economic activity and social cohesion. To exploit fully the opportunities offered in these areas, a more favourable regulatory and fiscal framework needs to be developed. (iv) Financial markets (iii) Regulatory reforms An adequate regulatory framework is a pre- condition for boosting productivity growth and raising the competitiveness of European firms. Governments and the Commission therefore have the responsibility to review existing regula- tions continuously to assess their appropriateness and to reduce the costs of implementing and monitoring these regulations and to increase their transparency and enforceability. This also holds for environmental legislation and regula- tion, which should be incentive-based so as to allow economic agents to achieve well-defined environmental objectives in a cost-effective way. As there are still wide disparities in regulatory practices between countries, different bench- marking exercises have been initiated by in- ternational bodies to identify the best regulatory practices. Such exercises could lead to a signi- ficant improvement in the regulatory framework of enterprises. As regards the Community, the Commission could coordinate such initiatives on the basis of contributions from the Member States. regulations Administrative and cumbersome procedures tend to weigh especially heavy on small and medium-sized enterprises, particularly during the start-up phase. Therefore, a first area where such benchmarking exercises could be launched is the administrative regulations for the start-up of business. Similarly, identifying and removing any remaining unjustified regulatory barriers to the development of venture capital and new financial products, particularly those that may assist in the financing of small and medium-sized enterprises (SMEs), should be a priority. Special attention needs also to be paid to job creation at local level in the social economy and new activities linked to the needs not yet satis- fied by the market, which have an important take authorities EMU will bring important changes to European financial markets. They will result in large and highly liquid euro markets. It is important that the national the necessary measures to remove legal and financial obstacles to market integration. As segmentation between Member States’ financial markets diminishes in EMU, any inefficiency will become more ap- parent amid intensified competition between euro-area financial the new euro financial markets are likely to prove attractive to financial institutions from outside Europe. It is essential, therefore, that operators should be fully prepared for EMU if the poten- tial of the new euro financial markets is to be fully realised. institutions. Moreover, To improve the efficiency of these reforms, they need to be closely monitored and, if appropriate, coordinated at the Community level through a regular multilateral surveillance, thereby comple- menting the ongoing macroeconomic multila- teral surveillance. To ensure steady progress with economic and the reform, Member States Commission should submit short annual reports setting out their policies aimed at making their product, service and capital markets more effi- cient. These reports will provide a basis for monitoring these reform efforts at the Commu- nity level and will provide an input to the broad economic policy guidelines, starting from next year. The Commission will also elaborate an extended scoreboard with indicators of effective market integration, including price differentials, and implementation of Single Market measures. 7. 2. Labour markets A durable reduction in the presently high levels of unemployment and an increase in the employment rate in the Community is possible. requires however a vigorous and unremitting use of a broad range of mutually reinforcing policies with success often emerging only over the medium to longer in interaction with term. Macroeconomic policies, It 16. 7. 98 ‹ EN ‹ Official Journal of the European Communities L 200/43 structural policies, should ensure the realisation of a protracted period of strong, non-inflationary growth supported by capacity-enhancing investment. The required policies in this respect form the essence of the present and previous broad economic policy guidelines. But solving the Community’s employ- ment problems will require a simultaneous and comprehensive modernisation of the Community’s labour markets with a view to increasing the employ- ment-content of growth and ensuring the employ- ability of the labour force. This second component of the Community’s strategy for high employment was developed in the Luxembourg employment guide- lines. (NAPs) The employment guidelines — based on the four pillars of improving employability, developing entre- preneurship, encouraging adaptability of businesses and their employees and promoting equal opportun- ities — will be implemented via the national action for employment. Adapted to the plans specific national circumstances, these plans must integrate the employment measures in a strategy of sound macroeconomic policy including budgetary consolidation in conformity with the requirements of they the Stability and Growth Pact. Furthermore, must provide a vehicle for action aimed at both re- ducing mismatches in the labour market and at en- hancing the responsiveness of firms to economic the NAPs will serve as an change. In this way, important policy tool directed towards reinforcing the Community’s growth and employment potential and as such they will undoubtedly form an important ingredient of future broad economic policy guide- lines. Member States’ actions should put the emphasis on a preventive strategy, which focuses on active policies to increase the supply of an adequate, educated and trained labour force. Such active measures need to be combined with efforts to increase incentives to seek and create jobs via a review of the structure and administration of tax and benefit systems. (i) Active labour market policies Over a five-year period, Member States must tackle youth unemployment and prevent long- term unemployment by offering every unem- ployed young person and adult a new start before they reach 6 and 12 months of unem- ployment respectively. This requires increased efforts for the employment services to perform efficient job searching and job matching services. Such measures should be combined with accom- panying measures like training and, where appropriate, wage subsidies and reductions of social charges, especially for the low skilled. It will be important to concentrate the scarce resources of the employment services on those who most need help to find a job. Long-term unemployment is particularly high in Belgium, Ireland, Italy and Spain, while youth unemployment is high in Finland, France, Greece, Italy and Spain. These Member States would have to make a special effort to respect the guidelines. (ii) Taxes and social security contributions In view of For more than 15 years, the increase in the overall tax burden and the structural develop- the taxation systems (tax and social ment of security contributions) in the Member States has been unfavourable to employment. As a result of the increase in the overall burden of taxation security contributions, a growing and social wedge has developed between what workers receive and what firms pay. This larger wedge hampers economic efficiency, growth and, even- tually, job creation. Its effects are especially harmful at the low end of the wage scale where it leads to the pricing-out of the market for low- skilled, low-pay jobs and an increase in ‘black market’ activities. these harmful effects, it is important for the Member States to take the necessary action to reverse this trend, for example through reform of social security and taxation systems. Such measures should, however, not jeopardise budgetary consolidation. The employment effect of such measures would be increased if supported by active labour market measures in education, apprenticeship schemes, vocational training and retraining. In order to make the taxation system more employment- friendly, Member States should also examine, if appropriate, the desirability of introducing a tax on energy or on pollutant emissions or any other tax measure. Any such changes should take into account the impact on competition and any additional burdens on individual and corporate tax payers. (iii) Welfare reform Welfare systems need to be reformed with the aim of increasing incentives, opportunities and and, more responsibilities generally, the labour market. This means moving from passive improving the functioning of to take up jobs L 200/44 ‹ EN ‹ Official Journal of the European Communities 16. 7. 98 income maintenance systems to welfare support through work. However, in some countries, taking up a job compared to receiving benefits offers little advantage, especially for low-income earners experiencing long unemployment spells: combined benefits for unemployment, housing and childcare can in some circumstances result in net rates of over 80 % in Belgium, Denmark, Finland, France, Germany, the Netherlands, Sweden and the United Kingdom. replacement Making work pay requires a double strategy. Firstly, implementing reforms which boost take home pay. The United Kinbgdom ‘welfare-to- work’ reforms open an interesting policy avenue. Secondly, acting on the benefit side, by adjusting job search and carefully eligibility criteria, training requirements cases, in some and, revising the time profile of benefits. Many coun- tries have had positive results field. However, interaction between different benefit systems should be reviewed to ensure it would always pay to take up a job that compared to receiving benefits. More generally, benefit and tax systems should be viewed in rela- tion to labour market regulations. Member States, especially those combining relatively generous benefit systems and high employment protection, should review their relevant legisla- in this the tion with a view to reconciling security and flex- ibility while making their benefit systems more efficient. (iv) Working time arrangements is important It that where there are arrange- ments to reduce working time, they should be implemented in ways which do not undermine in the adaptability and which do not result reduction of labour supply and output. Where appropriate, employment could be favoured by a greater flexibility of working time at the micro- economic level. In this context, some initiatives suggest that agreements combining a reduction of working time with job creation could entail positive results, provided unit labour costs do not increase. Another approach for increasing the labour content of growth would be to encourage the maximum use of voluntary, part-time and new forms of employment. The possibilities in that field are obviously very different in Member States given the very large differences in the proportion of part-time workers that one may observe at present. In these areas, the exchange, at Community level, of experiences and best practices needs to be encouraged. Done at Brussels, 6 July 1998. For the Council The President R. EDLINGER