Broad economic policy guidelines (1997)

1) OBJECTIVE

To ensure closer coordination of economic policies and sustained convergence of the economic performances of the Member States and of the Community.

2) ACT

Council Recommendation of 7 July 1997 on the broad guidelines of the economic policies of the Member States and of the Community [Official Journal L 209 of 02.08.1997].

3) SUMMARY

In a climate of moderate recovery, priority had to be given to two fundamental policy concerns:

• to reduce unemployment significantly;
• to maintain efforts towards achieving price stability and budgetary consolidation so that a majority of Member States would be in a position to participate in the single currency as from 1 January 1999.

In the macroeconomic field, the broad guidelines reaffirmed that the common strategy should build further on the following three elements:

• a stability-oriented monetary policy;
• sustained efforts to consolidate public finances;
• nominal wage trends consistent with the price stability objective; real wage trends below the increase in productivity in order to strengthen the profitability of investment.

The more the stability task of monetary policy were facilitated by appropriate budgetary measures and wage developments, the more monetary conditions, including exchange rates and long-term interest rates, would be favourable to growth and employment.

Considerable headway had been made towards price stability and inflation convergence. In April 1997 fourteen Member States had an inflation rate of 2 % or less. This level needed to be maintained. Greece needed to redouble its efforts to reach the targets of 4.5 % by the end of 1997 and 3 % by the end of 1998.

The currencies participating in the exchange-rate mechanism had registered a remarkable degree of stability. Member States should continue to treat their exchange-rate policies as a matter of common interest. Countries not participating in the exchange-rate mechanism were called upon to continue with stability-oriented macroeconomic policies in order to make such participation possible.

A large majority of Member States had taken significant measures to reduce their budget deficits to 3 % of GDP (or even less) in 1997. These efforts needed to be maintained in order to build confidence in the sustainability of the budgetary adjustment, especially in those countries where the 1997 budget contained temporary measures and where the ratio of debt to GDP was not approaching the reference value at a satisfactory pace.

To be sustainable, budgetary projections should clearly indicate the underlying economic assumptions and the medium-term strategy of the Member State concerned (structural reforms, etc.).

The Council reaffirmed the same general principles as outlined in the broad guidelines in previous years:

• more prominence should be given to expenditure restraint than to an increase in the overall tax burden;
• government spending priorities should focus on investment in infrastructure and human capital and on active labour market initiatives;
• a reduction in the tax burden or in social security contributions was desirable in the context of budgetary consolidation; Member States should also review the financial sustainability of their social protection and public pension schemes and implement reforms in good time.

Furthermore, any harmful competition between the tax systems of the Member States should be avoided.

As regards the budget deficit, five Member States met the 3% of GDP reference value in 1996: Luxembourg, Denmark, Ireland, the Netherlands and Finland. Luxembourg apart, they all needed to consolidate these results.

Greece again needed to make sustained efforts in order to meet the targets of its convergence programme, in particular with regard to the efficiency of the tax administration and the reduction in government spending.

The other nine Member States were expected to see their budget deficits reach the reference value of 3% of GDP or less in 1997. They should continue to implement their convergence programmes with determination in order to consolidate these results in the coming years.

It was essential to improve the operation of product and service markets, to stimulate competition, to foster innovation and to ensure efficient price setting in order to promote growth and employment. This improvement would be brought about by making the single market work better, with additional commitment on the part of Member States to:

• fully transposing and enforcing existing legislation;
• making further progress on the legal framework in areas such as taxation and company law;
• completing the liberalisation of energy markets;
• reducing the burden of over-regulation which led to market fragmentation;
• avoiding the use of state aid to postpone essential restructuring.

The Commission's action plan proposed a number of measures which should be in place by 1 January 1999 in order to redynamise the single market.

Labour market reforms and increased investment in knowledge were essential. Various conclusions could be drawn from the positive experience of a number of Member States, especially the conclusion that structural reforms needed to be comprehensive in scope so as to address in a coherent manner the complex issue of incentives in creating and taking up jobs and to exploit policy complimentarity. The process under way should continue and, where necessary, be intensified, with priority being given to:

• the maintenance of appropriate wage trends;
• reductions in non-wage labour costs;
• reform of the taxation and social protection systems;
• new patterns of work organisation (more flexible working-time arrangements, etc.);
• adaptation of the whole educational system (including vocational training) to the needs of markets and to the improvement of human capital.

These reforms needed to be supported by a stronger employment orientation in other policies.

Last updated: 08.11.2002