To increase the growth potential of the economy and to promote employment and social cohesion via structural reforms and the transition to a knowledge-driven economy while giving operational content to the conclusions of the Lisbon European Council.

Council Recommendation of 19 June 2000 on the broad economic policy guidelines of the Member States and the Community [Official Journal L 210, 21.08.2000].

The broad economic policy guidelines (BEPG) give operational content to the conclusions of the Lisbon European Council, which focus on the opportunities afforded by globalisation and a new knowledge-driven economy.

Growth prospects. During the 1990s, the European Union (EU) fostered economic integration and created a solid framework for the conduct of economic policies. The improvements in the framework conditions have not yet been reflected in a stronger economic performance, and this is indicative of the macroeconomic imbalances that prevailed at the time and the structural rigidities still existing in certain Member States. Nevertheless, since the adoption of the previous BEPGs in 1999, economic growth has been increasingly robust and broadly based in the EU thanks to a favourable environment and sound macroeconomic management. This could lead to non-inflationary economic growth of the order of 3% for the Union as a whole in the years ahead.

Key challenges. All Member States are confronted with these challenges. Firstly, restoring full employment is one of the priorities: although it has edged downwards, unemployment remains too high. Moreover, employment and participation rates are also low. As emphasised by the Lisbon European Council in 2000, the employment rate is to be raised to 70% by 2010.

Secondly, innovation and knowledge should become the driving forces for economic growth in Europe. This will require increased adaptability of economic structures, while investment in information and communication technologies (ICT), research and development (R&D) and human resources would have to be increased.

Thirdly, population ageing poses a major challenge for European economies since it has serious effects on saving, investment and public finance. Consolidation of public finance and reforms of pension and health-care systems have been identified with a view to tackling this demographic challenge.

In addition, improving social cohesion, and particularly measures to combat social exclusion, is a priority for Member States. By improving framework conditions for growth and employment, economic policies can make the strongest contribution to social inclusion.

In an increasingly integrated world economy, the reforms needed cannot be considered in isolation from the international context. The EU must therefore pursue a common commercial policy that favours open and competitive markets.

The EU must incorporate its responses to the challenges that exist into a coherent and comprehensive strategy for the medium to long term. The existence of integrated, efficient and competitive markets is a key feature of this strategy.

Belgium: Economic activity is expected to accelerate in 2000 on the back of buoyant domestic demand. Belgium has made further progress towards budgetary adjustment and, according to the stability programme, is set to achieve a budget balance in 2002. The government should aim to reduce the deficit even more sharply than envisaged in the stability programme, to contain real growth of primary expenditure and to use any other room for manoeuvre to reduce government debt.

On product and capital markets, competition in services should be increased, liberalisation of energy sectors speeded up, the administrative burden on business eased and investment in private venture capital encouraged. On the labour market, the government is called on to promote labour mobility and to ensure that wage negotiations better reflect local labour market conditions as well as to reinforce active labour-market policies.

Denmark: Economic growth should recover in Denmark in 2000. The budget surplus is set to reach 2.2% of GDP in 2000. To safeguard the healthy situation of public finances, the government should ensure that the increase in expenditure, notably local government expenditure, does not exceed the ceilings set in the budget and should aim to reduce tax and expenditure ratios while adhering to the commitments set out in the convergence programme.

On product and capital markets, the government is called on to strengthen competition policy, to improve the efficiency of the public sector, to intensify links between research and business and to take measures to encourage venture capital investments. On the labour market, it should reduce the overall tax burden on labour, in particular low incomes, and monitor the reform of early retirement and leave schemes.

Germany: Economic activity should accelerate in 2000. According to the stability programme, the government deficit is set to decrease slightly to 1% of GDP in 2000 before rising to 1.5% in 2001 following a tax reform. The government is called on to exploit any additional opportunities to reduce the deficit faster than envisaged, implement the tax reform with caution so as not to jeopardise budgetary consolidation, and to draw up a structural reform of the social security system, especially pension and health schemes.

On product markets, Germany should ensure an increased opening-up of public procurement, liberalise advertising regulations, improve competitive structures and reduce state aid. In addition, it should pursue the opening-up of the electricity sector and reduce the administrative burden on SMEs. On capital markets, the government should take measures to encourage investment capital.

On the labour market, Germany is called on to reassess its policy towards the eastern part of the country, notably as regards the efficiency of transfers and the general flexibility of the labour market. The government should also reduce the burden of taxes and social security contributions on labour and should reduce disincentives in the tax and benefit systems which discourage labour-market participation.

Greece: Economic growth in Greece will continue at a strong pace. Budgetary consolidation has continued. The government should consider setting as an upper limit the target of 1.2% of GDP for the deficit in 2000 and should secure control of expenditure. It should also pursue the reform of the social security sector and implement the privatisation schedule so as to achieve a faster reduction in government debt.

On product and capital markets, Greece should improve its record of transposing internal market legislation, speed up liberalisation in the telecommunications and energy sectors, promote business start-ups, encourage R&D and investment in ICT, and implement the 1998 Risk Capital Action Plan.

On the labour market, it should reform employment services, in particular with a view to combating long-term unemployment, and ensure full implementation of the reforms already undertaken. It should review wage formation systems with a view to enhancing flexibility and adapting wage developments to productivity differentials at geographical, sectoral and company level.

Spain: The prospects for economic growth in 2000 remain favourable. Fiscal consolidation has made clear progress and should produce a budget surplus in 2002. The government is called on to improve on the targets set in the updated stability programme, to implement the reform of the National Budget Law and to respect fully the existing internal stability pact aimed at bringing expenditure better under control. Reform of the pension system including increased resources for the pension fund reserve should continue.

On product and capital markets, the reform of competition law should be pursued, sector-specific aid reduced, the administrative burden eased, especially for SMEs, and venture capital markets developed with a view to increasing investment.

On the labour market, Spain should review the wage formation system and the social welfare mechanisms at regional and local levels, improve the efficiency of active labour-market policies and review job-protection legislation with a view to enhancing labour-market flexibility.

France: Economic growth in France should remain healthy in 2000. The government deficit was reduced to 1.8% of GDP in 1999. The government is called on to reduce the deficit in 2000 to a level below the one set in the stability programme, to bring expenditure under control and to take every opportunity to reduce the deficit further. In addition, reform of the pension system should be undertaken with a view to ensuring long-term sustainability of government finances.

On product markets, the record in transposing internal market directives should be improved, state aid reduced, the liberalisation of network industries widened and efforts to simplify administrative formalities for business continued. On capital markets, France should facilitate investment by institutional investors in stock markets and improve the tax framework for risk capital.

On the labour market, France is encouraged to reduce the tax burden on labour, review benefit and employment protection systems, and ensure that the 35-hour working week reform does not adversely affect wage costs, labour supply and work organisation.

Ireland: Economic growth will remain exceptional. Government finances are sound. In its budgetary policy, the government should aim to avoid any overheating in the economy, to restrain the growth in public consumption to the level indicated in the stability programme and to accord priority to developing infrastructures while achieving the stability objectives of fiscal policy.

On product and capital markets, Ireland is called on to strengthen competition policy and apply Community law thoroughly, to liberalise the transport sector and to promote venture capital investments. On the labour market, wage developments should be monitored and the participation of women in the labour market increased.

Italy: The prospects for economic growth in 2000 and 2001 are favourable. The stability programme provides for a fall in the deficit to 0.1% of GDP in 2003. With this in mind, the government should exploit any additional headroom to reduce government debt, keep control of current primary expenditure, take measures to contain future expenditure by reassessing the pension system and pursue the privatisation programme.

On product and capital markets, Italy is called on to reduce non-agricultural state aid, to simplify the regulatory environment for companies, to strengthen R&D and innovation, and to encourage venture capital investments. On the labour market, unemployment benefit should be improved, employment protection made more flexible, labour-market flexibility enhanced, notably wages, and taxation on labour and social security contributions reduced.

Luxembourg: Economic growth is expected to remain strong in 2000. As regards budgetary policy, the government is called on to monitor current expenditures and to implement social security reforms as a means of preparing for the challenge of an ageing population. On product markets, Luxembourg is encouraged to reform its competition policy with a view to implementing Community rules fully and to promote development of the information society. On the labour market, the tax and benefit system should be reviewed with a view to promoting an increase in the national employment rate.

Netherlands: Economic growth in the Netherlands is likely to accelerate further in 2000. To maintain healthy government finances and a budget surplus, the government is called on to consolidate government finances, notably by monitoring expenditure. The tax reform should not jeopardise the budgetary situation.

On product and capital markets, the Netherlands should make further progress in enforcing the public procurement directives, should pursue the reform of network industries, raise the involvement of the private sector in R&D and encourage venture capital investment. To maintain a sound labour market, obstacles to activity should be dismantled, especially for women and older people, and the number of people who remain outside the labour market supported by passive income support schemes should be reduced.

Austria: Economic growth will accelerate in 2000. The government deficit should be equivalent to 1.7% of GDP. According to the stability programme, the government should aim to exercise stricter expenditure control in the execution of the budget and implement structural reforms designed to improve the budgetary situation in the long term. The announced pension reform should be implemented.

On product markets, the public procurement guidelines should be further transposed, the process of regulatory reform in the energy and transport sectors accelerated and private-sector involvement in R&D encouraged. On capital markets, the government is called on to upgrade the supervisory framework, develop incentives for equity and risk capital investment, and promote venture capital in general. On the labour market, Austria should reform the benefit and pension system, and in particular early retirement, and should reduce the high tax burden on labour.

Portugal: Economic activity is expected to accelerate in 2000. According to the stability programme, the government deficit should fall to 1.5% of GDP. The government is called on to exercise strict control over expenditure in order to achieve, as a minimum, the deficit forecast, to ensure that budgetary policy contributes to correcting the major imbalances in the economy and to reform health and pension systems.

On product markets, state aid should be reduced, competition law brought more closely into line with Community law, administrative procedures simplified, and R&D and ICT diffusion promoted. Portugal should develop the venture capital market. On the labour market, the government is called on to improve education and training, enhance the performance of the labour market, including by making it more flexible, and encourage partnership among social partners.

Finland: The rapid economic growth in recent years should continue. There is even a risk of overheating. According to the stability programme, the budget surplus should remain above 4% of GDP throughout the period 2000-03. Given the risk of overheating, a tight financial stance should be maintained, government expenditure relative to GDP reduced and the tax burden on labour eased.

On product and capital markets, the government is called on to strengthen competition in a range of sectors, to reform competition law, to open up markets for public services, to promote venture capital and to facilitate investments by institutional investors. On the labour market, Finland should review the overall benefit system, make job-searching more effective and reduce taxes, particularly on low wages.

Sweden: The Swedish economy is expected to continue to grow strongly in 2000. In order to achieve its target of a budgetary surplus of 2% of GDP, the government should tighten the stance of budgetary policy, maintain tight expenditure control and reduce the tax burden, while taking account of the need for budgetary consolidation.

On product markets, rules detrimental to competition should be reviewed in a number of areas, notably construction, pharmaceuticals, railways and air transport. On capital markets, the government should facilitate access to risk capital. In order to improve the labour-market situation, it is encouraged to reduce the burden of taxation on labour income and to adapt the benefit and assistance schemes.

United Kingdom: Economic growth in 2000 is expected to be even stronger. A surplus of 1.3% of GDP is anticipated for the financial year 1999/2000. The underlying position of government finances should be kept broadly unchanged.

On product and capital markets, the government is called on to encourage efforts in the fields of R&D and innovation, to invest more in road and rail networks, and to analyse the reasons for the low level of investment in venture capital by pension funds. On the labour market, it should take measures to address the problem of pockets of unemployment in certain regions and long-term unemployment in general.

5) follow-up work

Commission Report on the implementation of the 2002 broad economic policy guidelines [COM(2001) 105 final - not published in the Official Journal].

KEY ECONOMIC POLICY AREAS

Macroeconomic policies: In 2000 the EU recorded its best economic growth performance of the decade, with GDP growing by 3.4%, thanks to strong domestic and external demand. Higher oil prices moderated this growth slightly towards the end of the year, but inflation, despite gathering pace, remained under control. The ECB raised its key rate on six occasions, to 4.75%. Job creation remained strong and unemployment fell to 8.4%. Budgetary consolidation progressed and the government deficit in the euro area fell to 0.7% (net of UMTS proceeds), slightly better than forecast. Wage developments as a whole remained appropriate.

Fiscal consolidation: All Member States improved their budgetary positions, resulting in an overall decline in government debt. Belgium, Ireland, Luxembourg, the Netherlands, Finland, Sweden and the United Kingdom significantly overachieved their targets. Others were unable to take full advantage of the faster pace of economic growth to improve their budgetary positions.

Quality and sustainability of public finances: Unlike in the 1990s, fiscal consolidation is based on expenditure restraint and not on tax increases. Little progress was made in the reform of public expenditure systems even if the issue of expenditure control is increasingly highlighted. Reforms of benefit systems lacked ambition although some efforts were made in certain countries.

As regards pension systems, Denmark, Ireland, the Netherlands, Austria, Sweden and the United Kingdom carried out reforms, while Belgium, Spain, France, Ireland and Finland created or announced the establishment of pension reserve funds. Some progress was made in reducing the tax burden: for the first time since 1970, the overall tax burden is on a declining trend. Measures were taken to reduce the tax burden, notably on low wages, in a number of countries. The Ecofin Council in November 2000 reached a significant agreement on the key points of the implementation of the tax package designed to curb harmful tax competition and reduce distortions within the single market.

Wage developments: Nominal wage increases in 2000 accelerated from the low rate in the previous year and wage moderation continued to prevail in general. No major initiatives have been taken to reform statutory minimum wages or the collective wage-bargaining process.

Knowledge-based economy: Overall spending on R&D remains at 1.8% of GDP, although this differs significantly between Member States. Europe still lags behind as regards private-sector involvement in R&D. Most Member States took steps to encourage firms to increase spending, particularly via tax measures.

The EU has been catching up with the United States in terms of ICT diffusion. The Internet penetration rate increased by 10 percentage points between April and October 2000 (to 28% of the population). However, there are important differences between Member States. Most countries have taken measures to strengthen ICT education and training.

Product markets (goods and services): The functioning of the single market has been improved thanks to progress in transposing directives in most Member States. Most countries have taken steps to open up public procurement (including Spain and Italy) and headway has been made in regard to competition policy and reducing sectoral and ad hoc state aid.

As regards public utilities, liberalisation of the telecommunications sector has contributed to significant reductions in prices for consumers. Progress is less clear in the energy sector, where differences between Member States persist. In the transport and postal sectors, still more needs to be done, including agreement on a general regulatory framework. The absence of a true internal market in services has led the Commission to adopt a new horizontal strategy for this sector. Headway has been made in reforming the regulatory framework: a number of countries have taken measures to reduce the administrative burden on enterprises.

Capital markets: Implementation of the Financial Services Action Plan has progressed well in many priority areas, such as the creation of a "single passport" for investment firms, electronic commerce, financial services and takeover bids. Progress has also been made in implementing the Risk Capital Action Plan. Countries have taken measures to ease constraints on institutional investors as well as fiscal disincentives to risk-taking. To safeguard the EU's financial stability, the practical functioning of institutional arrangements has been improved, particularly as regards coordination between national supervisors.

Labour markets: The improvement in labour market performance continues and there has been a fall of almost one percentage point in unemployment in 2001. This is due to the cyclical upswing but also to a fall in structural unemployment. It should though be noted that progress has been uneven between Member States since some countries have not taken full advantage of macroeconomic conditions to introduce structural reforms. Member States have made good progress in implementing active and preventive measures to tackle youth and long-term unemployment. There remains scope for further reform of tax and benefit systems designed to introduce incentives to seek and take up employment or to remain in the labour market.

The lack of labour market flexibility is one of the factors underlying high structural unemployment in several Member States. There has been some progress in the modernisation of work organisation but the degree of involvement of the social partners in this area has been disappointing. Measures have been taken in most Member States to address low female employment rates and pay differentials between men and women.

Sustainable development: A number of Member States have taken action to strengthen market-based approaches to environmental issues, e.g. to shift the tax burden from labour to energy. Nevertheless, some Member States continue to grant subsidies for certain sources of energy, such as coal, that have a negative environmental impact. No progress has been made towards agreeing an appropriate framework for energy taxation at Community level.