Broad economic policy guidelines (2002)

1) OBJECTIVE

To improve conditions for economic growth and job creation by way of an economic policy strategy based both on growth- and stability- oriented macroeconomic policies and on structural reforms to promote sustainable, job-creating and non-inflationary growth, while taking account of sustainable development.

2) ACT

Council Recommendation of 21 June 2002 on the broad guidelines of the economic policies of the Member States and the Community [Official Journal L 182 of 11.07.2002].

3) SUMMARY

MAIN PRIORITIES AND POLICY REQUIREMENTS

After a sharp and unexpected slowdown in economic activity and a deceleration in job creation in 2001, economic growth seems to be picking up. An improvement in confidence and in external demand point to a growth rate close to the potential estimated for the European Union (EU) in the second half of 2002. However, it is unlikely that unemployment will drop noticeably before 2003. Inflationary pressures are expected to remain contained.

The EU's goal is to achieve a balanced and sustainable expansion of economic activity. To meet the Lisbon European Council's objective of making Europe the most competitive and dynamic knowledge-based economy by the year 2010, the rate of potential growth must be increased and the pace of economic reform stepped up. Action must concentrate on four main areas:

• Safeguarding and strengthening the macroeconomic framework The EU's macroeconomic framework is based on two pillars: price stability and a sound budgetary policy. To allow automatic stabilisers to operate freely over the economic cycle, while respecting the 3% of GDP government deficit limit, Member States need to redouble their efforts to complete the transition to budgetary positions close to balance or in surplus by 2004. Beyond providing leeway for automatic stabilisers, this will allow for a steady decline in government debt, enabling budgetary challenges, including the ageing of the population, to be dealt with.
• Promoting more and better jobsAlthough the labour market reforms undertaken in the 1990s have produced good results, unemployment, and especially long-term unemployment, is still high in a number of Member States. Obstacles to the geographical and occupational mobility of the unemployed persist. Labour force participation rates for women and older workers remain unsatisfactory. Member States therefore need to take steps to raise participation rates and reduce unemployment. This will require the reform of tax and benefit systems and the labour market. The Barcelona European Council has called for the effective average retirement age to be increased by five years by 2010.
• Strengthening conditions for high productivity growthTo meet future challenges linked to the ageing of the population and to achieve a sustainable GDP growth rate of 3%, the productivity of the European economy must be increased. To boost competitiveness, entrepreneurship and investment, European energy, communication, services and labour markets need to be integrated further.
• Promoting sustainable developmentThe external effects of economic activities on the environment must be priced in. Investments in resource and energy efficiency can promote innovation and job creation. Economic policies can also contribute to economic and social cohesion, since job creation is the best protection against poverty and social exclusion.

GENERAL RECOMMENDATIONS

The broad economic policy guidelines encourage the Member States to take action in the following areas:

Macroeconomic policies

• achieve or maintain budgetary positions of close to balance or in surplus over the economic cycle, and if this is not yet the case, take the necessary action to ensure that these objectives are met (by 2004 at the latest)
• avoid pro-cyclical fiscal policies and allow automatic stabilisers to operate in full as the recovery gets under way
• ensure that wage increases are consistent with price stability and productivity growth

Quality and sustainability of public finances

• promote the quality of public expenditure by redirecting funds towards physical and human capital accumulation and research
• improve the long-term sustainability of public finances by pursing the three-pronged strategy of raising employment rates, reducing public debt and adapting pension systems
• strengthen tax coordination between the Member States

Labour markets

• make employment more attractive by reforming tax and benefit systems
• strengthen active labour market policies by improving their efficiency
• reduce obstacles to mobility and remove barriers to female labour force participation

Structural reform in product markets

• Internal market: increase the transposal rate of Internal Market directives, remove technical barriers to free movement, especially in the services sector and further open up public procurement markets.
• Competition: ensure effective and independent competition authorities to secure effective competition, reduce state aid and ensure its effectiveness.
• Network industries: encourage market entry in general and in the gas and electricity markets in particular. Member States should provide incentives to build new infrastructure

Efficiency and integration of the EU financial services market

• speed up the integration of financial markets to reduce the costs of accessing capital by implementing the Financial Services Action Plan (FSAP) by 2005 and the Risk Capital Action Plan (RCAP) by 2003
• improve cooperation and coordination arrangements at all levels for prudential purposes

Entrepreneurship

• create a business-friendly environment, in particular by simplifying the corporate tax system, increasing the efficiency of public services and reducing barriers to cross-border activity associated with differences between Member States (in accounting standards, corporate governance, taxation and VAT)
• translate into action the commitments made under the European Charter for Small Enterprises
• improve access to finance, especially for small and medium-sized enterprises (SMEs)

Knowledge-based economy

• stimulate research and development (R&D) and innovation by raising overall spending, improving ties between universities and business, enhancing cooperation between Member States, and adopting the sixth Research Framework Programme
• promote information and communication technologies (ICT) by ensuring effective competition and stimulating wider Internet use (definition of a new e-Europe 2005 Action Plan)
• strengthen education and training efforts in order to increase the number of highly qualified personnel and improve the basic skills of citizens

Sustainable development

• conduct social and environmental impact analyses of planned policy measures
• strengthen policies based on economic instruments like taxation, user and polluter charges or voluntary commitments
• introduce an emissions trading system at EU level to meet the requirements of the Kyoto protocol
• encourage the disclosure of environmental information in the annual accounts of companies
• reduce sectoral subsidies and tax exemptions which have a negative environmental impact
• reach a European agreement on energy taxation

COUNTRY-SPECIFIC ECONOMIC POLICY GUIDELINES

Belgium: Economic growth is not expected to exceed 1% in 2002 but should reach some 3% in 2003. Belgium should seek in 2002 to avoid any deterioration in public finances compared with 2001. The goal for 2003 is a budget surplus of 0.5%. Belgium should consolidate reform of the tax systems, increase labour mobility, promote a proper balance between the flexibility and security of employment and increase the employment rate for women. There needs to be an increase in competition in electricity and gas and a reduction in the administrative burden for businesses.

Denmark: Economic growth of 1.75% in 2002 and 2.5% in 2003 is forecast, driven mainly by domestic demand. The Danish budget is in surplus, but Denmark should ensure that the Government's target of restraining growth in government consumption is met. Danish labour market performance is the best in the EU, with an employment rate of 76%, the unemployment rate having been reduced to 4.3% in 2001. Denmark should continue its efforts to open up markets to competition, especially in gas and electricity.

Germany: Economic activity should recover in the second half of 2002, but growth will nevertheless remain below 1%. Germany recorded a budget deficit of 2.7% in 2001, which exceeded the target set in its most recent stability programme. The German Government has therefore undertaken to comply with the 3% of GDP reference value and reach a close-to-balance budgetary position in 2004. Budgetary policy should aim to ensure that the deficit does not exceed 3% of GDP and that it is reduced in 2003 in order to meet the target for 2004. Any budgetary room for manoeuvre should be used to reduce the deficit, and the health care system should be reformed. Germany should reform its tax and benefit systems to make work pay, improve the efficiency of active labour market policies and make work organisation more flexible. It should also ensure effective competition on electricity and gas markets.

Greece: The Government continued its policy of deficit reduction and forecasts a budget surplus of 0.8% of GDP for 2002. Economic growth is expected to accelerate in 2003. Greek budgetary policy should aim not to contribute to inflationary pressures, to apply clearly defined norms for current expenditure and to speed up the reform of the social security systems. Greece should also reform pension entitlements, improve education and training systems, continue to eliminate distortions to work incentives and reform the wage formation system. Business involvement in R&D and information technology diffusion should be encouraged. The public administration needs to be streamlined, and effective competition promoted in liberalised network industries.

Spain: After a slowdown, economic activity should grow in line with potential in 2003. In 2001, the Spanish budget was in balance for the first time in 25 years. The Government should continue its policy of expenditure restraint and ensure that the tax reform in 2003 does not undermine the medium-term stability of public finances. A comprehensive review of the pension system is also needed. On the Spanish labour market, wage formation should be reformed, labour mobility promoted, and participation rates, especially among women, increased. Spain should also reduce the administrative burden for businesses and increase competition, including in the liberalised telecommunications and energy sectors.

France: Economic activity will rebound in the course of 2002. According to the stability programme, the budget deficit should reach 1.9% of GDP before decreasing in 2003; the new Government has launched a public finance audit. The French Government should ensure that the budget deficit does not exceed the 3% of GDP reference value in 2002 and that any tax cuts are deficit-neutral so as to reach a close-to-balance budgetary position in 2004. Structural reforms, especially of the pension system, are needed. France should consolidate recent reforms of the tax and benefit system and monitor the effects of implementing the 35-hour week. It is encouraged to reduce the administrative burden on businesses and to speed up the liberalisation of gas and electricity.

Ireland: With an economic recovery in 2002, Ireland should reach a growth rate of about 5% to 6% in 2003. The stability programme targets a small budget surplus in 2002 and a small deficit for 2003. The Irish Government should ensure that the budgetary stance for 2002 is broadly neutral and should then continue to comply with the close-to-balance or surplus requirement. On the labour market, conditions approaching full employment are expected to continue and Ireland should promote the setting of wages in line with productivity developments. It is encouraged to increase effective competition in the local telecommunications, electricity, gas and transport sectors.

Italy: Economic growth is expected to pick up in the course of 2002, but will remain below 2%, reaching 2.75% in 2003. The stability programme targets a budget deficit of 0.5% for 2002 and a balanced budget in 2003. The Government should ensure that deficit-reduction commitments are kept to and that the tax reform does not undermine the objective of a balanced budget. It should also address the pension system as part of social security reform. Italy is encouraged to continue reforms to increase labour market flexibility, encourage the social partners to allow wages to take more account of productivity disparities, increase labour force participation, especially among women, and reduce the tax burden on labour, especially on low-paid earners. It should promote competition in the services sector and on the energy market. The administrative burden on businesses should be reduced.

Luxembourg: The budgetary surplus is expected to decline again in 2002 but increase moderately in 2003 as the economy picks up. The Government should aim to contain current government expenditure. As regards the labour market, Luxembourg should take steps to increase the national employment rate, especially for older workers and women. The announced reform of competition legislation should be implemented and the administrative burden on businesses should be reduced.

Netherlands: Economic growth of 1.5% is expected for 2002 and 2.75% for 2003. The budget will be in balance in 2002 and moderately in deficit in 2003. The Netherlands should ensure that the budgetary stance does not contribute to inflationary pressures in 2002 and should avoid deterioration in public finances in 2003. The labour market continues to perform very well. The Government should make work pay by reforming the benefit system and the disability scheme. The Netherlands should encourage investment in R&D and remove obstacles to competition in services.

Austria: In 2003, thanks to the economic upturn, output expansion should approach its potential of 2.5%. The stability programme forecasts a balanced budget in 2002 and 2003. To meet this objective, the Government should make structural expenditure savings, especially at decentralised levels of government. The planned reduction in the tax burden should not conflict with the target of budgetary balance. The pension system needs reviewing. The labour market continues to perform very satisfactorily. The Government should promote the diffusion of information and communication technologies and investment in R&D, as well as reducing the administrative burden on businesses.

Portugal: Economic growth should reach 1.5% in 2002 and 2.25% in 2003. Portugal's budget deficit deteriorated in 2001 to well over the target of 1.1%. The Portuguese Government therefore undertook to comply with the 3%-of-GDP reference value and reach a balanced position in 2004. The new Government adopted a rectifying budget in May 2002. Budgetary policy should ensure that the deficit does not exceed 3% of GDP in 2002 and should achieve a close-to-balance budgetary position by 2004. To meet this goal, additional measures beyond those included in the 2001 updated stability programme will be needed. Pension reform should be continued, and health care expenditure curbed. To maintain the favourable labour market situation, Portugal should improve its education and training system, monitor wage developments and modernise the labour market institutions. The Government should also promote investment in R&D and enhance competition, especially in energy.

Finland: Finland should see economic activity pick up in 2002-2003. According to estimates, the budgetary surplus has dropped. Budgetary policy should avoid a significant deviation from the medium-term spending forecasts, improve budgetary discipline at local-government level and continue with pension reform to cope with the ageing of the population. To reduce the unemployment rate, and especially the level of structural unemployment, Finland should take action to make work pay, increase the efficiency of active labour market programmes and refocus them onto long-term unemployment. The Finnish Government should facilitate business creation, enhance competition in the public service sector and reform the application of the Community competition rules.

Sweden: Economic growth of 1.7% in 2002 and 2.8% in 2003 is expected. The Government forecasts surpluses of 1.8% of GDP in both these years. To achieve its target of an average budget surplus of 2% over the cycle, Sweden should continue with the strategy of lowering taxes in 2002, while at the same time adhering to the expenditure ceiling set and maintaining tight expenditure control in 2003. In order to improve the labour market situation even further, Sweden should pursue the reforms of the tax and benefit systems and make active labour market programmes more efficient. The Swedish Government should also enhance competition in public service provision.

United Kingdom: Growth in 2002 is expected to reach 2%. According to the convergence programme, the budget surpluses of previous years will give way to a deficit of some 1% of GDP in the financial year 2002-2003 and following years. Government debt should fall to 36.3% in 2006-2007. The UK should allow public investment to rise, while avoiding any deterioration in public finances. To ensure a dynamic labour market, the UK should reinforce active measures targeted at those most prone to unemployment and should reform sickness and disability benefit schemes. The Government should continue to improve competition in specific sectors and deliver the announced infrastructure investment in the railways.

Last updated: 25.03.2003