Broad economic policy guidelines (1999)

1) OBJECTIVE

To ensure high and sustainable economic growth and employment via a comprehensive and coherent strategy comprising sound macroeconomic policies and policies that improve adaptability.

2) ACT

Council Recommendation of 12 July 1999 on the broad guidelines of the economic policies of the Member States and of the Community [Official Journal L 217 of 17.08.1999].

3) SUMMARY

The launch of the euro on 1 January 1999 marks a great achievement in the process of European integration. At the same time, the Union must face new challenges, since the economic and social situation in each of the Member States will be increasingly influenced by economic developments and policies in partner Member States. The lasting success of economic and monetary union will demand discipline from all policy actors, including the social partners, as well as a deepened and strengthened policy coordination. A new institutional framework favourable to growth, employment and price stability has been established together with enhanced surveillance and coordination instruments. Now the task is to put them into practice.

Since the summer of 1998 the economic recovery in Europe has slowed down as a result of the global crisis. On the back of sound economic fundamentals and confidence-building economic policies, economic activity should soon regain momentum and take off again to exceed its potential rate in 2000, against a background of low inflation. With regard to the level of unemployment, although the employment rate remains relatively low, the pace of job creation has quickened, and in 1998 the unemployment rate dropped below 10%. It is the countries that have accompanied sound macroeconomic policies with structural reforms that have achieved the greatest improvement in their performance. It is necessary to invest in infrastructure and skills in order to accelerate the development of those sectors of the economy based on high technology.

The achievement over the medium term of economic growth and high and sustainable employment will require a comprehensive and coherent strategy that consists of three components:

• sound macroeconomic policies conducive to price stability fully coordinated with wage setting;
• policies that improve the overall functioning of labour markets;
• economic reforms that enhance the efficiency and flexibility of goods, services and capital markets.

All economic policy actors are jointly responsible in the strategy to achieve self-sustaining, non-inflationary, investment-supported growth. All actors must ensure that the EU enjoys appropriate wage developments, sound public finances, economic reforms and a stability-oriented monetary policy. The European Employment Pact should define the process whereby all the policy actors enter into a dialogue with a view to achieving the Union's central economic and social objective of high employment within the framework of a strong and sustained medium-term growth process. There is no doubt that such a project requires coordination both at national and European level. At European level, it is indeed necessary to reinforce the dialogue between the Commission, the Council, the European Central Bank (ECB) and the social partners.

A policy mix conducive to growth, employment and stability in the euro area should comprise commitments regarding budgetary policies, wage developments and structural policies. The progress achieved in budgetary consolidation should be built on. This will create the necessary scope to face adverse cyclical developments, reduce the vulnerability of budgets to rising interest rates, make government spending and taxation more conducive to growth and job creation, and help countries prepare for the longer-term budgetary challenges associated with an ageing population. The Member States must therefore:

• improve their budgetary positions through expenditure restraint rather than through tax increases;
• ensure the efficiency of their public finances (for example by reviewing pension systems, investing in human capital, reducing the overall tax burden and strengthening tax coordination at Community level).

The non-euro-area Member States will need to conduct their monetary and budgetary policies so as to maintain and/or improve their convergence in terms of inflation and budgetary position, in preparation for the adoption of the euro. Greece and Denmark must comply with the exchange rate criterion given that their currencies participate in the new exchange-rate mechanism (ERM II).

The euro area is to take on global responsibilities; it must speak with one voice and must be represented effectively.

With regard to the economic situation in each individual Member State, the task is to identify the weak points and seek appropriate policies (macroeconomic, structural) to remedy them. The situation in each country is as follows:

- Economic growth will decelerate in Belgium in 1999 to about its trend rate, but should be sufficient to bring about a decline in unemployment.

- Economic growth in Denmark is likely to slow down in 1999 as economic activity is close to capacity limits and in response to counter-cyclical budgetary measures at central government level. Unemployment is likely to stabilise at its present level.

- Germany is experiencing a very significant slowdown. This is due to a generally greater exposure to weaker world trade and some specific domestic influences (such as the depressed construction industry). This situation could interfere with the decline in unemployment the country had begun to see.

- Economic growth in Greece has been strong in recent years and any slowdown in 1999 is likely to be modest. Unemployment is expected to decline gradually.

- Continued growth is expected in the Spanish economy, although at a somewhat lower rate than in previous years. A further decline in the still very high level of unemployment is anticipated.

- Economic growth in France will decelerate in 1999 to about its trend rate. A further but less rapid decline in unemployment is expected.

- Very rapid growth in the Irish economy is expected to continue in 1999, albeit not as strongly as in the previous two years. Unemployment should decline further at a significant pace.

- Economic growth in Italy is weak, with both domestic and external demand lacking strength, and there has not yet been any significant decline in unemployment.

- Economic activity in Luxembourg in 1999 is not expanding as rapidly as in 1998. The employment rate is very high.

- After several years of rapid expansion, the Dutch economy is slowing down in 1999. The already low unemployment rate is likely to fall further.

- The situation in Austria is similar to that in the Netherlands.

- Economic growth in Portugal is expected to slow, but it will remain close to the trend rate and should allow a further decline in unemployment.

- Although the Finnish economy is expected to slow down in 1999, unemployment should continue to fall.

- The situation in Sweden is similar to that in Finland.

- Economic growth in the United Kingdom in 1999 is likely to be lower, accompanied by a gradual rise in unemployment.

In the matter of budgetary policy, the measures introduced by the Member States under the Stability and Growth Pact have borne fruit in Denmark, Ireland and Sweden. However, most Member States (Belgium, Germany, Greece, Spain, France, Italy and Portugal) must be vigilant as regards their budgetary policies. The other countries must focus on the systematic control of spending in order to maintain the overall balance of their public finances. The first signs of an ageing population are beginning to appear in some Member States (e.g. Finland), which requires adjustment of social spending on pensioners.

Transposal of the single market directives appears to be causing problems in most Member States (Belgium, Greece, Spain, France, Ireland, Italy, Luxembourg, Netherlands, Austria, Portugal and the United Kingdom). Several Member States seem reluctant to carry through the policy of liberalisation in certain areas such as telecommunications, transport, postal services and energy. They should continue and step up their efforts in this direction.

In Germany, Greece, France, Italy, Austria, Portugal and the United Kingdom, measures appear to be required in the field of innovation and it is up to Member States to reduce the administrative red tape which hampers the creation of new businesses.

Some Member States (Spain, Luxembourg, Portugal, Italy, Ireland and France) still have to adapt their national legislation to comply with Community competition law.

The United Kingdom is showing the most encouraging performance in the Union with regard to employment, thanks to an employment policy based on a high level of flexibility. Employment rates in Belgium, Greece, France and Italy are very low and in Spain the rate is extremely poor. It is necessary to introduce training programmes targeting the long-term unemployed and their integration into the working environment. These measures must be accompanied by income tax concessions that will encourage people into work.

Last updated: 25.10.2002