COUNCIL RECOMMENDATION of 7 July 1997 on the broad guidelines of the economic policies of the Member States and of the Community (97/479/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 Commission,

Having regard to the conclusions of the European Council in Amsterdam of 16 and 17 June 1997,

HEREBY RECOMMENDS:

1. Main objectives: growth, employment and convergence

Since the summer of 1996, when the previous Guidelines were adopted, a moderate recovery in economic activity has taken hold in the Community. Supply-side fundamentals continue to improve whereas demand prospects are brightening. These developments in combination with an increasingly well-balanced macroeconomic policy mix and the emerging improvement in confidence should allow for a gradual strengthening in output growth to about its trend rate this year and to well above trend next year.

In the present environment, two fundamental policy concerns should be given prominence, with success on both fronts being mutually reinforcing. Firstly, although employment is expected to increase moderately in the short run, there is a need to raise the Community's low employment rate and to reduce unemployment significantly as emphasized in the Dublin Declaration on employment: 'The Jobs Challenge`. Secondly, despite appreciable strides in recent years towards the goals of price stability and sustainable public finances, further progress is required. This also contributes to achieving and maintaining a high degree of convergence so that a significant number of Member States will be in a position to participate in Economic and Monetary Union (EMU) as from 1 January 1999. In the coming quarters, it is of crucial importance to avoid any doubt about the strict application of the Maastricht criteria and the 1999 launch date for the single currency so as to reassure European citizens and businesses that the opportunities brought by EMU will indeed be seized, thus fostering growth and employment. Since the pursuit of sounder budgetary positions will bring important growth and employment benefits over the medium term, continuing budgetary consolidation efforts are in the interest of all Member States.

With the single Market and EMU, the Community is becoming one of the most important economic entities in the world. Its medium to longer term potential in terms of technological progress, labour and wealth creation is considerable. In order to exploit fully this potential for raising the standard of living, the Community must progressively achieve a high employment rate. Such a performance would also help to safeguard the sustainability of pension schemes, in a reformed manner, which form an integral part of the social protection systems in the Member States.

Restoring a sustained, high rate of non-inflationary growth, based on sound public finances, will create a favourable environment, both from a political and social point of view, for dealing with the Community's unemployment problem.

However, since structural deficiencies continue to restrain both growth and the degree to which growth can be translated into additional employment, most Member States need to implement structural reforms.

A high employment rate can be achieved only if productive capacity is large enough. The current investment ratio does not seem to provide for this. It is essential therefore that the currently favourable investment conditions, in terms of high profitability and low interest rates, are maintained. In addition, the realization of the transeuropean transport, energy and communication networks should be actively pursued, with the existing Community financial instruments and the European Investment Bank (EIB) playing a key role and with a greater involvement of the private sector. Investment in human resources, knowledge and skills can also help in developing stronger employment growth as also emphasized in the Commission's report 'Europe as a economic entity`.

Against this background, the Member States and the Community are urged, in accordance with Article 102a of the Treaty, to conduct their economic policies with a view to making significant progress towards sustainable, non-inflationary growth respecting the environment and a high level of employment, which are among the objectives stipulated in Article 2 of the Treaty. To this end, they are also called upon to coordinate their policies (Articles 3a and 103) within the context of increased integration of their economies.

2. Growth and stability-oriented macroeconomic policy mix

The present Guidelines reaffirm that the achievement of sustained, investment-supported output growth and job creation over the medium term without inflationary tensions continues to require a common macroeconomic policy strategy which builds further on the following three elements, as formulated in the 1996 Guidelines:

- 'A stability-oriented monetary policy whose task is not undermined by inappropriate budgetary and wage developments,

- sustained effort to consolidate the public finances in most Member States consistent with the objectives of their convergence programmes,

- nominal wage trends consistent with the price stability objective; at the same time, real wage developments should be below the increase in productivity in order to strengthen the profitability of employment-creating investment.

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

The recommendation on nominal wage trends can be considered, where appropriate, according to the past trends in the share of wages in the total added value.

With regard to medium-term prospects, EMU will lock in the fundamental change in the macroeconomic policy mix which has been progressively achieved in the Community and which has to be taken fully into account by the social partners and economic agents.

(i) A single monetary policy under the responsibility of an independent European Central Bank will have price stability as its primary objective while, without prejudice to this objective, supporting the general economic policies in the Community so as to contribute to the achievement of the objectives laid down in Article 2 of the Treaty.

(ii) The Treaty provisions in the field of budgetary policy (Articles 104 to 104c) and the Stability and Growth Pact will ensure sound and disciplined budgetary policies. Subject to these legal provisions, responsibility for budgetary policies will reside with the sovereign national governments which will have to coordinate their policies in the framework of the Broad Economic Policy Guidelines.

(iii) As regards wages, which are determined by autonomous social partners according to individual countries' practices, stability-oriented monetary and budgetary policies and the impossibility of exchange rate movements within the euro area will reinforce both the conditions and the incentives for an adequate evolution. These incentives should also be strengthened by an intensified social dialogue with all relevant parties, where possible and according to prevailing traditions, at the national level. A well-functioning wage formation process is a necessary requirement for high economic growth and reduces unemployment. At the Community level, the Commission, in accordance with Article 188b, will continue to develop the social dialogue, notably on macroeconomic policy issues, with a view to building on the common understanding of the economic policy strategy laid down in the Guidelines. The European social partners' contribution on the macroeconomic framework transmitted to the Dublin European Council constitutes an important step in the right direction which should be encouraged.

A cooperative application by everyone involved in economic decision making of this new framework will help to establish the conditions for sustained, high and employment-creating growth in the Community.

3. Price and exchange rate stability

Price stability

The Community has made considerable headway towards price stability and inflation convergence which is an essential requirement both for achieving sustained medium-term growth and for adopting a single currency. Inflation in the Community on average is expected to fall to 2 ¼ % in 1997, the lowest rate since the Community's inception. In the EMU perspective, Member States should aim at price stability and to target such a level over the medium term.

In nearly all Member States, the rate of inflation was low or came down significantly in the early part of 1997. In April 1997, fourteen Member States had an inflation rate (1) of 2 % or less.

Inflation fell rapidly in recent months in some Member States (in particular Spain, Italy and Portugal), but it is not yet reflected fully in their average rate of inflation observed over the last year (2). In April 1997, the average rate of inflation observed over the last year was at or below 2 % in nine Member States (Belgium, Denmark, Germany, France, Luxembourg, the Netherlands, Austria, Finland and Sweden); it was between 2 and 2,5 % in Ireland and the United Kingdom (3); and it was around 3 % in Spain, Italy and Portugal. Provided the good recent inflation performance in the latter countries is maintained, the average rate of inflation observed over one year will decline in the months ahead.

In Greece, where substantial progress in reducing inflation has been made over recent years, reinforced efforts are needed in order to bring inflation down to the official inflation targets of 4,5 per cent by the end of 1997 and to below 3 per cent by the end of 1998.

Exchange rate stability

In accordance with Article 109m, all Member States must continue to treat their exchange-rate policies as a matter of common interest. Finland and Italy entered the exchange-rate mechanism (ERM) in the autumn of last year and a significant majority of ERM currencies have registered a remarkable stability. Sounder and more credible economic policies, including budgetary policies, have contributed to a more appropriate alignment of exchange rates within the Community. In this context, as well as with a view to participation in EMU, it is imperative that Member States maintain - and where appropriate intensify - their commitments to stability-oriented macroeconomic policies. For countries which are not currently participating in the ERM, these policies would also contribute to creating the conditions for making such participation possible. Sound macroeconomic policy management creates the conditions for stable exchange rates and low long-term interest rates within the Community and contributes to a stable international monetary system.

4. Sound public finances

In the Community as a whole, the actual budget deficit declined from 5 % of GDP in 1995 to 4,3 % of GDP in 1996. Slow economic growth in 1996 made efforts at budgetary consolidation more difficult and masked the underlying improvement which was achieved. On the basis of the budget measures decided upon until mid-April 1997, the net borrowing of general government in the Community as a whole is likely to fall to just below 3 % of GDP in 1997, declining further to 2,5 % of GDP in 1998.

In their budgets for 1997, a large majority of Member States have taken significant measures to reduce their budget deficits to 3 % of GDP or less. It is of paramount importance that Member States rigorously implement these budgets and take immediate corrective action in the event of slippage from budgetary targets. As regards the budgets for 1998, an enactment of additional deficit-reducing measures is required in most Member States in order to achieve their convergence programme targets. This would serve to provide the needed confidence about the sustainability of the budgetary adjustment, especially in those countries where the budget deficit is not expected to be clearly below 3 % of GDP in 1997 or where the 1997 budget contained temporary measures or where the ratio of debt to GDP is not diminishing sufficiently and approaching the reference value at a satisfactory pace. This resolve is needed not only to comply with the Maastricht budgetary criteria but also to make further progress towards the attainment, over the medium-term, of the objective of a budgetary position close to balance or in surplus as referred to in the Stability and Growth Pact, thereby safeguarding a growth and stability-oriented macroeconomic policy mix.

It is necessary that budgetary adjustment programmes are credible and sustainable. The burden of adjustment should be allocated in a fair and just way. To be credible, it is important that programmes are transparent. Transparency requires that commonly agreed accounting rules and economic principles are strictly applied. Furthermore, annual budgets and medium-term budgetary projections should clearly indicate the underlying economic assumptions. To be sustainable, it is essential that deficit-reducing measures form part of a clearly stated medium-term strategy, including necessary structural reforms as stated in convergence programmes and from the beginning of Stage 3 in the stability or convergence programmes. These programmes should be closely monitored at the Community level.

Realizing the economic rewards of budgetary consolidation crucially hinges upon the quality of the measures taken. In this respect, the present Guidelines reaffirm the general principles which have been identified in previous Guidelines. Firstly, in most Member States, it is desirable to give more prominence to expenditure restraint than to an increase in the overall tax burden, taking account, where necessary, of the relationships between systems for social transfers and the tax system. In these Member States action should focus on structural measures to control better spending on public consumption, public pension provisions, health care, passive labour market measures and subsidies. If tax increases are unavoidable, care should be taken to minimize the adverse effects on growth and employment and to avoid a revival of inflationary pressures. Secondly, to the extent possible and without threatening the necessary reduction in budget deficits, government spending priorities may favour productive activities such as investment in infrastructure, human capital and active labour market initiatives. Thirdly, the desired reduction in the tax or social contribution burden in most Member States should be carried out consistently with the achievement and maintenance of sound budget balances. Demographic changes in Member States will put strain on public expenditure over the next years. In this respect, Member States should review the financial sustainability of their social protection and public pension schemes and timely implement reforms.

Given the interrelationship between taxation policy on the one hand and the Single Market, EMU and the fight against unemployment on the other, Member States stand to gain from increased cooperation in tax measures. Harmful competition between the tax regimes of the different Member States should be avoided. In this respect, Member States are called upon to examine, among other possibilities, the establishment of a code of conduct, setting out politically binding principles of fair tax competition.

As regards individual Member States, five - Denmark, Ireland, Luxembourg, the Netherlands and Finland - already respected the 3 % reference value in 1996. In Denmark where the budget balance is expected to turn positive this year, it is important to consolidate this performance over the business cycle and to keep the public debt-to-GDP ratio on a steady downward trajectory. Ireland should take advantage of the current strong growth phase to intensify efforts to restrain public expenditure, thereby making further progress towards a balanced budgetary position. A continuation of the restrained expenditure policy is also essential in the Netherlands and Finland, with a particular focus needed on social security transfers, offering the opportunity to lower further non-wage labour costs, income taxes or other employment-impeding taxes.

In Belgium, the budget deficit is expected to reach 3 % of GDP or less in 1997. On the basis of current policies, the deficit is likely to fall further in 1998. To pursue further budgetary consolidation, the Belgian government should strictly adhere to its new convergence programme. Particular attention should be given to ensuring sound social security accounts, with key elements being the introduction of effective mechanisms to control better health care spending and the continued pursuit of pension reforms.

In Germany, the budget deficit is expected to reach 3 % of GDP or less in 1997. On the basis of current policies, the deficit is likely to fall slightly further in 1998. The German government has made a firm commitment to take all the necessary measures to respect the 3 % reference value in 1997 and should take the necessary action to arrest the upward trend of the public debt-to-GDP ratio. The pace of budgetary consolidation should be maintained in 1998 in line with the new convergence programme. Continued budgetary consolidation should focus on a further reduction in the share of government spending in the economy - including reforms in the tax and social security systems. This could lead to a relief in the tax and contribution burden without threatening a strict adherence to the budgetary objectives of the new convergence programme.

In Spain, the budget deficit is expected to reach 3 % of GDP or less in 1997. On the basis of current policies, the deficit is likely to fall slightly further in 1998. In their 1998 budget, the Spanish authorities, which are fully committed to reaching the deficit target of 3 % of GDP in 1997, should pursue further budgetary consolidation as envisaged in the new convergence programme. It is important to continue the implementation of structural deficit-reducing measures, particularly to curb current expenditure and improve the efficiency in budgetary management.

In France, the budget deficit is expected to reach 3 % of GDP or less in 1997. On the basis of current policies, the deficit might not fall significantly further in 1998. It is essential that budgetary consolidation should be put on a sustainable basis over the medium term by implementing its recently agreed convergence programme without fail. In particular, it is necessary to contain health spending and to balance the social security accounts and to ensure that any further tax reductions, in themselves supportive to growth and employment, will not slow down the pace of deficit reduction.

In Italy, with the new measures taken in March, the budget deficit is expected to reach 3 % of GDP in 1997. The Italian authorities are urged to take all necessary measures to ensure that this target is reached. In order to achieve a reduction of the public deficit below 3 % in 1998 and in the following years, it is essential to fully implement the recently approved convergence programme. The objectives set out by the programme should be considered by the Italian government as ceilings, with a view to preventing shortfalls and to fostering faster decline in the government debt ration. In the 1998 budget, prominence should be given to measures with a permanent effect on deficit reduction, including structural measures, as the latter will also have a favourable impact on the efficiency of the entire economic system. Of crucial importance is the reform of the welfare state and the Italian tax system.

In Austria, the budget deficit is expected to reach 3 % of GDP or less in 1997. On the basis of current policies, the deficit is likely to fall slightly further in 1998. The Austrian government is urged to take all the necessary measures to meet its budget deficit target of 3 % of GDP in 1997 and to secure the sustainability of its budgetary consolidation efforts in subsequent years through a programme of ongoing and, where necessary, reinforced structural adjustments.

In Portugal, the budget deficit is expected to reach 3 % of GDP or less in 1997. In their 1998 budget, the Portuguese authorities, which are fully committed to reaching the deficit target of 2,9 % of GDP in 1997, should pursue further budgetary consolidation as envisaged in the new convergence programme. On the basis of current policies, the deficit is likely to fall slightly further in 1998. The new strategic agreement between the government and the social partners should be strictly complied with in order to achieve significant progress in reforming public administration and the social security and taxation systems.

In Sweden, the budget deficit is expected to be less than 3 % of GDP in 1997. On the basis of current policies, the deficit is likely to fall considerably further in 1998. Sweden should continue to implement the convergence programme implying improved public finances as well as carry on the regular follow-up of the programme.

In the United Kingdom, the budget deficit is expected to reach 3 % of GDP or less in 1997. On the basis of the previous Government's projections, the deficit is projected to fall further in 1998. It is recommended that the new Government establish an effective framework establishing sustainable fiscal consolidation.

As regards Greece, where announced measures are expected to lead to a further reduction in the government budget deficit in 1997, sustained efforts on a wide range of fronts are required in order to meet the targets of the convergence programme, including reinforced efforts to widen the tax base, to increase the efficiency of the tax administration and of the tax collection system, to curb government spending and to pursue and extend privatization plans. The deficit is expected to fall further in 1998.

Just in the same way as the Member States, the Community also is called upon to continue to maintain strict budgetary discipline. Strict budgetary discipline must be applied to all categories of the financial perspectives, while respecting the Interinstitutional Agreement on budget discipline and improvement of the budget procedure.

5. Better functioning product and services markets

In order to safeguard and promote the EC's competitiveness, employment and living standards in a world of free trade and constant technological change, it is essential that Member States and the Community, in line with the Brad Guidelines for Economic Policies, intensify their efforts to modernize their markets for goods, services and labour. In order to increase the ability of the Member States' economies to adapt to changing conditions and to enhance the growth potential, there is also a need to promote innovation, research and development and to improve education and training systems. To increase the efficiency of environmental policies contributing to economically and environmentally sustainable developments, they should rely on more market-based instruments both at the national level and - if EU-wide action appears necessary - at Community level.

As part of the strategy to foster growth and employment, while achieving price stability, it is essential to improve the operation of product and service markets, to stimulate competition, to foster invention and innovation and to ensure efficient price setting. This was the rationale for the Single Market Programme (SMP), the importance of which has clearly been highlighted in the Commission's recent evaluation (4). The conclusion of that evaluation was that on the one hand Member States' product markets are now generally highly integrated; on the other hand, the markets for services are less integrated, although the situation has improved significantly since the start of the SMP. Particular problems clearly remain. Services, especially insurance and banking as well as construction, should become the subject of more attention, particularly on the need to fully implement Single Market legislation. In addition Member States should take steps necessary to increase the efficiency of their public services.

Furthermore, product markets associated with public procurement continue to escape the full force of competition; other product markets continue to be excessively regulated by the Member States. Consumer face higher prices as a result. State aids continue to distort markets and blunt competition without any sign of improvement. Product standards, especially the concept of 'mutual recognition` is another area where progress has been too slow. The business environment for SMEs should be improved. In this respect their access to information should be quickened and made more user-friendly and measures should be taken to streamline regulations (the SLIM initiative).

Competition in, and the efficiency of, product and service markets will be improved by making the Single Market work better, with additional Member State commitment to: (i) implement fully and ensure proper enforcement of the existing legislative framework, particularly in the telecom sector; (ii) to make further progress on the legal framework in areas such as taxation and company law; (iii) complete the liberalization of the energy markets in the framework of existing directives and directives under negotiation; (iv) reduce the burden of over-regulation and to revise or remove national, market fragmenting measures; and (v) avoid using state aids to postpone essential restructuring. The Commission's Action Plan on the Single Market proposes a number of concrete actions that should be in place before 1 January 1999 to redynamize the Single Market.

The Community should further reform its own policies in accordance with the requirement in Article 102a of the Treaty that the Member States and the Community shall act in accordance with the principle of an open market economy with free competition, favouring an efficient allocation of resources, and in compliance with the principles set out in Article 3a.

6. Fostering labour market reforms and investment in knowledge

The positive experience of a number of Member States permits some important policy conclusions to be drawn both on the content and on the implementation of reforms. Firstly, structural reforms need to be comprehensive in scope, as opposed to limited or occasional measures, so as to address in a coherent manner the complex issue of incentives in creating and taking up a job. This approach allows policy complementarities to be exploited, thereby increasing the overall effectiveness of reforms and, by enhancing their social and political acceptability, reducing the likelihood of policy reversal. Secondly, mechanisms to monitor the impact of reforms on the labour market and on employment help asses the effectiveness of the reform and indicate the need for possible changes in priorities or implementation. As a result, the multi-annual employment programmes need to focus more on the interplay between the Guidelines and specific labour market measures whereas, the joint Employment Reports, which monitor their application, need to pay particular attention to the identification of good practices arising from the Member States policies.

A wide array of measures aimed at reinforcing labour market efficiency have been adopted in recent years at the national level and important reforms are currently under discussion in a number of Member States. This process should continue and, where necessary, be intensified. In this context, the challenge is to reconcile the maintenance of cohesive societies and the need to enhance job creation. Priority should be given to:

(i) higher employment growth fostered by the maintenance of appropriate wage trends and by wages that better take into account differences qualifications and regions. This is an important task for the social partners;

(ii) reductions in non-wage labour costs and lower income taxes which maximize job opportunities;

(iii) reform of the taxation and social protection systems, which should be linked to improving the functioning of labour markets;

(iv) new patterns of work organization, including more flexible working-time arrangements, tailored to the specific needs of firms and workers; greater use of voluntary part-time work and the promotion of local employment initiatives;

(v) adaptation of the whole educational system - including vocational training - both to the needs of markets and to the improvement of human capital, thereby fostering the growth potential of the economy. In this respect, priority should be given to improving the employability of the unemployed, in particular low skilled, inexperienced labour, and to reducing skill mismatches on the labour market by providing training better fitted to the changing needs of the labour market.

In addition, these reforms need to be supported by a stronger employment orientation in other policies. In particular, measures undertaken with the assistance of the Community's structural funds should also fit into the global employment strategy and the multi-annual employment programmes of the Member States.

Done at Brussels, 7 July 1997.

For the Council

The President

J.-C. JUNCKER

(1) As measured by the latest monthly harmonized index of consumer prices (HICP) relative to the same month one year earlier.

(2) As measured by the arithmetic average of the latest twelve monthly harmonized indices (HICP) relative to the arithmetic average of the twelve monthly harmonized indices of the previous period.

(3) For Ireland and the United Kingdom, the assessment is based on the Commission's own estimates since both countries have not yet published HICP data in a manner which allows the calculation.

(4) See Commission Communication on 'The impact and effectiveness of the Single Market` (COM(95)520, October 1996) and 'Economic Evaluation of the Internal Market` (European Economy, Reports and Studies, No 4, 1996).