86/667/EEC: Council Decision of 22 December 1986 adopting the annual report on the economic situation in the Community and laying down economic policy guidelines for 1987

31 . 12 . 86 Official Journal of the European Communities No L 385 / 1
II
(Acts whose publication is not obligatory)
COUNCIL
COUNCIL DECISION
of 22 December 1986
adopting the annual report on the economic situation in the Community and laying down
economic policy guidelines for 1987
( 86 / 667 / EEC)
HAS ADOPTED THIS DECISION :
Article 1
The Council hereby adopts the annual report on the
economic situation in , and economic policy guidelines to be
followed by , the Community , contained in Part I of the
Report annexed hereto , and lays down the economic policy
guidelines to be followed by the Member States , contained in
Part II of the said Report .
Article 2
This Decision is addressed to the Member States .
THE COUNCIL OF THE EUROPEAN COMMUNITIES ,
Having regard to the Treaty establishing the European
Economic Community ,
Having regard to Council Decision 74 / 120 / EEC of 18
February 1974 on the attainment of a high degree of
convergence of the economic policies of the Member States of
the European Economic Community ( J ), as amended by
Decision 75 / 787 / EEC ( 2 ) and by Decision
79 / 136 / EEC ( 3 ), and in particular Article 4 thereof,
Having regard to the proposal from the Commission ,
Having regard to the opinion of the European
Parliament ( 4 ), Done at Brussels , 22 December 1986 .
For the Council
The President
G. SHAW
Having regard to the opinion of the Economic and Social
Committee ( 5 ),
(') OJ No L 63 , 5 . 3 . 1974 , p. 16 .
( 2 ) OJ No L 330 , 24 . 12 . 1975 , p . 52 .
( 3 ) OJ No L 35 , 9 . 2 . 1979 , p. 8 .
( 4 ) OJ No C 322 , 15 . 12 . 1986 .
( 5 ) OJ No C 333 , 29 . 12 . 1986 .

31 . 12 . 86 Official Journal of the European Communities No L 385 / 3
ANNUAL ECONOMIC REPORT
1986 / 87
No L 385 / 4 Official Journal of the European Communities 31 . 12 . 86
ANNUAL ECONOMIC REPORT 1986 / 1987
CONTENTS
Part I — Reduction of unemployment in a more dynamic European economy
For an effective implementation of the cooperative Community strategy
Page
1 . Summary and conclusions
2 . Evolution of the economy and convergence
2.1 . The world economy
Box : Economic consequences of the oil price counter-shock
2.2 . The economic outlook in the Community
2.3 . Nominal and real convergence in the Community
3 . The cooperative growth strategy for more employment
3.1 . Objectives and methods
3.2 . Forecasts for 1986 and 1987 seen from the viewpoint of the cooperative strategy
3.3 . Macroeconomic policy imperatives in 1987 and beyond
Box : Medium-term scenarios for the cooperative strategy
4 . Contribution of policies to the cooperative strategy
4.1 . Monetary guidelines and coordination questions
4.2 . Budgetary policy
4.2.1 . Budget deficits , public debt , growth and employment
4.2.2 . Public expenditure , taxation , growth and employment
4.3 . Wages and the labour market
4.3.1 . Incomes and wage costs
4.3.2 . Adapting the labour market for more employment-creating growth
4.4 . The adaptability of markets
4.5 . Financing Community policies : the budget and financial engineering
4.6 . Social dialogue
6
11
11
16
18
25
36
36
39
41
48
49
49
54
54
55
60
60
62
65
68
71
4.7 . International economic policy coordination 72
31 . 12 . 86 Official Journal of the European Communities No L 385 / 5
Part II — Economic policy in the Member States
Page
Application of the cooperative growth strategy for more employment in the Member States in 1987
Belgium
Denmark
Federal Republic of Germany
Greece
Spain
France :
Ireland
Italy
Luxembourg
Netherlands
Portugal
United Kingdom
75
76
79
82
85
88
91
94
97
100
102
105
107
No L 385 / 6 Official Journal of the European Communities 31 . 12 . 86
ANNEX
PART I
REDUCTION OF UNEMPLOYMENT IN A MORE DYNAMIC EUROPEAN ECONOMY
FOR AN EFFECTIVE IMPLEMENTATION OF THE
COOPERATIVE COMMUNITY STRATEGY
1 . SUMMARY AND CONCLUSIONS
compared with the trend in recent years , when
unemployment has been rising or remaining station­
ary at a high level .
However , such progress does not yet mean full
employment . There remains an urgent need for
complementary measures , particularly as regards
youth unemployment and long-term unemployment ,
if relatively large groups of the population are not to
be left jobless for a long time to come . The political
and social long-term implications of such a
development could be disastrous . The sectoral and
regional changes associated with the necessary
adjustment of production structures and
technological progress also require back-up measures
to take account of the social dimension : the faster the
Community economy regains its momentum , the
easier it will be to deal with problems here .
If the Community strategy is to be successful , there
must be evolution , in some cases substantial , in
economic policies and behaviour compared with the
past . Such changes are under way . They must be
speeded up and consolidated . It is a question of
ensuring that economic agents make a balanced
contribution to the success of the strategy and that the
acceptance of economic policy is reinforced . The
social dialogue at Community level , and in particular
at national level , is therefore an important instrument
in implementing the strategy .
1.2 . This Annual Economic Report 1986 / 87 examines
economic trends and outlook and updates economic
policy guidelines in the light of the Community
strategy .
1.1 . In adopting the last Annual Economic Report
( 1985 / 86 ), after taking note of the favourable
opinions of Parliament , the Economic and Social
Committee and the European social partners , the
Council endorsed the Commission's proposed
'cooperative growth strategy for more employment' in
the Community .
The aim of the strategy is to achieve a significant and
lasting reduction of unemployment over a period of
several years . Unemployment in Europe is the result of
serious economic and social disequilibria . It cannot be
overcome with ad hoc measures that merely treat the
symptoms . The Community strategy takes both the
macro- and microeconomic , as well as the social
aspects of the problem , into account and attempts to
tackle unemployment at its root . At a macroeconomic
level , this means that there must for some time to come
be continued moderation in the growth of real wages ,
but that at the same time there must be an appropriate
evolution of demand conforming to stability
requirements . This combination will strengthen
profitability , investment and employment . At the
microeconomic level , paying due regard to the social
aspects , the adaptability of markets for goods ,
services , capital and labour must be improved , and , in
particular , the establishment of new firms , the
development of vocational training and the
introduction of new technologies must be promoted .
This will facilitate the necessary structural change ,
generate a new economic impetus and make it possible
to improve further the competitiveness of the
European economy , taking advantage of the large
European internal market .
The more dynamic and more employment-creating
growth resulting from such a policy was illustrated
with an annual rate of some 3 to 3,5 % at Community
level for the period 1986 to 1990 . This might be
associated with average employment growth of some
1 to 1,5 % a year , which would allow the average
unemployment rate in the Community to be brought
down by just under four percentage points by
1990 ( 1 ). This would represent major progress
1.3 . The Community 's economic environment has
changed considerably as a result of the fall in oil
prices , the normalization of the dollar exchange rate
and the fall in interest rates . The oil-consuming
industrial countries have never experienced such a
sharp improvement in their terms of trade in so short a
period of time in the post-war years . The devaluation
of the dollar took place against a background of better
coordination , to which the Plaza agreement in1 1990 : EUR 10 some 7% , EUR 12 some 8%
31 . 12 . 86 Official Journal of the European Communities No L 385 / 7
or manufactured output , these countries could be
constrained to reduce further their growth and
their imports .
September 1985 and the results of the Tokyo Summit
in May 1986 contributed . The fall in interest rates
constitutes welcome , but insufficient , assistance for
the highly indebted developing countries . The recent
negotiations on Mexico 's foreign debt and domestic
adjustment policy can also be seen as an example of
positive developments . The agreement reached in
Punta del Este in September 1986 to start a new round
of multilateral trade talks in the framework of GATT
lends strength to the hope that the trend towards
protection can be halted and reversed .
But even if there is a favourable development of the
world economy , the Community will not be receiving
any great stimulus towards growth from world trade
in the next few years . This is due to the nature of the
necessary process of adjustment : a reduction in the
huge United States trade deficit , and consolidation of
the position of the OPEC and developing countries .
For the Community , this is a further reason to
reinforce international cooperation to facilitate the
necessary adjustments at the world level and intensify
its effort to augment its own growth potential .
Despite these positive developments at international
level , considerable efforts are still necessary if the
major problems facing the world economy are to be
solved . There remains an urgent need to improve the
international monetary system . If there is to be a
return to an acceptable distribution of current account
balances at world level , there must be a gradual
reduction in the United States budget deficits and
expansionary fiscal measures in Japan , together with a
further rise in the value of the yen . The most
important contribution that the Community and the
EFTA countries can make to this international process
of adjustment is to reinforce their own growth on solid
foundations . An adequate expansion of world trade
depends therefore basically on a stronger growth in
Japan and Europe . Moreover , the problem of the
heavily indebted developing countries can be resolved
only in the longer term against a background of
stronger world-wide growth .
1.4 . Within the Community, the moderate upswing is
continuing in 1986 , and will probably persist in 1987 .
According to forecasts , growth in real GDP should
accelerate slightly ( 1985 : 2,4% ; 1986 : 2,5% ; 1987 :
2,8 % ) but it has not yet reached the level which would
be possible and necessary in order to secure a
substantial and lasting fall in unemployment in the
Community . Certainly , the threshold beyond which
economic growth produces higher employment is now
appreciably lower than it was in the sixties or
seventies . An increase of some 0,8 % in employment is
expected in 1986 and 1987 . The labour force is
continuing to grow, however , which is due less and
less to demographic factors and increasingly to
changing labour market behaviour ; the average
unemployment rate in the Community will fall only
slightly (EUR 9 : 1985 : 11,1% ; 1986 : 11% ; 1987 :
10,8% ). This is still thoroughly unsatisfactory .However , compared to present forecasts , the growth
prospects for world trade could be significantly
reduced by the serious risk factors weighing upon the
international economic environment . These risks can
be identified as follows : Similarly unsatisfactory is the pattern of growth
across the regions and Member States of the
Community. Before the first oil shock , the
less-developed regions and countries were clearly
catching up in terms of real GDP per head , but this
process has since come to a halt or has even partially
been reversed . In 1986 and 1987 there seems still to be
no real convergence under way . Promotion of this
process is an essential element in reinforcing the
economic and social cohesion of the Community .
— a significant further devaluation of the dollar or
uncontrolled movements of exchange rates .
— an insufficient or inappropriate adjustment
process in Japan and the United States which could
lead to a rapid increase in protectionism - in spite
of the intentions declared at Punta del Este - , a
recession in the United States or a resurgence of
inflation ,
— a major further change in the price of oil ,
— an aggravation of the situation of the developing
countries : confronted with the continued drop in
the terms of trade for the primary materials which
they export and a lack of sufficient external
financing or growing outlets for their agricultural
In overall terms , growth in the Community now
derives from internal demand. This shift occurred in
the first half of 1986 , hesitantly at first , and meant
that last spring's growth forecasts for 1986 had to be
revised downwards slightly . The dynamic elements in
real domestic demand are now investment in
equipment ( 1986 : 6,1% ; 1987 : 6,9% ) and private
consumption ( 1986 : 3,7% ; 1987 : 3,5 % ); investment
in construction is recovering , while public
consumption continues to grow very slowly . Despite
No L 385 / 8 Official Journal of the European Communities 31 . 12 . 86
will take account of the lower rate of inflation in most
countries . Concerning this last point , the importance
of the social dialogue is evident .
the worsening in the real current account balance for
goods and services , which has negative repercussions
on growth , the Community's nominal current account
surplus is continuing to rise temporarily ( 1985 : 0,5 %
of GDP; 1986 : 1,2% ; 1987 : 0,9% ).
These developments primarily reflect the considerable
improvement in the terms of trade as a result of the
falling price of oil and the devaluation of the dollar .
The Community's oil bill has been halved ; the
purchasing power of private households will increase
considerably in 1986 and 1987 in most countries ; yreal
wage costs per head show practically no increase in
1986 , but could speed up again in 1987 ; the
profitability of firms has improved , even if the
Community average is still far below the level which
obtained before the first oil shock ; in some
Community countries , the improvement in the terms
of trade has partially been used to take measures in
order to relieve the pressure on public budgets .
1.5 . The clear improvements in supply-side conditions
achieved over the last few years and the positive effects
of the fall in the price of oil are not sufficient to move
the Community spontaneously towards a path of
adequate and employment-creating growth allowing
unemployment to be reduced in the way which is
desired . Medium-term studies show that , despite the
better conditions , the average growth rate for the
years 1986 to 1990 could continue to lie below 3 % ,
and that in these circumstances unemployment in the
Community of Twelve could still be above 10% in
1990 . One reason is that , in the next few years , there
will be no strong stimulus towards growth coming
from the international environment . The Community
cooperative growth strategy for more employment,
which was adopted last year and is summarized in
point 1.1 above , has not lost its relevance . Quite the
reverse , it must now be implemented deliberately and
with determination. It is in this way that the
improvement under way in supply conditions and
behaviour can be put to the service of a faster growth
of employment and that the favourable conditions
resulting from the fall in the oil price and lower
inflation can be best exploited . If this opportunity is
not seized in 1987 and 1988 , it will no longer be
possible to reduce unemployment in the Community
significantly by the end of the decade .
The sustained growth of investment by enterprises
which is apparent in 1986 and forecast for 1987 not
only supports demand but also leads to an increase in
productive capacity. However , the overall level of
investment: in the Community ( as a percentage of
GDP ) remains about four points lower than its level
before the first oil shock , and the increase in
productive capacity and creation of new jobs still need
to accelerate progressively . An increased investment
effort therefore remains necessary for several years .
The effective implementation of the Community
strategy for growth and employment is also an
important element for achievement of the major
projects and tasks that the Community is committed
to in the medium-term . In this context , there is a
particular link of mutual reinforcement . The
encouragement of technological advance and the
completion of the internal market will supply an
essential boost to the economic potential and
competitivity of the Community ; simultaneously , the
achievement of this task will be significantly aided -
from the social point of view also - if implementation
of the strategy leads effectively to a more vigorous and
employment-creating growth . This growth should
greatly help the catching-up process of backward
regions and the reconversion of declining industrial
regions ; simultaneously , the reinforcement of the
economic and social cohesion of the Community and
the renewal of the process of real convergence should
contribute to increasing the economic potential and
dynamism of the Community . Finally , growth with
stable monetary conditions should facilitate the
development of the EMS and monetary cooperation ;
at the same time the creation of a zone of monetary
stability encourages trade , reinforces integration and
dilutes the impact of external shocks .
There has been a further fall in inflation rates, and a
strengthened convergence towards greater stability .
This favourable development is also largely due to the
improvement of the terms of trade . The fall in import
prices , notably for oil products , puts a brake on the
rise in the consumer price index and leads , in most
countries , to a slower growth in nominal wages and
costs . But this must also be regarded as a success for
the more convergent stabilization policies pursued for
several years in the EMS and the Community . The
average inflation rate in the Community (private
consumption prices 1986 : 3,7% ; 1987 : 3,0% ) has
now fallen to a level which has not been seen
for 20 years . This greater stability and price
convergence must be maintained and consolidated .
Some optimism seems justified in this regard . Even if
capacity utilization rates have risen , the recovery in
investment is beginning to contribute to an increase in
capacity , and the point at which tensions appear may
be receding . Moreover , the evolution of import prices
does not seem to imperil internal stability in 1987 and
there are chances that the growth of nominal wages
31 . 12 . 86 Official Journal of the European Communities No L 385 / 9
themselves more easily sustain private consumption
and , at the same time , produce additional revenue for
the public authorities as well as lower expenditure .
1.6 . In 1987 and during the following years , the effort to
improve supply conditions and the adaptability of
markets must be pursued . However , when the positive
impact of the improvement of the terms of trade fades ,
it will be necessary to sustain internal demand,
consistently with the goals of medium-term
consolidation of public finance .
Business investment should and can be the most
dynamic factor . It would suffice that present trends
become more dynamic to arrive at the expansion
necessary for achievement of the objectives of the
Community strategy . Any investment is , of course ,
based on a realistic economic assessment ; this is why it
is important to pursue efforts to improve profitability ,
reduce real interest rates on a sound basis and promote
the use of risk capital . However , the decision to invest
also depends upon confidence and entrepreneurial
readiness to take risks ; thus a positive influence
must be brought to bear on these attitudes . The
contribution of entrepreneurs therefore is to respond
to increasing profitability with higher , and more
job-creating investment .
1.7 . Public finance policy has an important but
particularly difficult role to play in implementing the
Community strategy . The goal of medium-term
consolidation of public finances should be further
pursued . At the same time , it is important that all
existing and future room for manoeuvre should be
exploited in a determined fashion , and as quickly as
possible , in order to improve the conditions governing
supply and demand through the lowering of taxes and
social security contributions and by stepping up public
investment . This margin comes from supplementary
receipts and lower expenditures resulting from more
vigorous growth and the increase in employment .
However , the room for manoeuvre available to the
various Member States differs very considerably . The
situation appears to be most favourable in Germany
and Luxembourg . In France , existing room for
manoeuvre is being used , large tax reductions already
being foreseen for 1987 and supplementary
reductions announced for 1988 , while the budget
deficit would be simultaneously reduced in each of the
two years . If growth were to strengthen still further
abroad , and , particularly in the Community ,
budgetary policy in France would be facilitated all the
more . In the United Kingdom , the Government , in its
autumn statement , provided for an increase in public
expenditure of some £4 750 million in 1987 / 88 . This
will mean that public expenditure in 1987 / 88 is
planned to be about 2 % higher in real terms than the
estimated out-turn in 1986 / 87 . On the other hand ,
the persistent , excessively high deficits and the level of
the public debt in Belgium , Greece , Ireland , Italy and
Portugal mean that priority must continue to be given
to the consolidation of public budgets . In recent years ,
Denmark has shown that this can be campatible with a
favourable trend in business investment and in
employment . Although , in the final group of countries
(Denmark , Spain , the Netherlands ), budgetary
constraints are less severe , other factors in the
foreseeable future limit the scope for macroeconomic
action .
Public investment and infrastructure investment in the
broader sense, which must not all be financed from
public funds , should likewise form a dynamic
component of demand . Public investment has suffered
from the consolidation of public finance; since the
beginning of the 1970s , its share of Community GDP
has declined by almost 1 ,5 percentage points . There is
now a need to make up for the ground lost as far as
economically viable projects of this kind are
concerned . Here , the necessary initiatives must be
taken , both at national and Community level , and the
private and public resources required must be made
available . The room for manoeuvre enjoyed by the
public authorities as a result of restructuring and
additional revenues or decreased expenditure through
growth and employment should , to some extent , be
exploited in implementing such projects .
In the next few years , private consumption, as the
biggest aggregate in domestic demand , can also
sustain demand . The moderate increase in real wages ,
increased employment and the lowering of taxes and
social security contributions , due to the use of
increased budgetary room for manoeuvre , enable
private consumption to rise in the medium term at real
rates of growth which approximate to GDP growth
rates . In this connection , it is important that
reductions in taxation and social security
contributions are effected relatively early on , while
adhering to the goal of medium-term consolidation of
public finances . At a later stage , when the profitability
of firms has strengthened and there is a greater
increase in employment , growth in employment and
gradually accelerating increases in real wages can
In 1987 and 1988 it will therefore probably only be
possible for a small group of countries to use
budgetary policy to exert an overall influence on
supply and demand conditions . It is also of
importance that the number of such countries is
increasing as the economic recovery is further
progressing . This beneficial chain reaction must be
reinforced through concerted action . In addition , all
Member States continue to have supplementary room
for manoeuvre to create more favourable conditions
for increasing employment through the restructuring
of public revenue and expenditure ( including the
selective dismantling of subsidies ). These possibilities
should not be underestimated and an exchange of
No L 385 / 10 Official Journal of the European Communities 31 . 12 . 86
experiences should take place . The principle of
restructuring should also apply to the Community
budget .
should rapidly show up in a stronger rise in
employment . Some reduction of social security
contributions could also help to strengthen
employment . However , this should rely on the use of
available financial headroom and should not affect
either the quality of social protection regimes or their
financial balance . Moreover , adjustments of certain
excessive or outdated labour market rules and
regulations could help to create new jobs . A large
number of initiatives to promote job creation ,
especially for the self-employed and in small
businesses , have been taken or are being examined ;
they should be encouraged and experiences in this
field exchanged .
In many cases , the measures to improve the
adaptability of markets , and in particular , the labour
market , have important social repercussions that
should be discussed in detail with the social partners .
Some of them are largely a matter of free collective
bargaining between the two sides of industry . This is
true , for example , of the reorganization and reduction
of working time , which can likewise make the growth
process more employment-creating provided it has a
neutral impact on the level of costs .
In this connection , the principle set out in last year's
Annual Economic Report should continue to apply ,
namely : 'The spirit in which the debate about market
adaptability is held is important for its success . The
objective behind efforts to increase flexibility is not to
destroy achievements made on the social front but to
create more jobs . As far as at all possible , therefore ,
economic efficiency should be reconciled with the
maintenance and further development of social
achievements .'
1.8 . Despite the considerable changes that have occurred
in the international monetary environment , the basic
principles governing monetary policy in the
Community do not need to be adapted . The aim of
monetary policy should continue to be appropriate
financing of the available scope for real growth and , at
the same time , consolidating and , where necessary ,
extending the successes that have already been
achieved in regard to the reduction in inflation rates .
Until now , the task of monetary policy has been
greatly facilitated by external economic
developments . The devaluation of the dollar and the
decline in oil prices and United States interest rates
have created further headroom for interest-rate cuts
without posing any risks on the inflation front . A
further sharp fall in the dollar might require a flexible
response on the part of interest rates in Europe in
order to counter the danger of a renewed overshooting
of the dollar , together with the adverse repercussions
this would have in the medium term . However , care
must be taken here to ensure that there is no new
build-up of inflationary potential . The erosion of
inflationary expectations and the stronger trend of
aggregate saving are also expected to bring about a fall
in long-term real interest rates on a sound basis in
most countries . This is consistent with the strategy .
The EMS has shown itself to be a stabilizing factor .
Closer convergence coupled with moves to liberalize
capital movements has accentuated the need for
tighter economic policy coordination , not only
domestically between monetary policy , budgetary
policy and income trends but also between Member
States . The progress that has been made in
establishing a zone of monetary and currency stability
is reducing the dependency on external influences .
This provides a sound basis for further progress in
integrating the economies of Europe .
1.10 . If the Community growth strategy ' for more
employment is to be successful, it is important that the
guidelines it contains should also be translated into
practice in all Member States . This is true both of
macroeconomic and microeconomic measures in the
economic policy field and of the social dialogue at
Community and national level .
In its communication , due for presentation to the
Council ( Economic and Financial Affairs ) in July
1987 , the Commission intends to conduct an interim
assessment of the way in which the Community
strategy is being implemented . Discussion of the
Commission's interim assessment could provide the
Council (Economic and Financial Affairs ) with an
opportunity to fulfil the mandate assigned to it by the
European Council of The Hague 'to follow progress in
implementation of the cooperative growth strategy
adopted at the end of 1985 .' In this context , and in
order to facilitate this work , the Commission invites
governments of the Member States to submit by the
beginning of May a short report on the initiatives and
tangible economic policy measures taken by them in
1.9 . The measures to improve market adaptability and the
business environment , to foster the establishment of
new and , in particular , small and medium-sized
businesses , to promote vocational training as well as
to encourage the development and application of new
technologies , must be advanced as a matter of
priority . Completion of the internal market is an
essential element for reinforcing competition and
improving markets . Labour market policy is
especially important for the achievement of
employment-creating growth . The social partners
should continue to pursue moderate real wage
increases conducive to employment until such time as
employment-creating investment becomes sufficiently
profitable and the unemployment rate shows a
continuing marked decline from one year to the next .
Substantial progress has been made in moderating real
wage increases in most countries in recent years and ,
provided there is adequate growth in demand , this
31 . 12 . 86 Official Journal of the European Communities No L 385 / 11
their own country . These reports , possibly
accompanied by reports compiled by the social
partners , could be discussed in the Economic Policy
Committee and as a part of the European social
dialogue .
At national level , the social level , the social dialogue
on the various aspects of the Community strategy has
not made sufficient headway in many countries . The
Commission is , therefore , calling on Member States'
Governments , pursuant to Article 3 of Council
Directive 74 / 121 / EEC of 18 February 1974 on
stability , growth and full employment in the
Community 0 ), to take the necessary initiatives ,
taking into account the particular conditions in
individual countries .
In addition , the Commission invites the social
partners to engage , if appropriate on their own
initiative , in dialogue at the national level on the
themes of the Community strategy .
(') OJ No L 63 , 5 . 3 . 1974 , p. 19 .
2 . EVOLUTION OF THE ECONOMY AND CONVERGENCE
2.1 . The world economy A halving of the dollar price implies a fall in the cost of the
western world's consumption of some US $ 220 000 million .
Over a half of this oil is traded internationally implying lower
payments to net oil-exporting countries from net oil
importers of about US $ 120 000 million . The fall in the
Community's total oil bill ( including domestic production),
based on 1985 consumption levels , is worth some 85 000
million ECU (2,5 % of GDP), while the net oil import bill
will fall by some 60 000 million ECU ( 1,8 % of GDP).
In the last 18 months , there have been three striking
developments in the world economy — the halving of dollar
oil prices , a correction of the dollar's overvaluation and the
reduction in interest rates . All of these three interconnected
developments will help the world economy move back
towards a more stable growth path in the medium term .
Nonetheless , the short-term forecast of world economic
growth is not much more optimistic than it was at this time
last year . Growth in the OECD area as a whole is expected to
be about 2,5 % in both 1986 and 1987 , slightly less than in
1985 .
The slowing of inflation caused by the oil price cut has
helped in the lowering of interest rates . In the United States ,
short-term rates declined by 1 V2 percentage points in the year
to July 1986 , while long-term rates declined even more , by
2 V2 percentage points . There were similar falls in the
Community (where short-term rates also declined by 1 V2
percentage points and long-term rates by 2 percentage
points ). The marked easing in monetary policy , especially in
the United States , has significantly contributed to these
interest-rate movements ( see Graphs 8 and 9 ).
Oil prices have fallen from a range of US $ 25 to 30 per barrel
in 1985 to US $ 10 to 15 per barrel during the course of this
year . The proportionate fall is even greater measured in
European currencies . Thus the spot oil price fell in dollars by
around 50 % in the 12 months to September 1986 ; in ECU it
fell some 65% . The impact will not be limited to the oil
market itself but there will also be widespread indirect
effects , namely the reduction in the oil bill , the
disinflationary impulse , the beneficial consequences for
potential output in industrial countries and thus the
possibility of economic policies consistent with a faster rate
of growth . A halving of the price of oil is unprecedented and
the effects on the world economy cannot be predicted at all
surely .
Lower oil prices and interest rates lead to higher profitability
in energy consuming industries , with the likelihood that
industrialists may either increase new investment or delay
scrapping of older plant . This would imply a certain
'supply-side' increase in potential output .
Prices as low as US $ 10 to 15 per barrel are expected to
induce a significant increase in oil consumption and a greater
energy intensity of growth which would be even more
marked if domestic prices of other energy sources were to
adjust to this fall . Domestically , this risks accentuating
problems associated with the protection of the environment .
Externally , allied to the fall in oil supply from producing
countries , a marked increase in consumption of oil and
oil-based products would increase the probability of a rapid
recovery in their price .
The widespread falls in interest rates are a welcome but
insufficient help for the heavily indebted developing
countries . A generalized decline in interest rates of 1
percentage point is worth around US $ 7 000 million per
year to the indebted developing countries ( reflecting the
extent of their short-term or floating rate debt). However ,
at the same time , the indebted developing countries have
suffered a further deterioration of their terms of trade
(- 1,7% in 1985 ) and a fall in their export earnings
(- 1,6% in 1985 and - 0,9% forecast for 1986 ). As a
No L 385 / 12 Official Journal of the European Communities 31 . 12 . 86
countries have improved greatly in 1986 ( by 7 V2 % but by
more than 30% excluding intra-OECD) trade ), the largest
improvement recorded since the war . However , the volume
of world imports ( excluding the Community), weighted by
the Community's market shares , is likely to grow only very
slowly ( about 1,3% in 1986 , 2,4% in 1987). This
underlines the growing need for a domestically generated
economic expansion in Europe as a whole .
result , they incurred a larger deficit on current account and
were on the whole unable to increase their growth rate
(4,1 % in 1985 and 3,3 % forecast for 1986 ). In particular ,
the oil exporters (mainly OPEC but also Mexico , China and
Malaysia ) face a period of austerity , implying a cut in
imports . The prospects are , however , better for some newly
industrialized countries ( for example Taiwan and South
Korea ) where the alignment of their currencies to the
weakening US dollar has given them a great competitive
advantage .
Present economic indicators signal for 1987 neither strong
growth nor a recession in the world economy . However ,
there are risks attached even to this rather moderate outlook ,
and the hypothesis of the Commission as regards world trade
could prove to be optimistic . Thus :
The fall in the dollar to date , although large ( 33 % against the
ECU in the 18 months to September 1986 , 40% against the
yen ), is not on its own sufficient to equilibrate rapidly the
United States trade account . In the first half of 1986 , the fall
in oil prices countered the effects on the terms of trade of the
dollar's devaluation . However , dollar oil prices are not , in
the Commission's short-term forecasts , expected to fall much
further , so rising non-oil import prices will thereafter worsen
the terms of trade . In time, this will lead to an adjustment in
United States export-import volumes ; but for 1986 and
1987 , it is not yet possible to anticipate an improvement in
the trade deficit since expenditure on imports could increase
faster than receipts from exports (J-curve effect ). Moreover
the current account is being progressively weighed down
with the interest service burden of the accumulating foreign
debt of the United States . These factors mean that the United
States current account deficit is expected to remain well in
excess of US $ 100 000 million in 1986 and 1987 . The
surpluses of the Community and Japan will increase
substantially in 1 986 because of the oil price effect . As a share
of GDP, Japan's surplus could be over 4% in 1986 , a
percentage four times greater than that of the
Community .
( i ) The depreciation of the dollar has not yet led to an
acceleration of inflation in the United States . However ,
it is probably only a matter of time before the dollar's
depreciation results in more marked import prices for
the United States , and some upward adjustment of
world commodity prices denominated in dollars .
Therefore , the risk of resurgent inflation should not be
underestimated . If a contractionary budgetary policy
required to reduce the budget deficit were to coincide
with a tightening of monetary policy either to prevent
an excessive fall of the dollar's exchange rate or to
choke off a rapid increase in inflation , then a recession
there could well result ;
( ii ) Oil prices could recover more rapidly than presently
expected , especially if , as began to be the case already in
mid-1986 , OPEC-countries were able to act in concert
to restrict output . It is possible that the fixing of quotas
by the OPEC countries in mid- 1986 has already begun
a movement in this direction . However , it must be
recognized that the oil price is now potentially volatile
in both directions .
( iii ) The international debt and banking system as a whole is
still exposed to the possibility of major country defaults
stemming from high international indebtedness and the
rather unsatisfactory outlook for developing
countries .
As regards domestic adjustment policies in the United States,
the Gramm-Rudmann-Hollings Deficit Reduction Act ,
enacted at the end of 1985 , sought to impose rigid budgetary
discipline reducing the federal budget deficit to zero over five
years . However , the outlook for the achievement of this
objective remains uncertain . Nevertheless , the pressure for
deficit reduction from the US $ 230 000 billion level of fiscal
year 1986 is strong , implying a restrictive US fiscal policy for
several years . Budgetary policy in Japan remains geared
towards the objective of strengthening the public finances in
the medium term . In the autumn , a programme of measures
supporting domestic demand was , indeed , adopted by the
Government including , in particular , accelerated spending of
3 000 000 000 000 yen ( 1% of nominal gross domestic
product ) on public works . Despite these measures , it appears
nevertheless that the repercussions of the gains in the terms of
trade to the whole economy , and in particular to consumers ,
are only coming through unevenly and have not as yet
generated the stimulatory effect which was initially
expected .
In the last year, the world economic environment has
changed dramatically with the lower oil price and dollar
exchange rate and lower interest rates . The magnitude and
the suddenness of the associated improvement in the terms of
trade of the oil consuming industrialized countries is
unprecedented in post-war history. It should be expected that
domestic demand in the industrialized countries will be
strong enough to avoid a slowdown in the trend of world
demand and output. However, the economic adjustment
process will take time and there is a danger of disruptions in
The overall growth in world trade of manufactures should
remain moderate . The terms of trade of the industrialized
31 . 12 . 86 Official Journal of the European Communities No L 385 / 13
this process towards a new, more balanced state of the world
economy. Industrialized countries in particular must
implement specific, coordinated policies in order to benefit
fully from the improved supply side conditions and to
accelerate the process of correcting the major balance of
payments disequilibria . The debt situation of the developing
countries is also still precarious, and represents a risk to the
international economy.
TABLE 1
World output , trade and prices
1984 1985 1986 1987
Real gross domestic product —
% change on preceding year:
EUR 12 2,2 2,4 2,5 2,8
Other OECD 5,5 3,4 2,6 2,4
— USA 6,5 2,8 2,8 2,3
— Canada 5,0 4,5 3,3 2,8
— Japan 5,7 4,5 2,0 2,4
— rest OECD 3,3 3,6 2,5 2,4
Total OECD 4,4 3,0 2,6 2,5
Volume of world inports —
% change on preceding year:
Including EUR — world import weights
Excluding EUR — world import weights
Excluding EUR — EUR markets weights
9,3
10,4
7,5
3,4
2,2
1,9
3,8
2,3
1,3
4,4
3,1
2,4
World export prices in US $ —
% change on preceding year:
Raw materials excluding fuels
Crude oil ( fob )
Manufactured products
- 1,5
- 4,5
- 2,8
- 10,5
- 3,0
- 1,2
3,2
- 47,3
17,3
- 1,6
- 12,9
4,0
Balance on current account — billions of US S.­
EUR 12
Other OECD
— USA
— Canada
— Japan
— rest OECD
2,8
- 67,5
- 101,6
1,9
35,1
- 3,0
14,4
- 74,4
- 117,7
- 1,7
49,2
- 4,3
50,5
- 65,8
- 139,5
- 5,4
85,0
- 6,0
43,5
- 75,5
- 140,5
- 6,5
79,0
- 7,6
Total OECD - 64,7 - 60,0 - 15,3 - 32,0
OPEC countries
Other developing countries i 1 )
Other countries ( 2 )
- 6,0
- 20,0
25,2
1,4
- 22,2
5,0
- 32,2
- 22,3
- 1,4
- 24,8
- 21,2
- 0,7
Errors and omissions - 65,5 - 75,8 - 71,1 - 78,6
( ! ) Other developing countries include China , Yugoslavia and South Africa .
( 2 ) Other countries exclude intra-Comecon trade .
Source: Commission services ( based on October economic forecasts ).
No L 385 / 14 Official Journal of the European Communities 31 . 12 . 86
TABLE 2
The savings / investment balance for the United States , Japan and the Community (% of GNP/GDP)
Source of funds Use of funds
Private
savings
Private
Investment
Surplus
savings
Current
account
surplus
+
General
Govt ,
deficit
USA 1985
1986
1987
17,2
16,4
15,9
16,6
16.5
16.6
0,6
- 0,1
- 0,7
- 2,9
- 3,5
- 3,3
+
+
+
3.5
3,4
2.6
Japan 1985
1986
1987
32,9
34,2
33,5
28,0
28,9
29,5
4,9
5,3
4,0
3,7
4,3
3,5
+
+
+
1,2
1,0
0,5
21,7
22,4
22,6
EUR 12 1985
1986
1987
16,1
16,5
17,0
5,6
5,9
5,0
0,5
1,2
0,9
+
+
+
5,1
4,7
4,1
NB: National accounts data for USA , Japan and the Community are not on a strictly comparable basis .
Source : Commission services ( based on October 1986 economic forecast ).
31 . 12 . 86 Official Journal of the European Communities No L 385 / 15
GRAPH 1
The price of oil
Average import prices of crude oil in the Community (EUR 12 ) in US $ , ECU and in real terms
(Index 1973 = 100)
(') Deflated by the price deflator of private consumption .
Source : Eurostat and Commission services .
No L 385 / 16 Official Journal of the European Communities 31 . 12 . 86
Economic consequences of the oil price counter-shock
The fall in oil prices is one of the major factors in the economic situation in 1986 . Assuming an oil price
of US $ 15 a barrel on average in 1986 (a plausible , if not certain , assumption ), the decline on the
1985 dollar price is 45 % . The major depreciation of the dollar against the ECU has further amplified
this development , with the ECU price of a barrel of oil in 1986 about 55 % down on the 1985 price .
The extent of the decline , in view of the important role played by oil as a source of energy in our
economies , suggests that this oil price counter-shock will have major implications for the outlook of
the economies of Europe .
These implications will affect both the short-term and the medium-to-long-term outlook , and they
will extend not only to supply and demand , but also to economic policy . Two preliminary reservations
must , however , be stated :
— The assumption is made here of a definitive fall in the oil price . The consequences are thereof
assumed to have the necessary time to work through to their full extent ( in contrast to the scenarios
presented in the main body of the text where the oil price recovers in the medium term). As a result ,
no delay in the reactions of economic agents is introduced while , in economic reality , uncertainty
on the durability of the fall potentially slows down changes in behaviour .
— Besides , other developments ( e.g. the depreciation of the dollar ) have also occurred in 1986 which
interfere with the consequences of the oil counter-shock alone . The favourable effects which can
be expected for Europe cannot , therefore , be translated into an immediate and precisely
predictable improvement in the European short-term economic situation .
TABLE 3
Estimated effects of the decline in oil prices from US $ 27 to 15 per barrel
Level of
GNP
( as % )
Level of
consumer prices
( as % )
Level of
employment
( as % )
Current balance
( as % of GNP)
1986 1987 1986 1987 1986 1987 1986 1987
Estimates of
the Commission (*)
Germany 1,4 1,7 - 1,7 - 2,4 0,9 1,2 1,4 0,3
France 0,9 1,9 - 1,4 - 2,2 0,9 1,2 1,5 0,9
Italy 0,3 2,1 - 1,2 - 2,9 0,2 0,7 1,5 0,5
United Kingdom 0,3 0,9 - 0,3 0,2 0 0 - 1,4 - 0,7
EUR 10 0,9 1,4 - 1,4 - 2,2 0,5 0,9 1,0 0,5
Estimates of the
Hermes model ( 2 )
France 1,1 1,9 - 3,5 - 4,4 0,3 0,5
Sources :
(') These estimates have been made by the Commission services and are not directly based on econometric models . The estimate
for the Community as a whole (EUR 10 ) is based on figures for individual countries .
( 2 ) The Hermes model (Harmonized European research for macrosectorial and energy systems) is based on the assumption that
30 % of increased profits are invested in the modernization of industry .
31 . 12 . 86 Official Journal of the European Communities No L 385 / 17
In the short term, two direct effects of the oil price counter-shock will appear : first , income transfers
from oil-producing countries to net oil-importing countries ; and secondly , widespread reduction in
the production costs of oil users . If oil prices average US $ 15 a barrel , substantial transfers of income
will take place ; equivalent to 1,8 points of GDP for the European Community , with marked
differences between countries depending on their degree of dependence ( ranging from 4,1 points for
Portugal to - 0,8 points for the United Kingdom). Taken separately (*), this would lead to a more
rapid growth in GDP at constant prices , the level of which at the end of two years would be 1,5 %
higher than that which would have been the case without the fall in oil prices . However , these
favourable effects will be attenuated by the decline — indeed , probably , the collapse — of imports by
oil-producing countries , although it seems to be agreed that the overall impact will still be postive for
European countries . In addition , the fall in oil prices should ease public deficits ( savings in expenditure
on energy of from 0,1 to 0,5 percentage points of GDP and growth in real terms in the base of taxation
and other compulsory contributions ).
The improvement in the terms of trade due to the oil price counter-shock will also lead to a very
marked decline in the rate of inflation in the European countries (except probably in the United
Kingdom because of the depreciation of sterling). The decline might be almost 2 % by the end of two
years . This has already led to a major fall in nominal long-term interest rates ( - 2,0 points from July
1985 to July 1986 for the Community), while , paradoxically , the decline in short-term rates seems
more hesitant , as it is strongly associated with exchange-rate movements . The decline in interest rates
plays an important role because of the improvement in the solvency of borrowers , even in the short
term , as a function of the percentage of their borrowing that is subject to adjustable rates . The trend
towards disinflation should also facilitate the task of the monetary authorities .
In the long-term, the staying power of these effects will depend crucially on whether oil prices remain
low , but also on economic expectations of oil prices . Even if oil prices were to remain close to US $ 15
a barrel for some time , they could then begin to rise again under the combined pressure of increasing
world demand for oil and declining supply . The long-term effects are thereof shrouded in uncertainty .
Supply effects which , by definition , come through fully only in the medium-to-long term , would arise
mainly from an increase in profitable capacity . Certain investment plans that would not have been
implemented without the oil price counter-shock , because it would have been impossible to generate
adequate profit margins , can now go ahead , owing to the improvement in expected profitability . In
the early years , this effect may be reinforced by decisions to postpone the scrapping of older
equipment , which will remain profitable for longer as a result of the fall in oil prices . Although these
pure supply effects are difficult to evaluate , they might lead to an increase in productive capacity of
2 to 5 % in the long term for the Community as a whole .
The fall in oil prices has major consequences for economic policy . It is likely , sooner or later ,
depending on the country concerned , to loosen the various constraints on monetary and fiscal policy
as inflation declines , public deficits contract and the balance on current account improves in most
Community countries . The indirect consequences leading to a greater margin for manoeuvre of
economic policy would increase . This can only help towards the implementation of the cooperative
growth strategy for more employment .
(') This figure is based on the ceteris paribus assumption , in particular unchanged economic policy , and is thus
additional to the effects of other shocks (Gramm-Rudman-Hollings Law , weakness of the dollar , etc .).
No L 385 / 18 Official Journal of the European Communities 31 . 12 . 86
2.2 . The economic outlook in the Community level , thus becoming the main factor supporting the upswing .
The highest growth rate of private consumption , just under
5% , will be achieved in Germany .
The fundamental changes in the economic environment
mentioned — halving of the oil bill , correction of the US $
exchange rate , decreases in interest and inflation rates —
have improved the growth prospects in Europe in the
medium term . However , at the beginning of 1986 , the
economy's upturn , which in any case was rather modest ,
showed signs of faltering . Oil producers had cut their
demand for industrial goods faster than the oil consumers
have increased their domestic demand . OPEC and Comecon
countries in particular , which in 1985 together accounted for
more than a third of total Community exports to third
countries , even reduce significantly their imports in 1986 ( by
around 25 % and 11 % in volume , respectively ). In addition ,
most non-oil developing countries could barely step up their
imports in 1986 due to external debt problems , low
commodity prices and associated lack of foreign exchange .
Non-Community OECD countries did increase their
imports , but in total the Community's export markets will
barely expand in 1986 . As a result , in addition to the loss in
price competitiveness , Community exports at constant prices
could even fall somewhat . It is thus mainly because
intra-Community imports are buoyant that member
countries exports in 1986 will increase by about 2,2% in
volume terms , less than half as much as in 1985 ( 5,7% ).
Alongside private consumption , investment continues to
support the economic recovery , even though growth rates
here are not as high as those which were typical of earlier
upswings . This is mainly due to less expansionary investment
in construction which in 1986 , however , will grow by
around 2,3% , after declining in 1985 (—-2,6% in real
terms ). Investment in equipment is by contrast still on a clear
upward trend ( real increase around 6% ). This is confirmed
by the most recent surveys of investment in European
industry . According to this survey , last autuam's already
expansionary investment plans of industrial companies for
1986 have been revised upwards in nearly all the member
countries ( from +7 to + 10% in real terms ). Investment
growth in industry in 1986 thus remains more buoyant than
in the economy as a whole . The relatively strong investment
increase in 1985 and 1986 has so far led only to a
stabilization of the number of industrial jobs in the
Community . This underlines the need for a continued strong
investment trend in the coming years in order to replace the
jobs lost as a result of insufficient investment activity in the
second half of the 1970s and early 1980s ( see Graph 10 ).
As in recent years , the increase in public consumption is well
below the average growth rate of domestic demand (1 ,7 % ).
On the whole there will be a marked expansion of domestic
demand in the Community in 1986 ( + 3,8 % in real terms
compared with 2,2% in 1985 ).
Imports of member countries from outside the Community ,
on the other hand , will increase significantly more sharply .
External trade will make a significant negative contribution
to the Community's real growth . Without this negative
impact , growth in the Community would be more than
1 percentage point higher . This negative impulse from the
Community's net real exports is , however , a substantial
contribution to the process of reabsorbing the imbalances in
world trade . In spite of these large changes in the volume of
exports and imports , the Community's current account will
register a significantly higher surplus in 1986 than in 1985
(equivalent to some 1,2% of nominal gross domestic
product compared with 0,5 % in 1985 ), due to the marked
improvement in the terms to trade .
In contrast to the situation as far as the growth of real gross
domestic product is concerned , the terms of trade effect has
worked through almost immediately in the case of consumer
prices, in spite of the fact that the reduction in costs has not
been fully reflected in final selling prices . Yet , the average
European consumer has benefitted more from the terms of
trade gain than the consumer in Japan , where a relatively
larger part of this external gain has remained in the enterprise
sector . As the Community consumer surveys have shown , the
steadying of prices has led to a significant increase in
purchasing power in Europe . The average rise in consumer
prices in 1986 ( around 3,7% ) will be the lowest in the
Community for the past 20 years .
In the first half of 1986 , the weakness in exports was only
partly offset by buoyant domestic demand. Because
purchasers expected prices to fall further , they held back for
a time in the early months of the year . Companies
demonstrated this by their partial de-stocking of inputs .
Consumers at first used the unexpectedly large increase in
real incomes to build up their savings . But there is evidence of
a revival in final demand , starting in the second quarter . This
is also borne out by the improvement in the consumer
climate , a leading indicator based on regular surveys in the
Community . Private consumption is expected to increase in
1986 by about 3,7% in volume terms at the Community
Despite the considerable improvement in real per capita
wages ( 2,3 % , using the consumer price deflator), real labour
costs per capita will remain stable in the Community in 1986
( on the basis of the GDP deflator). This favourable situation ,
which will not be repeated in the coming years , is due to the
large improvement in the terms of trade , which has reduced
companies' costs and at the same time increased the
purchasing power of consumers .
31 . 12 . 86 Official Journal of the European Communities No L 385 / 19
The upswing , though not very dynamic so far , has also had
an impact on the labour market. In 1986 , in the Community ,
the number of persons in employment is expected to rise by
0,8 % , well above the average for the 1960s and 1970s ( see
Table 4 ). In macroeconomic terms the threshold , above
which increases in output begin to have an effect on
employment , appears to have again been brought down .
However , the increase in employment is also attributable to
specific measures of labour market policy as well as the
growth of part-time employment . The increase in
employment will be above average in Denmark ( 1,9% ),
Spain ( 1,8% ) and Germany and the Netherlands ( 1,1 % in
both countries ). Despite the marked rise in the numbers
employed , the Community's unemployment will decline only
slightly in 1986 ( from 12% in 1985 to 11,9% , EUR 12 )
because the size of the Community's labour force continues
to increase ( by some 0,8 % in 1986 ). Recently , this has been
due more to the rising participation rate ( especially among
women), than demographic factors .
Despite this gradually improving labour market situation ,
certain segments of the labour force still pose specific
problems . Of particular significance is the continuing rise in
the share of long-term unemployment in the Community : at
present about 40 % of the unemployed have been out ofwork
for more than one year , compared with 36% in 1983 .
Although it is difficult to make direct comparisons between
Member States , there appear to be important differences in
this respect . For example , while in Denmark the proportion
of long-term unemployed in the total is only 6 % , it is over
50 % in Belgium , the Netherlands and Spain , and is between
30 and 40% in Germany , France , Ireland , Italy and the
United Kingdom . The total number of unemployed young
people has declined slightly ( from 4,6 million in 1985 to 4,5
million in 1986 , i.e. about 35% of total unemployed —
EUR 9 ). This reflects demographic changes and special
efforts of Member States to extend basic training and
education . Nevertheless , the unemployment ratio of young
persons between 15 and 25 years remains intolerably high at
the Community level ( around 20% ).
Economic outlook for 1987. The gradual recovery in
economic activity in the Community will , in 1987 , be
entering its fifth year . According to the normal cyclical
pattern of earlier upturns , this would mark the late phase in
the recovery process , and the upper cyclical turning point
would not be far off. But in the current situation , this
conclusion seems unfounded , since the cyclical upswing this
time differs markedly from its predecessors . Unlike 1972 / 73
and 1979 / 80 , rising capacity utilization has so far not been
associated with upward pressure on prices , but on the
contrary with falling inflation rates . Nor have unit labour
costs started to accelerate , as they have usually done in late
phases of an upturn , because the labour shortages typical of
earlier recoveries have not occurred .
For 1987 , there is no sign so far of the risk of overheating .
On average , for all the member countries in 1987 , the
Commission actually forecasts a further slowdown in
consumer prices ( 3,0% compared with 3,7% in 1986 ),
mainly because of progress in fighting inflation in the
member countries which have so far still had high rates of
price increase (Greece , Spain , Portugal and Italy ). In the
other member countries the inflation rate is probably
stabilizing at the relatively low 1986 level or will only
increase slightly .
In 1987 , domestic demand ( + 3,5% ) will again make the
most important contribution to growth ; the increase is likely
to be somewhat lower than the 1986 figure . The main
growth factors will continue to be private consumption
(3,5% in real terms ) and fixed investment ( 5,1% in real
terms ); investment in equipment ( 6,9 % in real terms ) will be
much more dynamic than construction ( 3,2 % in real terms ).
The expansion of public consumption will still be relatively
slow ( 1 ,3 % ). In addition , exports can hardly be expected to
provide a stimulus to the European economy in 1987 . After
standing almost still in 1986 , the Community's export
markets will probably grow slightly next year (by some
2,4 % in real terms ) as world trade again picks up somewhat .
Member country exports ( inside and outside the
Community ) could grow by 3,5 to 4% in 1987 . But , since
Community imports will go on growing vigorously ( around
6,5% ), external trade will continue to make a negative
contribution to the Community's real growth (probably
- 0,8 % compared with - 1,2% in 1986 ). The Community
will therefore continue to contribute to the process of
adjusting the disequilibria of world trade . Despite the
unfavourable trend in the Community's external trade in
volume , the current account will remain substantially
positive ( 0,9% of GDP or US $ 42 000 million in 1987 ,
I,2% of GDP or US $ 52 000 million in 1986 ).
All in all , the growth of the Community economy as a whole
in 1987 is likely , on present policies , to remain just under the
3% mark . Growth rates will range from 3,6% in Italy to
- 0,2 % in Greece . Although employment is again increasing
( 0,8% a year in 1986 and 1987 ) unemployment remains
excessively high ; in 1987 , the unemployment rate in the
Community of Twelve will probably only fall from 1 1 ,9 % to
II,7% .
Economic recovery in the Community is continuing. This is
due in large part to the transfer in incomes following the
considerable fall in import prices . Domestic demand,
especially private consumption and investment, are the
strongest growth elements, while the Community 's external
export markets are on the whole weak . Lower price increases
and interest rates are improving medium-term growth
prospects . Somefirst successes are beginning to be registered
in reducing the high level of unemployment in the
Community, but these fall short of what is required or
possible .
No L 385 / 20 Official Journal of the European Communities 31 . 12 . 86
TABLE 4
EUR 12 : Main economic aggregates 1961 to 1987
(Annual percentage changes)
1961 to
1973
1974 to
1980
1981 1982 1983 1984 1985 1986 (») 1987 ( 2 )
r value
Gross domestic I volume
product I
^ deflator
10,2
4,8
5,1
14,6
2,2
12,1
10,8
- 0,1
10,9
11,2
0,5
10,6
9,6
1,2
8,3
8,8
2,0
6,6
8,5
2,4
6,0
8,8
2,5
6,2
6.4
2,8
3.5
Private consumption deflator 4,6 12,1 12,1 10,4 8,4 7,0 5,8 3,7 3,0
r private ( 13 )
Gross fixed I public ( 13 )
capital formation ]
total
5,6
3,2
5,6
1,2
- 0,6
0,5
- 1,7
- 6,8
- 4,1
- 2,2
5,3
- 1,5
- 1,7
0,7
- 0,4
3,5
- 1,0
1,3
1,7
0,5
2,4
5,2
1,2
4,2
5.0
2,0
5.1
of which : construction Il - 2,6 2,3 3,2
equipment 8,0 6,1 6,9
Domestic demand ( const , prices ) 5,0 2,1 - 1,8 0,8 0,8 1,4 2,2 3,8 3,5
National indicator
Gap with respect to other
OECD countries - 0,6 - 0,2 - 4,1 1,0 - 1,9 - 4,2 - 1,1 0,4 0,9
r nominal
Compensation
of employees J real A ( 3 )
per head 1 g ( 3 )
10,0
4,7
5,2
14,9
2,5
2,5
12,8
1,7
0,6
10,9
0,3
0,4
9,9
1,5
1,4
7,6
0,9
0,6
6,8
0,8
1,0
6,0
- 0,1
2,3
4,8
1,3
1,8
Productivity ( 4 ) 4,5 2,2 1,1 1,5 2,1 2,1 2,0 1,8 2,0
Real unit labour costs ( 5 ) 100 104,5 104,3 103,0 102,4 101,1 99,9 98,1 97,4
Profitability ( 5 ) ( 6 ) 100 67,4 60,0 60,4 62,3 64,7 68,2 75,5 79,0
Competitiveness ( 5 ) ( 7 ) 100 108,8 105,5 98,9 93,2 86,7 85,6 95,1 95,9
Employment 0,3 0,0 - 1,2 - 0,9 - 0,8 - 0,2 0,4 0,8 0,8
Registered unemployed as %
of the civilian labour force ( 8 ) ( 9 ) 2,2 4,7 7,8 9,3 10,3 10,8 11,1 11,0 10,8
Current balance as % of GDP - 0,7 - 0,8 0,0 0,1 0,5 1,2 0,9
Long-term interest rate ( 10 ) 7,1 10,5 15,1 14,3 12,7 12,0 10,8 9,0
Money supply ( 1J ) 13,5 10,6 11,6 10,6 8,7 9,4 8,4 6,5
Net lending or borrowing of general
government as % of GDP ( 12 ) - 0,6 - 3,8 - 5,4 - 5,6 - 5,5 - 5,4 - 5,1 - 4,7 - 4,1
Public debt as % of GDP 45,0 49,8 53,5 56,0 58,9 60,3 61,8
Public debt interest as % of GDP 2,9 4,1 4,6 4,9 4,9 5,1 5,1 5,0
f 1 ) Estimates of the Commission services , October 1986 .
( 2 ) Forecasts of the Commission services , October 1986 , on the basis of present policies ..
( 3 ) A : GDP deflator ; B : private consumption deflator .
( 4 ) Gross value added per occupied person in the whole economy , on real terms .
( 5 ) Index : Average 1961 to 1973 = 100 .
{ 6 ) EUR 4 : D + F + I + UK ; non-agricultural business .
( 7 ) Real effective exchange rate (vis-a-vis the other nine industrial countries ) on the basis of unit labour costs for the whole economy .
( 8 ) Eurostat definition .
( 9 ) Excluding Greece , Spain , Portugal .
( ,0 ) Excluding Spain , Portugal .
( u ) End of year . Broad money supply M2 or M3 according to country .
( 12 ) Excluding Greece , Spain , Ireland , Portugal .
( u ) Estimate for EUR 10 .
31 . 12 . 86 Official Journal of the European Communities No L 385 / 21
TABLE 5
Imports of goods of the main economic zones
(% change in volume)
1982 1983 1984 1985 1986 (•) 1987 ( 2 )
EUR 12 ( including intra-EUR ) 2,7 2,0 7,1 5,5 6,3 6,4
USA
Japan
OPEC
- 2,3
0,5
5,1
12,7
- 2,8
- 10,1
23,6
11,0
- 7,4
4,7
- 1,9
- 11,3
10,9
8,5
- 25,0
6.3
6.4
- 12,5
Other developing countries - 8,2 - 1,2 5,5 3,3 1,8 3,0
World - 0,8 1,7 8,9 3,4 3,8 4,4
( ] ) Forecast of Commission services ; October 1986 .
Source : Eurostat and Commission services .
TABLE 6
Rate of change of demand components , EUR 12
(% change in volume)
1983 1984 1985 1986 (') 1987 (>)
Private consumption 1,0 0,9 2,2 3,7 3,5
Public consumption 1,7 1,0 1,7 1,7 1,3
Fixed investment - 0,3 1,3 2,4 4,2 5,1
Contribution to change in GDP of:
Final domestic demand ( 2 ) ( 3 )
change in stocks ( 2 )
foreign balance ( 2 )
0,9
0,5
- 0,3
1,0
- 0,2
0,1
2,1
0,0
0,2
3,4
0,4
- 1,2
3,4
0,2
- 0,8
GDP 1,2 2,0 2,4 2,5 2,8
Exports ( goods and services ) 3,1 7,6 5,7 2,2 3,7
Imports (goods and services ) 1,5 5,6 5,3 6,3 6,2
(') Forecast of Commission services ; October 1986 .
( 2 ) Change as percentage of GDP of preceding period .
( 3 ) Excluding change in stocks .
Source: Eurostat and Commission services .
No L 385 / 22 Official Journal of the European Communities 31 . 12 . 86
TABLE 7
Forecast increase in gross domestic product in 1986 and 1987
%)
1986 0 ) 1987 (')
GDP in
value
GDP in
volume
GDP
deflator
GDP in
value
GDP
volume
GDP
deflator
Belgium 6,7 2,0 4,6 3,1 1,3 1,8
Denmark 7,8 2,9 4,8 5,5 1,8 3,7
Germany 7,1 3,1 3,9 4,6 3,2 1,4
Greece 23,2 0,5 22,6 12,1 - 0,2 12,3
Spain 15,1 2,9 11,8 9,3 3,0 6,1
France 6,9 2,2 4,6 5,3 2,5 2,7
Ireland 7,6 1,8 5,6 6,8 3,1 3,6
Italy 12,7 2,8 9,7 9,1 3,6 5,3
Luxembourg 8,0 2,4 5,4 5,3 2,6 2,6
Netherlands 2,0 1,6 0,4 0,1 1,8 - 1,7
Portugal 23,8 3,8 19,2 14,4 3,5 10,5
United Kingdom 6,3 2,3 3,9 7,0 2,7 4,2
EUR 12 8,8 2,5 6,2 6,4 2,8 3,5 -,
( l ) Forecast of Commission services , October 1986 .
TABLE 8
Indicators of labour market developments
Unemployment as a percentage of the civilian
labour force Annual rate of change of total employment
1960 1970 1983 1985 1986 1987 1961 to 1970 1971 to 1980 1981 to 1985 1986 1987
Belgium 3,1 2,1 14,3 13,7 12,9 13,4 0,6 0,3 - 0,8 0,3 - 0,6
Denmark 1,6 1,1 10,1 8,8 7,6 7,7 1,1 0,7 0,9 1,9 0,3
Germany 1,0 0,6 8,4 8,4 8,1 7,7 0,2 - 0,1 - 0,6 1,1 1,0
Greece 7,8 7,8 7,6 8,3 - 0,7 0,6 1,0 0,5 0,0
Spain 17,8 22,1 21,7 21,5 0,7 - 2,1 - 2,2 1,8 1,2
France 0,7 1,3 8,8 10,3 10,5 10,7 0,6 0,4 - 0,5 0,1 0,3
Ireland 4,7 5,3 14,9 18,0 18,4 18,0 - 0,0 0,9 - 0,9 - 1,1 0,7
Italy 7,2 4,4 10,9 12,9 13,4 12,8 - 0,5 0,5 0,5 0,5 1,3
Luxembourg 0,1 0,0 1,6 1,6 1,3 1,2 0,6 1,3 0,1 0,8 0,7
Netherlands 0,7 1,3 14,3 13,1 12,0 11,1 1,2 0,2 - 0,9 1,1 0,9
Portugal 10,2 8,7 8,6 8,5 - 0,5 - 0,3 - 0,7 0,3 0,3
United Kingdom 1,6 2,5 11,6 12,0 12,0 12,0 0,2 0,2 - 0,8 0,8 0,8
EUR 12 11,0 12,0 11,9 11,7 0,2 0,2 - 0,6 0,8 0,8
EUR 9 (>) 2,5 2,0 10,3 11,1 11,0 10,8
USA
Japan
5,5
1,7
4,9
1,1
9.6
2.7
7,2
2,6
6,9
2,8
6,9
2,9
1,9
1,4
2,0
0,8
1,6
1,0
2,2 1,7
( J ) Without Greece , Spain and Portugal .
NB: The unemployment rates presented here are based on the number of registered unemployed on a common Eurostat definition . Exceptions : for Greece , Spain and
Portugal national survey results are presented .
Source : Eurostat and Commission services (October 1986 ).
31 . 12 . 86 Official Journal of the European Communities No L 385 / 23
GRAPHS 2 to 5
Comparative evolution of the Community, US and Japanese economies , 1982 to 1986
2 . Gross domestic product, s.a . 3 . Industrial production
three-month moving average , s.a .
4 . Unemployment rate, s.a . 5 . Trade balance
fob / cif, billions ECU ,
three-month moving average , s.a .
No L 385 / 24 Official Journal of the European Communities 31 . 12 . 86
GRAPHS 6 to 9
Comparative evolution of the Community, US and Japanese economies , 1983 to 1986
6 . Consumer prices
six-month change , s.a ., annual rates
7 . Exchange rates
Index of SDRs per currency unit
8 . Long-term interest rates 9 . Short-term interest rates
31 . 12 . 86 Official Journal of the European Communities No L 385 / 25
GRAPH 10
Trend of industrial investment in the Community (business survey indicator) in the context of other
macro-economic indicators
1985 and 1986 : Estimation of the Commission's services with the exception of gross fixed capital formation in industry which are
based on EC investment surveys .
Source : Eurostat and EC investment surveys .
2.3 . Nominal and real convergence in the Community
The Community's major political events of the last year —
agreement on the internal market programme , the Single
European Act , and the accession of Spain and Portugal — all
give heightened importance to economic convergence .
The notion of convergence covers essentially two distinct
objectives . The first concerns convergence on a better
stability of prices , but it includes also a better control of
monetary trends , nominal incomes and the main economic
equilibria such as for the public finances and the balance of
payments ; this may be called nominal convergence. The
second objective concerns the upwards convergence of living
standards , measured for example by real GDP per capita of
the regions and Member States of the Community ; but it
includes also the downwards convergence of unemployment ;
this may be called real convergence. These economic policy
objectives were already laid down in the preamble and Article
104 of the Treaty establishing the European Economic
Community . The Single European Act , in its Article 130 ,
reaffirms and specifies the objective of 'reducing disparities
between the various regions and the backwardness of the
least-favoured regions'. It designates this objective clearly as
an objective of the coordination of economic policies of
Member States and of the action that the Community pursues
through its structural funds and financial instruments
(Article 130 B ).
Nominal and real convergence are two goals that are not
independent . The achievement of nominal convergence is a
central condition in the pursuit of sustainable and dynamic
economic growth . Such a growth makes it easier for the
relatively poorer regions and Member States to diminish the
gap separating them from the more prosperous ones .
Convergent and low inflation rates are also required to secure
stability within the EMS and enhance the predictability of the
factors determining investment and savings' decisions .
In conjunction with the completion of the internal market ,
monetary stability should provide a major impetus to the
further expansion of intra-Community trade . In addition ,
No L 385 / 26 Official Journal of the European Communities 31 . 12 . 86
the absence of serious public sector or external disequilibria
allows the steady pursuit of policies favouring vigorous
economic growth .
subdued , the cource of unit labour costs and monetary
conditions must be compatible with price stability . The
forecast developments for 1986 and 1987 in this regard
warrant some optimism for the course of European inflation
rates in the near future . Growth rates of the money stock and
unit labour costs are expected to continue their decline ,
whilst the differences between the Member States will be
reduced further .
. The following paragraphs review recent trends in the main
economic indicators that are relevant to the assessment of
convergence .
Nominal convergence . The Community inflation rate has , in
line with the developments occurring elsewhere in the
industrialized world , declined considerably since 1982 , as
borne out by Graph 1 1 . The growth rate of the Community
private consumption deflator in 1986 is expected to be
3,7% , an achievement that has not been matched for 20
years . It is forecast to continue its downward course next
year .
Whereas monetary policy has become increasingly more
similar , the recent public finance record , both from the
viewpoint of the Community as a whole and as between the
Member States , has been less satisfactory . Differing degrees
of success in pruning public sector deficits may threaten the
consolidation of the convergence towards monetary stability
achieved so far . In several countries , public sector deficits
have clearly been curbed , but in a number of others the public
sector borrowing requirement is still excessive . Most of the
latter countries have in recent years financed their deficit
more and more ,by issuing interest-bearing liabilities to the
non-bank sector . This sounder form of debt financing has
contributed to the price stability oriented monetary policy
referred to earlier . On the other hand , the persistence of large
deficits has inevitably given rise to a corresponding sizeable
expansion of public debt and has exerted an upward pressure
on real interest rates in capital markets . The resulting
aggravation of the interest payments burden should be
interpreted as a signal to step up efforts to correct public
finance imbalances . If general government deficits in these
countries are not trimmed further , the threat of increased
debt monetization will be rekindled .
The slowdown of the average inflation rate has gone hand in
hand with a smooth reduction in inflationary disparities
between the Member States , in particular since 1984 , as
illustrated by Table 9 and Graph 1 2 . These show that for the
private consumption deflator this convergence process is
expected to continue in 1986 and 1987 . The present annual
percentage increase of the private consumption deflator is
expected to range from over 22 % for Greece — 4 percentage
points up from last year's growth rate — to virtually nil for
the Netherlands and Germany . Table 9 also shows that the
nominal convergence phenomenon occurring in recent years
is even more pronounced among the countries adhering to
the EMS . The EMS has proved a catalyst for nominal
convergence in that countries in which inflation has been
relatively high were subject to pressure favouring better price
stability during lengthy periods of unchanged exchange rate
parities ( cf . chapter 4.1 ). The reduction in , and improved
convergence of, inflation rates should be seen as a success of
economic policy and in particular of the EMS .
The Community on aggregate has reduced its general
government deficits from 5,6% in 1982 to 5,1 % in 1985 ,
and is expected to continue this desirable trend this year and
next to reach 4,1 % in 1987 . However , this decline has not so
far reached the point of stopping the growth of public debt as
a percentage of GDP for the Community as a whole . This
ratio has risen steadily for the Community average from
50% in 1982 and will be higher than 63% in 1987 (more
detail is provided in Chapter 4.2 ). Several countries , for
example Belgium , Ireland , Italy , are now confronted with a
level of debt exceeding their annual GDP . The forecasts for
1986 and 1987 suggest that these peoccupying trends are not
yet being corrected .
The foundations for the recent reduction in annual inflation
rates were laid by efforts to enhance control over their
fundamental determining factors ( see Graph 13 ). Monetary
policy was conducted increasingly with a view towards price
stability , illustrated by a decline in money growth per unit of
output . This deceleration resulted in part from the fact that
budget deficits were monetized to a lesser degree . In addition ,
nominal wages were adjusted , as reflected in a marked
slowdown in unit labour costs . The fact that , in the
meantime , monetary conditions and unit labour costs
converged between the Member States shows that most
Community countries adopted a similar stabilization policy
stance .
Whereas the evolution of budget deficits still leaves a lot to be
desired in a number of countries , most Member States
confronted with a serious current account problem are
predicted to see their situation improve significantly in 1986
and 1987 . Table 10 indicates that Denmark , Greece and
Ireland will cut their current account deficits following the
large terms of trade improvement and measures limiting
domestic consumption .
Checking inflation rates during this year and next is being
facilitated by favourable yet reversible exogenous factors ,
such as the massive oil price fall and the large depreciation of
the dollar . These factors exert only a once-and-for-all
deflationary influence . For the inflation rate to remain
Real convergence . Upward convergence , in terms of real
gross domestic product per capita and of the employment
31 . 12 . 86 Official Journal of the European Communities No L 385 / 27
Community in GDP per capita growth . The present forecasts
for 1986 and 1987 suggest that this tendency for Member
States' real income levels to diverge is not being arrested .
level , is crucial to ensuring greater economic and social
cohesion in the Community . Bringing about real convergence
has clearly become a more ambitious task following the
consecutive accessions to the Community in the eighties of
relatively less prosperous but populous countries . The recent
enlargements have rendered the Community much more
dissimilar , both in terms of GDP per capita and of
unemployment levels . Table 11 , which ranks the Member
States in descending order of real income per capita
( expressed in purchasing power standards ), in 1985 , shows
that the average inhabitant of the four poorest Community
Member States ( Spain , Greece , Portugal and Ireland ),
together representing some 20 % of the current Community
population , had a real income last year which was half that of
the average citizen of the four richest countries (Germany ,
France , Denmark and Luxembourg). The ratio of the
extremes (Portugal and Luxembourg ) was almost one to
three .
The evolution since 1975 of the various national
unemployment rates — which admittedly pose some
problems of comparability — was dissimilar as well . In this
respect , the level of dispersion between the Member States
trebled in a decade , as can be gauged from Graph 16 . This
increasing dispersion was both due to the development of
employment as well as labour force growth rates , which both
diverged from the middle of the 1970s onward .
These negative trends , as regards real convergence , since the
mid-seventies are also seen between the regions of the
European Community , for which , of course , absolute
disparities are considerably higher ( see Graph 16 ). The
virtual constancy of the indicator of real GDP per capita
inequalities over the 10 years or so prior to 1984 is also
observed among the regions of each of the major Member
States . None of the countries has witnessed a significant
reduction of regional GDP differences . The worsening of the
unemployment convergence record between Member States
is also paralleled at the regional level . Whereas the weakest
25 regions of the Community had an average unemployment
rate of 8 % in 1976 , relative to 2,4% for the 25 strongest , the
figures registered for 1985 stood respectively at 21,1 % and
6,6% .
During the 1960s , when European economic growth was
dynamic , world trade liberalized and the customs union
established , the Community made swift progress in real
convergence . Real GDP per capita as well as unemployment
levels converged between the Member States until about the
middle of the 1970s ( see Graph 14 and Graph 15 ). Graph 15.
shows , for instance , that from 1960 up to the first oil shock ,
the four relatively poorest countries of the Community
managed to reduce the gap separating them from the four
richest Member States by about one-third . At that time , the
reduction of the Member States' dispersion around the
European average coincided with a rapid real GDP per capita
expansion for the Community as a whole (4,0 % per annum ,
cf . Table 11 ).
It appears that a more dynamic growth of the European
economy is an important condition for the relatively
backward regions to catch up , and for the declining
industrial regions to convert . The implementation of the
cooperative strategy , as well as the completion of the
Community internal market , would help assure this
favourable economic climate which is indispensable .
However , to reduce real income inequalities with respect to
the relatively more prosperous areas of the Community , the
relatively poorer regions should not only share in the overall
European economic expansion , but their growth should also
be faster than the European average . Therefore , besides the
establishment of a more dynamic growth climate in the
Community in general , it is equally necessary to create in the
regions in question sound conditions for a durable and stable
economic expansion .
This experience shows that the achievement of a dynamic
economic growth in the Community is an important factor in
sustaining the process of real convergence . If the Community
were to generate a development during the next 10 to 15
years similar to the 1960s , the objective of real convergence
and greater economic cohesion would be brought much
nearer . However , the conditions of the 1960s are no longer
present and the Community must take account of this
fact .
Since 1975 , when the worldwide economic crisis triggered by
the first oil shock set in , and the trend rate of economic
growth was sizeably reduced , the real convergence process in
the Community has , however , been stalled , even reversed .
This phenomenon can be seen for both real growth and the
unemployment performance . The four relatively poorest
countries together have fallen short of the aggregate
European growth rate since the first oil shock , on account of
the slow expansion experienced in Greece and particularly
Spain . Meanwhile , Germany and Denmark , the two
relatively richest countries after Luxembourg , outpaced the
The regional catch-up and reconversion process has to be
based , among other factors , on fresh private and public
investment , which will require the mobilization of
considerable funds . The latter can in part be generated at
home by developing domestic savings , but investment in the
poorer countries and regions will also require sufficient
capital movements . Spontaneous capital inflows in these
areas of the Community will gather momentum provided
their expected profitability is adequate . To this end , the
authorities in these areas should pursue policies aimed at
creating an enterprise-friendly economic and political
environment . The removal of capital controls , proposed by
No L 385 / 28 Official Journal of the European Communities 31 . 12 . 86
the Commission , will also promote capital inflows as it
dispels foreign investors' fears in relation to the mobility of
their funds . However , past experience suggests that private
capital inflows alone are often insufficient . To this must be
added a determined action on the part of the public
authorities , in which the Community has an important role
to play through its structural funds , the European Investment
Bank and its other financial instruments .
In accordance with Article 130 D of the Single European Act ,
the Commission will submit to the Council a general
proposal intended to modify the structure and the operating
rules of the structural funds .
Its objective is to :
— specify and rationalize the role of these funds so that they
contribute better to achieving the objectives of economic
and social cohesion ,
— reinforce their efficiency ,
— permit better coordination between the operations of the
funds themselves , and in relation to the financial
instruments of the Community .
In this way , it should be possible to assure an important
contribution to the economic and social cohesion of the
Community . Moreover , the reinforcement of the process of
real convergence will also contribute to the overall dynamics
of the Community .
The Community has registered in the recent past significant
progress as regards nominal convergence . Inflation rates in
most countries have come down in the last few years as a
result of the conduct ofeconomic policy in general and of the
functioning of the EMS. The correction of current account
imbalances is also being undertaken with success . In several
countries, public sector deficits have clearly been curbed, but
in a number of others the public sector borrowing
requirement is still excessive . In the period up to the
mid-1970s, the Community witnessed both sustained and
dynamic growth and an improvement of real convergence .
Since then, however, the latter process has been arrested,
even slightly reversed. For real convergence in the
Community to resume, several complementary conditions
need to be fulfilled . First, it is necessary to create a more
dynamic growth environment in the Community as a whole,
which is a central objective of the Cooperative Strategy.
Secondly, it is necessary for the business environment in the
relatively backward and in the declining industrial regions to
be improved through appropriate adjustment policies that
are the responsibility of national and regional authorities .
Thirdly, it is necessary that the Community, through its
financial instruments and the intervention of the European
Investment Bank on the one hand, and its structuralfunds on
the other, complements the efforts of the authorities of the
disadvantaged regions to establish the foundations of
durable economic growth . In this way, it can make an
important contribution to achieving greater cohesion
between the regions and Member States of the
Community.
31 . 12 . 86 Official Journal of the European Communities No L 385 / 29
TABLE 9
Private consumption prices (deflator , % change per annum)
1961 to
1969
1970 to
1977
1978 1979 1980 1981 1982 1983 1984 1985 1986 1987
Belgium
Denmark
Germany
Greece
Spain
France
Ireland
Italy
Luxembourg
Netherlands
Portugal
United Kingdom
3,2
5,7
2,7
2.4
5,9
4,2
4,5
3,7
2,3
4,0
2,6
3,7
7.4
10,0
5.5
10,5
13.4
8,3
13.8
12.9
6,8
8,0
13,1
12.5
4.1
9.2
2,8
12,8
19,2
8,7
8,0
12,9
3.4
4.5
21,0
9,1
3,9
10.4
4,0
16.5
16,2
10.4
14,9
15,1
5.2
4.3
24,0
13.5
6,5
10,7
5.8
21,2
15,6
13.2
18,6
20,2
7,7
6.9
22.3
16.4
8,1
12,0
6,0
23,3
15.1
12,8
21.2
19,2
8,6
6,3
16,9
11,5
7.4
10,2
4,7
21,2
14,2
11,2
16,0
17,0
10,6
5,3
22,5
8.5
7,5
7,2
3.1
18,6
12,2
9,5
8.2
15,1
8,0
2,8
25,5
5,2
5,9
6,5
2.4
18,0
11,1
7.3
8.5
11,1
6.4
2.6
29,3
5,1
4,8
5.0
2.1
18,4
8.4
5.5
4.2
9,4
4,0
2.6
19,3
5.3
1,3
3,3
0,0
22,5
8,6
2,5
3,7
6,2
0,5
0,0
11,8
4,0
1,5
2,8
1,1
12,5
5,3
2,3
3,2
4,0
1,3
- 1,0
9,0
3,9
Averages
EUR 12
EUR 10
EMS
3,7
3,6
3,6
9,8
9,3
8,5
9,0
7,7
7,2
10,6
9,8
8,7
13,2
12,9
11,6
12,1
11,7
11,5
10,4
9.8
9.9
8,4
7,7
8,1
7,0
6,2
6,2
5,8
5,3
5,0
3,7
3,1
2,4
3.0
2,6
2.1
(a) Mean deviation from
the average
EUR 12
EUR 10
EMS
1,2
1,0
1,0
3,1
3,0
2,5
3,7
3,1
3,6
4,2
4,0
4,2
4,5
4,8
5,0
3,9
3,9
4,6
4,0
3,9
4,3
4,2
3,9
4,1
3,3
2,8
3,0
2,5
2,1
2,3
2,7
2,3
2,0
1,6
1,4
1,1
(b) Mean deviation from
the minimum
EUR 12
EUR 10
EMS
3,3
1,8
1,5
5.3
4,9
3.4
6,1
4,9
4,4
6,7
5,9
4,7
7,3
6,9
5,8
6,1
5,7
5,4
5,8
5,2
5,2
5,6
4,9
5,3
4,6
3,8
3,8
3,7
3,3
2,9
3,7
3,1
2,3
4.0
3,6
3.1
Source : Eurostat and Commission services , October 1986 .
TABLE 10
Current account of balance of payments as a percentage of GDP
I 1961 to1970 1971 to1980 1981 1982 1983 1984 1985 1986 Differencebetweenl986and - 1982 1987
Belgium / Luxembourg 0,9 0,6 - 3,2 - 2,0 0,5 1,1 1,8 3,5 5,5 3,8
Denmark - 2,2 - 2,9 - 3,0 - 4,2 - 2,2 - 3,2 - 4,4 - 4,1 0,1 - 3,6
Germany 0,7 0,6 - 0,7 - 0,5 0,7 1,0 2,2 3,2 2,7 2,1
Greece - 3,1 - 2,2 - 0,2 - 3,8 - 4,7 - 4,1 - 8,4 - 5,8 - 2,0 - 3,7
Spain - 0,9 - 2,4 - 2,3 - 1,4 1,3 1,7 3,5 5,9 3,7
France 0,2 - 0,4 - 1,4 - 3,0 - 1,7 - 0,9 - 0,8 0,1 3,1 0,4
Ireland - 2,3 - 6,4 - 14,8 - 10,7 - 6,9 - 5,7 - 3,2 - 1,3 9,4 - 1,3
Italy 1,8 - 0,2 - 2,3 - 1,6 0,2 - 0,8 - 1,1 1,2 2,8 0,9
Netherlands 0,0 1,2 2,1 2,8 2,9 4,1 4,3 3,9 1,1 2,8
Portugal - 1,0 - 3,3 - 11,7 13,5 - 7,2 - 3,0 1,8 5,4 18,9 4,2
United Kingdom 0,0 - 0,6 2,4 1,5 0,8 0,3 1,0 - 0,1 - 1,6 - 0,6
EUR 12 0,4O - 0,1 - 0,6 - 0,6 0,0 0,1 0,5 1,2 1,8 0,9
1 EUR 10 .
No L 385 / 30 Official Journal of the European Communities 31 . 12 . 86
TABLE 11
Real GDP per capita expressed in purchasing power standards
1960 1965 1970 1975 1980 1985
Luxembourg 145,4 135,5 128,8 126,9 124,4 129,3
Denmark 126,6 129,5 123,5 117,7 115,9 123,9
Germany 123,4 121,5 118,7 114,5 119,3 121,6
France 104,9 106,9 109,9 114,4 115,6 114,0
Belgium 103,4 104,7 107,1 111,0 112,2 109,8
Netherlands 118,3 114,9 115,6 114,7 110,9 106,1
United Kingdom 125,8 116,5 105,9 103,5 98,7 102,0
Italy 83,5 85,4 92,2 89,3 93,3 91,7
Spain 59,9 69,8 73,7 81,6 75,2 75,0
Ireland 67,3 65,9 66,7 68,5 70,4 70,7
Greece 39,1 46,1 52,3 57,7 59,0 57,1
Portugal 32,8 36,5 41,2 43,5 47,3 46,2
EUR 12 100,0 100,0 100,0 100,0 100,0 100,0
USA 186,6 179,5 163,0 154,7 152,6 157,6
Japan 63,1 79,7 104,3 106,5 114,0 128,1
EUR 12 ( 1960 = 100 ) 100,0 121,8 147,7 166,4 189,0 198,2
USA ( 1960 = 100 ) 100,0 116,9 129,5 137,7 154,4 166,9
Japan ( 1960 = 100 ) 100,0 153,5 244,0 280,1 340,6 401,4
Source : Commission services .
31 . 12 . 86 Official Journal of the European Communities No L 385 / 31
GRAPH 11
The evolution of the private consumption deflator
(% annual rate of growth )
Source : Commission services .
No L 385 / 32 Official Journal of the European Communities 31 . 12 . 86
GRAPH 12
Private consumption deflator
Weighted average EUR 12 and Member States' highest and lowest inflation rate
Source: Commission services .
31 . 12 . 86 Official Journal of the European Communities No L 385 / 33
GRAPH 13
Private consumption deflator , unit labour costs , and growth of money stock per unit of output
Weighted average percentage changes EUR 12
(') Broad money supply (M2 or M3 ) divided by GDP at current prices .
Source : Commission services .
No L 385 / 34 Official Journal of the European Communities 31 . 12 . 86
GRAPH 14
The evolution of real GDP per capita : inequalities between Member States (')
Standard deviation of real GDP per capita as a ratio of the Community average in percentage terms
(') The inequalities are measured by the weighted variation coefficient .
weighted standard deviation
The weighted variation coefficient
mean
x 100 reports the degree of relative dispersion around the
average .
A decrease of the coefficient signifies a reduction of dispersion .
Source: Commission services .
31 . 12 . 86 Official Journal of the European Communities No L 385 / 35
GRAPH 15
Relationship between income (*) per person in the four poorest and four richest countries in the Community :
EUR 12 ( as a percentage )
(') GDP per person at constant prices and purchasing power standards of 1980 .
Source: Eurostat and Commission services .
No L 385 / 36 Official Journal of the European Communities 31 . 12 . 86
GRAPH 16
The evolution of unemployment disparities (*) between the Member States and between the regions of the
Community
Standard deviation from Community unemployment rate
( ] ) Disparities are measured by population weighted standard deviations . Regions are selected at level 'II ' of disaggregation . These
concern , for instance , Regierungsbezirke in Germany , reggioni in Italy , regions in France , groups of counties for the UK ,
provinces for Belgium and the Netherlands . Neither of the aggregates includes Greece . Figures for the initial years are for
EUR 9 .
Source : Commission services , Directorate-General for Regional Policy .
3 . THE COOPERATIVE GROWTH STRATEGY FOR MORE EMPLOYMENT
3.1 . Objectives and methods
In the shape of the Annual Economic Report 1985 / 86 , the
Council adopted a strategy for securing a significant and
sustained reduction in the rate of unemployment in the
Community by the end of the decade by tackling the very root
of the problem . To illustrate this objective , a reduction of
some 30 to 40% in the number of people out of work
( representing between 4 and 5 million people ), that is to say ,
a decline in unemployment equivalent to between 3 and 4
percentage points was cited .
Following the accession of Spain and Portugal , the basic
problem remains the same , as both countries are also faced
with massive unemployment ( in 1986 : 21,7% in Spain and
8,6% in Portugal ). As a result , the average unemployment
rate for the Community of Twelve stands at 11,9% in
1986 ( M.
In their medium-term analyses , the Commission services
make the assumption that the labour force in the Community
will expand in the coming five years at an annual rate of
0,3% . Under the circumstances , a reduction of 3 to 4
percentage points in unemployment by 1990 will require an
annual increase in employment of between 1 and 1 ,5 % until
the end of the decade .
As in the last Annual Report , medium-term scenarios are set
out below in order to illustrate the orders of magnitude and
the measures advocated ( see box).
A first scenario , the baseline scenario , illustrates the
devolopment that would take place if present patterns of
behaviour and policies remained unchanged . It does , of
course , take account of the changes in the international
environment in recent months and of the latest forecasts
compiled for 1986 / 87 .
On average for the years 1986 to 1990 , the growth rate is
expected to be 2,7% (EUR 10 ) while employment will
(') In calculating an average for the Community of Twelve , the
figures used for Greece , Spain and Portugal are not entirely
comparable with those for the other countries , cf Table 8 .
31 . 12 . 86 Official Journal of the European Communities No L 385 / 37
In this context , investment, both private and public, is a key
variable .
probably grow over the same period by an annual rate of
0,7% , which would still not be sufficient to reduce
unemployment significantly ; in 1990 , the unemployment
rate (EUR 10 ) is thus expected to be around 9,7% of the
labour force , instead of 10,8 % in 1986 . In the Community
of Twelve , the unemployment rate would, therefore , exceed
10% .
Under the cooperative strategy , investment first of all
strengthens the dynamics of demand, without which any
increase in the growth rate is impossible . From the point of
view of supply, it reinforces the capital stock . For there to be
a return to lasting , higher growth , the capital stock needs to
be increased more rapidly , and hence the proportion of
resources going each year to public and private investment
increased . For the Community of Twelve , that proportion is
still almost 4 percentage points of GDP lower than its level in
the 1960s , with a good third of this decline being attributable
to the falling share of GDP accounted for by public
investment .
A more detailed analysis of 1986 and 1987 in terms of the
imperatives of the cooperative strategy is to be found in 3.2 of
this report . It will make it possible to assess to what extent the
more favourable trend in 1986 and 1987 is the result of a
change in behaviour patterns in the direction sought by the
cooperative strategy and of the exceptional improvement this
year in the terms of trade for the European economy .
In any event , however , it is clear that the problem of
unemployment will not go away by itself . This is why , while
taking into consideration recent short-term economic
developments , this Annual Report recommends a number of
measures that are consistent with the cooperative strategy
defined last year .
The data available on the market sector ( excluding housing
and agriculture ) in the four largest Community countries also
point to the need for a significant rise in the investment ratio .
Taking the average for those four countries , the growth of
the capital stock is still unchanged at its lowest level since
1980 , i . e . around 2,5% (cf. Graph 18 ). For it to grow again
at an underlying rate of 3,5 % and , in so doing , to underpin
on a sustainable basis an equivalent rate of growth of
production , investment would have to rise by between 2 and
3 percentage points of value added in the market sector
( assuming a constant intensity of capital ). The investment
drive required is therefore substantial .
These measures and their medium-term effect will be
discussed in detail below ( 3.3 and Chapter 4 ). Their aim
must be to reduce unemployment in two ways : first through a
return to a sustained rate of growth that should average
between 3% and 3,5% in the period 1986 to 1990 and ,
second , by maintaining and even raising the employment
content of each percentage point of growth . Basically , these
measures are centred around two main objectives : the
macroeconomic objective aims at holding demand at an
appropriate level and at raising the profitability of more
employment-creating investment by maintaining a moderate
increase in real wage costs per head . The microeconomic
objective aims at continuing to improve the adaptability of
the markets for goods and the factors of production , and
to provide the right climate for the creation of new
businesses .
To achieve the desired reduction in the unemployment rate ,
there is also a need for a continuing increase in the number of
jobs created for each percentage point of growth . From a
historical viewpoint , the relationship between growth and
employment has , in any event , shifted since the 1960s in the
latter's favour . This is clearly illustrated by the narrowing of
the gap between economic growth and the increase in
employment , that is to say , by the lowering of average
productivity per person employed ( see Graph 17 ). The rather
favourable response of employment to the modest recovery
in growth since 1983 is also significant here .
The fact that productivity gains per person employed in the
whole economy are still relatively modest does not , however ,
mean that Europe must be content with a defensive
employment strategy and should steer clear of technical
progress . Quite the contrary , modernization of productive
capacities , coupled with large productivity gains wherever
this is possible , is desirable to increase economic efficiency
and living standards , and is necessary if Europe is to be able
to reinforce its competitiveness and assert its presence on
those particularly important future-oriented markets on
which it has lost ground during the 1970s .
Thus , for example , in the scenario illustrating the
cooperative strategy this year, the growth rate is expected to
average 3,5 % in the period 1 986 to 1990 , a figure indicated
in last year's Report . The unemployment rate could be cut by
some 4 percentage points by 1990 , to stand at around 7 % in
the Community of Ten ( around 8% in the Community of
Twelve ). However , growth averaging close on 3,5 % in the
period 1986 to 1990 is assumed to accelerate gradually . In
this situation , employment could even increase , towards the
end of the decade , at a rate of above 1 ,5 % . The determined
application of the strategy should thus lead to a situation in
1990 in which not only the rate of unemployment would be
already significantly reduced , but also the European
economy would be in a better state so that , in the following
years , an adequate growth in conditions of stability could be
expected , and further rapid reduction in unemployment
achieved .
It is therefore necessary to reconcile the modernization of
productive capacity with the creation of a sufficient number
of jobs in the economy as a whole . This is possible since the
No L 385 / 38 Official Journal of the European Communities 31 . 12 . 86
relationship , at the macroeconomic level , between growth
and employment is in reality the result of several factors :
( i ) In a situation of more dynamic growth , the rate of
utilization of the capital stock is able to rise to a higher
level on a durable basis , thus improving capital
productivity and so creating conditions favourable to
extra employment .
fall also benefits those sectors where productivity gains
are weaker . In effect , thanks to the corresponding
increase in their relative prices , sectors with weak
productivity gains can maintain profitability and so are
in a position to create jobs . There is thus a transfer in
purchasing power between sectors which is related to
technical progress , and which is favourable to
employment ( 1 ).
For this mechanism to function well , which is desirable
from the point of view of employment , two conditions
must , in principle , be fulfilled : moderate growth in real
wage costs per head must also benefit those sectors
where productivity gains are above average . In
addition , markets must play , as efficiently as possible ,
their role in forming prices : a strengthening of
competitive forces and completing the internal market
will contribute to this . A stable monetary environment
also makes the market signals relative to price changes
that much clearer .
( ii ) The reduction and reorganization of working time can
contribute to an increase in the employment content of
growth . Such a reduction can take effect through an
increase in part-time working, or by a reduction in the
length of the working week or year . However , these
measures will only be fully effective in terms of
employment if they do not put a brake on the
mechanisms which lead , at the macroeconomic level , to
stronger and more employment-creating growth , and if
they are neutral for the level of costs . In this case , the
productivity gains distributed can also be in the form of
a reduction in working time . In addition , the increase in
the number of temporary workers and workers on fixed
contracts can be a further factor in raising the job
content of growth in particular where firms , as a result ,
decide not to introduce overtime working . Such
measures coming largely within the ambit of
agreements between the social partners should form the
basis for a deeper dialogue between both parties .
Thus , a moderate growth in real wage costs in the economy
as a whole , modifying the relative remuneration of labour
and capital in a direction favourable to the latter , also works
— at the micro- and macroeconomic level — in favour of
employment . Therefore , on a company level , it encourages a
more extensive utilization of the capital stock . At the same
time , however , it contributes to the creation of better
conditions for the development of activities which are more
employment-creating .
An important aspect of the measures recommended by the
cooperative strategy is thus clearly discernible , viz the close
complementarity that exists between them, irrespective of
whether they are macroeconomic or microeconomic
measures . An acceleration in growth will be all the more
conducive to employment if firms are able to respond flexibly
to increased demand . However , greater adaptability of the
markets in goods , labour and capital is not sufficient by itself
to encourage firms to undertake investment the profitability
of which is not also assured by favourable demand prospects .
In the final analysis , it is within a context of dynamic growth
that increased market adaptability will be fully justified , both
economically and socially . Failing that , there may be a
resurgence of defensive behaviour that will jeopardize the
very foundation of the renewal of the European economy.
( lii ) Finally , there is a long-term trend stemming from the
gradual restructuring of employment in favour of
sectors with low productivity gains per person
employed , notably the service sector , and to the
detriment of industry , where productivity gains are
higher . Thus , between 1970 and 1983 , the share of
employment in the Community (EUR 6 ) accounted for
by market and non-market services rose from 48 to
59% . At the same time , productivity in the service
sector rose at an annual average of only 1 ,6 % during
the same period , and that in manufacturing by
3,3% .
The fact that trends in productivity gains between
sectors and between firms have differed is only to be
expected . Even so , favourable conditions must allow
the productivity gains realized in the more dynamic
sectors to be enjoyed throughout the economy and , in
the final analysis , to create jobs . Moderate growth in
real wage costs per head in all sectors of the economy
and the mechanism of relative prices play a key role
here .
In effect , when sectors with higher than average
productivity gains take advantage of this situation to
lower their prices in relative terms , not only do they
improve their competitivity and are able to increase
production in response to increased demand , but this
Without a rapid change in attitudes and policies, the
Community will still be faced with unemployment of over
10% in 1 990 . This is an unacceptable prospect. A significant
v ) For the relative growth of employment , productivity and prices
within the different sectors of the Community , see chapter B.3 of
the Annual Economic Review 1986 / 87 . Table 14 of this report
shows that this mechanism has also had a particularly strong
effect in Japan : the differences between gains in productivity , but
in addition changes in relative prices , were particularly large
between industry and the other sectors . The dynamism of
Japanese industry has also profited other sectors of the economy
which ( taken together ) were the only ones to have increased their
employment .
31 . 12 . 86 Official Journal of the European Communities No L 385 / 39
consumption deflator , i.e. in terms of purchasing power , is
expected to increase by 2,3 % , faster than at any time since
1980 .
Furthermore , lower oil prices will have a positive direct effect
on the level of economically productive capacities , either
through more extensive use of the existing capital stock or
because firms will keep in operation longer , plant that would
otherwise have been scrapped .
and lasting reduction in unemployment can be achieved
through more buoyant and employment-creating growth, of
the order of3 to 3,5% on average in the years 1 986 to 1 990 .
Investment plays a key role here . Its share of value added
would have to increase progressively by around 3 percentage
points in total. Furthermore, the relationship between
growth and employment must improve . This does not mean
that Europe can be content with a defensive strategy
regarding employment. On the contrary, competition from
outside makes it necessary to modernize production
structures . The relationship that is emerging between growth
and employment is, however, determined by other factors,
such as a reduction and reorganization in the average
working time of each person employed, which is neutral for
the overall level of costs, more rapid job creation in sectors
with relatively low productivity gains, and the moderate
growth of real wage costs per head in all sectors of the
economy. In effect, when sectors with more than average
productivity gains also benefitfrom moderate growth in real
wage costs per head, they are able to reduce their relative
prices . This improves their own competitivity and also
benefits the sectors ofweaker productivity growth, who thus
see their profitability improving and so are able to create
jobs . Technical progress and increasing employment can be
reconciled with each other at the macroeconomic level.
These factors are conditioned, to a large extent, by an
increased adaptability of markets . Such adaptability will,
however, find its socialjustification only within a context of
more dynamic growth . This underscores the close
complementarity of the measures recommended by the
cooperative strategy, either at the macroeconomic or
microeconomic level.
Various indicators bear witness to the turnaround in the
trend of the 1970s towards deteriorating supply-side
conditions . The turnaround , in fact , dates from the
beginning of the 1980s :
— since 1980 , real labour costs per head (wages plus social
security contributions ) in the Community have risen on
average by only some 1 % a year compared with 2,4%
between 1973 and 1980 . Major sacrifices have ,
therefore , already been made in a number of countries by
employees , especially since , in many cases , their
disposable income has been eroded by even higher
taxation and parafiscal charges ,
— real unit labour costs in the Community , which are a
measure of the relative movements of real compensation
of employees and labour productivity , are now back at a
level, approaching that recorded in the 1960s ,
3.2 . Forecasts for 1986 and 1987 seen from the viewpoint of
the cooperative strategy
— the accompanying rise in the macroeconomic profit share
(operating surplus on value added ) has led to a further
increase in the profitability of productive capital
(operating surplus on the capital stock ). Even so ,
profitability has as yet made up , on average for the
Community , only some of the ground lost since the first
oil shock ( see Graph 18 ),
— for the first time in at least 20 years , profitability is
outpacing real wages per head in a lasting fashion .
In terms of the ambitious objectives set in the cooperative
strategy , forecasts for 1986 and 1987 are hardly satisfactory .
In both years , economic growth ( 2,5% and 2,8% ,
respectively ) and the increase in employment ( 0,8 % on
average ) will fall short of the underlying rate necessary . Of
course , the return to a stronger growth rate can take place
only gradually . However , the slowness of the process at the
moment is worrying , especially since the Community is
enjoying the benefits of a substantial improvement in its
terms of trade that is , in principle , influencing the conditions
of supply and demand in the manner aimed at in the
cooperative strategy .
Nevertheless , it would seem that the development of real
labour costs per head is accelerating in 1987 . According to
most recent forecasts , they are expected to rise by 1,3% ,
their fastest increase since 1980 . Real unit labour costs will
probably decline by only 0,7% , a rate slower than in any
other year since 1981 . At the same time , the situation is also
less encouraging as far as external competitiveness is
concerned .
The improvement in the terms of trade has provided the
European economies with an opportunity to obtain a further
improvement in profitability while permitting a relatively
sustained increase in real household income . The fall in
prices of imported goods is having a beneficial effect not only
on firms , but also on households , which consume final
products . For example , real per capita compensation of
employees is likely to be more or less stable in terms of costs ,
whereas real compensation per head , adjusted by the private
Indeed , the ECU rose by 42 % against the US dollar between
March 1985 and June 1986 and fell by only 7,4% against the
yen . Of course , for each of the European economies taken
separately , the effect of these large exchange-rate movements
No L 385 /40 Official Journal of the European Communities 31 . 12 . 86
However , the weakness of demand in recent years and the
uncertainties attaching to it may work to the detriment of
investment . In this connection , the more-detailed analysis of
Graphs 18 and 19 , which compare the growth in the capital
stock in the four largest Community countries with the
profitability and the utilization rate of the capital stock ,
brings to light two interesting points :
was cushioned by the relative stability between Community
currencies , notably those participating in the EMS .
Nevertheless , the average rate of appreciation against the
currencies of the Community's 19 major trading partners
ranges from 14,3 % for the Federal Republic of Germany to
1,2% for the United Kingdom . Taking the Community
countries together , and excluding intra-Community trade ,
the average appreciation is 17,8% . The Community ,
therefore , no longer enjoys the advantages afforded it on a
number of third-country markets by a strong dollar . — although the growth in the capital stock fell in line with
profitability after the first oil shock , the temporary
improvement in profitability between 1976 and 1978 and
the improvement discernible since 1982 have not yet
provided a sufficient stimulus to investment ,
— the quite close link that appears to have existed until 1 975
between the rate of capacity utilization and the growth in
the capital stock appears to have weakened since . As in
the case of the profitability curve and the curve
representing the growth of the capital stock , a large gap
has opened up since 1981 between the growth in the
capital stock and the utilization rate of productive
capacity .
The changing international environment has , of course , had
implications for the growth and structure of total demand.
An improvement in the terms of trade on the scale enjoyed by
the Community is naturally leading to a shift of emphasis
between external demand and internal demand . Yet the
adverse affects on exports of the appreciation of European
currencies and the slowdown in growth in some of the
Community's major trading partners have not been long in
making themselves felt . Since it was desirable for a number of
other reasons , the transfer of income from outside the
Community equivalent to around 2 % of GDP has been used
in several countries either to improve the financial situation
of firms , in cases where nominal wages have adapted rapidly
to falling inflation , or to return to a healthier public finance
position more quickly . In these countries , the revival in
internal demand is much weaker and much more diluted over
time than would have been the case if consumers had
continued to be the ones to benefit most from the
improvements in the terms of trade .
In 1986 , therefore , the improvement in the terms of trade has
had a beneficial effect on both supply-side and demand-side
conditions . This effect will , it is true , continue with regard to
internal demand in 1987 but it will remain insufficient and
may rapidly diminish . Under the circumstances , an
improvement in the unemployment Qutlook will have to
come from an effective implementation of the cooperative
strategy .
In all , total demand ( internal demand plus exports ) is
expected to expand by only 3,6% in 1987 , and this is
insufficient , bearing in mind the response of imports , to push
GDP growth above 3 % .
In order to achieve the cooperative strategy's objectives , the
attitudes and policies of all those involved in economic
activity will , therefore , have to be modified , in some cases
significantly , as of 1987 .
The growth in internal demand since 1985 is attributable , for
the most part , to a rapid increase in private consumption
( 3,6% on average in 1986 and 1987 ) and investment in
equipment ( between 6 and 7% in 1986 and 1987 ). The
recovery in investment in construction is noticeable , but
growth here remains weak (3,2% in 1987 ).
First , firms should respond , with even greater resolve , to the
improvement already underway in supply-side conditions by
increased investment . It is true that each investment decision
depends on economic calculations . This is why it is advisable
to continue with efforts to improve profitability , to lower
long-term real interest rates , on a sound basis , and to develop
the market for risk-capital ; but the investment decision is also
based on confidence and risk-taking . Behaviour patterns here
must also be modified in a direction which is favourable to
employment . Firstly , a more dynamic trend in business
investment would be positive as far as demand is concerned .
Secondly , from the point of view of supply , it would enable a
parallel development of productive capacity and output to
take place which would allow a slackening of inflationary
pressures which could result from rising utilization rates . The
European economies would thus benefit fully from the
current situation . Inflationary pressures which could result
The share of resources in GDP devoted to investment and the
growth in capital stock still however remain below what is
required in the medium term . Some of the determinants of
business investment are , however , displaying favourable
trends . The average profitability of the capital stock is
increasing ( see Graph 18 ) although only in the Federal
Republic of Germany is it back to a level approaching that
prior to the first oil shock . In all Community countries , the
utilization rate of productive capacity is climbing rapidly ( see
Graph 19 for the four largest Community countries ). The
ebb in nominal interest rates is continuing , and is also one of
the factors shifting the pattern of returns on financial
investment and productive investment in favour of the
latter .
31 . 12 . 86 Official Journal of the European Communities No L 385 / 41
The necessary economic policy mix was spelt out in last
year's Annual Report . It must now be effectively applied .
This also implies that the social dialogue at present under
way at the Community level extends to the Member States so
that the respective contributions of firms , employees and
governments can be better adapted to each other .
At country level , the mix of policies must not only take
account of the available room for manoeuvre and that which
is being created but its implementation requires a broad
acceptability on the part of the social partners and , to this
end , must be the subject of an in-depth dialogue at national
level with , and between , the two sides of industry .
from this rise in capacity utilization rates at present are very
largely neutralized by the moderation in import costs and
wage costs . In addition , the improved profitability resulting
from this moderation encourages a more extensive use of the
capital stock . Thirdly , an even faster rate of job creation
would also fully justify the efforts already made in many
countries by employees . It would improve the chances that
real wages remain favourable to employment for a
sufficiently long period .
However , economic policy makers have to continue to play
their part . They must also show by their actions that they are
determined to contribute to more buoyant supply and
demand conditions in the Community . In any event , they
cannot avoid their responsibility in the matter .
In 1986, the improvement in the terms of trade has
favourably influenced both supply-side and demand-side
conditions . The revival in profitability, underway since the
beginning of the 1980s, thanks also to the moderate growth
in real wage costs, has gathered pace . However, average
profitability in the Community has not yet returned to its
level of the 1 960s . According to the forecasts, the growth in
real labour costs will speed up in 1987. In addition, the
growth in total demand in 1987 will remain below the level
necessary for the purposes of the cooperative strategy. In
particular, investment will not stage as strong a revival as
could be hoped in view of the improvement in most of its
main determinants . A stimulus could, however, comefrom a
better outlook for demand. Under the circumstances, an
improvement in the unemployment outlook will have to
come from effective implementation of the cooperative
strategy by all those involved. Firms should react to the
improvement in supply-side conditions with a more rapid
investment and job-creation effort. This will create the
conditions most conducive to, and will provide full
justification for, the continuing moderate increase in real
labour costs per head that is necessary. Economic policy
makers will, however, also have a part to play .
Budgetary policy has a key role to play through the
restructuring of public revenue and expenditure in favour of
more employment-creating growth and through the way in
which it underpins demand . In this respect , three types of
measure may be envisaged , the implications of which are
looked at in greater detail in Chapter 4 :
— A recovery in economically profitable public investment
could add to the revival in private investment with a view
to modernizing productive capacities in Europe . It would
also provide a direct stimulus to growth .
— The moderate growth in real wages should be of the same
order ( around 1 % per annum) as that in the Report of
last year and could be complemented by some reduction
in social insurance contributions . From the viewpoint of
firms , this measure , which improves supply conditions
and favours investment , would alleviate indirect wage
costs which , as a Community average , represent about
30% of the total wage bill . From the point of view of
employees , it would allow a somewhat faster rate of
growth in purchasing power and maintain the level of
demand .
The financing of social security systems should , of
course , be kept on a sound basis . However , account must
also be taken of the fact that , for social security systems ,
the economic crisis is pushing up expenditure and adding
to the shortfall in revenue and this will be reversed as and
when the situation improves . The room for manoeuvre
that will , therefore , become available would have to be
used systematically to alleviate the burden on labour
costs , and thus to reverse in part the trend experienced in
the 1970s . The budgetization of social security
expenditure associated with the crisis could further be
considered .
3.3 . Macroeconomic policy imperatives in 1987 and
beyond
The consolidation that has taken place since the beginning of
the 1980s and the recent changes in the international
environment provide the European economies with an
outstanding opportunity . Company profitability is picking
up . Inflationary pressures originating inside the Community
are still weak ; the improvement in the terms of trade having
had a powerful disinflationary effect , and inflation , taking
the average for the Community , having fallen to its lowest
level since the 1960s . The reduction in the oil bill has eased
the external constraints and the Community is showing an
external surplus equivalent to 1 ,2 % of GDP in spite of the
depressed level of its exports .
The opportunity open to the Community must be seized with
determination , not only with a view to resolving the most
pressing problem facing the European economies , but also to
ensure that Europe makes its contribution to correcting
current-account balances worldwide and to providing the
response necessary to the problems of the developing
countries .
— A reduction in direct taxation paid by households and
firms would also help underpin demand and improve
conditions on the supply side .
No L 385 / 42 Official Journal of the European Communities 31 . 12 . 86
Together , these measures ( 1 )- should not jeopardize the
process of reducing the medium-term deficit . Indeed ,
combined with other measures , improving in addition supply
conditions , they contribute to stronger and sustained growth
and to a reduction in unemployment . As a result , expenditure
linked to the crisis will diminish progressively and the tax
base will increase more rapidly .
However , faster growth is also necessary from 1987
onwards . This could , it is true , be achieved through closer
economic policy coordination with the Community's major
partners ( see Chapter 4.7 ). It could also be achieved if there
were a further acceleration in the growth rate of private
investment stemming from increased confidence on the part
of business with regard to the future trend of demand and
profitability . In the case of an unfavourable trend , it could be
necessary to envisage a limited and temporary increase in the
budget deficit on average for the Community , respecting
nevertheless the objective of medium-term consolidation of
public finances .
This does , of course , pose the problem of budgetary policy
coordination in the Community . Some countries still have a
great deal to do to achieve budgetary consolidation . Others
have some headroom or would have some headroom in a
context of more dynamic growth .
The task of the countries in the former category would be
considerably facilitated if growth did pick up . For the
countries in the latter category , budgetary consolidation in
other Member States , achieved against a background of
sluggish growth , may be prejudicial to their own growth .
Here too , the benefits of cooperation are clear to see .
A continuing downward movement of interest rates in the
Community , which would reflect the fall and increased
alignment of inflation rates , can also make a positive
contribution to demand . Moreover , the monetary
authorities might have to accept further falls in interest rates
in order to resist the pressures to which the dollar's exchange
rate will be exposed . Internally , however , measures will have
to be taken to avoid a build-up in potential liquidity that
( ] ) These measures are illustrated in more detail in the Box .
could at a later stage jeopardize the headway made in the
battle against inflation , while ensuring adequate financing of
real growth . In this respect , the monetary authorities'
headroom will be all the greater if the inflation rate pressures
originating inside the Community , and in particular the trend
of nominal wage costs , remain weak .
The application of macroeconomic policies based on the
broad lines defined above will provide full justification for
the efforts made by employees . It is also indispensible if the
necessary microeconomic measures to make markets more
adaptable are to be fully effective as regards their impact on
employment .
The consolidation efforts made since the beginning of the
1980s and the recent changes in the international
environment provide the European economies with an
outstanding opportunity that must be seized resolutely, not
only with a view to resolving the problem of unemployment,
but also to ensure that Europe makes its contribution to
correcting current accounts worldwide and provides the
response necessary to the problems of the developing
countries . Budgetary policy has an important part to play
through the restructuring of public revenue and expenditure
in a direction favourable to the improvement in supply
conditions and employment, and through the appropriate
support it should provide for growth . The reduction and
closer alignment of inflation rates should allow the decline in
interest rates to continue . Even so, while taking account of
the problems that would arisefrom afurtherfall in the dollar
onforeign-exchange markets and of the need to ensure sound
financing ofgrowth, measures should be taken to avert any
build-up of potential liquidity that might ultimately prove
prejudicial to stability. Implementation of the measures
recommended must be the subject of close cooperation
between (a) Member States, with due regard being given in
particular to the different degrees of room for manoeuvre
available in each country, and (b) between, and with, the
social partners at national level in the interests of assuring a
broad acceptance by the social groups, and so that
contributions of each can be balanced.
TABLE 12
Public investment and total investment in the Community ( ! )
(in % of GDP)
1970 1974 1979 1984 1985 ( 2 ) 1986 ( 2 ) 1990 ( 3 )
Public gross fixed capital formation 4,2 4,0 3,2 2,8. 2,8 2,7 3,6
Gross fixed capital formation for the
total economy
22,7 22,3 20,8 18,6 18,4 18,5 21,7
(') Excluding Greece , Ireland , Spain and Portugal .
( 2 ) Economic forecasts of the Commission services , October 1986 .
( 3 ) Cooperative scenario .
Source : Eurostat and Commission services .
31 . 12 . 86 Official journal of the European Communities No L 385 /43
TABLE 13
Indicators of supply and demand
1961 to
1973
( average )
1974 to
1981
( average )
1982 1983 1984 1985 « 1986 (') 1987 «
(i) Indicators of demand (% changes per
annum):
Domestic demand at constant prices :
Community index
Gap : EUR / other OECD countries
5,0
- 0,5
1,6
- 0,6
0,8
1,0
0,8
- 1,9
1,4
- 4,2
2,2
- 1,1
3,8
0,4
3,5
0,9
Private consumption 5,0 3,0 0,6 1,0 0,9 2,2 3,7 3,5
GFCF 5,6 0,0 - 1,5 - 0,3 1,3 2,4 4,2 5,1
Exports of goods and services 9,2 4,6 1,5 3,1 7,6 5,7 2,2 3,7
(it ) Indicators of supply conditions :
Employment
(% change per annum ) 0,3 - 0,1 - 0,9 - 0,8 0,1 0,4 0,8 0,8
Productivity
(% change per annum ) 4,5 2,1 1,5 2,0 1,9 2,0 1,7 2,0
Real unit labour costs
( index 100 : average 1961 to 1973 ) 100,0 104,3 103,0 102,4 101,1 99,9 98,1 97,4
Profitability ( 2 )
( index 100 : average 1961 to 1973 ) 100,0 68,0 61,8 59,8 64,7 68,4 77,9 82,8
Equipment investment
(% change per annum ) — — 0,2 0,3 3,4 8,0 6,1 6,9
Cost competitiveness ( 3 )
( index 100 : average 1961 to 1973 ) 100,0 108,8 98,9 93,2 86,7 85,6 95,1 95,9
(') Estimates and economic forecasts of Commission services (October 1986 ).
( 2 ) Estimate for the Community of Ten : gross operating surplus in the whole economy on the capital stock at replacement
cost .
( 3 ) Real effective exchange rates on the basis of unit labour costs in the whole economy with respect to other OECD countries ,
excluding intra-Community trade .
Source: Eurostat and Commission services .
No L 385 / 44 Official Journal of the European Communities 31 . 12 . 86
TABLE 14
Sectoral developments in Europe , the United States and Japan ( 1970 to 1982 )
EUR 6 ( 3 USA Japan
1,8
1,7
3,4
2.4
2.5
2,1
2,1
3.6
1,9
2.7
0,2
7,1
5.1
4.2
5,2
67,2
83,0
117,2
124,5
99,9
97,2
97,8
136,2
121,4
121,7
68,7
100,4
132,2
133.4
111.5
( 1 ) Value added at constant prices
(% change per annum 1970 to 1982)
Agriculture
Industry ( ! )
Market services
Non-market services ( 4 )
Total ( 2 )
(2 ) Employment 1982
(Index = 100 in 1970)
Agriculture
Industry (')
Market services
Noil-market services ( 4 )
Total ( 2 )
(3) Productivity per person employed
(% change per annum 1970 to 1982)
Agriculture
Industry ( J )
Market services
Non-market services ( 4 )
Total ( 2 )
(4) Relative price with respect to the
prices of industrial products in 1 982
(Index = 100 in 1970)
Agriculture
Industry ( J )
Market services
Non-market services ( 4 )
Total ( 2 )
5.2
3.3
2,1
0,5
2,5
2,3
2,3
1,0
0,2
1,0
3,5
7,1
2.7
1.8
4,3
83,5
100,0
110.3
138.4
110,6
120,7
100,0
112,4
125.3
116.4
147,9
100,0
161,3
240,8
147,8
( 1 ) Narrow definition .
( 2 ) Including the other sectors ; energy , building , and public works .
( 3 ) Belgium , Germany , France , Italy , Netherlands , United Kingdom .
( 4 ) Essentially general government .
Source : Eurostat and Commission services .
31 . 12 . 86 Official Journal of the European Communities No L 385 / 45
GRAPH 17
GDP and employment in the Community (EUR 12 ) ( annual percentage growth rate) (')
(') The horizontal lines indicate average annual rates of growth in each of the periods .
Source: Eurostat and Commission services ( 1985 to 1987 : Estimates and forecasts of Commission services , October 1986 ).
No L 385 / 46 Official Journal of the European Communities 31 . 12 . 86
GRAPH 18
Profitability (*) and growth of the capital stock ( 2 ) in the Community (EUR 4) ( 3 )
(') Net operating surplus as a percentage of gross capital stock at replacement cost .
( 2 ) Gross capital stock at constant prices (% changes per annum ).
( 3 ) Germany , France , Italy , United Kingdom .
Source : Commission services .
31 . 12 . 86 Official Journal of the European Communities No L 385 / 47
GRAPH 19
Growth and utilization rate of the capital stock ( J ) ( 2 ) ( Index : peak of last 25 years = 100 )
Germany France
Italy United Kingdom
(') Growth of the gross capital stock .
( 2 ) Utilization rate on the basis of business survey data for manufacturing industry .
Source: Commission services .
No L 385 /48 Official Journal of the European Communities 31 . 12 . 86
Medium-term scenarios for the cooperative strategy
An illustration of the possible evolution of the Community economy is given , on the one hand , in a
medium-term projection on the assumption of no change in present policies and economic behaviour
and , on the other hand , in a highly stylized representation of the cooperative strategy . These latter
figures are only intended to be illustrative and should not be interpreted as formal objectives of
policy .
These scenarios have been calculated using the Compact model for the Community of Ten . This
model was described in detail in European Economy No 27 .
Hypotheses regarding the international environment
For both the baseline projection and the cooperative strategy it has been assumed that oil prices would
continue to climb again between now and the end of the decade . This will produce a deterioration in
the terms of trade amounting to some 7% during the period 1987 to 1990 . The exchange-rate
hypothesis is for virtual stabilization at their average 1986 level of the dollar / ECU and yen / ECU
exchange rates .
In the United States , the general government deficit would be gradually cut back , from 3,4 % of GDP
in 1986 to 1 % in 1990 . It would be stabilized in Japan at 0,5 % of GDP with effect from 1987 , after
touching 1 % in 1986 . Growth would be modest in the United States ( averaging 2,7 to 2,8 % in the
period 1986 to 1990 , depending on the scenario chosen ), and fairly firm in Japan ( 3,7 to 3,8 % ) over
the same period .
A scenario illustrating the cooperative strategy
The scenario used to illustrate the cooperative strategy this year leads to the same growth rate as in last
year's Annual Report ( 3,5% for the average of the years 1986 to 1990 ). Nominal demand is
maintained at approximately the same rate of growth in the cooperative scenario as in the baseline
projection (6 % or slightly more ). This growth rate is sufficient to generate a fall in the unemployment
rate equivalent to 3,7 percentage points of the labour force between 1986 and 1990 and , at the end of
the decade , brings the trend rate of increase in employment to 1 ,5 % per annum or a little higher . The
economic policy mix is designed to bring about , under conditions of monetary stability , faster growth
of the European economies through joint action on supply-side and demand-side conditions .
The same hypothesis as last year was taken for the growth in real labour costs per head , that is to say
an annual increase af 1 % ( average for the period 1986 to 1990); the gap between this increase and
productivity gains in annual average terms being 1,3 percentage points per annum .
This moderate growth in real labour costs is obtained in two ways : firstly , through an effort on real
wages excluding employers social security contributions : as in the scenario for last year , they increase
by 1,1 % on average for the years 1986 to 1990 ; secondly , through a reduction in rates of social
security contributions which is proportionally distributed between employers and employees .
Cumulated over four years ( 1987 to 1990 ), the fall in social contributions assumed , amounts ex-ante
to 1 % of GDP .
Medium-term budgetary policy is characterized by progressive reductions in direct taxation on
household and an increasing level of public investment . These two measures , cumulated over four
years each , amount to 1 ,2 % of GDP . Besides the endogenous reductions in certain transfer payments
( in particular unemployment benefits ), it was assumed that the progressive improvement in the
economic situation would enable the growth of expenditure aimed at directly easing the situation on
the labour market ( early retirement programmes etc .) to be moderated .
The lasting reduction in inflation , the improvement in the financial situation of firms , which relieves
pressure on the capital markets , and a monetary policy which , while remaining directed at stablility ,
finances faster real growth , imply a reduction in long-term interest rates of about 3 percentage points
on average in the Community between 1986 and 1990 . For the period as a whole , the real interest rate
amounts to 3,6% on average .
31 . 12 . 86 Official Journal of the European Communities No L 385 /49
Between 1987 and 1990 , the medium-term tax reductions and public expenditure increases cumulate
to a total of 3,2 % ofGDP . The higher growth rate and lower expenditures on social security to a large
degree offset measures in their impact on the budget deficit . By 1990 , the budget deficit is 1,2% of
GDP lower than in 1986 , which nonetheless represents a slower decline than in the baseline
projection .
In the cooperative scenario , the current balance on average for the years 1986 to 1990 is
0,5 percentage points of GDP below that of the baseline scenario ( 0,1 % of GDP as against 0,6 % ). A
variant of the cooperative scenario is presented in section 4.7 . The assumption behind this variant is
that Japan contributes more to the process of absorbing the major world imbalances . As a result , for
the years 1 986 to 1 990 , the Community current account improves by 0,3 percentage points of GDP on
the cooperative scenario .
Some principle macroeconomic aggregates illustrating the cooperative strategy
Baseline projection Cooperative scenario
Annual average growth rates
1986 to 1990 (%)
GDP volume
GDP price
GDP value
2,7
3,3
6,0
3,5
2,7
6,2
Employment
Productivity
Private consumption
Investment
Real wages per head
Real unit labour costs
0,7
2,0
3,0
3,7
1,9
- 0,3
1,2
2.3
3.4
6,8
1,1
- 1,3
Annual average levels,
1986 to 1990 (%;
Long-term rate of interest ( % )
Balance of payments
Current account (% GDP)
7,7
0,6
6,3
0,1
1986 actual level
1990 level in
cooperative scenario
Unemployment rate ( % ) 10,8 7,1
Budget deficit (% of GDP ) 4,7 3,9
Note: The data are for EUR 10 . For EUR 12 , the main difference in the Community average would be in the rate of
unemployment : 1986 : 11,9 % ; 1990 : 8,2 % .
The above figures were derived from a highly stylized model and are only given to indicate a possible range of magnitudes .
4 . CONTRIBUTION OF POLICIES TO THE COOPERATIVE STRATEGY
4.1 . Monetary guidelines and coordination questions
The Community's member countries have made further
progress in converging towards a monetary policy which
provides the scope for real growth in an environment of
monetary stability . The deceleration and more convergent
development of monetary aggregates are clear indications of
the increased coherence of national monetary policies (Table
1 5 ) . In the late 1970s , the growth of broad money was about
15 % a year in the Community (EMS 13 % ), while it is now
around 9,5% (EMS under 7% ), and is not expected to
accelerate again . Thus , monetary policy has made an
important contribution to the deceleration in the Community
inflation rate . While inflation in the Community still
averaged 13 % in 1980 , an average of 3,7 % is expected this
year .
No L 385 / 50 Official Journal of the European Communities 31 . 12 . 86
rate of inflation , but this does not mean that the Member
States in their monetary policy should all react to imported
price stability in the same way .
One of the primary objectives of monetary policy is to
achieve and preserve a high degree of monetary stability , a
role which is in full accordance with the cooperative strategy .
Monetary stability is the indispensable basis for the other
objectives of economic policy . By reducing uncertainties on
future purchasing power , it creates favourable conditions for
a cooperative pattern of behaviour by those involved in
economic activity and , in particular , weakens the
justification for indexation mechanisms . Accordingly , it
improves the climate for adjustments in relative prices and
contributes to an efficient allocation of the factors of
production .
In countries where the inflation rate and inflationary
expectations have already stabilized at a low level , there
should be no fundamental change in the course of monetary
policy embarked upon before import prices started to fall . In
this way , monetary policy underpins higher real growth . In
other respects , a short-lived and transitory deviation from
the targeted growth ofmoney supply does not necessarily call
for corrective action , since adverse effects on expectations
are improbable in these countries . If the presently favourable
preconditions for growth actually lead to a higher real
growth trend in 1987 , monetary policy should take this into
consideration in defining the money supply target .
A medium-term orientation of monetary policy is
appropriate for influencing expectations in the desired
direction in a durable way , and for safeguarding the successes
already achieved in reducing inflation .
However , monetary policy must take due account of the
scope for real growth . If, in the course of the implementation
of the cooperative strategy , the growth rate of productive
potential were to rise , monetary policy would have to
accommodate this . Higher money supply would also be
necessary if a permanently low level of energy prices were to
increase productive potential .
Countries which have made significant progress in fighting
inflation , but whose level of inflation is still well above the
Community average — e.g. Italy — should consolidate the
imported contribution to stability which initially represents
an effect only on the level of prices , and should aim to bring
inflation down permanently . This aim can be achieved if it is
made explicitly clear and credibly supported through
monetary policy decisions . A monetary policy which
continues to focus on reducing monetary growth would by
no means prevent further falls in interest rates . On the
contrary , as inflationary expectations stabilize at a low level ,
nominal and real long-term interest rates will come down .
Quantitative money supply or credit targets continue to play
an important role in a monetary policy geared to the medium
term and based on a high degree of price stability . However ,
financial innovations , the increasing liberalization of capital
movements , structural changes in the money and capital
markets , and changes in money demand behaviour can in
certain circumstances have an important impact on monetary
aggregates . This has to be taken into account when monetary
developments are assessed . The announcement of an annual
money growth target makes clear the basic course that
monetary policy is intended to follow . Employers , unions
and the government can adjust their decisions accordingly .
Money supply targets increase the level of information
available to economic agents ; the scope for friction is reduced
and consultation with employers and employed is made
easier . Countries whose room for conducting an independent
monetary policy is limited , and whose primary objective is to
stabilize the exchange rate , would also benefit from the
medium-term oriented monetary policy of the larger
countries ; exchange-rate expectations would be stabilized
and these countries can import and sustain a high degree of
price stability .
Lastly , countries which are now registering a low inflation
rate , but in which inflation expectations are still higher than
warranted by the actual rate of price increases ( e.g. France),
should adhere to a moderate growth of money supply
consistent with the scope for real growth in the medium term .
The recently observed decline and flattening of interest yield
curves in France — between January and August 1986
long-term interest rates fell by 3 percentage points and
short-term rates by 2 percentage points — is an indication
that monetary policy has gained in credibility . Low interest
rates on a lasting basis depend on inflationary expectations
stabilizing at a low level .
The stance ofpolicy proposed here means , on the other hand ,
that short-term cyclical considerations should play only a
minor role . Otherwise the successes in achieving a high
measure of price stability would again be put at risk . Nor
should it be overlooked that a monetary policy geared to the
medium term also has stabilizing effects on the cycle . During
a recession , money growth is , compared with GDP growth ,
relatively high . Liquidity increases but without adversely
affecting inflationary expectations . Conversely , the
At present , the cyclical situation is similar in most member
countries ; most of the countries are in a phase of moderate
upswing and all of them (except Greece ) are importing
stability through markedly falling import prices . There is no
sign of the danger of a renewed acceleration of inflation , at
least in the short run . However , the present low rate of
increase in consumer prices no doubt understates the trend
31 . 12 . 86 Official Journal of the European Communities No L 385 / 51
reduction of liquidity in a growth phase damps down
inflationary expectations , but without triggering the painful
effects of a stabilization policy .
common stability objective . The greater stability of exchange
rates was therefore both the result of the greater price and
cost stability in the EMS and its cause . The exchange-rate
adjustments of April and August 1986 have changed nothing
in this basic interdependence .
However , in a flexible exchange rate regime monetary policy
may be faced with a conflict between domestic and external
requirements . Thus , to avoid distortionary real disturbances
— which ultimately also endanger the primary objective of
monetary stability — a flexible response of monetary policy
with respect to exchange rate developments outside the
Community might be necessary . Such a response , however ,
should not represent a fundamental change in the chosen
stance .
Nevertheless , the EMS remains a system of fixed but
adjustable exchange rates . If economic policies are not
perfectly coordinated , the differences which accumulate in
the fundamental factors determining exchange rates must ,
from time to time , be corrected ; but such a policy does not in
principle support divergent economic trends from the
beginning . In future , financial markets will be more closely
integrated , not least because of a desirable increase in the
liberalization of capital movements . Interest rates within the
EMS have already moved considerably closer together .
Indeed , the difference between German and French
long-term rates has narrowed from 3 percentage points ,
before the realignment , to 2 percentage points thereafter . In
Belgium also , the decline in the long-term interest rates is
spectacular .
The realignment thus had real consequences for interest
rates . Currencies which were thought likely to be devalued
had to compensate for the pressure to adjust by means of
higher interest rates . This shows that , in the countries
suffering higher currency erosion , the delaying of the
realignment had an important stabilizing effect .
In recent years , nominal interest rates in Europe have
declined significantly . In 1981 , the level of short-term
interest rates averaged 15% for the Community . This
compares with the present 8,8% , which roughly
corresponds to the average for the 1970s (Table 16 ). It is
assumed that interest rates will also fall further — though
more slowly — in the foreseeable future . Despite all the
progress made in reducing inflation , real long-term interest
rates are still felt to be relatively high at present . In assessing
the present level of real interest rates , it must however be
borne in mind that in some countries the current inflation
rate is below the medium-term rate and the level of real
interest rates is therefore overestimated . Real interest rates
which are too low , do not adequately reflect relative scarcity
of capital . In the 1970s , they have led to an excessive
capital-intensity ofproduction , denoting the macroeconomic
misallocation of relatively scarce savings , and entailing a
deterioration in profitability . Moreover , real interest rates
which are too low reduce saving in the economy and thus
remove the basis for higher growth . As shown in Graph 20 ,
the level of real interest rates experienced for 1986 roughly
corresponds to the level of the late 1960s . On the other hand ,
the rate of return on physical capital is not yet back to this
level .
Because larger movements of capital are to be expected , the
increasing liberalization of the movement of capital initially
poses a potential risk to the stability of the EMS , but this can
be countered by the increased convergence of monetary and
overall economic policy . Thus , continuing liberalization of
capital movements is closely associated with an increased
integration of the economies of the Community and with the
further sound development of the European Monetary
System .
On the one hand , sufficiently high real interest rates are
necessary to avoid a misallocation of resources and to
safeguard the more employment-creating growth generated
by supply . On the other hand , it is certainly desirable for both
nominal and real interest rates to fall as a result of inflation
expectations being stabilized at a lower level , and because of
higher total savings . A monetary strategy geared to the
medium term is the appropriate way to achieve , on a sound
basis , the desired 'organic' fall in real interest rates .
The consequence of closer monetary integration is a greater
need for coordination . This is true of each country's
monetary policies within the EMS , but it is also true within a
country's economy for concertation of the instruments of
general economic policy : the instruments of economic policy
must be combined in such a way as not to endanger the
system of fixed exchange rates . Above all , a monetary policy
which is directed towards internal and external stability must
be supported by budgetary policy and an appropriate
evolution of incomes . Within the EMS , the need for
coordination , in particular between the large member
countries , has grown . Most importantly , agreement must be
further strengthened on the goals of stability policy .
The EMS has made a decisive contribution to the increasing
convergence of monetary policy and to reducing inflation
by subjecting the participating countries to a clear
exchange-rate discipline . Countries in which inflation has
been relatively high imported a measure of price stability
during lengthening periods of fixed exchange rates ; this
supported the disinflation process . But the EMS could gain in
stability only against the background of the strict pursuit of a
Coordinated action on monetary policy does not , however ,
imply the same policy in all countries . Each country faces
different problems . In particular , different methods are
No L 385 / 52 Official Journal of the European Communities 31 . 12 . 86
needed for dealing with the very unsatisfactory convergence
of budgetary policies and the related divergence which still
exists in inflation expectations . Each country must , as far as
it can , find the right policy mix to bring it closer to the
common goal of steady , non-inflationary and more
employment-creating growth .
The common course of the monetary policy of the EMS
member countries must also take account of developments
outside the EMS area . The more closely the economies
converge , and the greater the degree of liberalization of
capital movements , the less of a threat will be posed to the
stability of the EMS by external influences , because an
integrated monetary area would reduce their relative
importance . Capital movements to and from third countries
would be less of a danger to EMS stability because the
member countries would be equally affected . Here , the
strengthening of the ECU's role is of special importance . In
the event of capital moving out of the dollar , this would help
assure flows into the ECU and not , as has often been the case
in the past , into the German mark . In view of the uncertainty
surrounding the future movement of the dollar , this greater
integration of European monetary and currency policy
would be welcome . It would also make it easier for Europe to
act in concert in solving international imbalances .
Monetary policy in the Community should aim at an
adequatefinancing of the available scopefor real growth and
should at the same time preserve and, if necessary, advance
the successes achieved in reducing the trend rate of inflation
on a permanent basis . Up to the present, the task ofmonetary
policy has been made easier by external developments . The
depreciation of the dollar, as well as the the fall in oil prices
and in US interest rates, have increased the potential for
reductions in European interest rates without bringing the
threat of inflationary pressure. A tendency for the dollar to
fall substantiallyfurther might necessitate a flexible response
for European interest rates, to counteract the danger of a
renewed significant fall in the dollar exchange rate with its
negative medium-term consequences . However, attention
has to be paid to the necessity of avoiding any accumulation
ofnew potentialforfuture inflation . The EMS has proved to
be a stabilizing factor. Progress towards convergence in
association with greaterfreedom of capital movements have
increased the necessityfor a closer coordination of economic
policies both internally — between monetary policy, fiscal
policy and income developments — and among Member
States . The progress which has been achieved in creating a
zone of monetary stability reduces the impact of external
influences, and is an important condition for a greater
integration of the European economies .
TABLE 15
Deceleration and convergence in monetary growth
(percentages)
I 1961 to1969 1970 to1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987
Weighted average:
EUR
EMS 11,7
14,8
14,0
14,8
13,8
13,9
12,9
11,9
9,7
11,5
8,7
11,3
9,5
11,2
10,2
9,5
8,4
9,9
7,7
9,7
6,9
7,4
5,6
Measures of dispersion
related to average ( 1 ):
EUR
EMS 2,1
4,2
3,4
4,0
4,2
3,9
4,0
4,1
3,4
4,1
2,5
2,7
2,3
3,6
3,5
3.0
3.1
4,4
3,2
4,2
1,5
2,6
1,2
Measures of dispersion
related to lowest (' ):
EUR
EMS 4,8
6,5
5,2
10,2
9,2
9.0
8.1
6,6
4,4
7.3
4.4
4,8
3,0
5,8
4,8
5,5
4,4
5,0
2,8
4,4
1,6
3,8
2,0
(*) The dispersion index is a weighted sum of absolute deviations from the respective reference value .
Source : Commission services .
31 . 12 . 86 Official Journal of the European Communities No L 385 / 53
TABLE 16
Interest rate developments
fpercentages)
1961 to
1969
1970 to
1977
1978 1979 1980 1981 1982 1983 1984 1985 1986
Nominal short-term
interest rates:
EUR 12
EMS
USA
Japan
4,8
4,5
4,1
8,5
7,8
5,7
8,0
8,8
6,9
7,4
5,1
10,9
9,8
10,1
5,8
13,7
12,2
11,6
10,7
15,0
14,0
14,0
7,4
13,7
11.8
10,6
6,8
11,9
8,9
8,7
6,5
11,2
9,0
9,4
6,3
10,5
8,3
- 7,5
6,5
8,8
6,3
6,5
5,3
Nominal long-term
interest rates :
EUR 12
EMS
USA
Japan
6.5
6,3
4.6
9,8
9,2
6,5
7,7
10,3
8,8
7,9
6,3
11,2
10,1
8,7
8,3
13,0
11,5
10,8
8,9
15,1
13,5
12,9
8,4
14,3
12,5
12,2
8,3
12.7
10,6
10.8
7,8
12,0
10,3
12,0
7,3
10,8
9,1
10,8
6,5
9.0
7,5
8.1
5,2
Real long-term interest
rates (adjusted for
GDP prices) C1 ):
EUR 12
EMS
USA
Japan
2,4
2,3
1,6
- 0,3
0,4
0,3
- 1,0
0,1
0,6
0,5
1,7
0,4
1,3
0,2
5,7
0,1
0,8
1,2
6,1
4,2
3,5
4,0
5,7
3,7
2,1
5,3
6,6
4,4
2,7
7,7
7,1
5,7
4,5
8,2
6,7
4,8
4.1
7,0
5.2
2,6
2,1
3,9
3,9
(') The definition or real interest rates poses methodological problems . These problems are accentuated when substantial changes in the terms of trade , as in 1986 ,
bias the measurement of domestic prices with respect to the trend rate of inflation (upwards or downwards depending on the indicators ). An improvement in the
terms of trade tends to increase the price of GDP .
Source: Commission services .
No L 385 / 54 Official Journal of the European Communities 31 . 12 . 86
GRAPH 20
The return on capital and interest rates in the Community
(') Net operating surplus of the enterprise sector (excluding the housing sector ) as a percentage of its capital stock at replacement
costs (EUR 4). ( Index 1960 = 100 )
( 2 ) Yield on government securities deflated by the GDP price index ( EUR 10 ).
Source: Commission services .
4.2 . Budgetary policy
4.2.1 . Budget deficits , public debt, growth and
employment
Growth prospects in the Community can be improved by a
judicious balance of budget positions among Member States .
In 1986 , the reduction of budget deficits was , on the whole ,
somewhat more rapid than the year before . For the
Community as a whole (EUR 12 ) net borrowing , as a
percentage of GDP , is being reduced from 5,1% in 1985
to 4,7% in 1986 , whereas in 1985 the reduction was
three-tenths of one percentage point ( Tables 17 and 18 ). The
reduction of net borrowing was most marked in some
countries where its level was very high (Greece , Italy ), as well
as in Denmark where , in 1986 , a surplus is being achieved .
Further reductions in deficits are expected to take place in
1987 .
The reduction of budget deficits mentioned is not sufficient ,
however , in several countries to permit a stabilization , let
alone a reduction of the ratio of public debt to gross domestic
product . Indeed , in 1986 and 1987 combined , public debt as
a percentage of gross domestic product will increase by 4
percentage points or more in half of the Community
countries (Belgium , Spain , Ireland , Italy , the Netherlands
31 . 12 . 86 Official Journal of the European Communities No L 385 / 55
and Portugal — Table 19 ). The continuation of high budget
deficits is at the root of this development . In several
countries , interest charges are more or less equal to overall
deficits . In three countries , Germany , Luxembourg , and
especially Denmark , the public debt ratio is instead expected
to fall .
oriented normative budget concept , such as that of the
German Council of Economic Advisers ( Sachverstan­
digenrat ), shows that a certain annual increase in
government debt is legitimate . The Council of Advisers
considers this 'legitimate' increase to be 1 ,5 % of potential
output for Germany , in terms of budget definitions .
Budget deficits that lead to high public debt burdens have two
main macroeconomic consequences . Firstly , the public will
be ready to hold an increasing fraction of its assets in
government bonds only at increasing real interest rates .
Secondly , such budget deficits increase the risks of an
inflationary monetary expansion leading to an additional
increase in real interest rates as a premium for higher risk .
Because of the high level of real interest rates , private
investment is crowded out with negative consequences for
medium-term growth .
Judgement of the best budget policy strategy has always to be
based on both supply- and demand-side considerations . In
present conditions , there are good reasons to aim at a
strengthening of supply conditions and sustaining demand
conditions in the economy . The main Community countries
with approximately stabilized public debt situations are
Germany , France and the United Kingdom . In Germany , the
burden of the public debt is even declining . In France ,
existing room for manoeuvre is being used , large tax
reductions already being foreseen for 1987 and
supplementary reductions announced for 1988 while the
budget deficit would be simultaneously reduced in each of the
two years . If expansion strengthens abroad , and above all in
the Community , budgetary policy in France will be all the
more facilitated . In the United Kingdom , the Government , in
its autumn statement , provided for an increase in public
expenditure of some £ 4 3/4 billion in 1987 / 88 . This will
mean that public expenditure in 1987 / 88 is planned to be
about 2 % higher in real terms than the estimated out-turn in
1 9 8 6 / 8 7 . Thus , if the cooperative strategy should become by
its application the basis for economic measures for the
Community as a whole , some of these three countries could
reasonably envisage a further combination of tax reductions
and public investment , the mixture of which could
nevertheless be different from one country to the other . A
partial compensation for these measures could be expected
within a reasonable period of time , through the impact of
higher growth in terms of supplementary fiscal receipts and
lower expenditures related to the crisis .
Thus , since deficits and public debt are high , negative effects
predominate in the medium term , and their reduction should
only have beneficial effects . In the short run , negative
demand effects may dominate but , where the initial
condition is one of threatened financial instability , these
negative effects from corrective action may be of relatively
short duration . Denmark has provided an example of this in
recent years .
On the other hand , where the danger of financial instability is
limited and the public debt GDP ratio is already declining ,
the negative demand aspects of budgetary contraction
increase in importance . If taxes are reduced and other
measures are taken which improve the supply side , the initial
deterioration of the budget balance may , at least partially , be
compensated for after a relatively short time .
Budgetary policy must have a major responsibility in
achieving the cooperative strategy. As regards budget deficits
and the public debt, consolidation is still a priorityfor about
half the Member States of the Community. Other countries,
whose share in Community GDP is about two-thirds, are in
sustainable deficit situations and have some possible room
for manoeuvre for budgetary measures supporting growth .
These countries should now consider, where this is not the
case, a cooperative acceleration of budgetary actions to
strengthen supply and sustain demand conditions . With a
higher activity level in these national economies, the other
Member States will be able also to achieve consolidation
objectives at higher levels of activity and employment.
In practice , judging by the level of the public debt as well as
the speed at which it has grown in recent years , a substantial
reduction of the budget deficit as a percentage of GDP should
continue to be a primary objective in Belgium , Spain , Greece ,
Ireland , Italy and Portugal . If convincing medium-term
budgetary consolidation measures are combined with
effective monetary stabilization then large reductions in
nominal and real interest rates will be possible , which could
ease the effort needed to limit essential budgetary
expenditure .
4.2.2 . Public expenditure, taxation, growth and
employment
The reduction of budget deficits , while clearly a priority for
about half of the Member States , is not an objective per se
when the public finances are in a sustainable condition . In
fact , a certain government debt position in proportion
to GDP is consistent with the medium-term financial
equilibrium of an economy , for example a supply-side
The concept of 'room for manoeuvre' in budgetary policy has
at times focussed to an unfortunate degree on the important ,
No L 385 / 56 Official Journal of the European Communities 31 . 12 . 86
in the medium term . In addition , there are other projects
which could be realized in the longer term : motorway links
with the Scandinavian countries through Denmark and the
Baltic Straits , the Venice-Munich link , tidal power
installations on the Severn , a bridge at the Straits ofMessina ,
etc .
but only partial topic of budget deficits . For questions of
medium-term growth strategy , even more important policy
issues surround the level and structure of taxation and public
expenditure . In these latter categories , all Community
countries have , effectively , very important 'room for
manoeuvre' in the sense of desirable policy moves that could
contribute significantly to raising the medium-term growth
rate of output , investment , savings and employment . An
important issue for the social dialogue is to establish more of
a consensus on how policy over the level and structure of
public expenditure and taxation can contribute to the
objectives of the cooperative strategy .
Such projects would also generate national public investment
opportunities of an infrastructural nature . In addition , in the
majority of countries , investment possibilities exist in areas
such as urban renovation and the environment (water
treatment , etc .). In certain regions , particularly in the new
Member States , there still remains an urgent need to
strengthen the infrastructure . All in all , a significant number
of investment projects are therefore available with a
sufficient social rate of return . Progress in realizing these
projects would provide an important and useful contribution
to growth and employment .
Level and structure of public espenditure. It may be helpful
to distinguish between three broad categories of public
expenditure .
( i ) A first category is infrastructural investment and other 1
investment categories including research and development ' 1
and education . Such investments , in a wide sense , can also in
part be financed by the private sector . On conditions that
these investment programmes are efficiently managed and !
subject to requirements of a high or adequate social rate of
return , there is no reason to want to cut such expenditures
per se . A high level of such investments , with good or
adequate rates of return , will normally be part of a dynamic
economy . Public investment programmes have in particular
been more than proportionally affected by budgetary
economies , falling from 4% of GDP in 1975 to 2V2 % in
1985 . Subject to efficiency criteria , such expenditures could
now be expanded for a multi-year period as part of the
cooperative strategy .
Given the close links that exist between growth , employment
and technology , most governments have recognized the
importance of a strong research and development policy for a
more robust economic growth . In this respect , priority is
being given to research on advanced technologies aimed at
favouring innovation and a better link between basic
research and industry . European successes , in actions such as
Airbus , Ariane , Jet , Esprit and Brite , underline the value and
effectiveness of Europe's potential for R & D. In addition
they illustrate different possibilities for financing through
European programmes and financial participation in
precompetitive industrial research . The Community has
established framework programmes to obtain an increased
effectiveness of the Community's research activities . Also to
be noted is the Eureka initiative , which reflects the will of
governments to find new financial and economic synergies in
the field of European industrial cooperation .
As far as infrastructural investment is concerned , the State
has an essential role to play in the improvement of human
capital through training and the upgrading of professional
skills . Here also , close cooperation between public
authorities and those concerned should enable appropriate
forms of financing to be established , taking account of the
possibilities available and the gains to each party of improved
professional qualification ( see also section 4.3.2 ).
An infrastructural investment programme , comprising
projects of Community interest , as set out in last year's
Annual Economic Report , fits well into the strategy . Such
projects of European interest can be undertaken and financed
by the private sector . These concern the following projects in
particular :
— the establishment of a telecommunications trans-border
backbone network ( some 3 000 million ECU),
— three linking networks : road , rail and inland waterways
( 20 000 to 25 000 million ECU),
— the Paris-Brussels-Cologne high-speed rail link (3 000
million ECU )
— the Channel tunnel (4 000 million ECU ).
( ii ) A second category covers normal public services, such as
health care and pensions . A high level of these public services
is socially desirable . There are , of course , important
management issues present here , and reasonable discipline in
economic terms has to be maintained since the demands for
increased expenditures on these programmes can outstrip the
capacity of the economy . The question of the public versus
private mix in the organization of these programmes is also
an important issue for reasons of management efficiency as
well as social equity . However , the option of partial
privatization of health care and pensions has to be assessed
Overall , an investment volume of 30 000 to 35 000 million
ECU over a period of five to seven years can be envisaged
31 . 12 . 86 Official Journal of the European Communities No L 385 / 57
falling on employees is passed on to higher labour costs .
Assuming that a higher cost of labour tends to dampen the
demand for labour by firms , private employment will be
discouraged and economic growth will be lower ; hence the
importance of measures to cut social security costs and taxes
just discussed above .
with considerable caution . In particular , the transfer of these
social charges to private insurance systems will not
necessarily ease their costs . It could be , for example , that
lower social security taxes are offset by higher contractual
payments paid to private bodies and levied in the same way
by employers . The impact on overall labour costs and wage
behaviour would not then be very significant . Overall ,
reasonable economy in the management of these
programmes is required , but not their run-down .
Taxation and supply of labour. High marginal tax rates may
influence the incentive to work in a negative way and weaken
the foundations of economic growth .( iii ) A third category is social benefits that are paid because
of faults in the functioning of the economic system .
Unemployment benefits are an obvous example , at least at a
level above a minimal unemployment rate . However , this
category of 'avoidable' public expenditures is in fact much
more extensive , and includes also supplementary family
benefits to unemployed persons , expanded programmes of
early retirement pensions and , in several countries , disability
pension programmes that have been expanded to include
people with little or no medical disability . The total of these
'avoidable' public expenditures has increased by as much as
5% of GDP over the course of the last 15 years in the
Community on average . In terms of increased social security
charges , this amounts to about 10 % of labour costs , which is
clearly a very large margin in relation to any debate about the
economically warranted level of labour costs .
Taxation, disposable income and household savings . There
are other factors which have indirect effects on employment
by discouraging savings and hence capital accumulation .
Higher taxes on households' income reduce disposable
income and household savings . If the government spends a
higher fraction of its proceeds , net of transfers , on
consumption goods than do households , national savings go
down .
Taxation and resource allocation . Where many categories of
income or expenditure benefit from tax exemptions there will
be distortions in the allocation of resources that will reduce
their average productivity . In this case , higher general rates
of taxation will have to be applied , leading to dampened
incentives to work , employ , save and invest , as already
mentioned . Accordingly , it is desirable to verify that each
existing tax exemption still has an economic or social
justification , at the same time taking account of the fact that
its abolition would enable the tax base to be widened and
general rates to be lowered . This is the argument behind the
recent United States' reductions in income tax rates and
exemptions .
Implementation of the cooperative strategy should make it
possible to reconsider the pertinence of certain of these
programmes as employment prospects improve . For
example , the criteria for new admissions to some special
pension programmes may be reconsidered , while respecting
the acquired rights of existing pensioners , as part of a policy
to achieve a rising participation rate among those of working
age , as well as declining unemployment . Policy initiatives of
this kind are envisaged in several countries , such as Italy and
the Netherlands , where special pension programmes for
people ofworking age have expanded to the point of covering
over 10% of the labour force . In other countries too ,
analogous expenditures have led to a growth of social
security taxes that has contributed to the weak evolution of
employment . Economies in public expenditure and social
security taxes could in this way thus be part of a new virtuous
circle of employment creation and tax reduction . Greater
efficiency in these social expenditures may be obtained
through improving the employment possibilities of a
considerable proportion of the people currently benefiting
from these programmes .
Within the Community at present there are several tax
reform themes which may be highlighted .
As regards corporate profits taxes , several countries are
reducing rates of taxation (United Kingdom , France ,
Netherlands , Belgium , Luxembourg), partly offset by lower
depreciation allowances . Some countries envisage reducing
or eliminating other business taxes which are not based on
profits , such as a wealth tax on enterprises in Germany , the
'taxe professionnelle' in France and a trade tax in
Germany .
Possibilities for tax reform . The economic policy objectives
of reform in the levels and structure of taxation fall under
four main headings , concerning ( a ) the demand for labour ,
( b ) the supply of labour , ( c ) the level of savings and thence
capital accumulation , and ( d ) the efficiency of resource
allocation .
As regards income taxes on persons , France , Germany and
the United Kingdom are all engaged in a process of making
successive cuts in high marginal tax rates , partly financed
with a broadening of the tax base (United Kingdom), partly
Taxation, labour costs and the demandfor labour. It is likely
that a considerable part of the tax and social security burden
No L 385 / 58 Official Journal of the European Communities 31 . 12 . 86
through general budgetary economies . In France , Germany
and the United Kingdom , further reductions in personal
income tax are major governmental objectives for the next
few years .
In the context of the fall in the price of oil , several countries
have taken the opportunity to raise oil consumption taxes ,
often with a view to reducing deficits (Denmark , Spain ,
Greece , Italy , Ireland and Portugal ).
The Commission's proposals for the approximation of
legislation on indirect taxes could also imply changes in the
structure of taxation in certain countries .
Important contributions to the cooperative strategy should
come through specific actions affecting the level and
structure of public expenditure and taxation . Public
investments with a sufficient social rate of return could now
be increased which would also support the expansion in
productive potential and private investment. Social security
contributions should be reduced over a medium-term period.
The improvement in growth and employment and the
resulting increases in public sector revenue and savings in
transfer payments can create a virtuous circle . Tax reforms
should also aim at reductions in income tax rates and other
changes in the structure helpful to employment policy and
facilitate indirect tax approximation in the Community.
TABLE 17
General government revenue and expenditure (*), EUR 12
*
1 000 million PPS Percentage of GDP Percentage change
I 1985 1986 ( 2 ) 1984 1985 1986 ( 2 ) 1987 ( 2 ) 1985 1986 ( 2 ) 1987 ( 2 )
Indirect taxes 517,3 568,3 13,5 13,3 13,4 13,5 7,4 9,9 6,8
Direct taxes 497,0 526,9 12,7 12,8 12,5 12,4 9,7 6,0 6,2
Social security contributions
received
589,1 631,8 15,2 15,2 14,9 14,9 8,1 7,2 6,1
Total taxes and social security
contributions
1 603,4 1 727,0 41,3 41,3 ' 40,8 40,8 8,4 7,7 6,3
Other current revenue 148,4 152,4 3,7 3,8 3,6 3,3 12,3 2,7 - 3,3
Total current revenue 1 751,8 1 879,4 45,0 45,1 44,4 44,1 8,7 7,3 5,6
Current transfers paid 877,8 933,4 22,8 22,6 22,1 21,7 7,5 6,3 4,4
Actual interest payments 198,7 217,1 4,9 5,1 5,1 5,0 12,3 9,3 2,7
Government consumption 722,6 770,1 18,8 18,6 18,2 18,0 7,6 6,6 5,1
Total current expenditure 1 799,0 1 920,7 46,5 46,3 45,4 44,6 8,1 6,8 4,5
Gross saving - 47,3 - 41,2 - 1,5 - 1,2 - 1,0 - 0,5 — — —
Net capital transfers 45,5 41,5 1,1 1,2 1,0 0,9 17,1 - 8,8 - 4,5
Gross capital formation 107,3 114,8 2,8 2,8 2,7 2,7 7,7 7,0 6,0
Net lending ( + )
or borrowing ( - ) - 200,0 - 197,5 - 5,4 - 5,1 - 4,7 - 4,1
Memorandum : nominal GDP 3 882,2 4 225,8 100,0 100,0 100,0 100,0 8,6 8,9 6,4
(') National accounts definition , excluding loans , advances and participations .
( 2 ) Forecasts .
Source : Commission services .
31 . 12 . 86 Official Journal of the European Communities No L 385 / 59
TABLE 18
General government lending ( + ) and borrowing ( - )
(as % of GDP)
1970 1973 1981 1982 1983 1984 1985 (') 1986 (') 1987 (>)
Belgium - 2,2 - 3,3 - 12,6 - 11,1 - 11,7 - 9,5 - 8,4 - 8,0 - 6,2
Denmark 4,1 5,2 - 7,1 - 9,3 - 7,3 - 4,2 - 1,9 2,8 2,8
Germany 0,2 1,2 - 3,9 - 3,4 - 2,5 - 1,9 - 1,1 - 0,9 - 0,7
Greece — — - 10,6 - 9,4 - 8,9 - 10,1 - 13,9 - 10,6 - 7,1
Spain 0,7 1,1 - 3,0 - 5,8 - 5,4 - 5,0 - 6,2 - 4,9 - 4,4
France 0,9 0,9 - 1,8 - 2,5 - 3,2 - 2,9 - 2,6 - 2,9 - 2,6
Ireland — — -.15,8 - 14,2 - 11,8 - 9,8 - 11,6 - 10,7 - 9,9
Italy - 3,5 - 7,0 - 11,7 - 12,7 - 12,4 - 13,0 - 14,0 - 12,7 - 11,0
Luxembourg 2,7 3,3 - 2,3 - 1,3 - 0,8 1,5 4,1 3,7 2,6
Netherlands - 1,2 1,0 - 5,2 - 7,1 - 6,5 - 6,2 - 5,1 - 5,5 — 6,6
Portugal — — - 10,1 - 8,8 - 7,1 - 7,7 - 11,2 - 8,0 - 7,5
United
Kingdom 3,0 - 2,7 - 2,7 - 2,4 - 3,7 - 3,9 - 2,8 - 2,9 - 2,5
EUR 12 0,3(2 } 1,0 ( 2 ) - 5,4 - 5,6 - 5,5 - 5,4 - 5,1 - 4,7 - 4,1
(') Estimates and economic forecasts of the Commission services (October 1986 ).
( 2 ) Without Greece , Ireland and Portugal .
TABLE 19
Public Debt ( 2 )
(as % of GDP)
1973 1981 1982 1983 1984 1985 (') 1986 (■) 1987 (>)
Belgium ( 3 ) 63,2 88,1 96,1 105,1 111,6 118,3 121,9 125,6
Denmark 5,0 43,6 52,7 62,7 67,6 66,3 62,1 57,6
Germany 18,6 36,4 39,5 41,7 42,0 42,7 41,9 41,7
Greece ( 4 ) - 33,0 36,7 41,4 49,9 56,8 58,4 61,2
Spain 21,0 26,2 32,1 39,3 46,3 48,8 52,5
France 25,1 26,0 29,1 30,7 29,3 31,8 34,0 35,0
Ireland ( 4 ) 65,5 89,8 96,6 107,7 113,6 115,7 119,1 124,8
Italy 62,5 73,2 80,0 87,6 94,5 103,0 106,3 108,1
Luxembourg 20,5 14,0 14,4 14,8 14,8 14,5 13,8 12,8
Netherlands ( 3 ) 43,4 50,3 55,6 62,3 67,0 70,6 76,3 82,9
Portugal
United
Kingdom ( 5 ) 63,3
59.0
51.1
62,2
57,7
70,9
57,4
75,7
58,7
81,2
56,9
81,5
57,9
85,2
58,0
EUR 12 40,3 ( 6 ) 45,0 49,8 53,5 56,0 58,9 60,3 61,8
(') Estimates and forecasts of the Commission services on the basis of the October 1986 economic forecasts .
( 2 ) General government except Belgium , Greece , Ireland and the Netherlands .
( 3 ) General government without social security system .
( 4 ) Central government .
( 5 ) Debt at market prices .
( 6 ) Without Greece , Spain and Portugal .
Source: Eurostat and Commission services .
No L 385 / 60 Official Journal of the European Communities 31 . 12 . 86
TABLE 20
Evolution or public expenditure on social programmes from 1970 to 1983
(percentages of GDP)
Belgium Denmark Germany France Ireland Italy
Luxem­
bourg
Nether­
lands
United
Kingdom EUR 8 (')
1970:
Health care , sickness
Invalidity and work accidents
Pensions
Maternity and family
Unemployment
Others
3,8
2,2
7,1
3,5
0,6
0,0
5.6
2.7
6,9
2,7
0,4
0,1
5,7
2,6
9,4
2,1
0,1
0,3
4,9
1,8
7,5
3,1
0,3
0,0
4,1
1,3
4,6
2,3
0,4
0,1
—
2.7
2,9
7,8
1,8
0,0
0,0
5,7
3,1
7,7
2,6
0,6
0,8
3,9
1,2
6,7
1,5
0,3
0,1
5.0
2.1
7,9
2,3
0,3
0,2
Total 17,4 19,0 20,7 18,2 13,3 — 15,4 19,0 13,8 18,0
1983 :
Health care , sickness
Invalidity and work accidents
Pensions
Maternity and family
Unemployment
Others
6,5
3,3
11,5
3,0
4,2
0,5
7,1
2,5
10,4
3,1
4,1
1,1
7,5
3,1
12,1
2,0
2,0
0,6
6,8
2,3
11,2
3,1
2,7
0,2
8,4
7,4
3,1
5,7
5,4
11,5
2,0
0,8
0,0
11,1
12,0
1,2
0,0
0,8
8,4
6,4
10,3
2,7
4,2
0,0
4.7
2,2
9.8
2,8
2,3
0,3
6,7
2,9
11,1
2,6
2,5
0,4
Total 29,5 30,1 27,8 27,4 23,2 25,5 25,5 32,7 23,1 27,0
Increase, 1970 to 1983 :
Health care , sickness
Invalidity and work accidents
Pensions
Maternity and family
Unemployment
Others
2,7
1,1
4,4
- 0,5
3,6
0,5
1,5
- 0,1
3,5 .
0,4
3,7
1,0
1,8
0,5
2,7
- 0,1
1,9
0,3
1,9
0,5
3,7
0,0
2,4
0,2
4,3
2,8
3,0
—
8,4
4,2
- 0,6
0,0
0,8
2,7
3,3
2,6
0,1
3,6
- 0,8
0,8
1,0
3,1
1,3
2,0
0,2
1,7
0,8
3,1
0,2
2,3
0,2
Total 12,1 11,1 7,1 9,2 9,9 — 10,1 13,7 9,3 9,0
(') Excluding Italy .
Source: Eurostat (European system of social protection statistics ) data file .
Note: Figures are not comparable since the nature of benefits differ ; amounts of public versus private expenditures on some categories of
expenditures (e.g. health , pensions ) vary considerably between countries .
4.3 . Wages and the labour market
4.3.1 . Incomes and wage costs
average productivity per head would be 2,3 % during the
same period . Taking into account the fall in social
contributions of employees and direct taxes , as well as
modifications in the terms of trade , purchasing power of net
wages would grow on average over the period 1986 to 1990 a
little more rapidly .
These developments in total labour costs and net wage
incomes thus merit the support of both employers and
employees , since they should be conducive to a much
stronger employment performance and improved
profitability for enterprises as well as moderately growing
real incomes for employees .
All countries have made some progress since the early 1980s
in the moderation of real wage increases compared to
The cooperative strategy proposes that the social partners
agree on a development of labour costs which is compatible
with a significant increase in employment . The scenario
illustrating the cooperative strategy accordingly envisages
that real wages , in the form which is undoubtedly close to
that generally considered in the wage bargaining process ,
that is to say net of social contributions of employers , will
grow, in real terms , on average for the years 1986 to 1990 at
a moderate rate , close to 1,1 % per annum . Added to the
effects of this moderate growth would be that of some
lowering of employers' social contributions . The increase in
31 . 12 . 86 No L 385 / 61Official Journal of the European Communities
productivity growth . Profits have therefore improved .
Between 1981 and 1985 , progress has however been quite
different between countries ( cf. Table 21 ).
case of an improvement in the terms of trade , that this
recovery is speeded up and accompanied by a satisfactory
development in real wages . Efforts undertaken in recent
years to reduce the rigidity of indexation arrangements
should also be continued . The present stable situation should
make this easier to achieve .
However , in 1986 , a greater degree of convergence could be
attained within the Community . The improvement in the
terms of trade has enabled countries like Belgium , France and
Italy , where progress had been slower up to 1985 , to achieve
considerable improvements in the profitability of firms this
year . This is explained for example in Belgium by
index-linking arrangements , which are still fairly rigid , and
have made it possible to pass on the reduction in inflation
automatically to nominal wages . In France , in the framework
of the policy of collective agreements , which aims at aligning
nominal wages ex ante on the target for prices , account has
been taken of a faster than expected decline in inflation .
Within each country , the formation of wages at regional level
should be kept fairly pliant . Greater economic and social
cohesion within the Community also requires convergence of
regional unemployment rates towards the lowest rates ,
without implying depopulation in the poorest regions .
Resource transfers organized either by the Member States or
by the Community can and must contribute to achieving this
aim . To be fully effective , however , the resources must be
supplemented by private capital attracted by a rate of return
at least equal to that prevailing in more favoured regions .
Only in five countries , Belgium , Greece , Spain , France and
Italy , will the increase in real labour costs per head in 1987 be
lower than or close to 1 % . In Greece , Spain and France ,
indeed , the weakness of the employment recovery and the
especially high level of unemployment seem to justify an
increase in real labour costs below the Community average .
The same applies to Belgium and Portugal , where real labour
costs per head are expected to increase by close on 1 % . Lastly , the moderate rise in real wage costs per head should
be generalized , and benefit all sectors and firms .
In the other Community countries , th'e increase in real labour
costs per head will probably be 2 to 3 % ( cf . Table 22 ). In
these countries , it is desirable that the social partners take
account of the development of employment and the level of
unemployment in pay negotiations . For example , the change
in trend brought to labour costs could be less marked in
Germany , where unemployment is relatively low and profits
have increased fairly rapidly . In the United Kingdom , on the
other hand , the problem of a rapid increase in real wage
incomes , despite a high rate of unemployment , is an
especially acute one .
In this respect , productivity gains realized in the most
efficient sectors should be used first of all to improve the
competitiveness and profitability of the economy , rather
than to ensure higher than average wage rises in those
sectors . This permits an increase in the margin for
manoeuvre of sectors with lower gains in productivity . This
room can then be used to increase employment .
The need for wage moderation implies that both sides of
industry will act in a responsible manner . Wages are
determined in each country on the basis of traditional
procedures that have often stood the test of time . Although
they need not be called into question , they should ensure
respect for some basic principles .
At the level of the individual firm , it could however be useful
to keep rates of pay adaptable to react to the situation . This is
often necessary in order to assure stability of employment in
the face of cyclical changes in demand or prices . One
technique which could be envisaged is possibly to divide pay
into a fixed component and a variable component linked to
the firm's profits , which may help improve the motivation of
the work force . Adaptability of this type can also help to give
existing firms the margin required for restructuring while
maintaining a particular level of employment .Wage agreements should allow for rapid adjustments , in the
direction required by the cooperative strategy , to take
account of the very marked changes — largely unpredictable
— in the terms of trade . The social partners should examine
the possibility of maintaining some flexibility in the actual
development of nominal wages in such a situation . One of
the possibilities which could be envisaged would be the
introduction of safeguard clauses into wage agreements
protecting to a certain degree both parties . This ought to
ensure that either the recovery in profitability is not
compromised when the terms of trade deteriorate , or , in the
The various aspects of wage formation mentioned here
concern first and foremost the social partners . These are thus
subjects that should be examined thoroughly in the context
of the social dialogue , with a view to assuring an appropriate
equilibrium between labour market adaptability and the
protection of employees .
No L 385 / 62 Official Journal of the European Communities 31 . 12 . 86
The reorganization and reduction ofworking time can make
growth more employment-creating , on condition that it be
neutral for the level of costs . This goal can be attained in
association with a reorganization of the production process
which combines a reduction in working time with the longer
use of production facilities and a more flexible use of labour
within the company . This could increase capital productivity
which is desirable as a contribution towards boosting private
investment . The possibility of using existing plant for more
production with a larger workforce would also help to reduce
the insufficiency of the capital stock in relation to the level
which would be required at a high employment level in the
economy .
The evolution of labour costs has in recent years permitted a
certain improvement of the profitability of the enterprise
sector, and will thus help employment. The reduction of the
price ofoil adds to these trends . For the medium-termfuture,
a consensus needs to be formed favouring moderate real
wage increases, coupled to the extent possible to decreases
in social security charges, thus allowing a sustained
improvement in profitability and competitivity. To increase
the chances of a rapid reduction in unemployment, care
should be taken to ensure that wage formation procedures
remain sufficiently adaptable both in relation to
unforeseeable developments in the international context and
in relation to regional disparities . At the level of individual
firms, some adaptability in pay could be examined in order to
improve the motivation of the workforce and to make it
possible to stabilize employment in the face of cyclical
changes in demand or prices . However, above average
productivity gains realized in the most efficient sectors and
firms should be used mainly to improve competitiveness in
the economy as a whole, and not to achieve higher than
average pay rises in these sectors .
Since the uncertainties and adjustment costs associated with
a reorganization of the working process can be considerable ,
it must be incorporated in a cooperative approach . In
particular , capital as well as labour cost increases have to
avoided . In many cases , public support is also necessary in
the encouragement of experiments , and the exchange of
experiences and , in some situations , in order to cover
adjustment costs . In a number of Member States , the
government supports this restructuring process in a variety of
ways .
4.3.2 . Adapting the labour market for more
employment-creating growth
The deregulation of employment protection systems does not
constitute an objective in itself. There are advantages in
having a general framework of employment laws , as seen in
all European countries and Japan , in order to assure stability
and fairness in employment conditions . Employment
protection law can also form part of a wider social contract ,
in which a cooperative approach to industrial relations relies
on forward-looking employment policies .
Apart from the major macroeconomic determinants of
employment already discussed — aggregate demand , pay
levels and social security costs — there exist a larger number
of microeconomic policy instruments that can help or hinder
the employment propensity of the economy . Some of the
main headings are :
— working time practices ,
— employment protection regulations ,
— training and retraining facilities ,
— regulations affecting the start-up of small enterprises ,
self-employment and cooperative enterprises ,
— measures to help the long-term unemployed back into
activity and to integrate the young unemployed into the
workforce .
The considerable range of employment protection practices
in the Community , all within a context of a comprehensive
legal framework , gives some evidence of how unduly heavy
regulatory burdens may damage the employment propensity
of the economy . Surveys of employers made by the
Commission indicate that the regulations governing
dismissals and redundancies are perceived in some countries
as being particularly detrimental to employment . In such
cases , the severity of costs , procedures or judicial systems
of appeal concerning recruitment and termination
of employment contracts should be reconsidered , without ,
however , calling into question basic social rights . Such
reforms should be compatible with the objectives set out in
Article 118A of the Single European Act .
In these domains , initiatives have recently been taken or are
being considered in most Member States and at the
Community level . Moreover , many detailed measures to
improve the labour market have recently been the subject of a
memorandum entitled . Employment Growth into the 1990s
— a Strategyfor the Labour Market submitted in June 1986
to the Council for Employment and Social Affairs by the
ministers from Ireland , Italy and the United Kingdom .
The rules governing part-time work and fixed-term contracts
are also of considerable importance in determining the
balance struck between the quality and volume of jobs
offered . Evidence of an increasing supply of persons willing
to take such employment , and of the supply of jobs of this
type is sufficiently important in relation to the job shortage in
the Community that the conditions of these types of
employment contract should not be too restrictive . In
31 . 12 . 86 Official Journal of the European Communities No L 385 / 63
The contribution of training and qualifications towards the
greater regional flexibility of the labour market within the
Community was effectively recognized by the Council 's
decision to work towards the comparability between
vocational training qualifications for semi-skilled ( level 2 )
workers . The decision complements the Community action
to accelerate the mutual recognition of professional
qualifications , and will benefit in the first instance workers in
those sectors in which a high level of cross-border mobility is
already prevalent . It constitutes a step towards achieving the
human dimension of the internal market .
particular , if the Community is to succeed in increasing its
labour force participation rate , which it needs to do in view
of looming problems of changes in demographic structures , it
will have to rely in part on these forms of employment
contract , which are particularly suited to the preferences of
certain groups ( for example to the needs of the second worker
in families and of elderly workers ). These forms of
employment contract also have the advantage in present
conditions of reducing the regulatory costs at the margin
for new recruitment , without questioning the secure
employment status of existing permanent employees ; they
would also help assure a more employment-creating growth
process . On the other hand , precautions have to be taken to
limit the risks from developing precarious jobs and assure the
quality of such forms of contract . They should , for example ,
be governed by minimal social security coverage and other
labour laws such as those setting minimum wages .
Two of the most important factors conditioning the
adaptability of the labour market , with a view to achieving
more employment-creating growth , are the regulations and
negotiated practices governing ( a ) working time , and ( b )
employment protection . In both areas , surveys recently
conducted by the Commission (^ suggested that there exists ,
in the opinions of both employers and employees , a wish to
ease certain rules governing the labour market . This
willingness should be fully exploited by deepening the social
dialogue on these various themes .
Education, training and retraining constitute a key variable
in the economic adjustment process and must be considered
in conjunction with employment policy initiatives if major
bottlenecks are to be avoided and the social consequences of
industrial restructuring are to be attenuated . The central role
that education and training is now playing in Member States
is underlined by the increasing recognition of the links
between training , productivity and business success , and of
the importance for enterprises to invest more heavily in
training provision . As a tool of social adjustment , retraining
is particularly necessary to accompany business closure and
sectoral shrinkage , and even more so in areas of industrial
decline .
As stressed already in a Commission communication to the
Council in 1984 (COM(84 ) 484 final ), the long-term
unemployed will tend to be amongst the last to benefit from
any improvement in overall economic performance . Policies
to promote general economic and employment growth must
be supplemented by policy interventions targeted specifically
at the long-term unemployed . The Commission therefore
proposed a set of measures designed both to prevent people
from becoming long-term unemployed and to reintegrate
those who had already been unemployed for 12 months or
more . These measures formed the basis of the Council
resolution of December 1984 ( 2 ) which gave a commitment
to tackle the problem by increasing the efficiency of existing
social and employment policies as part of an effective
Community policy to combat unemployment . These
commitments were in addition to those set out in the Council
resolution ofJanuary 1984 concerning youth unemployment
in which the Member States agreed a series of actions to
promote training and employment opportunities for young
people .
In this regard , and within the framework of the social
dialogue at the Community level (Val Duchesse ), the
working party on training and motivation for workers in
connection with new technologies is seeking to contribute to
a positive environment . This is especially important in
relation to the Euro-Tecnet programme for new information
technologies , vocational training , and to the Comett decision
on cooperation between universities and enterprises on
high-level training .
A range of initiatives specifically to help the long-term
unemployed has been supported through the European
Social Fund and through the Poverty Programme ( 3 ). Many
Member States have introduced new measures in favour of
the long-term unemployed or extended existing measures .
A particular effort is called for to ensure effective local and
regional management of human resources , with sufficient
investment in training from both private and public sources
to ensure the general upgrading and modernization of skills
at all levels . Small and medium-sized businesses face
particular training and retraining problems ( in terms of
management development and advice , access to training ,
flexibility of delivery); in this connection , Member States are
being invited to respond positively to a comprehensive
package ofmeasures proposed by the Commission . The need
for more manpower " flexibility within the company also
stresses the importance to increase the level of training to
facilitate this internal mobility .
( ! ) 'Employment prospects : views of businessmen and the
workforce' European Economy, No 27 , March 1986 .
( 2 ) Council resolution of 19 December 1984 on action to combat
long-term unemployment .
( 3 ) COM(83 ) 211 final , 25 April 1983 .
No L 385 / 64 Official Journal of the European Communities 31 . 12 . 86
A report in the form of a communication will be submitted to
the Council in early 1987 with proposals for further action .
The report will be based on information obtained from
Member States and on the findings of recent reports
undertaken by the Commission and by other organizations
with an interest in policy on long-term unemployment .
However , the proportion of those registered as unemployed
who have been without work for a year or more has
continued to increase and now stands at an average of about
40 % across the Community . Furthermore , there has been a
significant increase in the proportion of people unemployed
for two years or more . The scale of the Community's
response to the problem clearly does not reflect the scale of
the problem itself ; a greater political and financial
commitment to action is needed to meet the objectives set out
in the 1984 resolution . Concrete measures , such as lower
social security charges for taking on the long-term
unemployed , could therefore be considered .
In addition , it is clear that , with respect to youth
employment , it will be necessary to focus attention on those
measures which are most likely to lead to subsequent
employment , rather than simply delay entry into the labour
market . Particular attention needs to be given to the
problems of young people over 20 , many of whom already
risk being numbered among the long-term unemployed when
training or temporary job-creation possibilities are
exhausted .
At the end of 1986 , the Commission will review progress in
implementing the actions agreed in the Council resolution .
Many types of regulatory policies andjob creation initiatives
can help improve the employment propensity of the
economy. Such initiatives need to fit coherently with a
positive macroeconomic policy as envisaged in the
cooperative strategy. The Community should not aim at a
general deregulation in employment protection law, but
Member States should, in some cases, adjust unduly onerous
regulations so as not to discourage the growth of various
forms of employment, :;o long as basic social security and
other conditions are respected. The adaptation of working
time, on conditions which are neutral for the level of costs,
can also help achieve more employment-creating growth .
Stronger action is required to ease the problems of the
long-term unemployed and ofyouth unemployment, and the
Community will soon be reviewing the adequacy of such
measures .
TABLE 21
Real unit labour costs (Ratio of real per capita labour costs to productivity ) ( Index 100 : average 1961 to
1973
Average
1961 to
1973
1975 1981 1982 1984 1985 (') 1986 (>) 1987 (')
Belgium 100 110,0 115,0 112,9 111,9 110,2 106,1 104,6
Denmark 100 104,6 100,5 99,2 96,1 94,4 92,9 93,5
Germany 100 105,9 103,5 102,2 98,9 97,8 96,1 95,7
Greece 100 90,2 106,4 106,1 107,2 109,2 101,2 98,9
Spain 100 104,0 102,9 100,7 94,4 91,8 89,1 87,7
France 100 105,9 108,1 107,3 105,3 104,4 102,1 100,2
Ireland 100 104,6 101,3 99,5 95,2 92,9 91,4 91,3
Italy 100 110,9 108,6 108,6 109,4 108,5 103,2 101,7
Luxembourg 100 123,4 124,9 120,4 111,2 109,3 106,4 107,5
Netherlands 100 108,8 102,5 101,1 95,8 94,3 95,4 97,8
Portugal 100 136,2 116,1 108,6 100,5 96,9 92,0 90,6
United Kingdom 100 110,1 100,3 98,5 98,8 97,9 99,9 100,3
EUR 12 100 107,2 104,3 103,0 101,1 99,9 98,1 97,4
(') Estimates and forecasts of the Commission services , October 1986 .
Source: Eurostat and Commission services .
31 . 12 . 86 Official Journal of the European Communities No L 385 / 65
TABLE 22
Labour costs and employment forecast for 1987 (*)
Employment
(percentage
change per
annum)
Wage costs per employee ( 2 )
(annual variation in % ) Productivity
in the whole
economy
(GDP per
occupied
person)
Real
unit labour
costs ( 5 )
(percentage
change per
annum)
Unem­
ployment
rate ( 6 )
nominal
real ( 3 )
on the basis
of GDP
prices
real ( 4 )
on the basis
of private
consumer
prices
1 2 3 4 5 6 7
Belgium 13,4 - 0,6 2,2 0,4 0,7 1,9 - 1,4
Denmark 7,7 0,3 5,9 2,1 3,0 1,5 0,6
Germany 7,7 1,0 3,2 1,8 2,1 2,2 - 0,3
Greece 8,3 0,0 9,6 - 2,4 - 2,6 - 0,2 - 2,2
Spain 21,5 1,2 6,3 0,2 1,0 1,8 - 1,6
France 10,7 0,3 3,0 0,3 0,7 2,2 - 1,9
Ireland 18,0 0,7 6,0 2,3 2,7 2,5 - 0,1
Italy 12,8 1,3 6,1 0,8 2,1 2,3 - 1,5
Luxembourg 1,2 0,7 5,6 2,9 4,2 1,9 1,1
Netherlands 11,1 0,9 1,7 3,4 2,7 0,9 2,4
Portugal 8,5 0,3 12,3 1,6 3,1 3,2 - 1,5
United Kingdom 12,0 0,8 6,6 2,3 2,6 1,9 0,4
EUR 12 11,7 0,8 4,8 1,3 1,8 2,0 - 0,7
') Forecasts of October 1986 .
2 ) Wages and social security contributions .
3 ) From the point of view of costs .
4 ) From the point of view of purchasing power .
5 ) Column 4 divided by the increase in productivity .
6 ) Registered unemployed , Eurostat definition as a percentage of the civilian labour force : except for Greece , Spain and Portugal
where national survey results are presented .
Source: Eurostat and Commission services .
4.4 . The adaptability of markets
Among the lines of action in the cooperative strategy , action
to improve the adaptability of markets is a basic factor in the
process of improving the competitiveness of firms and their
performance , in particular on the employment front . While it
is true that this improvement can be brought about by
medium-term measures that produce effects only gradually ,
the policy that is suggested can also have more immediate
positive effects in that it helps to guide and stabilize economic
expectations . The declared aim is to improve the functioning
of market mechanisms :
— by establishing a large area with no internal barriers to
the free circulation of goods , persons , services and
capital ,
— by providing each country with conditions conducive to
the development of companies and the promotion of
enterprise .
The reinforcement of the potential for growth and the
resulting employment performance necessarily go hand in
' hand with structural adjustment , but this structural
adjustment will be that much smoother if it unfolds against a
background of dynamic growth in which the social
dimension of the adjustment can be more easily taken into
consideration .
Progress towards completion of the internal market: in June
1986 , the European Council meeting in The Hague stressed
that if the objectives fixed not only for the current year but
also for the period up to 1992 were to be attained , then the
decision-making process leading to the completion of the
internal market would have to be substantially improved .
Considerable progress is needed to pass from the present
situation of advanced customs union to an economic area
without frontiers in 1992 .
Among the major initiatives identified in the White Paper on
the internal market , the most substantial economic results
are to be expected from the following measures :
No L 385 / 66 Official Journal of the European Communities 31 . 12 . 86
— Removing barriers to intra-Community trade : this
involves first of all removing barriers at frontiers , with
the major effect of reducing the cost of intra-Community
trade and thus encouraging its expansion , after the period
of relative stagnation that has followed the strong
expansion of 1958 to 1973 , when the share of
intra-Community trade in total Community trade rose
from 34 to 53% . The removal of barriers to
intra-Community trade also involves a move towards a
common market in services , especially financial services ,
with increased competition leading to a decline in the cost
of services rendered ( financial intermediaries , prices of
services ) both to business and to consumers .
market will accelerate the process of structural change . From
this viewpoint , it is necessary to ensure that the social
dimension is fully take into consideration, as required by
Article 118 A of the Single European Act . In addition , in
order to avoid both social resistance and injustice , it is
important that the costs and burdens of change are not borne
by some groups while others reap the benefits . Economic and
social policies , including current measures to assist the
process of structural change , e.g. the Social and Regional
Development Funds , will need to be particularly attentive to
ensuring a fair distribution of the costs and benefits of
integration and of promoting greater economic and social
cohesion .
It is also important to give the large internal market its full
financial dimension .
— Opening up public procurement to competition : public
procurement is a fairly substantial item , since general
government purchases of goods and services ( including
gross fixed capital formation ) represented about 18 % of
total public expenditure , or 9 % of Community GDP , in
1985 ; this figure does not include the purchases of the
numerous public sector firms in the competitive sector
that come under private law . Opening up public
procurement to competition will lead to budgetary
savings that may , according to initial estimates , be
considerable in certain sectors . Moreover , major benefits
will be forthcoming for suppliers , who will be able to
specialize more narrowly and take advantage of
economies of scale .
The liberalization of capital movements is a concomitant of
the general aim of ensuring the best possible allocation of
resources . It should be based on close convergence of
economic and monetary policies , which is a factor of stability
and confidence favourable to investment behaviour and to
lasting growth in the Community as a whole .
More specifically , liberalizing capital flows , while at the
same time progressing towards the creation of a common
market in financial services , will reinforce Europe's
attractiveness as a financial area and encourage the
development of a complete range of instruments based on the
most recent techniques . By offering savers a wider variety of
investment opportunities , and firms of all sizes an
international range of financing possibilities , the
liberalization of capital movements should enlarge the pool
of European savings that can be tapped for investment and
job creation at lower cost .
— The development of supply effects : the most striking
effects , those of increased competition in Europe , will be
a greater specialization of firms and consequently , at least
in certain sectors , economies of scale . The effects could
be reinforced by such developments as more intense
industrial cooperation in Europe , and more efficient and
concentrated R&D expenditure . Very favourable effects
may also be expected from eliminating disparities
between technical specifications ( rules , standards ,
type-approval procedures ), which are used at present
both by the authorities and by dominant firms as
instruments to segment markets , and thus reduce
competitiveness in the Community economy as a
whole .
With this in mind , the Commission adopted a
communication to the Council on 21 May 1986 , presenting a
programme for the liberalization of capital movements in the
Community . The proposed programme has two stages .
The first stage has now begun ; its aim is to achieve effective
liberalization , throughout the Community , of the capital
transactions most directly necessary for the smooth
functioning of the common market and the interlinking of
financial markets .
— Finally , the approximation of legislation on indirect
taxes : this could be a major element in reinforcing
intra-Community competition , in particular because it
will introduce greater transparency into final consumer
prices in the different countries . Moreover , in certain
cases or countries , it could provide an opportunity to
adopt a structure of compulsory levies better suited to the
purposes of supply policy ( see point 4.2 ).
This means first of all the gradual dismantling of existing
exemptions from Community obligations . It is important to
ensure that the restrictions still authorized — either under the
safeguard clauses of the Treaty ( Ireland , Italy , Greece ) or
under the Act of Accession ( Spain , Portugal ) — can be
gradually removed .
Although it is difficult to predict the precise effects of closer
economic integration on output , productivity and
employment , it is clear that the opening-up of the internal
31 . 12 . 86 Official Journal of the European Communities No L 385 / 67
It also means extending current liberalization obligations . A
proposal for a Directive was sent to the Council in June 1986 ,
with a view to extending the liberalization obligation to
long-term credits related to commercial transactions , the
acquisition of securities not traded on a stock exchange , and
the admission of transferable securities to national capital
markets .
average productivity gains achieved in the high performance
sectors can spread to the economy as a whole in the form of a
relative fall in the prices of these sectors' products . The
additional demand directed to these sectors thus reinforces
their process of growth and employment . As a result of this
mechanism it is also possible to improve the profitability of
the less-efficient sectors and hence put them in a position to
create jobs .
In the second stage , the principle of completely free capital
movements should be recognized , covering financial credits
and monetary investments (deposits , money market
securities ). The timetable for liberalizing these transactions
will have to make allowance for the variety of economic
situations in the Member States , and the present wide
differences in exchange controls . The Commission will be
sending further proposals to the Council during 1987 .
Moreover , with a view to achieving greater economic
efficiency , the governments of a number of countries have
endeavoured to reduce government intervention in their
economies . Whether it is a question of deregulation in a
certain number of areas ( transport , energy , etc .), by
transferring ( or restoring) to the private sector certain
activities previously entrusted to the public sector , or by
announcing the intention of reducing the volume of public
intervention in the form of subsidies , the aim is to improve
economic efficiency . From this point of view , the completion
of the internal market , to the extent that it implies stricter
control of state aids , requires greater transparency and
periodic assessments of all public intervention in favour of
firms , whatever form it takes ( subsidies , interest rebates , tax
expenditure , guarantees , purchase of equity ), in particular so
as to assess effects and efficiency in terms of the
competitiveness of Community firms .
Ensuring morefavourable conditions for the development of
businesses : if markets are to be more adaptable to the
fluctuations of supply and demand and to external stocks ,
firms must be able to carry out their activities in an
environment that is both stable and favourable to their
development .
The improvement of the environment of firms from the
points of view of taxation, financial arrangements and legal
administrative provisions , is one of the Commission's
continuing policy aims . Such an improvement — generally
based on . recommendations for alignment on the most
suitable national practices within the Community —
contributes to increasing transparency and to harmonizing
the conditions for the activity of firms in the Community , as
well as discouraging discretionary measures that may well
distort competition . As a follow-up , in particular , to its
communication of 1983 on tax and financial measures in
favour of investment , the Commission has taken several steps
to improve firms' tax environment ( carry-over of losses ,
reduced capital duties ), financial environment (promotion of
Europe-wide risk-capital activities ) and legal and
administrative environment ( examination of the impact of
Community and national regulations on small businesses and
cooperatives ). This policy will be actively pursued : its impact
will be the greater as it is relayed and reinforced at national
level by measures taken both at central and regional level .
The improvement of the environment of firms and the
reinforcement of the role of competition are liable to help
small businesses ; but the Commission also intends to develop
a more dynamic and more specific policy towards small
businesses and cooperatives, because of their importance in
job creation . To this end , it has adopted a programme (*) of
action which , as well as establishing a favourable
environment for the creation and development of small
firms , is aimed at responding to the specific needs of these
firms in terms of the provision of capital and adaptability to
the market ( flexibility ). The measures proposed in this
context relate in particular to training ( retraining of staff,
training of managers and heads of small businesses ),
encouraging arrangements for 'one-stop' information offices
in each Member State , and organizing pilot Community
information centres for small businesses , helping small
businesses penetrate the markets of third countries ,
supporting creation and innovation , encouraging
partnerships between large and small firms , adjusting
Community financing to the needs of small firms , and
developing risk-capital activity on a European scale .
The emphasis placed on greater competition as a factor in the
adaptability of Community economies has led some member
countries to take measures that increase firms' margin for
manoeuvre or improve the flexibility and effectiveness of
their management . For example , the trend in several
countries — in many cases helped along by disinflation — is
towards restoring firms' freedom to determine prices .
Indeed , most member countries consider price flexibility in
general as a particularly important factor in improving
growth and employment performance . In particular ,
through the action of competition , the above­
All these measures , which have been the subject of dialogue
and consultations with both sides of industry ( bodies
representing small business and trade unions ), should make
for a dynamic process of development and job creation in
(') Action programme for SME COM(86 ) 445 of 16 July 1985 .
No L 385 / 68 Official Journal of the European Communities 31 . 12 . 86
pursuant to the provisions of Article 130 of the Single Act ,
the Commission will improve the operation of the structural
funds , the instruments of the Community's financial
solidarity , so that they can contribute as effectively as
possible to achieving economic and social cohesion and to
removing the handicaps of the less-favoured regions and the
declining industrial regions . The decision to streamline is
part of the cooperative strategy , which , by promoting
dynamic growth , should reduce the disparities between
standards of living in the Member countries and their
regions .
small firms ; they can therefore play an important part in the
cooperative growth strategy for more employment .
Critical to the cooperative strategy are actions by the
Community and Member States to improve functioning of
goods, services and capital markets . Among the major
initiatives proposed by the Commission 's internal market
programme are measures for (a) the removal of technical
barriers to trade andfrontier costs, (b) cooperation in public
procurement, (c) indirect tax approximation, and (d) capital
market liberalization . Also, in this context, the social
dimension should not be neglected. The Commission has
also made proposals for improving the fiscal and regulatory
environment of the enterprise sector, with special attention
given to the needs of small and medium-sized enterprises .
Further efforts are thus now needed in favour of industry ,
research and innovation thus aiding and accelerating
structural adjustment and improving the competitiveness of
firms . This type of expenditure is especially important to the
success of the cooperative strategy , in that it improves the
scientific and technological base of enterprises , provides a
favourable educational base for the dissemination of
information technology , and reinforces the process of
establishing the Community market by its effects on
industrial supply .
4.5 . Financing Community policies : the budget and
financial engineering
Structural adjustment in , and convergence of, the Member
States' economies constitute , along with the control of the
financing of the common agricultural policy , priorities for
the budget of the enlarged Community . In conformity with
the cooperative strategy , the Community budget could make
an even greater contribution to aims such as more
employment-creating growth , stronger economic and social
cohesion , trouble-free integration of the new Community
Member States , and an improved internal market .
Moreover , the Community's financial instruments should be
employed to serve the strategy in the most imaginative and
efficient way possible .
The Community's 1987 budget is in the course of being
established . The Commission's preliminary draft budget
totalled 36,6 thousand million ECU , thus remaining within
the margin of the maximum VAT rate of 1 ,4 % . The small
expansion in expenditure for hte EAGGF-guarantee section
( 3,8% ), which still represents 62,5% of all budgetary
expenditure , made it possible to propose appreciable
increases in structural expenditure .
The budget adopted by the Council in its first reading
amounted to 35,9 thousand million ECU , with reductions ,
however , in amounts allocated to structural funds and
research ,
In line with the conclusions of the Fontainebleau European
Council , the Commission is currently considering proposing
to the Council an increase in the VAT financing limit to take
effect in 1988 .
Financial engineering: although budgetary resources are
scarce , abundant private funds are available and the
Commission proposes to take advantage of this financial
situation by concentrating on the development of financial
engineering . To this end , a new chapter has been inserted in
the preliminary draft budget for 1987 proposed by the
Commission .
The Community budget: the precarious situation of the
Community budget reflects the difficult balance between the
financing of the common agricultural policy decided by the
Council and the development of non-obligatory spending,
the role of which , in the search for greater economic and
social cohesion in the Community , has grown since
enlargement . In so far as agricultural spending is concerned ,
the problem is accentuated by the fact that its volume also
depends on external factors . Thus , for this expenditure , the
framework for budgetary discipline adopted by the Council
has had to be revised in 1986 as a result of the increasing
competition with other producers on third markets .
This new activity would mean persuading the market to
create or develop instruments or mechanisms to facilitate the
financing of measures or projects which the Community
considers of special interest . Existing instruments ( loans and
subsidies ) could be used to the best advantage to act as
catalysts , while the scope and functioning of Community
intervention should be expanded and improved , and the
relationship between Community and private financing
should be organized to enable the market to offer new types
In this context , the priorities laid down by the Commission in
'A Future for European Agriculture' are the progressive
reduction of supply in sectors producing surpluses ,
qualitative improvements of products and a structural policy
which more accurately reflects market realities . Moreover ,
31 . 12 . 86 Official Journal of the European Communities No L 385 / 69
of financing tailored to innovation , technology and
enterprise .
In the Commission's opinion many projects exist in the
Community that could be more easily launched and
completed if suitable financing arrangements were available .
The Commission has defined , for the immediate future , three
priority areas of its financial engineering activity where it is
studying , in close collaboration with the EIB , the possibilities
for development :
— Advanced technology projects well upstream in the chain
leading from research to industrial application ; in
particular , projects constituting the industrial follow-up
to joint research programmes that have been
part-financed by the Community . As such projects are
best financed from equity resources , the Commission has
put forward some ideas (private investment companies
backed by a guarantee mechanism ), after consulting the
financial community to ensure that they would be
appropriate .
— Small and medium-sized firms , in particular innovative
firms , facing specific financing problems . This is the area
with the widest scope for a variety of instruments ( risk
capital , guarantee funds , credit insurance , consultancy
bodies , etc .) and the Commission will be engaged in
getting these instruments developed .
— Major infrastructure projects , which are particularly
difficult to get off the ground and feasible only if a
considerable volume of capital with special
characteristics is available . The possible role for the
Community would be :
— for launching major projects ('declaration of
European utility ', budgetary aid ),
— to improve the environment for private investors ,
— to mobilize the capital market by the use of a revised
form of Community aid ( e.g. financing of
projects ).
The enlargement of the Community, the completion of the
internal market and the need to reduce unemployment are all
factors tending to increase the rate ofstructural change in the
Community. The Community budget should facilitate this
process through use of its various funds . In addition, in the
opinion of the Commission, financial engineering activities,
which would encourage the market to cover the main share of
the financing of work or projects to which the Community
attaches particular importance, would also make a
contribution; current priorities for the development of these
financial instruments would include high-technology
projects, innovation among small and medium-sized
enterprises, and some large infrastructure projects .
TABLE 23
European Community general budget , 1985 to 1987 : Payment appropriations
(millions of ECU)
1985 (')
EUR 10
1986 ( 2 )
EUR 12
1987 ( 3 )
EUR 12
1987 ( 4 )
EUR 12
Expenditure : I
Agriculture -— guarantee section 19 726 22 112 22 961 22 961
Agriculture — structural funds 738 802 966 983
Fisheries 82 190 221 208
Social Fund 1 413 2 533 2 589 2 499
Regional Fund
Integrated Mediterranean projects
Transport
Energy and industry
Research and innovation
1 624
9
76
129
578
2 373
133
27
114
648
2 495
240
34
173
847
2 422
175
21
147
744
Food aid 544 553 616 524
Development aid 541 618 642 536
Other expenditure including
refunds to Member States 2 763 5 071 4 892 4 726
Total 28 223 35 174 ( 5 ) 36 676 ( 6 ) 35 946
1 ) Out-turn .
2 ) Budget adopted by the Parliament on 10 July 1986 .
3 ) Preliminary draft budget for 1987 presented by the Commission to the Council on 21 July 1986 .
4 ) Draft budget adopted by the Council on 9 September .
5 ) The correction of the budgetary imbalance for the United Kingdom which amounts to 2 685 million ECU is included in
receipts .
( 6 ) The correction of the budgetary imbalance for the United Kingdom which amounts to 2 366 million ECU is included in
receipts .
No L 385 / 70 Official Journal of the European Communities 31 . 12 . 86
(millions of ECU)
1985 (')
EUR 10
1986 ( 2 )
EUR 12
1987 ( 3 )
EUR 12
1987 (
EUR 12
Receipts :
Agricultural levies 2 179 2 699 3 297
Customs duties 8 310 9 700 9 762
Value added tax (VAT) 15 218 22 468 23 130
Special contributions 1 911 211 212
Miscellaneous 654 96 275
Total 28 272 ( 7 ) 35 174 ( 5 ) 36 676 («) 35 946
Maximum rate of VAT 1,0 1,4 1,4
Effective rate of VAT 1,0 1,39 ( 8 ) 1,38 ( 9 )
Budget total as a % of GDP 0,85 1,03 1,02
(') Out-turn .
( 2 ) Budget adopted by the Parliament on 10 July 1986 .
( 3 ) Preliminary draft budget for 1987 presented by the Commission to the Council on 21 July 1986 .
( 4 ) Draft budget adopted by the Council on 9 September .
( 5 ) The correction of the budgetary imbalance for the United Kingdom which amounts to 2 685 million ECU is included in
receipts .
( 6 ) The correction of the budgetary imbalance for the United Kingdom which amounts to 2 366 million ECU is included in
receipts .
( 7 ) Including a surplus of 49 million ECU carried over to 1986 .
( 8 ) Except for the Federal Republic of Germany ( 1,33697 ) and the United Kingdom (0,67663 ).
( 9 ) Except for the Federal Republic of Germany ( 1,3296 ) and the United Kingdom (0,8176 ).
Sources : 1985 , Management accounts ; 1986 , Budget adopted on 10 July 1986 by the European Parliament ; 1987 , preliminary
draft budget presented by the Commission to the Council on 21 July 1986 , draft budget adopted by the Council on
9 September .
TABLE 24
European Community investment financing through capital market borrowing and on-lending
(million ECU)
1984 1985 1986
Lending by institution or mechanism:
European Investment Bank
Commission :
European Coal and Steel Community
Euratom
New Community Instrument
5 007
825
186
1 182
5 641
1 010
211
884
Total 7 200 7 746 7 800 to 8 300
Lending by sector or policy objective:
Private industrial sector
of which : global loans to small and medium enterprises
Infrastructure
2 709
1 719
2 132
2 830
1 735
2 413
2 500 to 2 800
1 400 to 1 600
2 800 to 2 900
Energy 2 359 2 503 2 500 to 2 600
Total 7 200 7 746 7 800 to 8 300
Source: Commission of the European Communities 'Report of the Commission to the Council and the European Parliament on the
borrowing and lending activities of the Community in 1985 ' (COM(86 ) 289 final ). The figures for 1986 are forecasts by
the Commission .
31 . 12 . 86 Official Journal of the European Communities No L 385 / 71
4.6 . Social dialogue industry represented by Unice (Union of the Industries of the
European Community ), CEEP (Confederation of European
Public Enterprises ) and the ETUC (European Trade Union
Confederation ). As a result of the work carried out in two
groups , one dealing with macroeconomic, the other with
microeconomic themes , an agreement covering several
points has been reached . It can be summarized as follows :
The success of the cooperative strategy implies changes ,
sometimes marked , in behaviour and economic policies .
Rising unemployment during the 1970s and weak growth
have gone hand in hand with the reinforcement of defensive
behaviour , often as a reaction aimed at preserving legitimate
rights and positions in the face of the radical changes
wrought by the oil crisis . However , such behaviour has often
not given enough attention to the rise in unemployment and
makes a solution to this problem more difficult .
This applies to firms , which became more hesitant to invest
in a context which they considered uncertain . It applies to
wage earners endeavouring to protect their purchasing
power and the stability of existing jobs , but it also now seems
to apply to economic policymakers , who , considering the
duration and the cost of cutbacks at the beginning of the
1980s , may be reticent to make use of available leeway .
— the need for all parties — firms employees and the
authorities — to apply the cooperative strategy effectively
in order to obtain the desirable decline in
unemployment ,
— the need for a rapid reallocation of resources to
employment-creating investment through a further
improvement in business profitability resulting from a
moderate increase in real wages and through action to
ensure that the lag between increases in profitability and
investment activity is as short as possible ,
— the need to preserve a stable monetary framework and to
reduce inflation where it is still too high ,
— the need to promote R&D and the training of the labour
force ,
— the need to complete rapidly the internal market , taking
full account of its social aspects ,
— the need to back up business investment by reviving
economically and socially profitable public investment .
Present imbalances are the result of such modes of behaviour ,
and the renewal of the European economy can only be
brought about by their simultaneous modification . The
propensity to invest can increase if the outlook for
profitability and demand is assured . Wage earners can be
more ready to accept moderate real wage growth and greater
labour market adaptability if, in return , the effects on
employment are seen to be coming through , and if the social
consequences ofmeasures are fully taken into account . There
will be less risk of macroeconomic policies more firmly
targeted on growth leading to rekindled inflation and the
reappearance of external imbalances if domestic costs are
harnessed , if enterprises can increase their productive
capacity , and if this takes place within a more dynamic
Community context .
The objective of social dialogue should be the simultaneous
modification of the behaviour of all groups in economic
activity .
Naturally , some differences in points of view have also
emerged . These principally concern the role of the State in
economic activity , both in its expenditure and taxation
activities and in its market-regulating responsibilities , as well
as the role of the reorganization and reduction of working
time , neutral with respect to the level of costs , in the creation
of employment .
It therefore seems clear that social dialogue should cover all
the themes of the cooperative strategy , both at the
macroeconomic and at the microeconomic level . Social
dialogue gathers together representatives of employers and
employees as well as governments . It should make possible a
broader consensus on the contributions of each group to the
cooperative strategy . By meeting at regular intervals , short
enough to take into account short-term economic
developments , the participants will be able to see that the
cooperative strategy is effectively applied and to adjust their
action to recent developments . Social dialogue at all levels
should therefore enable the social and employment
consequences of the necessary structural and technological
shifts to be harnessed more effectively .
At the Community level , the Commission will continue for its
part to intensify the social dialogue but , as the Commission
pointed out in its communication of July 1986 (COM(86 )
364 final ), the desire for cooperation , which the social
partners have demonstrated at European level , has not been
fully utilized at the national level . Governments in all the
Member States should take practical steps , bearing national
traditions in mind , but perhaps breaking new ground as well ,
to enter into dialogue at national level covering all aspects of
the strategy , and to create a favourable environment for
dialogue at the sectoral and enterprise level (*). In countries
The Commission has stimulated a fruitful dialogue at the
Community level , with , and between , the two sides of
(') See Article 3 of Council Directive 74 / 121 / EEC of 18 February
1974 on stability , growth and full employment in the
Community , OJ No L 63 , 5 . 3 . 1974 , p. 19 .
No L 385 / 72 Official Journal of the European Communities 31 . 12 . 86
where governments , for particular reasons , do not see their
way to encourage social dialogue themselves , the social
partners are invited to take the initiative . In this way ,
dialogue on the themes of the Community strategy can also
be entered into in these countries between the social partners
and , as far as possible , with the participation of
government .
complemented by domestic policy adaptations in order for
either the United States deficit or the Japanese surplus to be
reduced to acceptable dimensions . Despite the recognition in
the Group of Five agreement of the need for such changes ,
there has in fact been little progress in this area so far . As a
result , both the US deficit and the Japanese surplus are likely
to remain excessively large in 1986 and 1987 . The surplus of
the Community as a whole may be expected to increase
temporarily from its 1985 level , while remaining within
acceptable limits . However , within the Community total , the
distribution of surpluses and deficits between member
countries may require more adjustment , although there is
clearly no necessity for all member countries to run exactly
balanced current accounts .
Social dialogue is an important element of the cooperative
strategy. By bringing together representatives of employers
and employees, as well as governments, the objective is in
particular to contribute to the necessary changes in the
behaviour ofall parties in economic activity and bring about
a broad consensus on their respective contributions . The
themes covered should cover all economic and social aspects
of the cooperative strategy. At the Community level, the
Commission has stimulated a fruitful dialogue with, and
between, the social partners . The Commission will
endeavour to intensify still further this dialogue .
Governments of all Member States should take practical
steps in order to encourage, at national level, dialogue on all
the themes of the strategy, building on the desire for
cooperation shown by both sides of industry at the European
level, and taking account of the particular circumstances in
individual countries .
The United States has repeatedly urged surplus countries , in
particular Japan and Germany , to take additional measures
designed to stimulate domestic demand and thus accelerate
the reduction of their external surpluses and by that the
United States' deficit . However , faster growth in these two
countries alone , which account for only 15 % of US exports ,
would probably not have much effect in reducing the US
deficit . If all industrialized countries outside the United
States took measures to accelerate the growth of domestic
demand the impact on the US current balance would , of
course , be much greater , because in this case the benefit
would be extended directly to some 60 % of US exports . On
the other hand , while faster growth in all industrialized
countries outside the US would help to reduce the US deficit it
would do little , if anything , to reduce the Japanese and
German surpluses . This is because additional demand for
Japanese and German ^exports from other industrialized
countries would tend to offset the increase in imports
generated by the faster growth of their own domestic
demand .
4.7 . International economic policy coordination
The process of correcting the major balance of payments
disequilibria , which have affected the world economy since
1982 , has now been under way for more than a year .
Already , with effect from March 1985 , when the dollar
reached its peak , the exchange rates of major currencies had
begun to move in a direction more consistent with
fundamental economic factors . This process was given an
additional impetus when the Group of Five finance ministers ,
at their meeting in New York in September last year , agreed
that a depreciation of the dollar , and a corresponding
appreciation of the other major currencies , in particular the
yen , would be necessary to restore the structure of
international payments to a sustainable basis .
In order to bring down the United States' current account
deficit to sustainable proportions , it seems necessary to
envisage a certain slowdown in the evolution of domestic
demand there , which would imply a period of relatively
slower growth compared to other industrialized countries .
United States imports , unlike United States exports , are
highly income-elastic and could thus be expected to respond
sharply to slower growth of domestic demand . Table 25
shows the distribution of current surpluses and deficits that
might be expected to result if fiscal policy in the United States
were more restrictive , and assuming that real exchange rates
remained at their mid-1986 levels . The United States deficit
would be reduced to about 2 % of GDP by the late 1980s and
the Community surplus would disappear , but the Japanese
surplus would remain unacceptably large .
By the end of September 1986 , the currencies of the other
Group of Five countries had all appreciated substantially
against the dollar . In trade-weighted terms , the dollar itself
had depreciated by 22 % , and the yen had appreciated by
38% , from their average 1985 levels . The European
currencies had appreciated less in trade-weighted terms ,
since about half of their trade is conducted between
European countries . These exchange-rate adjustments , at
least as regards the ECU in relation to the dollar , are
probably now about sufficient . A determined application of the cooperative strategy over the
next four years , would , in these circumstances , result in some
deterioration of the current account of the Community . This
could certainly be acceptable , but would not correspond to a
lasting eyuilibrium . The main beneficiaries , in balance of
payments terms , would be other European and developing
However , in view of the enormous imbalances which have
built up over the years , especially in the United States and
Japan , these exchange-rate adjustments will need to be
31 . 12 . 86 Official Journal of the European Communities No L 385 / 73
countries . The impact on the United States current balance
would be fairly small , and in the Japanese case progress
towards reducing the surplus would be delayed still further
( see Table 26 ). This would not be the optimal option .
Therefore , an international policy mix designed to reduce
imbalances to sustainable levels would appear to require
some further combination of yen appreciation and fiscal
stimulus in Japan , in addition to a period of relatively
moderate growth in the United States and faster growth in
the Community . Table 27 shows the distribution of current
balances that would result from fiscal expansion equal to 1 %
of GDP in Japan in 1 987 and sustained throughout the period
until 1990 and a further 20% effective appreciation of the
yen during 1987 / 88 . This combination of measures ,
together with measures to assure the continued opening of
goods and financial markets , would reduce the Japanese
surplus substantially . This example shows that the overall
outcome can be significantly improved through cooperation .
It would be further improved by the participation of the
EFTA countries , which have already signaled some
sympathy for this effort .
economic policy coordination . The participants at the Tokyo
Summit have decided that the most promising way of
achieving such improvement would be to develop a regime of
indicators that would enable countries' objectives to be
specified in fairly precise quantitative terms and their success
in achieving these objectives to be closely monitored . It is
envisaged that national forecasts should be checked for
internal consistency and mutual compatibility with a view to
diagnosing future sources of tension and reaching agreement
on what changes in policy would be most appropriate to
forestalling them . Subsequently , the indicators would be
used to check performance in relation to objectives and to
identify appropriate remedial action where necessary .
Clearly a regime of this kind is no panacea for solving the
problems of international economic cooperation . However ,
to the extent that it provides a more complete quantitative
analytical framework within which the policies of the major
countries can be examined and the likely consequences of
those policies , both for the country concerned and for others ,
assessed , it should improve the prospects for avoiding serious
incompatibility between the policies of the participant
countries and the tensions which such incompatibility
provokes .
Recent developments in world output and trade have not
been helpful to developing countries . Sluggish growth in the
industrialized world has held down the rate of increase in the
volume of developing countries' exports and has depressed
commodity prices , with the result that the purchasing power
of developing countries' exports ( export earnings deflated by
import prices ) is estimated to have fallen this year by 11 % ,
and the aggregate current deficit of this group , after four
years of steady improvement , has deteriorated sharply again ,
in spite of the decrease in interest payments on external debts .
The main channel to improve the external position of the
developing countries must be to increase their exports . More
open markets for the developing countries' products are a
precondition for some progress in restoring their
creditworthiness . In addition , fresh capital is necessary for a
successful restructuring and adjustment of the economies of
the indebted countries towards more economic growth as
proposed in the Baker initiative . The recent negotiations over
Mexico's external debt and domestic adjustment policies are
a positive example in this regard .
The decision taken in Punta del Este in September to launch a
new round of multilateral trade under the GATT , lends
strength to the hope that the trend towards protectionism can
be halted and reversed . This is an essential condition to allow
the development of a more open and durable multilateral
trading system . Furthermore , these negotiations should
strengthen the structures and disciplines of the GATT , at a
time when they are perceived as having weakened against an
unfavourable background . In this context , the concerted
attempt to bring agricultural trade within the scope of these
negotiations will be of particular significance . Last , but not
least , GATT should adapt to new developments in the
structure of trade . An important step in this regard is the
decision to include liberalization of trading services into the
negotiations , bringing a new major sector within the scope of
the multilateral trading system .
The revival of growth in the developing countries is necessary
to avoid a further deterioration of the standard of living of
their populations and for progress towards solving their debt
problems . To this end , it is vital that the adjustment of
current account imbalances between the developed countries
does not have a contractionary overall effect on the growth of
the indebted developing countries . Indeed , their growth can
make a significant contribution to the steady expansion of
world trade .
Recent exchange-rate changes have created more favourable
conditionsfor correcting the large external imbalances which
had built up over previous years . They will not, however,
achieve this result by themselves . The return to a sustainable
pattern of current payments will, above all, require
budgetary restriction in the United States and expansionary
budgetary measures, accompanied byfurther appreciation of
the yen in Japan . In the event of policy adjustments along
these lines, major corrections to the United States and
Japanese current account imbalances could be achieved by
1990 . The more favourable growth trend achieved in the
It is clear from recent experience that there is still ample room
for improvement in the arrangements for international
No L 385 / 74 Official Journal of the European Communities 31 . 12 . 86
Community, by implementing the cooperative growth
strategy for more employment, and in the EFTA countries
will have a beneficial impact on world trade . The new round
of multilateral trade negotiations within GATT could
strengthen this positive tendency. This would have a
favourable effect on developing countries ' exports and would
increase the chances of consolidating their external
payments ' position in the medium term .
Projected current balances as percentages of GDP 1 986 to 1 990
TABLE 25
Present policies and mid-1986 exchange rates (baseline scenario )
1985 1986
Average
1987 to 1990
USA - 3,0 - 2,5 - 2,2
Japan + 3,7 + 4,5 + 3,2
EUR + 0,5 + 1,2 + 0,4
Annual average growth rates of real GDP during 1986 to 1990 inclusive would , in this scenario , be : USA 2,7 % , Japan : 3,6 % ,
EUR : 2,6 % .
TABLE 26
Cooperative strategy (without specific cooperative measures in Japan )
1985 1986
Average
1987 to 1990
USA - 3,0 - 2,5 - 2,0
Japan + 3,7 + 4,5 + 3,5
EUR + 0,5 + 1,2 - 0,1
Annual average growth rates of real GDP during 1986 to 1990 inclusive would , in this scenario , be : USA 2,8 % , Japan : 3,7 % ,
EUR : 3,5 % .
TABLE 27
Cooperative strategy combined with fiscal expansion and further 20 % effective yen revaluation in Japan
1985 1986 Average
1987 to 1990
USA - 3,0 - 2,5 - 1,7
Japan + 3,7 + 4,5 + 2,2
EUR + 0,5 + 1,2 + 0,1
Annual average growth rates of real GDP during 1986 to 1990 inclusive would , in this scenario , be : USA 2,9 % , Japan : 3,4 % ,
EUR : 3,6 % .
31 . 12 . 86 Official Journal of the European Communities No L 385 / 75
PART II
ECONOMIC POLICY IN THE MEMBER STATES
APPLICATION OF THE COOPERATIVE GROWTH STRATEGY FOR MORE EMPLOYMENT IN THE
MEMBER STATES IN 1987
The inescapable conclusion which emerges from an
examination of employment trends in recent years is that
energetic action is necessary in all the Member States to
reduce the level of unemployment substantially ; the single
exception is Luxembourg , where unemployment remains
low . On an annual average basis , the unemployment rate will
fall in only four out of the 1 2 Member States in 1 986 , while in
1987 it will fall in half of the Member States , but only two
(Germany and the Netherlands ) will register a fall over the
two years . In 1986 , the GDP growth of only two countries
(Germany and Portugal ) will be within the 3 to 3,5 % range
considered necessary , in the medium term , to reduce the
unemployment rate substantially . The outcome will be
decidedly better in 1987 , when six Member States will be in
this situation , three of them countries whose relative share in
Community GDP is high (Germany , Spain and Italy ) while
the result for France and the United Kingdom is only
one-quarter of a percentage point outside the bottom of the
range . Thus , although progress is being made in the right
direction , it is particularly important to examine whether
and how this progress can be consolidated and improved in
each of the Member States in 1987 and thereafter , and ,
similarly , how far economic and social policy should differ
from country to country to take account of the special
features of the economic situation in each Member State .
market . At the very most , transitional measures could be
envisaged to take account of the special problems in the
acceding countries .
It is also desirable for the Member States to act largely in
parallel in regard to the labour markets and labour costs ( in
particular through moderation of real wage increases ,
shortening working time , provided that this is cost neutral ,
introducing more flexible use of working time , reducing
social security charges , improving the regulatory system so as
to stimulate the recruitment of workers , encouraging the
creation of small businesses ).
In the course of 1987 , when the stimulatory effects of the
terms of trade gains begin to weaken , support of domestic
demand could become necessary ; this support must
necessarily differ from country to country , in view of the
requirements dictated by the situation in each Member
State .
From the monetary aspect , the continued fall in interest rates
is much to be desired as a source of stimulus for the expansion
of investment . However , in countries such as the Federal
Republic of Germany and the Netherlands , there has already
been an appreciable fall in interest rates due to the sharp drop
in inflation . A forced reduction would be liable to imperil the
aim of stability inherent in a sound monetary policy . In most
of the other Member States , and particularly in France and
Italy , the abatement of inflationary expectations points to a
continuing downward trend in interest rates .
It will not be possible to attain these internal objectives ,
however , unless the Member States turn their joint attention
to the external aspects of these problems within the
framework of international monetary cooperation . In all
probability , the downward pressure on the dollar will remain
appreciable throughout 1987 , given the need for a
deep-seated adjustment of the United States' external
account . It would not be in the Community's interest to
tolerate an excessive depreciation of the dollar which could
have adverse effects on its own growth . Nevertheless , the
adjustments to domestic monetary policy , which might by
implication be necessary in order to prevent the dollar from
falling too far , cannot go beyond certain limits , otherwise
they would become self-defeating .
All these considerations indicate that , within the policy mix ,
monetary policy can still have a stimulatory effect on growth
in some Member States , but that its role is very limited in
others .
As was already stressed in the Annual Economic Report
1985 / 86 , it is clearly very difficult , if not impossible , to
implement in isolation measures to boost employment ;
consequently , the success of any action of this type also
depends on reinforcing the social dialogue , not only at
Community level , but also in each Member State . The
interaction of government initiatives with those of the social
partners will be an essential precondition for the success of
any action to increase employment .
An approach which takes account of the specific
characteristics of each country's economic situation does not
necessarily mean a differentiation , from country to country ,
in applying all the measures recommended in Part I of the
present report .
A uniform and synchronized application of the proposals
made in Part I , chapter 4 , sections 4.3 to 4.6 should be
made .
Broadly comparable efforts will have to be made by the
Member States to improve the operation of the markets in
goods , services and capital , and to put into effect the
Community programme for completing the large internal
No L 385 / 76 Official Journal of the European Communities 31 . 12 . 86
the outlook for 1987 limit the room for manoeuvre in
macroeconomic policy .
Consequently , only a fairly small group of countries will be
able comprehensively to influence supply and demand
conditions . However , all the Member States will be able to
create more favourable circumstances for the expansion of
employment by modifying the structure of public
expenditure and revenue .
Nevertheless , an increasing number of countries can be
expected to have more room for manoeuvre in the course of
1987 and , in the countries where it already exists , the
possibilities for action will become more evident . This would
obviously be the case if , as is likely , the improvement in the
fundamental conditions for economic equilibrium already
experienced in 1986 were to be sustained in 1987 .
With regard to public finance , the possibilities for action
differ even more . In the Federal Republic of Germany and in
Luxembourg , the budgetary situation seems comfortable
enough to give the public authorities some room for
manoeuvre . In the United Kingdom , the Government in its
autumn statement provided for an increase in public
expenditure of some £ 4 3/4 thousand million in 1987 / 88 .
This will mean that public expenditure in 1987 / 88 is
planned to be about 2% higher in real terms than the
estimated out-turn in 1986 / 87 . In France , substantial tax
cuts are already planned for 1987 and further reductions
have been announced for 1988 , the intention being
simultaneously to reduce the budget deficit in each of the two
years . By contrast , the state of the public finances , and in
particular the high level of the public debt , means that
consolidation must continue in Belgium , Greece , Ireland ,
Italy and Portugal . In a third group of countries (Denmark ,
Spain and the Netherlands ), the budgetary constraints are
less severe , but certain aspects of
BELGIUM
In Belgium, economic growth in 1 986 is likely to be distinctly
faster than the rates achieved in the period 1981 to 1985 ; the
acceleration is due not only to the reverse oil shock but also to
the delays in finalizing a new fiscal consolidation
programme . Real personal disposable income and private
consumption are likely to increase by over 2,5% , after
remaining virtually static for several years . Business
investment is likely to expand sharply because of the
improvement in profit margins . In 1987 , however , growth
will inevitably be held back by the effect of the moderation of
personal incomes following the fiscal consolidation
programme decided in the spring of 1986 . Growth will
therefore have to be more reliant on business investment and
exports . Price increases are likely to remain weak after the
sharp slowdown in inflation in 1986 ( from 4,9 to 1,3% ).
The current account should produce a comfortable surplus in
the two years under review . General government net
borrowing , by contrast , is likely to show no more than a
slight improvement in 1986 , but in 1987 should be reduced
by 1,5 to 2 percentage points of GDP . The efforts to
strengthen the public finances will , in the first place , have a
negative effect on the employment level in the public sector ,
which will be offset to a large extent by an increase in the
private sector as a result , in particular , of the agreements
reached in the framework of the national negotiations . Over
the two years 1986 and 1987 , the level of total employment
and the unemployment rate will hardly change .
Incomes in 1986 and 1987 will evolve in line with the policy
adopted since 1982 and directed towards a moderate
development of real wages in order to safeguard the level of
competitiveness achieved after 1982 and to promote
employment-sharing . Adherence of these objectives will be
facilitated in 1986 by the slowdown in inflation which ,
through the working of the indexation system , has been
rapidly reflected in a deceleration of nominal wage increases .
Wage negotiations for the years after 1986 will be subject to
the restriction imposed by the Government's powers to
secure compliance with the general competitiveness norm .
Statutory powers of constraint can be invoked when sectoral
wage agreements depart too far from the general
recommendations set out in the national agreement reached ,
in September 1986 , between the social partners ; these are
geared to maintain a certain level of competitivity and to
create jobs , especially for young people . The slowdown in
wage increases has helped to reduce real unit-labour costs by
nearly 9% between 1981 and 1986 . This was paralleled by
an increase in the profitability of companies and an
improvement in their financial situation . A further reduction
in corporation tax was also decided , bringing the top rate
down from 45 to 43 % in 1988 . Lastly , monetary policy was
centred on the reduction of short-term interest rates to the
maximum degree compatible with the maintenance of a
stable exchange rate , so that the interest rate on investment
credit was down to 8,25 % by April 1986 , whereas it was still
12,75% at the beginning of 1985 . It was only in 1986 ,
however , that these improved conditions began to generate a
significant growth in company investment , since the
implementation of new projects was held back , probably
because of uncertainty as to how personal incomes would
evolve in the context of the fiscal consolidation measures .
Working hours will soon become more flexible , and , as
legislation enshrines the consensus between management apd
unions on the general use of flexible time , firms will be better
able to react to fluctuations in demand once new wage
agreements enter into force .
31 . 12 . 86 Official Journal of the European Communities No L 385 / 77
On the other hand , the condition of the public finances is
such that the only possible priority is for a vigorous and rapid
improvement so as to break the 'interest charges-debt' spiral .
In the spring , the Belgian government gave details of the fiscal
consolidation programme announced in its December 1985
investiture declaration , which aims to reduce the Treasury
borrowing requirement to the equivalent of 8 % of GDP in
1987 and 7 % in 1989 , compared with 1 1 ,5 % in 1985 . The
main emphasis is on cutting expenditure . The programme of
reducing personal taxation , decided earlier , has been
retained and heavier taxation of petroleum products has been
rejected . These programmes , taken together , should
temporarily counteract recent developments favourable to
employment and domestic demand . Nevertheless , the reverse
oil shock enables the Belgian economy to maintain relatively
favourable growth during the period of internal
adjustment .
The public finance situation necessarily restricts the
possibilities for boosting demand by budgetary action . As
before , priority should be given to bringing the public
finances back into balance and eliminating supply-side
rigidities , since these two obstacles must be removed in order
to return to steadier and more lasting growth . The
implementation of a monetary policy aimed at cutting
interest rates by as much as is compatible with the
maintenance of the Belgian franc's parity within the EMS is
also largely dependent on a reduction in the public sector's
financing needs .
The scale of the budget imbalance means that the
government's borrowing requirement target must be fully
attained within the planned time-limits , especially since , in
several respects , the international situation is relatively
favourable while , in 1986 and 1987 , cutting expenditure will
be aided by the fall in interest rates . Before the special powers
expire , it is essential to implement , if necessary , new
corrective measures to ensure that the target (a Treasury
borrowing requirement equivalent to 8 % of GDP in 1987 ) is
attained , in order to avoid the public finances being blown
off course should the planned measures fall to produce the
desired results , or should exogenous factors develop less
favourably . The only room for manoeuvre available to
budgetary policy in the short term relates to the structure of
revenue which could be modified with a view to generating
growth with a greater job content . One of the possibilities
would be to compensate for a reduction in social security
charges on wages by increasing indirect taxes in general , or
the taxation of petroleum products in particular .
It is desirable to keep open the possibility of setting limits to
wage developments after the special powers in this respect
expire , given the imperative need for the Belgian economy to
remain competitive in meeting external demand during the
period of internal adjustment . Nevertheless , the maintenance
of a policy of wage rigidity over a long period could now
justify some limited cases of relaxation , in order to respond
to the signals emanating from the labour market when
bottle-necks appear that are difficult to deal with by
retraining measures .
No L 385 / 78 Official Journal of the European Communities 31 . 12 86
TABLE 28
Belgium : Main economic aggregates 1961 to 1987
(Annual percentage changes)
1961 to
1973
1974 to
1980
1981 1982 1983 1984 1985 1986 (') 1987 ( 2 )
r value
Gross domestic J volume
product |
deflator
9,2
4,9
4,1
10,0
2,5
7,5
3,4
- 1,5
5,0
8,7
1,5
7,1
6,3
- 0,1
6,3
6,8
1.4
5.5
6,7
1,5
5,1
6,7
2,0
4,6
3,1
1,3
1,8
Private consumption deflator
Gross fixed f private
capital -
formation volume 1 total
of which : construction
equipment
3,7
5,1
7.8
1.9
8,1
- 18,1
- 6,3
- 16,3
- 22,9
3,6
7,4
- 0,3
- 8,9
- 1,7
- 5,4
8,0
7,5
- 3,6
- 7,6
- 3,9
- 5,1
- 9,5
5,9
4,4
- 8,8
1,0
- 4,2
9,9
4,8
3,8
- 13,2
1,2
- 0,4
3,6
1,3
7.0
- 6,4
5,3
2.1
9,5
1,5
6,9
- 9,8
5,0
2,2
8 4
Domestic demand at constant prices
Gap with respect to other Community
countries ( 3 )
r nominal
Compensation
of employees ■
per head 1 g ( 4 )
Productivity ( s )
Real unit labour costs
Competitiveness ( 6 )
Employment
8,9
4,6
5,1
4,3
0,3
- 0,2
0,6
11,6
3,8
3,5
2,4
1.4
1.5
0,1
- 4,1
6,4
1,4
- 1,5
0,5
0,9
- 8,2
- 2,1
0,3
- 0,8
8,1
1,0
0,7
2,9
- 1,8
- 11,5
- 1,3
- 2,5
- 2,6
6,4
0,0
- 1,0
0,9
- 0,9
- 2,3
- 1,6
1,7
- 0,3
6,8
1,4
0,8
1,4
0,0
0,1
0,2
1,3
- 0,8
4,5
- 0,6
- 0,3
1,0
- 1,6
1,8
0,5
3,0
- 0,5
2,5
- 2,0
1,2
1,7
- 3,6
2,9
0,3
1,3
- 1,4
2,2
0,4
0,7
1,9
- 1,5
- 0,6
- 0,6
Registered unemployed as %
of the civilian labour force ( 7 )
Current balance as % of GDP
Long-term interest rate
Money supply ( 8 )
2,2
1,0
6,5
10,1
6,8
- 1,4
9,4
11,2
11,1
- 4,6
13,8
10,0
13,0
- 3,3
13,5
7,5
14,3
- 0,6
11,8
7,0
14,4
- 0,4
12,0
6,1
13,7
0,4
10,6
6,7
12,9
2,3
8,0
5,8
13,4
2,8
7,2
4,0
Net lending or borrowing
requirement of general government
as % of GDP
Public debt as % of GDP
Public debt interest
as % of GDP
- 1,9 - 5,8
64,8
4,4
- 12,6
88,2
8,0
- 11,1
95,9
9,3
- 11,7
105,1
9,4
- 9,5
110,7
9,9
- 8,4
117,4
10,6
- 8,0
120,6
10,6
- 6,2
125,7
10,7
t 1 ) Estimates of the Commission services , October 1986 .
( 2 ) Forecasts of the Commission services , October 1986 , on the basis of present policies .
( 3 ) Differences in percentage points .
( 4 ) A : GDP deflator ; B : private consumption deflator .
( 5 ) Gross value added per occupied person in the whole economy .
( 6 ) Effective exchange rate (vis-àvis 19 industrial countries ) on the basis of unit labour costs for the whole economy . Positive figure = loss of
competitiveness ,
( 7 ) Eurostat definition .
( 8 ) End of year .
31 . 12 . 86 Official Journal of the European Communities No L 385 / 79
DENMARK
In Denmark, economic performance in recent years has
improved significantly in important respects : gross domestic
product rose quickly both in 1984 and 1985 ( 3,9 and 3,8 % ,
respectively), employment expanded by 2,4 % in the former
and by 3,1 % in the latter year and , although labour supply
rose rapidly in reaction to the increase in demand for
manpower , the rate of unemployment was reduced from a
peak of 10,2% in 1983 to 8,2% at the end of 1985 . The
upturn was led by a pronounced recovery in gross fixed asset
formation , which responded strongly to a marked
improvement in the profitability of investment resulting from
the policy of wage restraint in the early 1980s .
A decline in the private savings ratio , reflected also in
stronger borrowing by households , was a major reason for
this buoyancy . The external payments position deteriorated
further , although it prompted government action in
December 1985 and in March 1986 in order to restore
external balance . However , as a result of these measures ,
consumer demand levelled off and the rate of activity in the
construction sector , while at a high level , also showed signs
of weakening . Nevertheless , there was a moderate rise in
other business investment except in a few sectors such as
energy and shipping . Although the trade balance should
improve in the course of the year , interest payments abroad
remain high , and the deficit on current transactions may not
improve for the year as a whole . The slowing down of GDP
growth due to the restrictive measures , to some 3 % in 1986 ,
reduced the rise in employment and the unemployment rate
levelled off at some 7 3/4 % of the labour force . The rise in the
consumer price deflator should be of the order of 3V2% in
1986 , as against 5 % in 1985 , despite the increase in indirect
taxes .
The fast increase in employment since 1983 , of the order of
2% per annum, is the most spectacular result of the
economic policy pursued by the Danish authorities since
1982 , corresponding in many respects to the cooperative
growth strategy adopted by the Council last year . This
strategy has aimed mainly at stimulating the supply side of
the economy through real and nominal wage restraint , cuts in
public expenditure and adherence to a principle of external
and internal monetary stability within the framework of the
EMS . Real compensation of employees actually fell from
1983 to 1985 , and rose slowly from then on due to moderate
settlements and the ending of indexation . The consequent
rise in profitability helped to stimulate private business
investment . With a severe restraint on public expenditure
and some modest rise in receipts , the general government
borrowing requirement was reduced in the process from
9,3 % of GDP in 1982 to 1,9% in 1985 , while a surplus of
some 3% could emerge in 1986 . Tight budgetary
management gave more room for the expansion of the
tradeables sector . The thrust of incomes and budgetary
policy meant that monetary policy no longer had to bear
alone the burden of stabilization , and so domestic interest
rates declined sharply .
In October 1986 , new measures were introduced in order to
strengthen personal savings and discourage credit-financed
consumption . They include a shortening of the average
redemption period of new mortgage loans , higher stamp
duties on loan documents and a special tax on interest
payments on personal loans for consumption purposes . In
addition to these measures , the main events influencing
economic developments next year will be the implementation
from 1 January 1987 of the tax reform adopted at the
beginning of 1986 and the wage settlement of March 1987 .
The purpose of the tax reform is to increase private
household savings .
Despite this strong correction in the public finances , the
current external deficit widened considerably between 1983
and 1985 , partly as a result of some deterioration of the trade
balance and partly due to a substantial increase in net interest
payments abroad . The latter was a consequence partly of the
rise in the dollar in the period up to mid- 1985 , which boosted
the domestic currency value of the existing debt , and also of
the continued rise in the debt . Although , compared to the
position of 1979 , the trade deficit by 1985 had been reduced
by 4,4 percentage points of GDP , the overall current external
deficit in 1985 , at 4,4 % of GDP , was barely lower than the
deficit recorded in 1979 (4,7% ), and up from 3,3% in
1984 .
In 1987 it could somewhat stimulate consumer spending by
shifting taxation from households to corporations and
certain other institutions , including some non-profit
institutions , which until now were tax-exempt . This
stimulative effect is however counterbalanced by the increase
in local government taxation and by measures taken in
October 1986 . As a result of the full compensation for the cut
in working time and the planned extension of sickness
payment , average wage costs will have increased by more
than 3 % at the beginning of 1987 , reducing the room for
wage concessions during the biennial deal in March 1987 .
Investment in plant and equipment , following its sharp rise in
1984-1986 , will be much less buoyant in 1987 , particularly
in the energy sector . Overall the growth performance will be
considerably slower than in 1986 and will therefore become
more dependent on the international economic environment .
The rate of unemployment will be slightly higher than the
likely outcome in 1986 . On average , consumer prices will
probably increase at a rate similar to that of 1986 (3,5 to
4,0% ) which includes the effects of energy tax rises to
eliminate the impact of lower oil prices and of the dollar
In 1986 , domestic demand continued to increase markedly in
the first half of the year , again outgrowing potential supply .
No L 385 / 80 Official Journal of the European Communities 31 . 12 . 86
There is also the need to adapt the structure of the Danish
economy to the changing international environment . Action
has already been taken , and further proposals are pending , to
extend training and research facilities in areas where their
application may be particularly effective . Opportunities to
reorganize existing work patterns , to deregulate and to
increase the adaptability of the labour market should be
considered and discussed with the social partners .
exchange rate on consumer spending power ( ! ). The current
account of the balance of payments should show a
considerable improvement .
The wage drift experienced during 1986 , as a result of
sectoral imbalances in the labour market , together with the
envisaged rise in productivity , suggests that a moderate wage
settlement in line with previous experience would be
appropriate , particularly taking into consideration the
expected alleviation of personal taxation in 1987 .
Disregarding interest payments abroad , the current account
deficit appears to be essentially the result of excessive
domestic absorption rather than the consequence of reduced
price competitiveness . The recent weakening of the Danish
krone within the EMS illustrates , however , that the margin
of manoeuvre of the authorities remains narrow and that
monetary policy must take due account of the need to ensure
sufficient capital imports . Measures to raise the level of
private savings and to reduce the debt of households - such
as those introduced in October - are therefore of prime
importance . In this respect , an extension of pension schemes ,
to cover a wider section of the population , based on personal
contributions and possibly as part of the wage settlement ,
might be another useful contribution . In the shorter run the
external constraint would thus be loosened whereas , in the
longer run , increased savings would ensure the financing of
higher investment and improve growth potential without
endangering the external balance .
(*) The forecasts in the text seek to take into account the effects of
the measures adopted in October , whereas it has not been
possible to make corresponding revisions to the figures in
Table 29 .
As a result of past current deficits , the external gross debt is
now close to 40 % of GDP, with private and public debt each
accounting for about half . With an increase in nominal GDP
of some 6 % per year on average over the coming years , the
external debt /GDP ratio could be maintained constant with
a current external deficit of some 2,5% of GDP . With a
lower deficit , the external debt would tend to fall in
proportion to GDP . As a first step , it would seem urgent
already in 1988 to bring the external deficit down to the level
consistent with a constant debt /GDP ratio and , in the short
run , this can hardly be achieved without a continued tight
fiscal policy stance in line with the official objectives . A
further reduction of the external deficit should take place in
subsequent years to the extent that a lowering of the
debt / GDP ratio is aimed at . For 1987 , the general
government net lending implicit in the finance bill is , at about
3% of GDP , approximately unchanged from 1986 and is
consistent with a small surplus in the central government
budget . In view of the existing external constraint and the
necessity to ensure a balanced development of the Danish
economy , the effective achievement of this target is desirable ,
implying a vigorous implementation of the policy of zero real
growth in public expenditure pursued in recent years .
31 . 12 . 86 Official Journal of the European Communities No L 385 / 81
TABLE 29
Denmark : Main economic aggregates 1961 to 1987
(Annual percentage changes)
I 1961 to1973 1974 to1980 1981 1982 1983 1984 1985 1986 (') 1987 ( 2
r value
Gross
domestic ■
product deflator
11,7 11,7
1,6
9,9
9,1
- 0,9
10,1
14,4
3,0
11,3
10,4
2,0
8,1
9,9
3,4
5,8
9,5
3,8
5,4
7,8
2.9
4,8
, 5,5
1,8
3,7
Private consumption deflator
r private
Gross fixed
capital -
formation volume 1 total
6,6
6,6
10,1
- 5,1
- 2,2
- 3,1
12,0
- 19,7
- 17,0
- 19,2
10,8
10,9
- 9,4
7,1
7,2
4,0
- 15,4
0,9
6,6
12,4
1,7
11,0
5,0
15,9
5,4
14,6
3.3
10,7
2.4
9,8
2,8
- 1,3
2,1
- 0,9
of which : construction
equipment
- 4,9
0,7
- 21,7
- 15,0
- 1,3
20,1
1,1
0,6
7,2
15,8
13,1
16,5
6,3
13,7
- 0,7
- 1,2
Domestic demand at constant prices
Gap with respect to other
Community countries ( 3 )
r nominal
Compensation
of employees
per head 1 g
Productivity ( 5 )
Real unit labour costs
Competitiveness ( 6 )
Employment
10,7
3,4
3,8
3,2
0,2
1,7
1,1
0,6
11,7
1,6
0,8
1,2
0,4
- 0,3
0,4
- 4,1
9,2
- 0,8
- 2,5
0,4
- 0,9
- 7,5
- 1,3
3.5
2,7
12,1
1,4
1.6
2,7
- 1,3
- 3,2
0,3
0,9
- 0,3
7,9
- 0,2
0,6
1,6
- 1,8
- 0,5
0,5
4,0
2,6
5,4
- 0,3
- 1,1
1,2
- 1,5
- 3,5
2,4
5,3
3.3
4.4
- 1,0
- 0,6
0,7
- 1,7
0,9
3,1
4,1
- 0,7
4,0
- 0,7
0,7
0,0
- 0,7
3,8
1,9
1,8
- 1,5
5,9
2,1
3,0
1,5
0,6
0,6
0,3
Registered unemployed as
% of the civilian labour force ( 7 )
Current balance as % of GDP
Long-term interest rate
Money supply ( 8 )
1,1
- 2,1
9,0
10,6
5,5
- 3,5
16,0
11,7
8,9
- 3,0
19,3
9,1
9,5
- 4,2
20,5
11,4
10,2
- 2,2
14.4
25,5
9,8
- 3,3
14,0
17,0
8,7
- 4,4
11,6
15,8
7,5
- 4,1
10,4
7,7
7,6
— 3,6
10,5
2,9
Net lending or borrowing
requirement of general
government as % of GDP
Public debt as % of GDP
Public dept interest
as % of GDP
2,0 - 0,6
19,2
2,2
- 7,1
43,6
5,3
- 9,3
53,0
6,0
- 7,3
62,8
8,1
- 4,2
67,7
9,6
- 1,9
66,4
9,8
2,8
61,1
8,8
2,8
57,1
8,0
0 ) Estimates of the Commission services , October 1986 .
( 2 ) Forecasts of the Commission services , October 1986 , which do not take into account the effects of the measures adopted later in that month .
( 3 ) Differences in percentages points .
( 4 ) A : GDP deflator ; B : private consumption deflator .
( 5 ) Gross value added per occupied person in the whole economy .
( 6 ) Effective exchange rate (vis-a-vis 19 industrial countries ) on the basis of unit labour costs for the whole economy . Positive figure = loss of
competitiveness .
( 7 ) Eurostat definition .
( 8 ) End of the year .
No L 385 / 82 Official Journal of the European Communities 31 . 12 . 86
FEDERAL REPUBLIC OF GERMANY
years , the two sides of industry have already taken account of
the changing conditions on the labour market ; the negotiated
wage settlements resulted in a decline of the wage share in the
economy as a whole by more than 4% between 1981 and
1985 . This trend has continued in 1986 , helped by the terms
of trade improvement , even though the unexpectedly
favourable movement of domestic prices in 1986 was ,
understandably , not anticipated in wage settlements .
1986 marks the fourth year of upswing in the Federal
Republic ofGermany . At the beginning of the year , however ,
the growth trend was outweighed by the combined effects of
a number of special adverse factors , such as the unusually
harsh winter , uncertainties as to future dollar and oil price
movements , and the particularly low number of working
days . Despite renewed strong economic expansion from the
second quarter onwards , the economy's growth in 1986 , at
some 3 % in real terms , is likely to be somewhat lower than
was still expected at the beginning of the year . The principal
driving forces behind growth have been private consumption
and business investment . Consumer spending has been
boosted by wage increases which , in view of virtually stable
consumer prices , are permitting real private consumption in
1986 to grow at its fastest rate since 1971 . Investment , on the
other hand , has been supported by stronger domestic sales
and a further increase in profits related to the improvement in
the terms of trade . The weak trend of export volumes and
strong growth of import volumes , both of which had become
evident at the end of 1985 , have led to a considerable
deterioration of the real external balance (— 1 ,4 % of GDP ).
Nevertheless , the current account surplus has climbed to a
new record level ( almost DM 63 thousand million ) as a result
of a substantial improvement in the terms of trade .
The moderate increase of real wages in recent years has
resulted in a marked improvement in enterprises' profits ,
with a corresponding rise in rates of return on investment .
The more favourable investment climate has already led to a
rise in business investment as a whole , which is now once
again increasingly serving to expand capacity , and
investment in construction other than in dwellings has also
risen again noticeably for the first time .
Investment in dwellings has developed less favourably , with
the declining population trend and the mismatch between
building costs and incomes severely exacerbating the
prevailing underlying tendency of weakening demand . Here
much will depend in future years on building costs rising at a
slower rate than the overall price trend . The change of
emphasis in residential investment towards maintaining the
existing housing stock and increasing its quality provides an
opportunity for increasing the employment content of
investment activity in this area .
Although the special factors which supported demand in
1986 will weaken in 1987 , there will be further inherent
strength in domestic demand and export prospects
(particularly in the EMS area ) should again improve
somewhat . The upswing will therefore continue into its fifth
year ; in 1987 real gross domestic product is likely to grow by
3 1 /4 % . With the terms of trade remaining more or less
unchanged , prices will move in line with domestic costs and
rise only moderately . The surplus on current account is likely
to contract considerably to around DM 44 thousand million
(or 2,1% of GDP ).
The crisis in the building industry was intensified in the last
few years by the decline in the public investment . In the
framework of public finance consolidation , particularly with
respect to local authority budgets , progress was made partly
at the expense of public investment . Since 1985 , however ,
public investment has again been rising , in the current year
by about 6 % in nominal terms . Investment in the
infrastructure , environmental protection and urban renewal
has been supported by additional measures , which were also
of benefit to private investment . The first stage of the tax
reform and the small reduction in social security
contributions for unemployment insurance (by 0,1 % ) has
also helped to improve supply-side conditions while at the
same time underpinning demand . Furthermore , the
medium-term financial plans of the territorial authorities
provide for annual growth of public investment of 4 to 5 %
( in nominal terms ) up to 1 990 . In contrast to recent years , the
increase in such investment would thus correspond to the
growth of the economy as a whole .
Employment is likely to increase , on an annual average , by
about 280 000 in 1986 and by another 250 000 in 1987 .
Unlike previous phases of economic upswing , in which the
increase was concentrated in the services sector , employment
in manufacturing industry should also grow considerably , at
rates of 1V2 % this year and 1 % next . Despite increased use
of measures to improve the labour market situation , the fall
in unemployment , by 80 000 in 1986 and some 90 000 in
1987 , is still much smaller than the rise in employment , since
most of the new jobs are being filled by jobseekers not
registered as unemployed .
Although in recent years , by comparison with its European
neighbours , the Federal Republic of Germany has enjoyed a
more favourable economic situation , the unemployment
problem is still acute . It should therefore be a top priority to
redress this state of affairs through decisive action . In past
Monetary policy has stayed on a course of stability ,
permitting a further fall in the inflation rate and a
market-induced reduction in loan interest rates to a historical
low . So far this development has been favoured by external
31 . 12 . 86 Official Journal of the European Communities No L 385 / 83
factors . In the course of 1986 , the growth of central bank
money continuously overshot its target range , which led the
Bundesbank to proceed cautiously in respect of a further
reduction in short-term interest rates .
Supply conditions of enterprises have been further improved
at the microeconomic level . Even though skill-related wage
differentials have not been pursued extensively , shorter
working hours were agreed in several more industries , and a
growing number of new types of working time arrangements
are being introduced , in order to improve employment
opportunities . In view of the significant shortage of skilled
workers which has arisen in the Federal Republic , employers'
endeavours to provide vocational training and retraining
should be reinforced .
Monetary , budgetary and wages policies , in their efforts to
improve the environment for more employment-creating
growth , have together had an effect in the desired direction .
In addition , helped by the inprovement in the terms of trade ,
the evolution of internal demand has been buoyant . As the
positive impact of the oil shock slowly diminishes , future
German economic policy , in its efforts to achieve steady
economic growth at an appropriate rate and with price
stability , faces a new test .
With regard to the budgetary policy of recent years , the
public deficit has been reduced to such an extent that an
easing of income tax in two stages — in 1986 and 1988 — is
possible without endangering the success of consolidation .
The central government ( consolidated federal government
and Lander ) deficit has only narrowed slightly in 1986 and ,
against the background of present growth prospects , the
deficit of approximately 2% of GNP forecast for 1987
appears acceptable . Particularly in view of the risks to
economic activity which could emanate from external
developments , budgetary policy should be prepared to react
rapidly to any significant slackening of demand in the
economy as a whole . The second step of the tax cuts , which
in 1988 will provide relief of almost DM 10 thousand
million to households , should raise incentives , by
reducing the progressive element of taxation , and support
demand . The tax reform announced for the next legislative
period should also contribute to raising incentives and
thereby strengthen the forces for growth . This will be all the
more successful , the sooner the details of the tax reform are
decided . If the associated necessary expenditure cuts were set
out at the same time , it would be easier for the repeatedly
announced selective dismantling of subsidies to take shape .
In addition , one could envisage , where appropriate , and
within the limits of available capacity , expanding
worthwhile public investment beyond the budgetary
provisions . Finally , consideration could also be given to the
possibility of reducing social security contributions to the
Federal Labour Office ; in recent years its budget has been in
surplus , and this is likely to grow in future , given falling
unemployment .
Wage developments should also further contribute towards
employment policy . This is all the more likely , the more
secure the demand prospects . The rise in real per capita
wages should also remain below productivity growth in the
economy as a whole . Wage negotiators must therefore be
aware that next year , in contrast to the unique situation of
1986 , there will be no additional income gains available for
distribution arising from the terms of trade , and that it is
important that export prices reflect as little as possible of the
deterioration of competitiveness due to the appreciation
against the dollar , which naturally puts pressure on the profit
situation of enterprises .
Monetary policy should stick to its present course , which is
directed towards financing sufficient growth of productive
potential in the medium term while keeping prices stable .
Provided that wage costs do not have the effect of pushing up
prices , such a policy is likely to offer some scope for further
market-induced reductions in interest rates . On the other
hand , a reduction of key interest rates , necessitated by
external economic developments , could even have an
unfavourable impact on interest rate expectations at the long
end of the market , depending on the strength of monetary
expansion .
In order to improve supply conditions at the microeconomic
level , numerous measures have already been taken , affecting
the markets both for factors of production and for goods .
Administrative obstacles and , in some sectors , excessive
government influence continue to stand in the way of an
efficient allocation of resources . Such obstacles should be
dismantled more energetically than has so far been the
case .
No L 385 / 84 Official Journal of the European Communities 31 . 12 . 86
TABLE 30
Federal Republic of Germany : Main economic aggregates 1961 to 1987
(Annual percentage changes)
1961 to
1973
1974 to
1980
1981 1982 1983 1984 1985 1986 (>) 1987 ( 2 )
value
volume
deflator
Gross domestic
product
Private consumption deflator
8,9
4,4
4.4
3.5
3,7
5,9
4,0
3,5
5,2
4,5
7.1
2.2
4,8
4,8
0,9
0,3
0,8
0,3
3,0
2,3
Gross fixed
capital
formation
(volume )
of which :
private
public
total
construction
equipment
Domestic demand at constant prices
Gap with respect to other
Community countries ( 3 )
Compensation
of employees
per head
nominal
real A ( 4 )
B(4 )
4,2
0,2
4,0
6,2
- 3,9
- 9,7
- 4,8
- 5,1
- 4,3
- 2,7
5.2
1,2
- 0,9
0,9
0,3
70,9
- 0,7
4,8
- 0,8
10,4
5,0
- 3,7
36,4
2.3
3.7
- 0,6
4.4
4.8
- 4,5
- 9,3
- 5,3
- 4,3
- 6,7
- 2,0
- 3,4
4.1
- 0,3
- 0,7
1,1
- 1,4
4.2
73,9
2.5
- 1,7
6.9
0,5
9,0
7.1
- 3,3
39,5
2,8
4,8
1.5
3,3
3,2
5.1
- 8,6
3.2
1.7
5.6
2.3
1,5
3.8
0,5
0,6
3,0
- 2,4
11,2
82,2
1,5
- 1,5
8.4
0,6
7,9
5,3
- 2,5
41,0
3,0
4,7
2.7
1,9
2,5
1,2
- 2,1
0,8
1.6
- 0,5
1,9
0,2
3,4
1,4
0,9
2,6
- 1,1
4,4
85.8
- 2,0
0,1
8,4
1,0
7.8
4,7
- 1,9
41.9
3,0
4,9
2,6
2,2
2,1
- 0,3
- 0,4
- 0,3
- 6,2
9.4
1.5
- 0,9
3,0
0,8
0,9
1,9
- 1,0
6,4
91,3
- 2,5
0,7
8,4
2,2
6,9
5,0
- 1,1
42,5
3,0
7,1
3,1
3,9
0,0
7.1
5,0
3,5
0,7
7.5
4,8
2,0
4,0
0,1
4.0
1.9
- 1,8
12,6
102,8
5,4
1.1
8,1
3.2
5.6
5,6
- 0,9
41,6
2,9
4,6
3,2
1.4
1,1
5.5
4.8
5,5
3,5
8,0
4,2
0,7
3,2
1,8
2,1
2,2
- 0,4
2.9
105,8
1,8
1,0
7,7
2,1
5,1
5,4
- 0,7
41,3
2,9
Productivity ( s )
Real unit labour costs ( 6 )
Profitability ( 7 )
idem ( 1961 to 1973 = 100 )
Competitiveness ( 8 )
9,2
4,6
5,5
4.1
0,5
100
0,2
0,8
0,7
7.2
10,9
0,3
17,7
0,9
7.4
2.5
2,5
2.5
0,0
70,9
- 0,3
3.6
0,4
7,8
8.5
- 2,9
27,7
1.6
Employment
Registered unemployed as %
of the civilian labour force ( 9 )
Current balance as % of GDP
Long-term interest rate
Money supply ( 10 )
Net lending or borrowing of general
government as % of GDP
Public debt as % of GDP
Public debt interest
as % of GDP
( J ) Estimates of the Commission services , October 1986 .
( 2 ) Forecasts of the Commission services , October 1986 , on the basis of present policies .
( 3 ) Differences in percentage points .
( 4 ) A : GDP deflator ; B : private consumption deflator .
( 5 ) Gross value added per occupied person in the whole economy .
( 6 ) Ratio of real wages per head to productivity .
( 7 ) Net operating surplus relative to net capital stock at current replacement cost .
( 8 ) Effective exchange rate (vis-a-vis 19 industrial countries ) on the basis of unit labour costs for the whole economy , positive figure = loss of
competitiveness .
( 9 ) Eurostat definition .
( 10 ) M3 ; end of year .
31 . 12 . 86 Official Journal of the European Communities No L 385 / 85
GREECE
could be exceeded , not only because of the disappointing
results of the sales of government bonds to the public , but
also because the margin for increasing private sector credit
was overestimated by reference to the actual trend in the
public deficit .
In Greece, the stabilization measures taken in October 1985
to re-establish conditions for durable growth and eventual
convergence of the economy with the rest of the Community ,
represent a turning away from the economic policy that had
allowed the disequilibria to get worse . In 1985 , the public
sector net borrowing requirement had thus reached some
1 8 % of GDP , with the current balance of payments deficit at
US $ 3 300 million , or 10% of GDP . In response to this
situation , the Government , in October 1985 , finalized a
rigorous stabilization plan consisting , notably , of a 15%
devaluation of the drachma and the introduction of an
obligatory non-interest bearing deposit on certain imports .
This two-year plan aims at bringing about a marked
slowdown in the rise in wage costs , a sharp reduction in the
public sector borrowing requirement , and a significant
decrease in monetary growth . The Government was assisted
in its efforts to redress the balance of payments by a
Community loan , the first instalment of which was paid
immediately , with the second instalment to follow at the
beginning of 1987 .
Moreover , other factors have contributed to the delay of the
adjustment in demand . Consumption , after many years of
growth , responded only very slowly to the stabilization
measures , this inherent inertia aided by the working of the
underground economy . On top of this , there were
expectations in the early months of a further devaluation , the
effects of which were amplified by the high degree of liquidity
in the economy reflecting the excess level of domestic credit in
the first half relative to the targets set . Consequently , real
domestic demand in 1986 as a whole showed only a relatively
small fall , mainly because of the decline in public sector
investment , while private consumption will have scarcely
changed from its level of the previous year . Thus , imports did
not slow down to the extent expected , while , on the other
hand , exports were less buoyant than forecast . Overall , GDP
will still have recorded some slight growth in 1986 . The
belated improvement in the real external balance , as a result
of a temporarily unfavourable structure of exports and a
mediocre outcome recorded for tourism , combined with the
unfavourable effect which devaluation had initially on the
terms of trade , has meant that , despite an appreciable
improvement in the second half of the year , the current
balance of payments could show a deficit for 1986 as a whole
between 4,5 and 5 % of GDP , sligthly more than the planned
target of US $ 1 700 million .
Wage policy is now based on the adjustment of wages to the
targeted , rather than the observed , rate of inflation , which
excludes the effects of import prices . Applied with
determination , this policy will have helped to reduce real
wages by more than 7 % in 1986 , and to limit the rise in unit
wage costs in manufacturing industry to an annual average of
13 % , compared with 20,5 % in 1985 . This trend , together
with an exchange-rate policy which is disinflationary in that
it offsets the differential in unit wage costs and not the
differential in retail prices , and a moderate adjustment in
administered prices during 1986 , will have allowed a
slowdown in the rise in consumer prices from 25 % at the end
of 1985 to 16 % at the end of 1986 . However , because of the
substantial overhang from the end of 1985 , the slowdown
will not show up in the annual average , which is likely to
reach 22,5% in 1986 , compared with 19,3% in 1985 ( J ).
These developments should encourage determination in the
application of the stabilization plan in 1987 .
Wage policy should aim to ensure moderate growth in
nominal wages and salaries on the basis of an inflation rate
which will have been brought down to 10 % by mid-1987 —
if the effects of introducing VAT are excluded — and by strict
application of the indexation system adopted at the end of
1985 . The disinflationary effects of wage policy in 1987 will
nevertheless be limited , so that the main focus of the
stabilization policy should be on budgetary and monetary
management .
On the public finance front , where the emphasis has been
more on boosting revenue than on curbing expenditure , the
public sector borrowing requirement in 1986 will be down to
about 14% of GDP , in other words an improvement of 4
points compared to 1985 , a reduction in conformity with the
Council Decision granting the Community loan but
considerably below that planned at budget time . Moreover , a
significant proportion of the improvement — about 2,5 % of
GDP — will have been due to the fall in oil prices , most of
which the Government decided to offset by an increase in
taxation on petroleum products . In regard to monetary
policy , the target for aggregate domestic credit expansion
The strengthening of the public finances will have to be
pursued rigorously in order to bring the public sector net
borrowing requirement in 1987 down to a level compatible
with the budgetary objective set in the stabilization plan .
Given the rapid rise in the interest burden , this requires very
strict control of other expenditure , particularly that on
public consumption . In addition , transfers to firms will have
to be sharply reduced by , inter alia, cutting back on export
aids , agricultural subsidies and financial assistance to firms
in diffuculty . The necessary increase in revenue will come
( ! ) In November 1986 , the Government imposed a freeze on prices
until the end of January 1987 in order to prevent excessive price
rises , following the introduction of VAT .
No L 385 / 86 Official Journal of the European Communities 31 . 12 . 86
from the widening of the tax base , greater efforts to combat
fraud and the extra receipts generated by the introduction of
VAT on 1 January 1987 .
Strict control of the public finances will again have to be
accompanied by an expansion of credit to the private sector
below the growth rate of nominal GDP , estimated at 12% .
To this end , policy on interest rates will have to be more
active in 1987 : the movement towards positive real interest
rates , bearing in mind the scarcity of capital resources ,
should be maintained and the efforts to unify lending rates ,
already started in 1986 , continued . In addition , the sale of
medium-term government securities to the general public
should be developed . Such a policy will allow more efficient •
allocation of financial resources and will encourage saving
and capital inflows while at the same time exercising its own
disinflationary effect .
Such stabilization measures are essential if macroeconomic
equilibrium is to be restored but are nevertheless insufficient
to ensure the economy's longer-term growth ; this can only
come from achieving the type of investment that will
strengthen and modernize the country's industrial base . The
competitiveness of the economy could thus be improved in a
way which would enable the external constraint to be
overcome for good , while at the same time increasing
employment sufficiently to bring down unemployment . In
this context , there is a need to make progress in deregulating
prices and profits as well as freeing the operation of the
labour market .
Implementation of the policy outlined above should allow
the results achieved in the second half of 1986 to be
maintained in 1987 and , in particular , to reduce further the
external deficit and the rate of inflation . The decline in real
personal disposable income and the restrictive budget policy
stance will lead to a decrease in consumption , while
industrial investment should pick up in response to the
expected improvement in business profitability , though
without entailing an increase in equipment investment as a
whole , as a result of the restrictions imposed by the budget on
public enterprises . The decline which this will bring about in
domestic demand should lead to a further reduction in
imports , while exports should continue to be buoyed up by a
relatively expansive environment . Overall , real GDP could ,
nevertheless , show a slight fall in 1987 as a whole . Since this
outlook does not suggest any improvement in employment ,
unemployment could very well increase . By contrast , if oil
prices remain at their 1986 level , it will be possible to bring
the current account deficit down to US $ 1 300 million , or
3,5% of GDP , still a relatively high level .
Therefore , the stabilization plan aiming to restore major
equilibria will have to be applied rigorously in 1987 . In the
longer term , it will be necessary to pursue an adjustment
policy based on efforts to restructure the economy within the
framework of prudent monetary and budgetary policies .
Only in this way will the Greek economy be able to become
competitive again and enjoy lasting growth .
31 . 12 . 86 Official Journal of the European Communities No L 385 / 87
TABLE 31
Greece : Main economic aggregates 1961 to 1987
(Annual percentage changes)
1961 to
1973
1974 to
1980
1981 1982 1983 1984 1985 1986 (') 1987 ( 2 )
r value
Gross domestic J volume
product ]
deflator
12,5
7,6
4,5
19,8
3,4
15,8
19,6
- 0,3
20,0
24,5
- 0,2
24,7
20,3
0,3
19,9
23,0
2,6
19,9
19,6
2,1
17,1
23,2
0,5
22,6
12,1
- 0,2
12,3
Private consumption deflator .3,6 16,0 23,3 21,2 18,6 18,0 18,4 22,5 12,5
Gross fixed f private
capital
formation volume rota ] 10,0 - 1,0 - 7,5 - 1,9 - 1,9 - 4,7 3,4 - 3,0 0,5
of which : construction - 7,7 - 13,2 3,9 - 7,7 2,6 2,0 1,6
equipment - 7,1 14,1 - 8,2 - 0,9 4,4 - 9,0 - 1,0
Domestic demand at constant prices 2,9 - 0,7 0,8 4,9 - 0,8 - 1,2
GaO with respect to other
Community countries ( 3 ) 2$ - 1,4 - 1,0 2,8 - 6,1 - 4,5
r nominal
ompensation
of employees ■
per head 1 g ( 4 )
10,2
5,5
6,5
21,1
4,6
4,5
23,4
2,9
0,1
25,4
0,5
3,4
21,8
1,5
2,7
22,6
2,3
3,9
20,4
2,8
1,7
13,6
- 7,3
- 7,2
9,6
- 2,4
- 2,6
Productivity ( 5 ) 8,2 2,7 - 5,0 0,9 - 0,1 2,9 1,0 0,0 - 0,2
Real unit labour costs - 0,3 1,6 - 0,6 1,9 - 7,3 - 2,3
Competitiveness ( 6 ) 2,6 0,0 3,5 9,0 - 3,4 1,4 - 2,8 - 16,0 - 2,9
Employment - 0,6 0,8 0,1 - 1,3 - 1,0 - 0,2 1,1 0,5 0,0
Registered unemployed as %
of the civilian labour force ( 7 ) 7,9 8,1 7,8 7,6 8,3
Current balance as % of GDP
Long-term interest rate
Money supply ( 8 )
- 2,9
18,2
- 2,2
11,3
23,7
- 0,2
17,7
34,7
- 3,8
15,4
29,0
- 4,7
18,2
20,3
- 4,1
18,5
29,4
- 8,4
15.6
26.7
- 5,8
14,0
19,0
- 3,7
14,5
14,9
Net lending or borrowing
requirement of general
government as % Of GDP - 10,6 - 9,4 - 8,9 - 10,1 - 13,9 - 10,6 - 7,1
Public debt as % od GDP 33,0 36,7 41,4 47,5 54,8 55,0 56,5
Public debt interest
as % of GDP 1,7 3,2 2,6 3,4 4,6 5,5 6,0 6,1
(') Estimates of the Commission services , October 1986 .
( 2 ) Forecasts of the Commission services , October 1986 , on the basis of present policies .
( 3 ) Differences in percentage points .
( 4 ) A : GDP deflator ; B : private consumption deflator .
( 5 ) Gross value added per occupied person in the whole economy .
( 6 ) Effective exchange rate (vis-a-vis 19 industrial countries ) on the basis of unit labour costs for the whole economy . Positive figure = loss of
competitiveness .
( 7 ) Eurostat definition .
( 8 ) End of year .
No L 385 / 88 Official Journal of the European Communities 31 . 12 . 86
SPAIN
continued to be the objective in 1985 and 1986 , under the
Social and Economic Agreement signed in October 1984 .
The Agreement provided for nominal wage increases to be
held within the limits of the target inflation rate . However ,
because nominal wage increases were accompanied by
considerable wage drift , the slowdown in the growth of
nominal wages per head seen in recent years was interrupted
in 1986 .
In Spain, there was a marked acceleration in economic
growth in 1986 ; GDP , underpinned by an appreciable
upturn in domestic demand , could grow by some 3 % in
volume terms . Private consumption has benefited not only
from a degree of improvement in real wages but also , for the
first time since the first oil shock , from a appreciable recovery
in employment and a reversal of the tendency of the
unemployment rate to go on rising . Gross fixed capital
formation has felt the favourable effects of the improvement
in profits , of better market prospects and of the need for
industrial modernization connected in particular with the
Community's enlargement . Because of the weakness of
export markets and the jump in import volume , notably of
manufactures , the external account's contribution to growth
was substantially negative in real terms . Nevertheless ,
balance of payments on current account improved sharply
because of the very large terms of trade gain resulting from
the fall in energy and commodity prices . The acceleration
observed at the beginning of the year following the
introduction of VAT and the upsurge in food prices in the
middle of the year did not compromise the basic disinflation
trend in 1986 . However , in terms of annual averages , there is
an appreciable inflation differential between Spain and other
Member countries .
Significant progress has been recorded in restoring the
fundamental conditions necessary to achieve a balanced
development of the economy . For the first time in many
years , price increases at the consumption stage fell to a
single-digit rate in 1985 . In 1986 , the decline in the inflation
rate is being fostered by the fall in the prices of oil and other
raw materials , but the introduction of VAT and the rise in
food prices have acted in the opposite direction . Nominal
unit labour costs have risen slightly faster as a result of a
slower productivity increase , contributing particularly to
relatively rapid price increases in the services sector . The
current account , which was in deficit until 1983 , showed
growing surpluses thereafter as a result mainly of the steady
increase in the surplus on the services account and , in
particular , tourism .
Because of the improvement in the economic environment ,
corporate profits , after falling to a relatively low level at the
start of the 1980s , staged a recovery reinforced by the
application of tax measures which authorized investments
for 1985 and 1986 to be fully written off . These investments
have been undertaken primarily for the purpose of
rationalization , and , until recently , in order to save energy .
Moreover the significant inflow of foreign direct investment ,
which has expanded in the last few years , actually continued
in 1 986 , chiefly as a result of the favourable prospects opened
up by accession .
For 1987 , the real GDP growth rate should be at least of the
same order of magnitude as in 1986 , i . e . some 3 % . In view
of the expected recovery in the growth of third-country
markets , exports should prove more dynamic and help
maintain a large external surplus . Domestic demand will
probably benefit from the same favourable influences as in
1986 , but private and public consumption will probably
expand a little less rapidly than in the previous year . The rate
of price increase should fall quite markedly while still
remaining above the Community average . Overall
employment should continue to improve in 1987 , under the
impetus of a favourable economic environment .
Nevertheless , unemployment will remain very high ( 21,5 %
of the labour force ) chiefly because the active population will
go on increasing rapidly ( at a rate of over 1 % a year ).
The economic policy implemented since 1983 corresponds ,
in its intentions and many of its aspects , to the main lines of
the 'cooperative growth strategy for more employment'
adopted by the Community in the autumn of 1985 , and the
social dialogue is well advanced . In particular , the aim is , by
moderating real wages , to stimulate job-creating investment
while ensuring that domestic demand expands sufficiently
and that the competitiveness of the Spanish economy is
maintained . In addition to the main challenge facing this
strategy — to obtain a very significant reduction in
unemployment , which is far higher in Spain than in the other
Member States — these policies are also aimed at meeting the
challenge presented by accession to the Community .
The severe overshooting of labour costs , observed after the
first oil shock , was followed by a more moderate evolution in
recent years . Maintaining the purchasing power ofwages has
The efforts taken in hand to reduce the general government
borrowing requirement , which amounted to 6,2% of GDP
in 1985 , should allow it to be brought down to below 5 % of
GDP in 1986 despite the relatively rapid increase in the local
authorities' deficit . The effect on tax revenue of the
introduction of VAT seems to have been slightly positive
rather than neutral , as originally forecast , while two-thirds
or so of the reduction in oil prices has been compensated by
an increase in government revenue . On the expenditure side ,
the chief factors which have helped to cut the deficit in 1986
have been the smaller increase in interest charges and the
stabilization of capital transfers . Monetary policy will
probably achieve during 1986 the planned slowdown in the
growth of the monetary aggregate (ALP). The overshooting
recorded in the first half implied a tightening of monetary
policy and a rise in interest rates , which only resumed their
downward movement after July . Even though relatively high
in nominal terms , interest rates have remained considerably
lower in real terms than the Community average .
31 . 12 . 86 Official Journal of the European Communities No L 385 / 89
Exchange-rate policy is aimed at stabilizing the effective
nominal exchange rate of the peseta against the trading
partners in the Community ; because of a relatively strong rise
in domestic prices , this has entailed a slight competitivity loss
in 1986 .
On the supply side , the adjustment policy has been
strengthened since 1983 and again reinforced in March 1986
by provisions designed particularly to stimulate saving and
investment , to reduce the impact of bureaucracy on the
economy , and to increase labour-market flexibility .
If employment is to stage a lasting recovery and
unemployment is to be gradually scaled down , it is essential
to consolidate the results already achieved in restoring the
major equilibria and pursuing an energetic adjustment
policy . The options adopted by the Government formed after
the last elections are in line with this aim .
Because of the particularly severe imbalance between the
supply of, and the demand for , jobs , the objective to be
pursued when renewing the Social and Economic Agreement
should be the strict control of real labour costs per head . This
is the path which must be followed by a highly protected
economy , which is now being liberalized and which has a
large number of vulnerable small and medium-sized
enterprises , if it wishes to maintain its competitiveness while
continuing the process of reducing inflation and ensuring its
smooth integration into the large common market .
With regard to macroeconomic policy , budgetary policy for
1987 should continue to conform with the medium-term
objectives set by the authorities . Further progress in the
collection ofVAT and in combating tax evasion should result
in a relatively buoyant evolution of budget resources . On the
other hand , the policy of moderating operating expenditure
should continue , the main aim being to create some margin
for the more sustained evolution of public investment . It
seems advisable to reduce the general government borrowing
requirement to some 4% of GDP in 1987 . This will ,
moreover , ease the task of monetary policy and , in
particular , will help interest rates to come down while
permitting a further reduction in external indebtedness .
No L 385 / 90 Official Journal of the European Communities 31 . 12 . 86
TABLE 32
Spain : Main economic aggregates 1961 to 1987
(Annual percentage changes)
1961 to ;
1973
1974 to
1980
1981 1982 1983 1984 1985 1986 (>) 1987 ( 2 )
r value
Gross domestic J volume
product |
^ deflator
14,8
7,2
7,1
20,0
1,8
17,8
14,1
0,4
13,6
14,7
0,9
13,7
14,6
2,5
11,9
13,9
2,3
11,3
11,3
2,1
9,0
15,1
2,9
11,8
9,3
3.0
6.1
Private consumption deflator 6,7 18,2 14,9 13,9 12,5 19,8 8,4 8,6 5,3
Gross fixed f
capital I pub'":
formation volume total - 2,0 1,2 - 2,5 - 1,0 - 3,0 5,4 7,2 7,0
of which : construction - 2,2 - 2,0 1,5 1,5 6,0 5,8
equipment - 1,7 5,2 - 7,1 12,0 9,0 8,8
Domestic demand at constant prices 7,8 2,2 - 1,5 0,5 0,8 - 0,9 2,4 4,9 ■ 3,9
Gap with respect to other
Community countries ( 3 )
r nominal
Compensation
of employees -j real A ( 4 )
per head 1 g ( 4 )
14,7
7,2
7,6
22,3
3,9
3,9
16,3
2,3
1,0
12,8
- 0,7
- 1,2
. 13,5
1,5
1,1
13,0
1,2
1,7
9,5
- 0,5
1,1
9,7
- 1,9
1,0
6,3
0,2
0,9
Productivity ( s ) 6,4 3,9 3,3 1,4 2,9 6,6 3,4 1,0 1,8
Real unit labour costs 0,8 0,0 - 1,0 - 2,1 - 1,4 - 5,1 - 2,8 - 2,9 - 1,6
Competitiveness ( 6 ) - 0,5 - 10,9 3,1 0,3 - 0,2 - 0,5
Employment (- 1,9 ) (- 2,8 ) - 1,0 - 0,7 - 2,9 - 1,2 1,8 1,2
Registered unemployed as %
of the civilian labour force ( 7 ) ( 7,1 ) 14,4 16,2 17,7 20,7 22,1 21,7 21,5
Current balance as % of GDP - 1,7 - 2,4 - 2,3 - 1,4 1,3 1,7 3,5 3,7
Long-term interest rate 15,8 16,0 16,9 16,5 13,4 11,6 10,6
Money supply ( 8 ) 17,6 17,0 16,6 16,0 13,2 12,9 11,0 8,0
Net lending or borrowing
requirement of general
government as % of GDP - 0,9 - 3,0 - 5,3 - 5,3 - 5,0 - 6,2 - 4,9 - 4,4
Public debt as % of GDP 13,8 21,0 26,2 32,1 39,3 46,3 49,0 52,7
Public debt interest as % of GDP 0,6 0,7 1,0 1,3 2,1 3,5 3,4 3,3
(') Estimates of the Commission services , October 1986 .
( 2 ) Forecasts of the Commission services , October 1986 , on the basis of present policies .
( 3 ) Differences in percentage points .
( 4 ) A : GDP deflator ; B : private consumption deflator .
( 5 ) Gross value added per occupied person in the whole economy .
( 6 ) Effective exchange rate (vis-a-vis 19 industrial countries ) on the basis of unit labour costs for the whole economy . Positive figure = loss of
competitiveness .
( 7 ) Eurostat definition .
( 8 ) End of year .
31 . 12 . 86 Official Journal of the European Communities No L 385 / 91
FRANCE
in addition to the adjustments made to the rules and
regulations governing working hours at the end of the last
parliament , the new Government has introduced provisions
designed to ease the conditions governing redundancies , thus
removing , with effect from 1 January 1987 , the obligation to
obtain prior administrative authorization . New redundancy
procedures are at present under negotiation between the two
sides of industry . A further series of measures introduced by
decree are intended to extend the use of fixed-period
employment contracts , part-time working and casual labour .
Finally , in addition to the measures already taken by the
previous government regarding the social security treatment
of unemployment , provisions were incorporated in the June
1986 amending budget to give direct ecouragement to firms
to take on young people between the ages of 16 and 25
through temporary reductions in social security
contributions ; other measures to boost employment are
being prepared .
In France, private consumption has held up better in 1986
than in 1985 thanks to the appreciably faster growth in
spending power , due , inter alia , to the progress made in
reducing inflation . Helped by the improvement in firms'
financial situations , the upturn in investment has also been
maintained and has continued to spread to the distributive
trades and services . Domestic demand has thus been much
more buoyant than in previous years . This has resulted in a
high level of imports ; exports , however , have grown only
slightly , implying further losses of market shares . Given the
normal reaction lags , the April exchange-rates adjustment
has only very partially checked the trend towards
deterioration of the real external balance in 1986 .
Nevertheless , the terms of trade gains will have been
sufficient to bring about a marked improvement in the trade
balance in value terms . Moreover , considerable progress has
been made in reducing inflation , as a result of moderating
wage costs and the sharp fall in energy and raw material
costs , with consumer prices rising at an annual rate of 2,4 % .
In this situation , real GDP should grow by 2,3% and
employment in the enterprise sector should increase very
slightly , though not enough to reverse the upward trend in
unemployment . Nevertheless , any upturn in employment depends more
fundamentally on the competitiveness of the economy and
on the profitability of enterprises . These are the two
determinants of the increased pick-up of investment required
to expand production capacities . The inadequacy of
investment in the competitive sector over a period of many
years , its unsatisfactory distribution across industries , its
belated recovery , and the fact that it has been predominantly
directed towards rationalization , have prevented the
productive system from responding satisfactorily to changing
and potentially accelerating demand . The Government is
therefore aiming to give direct or indirect support to the
effort that firms still have to make to meet this priority
need .
In 1987 , the trend of domestic demand should be similar to
that in 1986 if, as the continuing improvement in firms'
financial positions would suggest , the level of investment
increases . Furthermore , the lagged impact of improved
competitiveness following the 1986 currency adjustment is
likely to reduce the restraining effect of external trade on
growth . All in all , GDP growth should reach 2,5% ; this
should permit a slightly greater increase in employment but
still no fall in unemployment . The rise in consumer prices
should again tend to fall somewhat and the trade balance
should continue to improve .
The stabilizing measures taken since 1983 and the improved
terms of trade have therefore brought about a marked
acceleration in growth , but the hoped-for recovery in the
employment situation has not yet begun . Although there has
been a slight increase in the numbers employed , the measures
taken in connection with the social security treatment of
unemployment have been insufficient to compensate for the
natural increase of the labour force , so that unemployment
has again risen slightly .
Thus , the new Government has resolutely continued the
liberalization policy intended to restore firms' pricing
freedom , removing the restrictions on their foreign exchange
transactions and making it easier for them to obtain finance .
On the prices front , a number of measures have been taken
since the autumn of 1985 , which will have led , by the end of
1986 , to the virtually complete liberalization of industrial
prices and trade margins and to a total freeing of prices and
margins in the service sector . Exchange controls have , for the
most part , been abolished for firms and for private
individuals . Finally , major reforms have been made to the
operation of the financial market ; these include the
opening-up of the money market to non-financial operators ,
and a set of measures to restore competition between
financial intermediaries through the abolition of certain
privileges regarding deposit-taking , through the replacement
of ceiling controls on credit by liquidity regulation based on
interest rates and through the gradual liberalization of
interest rates in banking . This package of measures is
intended to create a climate more propitious to enterprise ,
enabling businesses to adapt more readily to market
trends .
Concerned by the inadequate achievements on the
employment front , the Government elected on 16 March
1986 has taken , or is preparing to take , a number of
social measures intended to stimulate recruitment . It has
made a series of amendments to labour legislation , which
are designed , by making employment conditions more
flexible , to encourage firms to take on more staff. Thus ,
No L 385 / 92 Official Journal of the European Communities 31 . 12 . 86
In the wages field , the policy followed in the public sector and
behaviour in the private sector should continue to exhibit
considerable restraint , implying only a limited rise in the
purchasing power of earnings . These developments should
allow firms' competitiveness to be strengthened and enable
them to invest sufficiently to make possible a gradual
acceleration in capacity expansion .
Public finance policy should also help to achieve this goal as it
seeks to reduce the burden on the economy of taxation and
social security contributions and of the public deficit . While
it is true that the direct tax concessions already made or
planned will be partially offset by the increase in certain
social security contributions intended to forestall a social
security deficit , the measures adopted should generally be
neutral in regard to households , but favourable to firms , not
only because of the direct benefits but also because they
should promote a flow of funds to the financial market .
Furthermore , although the need to maintain the public
finances in equilibrium is bound to lead to further
expenditure cuts and therefore to the abolition of certain
subsidies , firms should nevertheless derive greater benefit
from the fact that the contraction in the deficit is likely to help
bring interest rates down . In attempting, in the manner
described , to reduce the central government's borrowing
requirement and the general government net borrowing to
approximately 2,6% of GDP , budgetary policy in 1987
is committed to public finance consolidation while
encouraging the growth of productive capacity and
employment .
The monetary policy stance has continued to be one of great
caution , but has , nevertheless , permitted an appreciable fall
in nominal interest rates . The capital inflows which followed
the April 1986 currency adjustment have made possible the
early repayment of certain external debts . Together with
other neutralizing factors , this has helped to keep "the growth
in the money supply at around the 5% target , which is
appreciably lower than the growth rate of nominal GDP . The
same caution should prevail in 1987 in order to consolidate
the substantial progress already made in reducing inflation .
Provided that the international environment is favourable , it
should not prevent a further fall in interest rates , the normal
outcome of the improved financial equilibrium of firms and
of central government .
31 . 12 . 86 Official Journal of the European Communities No L 385 / 93
TABLE 33
France : Main economic aggregates 1961 to 1987
(Annual percentage changes)
1961 to
1973
1974 to
1980
1981 1982 1983 1984 1985 1986 (') 1987 ( 2 )
r value 10,7 13,9 12,3 14,7 10,3 8,7 7,2 6,9 5,3
Gross domestic J volume
product ]
1^ deflator
5,6
4,9
2,8
10,8
0,5
11,8
1,8
12,6
0,7
9,5
1,3
7,3
1,4
5,8
2,2
4,6
2,5
2,7
Private consumption deflator 4,7 10,8 12,8 11,2 9,5 7,3 5,5 2,5 2,3
r private
Gross fixed
capital ■
formation volume 1 total
7,7
3,2
7,6
1,5
0,3
1,3
- 1,0
- 1,4
- 1,1
- 0,4
9,7
0,7
- 2,2
- 3,0
- 2,3
- 2,0
2,3
- 2,2
2,8
2,2
3,1
5.7
2.8
5,3
6,2
2,4
5,7
of which : construction 0,3 - 2,1 - 3,5 - 3,5 - 4,4 - 0,6 1,0 3,0
equipment 1,8 - 1,6 6,7 1,6 - 1,5 5,1 6,9 6,0
Domestic demand at constant prices 5,8 2,9 - 0,4 3,8 - 0,2 0,6 2,1 3,6 2,9
Gap with respect to other
Community countries ( 3 ) 1,1 0,8 1,4 3,0 - 1,1 - 1,2 0,1 0,2 0,6
r nominal
Compensation
of employees \ real A ( 4 )
per head .1 B ( 4 )
9,9
4,8
5,1
14,7
3,6
3,5
14,3
2,2
1,3
13,7
1,0
2,3
10,7
1,1
1,1
7,8
0,5
0,5
6,7
0,9
1,2
4,5
- 0,1
2,0
3,0
0,3
0,7
Productivity ( 5 ) 4,8 2,5 1,0 1,7 1,2 2,4 1,7 2,1 2,2
Real unit labour costs 0,0 1,1 1,6 - 0,7 - 0,1 - 1,8 - 0,6 - 2,2 - 1,9
Rates of return ( s ) - 1,5 5,5 5,0 5,7 14,0 9,9
idem ( 1961 to 1973 = 100 ) 100 57,8 46,3 45,6 48,1 50,5 53,4 60,9 66,9
Competitiveness ( 7 ) - 0,8 0,9 - 5,3 - 2,2 — 1 ,0 - 0,1 3,0 - 0,2 - 2,3
Employment 0,6 0,2 - 0,7 0,1 - 0,6 - 1,0 - 0,3 0,1 0,3
Registered unemployed as %
of the civilian labour force ( 8 ) 1,1 5,0 7,7 8,7 8,8 9,9 10,3 10,5 10,7
Current balance as % of GDP 0,2 - 0,7 - 1,4 - 3,0 - 1,7 - 0,9 - 0,8 0,1 0,4
Long-term interest rate 7,0 11,1 16,3 16,0 14,4 13,4 11,9 9,5 7,5
Money supply ( 9 ) 13,7 13,6 10,4 10,8 11,2 8,3 5,6 4,8 4,5
Net lending or borrowing
requirement of general
government as % of GDP 0,5 - 0,8 - 1,8 - 2,5 - 3,2 - 2,9 - 2,6 - 2,9 - 2,6
Public debt as % of GDP 25,4 26,0 29,1 30,7 32,9 35,2 36,9 39,2
Public debt interest
as % of GDP 1,3 2,1 2,2 2,6 2,8 2,8 2,9 2,9
*) Estimates of the Commission services , October 1986 .
2 ) Forecasts of the Commission services , October 1986 , on the basis of present policies .
3 ) Differences in percentage points .
4 ) A : GDP deflator ; B : private consumption deflator .
s ) Gross value added per occupied person in the whole economy .
6 ) Net operating surplus on the net capital stock of current replacement cost .
7 ) Effective exchange rate (vis-a-vis 19 industrial countries ) on the basis of unit labour costs for the whole economy . Positive figure = loss of the
'competitiveness .
8 ) Eurostat definition .
9 ) End of year .
No L 385 / 94 Official Journal of the European Communities 31 . 12 . 86
IRELAND
Scheme , which subsidizes incremental employment , have
also been successful , at least in terms of participation .
In Ireland, the immediate economic outlook has brightened .
Favourable external factors have powerfully reinforced the
gradual recovery already under way . Private consumption
regained an upward path in 1985 / 86 , but this has to be seen
in the light of the steep fall in the first half of the decade .
Aggregate investment has not yet stabilized , but is likely
to strengthen gradually next year , particularly as the
contraction in public sector activity slows . As yet , building
and construction activity shows little sign of renewed vitality ;
on the other hand , private sector investment in capital goods ,
which had fallen back following a peak in the replacement
cycle in 1984 / 85 , is likely to return to a more positive trend
in 1987 . Export volumes are no longer increasing at the very
high levels of recent years , but continue to grow, though at
more modest rates . Import movements have tended to be
volatile but are expected to respond to stronger final
demand . In 1987 therefore , when the beneficial effects of the
fall in the price of crude oil earlier this year are more fully felt
in the economy , and on the basis of existing policies , real
GDP should grow by over 3 % , with inflation , at about 3 % ,
the lowest since 1966 and the current account in small deficit .
On the negative side , relatively slow progress is being made in
reducing the large public deficits while the situation in the
labour market remains very serious . In 1986 , the fall in
employment slowed while the unemployment rate
steadied .
The very open nature of the Irish economy means that wages
policy must be designed not only to improve the profitability
of investment , and to reduce the share of labour-saving
investment , but also to maintain international
competitiveness . Recently , competitiveness pressures have
intensified , in particular as a result of the weakness of
sterling , and have prompted an 8 % devaluation of the Irish
pound within the EMS in August 1986 . Viewed under all
these aspects , recent wage trends in Ireland have not been
appropriate . Real per capita wages for the total economy ,
measured using the private consumption deflator , fell
somewhat in the early 1980s after a period of sharp increase ;
they recovered thereafter and in both 1986 and 1987 are
expected to grow by 3% (and by 1 V4 and 2 3/4 % ,
respectively , measured using the GDP deflator ); the relatively
high 1987 figure is partly due to the current public-service
wage agreement , which will give public servants a 3 % real
wage increase in that year . Real wage increases in
manufacturing industry have tended to exceed those for the
total economy . Moreover , while the dispersion in the level
and timing of wage settlements has allowed greater wage
flexibility in weaker firms , it has not protected them from the
impact on their costs of developments in the sheltered sector
of the economy , where a policy of moderation in real wages
has been less rigorously pursued .
An acceleration in net emigration and a decline in
participation rates have , at least temporarily , checked
growth in the labour supply and allowed the unemployment
rate to stabilize at around 1 8 % . In the year to April 1986 , net
emigration reached 30 000 , causing a small population fall
for the first time in a quarter of a century . Nevertheless , the
interplay of demographic influences over the medium term is
still likely to produce an average annual labour force growth
of l /z °/o . Thus , if unemployment is to be reduced
substantially , employment must rise at a much faster rate .
Ultimately , the level of employment growth required can
only be achieved if the capacity of the economy itself to
generate significant numbers of new jobs is considerably
enhanced .
A specific feature of the Irish economy is the leading role of
branches of foreign-owned firms in the export base ; these are
established mainly in a few 'high-tech ' sectors . Current policy
recognizes the continuing importance of direct foreign
investment , but aims at securing a better balance of output
and employment through encouraging native-owned firms to
compete more successfully in exporting and related activities .
This will require major investment . In this regard , adequate
levels of corporate profitability have become a more
important determinant for investment , given current
constraints on public spending and , in particular , a more
selective use of investment incentives . In addition , high real
interest rates have reversed a trend towards tax-based capital
borrowing by companies from the banks . While global profit
levels in recent years have improved , the relatively more
dynamic performance of the foreign-owned sector implies
that many native firms have been doing badly . The general
boost to profits imparted by the oil price fall may thus be
directed initially to consolidating balance sheet positions and
only later to new investment . Bearing in mind also that recent
trends in investment in capital goods reflect replacement or
capital deepening activity to a greater extent than the desired
capital widening among native firms , investment in
manufacturing seems likely to fall considerably short of the
This will require appropriate macroeconomic policies , in
particular a loosening of the constraints imposed on the
economy by the high public deficits , more moderate increases
in real wages , and more attention to the efficient and flexible
functioning of markets . The recently expanded training and
marginal employment schemes have an important
contribution to make in the shorter term . A social
employment scheme , introduced in early 1985 , offering
10 000 longer-term unemployed part-time work for one
year , mainly on local authority projects , reached its
participation target by mid-1986 after an initially slow
response . Other schemes , particularly the Enterprise
Allowance Scheme , designed to help unemployed persons
start their own business , and the Employment Incentive
31 . 12 . 86 Official Journal of the European Communities No L 385 / 95
budget and the current public-service wage agreement , imply
a substantial commitment of resources already and therefore
a correspondingly limited scope for the authorities to achieve
the planned level of adjustment in 1987 . In these
circumstances , the authorities should make every effort to
reach their declared target , but in any event should reduce the
Exchequer deficit by some 1V2 percentage points of GDP
relative to the expected out-turn of nearly 12 % for 1986 . It is
equally important however , that they take adequate account
of the medium-term dimension in framing budgetary policy
for 1987 . In particular , it is essential to avoid budgetary
commitments which reduce the scope for a substantial degree
of adjustment in 1988 and thereafter ; it is equally important
to decide on appropriate expenditure cuts to set spending on
a firm downward trend in the near future , even if not having
their major impact in 1987 . These expenditure cuts must be
correspondingly larger to the extent that any adjustments in
tax rates or allowances and any modest expansion of public
investment are accommodated within overall resource
constraints .
level required to meet the target of 7% annual growth in
output set in the 1984 White Paper on Industrial Policy .
If the improvement in the economy now in train is to
stimulate better balanced investment and output and a
resumption of growth in employment , increased efforts are
necessary to secure moderate increases in incomes . In this
context , the Government's recent guidelines on new pay
settlements are to be welcomed . It is equally essential to
correct the imbalances in the public accounts at a faster pace .
An appreciable reduction in the Exchequer deficit over the
medium term is the only way of arresting growth in the public
debt , and would also contribute to lower real interest rates ,
more moderate levels of taxation and , in general , an
environment more favourable to the healthy growth of
output and employment . Declared official policy ( ! ) is to
reduce the Exchequer deficit to just under 10% of GNP
( 8V2 % of GDP) by 1987 . In 1986 , however , it now appears
likely that the planned budget target for the deficit , 10 3/4 %
of GDP , will be exceeded by 1 percentage point . While part
of the excess is due to circumstances of a non-recurring
nature , a number of factors , principally the full year
incidence of the income tax reductions made in the 1986
(') Set out in the medium-term macroeconomic plan 'Building on
Reality '.
No L 385 / 96 Official Journal of the European Communities 31 . 12 . 86
TABLE 34
Ireland : Main economic aggregates 1961 to 1987
(Annual percentage changes)
1961 to
1973
1974 to
• 1980
1981 1982 1983 1984 - 1985 1986 (') 1987 ( 2 )
r value 12,0 19,4 21,3 17,3 9,1 10,8 7,1 7,6 6,8
Gross domestic J volume
product ( 3 ) |
{ deflator
5,4
6,4
2,7
16,2
3,4
17,4
1,4
15,7
- 1,9
11,3
4.2
6.3
2,0
5,0
1,8
5,6
3,1
3,6
Private consumption deflator 6,3 16,2 19,6 15,9 10,0 7,5 4,2 3,7 3,2
r private
Gross fixed
capital 1 public
formation volume 1 total
of which : construction
9,3
8,0
4,1
3,6
7,3
6,6
- 5,5
- 4,8
- 9,3
- 12,2
- 2,7
- 13,5
4,7
- 5,2
- 0,3
- 7,5
4,0
- 7,6
- 1,6
- 4,5
8,3
- 3,7
2,9
1,3
equipment 11,2 4,6 8,1 - 6,3 - 6,1 8,1 5,5 0,5 4,0
Domestic demand at constant prices 5,4 2,2 3,0 - 2,9 - 4,1 1,0 - 0,4 1,5 2,5
Gap with respect to other
Community countries ( 4 ) I
r nominal
Compensation
of employees
per head 1 g ( 5 )
11,5
4.1
5,2
19,6
3,8
3,0
18,3
0,8
- 1,1
15,3
- 0,3
- 0,5
11,1
- 0,2
1,0
12,3
5,7
4,5
7,3
2,2
3,0
6,9
1,3
3,1
6,0
2,3
2,7
Productivity ( 6 ) 4,1 2,5 4,0 1,9 0,0 6,2 4,6 2,9 2,5
Real unit labour costs ( 7 ) 1,0 2,0 - 3,1 - 2,2 - 0,2 - 0,5 - 2,3 - 1,6 - 0,1
Competitiveness ( 8 ) \
Employment 0,2 1,1 - 0,7 0,5 - 2,0 - 1,9 - 2,5 - 1,1 0,7
Registered unemployed as %
of the civilian labour force ( 9 ) 4,7 8,1 10,2 12,2 15,0 16,6 18,0 18,4 18,0
Current balance as % of GDP - 4,7 - 7,4 - 14,0 - 9,9 - 6,4 - 5,5 - 3,2 - 1,3 - 1,3
Long-term interest rate 7,2 14,2 17,3 17,0 13,9 14,6 12,7 9,8 8,8
Money supply ( 10 ) 12,1 19,5 17,4 13,0 5,6 10,1 5,3 5,4 7,3
Net lending or borrowing of general
government as % of GDP - 10,1 - 13,2 - 13,8 - 11,8 - 9,8 - 11,6 - 10,7 - 9,8
Public debt as % of GDP ( n ) 76,2 89,8 96,2 108,3 114,9 118,2 121,5 125,1
Public debt interest
as % of GDP ( n ) 5,4 7,0 8,6 9,1 9,7 10,6 10,0 9,6
(') Estimates of the Commission services , October 1986 .
( 2 ) Forecasts of the Commission services , October 1986 , on the basis of present policies .
( 3 ) Expenditure measure at market prices .
( 4 ) Differences in percentages points .
( 5 ) A : GDP deflator ; B : private consumption deflator .
( 6 ) Gross value added per occupied person in the whole economy .
( 7 ) Ratio of real wages per head to productivity .
( 8 ) Effective exchange rate (vis-a-vis 19 industrial countries ) on the basis of unit labour costs for the whole economy . Positive figure = loss of
competitiveness .
( 9 ) Eurostat definition .
( 10 ) M3 ; end of year .
( n ) Refers to Exchequer debt .
31 . 12 . 86 Official Journal of the European Communities No L 385 / 97
ITALY
companies have been authorized to recruit part of their
workforce from the persons appearing on the employment
office lists , solely on the basis of their professional skills ,
rather than being constrained to follow the order of
inscription on the lists . Attempts have also been made to
develop fixed-term employment contracts and training
contracts for young workers , but with limited success . The
Ministry of Labour has also produced an important
medium-term programme for reforming the labour market ,
intended to modify its structure and increase its flexibility .
This programme has led to the adoption of an emergency
plan for the recruitment , over two years , of 40 000 young
people into the public and semi-public sectors , with the help
of financial contributions from the central government .
Finally , at the end of September , the Government provided
for the allocation of funds for infrastructure and
reconstruction work in the south of Italy , which should allow
an estimated 200 000 temporary jobs to be created .
In Italy, measures tending to reduce the automatic nature of
wage and salary adjustments , and fiscal changes designed
partly to achieve a better balance of direct taxation as
between wage and salary earners and the self-employed , had
the effect of curbing private consumption at the beginning of
the year . This factor , tending to slow activity temporarily ,
was offset by thestrength of exports . Subsequently , domestic
demand as a whole grew faster , helped by the effects of the
marked fall in import prices on households' purchasing
power and on enterprises' profits , while exports have
remained on an upward trend . Overall , real GDP is likely to
expand by 2,6% in 1986 , inducing employment growth of
0,5% . This faster growth is coupled with a substantial
slowing of inflation , the private consumption deflator , on an
annual average basis , falling from 9,4 % in 1985 to 6,2 % in
1986 . At the same time , despite the high import elasticity , the
trade balance has recovered sharply under the influence of
the considerable terms of trade improvement . The current
balance should thus register a surplus amounting to some
1,2% of GDP in 1986 , compared with a deficit of 1 % in
1985 .
In 1987 , consumer demand will be stimulated by the
application of the new collective wage settlements , agreed
towards the end of 1986 , and by the continued rapid rise of
non-wage incomes , while enterprises' propensity to invest
should strengthen further . Moreover , the momentum of
external demand should be maintained . Demand as a whole
is therefore likely to be strong , so that real GDP could
increase by about 3,5 % , which , however , in all probability
implies a significant reduction of the external surplus . The
rate of inflation could drop below 4 % , and thus to a level not
seen since the end of the 1960s .
Also , at the end of 1985 , as a result of conciliation by the
Government , the wage-indexation system was substantially
modified , by tacit agreement , for a four-year period ;
indexation now compensates for only about half of inflation .
In a more relaxed climate of labour relations , a framework
agreement was signed in industry in May 1986 , settling the
dispute concerning the decimal point increases on the sliding
scale which were not paid in 1985 ( J ), and setting out the
principle of measures to help the recruitment of young
people , among whom the unemployment rate is particularly
high in Italy . The conclusion of three-year collective
agreements in industry should ratify the framework
agreement signed in May in a more relaxed climate than
usual ; the only serious problem remaining is the reduction of
working hours .
The social dialogue has thus helped towards an appreciable
easing of production costs , which is being reinforced by the
large fall in import prices , and which is bound to spread
progressively from the sectors which are closely linked to oil
imports towards those less directly linked .
Against this background , the authorities should continue
their efforts to reduce the structural imbalances on the labour
market and in the public finances and thus restore conditions
for lasting and balanced growth . The two problem areas are
not unconnected , since the still excessively high level of
absorption of resources by the public sector hinders the
progress of the productive system towards greater efficiency
and a higher level of employment .
Even though the economic background described above
should , in the short term , be conducive to a progressive
improvement in the labour market and to bringing down the
unemployment rate , this has not ' yet been evidenced during
1986 . In fact , companies have begun by taking back workers
who were temporarily laid off and using the authorized scope
for overtime before taking on new recruits . Furthermore , the
improved employment prospects have had a positive impact
on the activity rate . As a result , the unemployment rate has
not fallen as hoped , remaining at 10,6% .
This unsatisfactory evolution does not reflect the efforts
already made by the public authorities in the last three years
to improve the functioning of the labour market . Since 1 984 ,
In 1987 , the progress made in reducing inflation and the
foreseeable acceleration of economic activity will tend to
stabilize the pressure of the public deficit on the financial
markets ; this will still be excessive , however , and will
continue to be a major problem , thus justifying the stated
intention of the Government to eliminate gradually the part
of the deficit in excess of interest charges . The economic
outlook for 1987 offers an exceptional opportunity to make
(*) The Italian industrial confederation and the trades unions
differed on the interpretation of one point of their collective
agreements of 1983 , which had for the first time modified the
indexation system but had not set out clearly whether fractions
of a point of the index would be cancalled or taken into account
at a later date .
No L 385 / 98 Official Journal of the European Communities 31 . 12 . 86
definite progress in the direction indicated by the Treasury
Minister's consolidation plan . In order to ensure that this
comes about , a new budgetary procedure was adopted in
June . Each year , by the end of July , Parliament is to approve
a three-year economic and financial planning document
comprising the chief macroeconomic objectives and the
major budget aggregates . The autumn discussion in
Parliament would thus take place within an agreed
framework , and a safeguard clause would freeze
appropriations to the extent of the spending cuts set out in
legislation yet to be adopted . The document ,Oproduced by the
three responsible ministers ( Treasury , Financial Affairs and
Budget ), and adopted by Parliament with a lengthy delay
following the government crisis , sets a macroeconomic
framework for 1987 which is close to the Commission's
forecasts . It reflects the Government's intention to bring the
Treasury borrowing requirement down to below the target
set for 1986 and to reduce it to Lit 100 000 000 000 000 or
12,2% of GDP, compared with Lit 110 000 000 000 000 ,
or 14,6% of GDP , in 1986 . The achievement of this
objective , with taxes and social security contributions as a
whole unchanged as a percentage of GDP compared to 1986 ,
depends on implementing , as is the Government's declared
intention , a further shift of emphasis in taxation towards
indirect taxes , together with a strict limitation of current
expenditure , in line with inflation , and of capital spending , in
line with nominal GDP growth .
Monetary policy is set on a course of progressively easing
interest rates as inflationary forces moderate . The three
successive cuts in the discount rate which were made in
March , April and May 1986 , nevertheless , slightly exceeded
the decline in inflation because of the easing of international
interest rates . A further decline could come about as a result
of the effective implementation of the announced budgetary
policy . While reaffirming its determination to defend the
lira's position on the foreign exchanges , the Government has
also embarked on a cautious but resolute policy of
liberalization of capital movements .
Now that these economic policies are in the course of
implementation there are already signs that the fundamental
equilibria can be durably restored as mainly evidenced
in the return to stability of the lira exchange rate within
the EMS . This course , and , in particular , the policy
of budgetary austerity , should be pursued , taking all
necessary measures to limit the Treasury deficit to the
target of Lit 100 000 000 000 000 set for 1987 .
The disappointing evolution of employment is evidence that
the adjustment of real wage rates in relation to productivity
does not yet appear adequate , and that the productive base
has not developed at the desired pace . These deficiencies ,
while being reduced in the north and centre , are still very
evident in the south . Whilst this situation calls for further
prudence in wage trends , it could also be improved by
adjusting government receipts , without impairing the overall
equilibrium of the public finances , in order to ease to a
greater extent social security contributions in the southern
regions . With the same goal in view , the improvement of the
financial structure of enterprises , achieved notably through
directing savings into investment in shares , and the continued
strengthening of deficit areas of the public sector would help
to strengthen the competitiveness of the economy and , in
consequence , promote employment on a more stable
basis .
31 . 12 . 86 Official Journal of the European Communities No L 385 / 99
TABLE 35
Italy : Main economic aggregates 1961 to 1987
(Annual percentage changes)
1961 to
1973
1974 to
1980
1981 1982 1983 1984 1985 1986 - 0 ) 1987 ( 2 )
r value
Gross domestic J volume
product |
^ deflator
11,0
5.3
5.4
20,9
2,8
17,6
18,5
0,2
18,3
17,2
- 0,5
17,8
14,6
- 0,4
15,0
13.6
2,6
10.7
11,3
2,3
8,8
12,7
2,8
9,7
9,1
3,6
5,3
Private consumption , deflator 4,9 17,3 19,2 17,0 15,1 11,1 9,4 6,2 4,0
Gross fixed f ^
capital ^ public
formation volume I total
of which : construction
5,7
6,6
0,9
- 0,2
0,6
0,5
- 5,2
- 3,2
- 3,8
- 2,0
4,1
- 0,4
4,1
- 1,7
4,6
1,9
7,2
2,4
equipment 5,0 2,2 1,8 - 6,8 - 5,7 10,1 9,9 7,1 11,3
Domestic demand at constant prices 5,3 2,5 - 2,2 - 0,3 - 2,0 3,3 2,4 3,6 5,1
Gap with respect to other
Community countries ( 3 ) 0,6 0,4 0,4 - 1,0 - 3,2 1,9 0,2 - 2,0 1,6
r nominal
Compensation
of employees ■
per head 1 g ( 4 )
11,6
5,9
6,5
20,2
2,2
2,3
21,9
3,0
2,3
17,2
- 0,4
0,2
16,5
1,2
1,2
12,0
1,1
0,8
10,0
1,1
0,5
6,7
- 2,7
0,4
6,1
0,8
2,1
Productivity ( 5 ) 5,7 2,2 - 0,3 - 0,4 - 0,5 2,2 1,8 2,3 2,3
Real unit labour costs 0,0 1,8 - 1,0 - 0,8 - 4,9 - 1,5
Rates of return ( 6 ) - 8,6 - 28,5 21,0 7,9 40,8 10,4
idem ( 1961 to 1973 = 100 ) 100 51,7 51,1 46,7 33,4 40,4 43,6 61,4 67,8
Competitiveness ( 7 ) - 0,3 - 0,1 - 0,7 2,2 11,3 3,7 - 0,5 0,8 1,9
Employment - 0,4 0,8 0,5 - 0,1 0,1 0,4 0,5 0,5 1,3
Registered unemployed as %
of the civilian labour force ( 8 ) 5,2 5,9 8,0 9,7 10,9 11,9 12,9 13,4 12,8
Current balance as % of GDP 1,5 - 0,5 - 2,3 - 1,6 0,2 - 0,8 - 1,1 1,2 0,9
Long-term interest rate 6,9 13,3 20,6 20,9 18,0 14,9 13,0 10,6 8,7
Money supply ( 9 ) 14,7 21,5 15,9 17,2 13,2 12,1 11,1 7,5 7,5
Net lending or borrowing
requirement of general
government as % of GDP - 3,3 - 9,0 - 11,7 - 12,7 - 12,4 - 13,0 - 14,0 - 12,7 - 11,0
Public debt as % of GDP 44,8 67,7 70,2 76,8 84,3 91,1 99,5 103,1 106,8
Public debt interest as % of GDP 1,8 4,9 7,2 8,5 9,0 9,6 9,3 9,6 8,8
(') Estimates of the Commission services , October 1986 .
( 2 ) Forecasts of the Commission services , October 1986 , on the basis of present policies .
( 3 ) Differences in percentage points .
( 4 ) A : GDP deflator ; B : private consumption deflator .
( 5 ) Gross value added per occupied person in the whole economy .
( 6 ) Net operating surplus on the net capital stock of current replacement cost .
( 7 ) Effective exchange rate (vis-a-vis 19 industrial countries ) on the basis of unit labour costs for the whole economy . Positive figure = loss of
competitiveness .
( 8 ) Eurostat definition .
( ? ) End of year .
No L 385 / 100 Official Journal of the European Communities 31 . 12 . 86
LUXEMBOURG
In Luxembourg, economic activity has remained at a high
level in 1986 , due to the increase in domestic demand ; its
driving force , private consumption , has benefited from the
big rise in personal disposable income . Total exports have
advanced less rapidly than last year because of a slight dip in
the sales of steel products . All in all , gross domestic product
should grow by about 2,5% . Inflation has abated sharply
and the unemployment rate has fallen slighty .
In 1987 , gross domestic product should grow at a rate similar
to that recorded in 1 9 8 6 . A stabilization in the level of sales of
steel products and the continuing vigorous increase in
deliveries of other products will underpin the faster growth of
total exports . However , the expansion of business
investment could run out of steam . The upward movement of
consumer prices is liable to pick up speed because of a sharper
increase in wage costs in the services sector , and because an
open economy is very exposed to externally induced
inflationary risks . On the labour market , the increase in
numbers employed will be accompanied , as in the preceding
year , by a fall in the number of unemployed and a sharp cut in
the number of persons covered by special employment
schemes .
In most respects , the economic policy pursued by the
Government is compatible with the guidelines of the
cooperative strategy for growth and employment . Budgetary
policy has also contributed by measures underpinning
demand : part of the room for manoeuvre which became
available after the steel industry was restructured was used to
reduce personal income tax in 1986 , and in 1987 it will again
be possible to reduce personal and company taxation . There
will also be scope for supplementing the public investment
funds in order to guarantee the financing of their
medium-term programmes . The efforts to diversify the
structure of the Luxembourg economy have been continued
by selective action to assist new enterprises .
The trend ofwages and salaries started to pick up speed at the
end of 1984 , leading to rises in 1986 and 1987 which are
making up for earlier losses . In real terms , compensation of
employees per head will probably increase by more than the
growth of labour productivity . Even if this has positive
effects on domestic demand in the short term , the risk is that
competitiveness of enterprises will be damaged while
rationalization investment — unsuited to the creation of
more jobs — will be encouraged and industrial
diversification held back . As a result , the next wage
negotiations will be particularly important .
The integration of young people into the labour market will
require an additional effort to adapt vocational training to
enterprises' skilled labour requirements , in order to eliminate
the existence of a hard core of young unemployed , although
it is also necessary to recruit non-resident workers for new
jobs . Against the background of international competition , it
is becoming increasingly desirable to modify working hours
in line with the needs of companies . Less rigid legislation
would enable management and unions to negotiate , at the
level of the firms , more flexible systems of work
organization .
As a result of the slow rise in tax receipts , partly due to a cut
in direct taxes , and a steady rise in expenditure , in particular
on salaries and transfers , general government net lending will
fall in 1986 and 1987 . Although the investment fund reserves
are sufficient to finance projects for the provision of adequate
infrastructure in the fields of both traditional public
investment and of telecommunications and electronic data
processing , a certain amount of prudence will have to be
exercised in the management of other expenditure , in order
to maintain equilibrium in the central government budget
and thus ensure some room for manoeuvre for the future .
31 . 12 . 86 Official Journal of the European Communities No L 385 / 101
TABLE 36
Luxembourg : Main economic aggregates 1961 to 1987
(Annual percentage changes)
1961 to
1973
1974 to
1980
1981 1982 1983 1984 1985 1986 (') 1987 ( 2 )
r value
Gross domestic J volume
product |
^ deflator
8,6
4,1
4,4
8,5
1.5
6.6
9.8
- 0,1
9.9
10,3
0,9
9,4
9,4
1,6
7,7
12,4
5,3
6,7
7,7
2,2
5,4
8,0
2,4
5,4
5,3
2,6
2,6
Private consumption deflator 3,1 7,5 8,6 10,6 8,0 6,4 4,0 0,5 1,3
r private
Gross fixed
capital 4 public
formation volume 1 total 5,1 - 0,3
- 7,7
- 1,4
- 6,2
- 0,7
0,6
- 0,4
- 5,2
2,3
- 3,3
- 0,2
- 4,9
- 1,4
2,5
- 0,5
1,7
3,0
3,0
3,0
2,1
1,1
1,9
of which : construction - 2,5 1,1 - 1,4 - 3,1 0,7 2,1 0,8
equipment - 13,2 - 3,7 - 7,5 2,5 4,0 5,0 4,0
Domestic demand at constant prices 1,8 - 0,2 0,4 0,2 1,8 3,0 3,0
Gap with respect to other
Community countries ( 3 ) 0,4 0,4 - 0,9 0,2 - 0,8 - 0,4
r nominal
Compensation
of employees ■
per head 1 g ( 4 )
7,3
3,0
4,2
11,1
4,3 '
3,5
8,8
0,6
0,1
7,2
- 2,5
- 3,1
7,6
- 0,6
0,4
6,8
0,2
0,4
4,5
- 0,8
0,5
4,2
- 1,2
3,7
5,6
2,9
4,2
Productivity ( 5 ) 3,1 0,9 - 1,7 1,1 2,8 4,9 0,8 1,6 1,9
Real unit labour costs - 0,1 3,4 2,3 - 3,6 - 3,3 - 4,5 - 1,6 - 2,8 1,0
Employment 1,0 0,8 0,4 - 0,4 - 0,1 0,6 1,4 0,8 0,7
Registered unemployed as % of the
civilian labour force ( 6 ) 0,0 0,4 1,0 1,3 1,6 1,7 1,6 1,3 1,2
Current balance as % .of GDP 6,7 20,1 19,0 25,0 28,2 30,2 29,6 31,5 30,7
Long-term interest rate .I
Money supply ( 7 )
Net lending or borrowing requirement
of general government as % of GDP 2,0 2,9 - 3,1 - 2,3 - 0,6 1,5 4,1 3,7 2,6
Public debt as % of GDP 15,9 14,0 14,4 14,8 14,7 14,3 14,0 14,0
Public debt interest as % of GDP 0,8 1,0 1,0 1,1 1,2 1,3 1,3 1,3
(') Estimates of the Commission services , October 1986 .
( 2 ) Forecasts of the Commission services , October 1986 , on the basis of present policies .
( 3 ) Differences in percentage points .
( 4 ) A : GDP deflator ; B : private consumption deflator .
( s ) Gross value added per occupied person in the whole economy .
( 6 ) Eurostat definition .
( 7 ) End of year .
No L 385 / 102 Official Journal of the European Communities 31 . 12 . 86
THE NETHERLANDS
In the Netherlands, economic performance in 1986 has been
marked by a less rapid growth in export volume due to the
fall in sales of natural gas . By contrast , the rise in the
purchasing power of households - resulting from the
reduction in social security contributions and the fall in
inflation , due to an improvement in the terms of trade when
money wages had already been fixed to a large extent - has
led to a sharp increase in private consumption . Business
investment has again been buoyant , whereas investment in
residential construction and public sector investment have
remained sluggish . Overall , at 1,6 % , GDP will have grown
almost as much as last year , while the output of the corporate
sector , excluding the energy sector , is likely to have increased
by 2,7 % . The rate of inflation is down to zero , and interest
rates have fallen by almost a percentage point . The less
favourable movement of the trade balance and of transfers
has led to a slight reduction in the surplus on current account ,
in spite of the 2,6 % improvement in the terms of trade , due
to the fact that the fall in the export price of natural gas has
lagged behind the fall in oil prices .
moderation and better balance for the budget . The measures
taken to increase the adaptability of the labour market
have concentrated mainly on the decentralizing wage
negotiations , freezing minimum wages , reducing working
hours and extending opportunities for part-time employment
and early retirement . Supply conditions have also been
helped by the two-stage reduction in corporation tax . Real
wage rises have been moderate in recent years ; the policy of
decentralized negotiations has worked satisfactorily , and the
Government has not participated directly in the framing of
agreements . In the public sector , a freeze on nominal salary
levels was introduced and the Government is currently
imposing very strict limits on pay negotiations in this sector ,
which will have to take account of budgetary policy
constraints and developments in the market sector . In
1984 / 85 , this wage policy caused private demand to slacken ;
in 1986 , however , the reduction in employees' social security
contributions is boosting the real spending power of
households , who are also benefiting from the decline in
inflation . Falling interest rates have reinforced the
stimulatory effect that the improvement in business
profitability has had upon investment .
The policy pursued by the Central Bank , based mainly on
maintaining the guilder's parity against the German mark
within the EMS , has helped to reduce inflation to a very low
level , and has allowed interest rates to be brought down in
line with the international trend . Liberalization measures
have been taken on the financial and money markets to
facilitate access by foreign banking institutions to the Dutch
market and the use of new financing instruments by Dutch
companies . Priority has had to be given in budgetary policy
to reducing the medium-term public sector deficit in order to
reinforce budget management and to underpin the structural
adjustment of the economy ; this has left little scope for
supporting economic growth in the short-term . Despite the
substantial reduction made in the deficit in 1985 ,
developments on the energy markets have worsened the
budget problem . In order to forestall too serious a
deterioration in the deficit in 1987 , decisions have had to be
taken to cut expenditure and to increase indirect taxes ; thus ,
active measures to sustain demand through the budget will be
virtually impossible .
In 1987 , GDP growth is not likely to accelerate greatly ,
probably reaching a rate of approximately 1,8% . Exports
are likely to grow more rapidly overall , as the volume of sales
of natural gas will show a less marked fall than in 1986 . The
1986 oil price fall will cause a redistribution of income in
1987 , taking into account its lagged effect on the price
of natural gas ( of the order of 3% of GDP), from
the government budget to companies , households and
abroad . Notwithstanding Government measures , affecting
expenditure and current receipts , to prevent a too-strong
deterioration of its deficit , which will slow down private
consumption , internal demand should increase at a rate
comparable with that of 1986 . The improvement in
corporate profitability and the increase in capacity utilization
rates will stimulate business investment further , residential
construction will probably increase slightly but public sector
investment is likely to slow down . The general level of prices
may well be lower than in 1986 . The deterioration in the
terms of trade by more than 1 % should reduce the surplus on
current account . Thanks to the growth in manufacturing
output , employment will increase and , in addition , because
of the reorganization of working time , the unemployment
rate will decline , though still remaining very high
( 11,1% ).
The new Government's econdmic policy objectives are to
reduce the budget deficit , to stabilize or lower the burden of
taxes and social security contributions , to maintain
purchasing power and to reduce unemployment . Because of
the high level of unemployment , continued priority will need
to be given to exploring all possible means of increasing
employment , and the measures already taken will need to be
extended , even though some of them , such as the reduction in
working hours , have not yet produced the expected
equivalent increase in recruitment . It is therefore highly
important to ensure that the agreement between employers
and unions and the Government's programme for providing
The economic policy which the Government has pursued in
recent years on the basis of its autumn 1982 programme has
already been broadly in line with certain principles and ideas
now underlying the cooperative strategy for growth and
employment . This has been true , for example , of the
improvement in the working of the labour market , wage
31 . 12 . 86 Official Journal of the European Communities No L 385 / 103
the young unemployed with vocational training or work
experience are implemented as soon as possible . The
emergence of bottlenecks in some sectors of the labour
market demonstrates how urgent it is to improve skills .
The results of the decentralized wage negotiations appear to
allow the competitive position of firms to be maintained .
Similarly , the Government's policy of standing back from
wage negotiations is unlikely to affect the trend of public
expenditure , since the link between adjustments to pay and
transfer payments in the public sector and adjustments to
wages and salaries in the private sector has been severed and
there are no plans to restore it . The public sector will
probably not escape entirely from some adjustment to wage
and salary levels , at least for certain categories , since it will
otherwise be impossible to recruit qualified staff, the lack of
which is already beginning to be felt .
The appreciable fall in natural gas revenue from 1987 will
make it considerably more difficult to reduce the central
government budget deficit , which , according to the
Government's programme , should be cut to 5 1 /4 % of net
national income in 1990 compared with 6,7% in 1986 .
Some deterioration in the general government borrowing
requirement ( excluding early repayment of social housing
loans ), which is expected to exceed 8% of net national
income in 1987 , with a central government deficit of
7,9% , is thus unavoidable . This outcome presumes the
implementation of an extensive programme for making up
the shortfall due to changes in hydrocarbon prices , both
through cuts in expenditure and through the raising of new
revenue . In 1987 , government debt increases further , by
more than 7 percentage points of GDP , and it is therefore
important to pursue a tight budgetary stance in order to
contain the central government net borrowing requirement
within the limits implicit in the budget , and to create the
necessary conditions for subsequent reductions .
This guideline in no way detracts from a policy of
restructuring public expenditure and , as far as possible ,
revenue , intended to stimulate the growth of the private
sector and including direct employment measures which have
already produced satisfactory results .
No L 385 / 104 Official Journal of the European Communities 31 . 12 . 86
TABLE 37
Netherlands : Main economic aggregates 1961 to 1987
(Annual percentage changes)
I 1961 to1973 1974 to1980 1981 1982 1983 1984 1985 1986 (') 1987 ( 2 )
r value 11,3 9,6 4,8 4,5 3,0 4,9 4,2 2,0 0,1
Gross domestic J volume
product |
{ deflator
5,3
6,0
2,4
7,1
- 0,7
5,5
- 1,4
6,0
1,4
1,6
2.4
2.5
1,7
2,4
1,6
0,4
1,8
- 1,7
Private consumption deflator .5,2 7,3 6,3 5,3 2,7 2,5 2,6 0,0 - 1,0
r private
Gross fixed
capital -
formation volume 1 total 6,3 - 0,2
- 11,5
- 4,6
- 10,4
- 3,5
- 7,1
- 4,1
3,3
- 4,6
2,1
3,7
7,6
4,3
5,2
- 4,3
3,7
6,2
0,4
5,4
3.7
- 3,1
2.8
of which : construction - 10,8 - 6,4 - 3,4 2,5 - 3,3 4,1 2,4
equipment - 9,6 0,2 10,0 7,0 13,7 7,0 3,3
Domestic demand at constant prices - 4,6 - 0,9 1,5 1,4 2,2 2,3 2,4
Gap with respect to other
Community countries ( 3 ) - 1,2 - 0,2 - 0,7 0,7 - 1,5 - 1,4
r nominal
Compensation
of employees -
per head 1 g ( 4 )
11,4
5,0
6,0
9,5
2,2
2,0
3,5
- 1,9
- 2,7
5,8
- 0,3
0,5
3,2
1,5
0,4
0,8
- 1,7
- 1,7
1,4
- 1,0
- 1,2
2,1
1,7
2,1
1,7
3,4
2,7
Productivity ( 5 ) .3,9 2,1 0,8 1,1 3,0 2,2 0,6 0,5 0,9
Real unit labour costs 1,1 0,1 - 2,7 - 1,4 - 1,5 - 3,8 - 2,6 1,2 2,5
Competitiveness ( 6 ) 2,7 0,7 - 9,7 2,5 - 2,7 - 6,2 - 3,9 4,4 0,6
Employment 0,9 0,3 - 1,5 - 2,5 - 1,9 - 0,4 1,1 1,1 0,8
Registered unemployed as %
of the civilian labour force ( 7 ) 1,3 5,3 8,6 11,6 14,0 14,3 13,1 12,0 11,1
Current balance as % of GDP 0,5 0,8 2,2 3,2 2,9 4,1 4,3 3,9 2,8
Long-term interest rate 5,9 9,4 12,2 10,5 8,8 8,6 7,8 6,8 6,1
Money supply ( 8 ) 10,3 9,6 5,3 7,6 10,5 7,7 10,5 5,1 3,5
Net lending or borrowing
requirement of general
government as % of GDP - 0,4 - 2,5 - 5,5 — 6,6 - 5,9 - 6,2 - 5,1 - 5,5 - 6,6
Public debt as % of GDP 41,7 50,3 55,6 62,3 66,3 70,0 75,5 82,6
Public debt interest
as % of GDP 3,1 4,4 4,7 5,3 5,6 6,0 6,4 6,4
(') Estimates of the Commission services , October 1986 .
( 2 ) Forecasts of the Commission services , October 1986 , on the basis of present policies .
( 3 ) Differences in percentage points .
( 4 ) A : GDP deflator ; B : private consumption deflator .
( 5 ) Gross value added per occupied person in the whole economy .
( 6 ) Effective exchange rate (vis-a-vis 19 industrial countries ) on the basis of unit labour costs for the whole economy . Positive figure = loss of
competitiveness .
( 7 ) Eurostat definition .
( 8 ) End of year .
31 . 12 . 86 Official Journal of the European Communities No L 385 / 105
PORTUGAL
preceding years , investment increased by some 8% in
volume terms during 1986 , and a comparable , or even
higher , rate is anticipated for 1987 .
The size of the public debt and its rapid expansion (47,4 % of
GDP in 1980 and 81,2% in 1985 ) have , in particular ,
prompted the authorities to aim at a sharp reduction in the
general government borrowing requirement in 1986 . In the
past , budgetary policy had been conducted on a short-term
perspective ; this caused distortions in resource allocation , in
particular by supporting unprofitable public enterprises and
exercising a crowding-out effect to the detriment of private
enterprises . From now on , the authorities intend to pursue
the objective of medium-term consolidation based , in
particular , on the greater transparency of central government
accounts , bringing public expenditure under control ,
establishing a new system of tax incentives for investment ,
and financing the borrowing requirement by greater resort to
the market .
Despite some progress observed in the modernization of
financial channels , these are still inadequate to sustain the
proper development of long-term saving and risk capital . In
particular , interest rates are still at very high levels , mainly
because of the strong demand for finance from government
departments and public enterprises , the instability of the
escudo's exchange rate and expectations of high inflation .
Because of its heavy dependence on imported energy , the
Portuguese economy derived particular benefit from the
reverse oil shock , and continued its expansion at a rate above
the Community average in 1986 . The rate of growth of GDP
( in volume), estimated at near 4% , was close to the one
recorded in 1985 . At the same time , the main source or
buoyancy shifted from exports to domestic demand . After
declining for some years , real wages embarked on a stronger­
than-forecast catching-up process mainly because the
inflation rate , though remaining well above the Community
average , turned out to be appreciably below the initial
forecasts . This provided a lively stimulus for private
consumption . Fixed investment , which had fallen back
markedly until 1985 , recovered as a result of the
improvement in companies' financial positions , the growing
support provided by the measures to promote productive
investment and investment in dwellings as well as the public
investment programme . There was a slowdown in export
growth , mainly because third country markets contracted .
Due , however , to the substantial improvement in the terms of
trade , the balance of payments surplus climbed to a record
level ( 5,4% ofGDP). The decline in employment was halted ,
and the unemployment rate fell slightly for the first time in
many years .
In 1987 , private consumption will be slightly less buoyant ,
but the increase in gross fixed capital formation could
accelerate under the impetus of lower interest rates and the
sharp expansion of public investment . The growth of GDP in
volume terms should be slightly slower than in 1986 ( in the
region of 3,5% ). Developments on Portugal 's external
markets should permit a moderate export recovery ; even
though it will deteriorate slightly , the balance of payments on
current account should remain comfortably in surplus .
Inflation should continue to fall , but the consumer price rise
( + 9% ) remains markedly above the Community average .
Employment will benefit from the favourable economic
situation . However , the recorded unemployment rate will be
slow to fall ( from 8,6 % of the labour force in 1986 to 8,5 %
in 1987), mainly because of a further increase in the
population working age .
With regard to the evolution of wages in 1986 , the
Government granted a 16,5 % increase to civil servants and
recommended increases of 17% to the private sector . The
collective negotiations produced sometimes even larger
increases initially , particularly in the public enterprises .
However , when the prospect of lower inflation was
confirmed ( an annualized rate of 12 instead of 14% ), the
authorities took a somewhat tighter line on pay and nominal
wage increases per head have decelerated . Overall the
increase in nominal labour costs has been notably higher than
the Community average . However , the share of wages in
national income has declined , although in terms of
purchasing power (deflated by the consumer price index ) the
real wage level increased .
Gross fixed capital formation has grown satisfactorily . After
a cumulative fall of 25,5% in real terms in the three
The main challenge facing Portugal is to find a way out of the
vicious circle of a 'stop-go' cycle which has severely hampered
its development in the last decade , so that it can grapple with
its fundamental problems , particularly that of modernizing
the system of production . This has become more urgent
because of the country's accession to the Community . As a
result of insufficient investment , the export structure has
hardly been diversified , while any upturn in domestic
demand is rapidly blocked by the external constraint . The
government which took office in the autumn of 1985 has
chosen as its priority objective to bring about the recovery of
investment and to improve the conditions conducive to
economic growth by putting the public finances on a sounder
footing , eliminating the inflation differential with the rest of
the Community and , at a microeconomic level , making
markets more flexible .
In 1987 , significant progress should be made in eliminating
the underlying imbalances in the economy . To achieve this ,
the public sector borrowing requirement , which is a crucial
strategic variable , should be considerably reduced . The drive
to moderate operating expenditure and to limit subsidies to
public enterprises will have to be kept up , as will the action to
combat tax evasion and avoidance . As a result , it should be
possible to bring the central government borrowing
requirement down to under 8 to 8,5 % of GDP . This policy
No L 385 / 106 Official Journal of the European Communities 31 . 12 . 86
would , in particular , permit the required deceleration in
domestic credit expansion , while strengthening the tendency
for the escudo's exchange rate to stabilize . These are the
essential conditions for the country to realize the ambitious
objective of keeping price increases under 10 % , and for real
wages , in conformity with the spirit of the tripartite
agreement concluded last June , to follow a course compatible
with an improvement in the competitiveness of the
Portuguese economy and hence with its participation , in
favourable circumstances , in the wider common market .
TABLE 38
Portugal : Main economic aggregates 1961 to 1987
(Annual percentage changes)
1961 to
1973
1974 to
1980
1981 1982 1983 1984 1985 1986 (') 1987 ( 2 )
C value
Gross domestic J volume
product
L deflator
Private consumption deflator
11,2
6,9
4,0
3,4
23,2
3,3
19,8
21,4
18,7
0,4
18,2
20,0
26,1
3,5
21,8
22,5
23,7
- 0,3
24,1
25,5
23,4
- 1,7
25,6
29,3
25,9
3,7
21,3
19,3
23,8
3,8
19,2
11,8
14.4
3,5
10.5
9,0
Gross fixed f private
capital
formation volume total
Of which : construction
equipment
Domestic demand at constant prices
Gap with respect to other
Community countries ( 3 )
8,0
7,5
5,4
2,9
4,6
4,4
4.8
2.9
2,9
2,0
4,0
3,4
- 7,5
- 3,0
- 13,1
- 7,0
- 18,0
- 13,5
- 23,0
- 7,0
- 1,8
- 4,0
1,0
0,6
7,8
6,1
10,0
6,7
8,5
8.5
8.6
4,8
r nominal
Compensation
of employees •
per head 1 g ( 4 )
Productivity ( 5 )
Real unit labour costs
Competitiveness ( s )
Employment
12,0
7,8
8,4
7,4
0,4
- 0,5
25,2
4,5
2,8
3,4
1,1
- 0,1
20,6
3,5
3,2
- 0,2
3,7
0,6
18,5
- 2,7
- 3,3
4,0
6,4
- 5,7
- 0,5
21,6
- 2,0
- 3,1
1,4
- 3,4
- 8,4
- 1,7
19,8
- 4,6
- 7,4
- 0,4
- 4,2
- 1,5
- 1,3
22,0
0,5
2,2
4,2
- 3,6
0,4
- 0,5
17,1
- 1,8
4,7
3,5
- 5,1
- 1,1
0,5
12,3
1,6
3,0
3,2
- 1,6
- 2,9
0,6
Registered unemployed as %
of the civilian labour force ( 7 )
Current balance as % of GDP
Long-term interest rate
Money supply ( 8 )
0,7
6,5
- 6,2
16,4
- 11,7
22,6
23,8
- 13,5
25,2
24,6
7,9
- 7,2
30,3
16,3
8,5
- 3,0
32,5
24,5
8.7
1.8
25.4
28.5
8,6
5,4
19,5
26,0
8,5
4,2
16,5
16,0
Net lending or borrowing
requirement of general
government as % of GDP
Public debt as % of GDP
Public debt interest as % of GDP
- 10,1
59,0
5,4
- 8,8
62,2
5,5
- 7,1
70,9
6,4
- 7,7
75,7
7,1
- 11,2
81,2
7,7
- 8,0
83,5
9,7
- 7,5
88,0
9,3
( ! ) Estimates of the Commission services , October 1986 .
( 2 ) Forecasts of the Commission services , October 1986 , on the basis of present policies .
( 3 ) Differences in percentage points .
( 4 ) A : GDP deflator ; B : private consumption deflator .
( 5 ) Gross value added per occupied person in the whole economy .
( 6 ) Effective exchange rate (vis-a-vis 19 industrial countries ) on the basis of unit labour costs for the whole economy . Positive figure = loss of competitivenes .
( 7 ) Eurostat definition .
( 8 ) End of year .
31 . 12 . 86 Official Journal of the European Communities No L 385 / 107
UNITED KINGDOM
In the United Kingdom, economic activity is again expanding
at a moderate pace , after a period of slower growth during
the latter part of 1985 and the first half of 1986 . GDPis likely
to rise by 2V4 % in real terms in 1986 and to accelerate
somewhat in 1987 , with an expected growth rate of 2 3/4 % .
The main contribution to growth in both years is coming
from private consumption , the strength of which is explained
by steady growth of earnings combined with a renewed
slowing of inflation in 1986 , and a further easing of the
personal income tax burden . Other elements of demand have
been relatively subdued , although exports and investment
activity are expected to grow somewhat faster in 1987 .
The moderation of wage increases , both in nominal and real
terms , is one of the key issues in improving employment
prospects in the United Kingdom. The growth of nominal
earnings decelerated sharply at the beginning of the 1980s
but , since mid-1982 , the underlying annual rate of increase
has been roughly stable at about 7V2 % , while consumer
price inflation (private consumption deflator ) has been
around or below the 5% per annum mark . In 1986 ,
particularly under the influence of lower energy and other
commodity prices , inflation should turn out to be about 4 %
(or , as measured by the retail price index , some 3 % ), but as
yet this has had little impact on wage settlements . Given the
faster progress on inflation achieved by other industrialized
countries , this implies a further erosion of the United
Kingdom's competitive position ; this process was more than
offset by the exchange-rate movements during 1986 , but the
underlying weakness remains a threat to employment .
The forecast rate of GDP growth is sufficient to permit a
continuing expansion of employment but , with much of the
increase accounted for by new entrants to the labour force
going into self-employment or part-time jobs , it is not enough
to make serious inroads into the unemployment level . Over
the period from March 1983 to March 1986 total
employment rose by about one million , while the numbers
unemployed still grew by more than 150 000 ; this represents
a rise in the activity rate of some three percentage points , a
trend which can be expected to taper off. The rise in
employment was made up of increases of half a million in
self-employed people and of more than 550 000 women
in part-time employment , while full-time dependent
employment fell .
Despite the steady rise in real wages , profitability has also
been improving significantly in recent years . This was made
possible initially by a more rapid expansion of labour
productivity than of real wages during the first three years of
the recovery , and subsequently by the weakness of non-wage
input costs . A Bank of England study concluded that the
pre-tax real rate of return of United Kingdom industrial and
commercial companies rose from 6 % in 1980 to 12V2 % in
1985 . This figure will have fallen in 1986 , because of the
setback to oil companies' profits , but there will have been a
further improvement in the profitability of companies in
other sectors taken as a whole , their rate of return having
already risen from the trough of 3% in 1981 to 8% in
1985 .
The effects of the sharp fall in the oil price ori the United
Kingdom , as a major oil producer , are different from those
on most of the other Community economies . While
industrial and domestic energy input costs have been lowered
( as in other countries ), the economy as a whole has suffered a
terms-of-trade loss and , associated with this , there was a
downward adjustment to the sterling exchange rate in early
1986 and again in the summer , particularly against other
European currencies . The financial position of non-oil
companies has improved substantially , although profits of
the whole economy have fallen because of the deterioration
in the oil sector .
Despite the improvement in profitability , the growth of
private investment has slowed down over the last two years .
This may be a reaction to the relatively rapid expansion of
capital spending in 1982 to 1984 and to the higher level of
real interest rates in the recent period . Another important
influence on the pattern of investment has been a change in
the corporation tax system , intended to reduce the
distortions between different types of investment and sources
of finance , and between capital as a whole and labour . This
consisted of a reduction of the tax rate ( in three steps , from
50 to 35 % ), accompanied by the gradual removal of initial
investment allowances . In recent years , the strong investment
performance in the service industries has been paralleled by a
substantial rise in employment in these sectors , even if many
of the additional jobs are part time , while the more modest
recovery of investment in manufacturing has been
insufficient to reverse the continuing decline in jobs .
Because of the lower oil export prices , the current-account
surplus has shrunk and a deficit ( 0,6 % of GDP) is expected
for 1987 . There has also been a sharp fall in government oil
revenues ( roughly halving to an estimated £ 5 000 million in
the 1986 / 87 financial year), but greater than expected
buoyancy of other tax revenues has limited the impact on the
fiscal position . The different measures of money supply have
been growing at strikingly different rates , with broad money
expanding at a rate well above its target range . United
Kingdom interest rates , however , while following the
international downward trend , have remained high in real
terms , perhaps partly because a risk premium arises from the
uncertainty associated with future inflation and
exchange-rate movements .
The area in which progress is most urgently needed in the
United Kingdom is that of a slower increase in wages . Lower
No L 385 / 108 Official Journal of the European Communities 31 . 12 . 86
wage settlements would open the way for slower inflation , an
improvement in the United Kingdom's competitiveness , a
further strengthening of profitability , and lower interest rates
(both nominal and real ), which would increase the
attractiveness of investment in new capacity and augment the
employment content of growth . It is however clear that ,
despite the high unemployment level , the present functioning
of the labour market is resulting in little slowing of wage
settlements . The Government has taken steps intended to
improve flexibility of the labour market and , in particular , of
the wage determination process by measures such as the
reduction of the scope of wages councils to set minimum
wages for young people and has also introduced proposals
for a form of profit-sharing , in which a part of gross wages
could be linked to corporate profit perfomance . Against the
background of the declared aim of government policy to
guard against any shortfall of demand in the economy ,
contact between government and the representatives of
employers and employees can contribute to a greater
awareness on all sides of the importance of lower wage
increases for employment creation .
In recent years , the emphasis of fiscal policy in the United
Kingdom has been on reducing the budget deficit as a
proportion of GDP, containing the growth of public
expenditure , and introducing a number of tax reductions and
changes intended to encourage enterprise and to promote
market flexibility . The public sector borrowing requirement
(PSBR ) in the financial year ending March 1986 , at 1 ,7 % of
GDP, turned out to be slightly lower than planned , while
general government expenditure as a proportion of GDP was
( at 44,5% ) two points lower than in 1984 / 85 . The fiscal
stance for the current year , set in the March 1986 budget , is
broadly unchanged , with only a slight widening ( to 1 ,9 % of
GDP) of the forecast PSBR . In spite of the substantial loss of
oil revenue , the Government , in this year's budget , was still
able to implement a further cut in personal income tax
amounting to one percentage point off the basic tax rate , thus
helping to reduce the taxation 'wedge' between what an
employee costs to the employer and what the employee
receives as net-of-tax income . As in the past , there has been
some upward slippage of successive plans for public
expenditure , although the impact on the PSBR is largely
offset by the accelerated programme of privatization .
Before the autumn statement , the outlook for fiscal
developments in 1987 suggested that the Government would
again have at its disposal some room for manoeuvre to reduce
the tax burden or to raise public spending in the 1987 / 88
financial year , within the framework of its medium-term
financial strategy . This position is now overtaken by the
announcement in the Government's autumn statement of an
increase in the provision for public expenditure in 1987 / 88
of some £ 4 750 million . This will mean that public
expenditure in 1987 / 88 is planned to be about 2% higher in
real terms than the estimated out-turn in 1986 / 87 . If output
were to grow less rapidly than productive potential ( about
2V4 % ), it may be appropriate to allow some increase in the
PSBR above the figure of £ 7 000 million ( 1,7% of GDP)
included in the MTFS , providing that there is no upsurge of
inflation . However , there can be no automatic relationship
between the appropriate PSBR and the state of the economic
cycle . Any fiscal relaxation beyond that foreseen in the
MTFS would need to be accompanied by the maintenance of
downward pressure on the increase in real wages and the
maintenance of a firm monetary stance so as to avoid an
exacerbation of the vicious circle of wage and price increases ,
and the associated risk of further exchange-rate depreciation .
It should also be seen within the framework of action decided
at Community level .
The Government is committed to using the fiscal room for
manoeuvre , at least in part , for a further easing of the
personal income tax burden , so as to increase incentive and
boost after-tax incomes . In view of the likely continued
strong growth of real personal incomes in 1987 , however ,
there would be a more balanced pattern of growth if some of
the room were used to support demand components other
than private consumption . The scope for additional public
sector infrastructure investment offering an acceptable rate
of return should be examined . Such investment might have a
greater short-term impact on employment than income tax
cuts and , like such cuts , would tend to strengthen productive
potential .
The Government has continued its programme of
microeconomic measures aimed at improving supply
conditions and increasing incentives for enterprise . The
programme of privatizing public-sector business has
continued , and a number of developments are contributing
to the creation of a more competitive market in financial
services . In the summer , new proposals were introduced as
part of the continuing deregulation programme to lift the
burdens on businesses . Proposals include simplifying tax and
accounting procedures for small businesses , easing
requirements for permission to change the use of buildings ,
and modification of employment rights in certain
circumstances . The deregulation programme complements
other measures intended to stimulate business start-ups and
expansion , with particular benefits to the self-employed and
small businesses which have an important influence on job
creation .
31 . 12 . 86 Official Journal of the European Communities No L 385 / 109
TABLE 39
United Kingdom : Main economic aggregates 1961 to 1987
(Annual percentage changes)
1961 to
1973
1974 to
1980
1981 1982 1983 1984 1985 1986 (>) 1987 ( 2 )
r value
Gross domestic J volume
product ( 3 ) 1
^ deflator
8,4
3,1
5,1
17,7
1,0
16,5
10,2
- 1,2
11,5
8,8
1,0
7,9
9,0
3.8
4.9
6,3
2,2
4,1
9,8
3.7
5.8
6,3
2,3
3,9
7,0
2,7
4,2
Private consumption deflator 4,8 15,7 11,4 8,7 5,0 4,8 5,3 4,0 3,9
Gross fixed f
capital
formation volume 1 total 4,6
1,6
- 10,6
- 0,6
- 7,0
- 26,2
- 9,5
5,6
— 6,6
4,3
2,4
36,6
5,7
8,7
11,8
9,1
2,5
- 2,8
1,8
0,8
10,2
1,9
4,1
- 0,8
3,5
of which : construction - 2,0 - 8,4 6,4 6,7 8,3 - 3,1 2,8 3,0
equipment 1,6 - 10,7 1,8 4,5 10,1 7,8 0,9 4,0
Domestic demand at constant prices 3,2 0,3 - 1,7 2,2 4,7 2,8 2,8 3,2 3,2
Gap with respect to other
Community countries ( 4 ) 2,6 4,4 0,8 0,4 - 0,8 - 0,3
r nominal
Compensation
of employees ■
per head 1 g ^
8,3
3,1
3,3
17,5
0,9
1,5
13,2
1,2
1,5
9,1
1,5
0,5
9,2
4,0
3,9
5,5
1,1
0,4
7,3
1,3
2,0
7,5
3,5
3,4
6,6
2,3
2,6
Productivity ( 6 ) 3,3 4,7 0,2 2,4 1,4 1,9
Real unit labour costs - 1,7 - 0,6 1,0 - 1,1 2,1 0,4
Profitability ( 7 ) - 4,4 1,5 4,8 9,4 - 3,8 3,2 - 7,1 - 0,6
idem ( 1961 to 1973 = 100 ) 100 69,0 62,1 65,1 71,2 68,5 70,7 65,7 65,3
Competitiveness ( 8 ) - 1,5 4,0 2,1 - 3,7 - 5,4 1,4 1,7 - 9,2 - 2,1
Employment 0,2 0,1 - 3,9 - 1,4 - 0,8 1,5 1,3 0,8 0,8
Registered unemployed as %
of the civilian labour force ( 9 ) 2,1 4,5 9,2 10,6 11,6 11,8 12,0 12,0 12,0
Current balance as % of GDP - 0,0 - 0,8 2,4 1,4 1,0 0,4 1,0 - 0,1 - 0,6
Long-term interest rate 7,6 13,7 14,8 12,7 10,8 10,7 10,6 9,5 9,5
Money supply ( 10 ) 9,4 11,9 13,7 8,9 10,3 9,8 13,4 15,4 8,0
Net lending or borrowing
of general government as % of GDP - 0,7 - 3,9 - 2,8 - 2,3 - 3,7 - 3,9 - 2,8 - 2,9 - 2,5
Public debt as % of GDP ( n ) 56,6 51,1 57,8 57,5 59,2 57,8 59,0 57,8
Public debt interest as % of GDP 4,4 5,0 5,1 4,7 4,9 5,0 4,8 4,6
(') Estimates of the Commission services , October 1986 .
( 2 ) Forecasts of the Commission services , October 1986 , on the basis of present policies .
( 3 ) Expenditure measure at market prices .
( 4 ) Differences in percentage points .
( 5 ) A : GDP deflator ; B : private consumption deflator .
( 6 ) Gross value added per occupied person in the whole economy .
( 7 ) Net operating surplus relative to the net capital stock at current replacement cost .
( 8 ) Effective exchange rate (vis-a-vis 19 industrial countries ) on the basis of unit labour costs for the whole economy . Positive figure = loss of
competitiveness .
( 9 ) Eurostat definition .
( 10 ) Sterling M3 ; end of year .
( n ) General government gross debt at market values .


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