Category Archives: Economic and monetary affairs

Economic and Monetary Union (EMU), as provided for in Title VII of the Treaty establishing the European Community, involves close coordination of the economic policies of the Member States at European level and requires Member States to avoid excessive budget deficits (“Stability and Growth Pact”). EMU has led to the introduction of a single currency: the euro.

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Revising the Stability and Growth Pact: Public Finances in EMU 2006

Revising the Stability and Growth Pact: Public Finances in EMU 2006

Outline of the Community (European Union) legislation about Revising the Stability and Growth Pact: Public Finances in EMU 2006

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Economic and monetary affairs > Stability and growth pact and economic policy coordination

Revising the Stability and Growth Pact: Public Finances in EMU 2006

Document or Iniciative

Communication from the Commission to the Council and the European Parliament: Public Finances in EMU 2006 – The first year of the revised Stability and Growth Pact [COM(2006) 304 final].

Summary

The Commission considers the implementation of the revised Stability and Growth Pact (SGP) to have been mainly positive, particularly the corrective arm of the Pact. However, there remain some concerns related to the implementation of the preventive part of the Pact. Despite the positive results, the Commission draws attention to some challenges ahead.

Consolidating public finances: positive results

The consolidation of public finances has resumed and there has been smooth and consistent implementation of the revised SGP procedures, benefiting from an increased economic rationale for decisions and recommendations. The revised SGP ensures that excessive deficits are properly identified and allows better account to be taken of country-specific economic considerations. When the deficit of a Member State exceeds 3% of gross domestic product (GDP), the Commission must prepare a report providing an overall assessment of the economic and budgetary situation in that Member State. The reports give consideration to all elements that are relevant for an evaluation of the situation, to allow a decision to be taken on the existence of an excessive deficit and deadlines set for its correction. Since the reform, all deficits in excess of 3% of GDP have been considered excessive. In the view of the Commission, this confirms that the SGP remains a rule-based framework, which is the best guarantee that commitments will be honoured and that all Member States will be treated equally.

When deficits in excess of the reference value of 3% of GDP occur, corrective measures must be adopted promptly. The consideration of economic factors is also important and permits the Council to set realistic deadlines for correcting excessive deficits when applying the excessive deficit procedure. Taking account of the economic situation has not, in the opinion of the Commission, led to a more lenient application of the rules. More account has been taken of the development of public debt when applying the excessive debt procedure.

In March 2005, when agreement was reached on the revision of the SGP, the Council stressed that improved cooperation between the Commission, the Council and Member States was important in order to strengthen national ownership of and compliance with the SGP rules. Experience has shown that, by introducing more scope for economic judgement in the budgetary surveillance process, the reform has stimulated a constructive and transparent dialogue about economic policy at EU level. This has strengthened peer support and pressure, thus contributing to the smooth operation of the Pact.

Implementation of the preventive arm of the Pact: some concerns

The 2005 reform of the SGP introduced a number of changes, strengthening the preventive arm of the Pact by increasing its economic rationale. One criticism of the original Pact was that a uniform medium-term budgetary objective of “close to balance or in surplus” imposed inappropriate budgetary policies in some countries experiencing high nominal growth. The revised SGP no longer requires Member States to converge on a uniform close-to-balance budgetary position in the medium term. Rather, an individual medium-term objective is set for each Member State, taking into account the economic and budgetary circumstances in each country, so as to provide a sufficient safety margin with respect to the reference value of 3% of GDP and ensure convergence on prudent levels of debt. The revised SGP also includes a number of simple budgetary policy principles appropriate for Member States that have not yet achieved their medium-term target and for budgetary policy during cyclical upswings. In particular, Member States in the euro zone or participating in the exchange-rate mechanism (ERM II) should aim for an annual structural adjustment in line with the benchmark of 0.5 % of GDP.

The Commission recognises that the medium-term budgetary objectives reflect economic fundamentals and national strategies. It notes that some countries have proposed medium-term targets that are more ambitious than strictly required by the revised SGP. In most cases, this is to allow consistency between the objectives set in the European context and a national strategy to ensure the sustainability of public finances, reflecting the economic situation in each country.

However, the Commission notes that planned budgetary efforts to achieve the objectives are not always sufficiently ambitious and fall short of the 0.5 % benchmark in 2006. According to the Commission Spring Forecast, on average the structural balance for the EU will not improve and for some Member States will even deteriorate. There is a risk that budgetary policy will turn expansionary and pro-cyclical. Rigorous budgetary execution and, possibly, additional consolidation measures in 2006, together with ambitious budgetary policy for 2007, are needed in order to reduce the gap between the progress already made and requirements under the SGP.

Despite clear improvements, the Commission feels that some questions remain about the credibility of the medium-term budgetary adjustments planned by Member States. The Commission notes that the medium-term budgetary projections presented in the 2005 updates of stability and convergence programmes are, in most cases, based on realistic macroeconomic assumptions. Another positive development is the much less frequent use of one-off and other temporary measures within medium-term programmes. In a number of cases, however, the measures necessary to achieve the budgetary objectives are not specified in sufficient detail. The combination, in some programmes, of a concentration of efforts on the end of the period covered by programmes and a lack of detail about the measures underlying the planned reduction in the deficit is a source of concern.

Identifying the challenges ahead for the revised SGP

Experience over the year since the revision of the SGP in the summer of 2005 shows that the EU budgetary framework is regaining credibility. However, the Commission identifies a number of challenges ahead:

  • Respecting the spirit of the reform when the economic climate is favourable. The Commission stresses the importance of conducting prudent budgetary policies when the economic climate is favourable so as to contain the accumulation of debt and ensure it is reduced to sustainable levels. It considers that larger budgetary adjustments should be made in 2006 and will endeavour to ensure that the budgets set for 2007 are ambitious.
  • Putting a greater emphasis on the sustainability of public finances. Despite the progress made in reducing the government deficit, the debt ratio in the EU increased from 62.4 % of GDP in 2004 to 63.4 % of GDP in 2005. Given the long-term challenges faced by most EU Member States, such as an ageing population, large reductions in public debt are needed.
  • Improving governance as regards statistics. The effective implementation of the European budgetary framework depends on the quality, reliability and early publication of harmonised budgetary statistics in accordance with European accounting standards. The ongoing work to strengthen the European statistical system must be intensified.
  • Creating better synergies between budgetary policy and growth. An important challenge facing the EU is how to foster the implementation of reforms that allow progress towards sustainable public finances and, at the same time, enhance growth prospects. In order to support sustainable growth, increased attention should be paid to the implications of budgetary policy on macroeconomic developments.
  • Developing fiscal rules and institutions at national level. The agreement on the SGP reform stressed that national budgetary rules and institutions could play a more prominent role in domestic budgetary surveillance. The Commission welcomed the declaration of national Finance Ministers, in the context of the reform of the SGP. It considers that progress could also be made on strengthening the interaction between national budgetary procedures and the EU budgetary framework.

Broad economic policy guidelines

Broad economic policy guidelines

Outline of the Community (European Union) legislation about Broad economic policy guidelines

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Economic and monetary affairs > Stability and growth pact and economic policy coordination

Broad economic policy guidelines (1996)

1) Objective

To ensure closer coordination of economic policies and sustained convergence of the economic performance of the Member States and of the Community.

2) Document or Iniciative

Council Recommendation of 8 July 1996 on the broad guidelines of the economic policies of the Member States and of the Community [Official Journal L 179, 18.07.1996].

3) Summary

As a result of the marked slowdown in economic activity at the end of 1995/beginning of 1996, the Community had been unable to make significant progress towards achieving certain fundamental economic objectives, namely the promotion of sustainable, non-inflationary growth and a high level of employment.
Nevertheless, economic fundamentals (low inflation, absence of exchange-rate tensions, improved investment profitability, etc.) were favourable, leading to expectations of a rebound in economic activity.
All parties were encouraged to conduct their economic policies in such a way as to contribute to the achievement of the Community´s objectives and to improve coordination of their policies.

The Council reaffirmed the need for a stable macroeconomic framework characterised by:

  • a stability-oriented monetary policy;
  • sustained efforts to consolidate public finances;
  • nominal wage trends consistent with the price stability objective; real wage trends below the increase in productivity in order to strengthen the profitability of employment-creating investment.

To reinforce both the credibility of the macroeconomic framework and the effectiveness of the coordination process, Member States were invited to present updated convergence programmes reflecting a strong political commitment.

As far as price stability was concerned, nine Member States (Belgium, Denmark, Germany, France, Ireland, Luxembourg, the Netherlands, Austria and Finland) had already met the objective of an inflation rate below 3 %.
In Sweden and the United Kingdom, where inflation had fallen significantly, policies should aim to consolidate the results achieved.
Those countries where inflation was expected to be between 3% and 5 % in 1996 (Spain, Italy and Portugal) should endeavour to reduce the inflation rate to below 3 % in 1997.
Despite visible progress achieved in the last few years, Greece should continue and intensify its efforts.

Member States should continue to treat their exchange-rate policies as a matter of common interest.

The state of public finances in the Community remained unsatisfactory given the slippages identified relative to announced targets, which were admittedly due in part to the slowdown in economic activity. Member States should strengthen their budgetary consolidation programmes, in particular so as to restore their credibility and to boost confidence on the financial markets..

Three countries already respected the 3 % of GDP reference value: Luxembourg, Ireland and Denmark. The latter two should move towards more ambitious medium-term targets.
Budgetary consolidation remained the central policy priority for Italy, whose primary focus had to be action to combat tax evasion.
Greece needed to make sustained efforts on all fronts.
The ten remaining countries were undoubtedly able to make the additional effort required to reach the 3 % reference value by resolutely implementing the budgetary component of their convergence programmes.

Over and above the specific characteristics of each country, some general principles were spelt out:

  • restraining expenditure increases, as opposed to increasing the overall tax burden further;
  • re-directing government spending towards investment in infrastructure, human capital and active labour market measures;
  • improving the efficiency of public services;
  • ensuring that a reduction in the overall tax burden, desirable in many Member States, did not endanger deficit reduction.

Like the Member States, the Community was called upon to maintain strict budgetary discipline.

Macroeconomic action should be supplemented by measures aimed at improving the functioning of product and service markets. This required reinforcement of competition policies, curbing of state aid, and better transposal of single market legislation.
It was also desirable that measures be taken rapidly to promote innovation, facilitate the emergence of the information society and create a working environment more conducive to initiative and to the development of small and medium-sized enterprises.

Significantly improving the employment situation required not only durable and buoyant economic growth and efficient product and service markets, but also a broad range of labour market reforms. All the reforms recommended featured in the European employment strategy initiated at the Essen European Council and which the Member States were implementing by means of their multiannual employment programmes. The Commission would do all it could to mobilise all parties around the top priority of fighting unemployment.

4) Implementing Measures

5) Follow-Up Work

On 23 April 1997 the Commission presented its progress report on the implementation of the 1996 broad economic policy guidelines [COM(97) 169 final, not published in the Official Journal].

The macroeconomic policy mix had been in line with the broad guidelines:

  • monetary policies had been credibly oriented towards achieving and maintaining price stability;
  • governments in virtually all Member States had taken significant steps to consolidate their public finances in 1996-97;
  • wage agreements had maintained the annual rise in real wages at a level below the growth in productivity.

This had already brought important benefits: a higher degree of exchange-rate stability within the exchange-rate mechanism had returned and long-term interest rates had converged towards lower levels. The implementation of sound economic policies had allowed the confidence of the business sector to grow and economic activity to be stepped up gradually.

The recovery was likely to accelerate provided that budgetary consolidation policies remained credible and that consumption was less dependent on uncertain job prospects. The average unemployment rate, which had stabilised in the first half of 1996, had fallen marginally since then.

For the Community as a whole, inflation had dropped to 2.4 % in 1996, which was generally in line with predictions. This generalised fall in inflation resulted from a number of factors, including a strict monetary policy, wage moderation and stronger competitive pressures. The prospects for 1997 were even better than the results for 1996.

The credibility of the policies implemented, along with the strengthening of the dollar, had contributed to a more appropriate alignment of exchange rates within the Community: the lira and the Swedish krona had regained the ground lost in 1995 and the pound sterling had appreciated markedly. Finland and Italy had joined the EMS exchange-rate mechanism on 14 October and 25 November 1996 respectively (only Greece, Sweden and the United Kingdom are not members). All the currencies participating in the exchange-rate mechanism had remained within narrow margins against each other, except the Irish pound, which had appreciated considerably, in particular as a result of the rapid growth of the Irish economy.

All Member States except Germany had made progress towards reducing the budget deficit in 1996: the Community average had fallen from 5.0 % of GDP in 1995 to 4.3 % in 1996, and this despite the cyclical deterioration. It should be pointed out that Finland and the Netherlands managed to reduce their deficits to below 3 % of GDP in 1996. All the Member States which had not yet met this objective had adopted measures to attain it in 1997, with the exception of Greece (the Greek Government was aiming for 4.2 %).

On the other hand, the upward trend in the debt ratio had continued in 1996: the Community average had risen from 71.2 % in 1995 to 73.5 % in 1996. It was particularly in Germany, Spain, France, Austria and the United Kingdom that the ratio had continued to rise.

The nature of Member States´ consolidation efforts had not always conformed to the broad guidelines. Thus, the share of GDP attributable to public expenditure had risen in Denmark, France and Italy and the tax burden had increased in Denmark, Spain, France, Italy, Austria, Portugal, Finland and Sweden. In 1997 budgetary consolidation was expected to be achieved mainly through expenditure restraint; the average tax burden was likely to remain constant. Some countries were using one-off measures to achieve budgetary consolidation (this would be particularly true of 1997): such measures would have to be supplemented by measures leading to a lasting improvement in the budgetary situation in order not to undermine confidence in a return to sound public finances.

Numerous measures had been taken at both the Community and the national level to boost the competitiveness and efficiency of the European economies. Progress had been made in the transposal of directives, but more still needed to be done. Likewise, eleven single market measures proposed by the Commission had not yet been adopted by the Council.

Wage trends were increasingly in line with the objective of price stability: at Community level, real wage costs had increased by 1 % while actual growth in labour productivity had settled at 1.5 %. Greece, Portugal, Finland and Sweden had not complied with the recommendation.

As regards employment, the Member States had adopted a broad range of measures covering the priority issues identified at Essen. It was still too early to assess the impact of these reforms on unemployment.


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Economic and monetary affairs > Stability and growth pact and economic policy coordination

Broad economic policy guidelines (1997)

1) Objective

To ensure closer coordination of economic policies and sustained convergence of the economic performances of the Member States and of the Community.

2) Document or Iniciative

Council Recommendation of 7 July 1997 on the broad guidelines of the economic policies of the Member States and of the Community [Official Journal L 209 of 02.08.1997].

3) Summary

In a climate of moderate recovery, priority had to be given to two fundamental policy concerns:

  • to reduce unemployment significantly;
  • to maintain efforts towards achieving price stability and budgetary consolidation so that a majority of Member States would be in a position to participate in the single currency as from 1 January 1999.

In the macroeconomic field, the broad guidelines reaffirmed that the common strategy should build further on the following three elements:

  • a stability-oriented monetary policy;
  • sustained efforts to consolidate public finances;
  • nominal wage trends consistent with the price stability objective; real wage trends below the increase in productivity in order to strengthen the profitability of investment.

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

Considerable headway had been made towards price stability and inflation convergence. In April 1997 fourteen Member States had an inflation rate of 2 % or less. This level needed to be maintained. Greece needed to redouble its efforts to reach the targets of 4.5 % by the end of 1997 and 3 % by the end of 1998.

The currencies participating in the exchange-rate mechanism had registered a remarkable degree of stability. Member States should continue to treat their exchange-rate policies as a matter of common interest. Countries not participating in the exchange-rate mechanism were called upon to continue with stability-oriented macroeconomic policies in order to make such participation possible.

A large majority of Member States had taken significant measures to reduce their budget deficits to 3 % of GDP (or even less) in 1997. These efforts needed to be maintained in order to build confidence in the sustainability of the budgetary adjustment, especially in those countries where the 1997 budget contained temporary measures and where the ratio of debt to GDP was not approaching the reference value at a satisfactory pace.
To be sustainable, budgetary projections should clearly indicate the underlying economic assumptions and the medium-term strategy of the Member State concerned (structural reforms, etc.).

The Council reaffirmed the same general principles as outlined in the broad guidelines in previous years:

  • more prominence should be given to expenditure restraint than to an increase in the overall tax burden;
  • government spending priorities should focus on investment in infrastructure and human capital and on active labour market initiatives;
  • a reduction in the tax burden or in social security contributions was desirable in the context of budgetary consolidation; Member States should also review the financial sustainability of their social protection and public pension schemes and implement reforms in good time.

Furthermore, any harmful competition between the tax systems of the Member States should be avoided.

As regards the budget deficit, five Member States met the 3% of GDP reference value in 1996: Luxembourg, Denmark, Ireland, the Netherlands and Finland. Luxembourg apart, they all needed to consolidate these results.
Greece again needed to make sustained efforts in order to meet the targets of its convergence programme, in particular with regard to the efficiency of the tax administration and the reduction in government spending.
The other nine Member States were expected to see their budget deficits reach the reference value of 3% of GDP or less in 1997. They should continue to implement their convergence programmes with determination in order to consolidate these results in the coming years.

It was essential to improve the operation of product and service markets, to stimulate competition, to foster innovation and to ensure efficient price setting in order to promote growth and employment. This improvement would be brought about by making the single market work better, with additional commitment on the part of Member States to:

  • fully transposing and enforcing existing legislation;
  • making further progress on the legal framework in areas such as taxation and company law;
  • completing the liberalisation of energy markets;
  • reducing the burden of over-regulation which led to market fragmentation;
  • avoiding the use of state aid to postpone essential restructuring.

The Commission’s action plan proposed a number of measures which should be in place by 1 January 1999 in order to redynamise the single market.

Labour market reforms and increased investment in knowledge were essential. Various conclusions could be drawn from the positive experience of a number of Member States, especially the conclusion that structural reforms needed to be comprehensive in scope so as to address in a coherent manner the complex issue of incentives in creating and taking up jobs and to exploit policy complimentarity. The process under way should continue and, where necessary, be intensified, with priority being given to:

  • the maintenance of appropriate wage trends;
  • reductions in non-wage labour costs;
  • reform of the taxation and social protection systems;
  • new patterns of work organisation (more flexible working-time arrangements, etc.);
  • adaptation of the whole educational system (including vocational training) to the needs of markets and to the improvement of human capital.

These reforms needed to be supported by a stronger employment orientation in other policies.

4) Implementing Measures

5) Follow-Up Work


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Economic and monetary affairs > Stability and growth pact and economic policy coordination

Broad Economic Policy Guidelines (2008- 2010)

The potential economic stability and growth of the European Union (EU) should be developed through the implementation of adapted national policies. The Council recommends that Member States align their macroeconomic * and microeconomic * policies taking into account changes in European society and fluctuations in the international situation.

Document or Iniciative

Council Recommendation 2008/390/EC of 14 May 2008 on the broad economic policy guidelines for the Member States and the Community (2008-2010) [Official Journal L 137 of 27.5.2008].

Summary

The recommendation on the broad economic policy guidelines (BEPG) establishes the framework for coordinating the policies of the European Union (EU) Member States.

Macroeconomic policies for growth and jobs

Compliance with guidelines 1 to 5 will contribute towards:

  • securing economic stability for sustainable growth,by calling on Member States to ensure the development of their public finances in line with the Stability and Growth Pact (SGP) and by ensuring that in the case of current account deficits they implement structural reforms and fiscal policies to encourage the competitiveness of their markets;
  • strengthening sustainable economic and fiscal viability,in the context of Europe’s ageing population. Member States must undertakea satisfactory pace of debt reduction and improve the efficiency of their pension, social protection and health care systems. They should encourage the presence of workers in the labour market for a longer period;
  • improving the effectiveness of public finances, by aligning public expenditure to the growth objectives of the renewed Lisbon Strategy and by taking fiscal measures to encourage jobs and investment;
  • ensuring that wage developments support economic growth and stability, by encouraging the creation of framework conditions for wage-bargaining systems as labour costs should encourage price stability and contribute to productivity;
  • coordinating macroeconomic, structural and employment policies, to increase theadjustment capacity in labour and product markets in the worldwide economy following the principle of flexisecurity.

Guideline 6 recommends that States in the euro area coordinate their economic and fiscal policies better in order to contribute to a dynamic and well-functioning euro area. In particular they should pay attention to fiscal sustainability in compliance with the SGP and accelerate structural reforms aimed at productivity, competitiveness and economic adjustment capacity. The euro area should also increase its influence and competitiveness at the international level.

Microeconomic reforms to raise Europe’s growth potential

In accordance with the Lisbon Strategy, guidelines 7 to 11 highlight the importance of knowledge and innovation as factors for competitiveness, growth and sustainable development. Member States and the Community should pursue an integrated approach to climate and energy policy with the aim of increasing the security of supply and the availability of affordable energy, and combating climate change.

Measures taken by Member States should:

  • increase investmentin research and development, particularly by businesses, with a general aim of 3% of Europe’s GDP being invested by 2010. Public-private partnerships should be developed, as well as centres of excellence of educational institutions and national research institutes and the transfer of technologies between public research institutes and businesses;
  • facilitate innovation in all its forms, through the establishment of support services, recourse to public procurement, access to national and international funds and the protection of intellectual property rights. Local and regional innovation poles should contribute to the technological convergence of European territories;
  • accelerate the dissemination and widespread use of information communication technologies (ICTs), by increasing the deployment, power and interoperability of information networks in particular;
  • strengthen the European industrial base, by adopting an approach which strengthens the ability of the economy to reorient its activities towards sectors with higher productivity;
  • use resources in a sustainable way, and create synergies between production, the environment and growth. This implies that Member States should give priority to energy efficiency and tackling climate change.

The European Union (EU) should become more attractive to foreign investors and workers. Guidelines 12 to 16 make recommendations to:

  • extend and deepen the internal market,byeliminating remaining obstacles to cross-border activity in the EU, including activities related to the single market for services and public procurement;
  • ensure open and competitive markets,as a result of implementing competition policy more effectively, including in the network industries. State aid should be directed towards horizontal objectives such as research, innovation and the optimisation of human capital;
  • improve European and national regulationsin terms of their impact on economic, social and environmental areas and on the competitiveness of businesses. Administrative burdens which weigh heavily on enterprises should be reduced;
  • encourage an entrepreneurial culture and create a supportive environment for SMEs, in particular regarding their creation, transfer of ownership and access to finance;
  • expand, connect and modernise European infrastructures,for better integrated markets. Member States should give priority to transeuropean networks (TENs).
Key terms of the Act
  • Macroeconomic policies: this term encompasses policies believed to influence economic factors on ‘a large scale’ such as price levels, unemployment, growth potential, Gross Domestic Product, etc.
  • Microeconomic policies: this term encompasses policies aimed at directing decisions of an economic nature, for example people or morals.

Related Acts

Council Recommendation 2009/531/EC of 25 June 2009 on the 2009 update of the broad guidelines for the economic policies of the Member States and the Community and on the implementation of Member States’ employment policies [OL L 183 of 15.7.2009].

The Council addresses recommendations to Member States to ensure that they take account of the 2009 update of the integrated guidelines for growth and employment. These recommendations are specific to the situation of each State. They have been drawn up in the context of the slowdown in economic activity and employment growth resulting from the international financial crisis.

Member States are to adapt their national reform programmes and to give an account of those adaptations in their annual reports on the implementation of those programmes.

These recommendations, issued as part of the second cycle (2008 – 2010) of the Lisbon strategy for growth and jobs, are presented in the form of a single instrument. The latter is intended for the revision of the broad guidelines for the economic policies and the employment policy guidelines.


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Economic and monetary affairs > Stability and growth pact and economic policy coordination

Broad economic policy guidelines (1998)

1) Objective

To ensure closer coordination of economic policies and sustained convergence of the economic performances of the Member States and of the Community.

2) Document or Iniciative

Council Recommendation of 6 July 1998 on the broad guidelines of the economic policies of the Member States and of the Community [Official Journal L 200 16.07.1998].

3) Summary

Implementation, by the Member States, of policies aimed at achieving a high degree of economic convergence had yielded tangible results, enabling the Council of the European Union to decide on 3 May 1998 that eleven Member States fulfilled the necessary conditions for the adoption of the euro. However, insufficient progress had been made in reducing unemployment in many Member States.

Since the summer of 1997 an increasingly robust economic recovery had taken hold in a context of historically low inflation. The underlying economic fundamentals were sound and improving continuously, indicating solid growth prospects. An even stronger recovery could lead to a slight reduction in the unemployment rate up to 1999.

In the macroeconomic field, the broad guidelines reaffirmed that the common strategy should build further on the following three elements:

  • a monetary policy oriented towards price stability;
  • sustained efforts to achieve and maintain sound budgetary positions consistent with the Stability Pact;
  • nominal wage trends consistent with the price stability objective; real wage trends consistent with the increase in productivity in order to strengthen the profitability of investment.

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

The macroeconomic policy mix of the euro area would result essentially from the interaction of the single monetary policy, on the one hand, and the specific budgetary developments and wage trends in the participating countries, on the other. In order to achieve an appropriate mix, economic policies would be subject to closer surveillance and coordination.

For the “pre-ins” (Denmark, the United Kingdom and Sweden) the need for stability-oriented macroeconomic policies would be equally strong.

Both in the prospective euro area and in Denmark, Sweden and the United Kingdom, the average inflation rate had fallen below 2 %. These countries now needed to conduct their economic policies with a view to maintaining price stability, in order thus to maintain monetary conditions favourable to growth and to avoid unduly wide inflation differentials.

Greece needed to reinforce its efforts to reduce its inflation rate further, in particular in order to contain the consequences of the devaluation of the drachma upon its entering the European exchange-rate mechanism in March 1998.

Additional progress was needed in most Member States in order to ensure compliance with the Stability and Growth Pact’s objective of budgetary positions close to balance or in surplus. Consolidation was required in order to:

  • facilitate the task of the single monetary policy and the monetary policies of the “pre-ins”;
  • be able to keep long-term interest rates at a low level, thereby promoting private investment;
  • ensure that public finances regained the necessary room for manoeuvre so as to cope with adverse economic developments;
  • ensure that public debt ratios above 60 % continued to approach the reference value at a satisfactory pace.

It was also important that Member States provided assurances regarding the continuity of budgetary adjustment.

To this end, the Council reaffirmed the same general principles as identified in the broad guidelines in previous years:

  • more prominence should be given to expenditure restraint than to an increase in the overall tax burden;
  • a reduction in the overall tax burden was desirable in most Member States in order to promote economic dynamism;
  • in cases where government deficits or government debt-to-Gross Domestic Product (GDP) ratios were still high, it was important that any tax reduction should not slow down the pace of deficit reduction;
  • public spending priorities should be directed towards investment in infrastructure and human capital and towards active labour market policies.

In the same way as the Member States, the Community was called upon to continue to maintain strict budgetary discipline.

The country-specific guidelines were as follows:

Belgium should ensure that its commitment to maintaining the primary surplus at 6% of GDP over the medium term was realised, in order to secure a fast decline in the debt ratio, which was still at a very high level.

Germany needed to step up its budgetary adjustment so as to put its debt ratio firmly on a declining path and to bring it back below the reference value in the near future.

Spain should take advantage of current favourable economic conditions to accelerate the achievement of the medium-term target of a budget close to balance or in surplus.

In France budgetary adjustment efforts should be pursued in order to respect the obligations of the Stability and Growth Pact beyond 1999 and to stabilise the debt ratio.

Ireland needed to implement a tight fiscal policy in order to reduce the risk of the economy overheating. As a result of the increasing government surpluses, the debt ratio was expected to fall below the reference value in 1998 and to continue declining thereafter.

Italy needed to step up its budgetary consolidation efforts in order to respect the obligations of the Stability and Growth Pact and to reduce rapidly the debt ratio, which was still at a high level.

Luxembourg was expected to keep a budget surplus along with a very low debt ratio in the coming years.

The Netherlands should refrain from relaxing its budgetary stance in order to ensure a further continuous decline in the debt ratio.

Austria should continue its consolidation efforts in order to achieve the medium-term target of a budgetary position close to balance or in surplus and to keep the debt ratio on a downward path.

Portugal should continue to improve its budgetary position further in order to respect the obligations under the Stability and Growth Pact. The debt ratio was expected to fall below the reference value in 1998 and to continue declining afterwards.

Finland was expecting a budgetary surplus in 1998 and increasing surpluses in the coming years. The planned income tax reduction in 1999 should not undermine this process.

Denmark was expected to increase its budget surplus in the coming years. The debt ratio should fall below the reference value in 1998 and continue to decline afterwards.

Greece needed to continue its budgetary consolidation efforts if it was to realise its goal of joining the euro area by 2001. Its deficit had declined to 4.0 % of GDP in 1997 and should decline to below the reference value in 1998. The debt ratio had declined for the first time in 1997.

Sweden should control government expenditure tightly in order to maintain a surplus.

In the United Kingdom the budget should balance by the end of the decade. The planned measures should be implemented, especially since account should be taken of the need to bring about stable conditions for the economy overall.

The social partners should set wages in line with the following general rules:

  • aggregate nominal wage increases must be consistent with price stability;
  • real wage increases with respect to labour productivity growth should take into account the need to maintain, or even strengthen, the profitability of investment;
  • wage agreements should take better account of differentials in productivity levels according to qualifications, skills and geographical areas;
  • labour-cost differences between Member States should continue to reflect discrepancies in labour productivity.

In EMU a higher degree of adaptability in the wage-formation process would be required because it would play an important role if there were country-specific disturbances. To this end, the social dialogue needed to be strengthened at all levels.

Structural reforms in product, service, capital and, especially, labour markets remained necessary in order to enable Member States to respond to country-specific economic disturbances and to reinforce the Community’s competitiveness.

With regard to improving the efficiency of product, service and capital markets, efforts should focus on:

  • improving the functioning of the single market, in particular by ensuring the prompt implementation of the action plan for the single market with a view to reducing the degree of non-implementation of directives;
  • enhancing competition by streamlining and decentralising the application of the antitrust rules in order to enhance its effectiveness and reduce the costs imposed on enterprises;
  • developing a regulatory and fiscal framework which was more favourable to businesses;
  • removing legal and financial obstacles to the integration of European capital markets.

It was important to modernise labour markets in order to increase the intensity of job creation and to ensure the employability of the labour force. These objectives had also been set out in the employment guidelines. Member States should put the emphasis on:

  • active labour market policies, so that employment services were better placed to perform efficient job-searching and job-matching services, and combining these measures with accompanying measures such as training;
  • measures to make tax and social welfare contribution systems more favourable to employment, in particular by reversing the trend whereby the gap between what workers received and what firms paid was widening;
  • reforming welfare systems, with a view to moving from passive income maintenance systems to welfare support through work; take-home pay should be made more attractive and eligibility criteria adjusted in order to make it more obligatory to look for work or follow a course of training;
  • exchanging experiences and best practices in the field of working arrangements; arrangements to reduce working time should not undermine adaptability or reduce labour supply and output.

4) Implementing Measures

5) Follow-Up Work


Another Normative about Broad economic policy guidelines

Topics

These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic

Economic and monetary affairs > Stability and growth pact and economic policy coordination

Broad economic policy guidelines (1999)

1) Objective

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

2) Document or Iniciative

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

3) Summary

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

4) Implementing Measures

5) Follow-Up Work


Another Normative about Broad economic policy guidelines

Topics

These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic

Economic and monetary affairs > Stability and growth pact and economic policy coordination

Broad economic policy guidelines (2000)

1) Objective

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

2) Document or Iniciative

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

3) Summary

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

MAIN PRIORITIES AND POLICY REQUIREMENTS

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

Key challenges. All Member States are confronted with these challenges. Firstly, restoring full employment is one of the priorities: although it has edged downwards, unemployment remains too high. Moreover, employment and participation rates are also low. As emphasised by the Lisbon European Council in 2000, the employment rate is to be raised to 70% by 2010.
Secondly, innovation and knowledge should become the driving forces for economic growth in Europe. This will require increased adaptability of economic structures, while investment in information and communication technologies (ICT), research and development (R&D) and human resources would have to be increased.
Thirdly, population ageing poses a major challenge for European economies since it has serious effects on saving, investment and public finance. Consolidation of public finance and reforms of pension and health-care systems have been identified with a view to tackling this demographic challenge.
In addition, improving social cohesion, and particularly measures to combat social exclusion, is a priority for Member States. By improving framework conditions for growth and employment, economic policies can make the strongest contribution to social inclusion.
In an increasingly integrated world economy, the reforms needed cannot be considered in isolation from the international context. The EU must therefore pursue a common commercial policy that favours open and competitive markets.
The EU must incorporate its responses to the challenges that exist into a coherent and comprehensive strategy for the medium to long term. The existence of integrated, efficient and competitive markets is a key feature of this strategy.

POLICY RECOMMENDATIONS

Macroeconomic policies:

  • maintain price stability;
  • speed up fiscal consolidation in order to achieve budgetary positions close to balance or in surplus and to lower public debt;
  • encourage the social partners to behave responsibly in order to support wage developments consistent with price stability and job creation.

Speed up fiscal consolidation:

  • take advantage of any additional room for manoeuvre in achieving better-than-expected budgetary positions;
  • achieve earlier than envisaged a budgetary position close to balance or in surplus so as to create sufficient policy headroom to cope with adverse cyclical fluctuations;
  • to reduce public debt as preparation for the challenge associated with population ageing.

Quality and sustainability of public finances:

  • improve public finances through expenditure restraint and introduce mechanisms that help control spending;
  • redirect government spending towards capital, human resources, innovation, R&D and ICT;
  • make work pay by reviewing benefit systems and reducing the tax burden;
  • review pension and health-care systems;
  • improve the efficiency of tax systems;
  • improve the smooth functioning of the internal market through reforms of the VAT system, administrative cooperation and tax coordination between Member States and reach an agreement on the tax package.

Wage developments:

  • foster wage increases that are consistent with price stability and labour productivity growth in order to promote job creation;
  • ensure that collective bargaining systems take account of productivity differentials (according to skill, qualification or geographical area);
  • pursue policy aimed at reducing gender pay differences due to de facto discrimination.

Knowledge-driven economy:

  • promote involvement of the private sector in the financing of R&D expenditure and improve the functioning of risk capital markets;
  • stimulate competition in product and capital markets;
  • support fundamental research and reinforce the links between research establishments and businesses;
  • ensure availability of low-cost, high-speed Internet access;
  • intensify R&D cooperation so as to establish a European area of research and innovation and an EU patent system;
  • invest in appropriate education and training.

Product (goods and services) markets:

  • implement internal market legislation fully and effectively, especially in the area of public procurement, and improve technical standards and mutual recognition;
  • ensure the independence of competition authorities;
  • reduce and improve the monitoring of state aid;
  • complete the liberalisation of the telecommunications market and speed up the liberalisation of the energy, postal and transport sectors;
  • reinforce competition in service sectors, especially in financial services and the distributive sector, and improve the effectiveness of public services and public administration;
  • reduce regulatory burdens on business.

Capital markets:

  • facilitate access to investment capital, including for small and medium-sized enterprises (SMEs), and participation of all investors in an integrated market by eliminating existing barriers;
  • promote integration of government bond markets;
  • promote cross-border activities, notably as regards cross-border payments (BG) (CS) (ET) (GA) (LV) (LT) (HU) (MT) (PL) (RO) (SK) (SL);
  • enhance the comparability of companies’ financial statements;
  • promote the development of new firms and investment in venture capital by way of fiscal measures;
  • ensure more intensive cooperation between financial market regulators and supervisors.

Labour market:

  • implement a comprehensive preventive strategy against long-term unemployment, reduce the tax burden and social security contributions with a view to encouraging job creation, and facilitate access to training and education;
  • reform tax and benefit systems in order to encourage participation in an active working life and to develop an active employment policy;
  • enhance labour mobility and ensure mutual recognition of qualifications and portability of pension entitlements;
  • modernise work organisation (part-time work, job protection);
  • strengthen efforts at securing equal opportunities for men and women, in particular by taking measures to reconcile work and family life.

Sustainable development:

  • strengthen policies based on economic instruments such as taxation and user charges;
  • help achieve the objectives under the Kyoto Protocol;
  • review sectoral subsidies and tax exemptions;
  • work to agree on an appropriate framework for energy taxation at European level.

COUNTRY-SPECIFIC ECONOMIC POLICY GUIDELINES

Belgium: Economic activity is expected to accelerate in 2000 on the back of buoyant domestic demand. Belgium has made further progress towards budgetary adjustment and, according to the stability programme, is set to achieve a budget balance in 2002. The government should aim to reduce the deficit even more sharply than envisaged in the stability programme, to contain real growth of primary expenditure and to use any other room for manoeuvre to reduce government debt.
On product and capital markets, competition in services should be increased, liberalisation of energy sectors speeded up, the administrative burden on business eased and investment in private venture capital encouraged. On the labour market, the government is called on to promote labour mobility and to ensure that wage negotiations better reflect local labour market conditions as well as to reinforce active labour-market policies.

Denmark: Economic growth should recover in Denmark in 2000. The budget surplus is set to reach 2.2% of GDP in 2000. To safeguard the healthy situation of public finances, the government should ensure that the increase in expenditure, notably local government expenditure, does not exceed the ceilings set in the budget and should aim to reduce tax and expenditure ratios while adhering to the commitments set out in the convergence programme.
On product and capital markets, the government is called on to strengthen competition policy, to improve the efficiency of the public sector, to intensify links between research and business and to take measures to encourage venture capital investments. On the labour market, it should reduce the overall tax burden on labour, in particular low incomes, and monitor the reform of early retirement and leave schemes.

Germany: Economic activity should accelerate in 2000. According to the stability programme, the government deficit is set to decrease slightly to 1% of GDP in 2000 before rising to 1.5% in 2001 following a tax reform. The government is called on to exploit any additional opportunities to reduce the deficit faster than envisaged, implement the tax reform with caution so as not to jeopardise budgetary consolidation, and to draw up a structural reform of the social security system, especially pension and health schemes.
On product markets, Germany should ensure an increased opening-up of public procurement, liberalise advertising regulations, improve competitive structures and reduce state aid. In addition, it should pursue the opening-up of the electricity sector and reduce the administrative burden on SMEs. On capital markets, the government should take measures to encourage investment capital.
On the labour market, Germany is called on to reassess its policy towards the eastern part of the country, notably as regards the efficiency of transfers and the general flexibility of the labour market. The government should also reduce the burden of taxes and social security contributions on labour and should reduce disincentives in the tax and benefit systems which discourage labour-market participation.

Greece: Economic growth in Greece will continue at a strong pace. Budgetary consolidation has continued. The government should consider setting as an upper limit the target of 1.2% of GDP for the deficit in 2000 and should secure control of expenditure. It should also pursue the reform of the social security sector and implement the privatisation schedule so as to achieve a faster reduction in government debt.
On product and capital markets, Greece should improve its record of transposing internal market legislation, speed up liberalisation in the telecommunications and energy sectors, promote business start-ups, encourage R&D and investment in ICT, and implement the 1998 Risk Capital Action Plan.
On the labour market, it should reform employment services, in particular with a view to combating long-term unemployment, and ensure full implementation of the reforms already undertaken. It should review wage formation systems with a view to enhancing flexibility and adapting wage developments to productivity differentials at geographical, sectoral and company level.

Spain: The prospects for economic growth in 2000 remain favourable. Fiscal consolidation has made clear progress and should produce a budget surplus in 2002. The government is called on to improve on the targets set in the updated stability programme, to implement the reform of the National Budget Law and to respect fully the existing internal stability pact aimed at bringing expenditure better under control. Reform of the pension system including increased resources for the pension fund reserve should continue.
On product and capital markets, the reform of competition law should be pursued, sector-specific aid reduced, the administrative burden eased, especially for SMEs, and venture capital markets developed with a view to increasing investment.
On the labour market, Spain should review the wage formation system and the social welfare mechanisms at regional and local levels, improve the efficiency of active labour-market policies and review job-protection legislation with a view to enhancing labour-market flexibility.

France: Economic growth in France should remain healthy in 2000. The government deficit was reduced to 1.8% of GDP in 1999. The government is called on to reduce the deficit in 2000 to a level below the one set in the stability programme, to bring expenditure under control and to take every opportunity to reduce the deficit further. In addition, reform of the pension system should be undertaken with a view to ensuring long-term sustainability of government finances.
On product markets, the record in transposing internal market directives should be improved, state aid reduced, the liberalisation of network industries widened and efforts to simplify administrative formalities for business continued. On capital markets, France should facilitate investment by institutional investors in stock markets and improve the tax framework for risk capital.
On the labour market, France is encouraged to reduce the tax burden on labour, review benefit and employment protection systems, and ensure that the 35-hour working week reform does not adversely affect wage costs, labour supply and work organisation.

Ireland: Economic growth will remain exceptional. Government finances are sound. In its budgetary policy, the government should aim to avoid any overheating in the economy, to restrain the growth in public consumption to the level indicated in the stability programme and to accord priority to developing infrastructures while achieving the stability objectives of fiscal policy.
On product and capital markets, Ireland is called on to strengthen competition policy and apply Community law thoroughly, to liberalise the transport sector and to promote venture capital investments. On the labour market, wage developments should be monitored and the participation of women in the labour market increased.

Italy: The prospects for economic growth in 2000 and 2001 are favourable. The stability programme provides for a fall in the deficit to 0.1% of GDP in 2003. With this in mind, the government should exploit any additional headroom to reduce government debt, keep control of current primary expenditure, take measures to contain future expenditure by reassessing the pension system and pursue the privatisation programme.
On product and capital markets, Italy is called on to reduce non-agricultural state aid, to simplify the regulatory environment for companies, to strengthen R&D and innovation, and to encourage venture capital investments. On the labour market, unemployment benefit should be improved, employment protection made more flexible, labour-market flexibility enhanced, notably wages, and taxation on labour and social security contributions reduced.

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

Netherlands: Economic growth in the Netherlands is likely to accelerate further in 2000. To maintain healthy government finances and a budget surplus, the government is called on to consolidate government finances, notably by monitoring expenditure. The tax reform should not jeopardise the budgetary situation.
On product and capital markets, the Netherlands should make further progress in enforcing the public procurement directives, should pursue the reform of network industries, raise the involvement of the private sector in R&D and encourage venture capital investment. To maintain a sound labour market, obstacles to activity should be dismantled, especially for women and older people, and the number of people who remain outside the labour market supported by passive income support schemes should be reduced.

Austria: Economic growth will accelerate in 2000. The government deficit should be equivalent to 1.7% of GDP. According to the stability programme, the government should aim to exercise stricter expenditure control in the execution of the budget and implement structural reforms designed to improve the budgetary situation in the long term. The announced pension reform should be implemented.
On product markets, the public procurement guidelines should be further transposed, the process of regulatory reform in the energy and transport sectors accelerated and private-sector involvement in R&D encouraged. On capital markets, the government is called on to upgrade the supervisory framework, develop incentives for equity and risk capital investment, and promote venture capital in general. On the labour market, Austria should reform the benefit and pension system, and in particular early retirement, and should reduce the high tax burden on labour.

Portugal: Economic activity is expected to accelerate in 2000. According to the stability programme, the government deficit should fall to 1.5% of GDP. The government is called on to exercise strict control over expenditure in order to achieve, as a minimum, the deficit forecast, to ensure that budgetary policy contributes to correcting the major imbalances in the economy and to reform health and pension systems.
On product markets, state aid should be reduced, competition law brought more closely into line with Community law, administrative procedures simplified, and R&D and ICT diffusion promoted. Portugal should develop the venture capital market. On the labour market, the government is called on to improve education and training, enhance the performance of the labour market, including by making it more flexible, and encourage partnership among social partners.

Finland: The rapid economic growth in recent years should continue. There is even a risk of overheating. According to the stability programme, the budget surplus should remain above 4% of GDP throughout the period 2000-03. Given the risk of overheating, a tight financial stance should be maintained, government expenditure relative to GDP reduced and the tax burden on labour eased.
On product and capital markets, the government is called on to strengthen competition in a range of sectors, to reform competition law, to open up markets for public services, to promote venture capital and to facilitate investments by institutional investors. On the labour market, Finland should review the overall benefit system, make job-searching more effective and reduce taxes, particularly on low wages.

Sweden: The Swedish economy is expected to continue to grow strongly in 2000. In order to achieve its target of a budgetary surplus of 2% of GDP, the government should tighten the stance of budgetary policy, maintain tight expenditure control and reduce the tax burden, while taking account of the need for budgetary consolidation.
On product markets, rules detrimental to competition should be reviewed in a number of areas, notably construction, pharmaceuticals, railways and air transport. On capital markets, the government should facilitate access to risk capital. In order to improve the labour-market situation, it is encouraged to reduce the burden of taxation on labour income and to adapt the benefit and assistance schemes.

United Kingdom: Economic growth in 2000 is expected to be even stronger. A surplus of 1.3% of GDP is anticipated for the financial year 1999/2000. The underlying position of government finances should be kept broadly unchanged.
On product and capital markets, the government is called on to encourage efforts in the fields of R&D and innovation, to invest more in road and rail networks, and to analyse the reasons for the low level of investment in venture capital by pension funds. On the labour market, it should take measures to address the problem of pockets of unemployment in certain regions and long-term unemployment in general.

4) Implementing Measures

5) Follow-Up Work

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

KEY ECONOMIC POLICY AREAS

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

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

Quality and sustainabilityof public finances: Unlike in the 1990s, fiscal consolidation is based on expenditure restraint and not on tax increases. Little progress was made in the reform of public expenditure systems even if the issue of expenditure control is increasingly highlighted. Reforms of benefit systems lacked ambition although some efforts were made in certain countries.
As regards pension systems, Denmark, Ireland, the Netherlands, Austria, Sweden and the United Kingdom carried out reforms, while Belgium, Spain, France, Ireland and Finland created or announced the establishment of pension reserve funds. Some progress was made in reducing the tax burden: for the first time since 1970, the overall tax burden is on a declining trend. Measures were taken to reduce the tax burden, notably on low wages, in a number of countries. The Ecofin Council in November 2000 reached a significant agreement on the key points of the implementation of the tax package designed to curb harmful tax competition and reduce distortions within the single market.

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

Knowledge-based economy: Overall spending on R&D remains at 1.8% of GDP, although this differs significantly between Member States. Europe still lags behind as regards private-sector involvement in R&D. Most Member States took steps to encourage firms to increase spending, particularly via tax measures.
The EU has been catching up with the United States in terms of ICT diffusion. The Internet penetration rate increased by 10 percentage points between April and October 2000 (to 28% of the population). However, there are important differences between Member States. Most countries have taken measures to strengthen ICT education and training.

Product markets (goods and services): The functioning of the single market has been improved thanks to progress in transposing directives in most Member States. Most countries have taken steps to open up public procurement (including Spain and Italy) and headway has been made in regard to competition policy and reducing sectoral and ad hoc state aid.
As regards public utilities, liberalisation of the telecommunications sector has contributed to significant reductions in prices for consumers. Progress is less clear in the energy sector, where differences between Member States persist. In the transport and postal sectors, still more needs to be done, including agreement on a general regulatory framework. The absence of a true internal market in services has led the Commission to adopt a new horizontal strategy for this sector. Headway has been made in reforming the regulatory framework: a number of countries have taken measures to reduce the administrative burden on enterprises.

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

Labour markets: The improvement in labour market performance continues and there has been a fall of almost one percentage point in unemployment in 2001. This is due to the cyclical upswing but also to a fall in structural unemployment. It should though be noted that progress has been uneven between Member States since some countries have not taken full advantage of macroeconomic conditions to introduce structural reforms. Member States have made good progress in implementing active and preventive measures to tackle youth and long-term unemployment. There remains scope for further reform of tax and benefit systems designed to introduce incentives to seek and take up employment or to remain in the labour market.
The lack of labour market flexibility is one of the factors underlying high structural unemployment in several Member States. There has been some progress in the modernisation of work organisation but the degree of involvement of the social partners in this area has been disappointing. Measures have been taken in most Member States to address low female employment rates and pay differentials between men and women.

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


Another Normative about Broad economic policy guidelines

Topics

These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic

Economic and monetary affairs > Stability and growth pact and economic policy coordination

Broad economic policy guidelines (2001)

1) Objective

To improve the conditions for economic growth and employment creation by way of an economic policy strategy consisting of growth- and stability-oriented macroeconomic policies and structural reforms aimed at sustainable, employment-creating and non-inflationary growth, with due account being taken of the need for sustainable development.

2) Document or Iniciative

Council Recommendation of 15 June 2001 on the broad economic policy guidelines of the Member States and the Community [Official Journal L 179, 02.07.2001].

3) Summary

General framework. The 2001 broad economic policy guidelines (BEPGs) confirm the policy strategies of the previous BEPGs and extends them further in the light of the outcome of the Stockholm European Council in March 2001. A key objective for the European Union (EU) remains that of achieving full employment, among other things as a means of meeting the challenge of ageing populations. The European Council also stressed that the promotion of sustainable development should be integrated in the BEPGs.
Close coordination among economic policy actors and a dialogue between the Council, the Eurogroup and the European Central Bank (ECB) involving the Commission are essential in fostering harmonious economic developments, notably for the Member States participating in the euro area.

Main priorities and policy requirements

Recent and prospective economic developments. Since the adoption of the previous BEPGs, the global economic environment has become distinctly less favourable. While this slowdown is expected to be relatively short-lived, the risks of a less favourable outcome are considerable. Three factors are contributing to the slowdown. Firstly, oil prices increased in the autumn of 2000 and could remain relatively high. Secondly, there has been a sharp contraction in economic activity in the United States and Japan. This development is also affecting economic growth in a number of emerging countries. Third, volatility has remained very high on global equity markets, where a pronounced correction has taken place, especially in technology stocks, reflecting a downward shift in investors’ perception of the long-term profit outlook.
The second year of economic and monetary union (EMU) was a successful one. Economic growth in the euro area was the strongest for a decade, with unemployment falling to its lowest level. Higher oil prices and the downturn in global demand dented growth momentum. Nevertheless, the euro area looks set to continue to enjoy relatively solid economic growth of about 2.75 % in 2001 and 2002. Strongly improved macroeconomic fundamentals, including sustained wage moderation, have engendered a virtuous growth cycle firmly rooted in domestic demand. Furthermore, the large internal market coupled with the single currency makes the euro area less vulnerable and provides a stable base for growth.
The Member States not participating in the euro area, viz. Denmark, the United Kingdom and Sweden, are also being affected by the global economic slowdown. However, good progress on structural reforms and continuing healthy domestic demand position them well to weather the deteriorating external environment.

Short-term challenges. The task is to maintain growth and employment creation. In the context of increasingly less favourable global conditions, the EU and the euro area will have to rely increasingly on their own strengths. Growth- and stability-oriented macroeconomic policies and structural reforms are crucial to further enhancing internal growth dynamics. This could underpin business and consumer confidence.
Budgetary policies should avoid any excess demand. This is buttressing price stability and can facilitate monetary conditions conducive to economic growth and employment creation. In particular, budgetary policies should continue to be geared to the achievement of budgetary positions close to balance or in surplus.
Wage moderation must be preserved, particularly in the Member States already experiencing some labour market bottlenecks. EMU entails additional responsibilities for governments and social partners, who must contribute to a balanced macroeconomic policy mix both at Member State and euro-area level. Moreover, a judicious combination of structural reforms can thus increase further the resilience of the economy in absorbing the impact of shocks.

Medium-term challenges. The main goal is to consolidate the bases for future growth and employment. Although productivity gains have helped to improve potential output growth in recent years, this improvement is still considered insufficient to sustain annual growth rates of 3 % over an extended period of time. The EU must, therefore, improve the functioning of markets by addressing the market imperfections or failures that still exist. This will make for improved use of productive resources. In particular, human resources are currently underutilised in the EU, with unemployment remaining unacceptably high and a relatively low employment rate, especially for older workers and women.
Labour market regulation and institutions should be reviewed so as to diminish obstacles to labour demand and supply. The regulatory framework should encourage people to enter into or remain in the labour market. For this, tax and benefit schemes should be reformed. This increase in labour supply must be accompanied by an improvement in the investment climate. To this end, the EU is focusing on completing the internal market, especially in the service sector, the financial sector and network industries. In addition, fostering entrepreneurship and innovation, which is an integral part of the Lisbon strategy, is necessary in order to increase Europe’s growth potential. To this same end, Member States are called on to encourage private investment in Research and Development R&D.
At world level, the promotion of competition finds its logical complement in the pursuit of a common commercial policy that favours open world trade and a new multilateral trade round within the context of the World Trade Organisation (WTO).

Long-term challenges. In the long term, population ageing is the major challenge facing the EU. In 2050 the EU’s working-age population will have fallen by approximately 40 million people while the old-age dependency ratio will have doubled. The impact on public finances is already beginning to be felt in some Member States. Expenditure on public pensions and healthcare will increase substantially, and this will have considerable consequences for the sustainability of public finances.
Population-ageing will have implications for potential labour supply and the level of aggregate savings and thus for economic growth. Ambitious strategies are needed to address the economic and budgetary challenges: pension systems need to be reformed, e.g. by raising the effective retirement age. Public pension fund reserves would have to be set up and supplementary private pension schemes encouraged.

General recommendations

Implementation of macroeconomic policies:

  • to achieve budget positions of close to balance or in surplus so as to provide a sufficient margin to cope with the impact of adverse cyclical fluctuations;
  • to avoid pro-cyclical fiscal policies;
  • to avoid in certain Member States inflationary pressures and overheating of the economy by tightening budgetary policy, pursuing wage moderation and taking structural reforms further;
  • to ensure that wage increases are consistent with price stability, do not exceed the growth of productivity and take account of productivity differences according to skill, qualification or geographical area.

Quality and sustainability of public finances:

  • to make tax and benefit systems more employment-friendly by reducing the overall tax burden, especially with respect to low-wage labour;
  • to redirect public expenditure towards physical and human capital accumulation and R&D;
  • to enhance the efficiency of public spending by institutional and structural reforms, in particular by controlling spending;
  • to improve the long-term sustainability of public finances by pursuing a strategy combining measures to raise employment rates, rapidly reduce government debt and reform the pension and health systems;
  • to pursue tax coordination in order to avoid harmful tax competition;
  • to maintain strict budgetary discipline at Community level.

Labour market:

  • to implement the employment guidelines and recommendations addressed to Member States by the Council;
  • to promote increased participation in the labour market, especially among women and older workers;
  • to ensure that tax and benefit systems make work pay and to reduce the burden of taxation on labour;
  • to bring down the obstacles to labour mobility within and between Member States, notably through the mutual recognition of qualifications and improved portability of pensions;
  • to facilitate occupational labour mobility by improving education, training and life-long learning;
  • to improve the efficiency of active labour market policies and to target these policies towards those individuals most prone to the risk of long-term unemployment;
  • to promote more flexible work organisation, including working-time arrangements and the regulatory, contractual and legal framework;
  • to reduce gender pay differences due to de facto discrimination.

Product markets (goods and services):

  • to complete the internal market by increasing the rate of transposal of directives, eliminating technical barriers to trade, removing regulatory barriers on service markets and further opening up public procurement;
  • to reinforce competition by accelerating the liberalisation of network industries (energy, rail, air transport and postal services), by ensuring effective independence and effectiveness of the competition authorities and by reducing the overall level of state aid as a proportion of gross domestic product (GDP).

Efficiency and integration of the EU financial services market:

  • to implement the approach endorsed in respect of securities markets legislation;
  • to implement the Financial Services Action Plan by 2005, in particular with a view to creating an integrated securities market by the end of 2003;
  • to set in place a risk capital market through implementation of the Risk Capital Action Plan by 2003;
  • to improve, via increasing linkages, supervisory arrangements across sectors and across borders in the field of prudential supervision.

Entrepreneurship:

  • to create a business-friendly environment by reducing the administrative burden for business, by increasing the efficiency of public services and by simplifying and ensuring a more uniform application of VAT systems;
  • to improve access to the various kinds of funding, especially for small and medium-sized enterprises (SMEs) in their early stages.

Knowledge-based economy:

  • to stimulate R&D and innovation, notably by strengthening intellectual property rights and achieving agreement on how to deliver the Community patent, by improving ties between universities and business, by enhancing collaboration in Europe via networks of centres of excellence and by ensuring sufficient funding;
  • to promote access and use of information and communication technologies (ICT) by implementing the unbundling of the “local loop” in order to reduce the costs of using the Internet, by ensuring more widespread use of the Internet in schools and in public administrations and by strengthening the regulatory framework for e-commerce;
  • to strengthen education and training efforts by increasing the number of experts and the basic skills, in particular ICT skills, of the population and by enhancing the capabilities of education systems to respond to changes in requirements.

Sustainable development:

  • to implement the European sustainable development strategy agreed by the Gothenburg European Council;
  • to introduce and strengthen market-based policies such as taxation and user and polluter charges;
  • to reduce sectoral subsidies and tax exemptions;
  • to intensify the use of economic instruments in order to curb greenhouse gas emissions and fulfil the requirements of the Kyoto Protocol;
  • to agree on an appropriate framework for energy taxation at European level and for the creation of a single market in energy.

Country-specific economic policy guidelines

Belgium: After the economy expanded by 4 % in 2000, real GDP is expected to increase at around 3 % in 2001 and 2002. Belgium managed to balance its budget in 2000. The government is projecting a surplus of 0.2 % in 2001 and 0.3 % in 2002. It should take steps to ensure that the surplus projected in its stability programme is achieved and to contain the increase in expenditure within the limit set. In 2002 and beyond, the budgetary margins should be used to reduce debt.
To prepare the country for the implications of population ageing, a reform of the pension system is needed. On the labour market, the reform of the tax and benefit systems should be continued. In addition, labour market flexibility and labour mobility should be enhanced.
Competition in transport, gas and electricity needs to be increased. Belgium is encouraged to increase the transparency of the links between the public and private sectors, notably at local level, and to simplify the administrative burden on businesses. The risk capital market should be further developed.

Denmark: The economic expansion is expected to slow somewhat to slightly above 2 % in 2001. According to the government, the budget surplus should increase to 2.8 % of GDP in 2001 and 2.6 % in 2002. Denmark should strictly limit the increase in government consumption in 2001 and in the medium term and should maintain high government surpluses.
If the labour market is to remain one of the best in the European Union, the government should further reduce the overall fiscal pressure on labour, especially for low- and medium-wage earners, and should continue reforms of transfer systems. It should also strengthen enforcement of competition rules and should enhance conditions for competition in public procurement and develop the risk capital market by further adapting the fiscal framework so as to facilitate investment.

Germany: Economic growth in Germany should be 2.25 % in 2001 and 2.5 % in 2002. Leaving aside UMTS proceeds, the government deficit fell to 1.0 % of GDP in 2000. According to the stability programme and thanks to the tax reform, the deficit should be 0.5 % in 2001 before falling gradually to zero by 2004. The government should ensure that projected deficits are met. Higher-than-projected revenues should be used to reduce the deficit. It is important to reinforce coordination among the various levels of government in order to establish a national stability pact. The government is called on to pursue pension reform and reform of the healthcare sector.
Active labour market programmes should be made more efficient and targeted towards long-term unemployment. Reforms of the tax system should make work pay. Non-labour costs should also be reduced. Competition on product markets and in public procurement could be reinforced. The higher education system should be reformed in order to meet the shortages of IT personnel. The government is called on to develop the risk capital market.

Greece: Economic activity in Greece is expected to accelerate in 2000, with GDP set to rise by 4.8 % in 2002. The stability programme projects that the Greek budget will run a surplus of 0.5 % in 2001 and 1.5 % in 2002. The government’s budgetary stance for 2001/2002 is oriented towards price stability and towards pursuing the reform of the public sector in order to reduce its size in the medium term and to accelerate the reform of the social security sector in order to ensure the viability of the system.
Greece should press ahead with its labour market reforms by loosening restrictive employment protection legislation in particular and should improve incentives to work in the formal sector of the economy. Wages should take better account of productivity and local labour market conditions. Investment in education and training should also be stepped up.
The government is called on to reduce the administrative burden on business and to encourage investment in R&D and the wider diffusion of ICT. Moreover, the liberalisation of the gas and sea transport sectors should be speeded up. The risk capital market should be developed further by easing constraints on institutional investors.

Spain: Economic growth in Spain is forecast to decelerate in 2001 compared with previous years and to recover slightly in 2002. According to the stability programme, the budget is expected to be in balance in 2001 and to show a surplus of 0.3 % by 2004. The government should hold back current expenditure in order to achieve a budget balance in 2001 and should monitor inflationary pressures. The tax reform planned for 2002 must not jeopardise the budgetary objectives. The public pension fund reserve must be increased.
As regards the labour market, Spain is called on to reform the wage formation process in order to take better account of productivity differentials, to invest in education and training (in particular, to tailor active employment policies more closely to labour market requirements) and to take steps to ensure a balance between flexibility and security. The basic ICT skills of the population and the supply of highly qualified personnel should also be increased. The regulatory framework for SMEs should be simplified. The government is also called on to develop the risk capital market further, especially by easing constraints on institutional investors.

France: In 2001 and 2002 economic growth of just under 3 % is expected. The public deficit in 2000 was below target. According to the stability programme, further reductions in the deficit are to be pursued in order to run a budget surplus in 2004. To this end, the government should monitor public spending in 2001 and beyond and use any available margin to strengthen the budgetary position as preparation for meeting long-term challenges. It is therefore called on to make further progress in reforming the pension system.
On the labour market, France should consolidate recent reforms of the tax and benefit systems and should pay particular attention to early retirement schemes and income guarantee schemes. It should monitor closely the effects of the implementation of the 35-hour working week and should reform employment protection. Network industries, especially the gas and electricity sectors, should be liberalised. France is called on to continue the reduction of ad hoc state aid, to reduce the administrative burden on businesses and to develop the risk capital market, notably by easing constraints on institutional investors.

Ireland: The buoyant economic growth recorded in Ireland is expected to slow down somewhat in 2001 and 2002. The stability programme projects budget surpluses of around 4.2 % of GDP for the period 2001-03. Public finances are sound. However, in February the Council issued a recommendation to Ireland on account of the expansionary budget for 2001. The government has therefore been called on to use countervailing measures to align the budget plans for 2001 more closely with the 2000 BEPGs and to prepare a budget for 2002 that contributes to an easing of the pace of demand and to improved expenditure control. While budgetary stability should be observed, investment in infrastructure, human capital and R&D should be increased.
The government should take care to ensure that wage developments remain consistent with price stability and that the participation of women in the labour market is increased. Measures are needed to introduce more competition into specific markets, notably transport, electricity and gas, to increase R&D expenditure and to develop the risk capital market further.

Italy: Economic activity in Italy is expected to slow down in 2001 but to pick up again in 2002. According to the stability programme, the government deficit is projected to improve in 2001 and 2002 and to reach a balance in 2003. The government should ensure that these objectives are met and, in particular, should match any losses of revenue stemming from tax reductions with offsetting expenditure cuts and rationalisation measures. Every opportunity should be taken to accelerate the reduction in the still excessive level of government debt. The domestic stability pact must be strengthened in order to control expenditure at all levels of government. To ensure the sustainability of long-term government finances, the pension system needs to be reviewed.
As regards the labour market, Italy is called upon to ensure that wage developments take better account of productivity, to increase labour market flexibility and to reform the taxation of labour and social security contributions, notably for those at the lowest end of the wage scale. The government should aim to promote business sector involvement in R&D, foster the diffusion of ICT, press ahead with the liberalisation of the energy sector, further reduce the administrative burden on businesses, increase competition and further develop the risk capital market, in particular by easing constraints on institutional investors.

Luxembourg: Economic growth will be around 5 % of GDP in 2001 and 2002 on the back of strong domestic demand. The budget surplus in 2001 and 2002 should decline to between 3 % and 4 % of GDP in the wake of a tax reform. The government should pursue a more restrictive budgetary policy in order to counter inflationary pressures and to monitor government expenditures closely.
On the labour market, Luxembourg should increase its national employment rate, especially for women and older workers. The reform of competition legislation should be implemented while fixed and monitored prices should be abolished.

Netherlands: The recent macroeconomic performance in the Netherlands has been noteworthy. Economic growth is expected to increase by some 3 % in 2001 and 2002. According to the stability programme, the government surplus is projected to fall to 0.7 % in 2001 following tax reforms. The government should maintain control of public expenditure in order to contain inflationary pressures and improve the budgetary outcome in 2002 as against 2001. Budgetary margins should be used to speed up the reduction in government debt.
As regards the labour market, the government is called upon to continue reforms of the tax and benefit system to make work pay. The Netherlands should promote the use of ICT, create a climate more conducive to innovation, facilitate market entry in electricity, gas, cable networks and public transport, and further develop the risk capital market.

Austria: Economic activity is expected to grow by some 2.5 % in 2001 and growth will remain buoyant in 2002. A budgetary consolidation programme has been launched and, according to the stability programme, the government deficit is projected to fall to 0.75 % in 2001 and zero in 2002. The government is called on to ensure tight budgetary execution at all levels of government in order to meet the targets of the stability programme, to reduce the tax burden in subsequent years without jeopardising budgetary consolidation and to reform the pension and healthcare systems so as to counter rising expenditure and to cope with population ageing.
As regards the labour market, Austria should take steps to ensure that there are greater incentives for older workers to remain active. In addition, the Community’s public procurement directives should be transposed and public procurement should be further opened up to competition, while development of the knowledge-based economy should be promoted, the supply of ICT-skilled personnel increased and the risk capital market further developed, notably by easing constraints on institutional investors.

Portugal: Economic activity is likely to slow down and growth is estimated at just over 2.5 % in 2001 and 2002. According to the stability programme, the deficit should fall to 1.1 % in 2001 and 0.7 % in 2002. The government is expected to meet its budgetary target in 2001 and, to this end, should adhere strictly to current expenditure plans, prepare a budget for 2002 which aims at a faster decline in the deficit than planned in the stability programme, preferably by reducing expenditure, and reform the social security and healthcare systems.
As regards the labour market, Portugal is called on to increase investment in the education and training systems, enhance the quality of work and modernise labour market institutions. It should also raise the level of R&D investment, promote the diffusion of ICT, reduce state aid, liberalise the energy sector and develop the risk capital market, notably by easing constraints on institutional investors.

Finland: Economic growth is forecast to be around 4 % in 2001 and 2002. The budget is in healthy surplus and, according to the stability programme, a surplus equivalent to some 4 % of GDP seems possible in the medium term. The government should adhere to the expenditure target and maintain government surpluses in 2001 and beyond in order to contend with population ageing, to which Finland is particularly exposed. The policy of debt reduction should be pursued and the effective retirement age should be raised.
On the labour market, the government is called on to reduce tax rates, especially for low-wage earners, adapt social security benefits in order to improve incentives to take up job offers and to stay in the labour force, and to increase the efficiency of active labour market programmes. In addition, compliance with public procurement rules should be enhanced, competition in distribution, construction and the media sector increased and the risk capital market further developed.

Sweden: Economic activity has slowed down somewhat and growth is forecast at 2.7 % in 2001 and 3 % in 2002. According to the convergence programme, the budget surplus should be 3.5 % and 3.3 % respectively. The government is called on to maintain high government surpluses in 2001 and subsequent years, to continue with its strategy of lowering taxes while attaining the medium-term surplus target of 2 % and to reduce public debt.
As regards the labour market, Sweden is called upon to ensure the efficiency of active labour market programmes and pursue reforms of the tax and benefit systems. In addition, compliance with public procurement rules should be enhanced and competition increased in air transport and pharmaceuticals. Sweden is also called on to develop the risk capital market further by adapting the fiscal framework.

United Kingdom: Economic growth should reach 2.7 % in 2001 and 3 % in 2002. The recent budgetary projections show a surplus of 1.7 % of GDP (excluding UMTS receipts) in the financial year 2000/01, with a reduction to 0.5 % predicted for the following year and a slight deficit thereafter. The government should ensure that the targets are achieved and, as announced, could double public investment while ensuring that the rules of the stability and growth pact are met.
As regards the labour market, the United Kingdom is called on to reinforce the measures targeted at those individuals most prone to the risk of unemployment and reform benefit schemes so as to provide the necessary incentives. It should also address the low level of productivity, increase competition in banking and postal services, step up investment in public transport and encourage pension funds to play a greater role in developing the risk capital market.

4) Implementing Measures

5) Follow-Up Work

Commission report on the implementation of the 2001 Broad Economic Policy Guidelines [COM(2002) 93 final, not published in the Official Journal].

Overview of key policy areas

Implementation of macroeconomic policies. The macroeconomic environment deteriorated much more sharply than expected in 2001 because of a number of adverse economic shocks and the terrorist attacks of 11 September, which brought economic growth to a standstill towards the end of the year. Employment growth decelerated but remained positive and inflation fell during the year.
Given the lower risks to price stability the monetary authorities cut interest rates on several occasions. The budget position deteriorated on account of the economic slowdown as the automatic stabilisers took effect and following the tax reforms in a number of countries. The EU-wide budget deficit increased from 0.1 % of GDP in 2000 to 0.5 % in 2001, while the euro-area budget deficit rose from 0.8 % to 1.1 % (net of UMTS receipts). It was only in Greece, Spain, Italy and Austria that outcomes were better than in 2000.
While the trend in nominal wages remained moderate in 2001, the euro area witnessed an acceleration in real wages slightly in excess of labour productivity growth.

Quality and sustainability of public finances. The share of government expenditure in GDP decreased while public investment remained stable in many Member States, fostering growth and employment. An increasing number of Member States introduced reforms aimed at containing expenditure through multiannual programmes and agreements between different levels of government. The long-term sustainability of public finances made mixed progress depending on the Member State concerned. Several Member States achieved budget surpluses, while others (Germany, France, Italy and Portugal) still have some way to go. Several Member States successfully pursued reforms of pension systems that are becoming urgent in view of population ageing.

Labour market. The labour market suffered from the economic environment and employment growth fell to 1.1 %, the unemployment rate having decreased slightly to 7.8 % by the end of the year. The situation differs between Member States. Many countries reformed their benefit systems and, in so doing, reduced the tax burden on labour, notably for low-wage earners. The reforms of benefit systems are not sufficiently targeted towards enhancing work incentives. In only a few cases were measures taken to boost geographical mobility, whether between Member States or within them. Spain, Greece and Portugal are reforming their educational system in general. Most countries are having difficulty in better targeting active labour market policies. The organisation of working time has become more flexible in recent years in some Member States (part-time work, fixed-term contracts, temporary agency work and teleworking).

Product market (goods and services). Progress has been mixed. Goods markets are becoming increasingly integrated. The transposal of internal market directives improved. However, barriers to cross-border trade still exist for a number of specific products. By contrast, little progress was made in creating an internal market in services. The opening-up of public procurement markets continued. The reinforcement of competition resulted in lower prices in the telecommunications and electricity sectors. However, differences persist between Member States and between sectors, while the liberalisation process is less advanced as regards railways and postal services. Overall state aid, the data on which are available only with some time lag, continued to decrease in the vast majority of Member States and transparency improved. The EU average declined to 1.2 % of GDP in 1997-99.

Efficiency and integration of EU financial markets. Regulation of European securities markets made good progress following the agreement of the European Parliament on the approach proposed by the Committee of Wise Men. Implementation of the Financial Services Action Plan (FSAP) progressed significantly, as did implementation of the Risk Capital Action Plan (RCAP). Several Member States took measures aimed at developing the risk capital market.

Entrepreneurship. A great variety of measures were taken to reduce the regulatory burden on business, to stimulate business creation and to ease access to finance for SMEs. Differences do though remain between Member States, notably in the area of taxation. Most Member States took measures to promote business start-ups and SMEs. Initiatives were launched to reduce the business tax burden.

Knowledge-based economy. The Member States took various measures to increase business investment in R&D. However, the deadline for agreeing on how to deliver the Community patent was missed. The ICT take-up was only moderate in comparison with previous years. Progress in unbundling the local loop was slow. In spite of the fall in Internet access prices and the increase in Internet access at home, the EU did not close the gap with the United States. The share of schools in which pupils have access to the Internet is above 70 % in most Member States. A number of governments took measures to increase the number of ICT experts and to promote basic ICT skills among the population.

Sustainable development. Various initiatives were launched, including the Directive on emissions trading and the White Paper on the European Transport Policy. Progress in Member States included the following: the United Kingdom and Denmark introduced a system of tradable emission permits, while several other countries are examining the possibility of so doing. Although a large number of different measures were taken by Member States to promote sustainable development, the discussions on energy taxation made little or no progress.

Assessment by Member State

Belgium. Belgium made some progress in implementing the budgetary recommendations and the labour market recommendations, but no major measures were taken to promote more wage flexibility. Some progress was made with regard to product markets while there was good progress in developing the risk capital market.

Denmark. The government made good progress in implementing the budgetary recommendations of the 2001 BEPGs, while limited progress was made in implementing the 2001 labour market recommendation. Some progress was made in implementing the product market and capital market recommendations.

Germany. Progress was made in implementing the budgetary recommendations even though budget deficits increased markedly in the wake of the economic downturn and tax reforms. Some progress was made on the labour market and the “Job Aktiv” law is a first step in the right direction although more needs to be done. The government made good progress in implementing the product market recommendations and there was also progress in implementing the capital market recommendations.

Greece. Some progress was made on the budgetary front, leading to a significant improvement in the government finance situation. The reform of the social security sector has not yet been initiated. On product markets too, some progress was made, although in some areas such as R&D and competition progress was slow. The government made some progress with the capital market recommendations.

Spain. Spain made good progress in implementing the budgetary recommendations; It is likely to have met the target of a balanced budget in 2001. Some progress was made on the labour market while substantial progress was made with regard to the product and capital markets.

France. France made some progress in implementing the budgetary recommendations although budgetary adjustment slowed down markedly. Some progress was made regarding the labour market but no legislation was introduced to increase employment protection. Some progress was made as regards the product and capital markets

Ireland. The government made satisfactory progress in implementing the budgetary recommendations. Some progress was made with labour market reforms and on capital markets, while good progress was made as regards the product market recommendations.

Italy. Italy made some progress on the budgetary front and consolidation continued. Some progress was made in implementing the labour market recommendations. The government also took measures to implement the product and capital market recommendations of the BEPGs.

Luxembourg. The government correctly implemented the budgetary recommendations. Some progress was made in implementing the labour market recommendation but implementation of the product market recommendations does leave something to be desired.

Netherlands. Altogether, the Netherlands made good progress in implementing the budgetary recommendations. Some progress was made on the budgetary front but there has still not yet been any reform of the disability scheme. Good progress was made in implementing the product market recommendations while there was some progress in implementing the capital market recommendations.

Austria. The government made good progress in implementing the budgetary recommendations. Some progress was made as regards labour and capital markets while more significant progress was made regarding the capital market.

Portugal. Altogether, Portugal made some progress in implementing the budgetary recommendations although the deficit increased in the wake of the economic slowdown. Some progress was made in implementing the labour market recommendations but employment protection legislation was not eased. Progress on product markets was satisfactory and some progress was made on capital markets.

Finland. Altogether, Finland made some progress in implementing the budgetary recommendations and the budgetary position remained sound. Good progress was made on the labour market, where efforts were aimed at reducing structural unemployment. Some progress was made in implementing the product and capital market recommendations.

Sweden. The budgetary recommendations of the BEPGs were implemented satisfactorily. Good progress was also made in implementing the labour market recommendations. However, limited progress was made in implementing the product market recommendations and no measures were taken to increase competition in specific sectors. Some progress was made in implementing the capital market recommendations.

United Kingdom. The government made some progress in implementing the budgetary recommendations. Good progress was made in implementing the labour market recommendations and some progress was made as regards product and capital markets.


Another Normative about Broad economic policy guidelines

Topics

These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic

Economic and monetary affairs > Stability and growth pact and economic policy coordination

Broad economic policy guidelines (2002)

1) Objective

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

2) Document or Iniciative

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

3) Summary

MAIN PRIORITIES AND POLICY REQUIREMENTS

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

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

  • Safeguarding and strengthening the macroeconomic framework
    The EU’s macroeconomic framework is based on two pillars: price stability and a sound budgetary policy. To allow automatic stabilisers to operate freely over the economic cycle, while respecting the 3% of GDP government deficit limit, Member States need to redouble their efforts to complete the transition to budgetary positions close to balance or in surplus by 2004. Beyond providing leeway for automatic stabilisers, this will allow for a steady decline in government debt, enabling budgetary challenges, including the ageing of the population, to be dealt with.
  • Promoting more and better jobs

    Although the labour market reforms undertaken in the 1990s have produced good results, unemployment, and especially long-term unemployment, is still high in a number of Member States. Obstacles to the geographical and occupational mobility of the unemployed persist. Labour force participation rates for women and older workers remain unsatisfactory. Member States therefore need to take steps to raise participation rates and reduce unemployment. This will require the reform of tax and benefit systems and the labour market. The Barcelona European Council has called for the effective average retirement age to be increased by five years by 2010.
  • Strengthening conditions for high productivity growth

    To meet future challenges linked to the ageing of the population and to achieve a sustainable GDP growth rate of 3%, the productivity of the European economy must be increased. To boost competitiveness, entrepreneurship and investment, European energy, communication, services and labour markets need to be integrated further.
  • Promoting sustainable development

    The external effects of economic activities on the environment must be priced in. Investments in resource and energy efficiency can promote innovation and job creation. Economic policies can also contribute to economic and social cohesion, since job creation is the best protection against poverty and social exclusion.

GENERAL RECOMMENDATIONS

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

Macroeconomic policies

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

Quality and sustainability of public finances

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

Labour markets

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

Structural reform in product markets

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

Efficiency and integration of the EU financial services market

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

Entrepreneurship

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

Knowledge-based economy

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

Sustainable development

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

COUNTRY-SPECIFIC ECONOMIC POLICY GUIDELINES

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

4) Implementing Measures

5) Follow-Up Work

Commission communication on the implementation of the 2002 broad economic policy guidelines [COM(2003) 4 final – Not published in the Official Journal].

The Commission presented an assessment of the implementation of the 2002 economic policy guidelines at EU level and for each of the Member States.

OVERVIEW OF MACROECONOMIC POLICIES

Economic growth and inflation. There was no pick-up in economic growth in 2002. Although growth remained slack (put at below 1%), there was still progress in creating jobs. However, inflation was slow to come down and there remained differentials between Member States. According to Eurostat, the changeover to the euro accounted for no more than 0%-0.2% of inflation in the first half of 2002.

Interest rates. The monetary policy of the ECB was kept on hold during most of 2002. In December, as a result of lower inflationary risks, the ECB cut its interest rates by 0.5%.

Quality and sustainability of public finances. Budgets deteriorated markedly under the impact of the automatic stabilisers. In some Member States, this was also due to discretionary loosening of budget policies. Some Member States facing still high structural deficits failed to make any further progress towards achieving budgetary positions of close to balance or in surplus and some even moved into reverse. The Commission then took action under the Stability and Growth Pact and the Treaty. The long-term sustainability of public finances was far from guaranteed in most Member States, and in particular Belgium, Germany, Greece, Spain, France, Italy, Austria and Portugal need to make further progress.

Labour markets. Despite weak economic growth, labour markets performed rather well in 2002, this being reflected in continuous employment growth. The unemployment rate in the EU increased only slightly, by 0.2%, to 7.6% of the labour force. However, labour-market reforms made only slow progress. While most Member States adapted their tax and benefit systems to make work pay, the measures taken were generally piecemeal.

Product markets. Progress in completing the internal market was disappointing since only five Member States met the target of reducing the deficit in the transposal of internal market legislation to 1.5% or less. In addition, the number of infringement proceedings remained excessively high. However, progress was made in reinforcing the regulatory and competition authorities, while state aid continued to decline in most Member States. The liberalisation of telecommunications and energy markets was beginning to produce gains for consumers. Generally, however, competition remained inadequate in the network industries.

Capital markets. The process of financial integration progressed markedly and the objectives set by the Barcelona Council were largely achieved. Cross-border coordination of financial supervision could be further improved.

Entrepreneurship. The regulatory environment improved in all Member States. Some of them took measures to alleviate administrative burdens on firms, to reduce the time and cost required for setting up a new company, to stimulate competition and to increase the efficiency of the public sector and general government. Implementation of the European Charter for Small Enterprises was progressing in all Member States.

Knowledge-based economy. The European Union was slowly catching up on the United States in ICT usage but large gaps remained in terms of business R&D and patenting. Use of the Internet continued to grow.

Sustainable development. Various measures were taken including an increase in energy taxes, while other steps were taken to protect the environment. Progress was made in the negotiations on establishing a Community emissions trading scheme.

ASSESSMENT BY MEMBER STATE

Belgium. Belgium maintained its balanced budgetary position. Some progress was also made on the labour market (apart from the promotion of geographical mobility) and product markets in fostering entrepreneurship and the knowledge-based economy.

Denmark. Denmark was among the Member States considered to have given the best follow-up to the 2002 broad economic policy guidelines. Progress was made, notably as regards public finances and product markets, in promoting entrepreneurship and the knowledge-based economy.

Germany. Germany made limited progress in implementing the recommendations, notably as regards public finance (the 3% government deficit threshold laid down in the Treaty was overstepped). Limited progress was also made in implementing the labour-market recommendations. By contrast, some progress was made as regards product markets and in promoting entrepreneurship and the knowledge-based economy.

Greece. Greece made progress in the field of public finance, including a modest reform of the pension system, and on the labour market. As regards product markets, some progress was also made in promoting entrepreneurship and the knowledge-based economy.

Spain. Progress was made on the public finance front: the Spanish budget was still in balance. Some progress was made on labour product markets, and promoting entrepreneurship and the knowledge-based economy, e.g. with a view to supporting the adoption of new technologies in enterprises.

France. Limited progress was made in following up the public finance recommendations. However, some progress was discernible in implementing the labour-market recommendations. Measures were taken to reduce the administrative burden on business and to facilitate the use of the Internet.

Ireland. Some progress was made on public finances, even though the fiscal stance was more expansionary than expected. On the labour market, some measures were taken to increase the participation of women. The recommendations on product markets, entrepreneurship and the knowledge-based economy had positive effects, including keener competition in the network industries.

Italy. Progress in following up the labour-market recommendations was limited, whereas some progress was made in respect of the labour market. Measures were taken in other fields to alleviate the administrative burden, to enhance competition and to encourage the use of new technologies.

Luxembourg. Some progress was made in following up the public-finance and labour-market recommendations. There was no decisive progress as regards product markets, entrepreneurship and the knowledge-based economy, but measures were taken to alleviate the administrative burden on enterprises.

Netherlands. Some progress was made as regards public finances and the labour market, notably as a result of measures to make work pay. Steps were also taken to improve competition in the services sector and to promote the use of IT.

Austria. Progress with public finances was limited, and a balanced budget was not achieved in 2002. Progress was also limited on the labour market. By contrast, some progress was made on product markets, entrepreneurship and the knowledge-based economy, while additional financial resources were allocated to research, and the administrative burden was reduced.

Portugal. Some progress was made in following up the public-finance recommendations, and the public deficit fell sharply in 2002. On the labour market, some progress was discernible in implementing the national Lifelong Learning strategy. Portugal also made progress on education, R&D, the use of new technologies and competition in the network industries.

Finland. Some progress was made on public finances. However, central government expenditure exceeded the original target. Progress was also made with the labour-market recommendations, including a reduction in taxation for low- and medium-wage earners. Not much progress was made on product markets, entrepreneurship and the knowledge-based economy.

Sweden. Good progress was discernible in implementing the public-finance recommendations. As regards the labour market, measures were taken that reflected the recommendations. Some progress was made in the other fields, notably thanks to measures to enhance competition.

United Kingdom. Some progress has been made in implementing the public-finance recommendations and investment rose in line with the recommendations. Measures on the labour market improved employability. As regards product markets, entrepreneurship and the knowledge-based economy, progress was satisfactory, notably in the competition field.

 


Another Normative about Broad economic policy guidelines

Topics

These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic

Economic and monetary affairs > Stability and growth pact and economic policy coordination

Broad economic policy guidelines (2005- 2008)

The European Union must focus its policies on economic growth and employment. The current broad economic policy guidelines (BEPGs) reflect the new start for the Lisbon strategy. They focus on macroeconomic policies * and on the measures and policies that the Member States should adopt to make Europe a more attractive place in which to invest and work (macroeconomic policies) *.

Document or Iniciative

Council Recommendation 2005/601/EC of 12 July 2005 on the broad economic policy guidelines of the Member States and the Community (2005-2008) [Official Journal L 205, 6.8.2005].

Summary

The recommendation falls within the general framework of the Lisbon strategy: the European Union must mobilise all the resources available in order to achieve the objectives of this strategy, which is designed to make the EU economy the most competitive in the world by 2010. The recommendation is in two parts. The first one addresses the way in which macroeconomic policies can contribute to relaunching the Lisbon strategy while the second deals with the measures and policies that the Member States should adopt in order to boost knowledge and innovation for growth (macroeconomic policies *). The BEPGs apply to all the Member States and will be complemented by the Lisbon Community Programme 2005 to 2008.

The state of the EU economy

First of all, the recommendation takes stock of the current state of the EU economy, which, after gathering momentum from mid-2003 onwards, decelerated in the second half of 2004 as a result of external factors such as high, volatile oil prices and the slowdown in world trade expansion. The Council considers that the lack of resilience in some European economies is attributable partly to structural weaknesses. GDP is expected to continue to grow at a moderate pace in 2005.

As the world growth cycle reaches maturity, offsetting the dampening effect of high world oil prices, the emphasis will fall increasingly on domestic demand in the EU to provide greater impetus to the upswing.

Structural and macroeconomic policies need to be thought of against the background of an increase in the prices of raw materials, in particular oil, and a downward pressure on industrial prices. Potential growth rates in the EU therefore depend to a large extent on increasing confidence among businesses and consumers, as well as on favourable global economic developments, including oil prices and exchange rates.

The sluggishness of the EU’s economic recovery is a continuing source of concern, even if the forecasts are for a fall in the unemployment rate.

Macroeconomic policies for growth and jobs

The Council wishes to see macroeconomic policies that will create the conditions for more growth and jobs and will secure economic stability. Monetary policies can contribute to this by pursuing price stability.

The recommendation lists the following six economy policy guidelines to be implemented by the Member States:

  • to secure economic stability for sustainable growth. In line with the stability and growth pact, Member States should respect their medium-term budgetary objectives. They should avoid pro-cyclical fiscal policies, i.e. they should not spend more at times of excessive deficit if the converse proves to be necessary, i.e. reducing public spending. Member States with excessive deficits should adopt effective measures in order to correct them promptly, and if necessary introduce structural reforms;
  • to safeguard economic and fiscal sustainability. In view of the projected costs of ageing populations, the Member States should reduce their public debt in order to strengthen public finances and reinforce their pension, social security and health care systems so as to ensure that they are financially viable, socially adequate and accessible. They should also take measures to increase labour market participation among women, young people and older workers;
  • to promote a growth- and employment-orientated and efficient allocation of resources. Member States should redirect public expenditure towards growth-enhancing categories. They should also adapt their tax structures in order to strengthen growth potential. Mechanisms should be put in place in order to assess the relationship between public spending and the achievement of policy objectives aimed at ensuring the coherence of the reforms;
  • to ensure that wage developments contribute to economic stability. Member States should put in place the right framework conditions for wage-bargaining systems, while respecting the role of the social partners. This should promote nominal wages and labour cost developments consistent with price stability and the trend in productivity over the medium term;
  • to promote greater coherence between macroeconomic, structural and employment policies. Member States should pursue labour and product market reforms that increase growth potential. They should reinforce the macroeconomic framework by increasing flexibility, factor mobility and adjustment capacity in labour and product markets in response to globalisation, technological advances, demand shift and cyclical changes. In addition, tax and benefit systems should be reformed in order to improve incentives and to make work pay. The ability of labour markets to adapt to economic requirements needs to be increased, while at the same time ensuring employment flexibility and security and investing in human capital;
  • to contribute to a dynamic and well-functioning EMU. Member States in the euro area need to ensure better coordination of their economic and budgetary policies, in particular:

– pay particular attention to the fiscal sustainability of their public finances;
– contribute to a policy mix that supports long-term economic recovery and ensures price stability, thereby enhancing consumer and investor confidence;
– press forward with structural reforms;
– ensure that the euro area’s influence in the global economic system is commensurate with its economic weight.

Microeconomic reforms to raise Europe’s growth potential

The Council considers that, in order to enhance the EU’s growth potential, it is necessary to create jobs and increase productivity. An essential growth factor is investment in R&D, innovation and education. Their international dimension should be strengthened in terms of joint financing and reducing barriers to researcher and student mobility. The Council sets out ten guidelines for microeconomic reforms aimed at increasing growth potential. These are:

  • to increase and improve investment in R&D. Businesses will need to play a key role in increasing and improving investment in this area. The Council confirms an overall objective for investment of 3 % of GDP by 2010. This level of investment must be achieved by an adequate split between private and public investment. Member States must further develop measures to foster R&D, in particular by:

– improving framework conditions to ensure that companies operate in a sufficiently competitive and attractive environment;
– allocating more effective and efficient public expenditure to this area;
– developing public-private partnerships;
– developing and strengthening centres of excellence of educational and research institutions;
– improving the transfer of technologies between research institutes;
– developing and making better use of incentives to leverage private R&D;
– modernising the management of research institutes and universities;
– ensuring a sufficient supply of qualified researchers;

  • to facilitate all forms of innovation. Member States should focus on improvements in innovation support services, in particular for the dissemination and transfer of technology, the creation of innovation poles bringing together research institutes, universities, etc. They should also take measures to encourage cross-border knowledge transfer and public procurement of innovative products and services. Access to domestic and international finance should be improved. Effective and affordable means of enforcing intellectual property rights should be put in place;
  • to facilitate the spread and effective use of information and communication technologies (ICT) and build a fully inclusive information society. Member States should encourage the widespread use of ICT in public services, small and medium-sized enterprises (SMEs) and households. They should provide the necessary framework for the related changes in the organisation of work in the economy and promote a European presence in the ICT sector. They must ensure the stability and security of networks and information;
  • to strengthen the competitive edge of Europe’s industrial base. Europe needs to pursue a modern and active industrial policy, which entails bolstering the competitive advantages of its industrial base. This means establishing attractive framework conditions for manufacturing, enhancing competitiveness factors in response to the challenges of globalisation, developing new technologies and creating new markets by promoting new technological initiatives based on public-private partnerships and creating business clusters within the EU;
  • to encourage the sustainable use of resources and step up environmental protection. Member States should give priority to energy efficiency and the development of sustainable energies, in particular renewable energies, and promote the rapid spread of environmentally friendly technologies both in Europe and worldwide. Member States should pay particular attention to SMEs by withdrawing subsidies with a negative effect on the environment and sustainable development. Environmental protection should be pursued in areas such as halting the loss of biological diversity between now and 2010, combating climate change and implementing Kyoto targets (EN), etc.;
  • to extend and deepen the internal market. Member States should speed up the transposition of internal market directives, give priority to stricter and better enforcement of internal market legislation, apply Community rules effectively, promote an internal market in services, speed up the integration of financial markets, etc.;
  • to ensure open and competitive markets in response to globalisation. In order to reap the benefits of globalisation, Member States should give priority to removing the regulatory and trade barriers that hinder competition. Competition policy must be enforced more effectively and state aid reduced. Open and competitive markets also require the kind of investment in R&D described above. Member States should promote external openness, particularly in a multilateral context;
  • to create a more competitive business environment. The Council recommends that Member States increase competition between businesses and encourage private initiative through better regulation. It calls on Member States to reduce the administrative burden on enterprises, particularly SMEs and start-ups, to improve the quality of regulations and to encourage businesses to develop their corporate social responsibility;
  • to promote entrepreneurship and create a supportive environment for SMEs. Member States should improve access to finance in order to favour the creation and growth of SMEs. A favourable environment is also created by simplifying tax systems and reducing non-wage labour costs. In addition, the innovative potential of SMEs should be strengthened, e.g. by providing relevant support services. National legislation on bankruptcy, transfer of ownership, etc. should be revised in order to remove any remaining barriers;
  • to improve European infrastructure. Efficient, modern infrastructures are important in facilitating the mobility of persons, goods and services within the EU. The presence of infrastructure is often a decisive factor for businesses seeking new locations. Member States should put in place conditions conducive to the development of such infrastructure and consider the possibility of developing public-private partnerships. Lastly, they should examine the question of appropriate infrastructure pricing systems.
Key terms used in the act
Macroeconomic policies: this term covers policies aimed at influencing economic aggregates such as prices, unemployment, growth potential, GDP, etc.
Microeconomic policies: this term refers to policies designed to influence economic decisions taken, for example, by natural or legal persons.

Related Acts

Council Recommendation 2007/209/EC of 27 March 2007 on the 2007 update of the broad guidelines for the economic policies of the Member States and the Community and on the implementation of Member States’ employment policies [Official Journal L 92 of 3.4.2007].
The Council calls upon Member States to take action along the lines set out in the recommendation with a view to updating the broad economic policy guidelines for 2007. The guidelines set out in the Annex to the Recommendation contain specific recommendations for each Member State.

Member States must report on the follow up in their next annual progress reports on the implementation of their national reform programmes in the framework of the Lisbon Strategy.

The European economy: 2004 Review

The European economy: 2004 Review

Outline of the Community (European Union) legislation about The European economy: 2004 Review

Topics

These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic.

Economic and monetary affairs > Stability and growth pact and economic policy coordination

The European economy: 2004 Review

Document or Iniciative

The EU Economy 2004 Review – Summary and main conclusions [COM(2004) 723 final – Not published in the Official Journal].

Summary

The communication reviews economic progress in the European Union in 2004. It influences the mid-term review of the Lisbon Strategy by analysing first macroeconomic developments in the euro area and then four major topics: convergence, employment, productivity and the environment.

Belated recovery of the economy and its resilience to economic shocks

The Commission notes that economic prospects brightened in 2004 against the background of a favourable international environment. Growth was driven mainly by exports, while domestic demand in the euro area gathered pace. However, the two main components of domestic demand, investment and private consumption, remained too unsteady to speak of a secure recovery.

In spite of the improvement in economic prospects, the rebound of the EU economy is belated and sluggish compared with the other major economies such as the United States. The Commission wonders about the euro area’s economic resilience. Is it more sensitive than other regions to economic shocks? Are its economic structures less favourable to economic resurgence?

Analysis shows that, although adverse economic events have impacted on economic confidence indicators, their effects on industrial production were short-lived and not particularly deep. Rather, structural rigidities have been a more significant factor in the late cyclical adjustment in the euro area. These rigidities impact mainly on investment activity. Thus, the speed of the return to potential output will be determined by how much these rigidities continue to weigh on investment once the cyclical impact of a lack of demand and financial constraints holding back investment growth have worn off.

The slow price adjustments in the euro area stem from wage rigidities and imperfect competition.

Making the Union competitive by 2010

In the communication the Commission focuses on the four areas that hold the key to making the Union competitive by 2010. These are:

Convergence: On 1 May 2004 ten new Member States joined the Union. The Commission examines the conditions that will enhance their capacity to catch up economically and in terms of convergence since they start from income levels significantly below the EU average. Admittedly, the new Member States have already embarked on a major economic convergence process, but this has been entirely driven by investment and productivity. The Commission takes the view that the fairly low employment rates in those countries will have to be increased and domestic savings progressively mobilised in order to complement foreign direct investment. Macroeconomic stability will have to be further entrenched and public deficits reduced. To this end, domestic reforms must continue. The Commission considers that the EU’s Structural Funds can help to foster convergence provided that there is more targeted geographical and thematic concentration.

Employment: For the Commission it is difficult to see how the employment objectives of the Lisbon Strategy, namely the increase in employment rates envisaged by 2010, can be achieved. This is partly because of the economic slowdown but also because progress on structural reforms has been slow and insufficient. The Commission does though note progress in some areas, such as improving female employment. It takes the view that the strategy is clear but reminds Member States that much remains to be done as regards reforms: wage differentiation, labour market regulations, improvement in education and training, etc. These reforms must be country-specific, taking into account the mix of labour market and social protection regulations.

Productivity: The EU economy must not only achieve a higher labour input but also enhance productivity growth. The productivity slowdown is structural, reflecting low productivity growth in mid-tech industries, the relatively small size of the EU’s information and communication technologies (ICT) production industry, etc. In addition, the higher returns which can be earned outside Europe on the back of globalisation and increased international capital mobility may exert pressure on capital productivity within the EU. These developments could be part of the explanation as to why labour productivity growth has declined. The Commission notes that total factor productivity is determined by the competences of workers and the technological level of capital equipment. It would like to see the knowledge-based economy better entrenched in Europe and the gap with the United States closed. The US economy has shifted towards high-productivity growth industries such as the ICT-producing and ICT-using sectors. Thanks to its superior innovation system and the larger amount of resources allocated to research, the United States is in a better position to cope with the globalisation-induced competitive and technological pressures evident since the mid-1980s. Reforms which would allow new and innovative firms to develop and the process of internal integration to be pursued are particularly needed.

Environment: Protection of the environment and economic growth are often seen as competing aims, but the demand for environmental protection has risen along with economic growth. Environmental policy aims to place these resources under a common-property regime by providing for restrictions on activity which is hazardous or damaging to the environment. Public action, market forces and the growth of the service sector have triggered a reduction in the pollution intensity of economic activity in the EU. The Commission notes that the increase in environmental protection has not taken place because pollution has been exported through large-scale relocation. Environmental policies cause an adjustment of economic structures, for example by adapting the property-rights regimes for natural resources to take account of their increased scarcity and new scientific insights. They must also take account of the health risks to which the public is exposed.

The OECD and the examination of EC economic policies

The OECD and the examination of EC economic policies

Outline of the Community (European Union) legislation about The OECD and the examination of EC economic policies

Topics

These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic.

Economic and monetary affairs > Stability and growth pact and economic policy coordination

The OECD and the examination of EC economic policies

Document or Iniciative

Communication from the Commission to the Council: Establishment of an OECD EDRC examination of EC economic policies alongside the Euro Area Survey [COM(2005) 150 final – Not published in the Official Journal].

Summary

In the communication, the Commission replies to the request made to the OECD by Australia, Canada, Korea, the United States, Japan and Mexico to widen the economic examination carried out by the EDRC so as to include Community policies that have an impact on the EU’s economic performance. For the time being, there is no overall annual review for the euro area *, and the OECD’s economic reviews are restricted to individual country examinations. The Commission accepts that a Union review should be carried out, provided that a number of conditions are met.

The EC and the OECD EDRC review

The EDRC is an OECD committee. It prepares country-specific economic reviews that are published every one to two years for each of the 30 OECD members. The reviews are designed:

  • to assess how authorities can improve economic performance;
  • to encourage the participating economies to strengthen their policies with a view to enhancing productivity and to promote growth.

The review leads to formal recommendations which are not legally binding on members.

Since the reviews are country-specific, there is no genuine EDRC review of Community policies from a global viewpoint. The 19 Member States of the European Union which are also OECD members are reviewed individually, with Community-wide policies often being addressed, albeit in a fragmented and repetitive manner. This does not allow official EC representatives to comment properly on such policies in a way that reflects their Community nature. However, since 2001 the EDRC has carried out an annual self-standing review of the euro area because of the particular characteristics of its economy.

This situation is unsatisfactory, both from an internal EC perspective and from the perspective of the other OECD members. Accordingly, the Commission suggests that the EC accept the establishment of a separate and distinct review by the EDRC of Community economic policies alongside the existing euro-area survey.

Establishing an EDRC review of Community economic policies

The Commission proposes that:

  • a separate and distinct EU-25 review of Community structural and sectoral policies be established;
  • the existing euro-area review continue and be confined to macroeconomic policy issues.

The Commission stresses that the two exercises should be kept separate since the euro-area review concerns only twelve Member States (all OECD members), while the EU-25 review concerned all the Member States (which are not all OECD members). The Commission considers that the advantages of an EU-25 review would be the transparency and overall visibility of Community policies.

Community conditions

Establishing an EU-25 review would necessitate appropriate procedural devices which must take account of the uniqueness of the Community, and in particular the division of competencies between the Community and its Member States, the rules on the external representation of the Community and the status of the Community within the OECD. These arrangements will be negotiated within the OECD.

The Commission stresses that acceptance by the Community of an EDRC review is dependent on certain guarantees being given, namely:

  • the six Member States that are not currently OECD members (Cyprus, Estonia, Latvia, Lithuania, Malta and Slovenia) will be granted observer status for the EU-25 review;
  • the Community policies will be examined during the EU-25 review and no longer analysed during the separate reviews of Member States;
  • the EU-25 review could alternate with the euro-area review, given the considerable coordination that would be required at various levels of the Union;
  • the Commission will have a clear mandate to negotiate the specifications and arrangements for any EU-25 review with the OECD;
  • the Commission will represent the EC Member States for the purposes of the review;
  • the examination procedure of the review will follow the same model as the euro-area review and will be subject to consensus within the EDRC;
  • the Community be granted a status that allows for equality of treatment with regard to other examinees, which have a right of veto within the EDRC.
Key terms used in the act
  • OECD (Organisation for European Cooperation and Development): The OECD is a forum within which governments collaborate in response to the economic, social and ecological challenges posed by globalisation. In 1961 it replaced the Organisation for European Economic Cooperation (OECE), which was set up in 1947 under the Marshall Plan.
  • Euro area: At present, twelve Member States make up the euro area, i.e. they have introduced the euro as their official currency. The Member States concerned are: Germany, Austria, Belgium, Spain, Finland, France, Greece, Ireland, Italy, Luxembourg, the Netherlands and Portugal. Three countries, viz. Denmark, Sweden and the United Kingdom, have not yet introduced the euro. The Member States that joined the Union on 1 May 2004 are to introduce the euro once they are ready to do so.

Public finances in Member States in 2005

Public finances in Member States in 2005

Outline of the Community (European Union) legislation about Public finances in Member States in 2005

Topics

These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic.

Economic and monetary affairs > Stability and growth pact and economic policy coordination

Public finances in Member States in 2005

Document or Iniciative

Communication from the Commission to the Council and the European Parliament of 1 June 2005: “Public finances in EMU – 2005” [COM(2005) 231 final – Not published in the Official Journal].

Summary

The communication summarises the main policy messages of the report entitled ” Public finances in EMU – 2005 “, the latest of the reports the Commission has drawn up each year since 2000. The Commission notes that there are still budgetary imbalances in some countries (Germany, Cyprus, France, Greece, Hungary, Italy, Malta, Poland, Slovakia and United Kingdom), although the general government deficit in the euro area has improved marginally. According to forecasts, the euro-area and EU deficits should remain roughly stable in 2005 and 2006.

Ten Member States face excessive deficit procedures

The communication takes account of the reform of the stability and growth pact (SGP). Since the summer of 2004, ten EU countries have been subject to the excessive deficit procedure (EDP):

  • France and Germany. Following the Court of Justice ruling *, both countries have taken measures that could result in the excessive deficit being corrected in 2005. At this stage no further action under the EDP is necessary.
  • Netherlands. The Netherlands reduced their excessive deficit to 2.5 % of gross domestic product (GDP) in 2004. The Commission therefore proposed in May 2005 to abrogate the decision on the existence of an excessive deficit.
  • Cyprus, Hungary, Malta, Poland, Czech Republic and Slovakia. The Council decided that an excessive deficit existed in each of these countries outside the euro area. In order to remedy the situation, it issued recommendations to these countries. All of them, apart from Hungary, have taken effective measures in response to the recommendation.
  • Greece. The Council has issued a notice to Greece, the last step before sanctions. Greece has until 2006 to correct the excessive deficit, which is of an unprecedented magnitude (5.2 % and 6.1 % of GDP in 2003 and 2004 respectively).

The Commission is placing emphasis on improving statistical governance in the budgetary field following the revision in the Greek government accounts in 2004. In a communication on a European governance strategy for fiscal statistics [COM(2004) 832 final], the Commission put forward three lines of action:

  • building up the legislative framework;
  • developing the Commission’s operational capacity;
  • defining European standards on the independence of statistical institutes.

Reform of the stability and growth pact: analysing budgetary data

The communication describes the main stages of the reform of the stability and growth pact. The debate has led to changes in the basic regulations on the surveillance of budgetary positions and the implementation of the excessive deficit procedure.

The Commission notes that the report aims to improve the understanding of public finance issues in the EU and to upgrade budgetary surveillance. For 2005, the report presents an analysis of the discrepancy between budgetary plans presented in stability and convergence programmes and the actual results achieved, an analysis of the determinants of debt dynamics and an analysis of the long-term sustainability of public finances.

These analyses enable the Commission to:

  • achieve effective budgetary planning. The Commission has collected data enabling it to compare actual budgetary developments in the Member States with initial objectives. In this way it has been able to see how its assessment of stability and convergence programmes has evolved over the years. It highlights the importance of finding ways to avoid spending slippages and more effectively plan expenditure patterns in a manner that increases their quality – also to better match the new Lisbon priorities.
  • understand the determinants of debt dynamics. The Commission focuses on “stock-flow adjustment”, which captures the residual discrepancy between the change in the outstanding debt stock and the general government deficit, as defined in the Protocol to the Maastricht Treaty. The usual analysis focuses on deficits and nominal growth, while much less attention has been given to the stock-flow adjustment. However, this component conveys relevant information about the evolution of government assets and liabilities and about the discrepancy between deficits. The report shows that the stock-flow adjustment in past years has, on average, been positive (consequently adding to the build-up of debt) and that in some countries it is partly associated with cash deficits being systematically higher than “Maastricht deficits”.
  • increase focus on the long-term sustainability of public finances. Public finances must be sustainable, despite ageing populations and the costs involved in the European social model. The 2005 report shows that the Member States must consolidate their budgets in order to achieve a sustainable position. The reform of the stability and growth pact is helping to ensure the long-term sustainability of public finances. The exchange of information among Member States and with the Commission on national expenditure will increase transparency and lead to a better assessment of the long-term sustainability of public finances.

Structural reforms and budgetary objectives

The Commission gives high priority to economic reforms that increase growth and employment. The report reviews and discusses the link between the implementation of structural reforms and budgets in implementing the EU framework for fiscal policy. This important issue has been under-researched.

Reforms can contain the growth of certain types of government expenditure, such as reforms of pension or health care systems. Reforms aimed at improving potential output and growth may also have indirect positive effects. However, numerical rules to limit excessive deficits may discourage reforms. The trade-off between reforms and budgetary objectives can be explained by the short-term costs of reforms and by the fact that reforms can be costly to particular groups in society, so that tax cuts or other government transfers may be needed.

The report looks at labour and product market reforms and pension reforms. The analysis focuses on two issues: the short-term impact of reforms on budgets, and the possibility that fiscal consolidation measures prevent reforms. According to the data, there is no strong evidence to show that reforms are less frequent in times of budgetary consolidation. However, in the aftermath of reforms there is, in general, a slight deterioration in budget balances. The Commission believes that reforms should be considered with caution in the implementation of the stability and growth pact (SGP). The 2005 SGP reform package includes provisions aimed at ensuring that the budgetary objectives of the EU fiscal framework do not clash with structural reforms that may contribute to sound public finances and increased growth.

New Member States: fiscal challenges

The ten Member States that joined the EU in 2004 are continuing their economic integration by catching up in terms of their income levels and by looking forward to adopting the euro. Fiscal policy can make a key contribution in this process via efficient and sustainable tax and expenditure policies and by supporting stable development of the economy. In the short term, some of the new Member States may need to make difficult choices, for example on higher spending in certain areas such as infrastructure, training or R&D, which may make it even harder to contain budget deficits. The report discusses the main challenges facing the new Member States in conducting their fiscal policy, such as the problem of an ageing population.

The new Member States are in a position to finance some of their needs thanks to their high potential growth and, in some cases, their low public debt. However, the stock of contingent liabilities is relatively high in many of these countries, and this creates the risk of sudden upswings in debt levels if government payments related to guarantees materialise. The Commission highlights the importance of taking advantage of periods of strong growth to achieve budgetary improvements. In this way, Member States can ensure adequate headroom to stabilise the economy during a downturn.

The Commission believes that there is scope for policy-makers in the new Member States to pursue their growth and stability objectives while ensuring proper management of public finances. Efforts must be made to:

  • restructure existing expenditure programmes;
  • enhance tax bases in order to strengthen public finances and foster conditions conducive to growth;
  • enhance the transparency of budgetary procedures;
  • improve risk management in the private sector via well-designed surveillance.

Although the framework for economic and budgetary surveillance in EMU has provided positive results, analyses show that Member States need to do more if they are to deliver the expected results. The reform of the SGP and the Lisbon strategy have responded to the need to match procedural rules with the economic reality and needs of the Member States. They will be tested in the years to come. The way the new SGP framework will be implemented from the start will be crucial for its future credibility. The Commission encourages the Member States to pursue this ambitious strategy by enhancing the quality and ensuring the sustainability of their public finances.

Key terms used in the act
  • Case C-27/04: The debate surrounding the stability and growth pact gathered momentum following a ruling on 13 July 2004 by the Court of Justice of the European Communities (CJEC) concerning the excessive deficit procedures initiated against Germany and France. In November 2003 the Commission sent the Council recommendations for speeding up the excessive deficit procedure in both cases. However, the Council did not act on those recommendations and suspended the excessive deficit procedures. It argued that its conclusions were of a political nature. The Court ruled that the Commission’s complaint, namely that the Council had not adopted the formal instruments contained in the Commission recommendations, was inadmissible and that the Council conclusions of 25 November 2003 adopted in respect of France and Germany were annulled as regards suspension of the excessive deficit procedure.

Requirements for budgetary frameworks of the Member States

Requirements for budgetary frameworks of the Member States

Outline of the Community (European Union) legislation about Requirements for budgetary frameworks of the Member States

Topics

These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic.

Economic and monetary affairs > Stability and growth pact and economic policy coordination

Requirements for budgetary frameworks of the Member States

Document or Iniciative

Directive 2011/85/UE of the Council of 8 November 2011 on the requirements for budgetary frameworks of the Member States [Official Journal L 306 of 23.11.2011].

Summary

This Directive shall apply to the national budgetary frameworks of the Member Sates. The budgetary frameworks detail all the measures, rules and institutions through which the public administrations in the Member States conduct the budgetary policy.

The Directive lays down rules applicable to specific elements of the budgetary frameworks, in particular:

  • systems of budgetary accounting and statistical reporting;
  • rules and procedures governing the preparation of forecasts for budgetary planning;
  • country-specific numerical fiscal rules, such as the debt or deficit limits;
  • medium-term budgetary frameworks;

System of accounting and statistical reporting

Member States shall have in place public accounting systems comprehensively and consistently covering all sub-sectors of general government.

The accounting systems must also enable Member States to ensure regular public availability of fiscal data for all sub-sectors of general government.

Furthermore, the public accounting systems shall be subject to internal control and independent audits.

Forecasts for fiscal planning

Member States shall base their fiscal planning on the most realistic macroeconomic and budgetary forecasts possible. In particular, these forecasts shall include a study of the main fiscal variables based on different assumptions relating to growth and interest rates.

Member States shall make public their macroeconomic and fiscal forecasts, as well as the methods and parameters they have used. They shall also identify the institution responsible for producing these forecasts.

Member States’ forecasts are then compared with the forecasts produced by the Commission. The latter is also required to publish the methods, hypotheses and parameters used. Any significant differences between the Member States’ and the Commission’s forecasts shall be described and explained.

Numerical fiscal rules

EU budgetary surveillance shall be based on the numerical fiscal rules specific to each Member State. The objective of these rules is to avoid excessive public deficit and excessive public debt.

The fiscal rules specific to each country include in particular:

  • the target definition and scope of the rules;
  • the effective compliance with the rules, based on reliable and independent analysis carried out by independent bodies or bodies endowed with functional autonomy vis-à-vis the fiscal authorities of the Member States;
  • the consequences in the event of non-compliance.

Medium-term budgetary frameworks

Member States shall establish a medium- term budgetary framework. This framework is defined as a set of national fiscal procedures extending the development of fiscal policy beyond the annual budgetary calendar. It is accompanied by the adoption of a fiscal planning horizon of at least 3 years. The budgetary framework consists of the following elements:

  • comprehensive and transparent multiannual budgetary objectives, for example in terms of the general government deficit of public debt;
  • projections of each major expenditure and revenue item of the general government;
  • a description of medium-term policies envisaged with an impact on general government finances;
  • an assessment of the effects the policies envisaged could have on the long-term sustainability of the public finances.

Context

The Stability and Growth Pact is a set of rules which establish economic and budgetary surveillance at European level. The aim is to ensure economic and financialstability in the EU.

Member States must therefore pursue sound budgetary policies in order to avoid excessive public deficits which could put the economic and financial stability of the EU in danger.

In 2011 the Stability and Growth Pact was subject to huge reform.. The new measures adopted constitute a significant step in ensuring budget discipline, promoting the stability of the European economy, and preventing a new crisis in the Union.

The Stability and Growth Pact henceforth brings together six legislative acts which entered into force on 13 December 2011:

  • Regulation No. 1173/2011 on the implementation of efficient budgetary surveillance in the euro area;
  • the Regulation (EU) No. 1174/2011 on enforcement measures to correct excessive macroeconomic imbalances in the euro area;
  • the Regulation (EU) No. 1175/2011 amending the surveillance procedures of budgetary positions;
  • the Regulation (EU) No. 1176/2011 on the prevention and correction of macroeconomic imbalances ;
  • the Regulation (EU) No. 1177/2011 amending the procedure concerning excessive deficits;
  • Directive No. 2011/85/EU on requirements for budgetary frameworks of the Member States.

References

Act Entry into force Deadline for transposition in the Member States Official Journal
Directive 2011/85/UE

13.12.2011

OJ L 306 of 23.11.2011

Stability and growth pact and economic policy coordination

Stability and growth pact and economic policy coordination

Outline of the Community (European Union) legislation about Stability and growth pact and economic policy coordination

Topics

These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic.

Economic and monetary affairs > Stability and growth pact and economic policy coordination

Stability and growth pact and economic policy coordination

The Stability and Growth Pact is intended to ensure that Member States maintain budget discipline in order to avoid excessive deficits. It therefore contributes to monetary stability. Member States coordinate their economic policies at European level.

STABILITY AND GROWTH PACT

Implementation of the pact

  • Resolution of the Amsterdam European Council on the stability and growth pact
  • Surveillance of budgetary policies
  • The corrective arm: the excessive deficit procedure
  • Requirements for budgetary frameworks of the Member States

Implementation of the pact

  • A European Economic Recovery Plan
  • Reporting of planned deficits by Member States
  • European financial stabilisation mechanism

ECONOMIC POLICY COORDINATION

Basic provisions

  • Resolution of the European Council on economic policy coordination (1997)
  • Reinforcing economic policy coordination
  • Streamlining of annual economic and employment policy coordination cycles

Council recommendations

  • Broad guidelines for economic policies
  • Broad Economic Policy Guidelines (2008- 2010)
  • Broad economic policy guidelines (2005- 2008)
  • Broad economic policy guidelines 2003-2005
  • Broad economic policy guidelines (2002)
  • Broad economic policy guidelines (2001)
  • Broad economic policy guidelines (2000)
  • Broad economic policy guidelines (1999)
  • Broad economic policy guidelines (1998)
  • Broad economic policy guidelines (1997)
  • Broad economic policy guidelines (1996)

Public finances in Member States

  • Ensuring the effectiveness of the preventive arm of the Stability and Growth Pact: Public Finances in EMU – 2007
  • Long-term sustainability of public finances in the EU
  • Revising the Stability and Growth Pact: Public Finances in EMU 2006
  • Public finances in Member States in 2005
  • Public finances in Member States in 2004

The European economy

  • The European economy: 2007 Review
  • The European economy: 2006 review – strengthening the euro area
  • The European economy: 2004 Review
  • The OECD and the examination of EC economic policies

Declaration on the Euro area

  • 2009 Annual Statement on the Euro Area
  • 2007 Annual Statement on the Euro Area

Surveillance of budgetary policies

Surveillance of budgetary policies

Outline of the Community (European Union) legislation about Surveillance of budgetary policies

Topics

These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic.

Economic and monetary affairs > Stability and growth pact and economic policy coordination

Surveillance of budgetary policies

Document or Iniciative

Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies [See amending acts].

Summary

This Regulation constitutes the preventive arm of the stability and growth pact. It aims to monitor and coordinate Member States’ budgetary policies, by way of a preventive measure to ensure budgetary discipline within the European Union.

To this end, the Regulation provides for a European Semester at the start of each year to assist Member States in putting in place healthy budgetary policies. Member States submit to the Commission stability programmes (for Member States in the euro zone) and convergence programmes (for Member States outside the euro zone) in which they adopt medium-term budgetary objectives. These programmes are assessed by the Commission and are the subject of specific Council recommendations for each State.

European Semester for economic policy coordination

The European Semester comprises a six-month period during which Member States’ budgetary policies are examined.

At the start of the Semester, the Council shall identify the key economic challenges for the European Union (EU) and provide Member States with strategic policy guidelines to be followed.

Subsequently, and on the basis of these guidelines, Member States shall establish:

  • their stability or convergence programmes under this Regulation;
  • their national reform programmes, in line with broad guidelines for economic policy and guidelines for employment policies.

At the end of the European Semester and following an assessment of the programmes, the Council sends recommendations to each Member State. Based on the Commission’s Opinion, the Council thus makes known its assessments before Member States draw up their final budgets for the following year.

Medium-term budgetary objectives

Each Member State has a medium-term deficit objective for its budgetary position, defined in structural terms. The medium-term objectives differ between Member States: they are more stringent where the level of debt and estimated costs of an ageing population are higher.

For the Member States that have adopted the euro and for those participating in the ERM 2 at over – 1 % of GDP, the medium-term objectives may be revised when a major structural reform is undertaken or every three years, when forecasts are published enabling the estimated costs of ageing populations to be updated.

Multilateral surveillance: stability and convergence programmes

The stability and convergence programmes serve as a basis for multilateral surveillance by the Council of the EU. This surveillance, provided for in Article 121 of the Treaty on the Functioning of the EU should prevent, at an early stage, the occurrence of excessive public deficits and promote the coordination of economic policies.

Each Member State must present the Council of the EU and the Commission with a stability programme (for Member States in the euro zone) or a convergence programme (for Member States outside the euro zone).

Stability or convergence programmes must include the following information:

  • the medium-term budgetary objective, an adjustment path for achieving the objective, government balance as a percentage of GDP, the foreseeable trend for the government debt ratio, the growth rate planned for government expenditure, the growth path of government revenue at unchanged policy, and quantified discretionary revenue measures. In addition, convergence programmes have to state the relationship between these objectives and price and exchange rate stability, as well as the medium-term objectives of monetary policy;
  • information on implicit liabilities related to ageing, and contingent liabilities (such as public guarantees) with a potentially large impact on government accounts;
  • information on the consistency of the programmes with the broad economic policy guidelines and the national reform programmes;
  • the main assumptions underlying the economic outlook, which are likely to influence the realisation of the stability and convergence programmes (growth, employment, inflation and other important variables);
  • an assessment and a detailed analysis of the budgetary measures and other economic policy measures – taken or envisaged – of relevance in achieving the programme’s aims;
  • an analysis of how changes in the main economic assumptions would affect the budgetary and debt positions;
  • where applicable, the reasons for a deviation from the adjustment path needed to achieve the medium-term budgetary objective.

Stability and convergence programmes must be submitted every year during the month of April. They are published by the Member States.

Examination of the stability and convergence programmes

On the basis of assessments by the Commission and the Economic and Financial Committee, the Council examines the medium-term budgetary objectives presented by Member States in their programmes. It checks in particular:

  • whether the medium-term budgetary objective is based on plausible economic assumptions;
  • whether the measures taken or envisaged are sufficient to achieve the budgetary objective;
  • whether an assessment of the adjustment path shows that the Member State concerned is seeking to improve its (cyclically adjusted) budgetary balance year-on-year;
  • whether annual growth in government expenditure by the Member State concerned is not too high – i.e. does not exceed a benchmark rate in the medium term.

When making its assessments, the Council must take account of the implementation of major structural reforms, especially pension reforms.

The Council is to examine the programme within three months of its submission. On a recommendation from the Commission and after consulting the Economic and Financial Committee, the Council delivers an opinion on the programme. Where it considers that the objectives and content of a programme should be strengthened, the Council can invite the Member State concerned to adjust it.

Avoiding the occurrence of an excessive deficit: the early warning mechanism

As part of multilateral surveillance, the Council monitors the implementation of stability and convergence programmes on the basis of information provided by the Member States and assessments carried out by the Commission and the Economic and Financial Committee.

Thus, if the Commission identifies a significant divergence from the medium-term budgetary objective or from the adjustment path that should lead to that objective being achieved, it will address recommendations to the Member State concerned to prevent the occurrence of an excessive deficit (early warning mechanism, Article 121(4) of the Treaty on the Functioning of the EU).

Furthermore, recommendations adopted in the Council may be made public.

Context

The stability and growth pact is a set of rules putting in place economic and budgetary surveillance at European level. The objective is to guarantee the economic and financial stability of the EU.

Member States must therefore apply healthy budgetary policies in order to avoid the occurrence of excessive government deficits which might endanger the economic and financial stability of the EU.

In 2011, the stability and growth pact was the subject of extensive reforms. The new measures adopted are an important step in guaranteeing budgetary discipline, promoting the stability of the European economy and preventing another crisis within the Union.

The stability and growth pact now includes six legislative acts which entered into force on 13 December 2011:

  • Regulation (EU) No 1173/2011 on the effective enforcement of budgetary surveillance in the euro area;
  • Regulation (EU) No 1174/2011 on enforcement measures to correct excessive macroeconomic imbalances in the euro area;
  • Regulation (EU) No 1175/2011 amending this Regulation on surveillance procedures for budgetary positions;
  • Regulation (EU) No 1176/2011 on the prevention and correction of macroeconomic imbalances;
  • Regulation (EU) No 1177/2011 amending the procedure on excessive deficits;
  • Directive No 2011/85/EU on requirements for budgetary frameworks of the Member States.

References

Act Entry into force Deadline for transposition in the Member States Official Journal

Regulation (EC) No 1466/97

1.7.1998

OJ L 209 of 2.8.1997

Amending act(s) Entry into force Deadline for transposition in the Member States Official Journal

Regulation (EC) No 1055/2005

27.7.2005

OJ L 174 of 7.7.2005

Regulation (EU) No 1175/2011

13.12.2011

OJ L 306 of 23.11.2011

 

The corrective arm: the excessive deficit procedure

The corrective arm: the excessive deficit procedure

Outline of the Community (European Union) legislation about The corrective arm: the excessive deficit procedure

Topics

These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic.

Economic and monetary affairs > Stability and growth pact and economic policy coordination

The corrective arm: the excessive deficit procedure

Document or Iniciative

Council Regulation (EC) No 1467/97 of 7 July 1997 on speeding up and clarifying the implementation of the excessive deficit procedure [Official Journal L 209 of 2 August 1997] [See amending acts].

Summary

The aim of this Regulation is to clarify and speed up the excessive deficit procedure provided for in Article 126 of the Treaty on the Functioning of the European Union (EU) (formerly Article 104 of the Treaty on the European Community). The emergence of excessive deficits must be prevented and rapidly corrected.

The reference value: 3 % of GDP

As set out in the Protocol on the excessive deficit procedure annexed to the Treaty on the Functioning of the EU (by the Maastricht Treaty in 1992), the reference value for government deficit is 3 % of gross domestic product (GDP). A deficit exceeding this value is considered exceptional when:

  • it results from an unusual event outside the control of the Member State concerned which has a major impact on the financial position of the government;
  • it results from a severe economic downturn (if the excess over 3 % of GDP is the result of negative annual GDP growth or a cumulative fall in production over a prolonged period of very low annual growth).

Moreover, the excess over the reference value is considered temporary if the European Commission’s budget forecasts state that the deficit will fall below the reference value when the unusual circumstance or serious downturn is over.

The existence of an excessive deficit: considering all factors

The European Commission carries out an assessment, and the Council of the European Union decides whether or not there is an excessive deficit. The Commission prepares a report and must take all relevant factors into account.

The relevant factors include:

  • developments in the medium-term economic position (potential growth);
  • prevailing cyclical conditions;
  • the implementation of policies aimed at encouraging research and innovation;
  • developments in the medium-term budgetary position, particularly fiscal consolidation efforts in “good times”;
  • reform of retirement pension schemes.

The European institutions are also required to give due consideration to any other factors which, in the opinion of the Member State concerned, are relevant for assessing the excess over the reference value.

The excessive deficit procedure

7. Commission Report. Within two weeks of the Commission adopting the report it draws up if a Member State does not fulfil the criteria laid down in Article 126 of the Treaty on the Functioning of the EU, the Economic and Financial Committee formulates an opinion.

The Commission takes this opinion into account and, if it considers an excessive deficit to exist, addresses an opinion to the Member State concerned. It also informs the Council.

Council Recommendation

On the basis of the Commission’s opinion, the Council decides, by a qualified majority, whether an excessive deficit exists. The Council also considers any observations made by the Member State concerned.

If the Council decides that an excessive deficit exists, when it makes that decision, it issues recommendations to the Member State concerned. The Council establishes a deadline of no more than six months for effective action to be taken. The correction of the excessive deficit should be completed in the year following its identification, unless there are special circumstances. In its recommendations, the Council is to request the Member State to achieve a minimum annual improvement of at least 0.5 % of GDP as a benchmark.

If unexpected adverse economic events with major unfavourable consequences for government finances occur after the adoption of the Council’s recommendations, and if the Member State concerned has acted in accordance with the recommendations, the Council may adopt revised recommendations.

Where no effective action has been taken within six months of the identification of an excessive deficit, the Council decides whether to make its recommendations public. When considering whether effective action has been taken in response to its recommendations, the Council bases its decision on the public declarations of the Member State concerned.

Formal notice and sanctions. Within two months of its decision establishing that no effective action has been taken, the Council may give notice to the Member State concerned to take measures to reduce the deficit. If effective action has been taken in compliance with a notice, and unexpected adverse economic events with major unfavourable consequences for government finances occur after the adoption of that notice, the Council may decide, on a recommendation from the Commission, to adopt a revised notice.

No later than four months after notice has been given, the Council normally decides to impose sanctions if the Member State fails to comply with the Council’s decisions.

As stipulated in Article 139, paragraph 2(b) of the Treaty on the Functioning of the EU (formerly Article 122 of the Treaty on the European Community), the formal notices issued by the Council and the sanctions provided for in Article 129 of the Treaty do not apply to Member States not (yet) participating in the euro.

Abeyance of the procedure

The excessive deficit procedure may be held in abeyance:

  • if the Member State concerned acts in compliance with the recommendations made by the Council;
  • if the participating Member State concerned acts in compliance with the notices issued by the Council.

The period during which the procedure is held in abeyance is not included in the periods relating to the giving of notice or to the imposition of sanctions.

Corrective action

The Council sets a deadline for corrective action to be taken by the Member State. This corrective action must comply with the Council’s recommendations and its sanctions. Upon the expiry of this deadline, the Commission gives the Council its opinion on the corrective measures taken by the Member State concerned. The Commission’s opinion is based on the premise that these measures have been fully implemented and that economic developments are in line with forecasts.

In order to examine a participating Member State’s adjustment efforts, the Council may ask the Member State to submit reports in accordance with a specific timetable:

  • if action by that participating Member State is not being implemented or, in the Council’s view, is proving to be inadequate;
  • if actual data indicate that an excessive deficit has not been corrected by that participating Member State within the time limits specified in the recommendations.

Sanctions

Sanctions resulting from a procedure for excessive deficit first take the form of a non-interest-bearing deposit with the EU. The amount of this deposit comprises:

  • a fixed component equal to 0.2 % of GDP;
  • a variable component equal to one tenth of the difference between the deficit as a percentage of GDP in the year in which the deficit was deemed to be excessive and the reference value of 3 % of GDP.

Each following year, the Council may decide to intensify sanctions by requiring an additional deposit. This will be equal to one tenth of the difference between the deficit as a percentage of GDP in the preceding year and the reference value of 3 % of GDP.

Deposits may not exceed the upper limit of 0.5 % of GDP per year.

As a rule, a deposit is converted into a fine if, in the Council’s opinion, the excessive deficit has not been corrected after two years.

The Council may decide to abrogate some or all of the sanctions, depending on the significance of the progress made by the participating Member State concerned in correcting the excessive deficit.

The Council will abrogate all outstanding sanctions if the decision on the existence of an excessive deficit is repealed. Any fines already imposed will not be reimbursed to the participating Member State concerned.

Both the interest on the deposits lodged with the Commission and the yield from any fines will be distributed among Member States without an excessive deficit, in proportion to their share of the total gross national product (GNP) of the eligible Member States.

Context

The aim of the Stability and Growth Pact is to prevent excessive budget deficits emerging in the euro zone after the beginning of the third phase of Economic and Monetary Union (EMU), which started on 1 January 1999.

As the Treaty only sets out quantitative criteria for adopting the single currency and does not specify a budgetary policy to be implemented after the introduction of the euro, Member States judged it necessary to adopt the Stability and Growth Pact. It is therefore in keeping with the principles set out in the Treaty and extends its provisions.

The Pact is intended to ensure sound management of public finances in the euro zone in order to prevent a situation arising in which one Member State’s lax budgetary policy penalises the other Member States through interest rates and undermines confidence in the economic stability of the euro zone. It is designed to ensure the sustained and lasting convergence of the economies of Member States belonging to the euro zone.

Moreover, this Regulation was the subject of an initial revision in June 2005. A second recast is currently underway. The Proposal for the new regulation should be adopted by the European Parliament and the Council of the EU towards the end of 2011.

References

Act Entry into force Deadline for transposition in the Member States Official Journal

Regulation (EC) No 1467/97

1.1.1999

OJ L 209, 2.8.1997

Amending act(s) Entry into force Deadline for transposition in the Member States Official Journal

Regulation (EC) No 1056/2005

27.7.2005

OJ L 174, 7.7.2005

Resolution of the Amsterdam European Council on the stability and growth pact

Resolution of the Amsterdam European Council on the stability and growth pact

Outline of the Community (European Union) legislation about Resolution of the Amsterdam European Council on the stability and growth pact

Topics

These categories group together and put in context the legislative and non-legislative initiatives which deal with the same topic.

Economic and monetary affairs > Stability and growth pact and economic policy coordination

Resolution of the Amsterdam European Council on the stability and growth pact

Document or Iniciative

Resolution of the European Council on the Stability and Growth Pact (Amsterdam, 17 June 1997) [Official Journal C 236 of 02.08.1997].

Summary

This Council resolution establishes the political basis for the stability and growth pact. It provides the Member States, the Council and the Commission with firm policy guidelines for implementation of the stability and growth pact.

The Member States undertake to abide by the medium-term budgetary objective of positions close to balance or in surplus. In addition the Member States:

  • are invited to make public, on their own initiative, the Council recommendations made to them;
  • commit themselves to taking the corrective budgetary action they deem necessary to meet the objectives of their stability or convergence programmes;
  • will launch the corrective budgetary adjustments they deem necessary without delay on receiving information indicating the risk of an excessive deficit;
  • will correct excessive deficits as quickly as possible after their emergence;
  • undertake not to invoke the exceptional nature of a deficit linked to an annual fall in GDP of less than 2 % unless they are in severe recession (annual fall in real GDP of at least 0.75 %).

The Commission:

  • will exercise its right of initiative under the Treaty in a manner that facilitates the strict, timely and effective functioning of the stability and growth pact;
  • will present without delay the necessary reports, opinions and recommendations to enable the Council to adopt decisions rapidly;
  • undertakes to prepare a report whenever there is the risk of an excessive deficit or whenever the planned or actual government deficit exceeds the reference value of 3 % of GDP;
  • undertakes, in the event that it considers a deficit exceeding 3 % of GDP is not excessive and that this opinion differs from that of the Economic and Financial Committee, to present in writing to the Council the reasons for its position;
  • undertakes, following a request from the Council, to make, as a rule, a recommendation for a Council decision on whether an excessive deficit exists.

The Council is committed to rigorous and timely implementation of all elements of the stability and growth pact in its competence and in addition is:

  • urged to regard the deadlines for the application of the excessive deficit procedure as upper limits;
  • invited always to impose sanctions if a participating Member State fails to take the necessary steps to bring the excessive deficit situation to an end and to apply rigorously the whole range of sanctions provided for;
  • invited always to state in writing the reasons which justify a decision not to act.

In September 2004 the Commission reacted to this and to the debate surrounding the stability and growth pact by issuing a communication on strengthening economic governance and clarifying the implementation of the Stability and Growth Pact. It proposes a series of improvements to the pact. The Commission focuses particularly on the trend in economic factors in the Member States and the long-term sustainability of public finances.

At the European Council of 22 and 23 March 2005the Finance Ministers reached a political agreement on better management of the stability and growth pact.

Related Acts

Council Regulation (EC) No 1467/97 of 7 July 1997 on speeding up and clarifying the implementation of the excessive deficit procedure [Official Journal L 209 of 02.08.1997]
Council Regulation (EC) No. 1467/97 clarifies and speeds up the excessive deficit procedure so that it acts as a genuine deterrent.

Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies [Official Journal L 209 of 02.08.1997].
Council Regulation (EC) No 1466/97 governs the surveillance of the Member States’ budgetary positions and the coordination of their economic policies.