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Council Recommendation of 15 June 2001 on the Broad Guidelines of the Economic Policies of the Member States and the Community (2001/483/EC)
THE COUNCIL OF THE EUROPEAN UNION,
Having regard to the Treaty establishing the European Community, and in particular to Article 99 (2) thereof,
Having regard to the recommendation from the Commission,
Having regard to the discussion by the European Council on 15 June in Göteborg,
Whereas a Resolution on the recommendation from the Commission was adopted by the European Parliament,
HEREBY RECOMMENDS:
I. GENERAL ECONOMIC POLICY GUIDELINES
A year ago, in Lisbon, the European Union set itself a new strategic goal for the next decade: "to become the most competitive and dynamic knowledge-based economy in the world capable of sustainable growth with more and better jobs and greater social cohesion". The 2000 Broad Economic Policy Guidelines (BEPGs) set out a comprehensive policy strategy to fulfil this ambition. This strategy consists of growth- and stability-oriented macroeconomic policies and comprehensive economic reforms of labour, product and capital markets. These policies should sustain robust economic growth in the short term, strengthen the basis for future growth in the medium term and enhance the capacity to cope effectively with longer-term structural changes, including the impact of population ageing.
The 2001 BEPGs confirm the existing policy strategy and extend it further in the light of the results of the Stockholm European Council (23-24 March 2001). There it was emphasised that the Union and the Member States are fully committed to the goal of full employment and see it as an important way of meeting the challenge of ageing populations. It was also stressed that the promotion of sustainable development should be integrated in the BEPGs. They have been drawn up against the background of the examination of the implementation of the 2000 BEPGs and the assessment of the economic situation and outlook as presented in the Commission's Spring 2001 Economic Forecasts.
Section 2 starts with a discussion of the economic background to these guidelines and concludes by identifying the main policy challenges in the short, medium and longer term. Section 3 then describes the general policy recommendations which are applicable to all Member States and the Community. Within the overall strategy, policy priorities differ somewhat across Member States due to differences in economic performance, prospects, structures and institutions. Taking due account of them, Part II presents the country-specific economic policy guidelines. The budgetary recommendations are based on the national stability or convergence programmes, their underlying economic assumptions and the Council Opinions thereon. The assessment in 2002 whether these recommendations have been followed will also take into account major changes in the general economic environment.
2. MAIN PRIORITIES AND POLICY REQUIREMENTS
2.1. Recent and prospective economic developments
A markedly less favourable external economic environment - Since early summer 2000, when the previous guidelines were adopted by the Council, the global economic environment has become distinctively less supportive on the back of a number of inter-related forces. While the global slowdown is generally expected to be relatively short-lived, the risks of a less favourable outcome are considerable.
First, throughout the summer, oil prices increased and reached new highs in the autumn. Although they have retreated from their late 2000 peak and slowing global demand reduces the risk of a renewed price hike, oil prices remain relatively high and continue to exhibit a high degree of volatility. Second, and more important, there has been an unexpected sharp slowdown in economic activity in the United States and Japan over recent months. In the United States, some adjustment towards a more sustainable growth path was both expected and desirable, as it could effectively lead to a correction of important imbalances that had built up during the expansion. Expectations centre on a recovery in the second half of 2001 based inter alia on a judicious use of the available room for policy manoeuvre. However, the outlook remains subject to considerable uncertainties. In Japan, the fragile recovery is faltering and the economy remains vulnerable to shocks. The deteriorating external environment is already affecting growth in a number of emerging market economies, mainly through a deceleration of exports. Third, volatility has remained very high on global equity markets and a pronounced correction has taken place, especially in technology stocks, reflecting a downward shift in investors' perception of long-term profit outlook.
Growth in the euro area is holding up rather well - The second year of Economic and Monetary Union was a successful one. In the euro area, economic growth was the strongest and unemployment fell to the lowest level for a decade. Headline inflation accelerated, mainly driven by temporary factors such as energy prices and a weak exchange rate, but inflation is expected to be well below 2 per cent in the medium term. Nevertheless, the growth momentum has been dented, firstly by the negative shock imparted by rising oil prices and, subsequently, by the downturn in global demand.
Looking forward, despite the downturn in world economic activity, the euro area looks set to continue to enjoy in 2001-2002 relatively solid economic growth of about 2 3/4 per cent and continued job creation while upside risks to price stability have diminished. Strongly improved macroeconomic fundamentals, including sustained wage moderation, and sound policies have fostered a favourable investment climate and steady employment creation. They have engendered a virtuous growth circle that is firmly rooted in domestic demand. While having come down, business and especially consumer confidence remain well above their long-term averages as they continue to be supported by the increased dynamism of the economy. High capacity utilisation, favourable financing conditions and strong profitability support investment demand, while rising disposable incomes, fostered by productivity gains, higher employment and tax reforms, continue to underpin consumer demand.
Furthermore, the large internal market coupled with the single currency provides a strong and stable base for domestic growth with less exposure to exchange-rate fluctuations. The coming introduction of euro notes and coins on 1 January 2002 will give further impetus to economic integration and will turn the euro into a reality in daily life and make monetary union more visible. Moreover, thanks to progress with economic reforms, the euro area's resilience to external disturbances has been fortified. As a consequence, even if external downside risks were to materialise - in particular if the US economy does not quickly return to solid growth - the above factors will help mitigate the impact on the euro area.
The non-euro-area Member States - After robust economic growth and job creation in 2000, Denmark, Sweden, and the United Kingdom, like the euro area, are being affected by the adverse developments in the world economy. As a result, economic growth is expected to slow to a more moderate pace. Good progress on structural reforms and continuing healthy domestic demand position them well to weather the deteriorating external environment. Inflation in these countries remains subdued at or below the level recorded in the euro area.
Looking ahead, the EU and the euro area face a number of key challenges in the short, medium, and longer term. A successful response to these challenges will depend on appropriate policy action being taken now.
The short-term challenge: preserving the expansion in growth and jobs - The immediate task ahead is to maintain strong economic performance in a context of less supportive global economic conditions. The EU and the euro area will have to rely increasingly on their own strengths.
Growth- and stability-oriented macro-economic policies and comprehensive structural reforms are crucial to maintain and further enhance internal growth dynamics. They will underpin business and consumer confidence. In this context, budgetary policies should contribute to avoiding excess demand and inflationary pressures, and wage moderation needs to be sustained. This is supporting price stability and can facilitate monetary conditions conducive to economic growth and continued employment creation.
In particular, budgetary policies should continue to be geared to the achievement of budgetary positions close to balance or in surplus. Preserving the hard-won macroeconomic stability and extending it into the future is essential. Pressures to increase government expenditure and reduce taxes could put budgetary positions in jeopardy. Furthermore, wage pressures have arisen in some Member States, sparked by emerging labour market bottlenecks and demands for compensation for the recent increase in headline inflation and past moderation.
Economic and Monetary Union has implied an important regime change that entails additional responsibilities for all major policy actors in making it a success. The single monetary policy is set for the euro area as a whole and the exchange rate can no longer be used to restore lost competitiveness, resulting from a delay in structural change or an inappropriate macroeconomic policy mix.
Governments and Social Partners therefore bear responsibility in contributing to a balanced macroeconomic policy mix both at Member State and euro-area level. The social partners are called upon to continue to act in a responsible manner, thereby enhancing prospects for increased growth and employment.
More generally, there is a need to increase further the resilience of the economy through a judicious combination of structural reforms. More flexible and open markets will enhance the capacity to deal with change and help to absorb the impact of shocks. They will also foster a positive interaction between structural improvements in the economy and entail benefits in terms of macroeconomic performance. In addition, structural reforms can have a positive impact in the short term through downward pressure on prices.
The medium-term challenge: improving the basis for future growth and employment - The growth performance since 1997 has to be seen in a context of a cyclical recovery where slack could be used up. While potential output growth may well have improved over recent years as a result of productivity gains fostered by improved market functioning and new information and communication technologies, it is still considered to be insufficient to sustain growth rates of around 3 per cent over an extended period of time. Sustaining the expansion will therefore hinge on a permanent increase of potential growth.
Policies should concentrate on creating the right conditions for the efficient use of productive and natural resources and for their enhancement over time. In particular, policies should contribute to improved market functioning by addressing market imperfections or failure due to the existence of externalities, market power, imperfect information or the regulatory environment.
The present under-utilisation of human resources should be reduced. Registered unemployment in the EU is still unacceptably high and labour force participation and employment rates are low, especially for older workers and women, and in many Member States far from the targets agreed in Lisbon and Stockholm. The mutual reinforcement of economic and social policies leads through improved employment opportunities to a better use of the human resource potential in the EU. This requires reviewing labour market regulation and institutions to diminish obstacles to labour demand and supply which they may pose. An increase in the level of participation in the labour market, especially for groups that are underrepresented or disadvantaged is also key to social inclusion.
To promote an increase in the labour supply, it is necessary to make sure that the regulatory framework encourages people to enter into or remain in the labour market. In particular, tax and benefit schemes should be further reformed to strengthen financial incentives for people to take up or stay in a job. A switch to focused active policies is needed to enhance the opportunities of unemployed and inactive persons. Active labour market policies also promote social inclusion. The more efficient use of the European labour force as a whole should also be achieved through the reduction of barriers to labour mobility within and between Member States, particularly with a view to tackling skills bottlenecks. Moreover, life-long learning should be fostered with a view to encouraging participation in the labour force and to enhancing the flexibility and adjustment capacity of the labour force.
An increase in labour supply will normally have to be accompanied by capacity-enhancing investment. This includes creating a business environment conducive to investment, supported by adequate public infrastructure and a modern and efficient public administration. Well-functioning, competitive and integrated product and capital markets will contribute by making sure that resources are put to their best possible use. In this context, there is a need to enhance competition in goods and services markets and, in particular, in utilities and financial services. To this end, action at Community level should focus on completing the internal market, especially in services included in the financial sector and in network industries. Member States, for their part, should see to an effective and, above all, faster implementation of the internal market legislation and encourage greater competition.
A central element in the Lisbon strategy is the recognition of the necessity to foster entrepreneurship and innovation in the EU, both of which are fundamental pre-conditions for increasing Europe's potential for growth and, subsequently, its competitiveness, wealth and job creation. Strengthening entrepreneurship and innovation constitutes a key challenge for all Member States.
The promotion of competition within the internal market finds its logical complement in increased competition at world level. This would add important positive effects in raising the European productive potential.
The European Union should therefore continue to adopt a common commercial policy that favours open world trade and press for a new multilateral trade round within the context of the WTO.
Strong productivity growth and competitiveness in a global context will require ongoing structural change. Europe's transition towards a knowledge-based economy is progressing but shortcomings remain in the relationship between industry and science and the level of private investment in R& D, such that commercialisation of the research effort remains weak. In addition, the supply of qualified ICT personnel and trained researchers is insufficient. Moreover, higher investment in the EU is crucial for a rapid diffusion of innovation (in particular ICT) across the whole economy and thereby for increasing, in the medium-term, the growth potential.
The longer-term challenge: preparing for the impact of ageing populations - The need for growth- and stability-oriented macroeconomic policies and comprehensive economic reforms aimed in particular at increasing labour supply is amplified by the challenge posed by ageing populations that is visible on the horizon. On present trends, the EU's working age population will fall by approximately 40 million people between 2015 and 2050 and the old age dependency ratio will roughly double over the next five decades. The impact on public finances is already beginning to be felt in some Member States.
Tentative calculations point to increased expenditures on public pensions of the order of 3 to 5 per cent of GDP over the period from 2010 to 2050. In addition, expenditure on health care and care for the elderly is expected to increase substantially. The ageing population will thus have considerable consequences for the long-term sustainability of public finances taking into account the need to provide for universal pensions. As the impact is beginning to be felt, governments need to act now to ensure the quality, adequacy and fiscal sustainability of pensions and of health care for the elderly, and to improve incentives for higher employment. To this end, the current systems and policies need to be reviewed and, where appropriate, be reformed. Structural improvements in public finances need to be achieved to prepare for the coming financial burdens imposed by ageing populations on public finances.
Beyond the immediate financial impact, the ageing of populations has wider implications for economic growth, as a result of the shrinking of the potential workforce and of potentially important effects on the level of aggregate savings. Further growth in living standards will increasingly have to be supported through increases in labour productivity and by raising the employment rate. Promoting investment and the process of capital deepening, thereby increasing labour productivity, contributes to tackle the negative impacts of ageing. In addition, a reduced inflow of young, newly-educated persons into the labour force may hamper skill renewal and thus the take-up of new technology. Increasing new-technology proficiency among young people and fostering life-long learning could help to counteract the effects of ageing on skils.
Member States need to develop comprehensive strategies for addressing the economic and budgetary challenges posed by ageing populations. Strategy measures might include reform of pension and health care systems, and care for the elderly, increasing the effective retirement age, stimulating higher labour supply participation, especially for older workers, setting up and increasing public pension fund reserves and possibly encouraging the expansion of supplementary privately-funded pension schemes (pillars 2 and 3). These strategies should be presented in conjunction with the stability and convergence programmes and be examined in the context of multilateral surveillance, taking due account of the principle of subsidiarity.
Ensuring close policy co-ordination - Close co-ordination among policy actors and continuous and fruitful dialogue between the Council, the Eurogroup, and the ECB, involving the Commission and respecting all aspects of the independence of the ESCB are essential in fostering harmonious economic developments. This also includes early exchange of information and the improvement of common statistics. The effectiveness of policy actions will be enhanced by taking proper account of spill-over effects that become more important as integration intensifies.
This is particularly true for the euro-area Member States. To deal with these challenges and to exploit the full potential of EMU, the authorities of the euro-area Member States are closely co-ordinating their economic policies in the Eurogroup. In accordance with the conclusions of the Nice European Council, the Eurogroup has started to extend the range of mainly structural matters it deals with in order to contribute to the reinforcement of the growth potential of the euro area.
The policy strategy both at macro and microeconomic level to deal effectively with these key challenges is set out in more detail in the next section. Its main components are to:
3.1. Ensure growth- and stability-oriented macroeconomic policies
Macroeconomic policy plays a key role in sustaining growth and employment and in preserving price stability. Over the short term, it should aim at the continuation of a well-balanced economic expansion and the full realisation of current growth potential. Over the medium term, it should contribute to the establishment of the framework conditions which promote adequate levels of saving and investment to position the economy on a sustained, higher, non-inflationary, growth and employment path.
In the euro area, following buoyant economic activity in 2000, growth is expected to slow down but to remain fairly robust and above the potential rate in 2001-2002 whilst inflation should ease. An appropriate and tension-free macroeconomic policy approach consists of the following elements.
The primary objective of the single monetary policy is to maintain price stability in the euro area. Without prejudice to this objective, it supports the general economic policies in the Community.
Sound budgetary positions, in line with the Stability and Growth Pact, provide the necessary scope for the full working of the automatic stabilisers without the risk of breaching the 3 per cent of GDP limit for the general government budget deficit. They also have favourable effects on interest rates and contribute to the crowding-in of private investment, to the further reduction of the government debt to GDP ratio thus contributing to preparing for the costs of demographic changes and, by increasing the credibility of the budgetary framework of EMU, to a strengthening of investors' confidence.
As a general principle, it is important that budgetary policies be guided by the need to avoid pro-cyclical stances which lead to exacerbated swings in economic activity, unsustainable structural balances and burden the single monetary policy. Most Member States have reached a minimum budgetary position which allows them to let the automatic stabilisers work without exceeding the excessive deficit limit. This important result must be preserved. Further fiscal consolidation is needed in most cases.
All Member States, within compliance with the Stability and Growth Pact, need to ensure that cyclically adjusted budgetary positions move towards, or remain in, balance or surplus in the coming years. This will create additional room for manoeuvre for cyclical stabilisation, to cope with unexpected budgetary developments, to put government debt on a more rapidly descending trajectory and to prepare for the budgetary challenges associated with population ageing. Based on the latest 2000/01 updates of the stability programmes, following a slight deterioration in 2001, the aggregate euro area budgetary position is set to improve gradually to a balanced position in 2003.
The euro area Member States should ensure that their budgetary policies support the price-stability orientation of the single monetary policy. In this context, they should stand ready to use budgetary and structural policies to contribute to domestic price stability and to take into account both the euro-area dimension and the national implications of the single monetary policy in conducting their budgetary policies. In general, Member States should:
Regarding the non-euro-area Member States, monetary policy in Denmark is reserved for the fixed-exchange rate policy toward the euro in the framework of ERM2 which is seen as instrumental to achieve price stability. In Sweden and the United Kingdom monetary policies aim at price stability through targeting inflation. Their successful achievement will help create the conditions for exchange rate stability.
The non-euro area Member States shall also maintain sound budgetary positions in accordance with the Stability and Growth Pact. In general, they should:
Wage developments in Member States should reflect different economic and employment situations. Governments should promote the right framework conditions for wage negotiations by social partners. For wage developments to contribute to an employment-friendly policy-mix, social partners should continue to pursue a responsible course and conclude wage agreements in Member States in line with the general principles set out in the broad economic policy guidelines. It is necessary that:
3.2. Improve the quality and sustainability of public finances
Member States must sustain sound budgetary positions while at the same time improving the quality and sustainability of public finances in line with the report endorsed by the Stockholm European Council. This will ensure that public finances maximise their contribution to growth and employment and the achievement of the objectives agreed in Lisbon and Stockholm, including social cohesion. An appropriate balance and sequencing have to be drawn between running down public debt, cutting taxes and financing public investment in key areas. To this end Member States should:
Just like the Member States, the Community should apply strict budgetary discipline. This must be applied to all categories of the financial perspective, while respecting the inter-institutional agreement on budget discipline and the improvement of the budget procedure; a flexible allocation of Community resources should be exploited in order to enhance the economic impact of the EU budget.
3.3. Invigorate labour markets
The strong employment performance of recent years continued during 2000. This has been due in large part to the favourable macroeconomic conditions, but labour market developments also strongly suggest a reduction in structural unemployment thanks to reforms and policies to improve the functioning of labour markets implemented over the past decade, in particular in the context of the European Employment Strategy. Wage growth has been relatively moderate despite the sharp fall in unemployment, while long-term unemployment has fallen by even more than the overall rate. Nevertheless, there remains ample scope for further progress. In particular, the EU is facing four challenges. Firstly, signs of recruitment difficulties and skill shortages have emerged in a number of Member States, which suggests that the EU may now be approaching the limits of rapid cyclical employment growth.
Secondly, unemployment is still unacceptably high with large differences across Member States and regions. Thirdly, further large reductions in unemployment and a substantial increase in labour supply will be needed to hit the EU employment targets of 70 per cent overall employment rate and of 60 per cent for women by 2010 as agreed by the Lisbon European Council, including the intermediate targets of 67 per cent and 57 per cent respectively by January 2005, as well as 50 per cent for older workers by 2010, agreed at the Stockholm European Council. Fourthly, as reaffirmed at the Stockholm European Council, the aim should be to create better jobs as well as more jobs, notably via improved education, life-long learning and a better reconciliation of working and personal life.
To meet these challenges, Member States should take advantage of the favourable macroeconomic conditions to make the necessary structural improvements in labour markets and move towards the goal of full employment.
On 19 January 2001, the Council adopted detailed guidelines for employment policies for the year 2001, consistent with the priorities in the 2000 Broad Guidelines of the Economic Policies, as well as Member State specific recommendations therein. In pursuing labour market reforms, Member States should vigorously implement the Employment Guidelines and recommendations addressed to them.
They should, in particular, take the following measures:
3.4. Ensure efficient product (goods and services) markets
The creation of the Internal Market and the launch of the euro have fostered competition in EU product markets. This has had a moderating effect on inflation rates and has been a factor in the convergence of price levels between Member States with clear benefits for consumers. Competition has also led to a rationalisation of production, which has contributed to improving the competitive strength of European companies. However, the internal market for services is still hampered by existing barriers, creating obstacles to cross-border activities. Liberalisation has already produced lower prices in the telecommunications sector, and there have been benefits in those countries who have opened up their energy markets. The Council will examine as soon as possible the Commission proposal to fully liberalise electricity and gas for all consumers. Similarly, the opening up of the European economy to world trade has exposed European companies to international competition, which has contributed to increasing the efficiency of European product markets. The European Union continues to be committed to trade liberalisation, and to opening a new trade round within the WTO. While significant progress has been made in the functioning of European product markets, a number of areas remain where further efforts are needed. Member States should:
3.5. Promote the efficiency and integration of the EU financial services market
The EU financial system is integrating progressively under the influence of globalisation, deregulation, technological advances and the introduction of the euro. The efficiency gains from financial integration will be reflected in an improved allocation and lower cost of capital, with beneficial effects on growth and employment creation in the EU economy. However, the remaining obstacles to financial integration prevent potential benefits from being fully reaped. Among the more important of these obstacles is the absence of a clear and consistently applied EU regulatory framework for many areas of financial services. Progress in developing such a framework has been made through a range of actions under the Financial Services Action Plan (FSAP). Implementation of the Risk Capital Action Plan (RCAP) should enhance the availability of adequate financing opportunities for innovative SMEs, whose flexibility and growth potential make them important sources of economic growth and employment. However, progress towards a truly single market for financial services is, at present, too slow. In this respect, it is necessary to:
3.6. Encourage entrepreneurship
Strengthened entrepreneurship will increase the EU's potential for growth, competitiveness and job creation. A more favourable environment for business needs to be created in Europe. Businesses and citizens need a regulatory and fiscal environment which is clear, simple, effective and workable in a rapidly changing global market place. Measures to improve the efficiency of the public sector and to limit red tape have been introduced in order to reduce the administrative burden on enterprises. Nevertheless, there is scope for significant further action. European SMEs still consider lack of access to finance an obstacle to start-ups as well as a problem limiting companies' growth potential. Member States should:
3.7. Foster the knowledge-based economy
The European Union's transition to the knowledge-based economy is advancing, but it should be speeded up if the Lisbon strategic goal is to be achieved. Business and citizens need to be encouraged to seize the opportunities offered by the knowledge-based economy.
In spite of recent progress in ICT diffusion, the EU continues to lag behind the United States in areas such as research and development, investment in new technology, and internet penetration. It is of high importance that the guidance provided by the Stockholm European Council to accelerate economic reforms is brought into life within the agreed period. Increased investments in human capital, R& D and ICT are required in order to strengthen European competitiveness. The establishment of competitive product markets (see Section 3.4) and well-functioning capital markets (see Section 3.5) contribute to a business climate supportive of innovation and risk-taking that will encourage investment. In the area of R& D, the main challenge is to raise private sector involvement contributing to a better commercialisation of R& D results and to the establishment of the European Research Area to facilitate the transition to the knowledge-based economy, it is necessary to:
3.8. Enhance environmental sustainability
Challenges like climate change, the depletion of the ozone layer or the preservation of biodiversity show the need for an active environmental policy in order to ensure a responsible use of scarce natural resources and an economic development which is environmentally and socially sustainable in the long run. Commitments undertaken at international level also call for policy action.
The Stockholm European Council has asked to integrate the promotion of sustainable development into the Broad Economic Policy Guidelines. Sustainable Development is a concept that goes beyond a purely economic assessment and strives for improvements in the quality of life by promoting coherent policy actions based on an overarching assessment of their economic, social and environmental dimensions. In doing so, it takes a long-term view, looking at the welfare of both present and future generations. This section focuses on the integration of environmental aspects into economic policy, in particular the use of market-based instruments, as a means of promoting sustainable development.
Government action is often delayed by concerns about possible short-term consequences of policies to protect the environment on economic growth, employment and on the competitiveness of individual firms, sectors and Member States. In this context, Member States should make increased use of market-based instruments in pursuit of environmental objectives, as they provide flexibility to industry to reduce pollution in a cost-effective way, as well as encourage technological innovation. Furthermore, they are often the most efficient means to curb pollution since they lead to the internalisation of external costs in prices. They are therefore a way to implement more consistently the polluter-pays-principle. In this respect, better information and cost-benefit analysis are important. Investment in new, environmentally friendly technology can also be an important source of progress.
Member States should set clear targets and timetables for environmental policies so that business and consumers can adjust smoothly. Gradual but steady and credible changes in the level and structure of tax rates until external costs are fully reflected in prices would minimize structural adjustment problems and support adaptation and innovative solutions by firms. This approach would also minimise the need for exemptions for those firms or sectors that are most affected. Such exemptions often reduce the environmental effectiveness of the measure, distort the tax structure and are difficult to remove at a later date. Establishing a framework for the use of market-based instruments at Community level could help avoid such distortions and underpin the internal market.
Therefore, it is necessary to:
Done at Göteborg, 15 June 2001.
For the Council
The President
B. Ringholm
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