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Broad economic policy guidelines (1996)

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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) ACT

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.

Last updated: 11.08.2002
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