Broad economic policy guidelines (1998)
To ensure closer coordination of economic policies and sustained convergence of the economic performances of the Member States and of the Community.
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].
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.
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.