title: Commission recommendation for the 2000 broad guidelines of the economic policies of the Member States and the Community (drawn up in conformity with Article 99(2) of the Treaty establishing the European Community)

eurovoc_concepts:
economic growth
economic policy
economic union
labour market
sustainable development

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text: COMMISSION OF THE EUROPEAN COMMUNITIES Brussels, 11. 4. 2000 COM(2000)214 final COMMISSION RECOMMENDATION for the 2000 Broad Guidelines of the Economic Policies of the Member States and the Community drawn up in conformity with Article 99(2) of the Treaty establishing the European Community TABLE OF CONTENTS I. GENERAL ECONOMIC POLICY GUIDELINES. 3 1. 2. Introduction. 3 Main priorities and policy requirements. 4 2. 1 The state of the EU economy at the start of the new millenium. 4 2. 2 Key challenges. 5 2. 3 Moving forward the strategy: strengthening the EU economy's potential for growth. 7 3. Policy recommendations. 9 3. 1 Ensure growth and stability-oriented macroeconomic policies. 9 3. 2 Maintain sound public finances. 10 3. 3 Improve the quality and sustainability of public finances. 11 3. 4 Promote appropriate wage developments. 12 3. 5 Foster a knowledge-based society. 13 3. 6 Ensure efficient product (goods and services) markets. 13 3. 7 Promote capital markets through further integration and deepening. 14 3. 8 Invigorate labour markets. 15 3. 9 Enhance sustainable development. 16 II. COUNTRY-SPECIFIC ECONOMIC POLICY GUIDELINES. 17 1. 2. 3. 4. 5. 6. 7. 8. 9. Belgium. 17 Denmark. 19 Germany. 21 Greece. 23 Spain. 25 France. 27 Ireland. 29 Italy. 31 Luxembourg. 33 10. Netherlands. 34 11. 12. 13. 14. Austria. 36 Portugal. 38 Finland. 40 Sweden. 42 15. United Kingdom. 44 2 matters in more detail. Furthermore, the shift in the focus of the BEPGs also reflects the clear emphasis in the Lisbon conclusions towards a simplification and streamlining of all the existing instruments. To enhance co-ordination, other Council formations are called upon to contribute to the preparation by the ECOFIN Council of the BEPGs. the 2000 BEPGs, The background for the 2000 BEPGs is the economic situation and outlook as outlined in the Commission services' spring 2000 Economic Forecasts. Moreover, the Commission has been mindful of the need to develop synergies between the various co-ordination processes, in particular the Employment Guidelines and the monitoring of structural reform. Finally, in formulating its the recommendation for Commission has drawn also on the findings and conclusions of its Implementation Report on the 1999 BEPGs. The Report concluded that the overall implementation of the 1999 BEPGs is encouraging. The overall macro-economic management was appropriate. Progress with the reform of labour markets is mixed: while active labour market policies were implemented in many Member States, benefit systems and rigid employment protection legislation have been tackled in only a few. With respect to economic reforms, progress has been most visible in the implementation of internal market legislation and the liberalisation of telecommunications and electricity markets. A certain improvement, but not enough, has been made in disciplining State aid and the development of risk capital markets. Little progress has been made in a number of other areas, including the enforcement of public procurement rules, and the promotion of R&D and innovation. I. GENERAL ECONOMIC POLICY GUIDELINES 1. INTRODUCTION The Treaty requires Member States to conduct to their economic policies with a view contributing to the achievement of the objectives of the Union and in the context of the Broad Economic Policy Guidelines (BEPGs) (Article 98). It also requires Member States to regard their economic policies as a matter of common concern and to co-ordinate them within the Council (Article 99). To this end, since the start of Stage 2 of Economic and Monetary Union,1 the Council, upon a recommendation of the Commission, has adopted each year the BEPGs. At the centre of the economic policy co- ordination process, they provide the framework for the definition of the overall policy objectives and orientations for the Member States and the Union. The BEPGs acquire an increased significance in view of the Council Report on "Economic policy co-ordination" endorsed by the Helsinki European Council and the Lisbon Special European Council on "Employment, economic reform and social cohesion", in which the European Council decided that it will hold an annual Spring meeting devoted to economic and social questions. Building upon and extending the existing strategy, the present BEPGs are centred on, and give operational content to, the conclusions of the Lisbon Summit. In particular, the present BEPGs focus on the medium and long-term implications of structural policies and on reforms aimed at promoting potential, employment and social cohesion, as well as on a knowledge-based the towards economy. The Cardiff and Luxembourg processes will deal with their respective subjects economic transition growth 1 In anticipation of the start of Stage 2 of Economic and Monetary Union on 1 January 1994, the first BEPGs were adopted in December 1993. Since then, the BEPGs have been adopted in the summer of each year. 3 2. MAIN PRIORITIES AND POLICY REQUIREMENTS 2. 1 The state of the EU economy the new the start of at millennium The heritage of the 1990s – Over the last decade, the European Union has significantly fostered economic integration and has created a solid framework for the conduct of economic policies. The internal market is largely complete and previously over-regulated industries have been liberalised and exposed to the forces of competition. A stability-oriented monetary policy, supported by sound budgetary policies and appropriate wage developments, has been put in place. The euro has been successfully introduced. A comprehensive the co- ordination of economic and employment policies has been established. framework for In spite of these impressive achievements, the European Union's economic performance in the 1990s was disappointing, both in comparison with the past and with the United States. Real GDP growth in EU-15 and USA % p. a. USA EU-15 6 5 4 3 2 1 0 1960s 1970s 1980s 1990s Source: Commission services. Economic growth was relatively weak, no net gains in employment were made and the current unemployment rate is still higher than at the start of the decade. Living standards in the EU are on average about 35 per cent lower than in the United States despite the near convergence of output per hour worked to US levels after four decades of catching up. The large gap in per capita income can in part be ascribed to low and stagnating participation and employment rates. Furthermore, real investment in the EU hardly rose in the 1990s leading to a further fall in the investment-to-GDP ratio while real investment in the United States nearly doubled. the paradox The impressive between improvement in the framework conditions and the lacklustre economic performance is indicative of the severity of the macroeconomic imbalances and structural rigidities prevalent at the start of the previous decade. In part, it also reflects the late start to economic reforms in many Member States and the time it takes before an appropriate policy mix starts to bear fruit. In this context, it should be noted that several Member States experienced economic performance over the last decade. Although most impressive an Trends in living standards and labour productivity, EU-15 (PPS; USA = 100) % 100 95 90 85 80 75 70 65 60 55 50 45 GDP per working hour GDP per capita GDP per person employed 1960 1965 1970 1975 1980 1985 1990 1995 2000 Source: Commission services. 4 that they enjoyed subsequently reduced were also affected by the recession in the early 1990s, strong recoveries unemployment significantly, in some cases to levels not seen since the early 1970s. Whilst country-specific factors played a role, these countries have in common that a swift macroeconomic adjustment in hand with a comprehensive went hand structural reform package and that this mutually- reinforcing strategy was implemented with resolve. On the verge of a virtuous circle – Since early summer 1999, when the latest BEPGs were adopted, an increasingly robust and broadly- based economic recovery has taken hold in the Union. Under the combined impact of supportive macroeconomic policies, a competitive euro exchange rate and buoyant global economic activity, the upswing is expected to gain further momentum this year and next. With considerable slack remaining in product and labour markets in most Member States and with prospects of a healthy rebound in investment, solid growth should be able to take place without encountering capacity constraints and generating inflationary tensions if, as expected, wage developments continue in countries with more mature recoveries there are some signs of bottlenecks and overheating risks. Furthermore, the marked depreciation of the euro combined with a strong rise in oil prices point to a heightened risk of imported inflation. to be appropriate. However, Job creation has continued at a strong pace as in employment, growth has become richer leading the to a progressive decline unemployment rate. On the back of auspicious growth prospects, continued shifts towards the more labour-intensive service sectors and efforts to enhance effective labour supply, employment growth is expected to continue at a strong pace, leading to a further reduction in unemployment. in Contributions to growth in EU-15 % Real GDP growth Domestic demand Net exports 4 3 2 1 0 -1 -2 1993 1994 1995 1996 1997 1998 1999 2000 2001 Source: Commission services. the Provided The brightened economic outlook reflects in part the influence of favourable cyclical factors. More importantly, though, it is the result of skilful macroeconomic management, increasingly right structural policy underpinned by policy environment. recommendations of the present BEPGs are implemented with resolve, the EU economy may enter a virtuous circle of vigorous output growth, high confidence and strong employment creation. Under these conditions, an annual economic growth rate of around 3 per cent for the EU as a whole should be a realistic prospect for the coming years. that the 2. 2 Key challenges On these sound foundations, European policy makers face new challenges and opportunities in the coming years and beyond. The key challenges consist of the return to full employment, the transition to a knowledge-based economy, the impact of a rapidly ageing population and the improvement of social cohesion. All Member States are confronted with these challenges, but there are marked differences both in the extent to which countries are exposed to them and in the degree to which they have already prepared themselves. 5 therefore Restoring full employment – Although edging down gradually, at around 9 per cent of the Union is still labour force, unemployment unacceptably high - with an important gender gap remaining in most Member States. Moreover, the Union's employment and participation rates are low, in particular those of women and older workers in a large number of countries. The present degree of non-employment is the source of large economic and social costs. The return to the key full employment remains objective of economic and social policy and implies in particular the creation of jobs in the services sector, an increase in the rate of female employment and a greater participation of older workers. As emphasised by the Lisbon Special European Council, the overall aim is to raise the employment rate from an average of 61 per cent today to as close as possible to 70 per cent by 2010 and to increase the number of women in employment from an average of 51 per cent today to more than 60 per cent by 2010, for the EU as a whole. The realisation of these objectives over the medium to long term would not only help to bring the EU economy onto a durably higher growth path, it would also considerably alleviate Member States' public finances and social security systems and help fight effectively against social exclusion. in for Promoting the transition to a knowledge- based economy – Innovation and accumulation of knowledge are increasingly becoming key productivity, competitiveness, drivers economic growth, employment and standards of living. Yet, the Union lags behind the United States both in terms of innovation capacity, with the gap having increased since the mid-1990s, and the production and diffusion of information and communication technologies there are serious skill (ICT). Furthermore, shortages, in particular within the sciences and engineering, and there is a lack of basic ICT literacy for all workers and of expert skills needed in the Information Society. Meeting this challenge will therefore require the adaptation of economic structures, the allocation of resources among sectors, firms and occupations as well as an im- provement in the match between skills and jobs. Preparing for population ageing – The EU is expected to witness a substantial increase in the proportion of people in older, non-active age groups after 2010 and a decrease in the size of the labour force. Apart from the potentially important effects on the level of aggregate savings, a rising dependency ratio will have considerable consequences for the contribution Employment in EU-15 % Total employment rate Female employment rate 75 70 65 60 55 50 45 40 35 30 % Dependency ratios in EU-15 Total Old age 80 70 60 50 40 30 20 10 0 1970 1975 1980 1985 1990 1995 1980 1990 2000 2010 2020 2030 2040 2050 Source: Commission services. Note: Total dependency ratio = the ratio of the number of people in age groups 0-14 and 65+ divided by the population in the working age groups 15-64 year old. Old age dependency ratio = the ratio of the number of people in age group 65+ divided by the population in the working age groups 15-64 year old. Source: Commission services. 6 it is offset by the budgetary of the factor labour to economic growth and for the sustainability of public finances. A rising dependency ratio will result in lower economic sustained growth unless in factor productivity growth. improvements Regarding impact of ageing populations, unchanged policies are expected to lead to large increases in expenditures on public pensions and health care systems. To tackle this issue, Member States will need to develop comprehensive strategies, including measures to ensure the sustainability of public finances, the reform of pension and health care systems and action force labour for older workers. participation, especially Recognising this challenge, the Lisbon European Council has called for stronger co-operation between Member States, notably on the future evolution of social protection from a longer-term perspective. stimulate higher to Improving social cohesion – Although Union citizens enjoy, on average, high living standards and high social protection levels, social exclusion still abounds. Unemployment remains the prime cause of social exclusion in the EU. Exclusion is especially due to the high proportion of long- term unemployment and the highly concentrated nature of unemployment – in particular regions or communities, and among special social groups or categories of workers. Although social inclusion goes beyond labour market issues, the best safeguard against social exclusion is a job. Creating better framework conditions for high employment and low unemployment is therefore the strongest contribution economic policies can make to social inclusion. 2. 3 Moving forward the strategy: strengthening the EU economy's potential for growth The challenges of restoring full employment, creating a knowledge-based economy, preparing for population ageing and safeguarding social cohesion are inter-linked and will need to be addressed by a coherent and comprehensive economic policy strategy for the medium-to-long term. The focus of this strategy should be to enhance the capacity of the EU economy to generate high rates of non-inflationary growth over a prolonged period. Although important progress in meeting the key challenges can be expected in the context of the current cyclical upturn, it is difficult to see how this pace of progress can be maintained over time without a substantial rise in the potential output of the Union's economy. To this end, the EU policy response should be ● ● ● to maintain growth and stability-oriented macroeconomic policies; to promote the development of knowledge- based economic activity; to press ahead with deep, comprehensive, reforms of product, capital and labour markets; and : ● to modernise social protection systems. Investment performance in EU-15 % of GDP 30 25 20 15 10 5 0 1970 Total investment Private investment Public investment 1975 1980 1985 1990 1995 2000 Source: Commission services. 7 (iv) promote appropriate wage developments; (v) foster a knowledge-based economy; (vi) ensure efficient product (good and services) markets; (vii) promote capital markets through further integration and deepening; (viii) invigorate labour markets; and (ix) enhance sustainable development. * * * the policy Member States face broadly the same challenges and general needs. Hence recommendations set out in Section 3 apply to all of them. At the same time, there is an important degree of diversity among Member States in terms of economic performance and prospects as well as structures and institutions. This means that within the overall strategy, policy priorities differ somewhat across Member States. These are addressed in Part II which identifies country- specific economic guidelines. It must be noted in this context that Member States are currently for revising Employment to the 2000 Employment Guidelines. The country-specific guidelines, in so far as labour market issues are the 2000 therefore complement concerned, Employment Guidelines and underpin the implementation of the revised National Action Plans. their National Action Plans take account of efficiently The four responses are all of great importance. They are inter-linked, mutually support each other and must be carried out simultaneously in order to be able to meet the EU's key challenges. Sound macroeconomic conditions provide the best framework for reaping, as quickly as possible, the full benefits of moving towards a knowledge-based economy and of economic reforms. Conversely, functioning markets and modernised social security systems will make macroeconomic policies work better. In sum, an effective policy approach needs to be comprehensive, which in turn is more likely to inspire confidence among consumers and investors and so produce benefits more rapidly. The explicit link between the need for reforms the Union's key and objectives, full employment and social cohesion, will enhance the citizens' support for the strategy and the process of change that it will involve. the achievement of the goals of in particular the The main planks of the strategy are sketched below, with recommendations specific contained in Section 3. This policy strategy should be pursued with resolve by all policy in a co-ordinated actors and manner, and a comprehensive mix of policies which mutually reinforce conditions for job creation, for the capacity to innovate and accumulate knowledge and for greater social inclusion: implemented achieve balanced to (i) and ensure macroeconomic policies; growth stability-oriented (ii) maintain sound public finances; (iii) improve the quality and sustainability of public finances; 8 3. POLICY RECOMMENDATIONS 3. 1 Ensure growth and stability- oriented macroeconomic policies The macro-economic policy mix plays a key role in promoting growth and employment and in preserving price stability. Over the short term, it should assist the recovery and ensure the full realisation of the current growth potential. Over the medium-term, it should contribute to the establishment of the framework conditions ensuring the positioning of the economy on a sustained, higher, non- inflationary, growth and employment path, inter alia through adequate levels of saving and investment. In the euro area, an appropriate policy consists of: monetary policy aimed at maintaining price stability in accordance with the Treaty; sustained efforts to achieve, as rapidly as possible, and maintain, over the medium- term, budgetary positions close to balance or in surplus (see section 3. 2); and the social partners a continuation of responsible behaviour on the part of that that are supports wage developments job consistent with price stability and creation (see section 3. 4). % Interest rates, euro area Long-term Short-term Main refinancing rate i. ii. iii. 6 5 4 3 2 1 0 The Member States outside the euro area, which retain national responsibility for monetary and exchange rate policy, stability-oriented also maintain macroeconomic policies as the basis for sustained growth and employment creation. They should: should continue the rigorous implementation of their convergence programmes; conduct monetary and budgetary policies so as to maintain, and where appropriate foster, price stability and the sustainability of the government financial position. This would also help to prepare countries for the adoption of the euro; and in ERM2 maintain sound monetary and budgetary policies in order to respect exchange rate commitments, for the two Member States participating (Denmark and Greece), or to achieve the inflation target, thus creating the conditions for exchange rate stability for the two Member States that pursue direct inflation targets (Sweden and the United Kingdom). Actual and cyclically-adjusted budget balances, euro area % of GDP Cyclically-adjusted budget balance Actual deficit iv. v. vi. 1 0. 5 0 -0. 5 -1 -1. 5 -2 -2. 5 Jan-99 Jul-99 Jan-00 1998 1999 2000 2001 Source: Commission services. Source: Commission services. 9 3. 2 Maintain sound public iii. finances Sound budgetary positions, in line with the Stability and Growth Pact, will create the necessary scope for the full working of the automatic stabilisers without the risk of breaching the budget deficit threshold of 3 per cent of GDP. It will also contribute to keeping interest rates low, to the crowding-in of investment, to the further reduction in the government debt to GDP ratio and, by increasing the credibility of the budgetary framework of EMU, to a strengthening of investors' confidence. Given expected output growth above the potential rate, a pro-cyclical stance of budgetary policy should be avoided. With budgetary in underlying prospects positions for the euro area and the EU as a whole, there is a need for further budgetary consolidation efforts. Since economic and budgetary situations differ across Member States, the scope, timing and speed of further adjustment will need to be tailored to national circumstances. In general, however, Member States should: indicating no improvement i. ii. in 2000 clearly below take advantage of the better-than-expected economic growth to achieve budgetary positions the objectives set in the updated stability and is convergence programmes; in year's with conformity the to recommendation budgetary adjustment as of the year 2000 and should be all the more possible in most Member States given the better-than- planned outcomes in 1999; front-load this last meet a budgetary position of close to balance or in surplus earlier than envisaged in the updated stability and convergence programmes so that a sufficient margin to cope with the impact of adverse cyclical fluctuations will have been achieved at the latest in 2001; and where appropriate, fiscal pursue, consolidation beyond the minimum requirements of the Stability and Growth Pact so as to create additional room for manoeuvre for cyclical stabilisation, to cope budgetary developments, to put the debt on a more to rapidly descending prepare the budgetary challenges for associated with population ageing. trajectory and unexpected with General government net lending(+)/borrowing(-) in the updated stability- and convergence programmes (% of GDP) Date1) 19992) 2000 2001 2002 2003 Stability programmes B D E F4) IRL I L NL5) A P 12/99 12/993) 01/00 01/00 12/99 01/00 02/00 11/99 03/00 02/00 FIN 09/99 EUR-11 -0. 9 -1. 1 -1. 1 -1. 8 2. 0 -1. 9 2. 4 0. 5 -2. 0 -2. 0 2. 3 -1. 2 -1. 0 -1. 0 -0. 8 -1. 7 1. 2 -1. 5 2. 5 -0. 6 -1. 7 -1. 5 4. 7 -1. 1 -0. 5 -1. 5 -0. 4 -1. 2 2. 5 -1. 0 2. 6 -1. 3 -1. 5 -1. 1 4. 2 -1. 0 0. 0 -1. 0 0. 1 -0. 7 2. 6 -0. 6 2. 9 -1. 1 -1. 4 -0. 7 4. 6 -0. 6 Convergence programmes 12/99 12/99 11/99 12/99 DK EL S UK6) EU-15 3. 0 -1. 6 1. 9 1. 2 -0. 6 2. 1 -1. 2 2. 1 0. 2 -0. 7 2. 2 -0. 2 2. 0 0. 2 -0. 6 2. 3 0. 2 2. 0 -0. 1 -0. 3 0. 2 -0. 5 0. 2 -0. 3 n. a. -0. 1 3. 1 n. a. -1. 3 -0. 3 4. 7 -0. 2 2. 5 n. a. n. a. -0. 4 -0. 2 1) Date of adoption. 2) Outturn. 3) Addendum to the updated stability programme of February 2000. 4) Favourable scenario; cautious scenario projections: -1. 3, -0. 9 and -0. 5 % of GDP, respectively, in the years 2001 to 2003. 5) Cautious scenario; the programme contains also a middle and a favourable scenario. The projections for the latter are -½ and 0 % of GDP, espectively, in the years 2001 and 2002. 6) 1999 outturn for calendar year. Programme data for financial years. Source: Commission services. 10 3. 3 Improve the quality and sustainability of public finances the fiscal enhancing growth and The current favourable economic prospects provide the opportunity to introduce comprehensive reforms involving expenditure restructuring and reductions in the tax burden, while consolidation. The composition and quality of budgetary consolidation is instrumental in enhancing employment and guaranteeing a smooth functioning of EMU. Public expenditures need to be restructured in order to support investment in tangible and intangible capital and to enhance the growth potential of the economy; tax reforms aimed at lowering tax burdens and removing tax distortions will play an essential role in increasing employment potential. Furthermore, tax systems have to cope with the challenges brought about by economic integration and technical change. Welfare economic transformation and need to be adapted to ensure that work pays, disincentives to work are removed and quality services are provided in an efficient manner. At the same time, the modernisation of the welfare state should ensure that the emergence of the “new economy” does not compound the existing social problems of unemployment, social exclusion and poverty. There is a need to ensure the sustainability of public finances in the medium and long term while taking account of demographic and other long- run structural developments. Member States should: systems must underpin improve budgetary positions through expenditure restraint rather than through tax increases; the of achievement introduce or enhance the mechanisms and institutions that help control spending so cut without that could be taxes jeopardising or maintenance budgetary positions; in this context, set rigorous medium-term norms for annual growth of primary expenditure, so that expenditure growth is well below terms medium-term real output growth; in real healthy i. ii. iii. General government expenditures and receipts, EU-15 % of GDP 54 52 50 48 46 44 42 40 General government expenditure General government receipts Tax burden 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Source: Commission services. iv. v. vi. vii. benefit systems review favour employment, review pension and health care systems to increase efficiency and take account of the ageing of the population; to reduce the overall tax burden, especially on low-wage labour, within continued fiscal consolidation; improve the efficiency and transparency of tax systems, especially through widening the tax base, reducing tax rates and ensuring enforcement procedures; appropriate engage in reforms of the VAT system simplification and aiming at greater modernisation of existing rules, more uniform application of existing provisions and the re-enforcing of administrative co- ongoing operation; discussions on taxation of e-commerce, which is instrumental to guaranteeing a smooth functioning of the internal market; and conclude the investment restructure government spending in favour of in physical and human capital, R&D, innovation and information technologies and in favour of expenditure on active in accordance with the Employment Guidelines; labour market policies viii. pursue tax-co-ordination further so as to avoid harmful tax competition; reach an agreement on the tax package in line with the conclusions of the European Council held in Helsinki in December 1999. 11 i. ii. increases insist upon nominal wage consistent with price stability. In the euro area, that means insisting upon aggregate increases consistent with price wage increases within the price stability objective of the ECB; although there may be differences among Member States, it is essential that wage developments at the national level should be appropriate to national economic conditions; encourage real wages to increase in relation to labour productivity growth while taking into account the need to strengthen, where necessary, and subsequently maintain, the profitability of capacity-enhancing and employment-creating investment. This implies that in countries where overall is slowing labour productivity growth down, the scope for real wage increases will be reduced. More specifically, a reduction in working time should not lead to an increase in real unit labour costs. For improved profitability to result in higher investment in the Union, it is essential to investment-supportive forge environment terms of demand developments, labour market conditions, taxation and the regulatory framework; an in iii. ensure that collective bargaining systems take account of productivity differences (whether according to skill, qualification or geographical area) when determining wage levels; and iv. pursue policy aiming to reduce gender pay differences due to de facto discrimination. Just like the Member States, the Community should apply strict budgetary discipline. This must be applied to all categories of the financial inter- perspectives, while 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. respecting the 3. 4 Promote appropriate wage developments Wage cost developments in Member States should be allowed to reflect different economic and employment situations. Governments can create the right framework conditions which facilitate the negotiations of the social partners. For wage developments to contribute to an employment-friendly policy mix, the social partners should continue to pursue a responsible course and conclude wage agreements in Member States in line with the general principles set out the Broad Economic Policy Guidelines. It is necessary to: in % 7 6 5 4 3 2 1 0 Wage developments, euro area % Nominal compensation per employee Nominal unit labour costs Real compensation per employee, GDP deflator 4 3 2 1 0 -1 Labour productivity 1990 1992 1994 1996 1998 2000 Source: Commission services. 12 3. 5 Foster a knowledge-based society The European Union needs to improve its innovative capacity as an essential element in its strategy to increase growth and employment. But the impact of innovation and technology diffusion will be modest unless they are part of a broader reform process in the area of product, capital and labour markets. Competition and well-functioning financial markets are essential conditions for increased innovation and better diffusion of technology. Member States should: i. ii. iii. iv. v. provide adequate incentives to increase the involvement of the private sector in the financing of R&D in particular by using tax policies and by improving the functioning of risk capital markets; expenditures, raise the level of competition in product to and capital markets with a view strengthening to firms incentives innovate and to promote the diffusion of technology and information; for ensure adequate public support for the funding of basic research, the creation of centres of excellence and the provision of incentives for the establishment of better links between institutes and research business; available make Internet access; low-cost, high-speed take measures to reduce the fragmentation and compartmentalisation of the R&D effort and to intensify co-operation at the EU level so as to establish a European area of research and innovation; improve the networking of research centres by 2001 and take steps to remove obstacles to the mobility of researchers by 2002; ensure, on the basis of a Commission proposal, the establishment of an EU patent system by the end of 2001; and 13 23 33 50 55 74 50 65 65 60 54 0 60 65 61 75 R & D expenditures (1998) Private share of R & D % of GDP EL P E I IRL A B UK DK NL F D FIN 0 1 2 3 S 4 5 Note: The data refer to the share of R & D performed by the private sector. Source: Commission services and OECD. vi. strengthen education and training efforts, both private and public, in order to raise the adaptability of the labour force and to avoid the emergence of unemployment and social exclusion due to a lack of skills; promote lifelong learning of Information Society skills; halve by 2010 the number of 18-24 year olds with only lower-secondary education; the number of researchers and engineers; guarantee the internet and multimedia availability of resources to all schools by the end of 2001 and the required teacher skills by the end of 2002; use information technology on a wider scale in schools. increase 3. 6 Ensure efficient product (goods and services) markets to countries full advantage of Well-functioning product markets are essential to enable the take the EU opportunities provided by the introduction of the euro, globalisation and the new technologies and play an important role in tackling employment challenges. In this area, significant progress has already been achieved, in particular as a result of structural reforms implemented in Member States and the impulse given by the Cardiff process. In services, progress has been slowest, however. By i. ii. iii. iv. v. vi. vii. the end of 2000, a strategy for the removal of barriers to trade in services is needed. Member States should: viii. implement the internal market legislation fully and effectively, especially in the areas of public procurement and technical standards; ensure the independence of competition authorities; competition empower authorities to enforce Articles 81 (cartels) and 82 (abuse of dominant positions) of the EU Treaty; ix. to improve the develop measures efficiency of public administration by promoting the use of new management (e-commerce, and Internet, public procurement on line) techniques and by stimulating transparent Public-Private Partnerships; and communication monitor the effective implementation of the many regulatory reforms in order to obtain concrete terms of economic efficiency. results in reduce State aid, in particular ad hoc aid, and redirect it towards horizontal goals; improve the monitoring of State aid and the assessment of its efficiency; 3. 7 Promote capital markets through further integration and deepening improve integrated financial markets the Efficient, allocation of capital and reduce its cost. They facilitate the process of structural reform and play an essential role in supporting an entrepreneurial culture. Sound financial systems also contribute to macro-economic stability. Since the introduction of the euro, encouraging progress in the integration of financial markets has been made, not the least by the on-going implementation of the action plans for Financial Services and Risk Capital. This work is a key political priority; the Lisbon Special European Council has asked full implementation of the action plans by 2005 and 2003 respectively. It is necessary to: i. ii. facilitate the widest possible access to investment capital on an EU-wide basis, including for SMEs, by means of a “single passport for issuers”; facilitate participation of all investors in an integrated market by eliminating barriers to investments in pension funds, by ensuring adequate investor protection, by clarifying the distinction between sophisticated and retail investors, by reviewing conduct of business rules and by the framework for the investment activities of institutional investors; improving of the liberalisation complete the telecommunications market by the end of 2001 and, in particular, introduce greater local access networks competition before the end of 2000; in speed up the liberalisation of the energy (electricity and gas), postal services and transport sectors; as a minimum, fully implement the Community Directives that open markets for public utilities; make certain that the benefits of lower prices and high quality of services are also transmitted without delay to consumers and industrial users via adequate regulation and taking account of public service obligations; reinforce competition in services sectors, especially in the financial services, the distribution sector and business services, enable and undertake measures electronic commerce to fully develop its potential; to reduce regulatory burdens on business, especially on SMEs, and set out a strategy for further co-ordinated action to simplify the regulatory environment by 2001; 14 iii. iv. v. vi. transparency promote further integration of government bond markets through greater consultation and issuing techniques and instruments, and improved functioning of cross-border sale and repurchase (“repo”) markets; debt on improve the efficiency and integration of securities clearing and settlement systems, with the aim of facilitating and promoting sound cross-border activities; enhance the comparability of financial statements of companies which need access to an integrated financial market and allow the EU to respond quickly to developments the underway international accounting field; in speed up fiscal actions to promote the development of new firms and investment in venture capital, changes in bankruptcy legislation to give entrepreneurs a second chance, and actions to promote employee ownership schemes; vii. intensive ensure more co-operation between EU financial market regulators and supervisors; and viii. make rapid progress on the long-standing proposals on takeover bids and on the restructuring and winding-up of credit institutions and insurance companies. The Union should contribute to international financial and monetary stability by engaging in an effective dialogue with its main trading partners. It should also help ensuring an architecture of the international financial and monetary system adapted to the globalisation of financial markets. Venture capital investment, EU vs. USA ( in euro million) USA EU-15 14000 12000 10000 8000 6000 4000 2000 0 1995 1996 1997 1998 Source: EVCA, Venture One. 3. 8 Invigorate labour markets Labour market performance is improving but differs widely among the Member States, partly owing to the uneven progress made in implementing structural reforms and active measures designed to improve employability. The countries that have made most progress are reaping the rewards in the form of higher employment and reduced structural unemployment. However, considerable problems remain: unemployment is still unacceptably high and concentrated among certain groups and regions; and the long-term unemployed form a high proportion. The low employment rate, particularly among women and older working-age people, is constricting the EU’s growth potential. Furthermore, the demographic evolution in the EU will see stagnation in the growth of the working age population. To tackle these problems and fully grasp the benefits of the knowledge based economy, the integrated four-pillar strategy set out in the Employment Guidelines should be implemented and in a prompt and transparent manner. The emphasis on investing in people is a key reinforcement of the European social model. Member States should: and implement promote the transition from passive to active measures a comprehensive preventive strategy against long-term and youth unemployment, in line with the Employment Guidelines; in particular, the employability of individuals through a lowering of taxes, especially on low-paid workers; facilitate raise i. 15 lifelong and the unemployed access to labour market training, education aim and at learning, reintegrating through well-focussed active programmes; involve the public the social partners with authorities improve to the efforts in education, training and opportunities for lifelong learning; ii. iii. reform tax and benefit systems to ensure appropriate incentives and rewards for participation in an active working life; assess in particular duration and eligibility the criteria in benefit systems; avoid to transfer of unemployed people expensive, passive systems; labour mobility, enhance inter alia by the portability of pension improving entitlements in order to sustain labour mobility across sectors and regions in the EU; Labour effective tax rate on total employment (1999) IRL 1) UK EL P E NL I F A D FIN B DK S 50 0 10 20 30 40 Note: Labour effective tax rate on total employment is the ratio of social security contributions plus personal income taxes on labour income to gross wages. Whilst conceptually broadly similar to the implicit tax rates published by Eurostat, there are some methodological differences. Largely based on macroeconmic data, they allow, however, to be updated in line with the Commission services' economic forecasts, thus enabling an assessment on the basis of the most recent information. Source: Commission services. iv. v. in co- modernise work organisation operation with social partners, the including flexible and annualised working hours, measures to facilitate part-time work and a review of tight job protection legislation and high severance payments; accompany any in overall working time, whether by legislation or social agreements, by efforts to prevent an increase in unit labour costs and take future labour supply needs into account; and reductions strengthen efforts on equal opportunities policy for women and men, inter alia, by improving incentives in tax and benefits systems and by promoting policies to reconcile work and family life. 3. 9 Enhance sustainable development The promotion of environmentally-friendly technologies, products and behaviour could contribute to a more sustainable development. A sound environmental policy that tries to exploit the efficiency gains embodied in market-based instruments would also bring benefits in terms of more efficient economic structures, by this contributing to higher growth and employment. Member States should: like taxation, user introduce or strengthen market-based policies charges, insurance/liability schemes and tradable permits, which put a price on scarce resources; help the EU objectives under the Kyoto protocol; and contribute to break the link between environmental pressure and economic growth; and achieving reassess existing or new policies which impact, have a negative environmental such as harmful sectoral subsidies and tax exemptions. i. ii. 16 iii. iv. maintain the primary surplus at levels somewhat above 6 per cent of GDP in order to ensure a continuous reduction in the general government deficit and to allow a fast reduction in government debt ratio; and allocate the proceeds of privatisations or other sales of assets owned by the State to the reduction of government debt. Product markets in Belgium is very well integrated into the European economy. The openness of the Belgian economy creates competition, especially in the goods markets. However, problems persist in selected services sectors. While significant progress has been made internal market transposing legislation, implementation should be speeded up. The Belgian government has expressed its commitment to reduce the administrative burden for enterprises by 25 per cent by the end of its term. Despite recent efforts, the ratio of R&D spending to GDP is below EU average, as is ICT penetration. In view of the above, Belgium should give high priority to the following: i. ii. iii. lack of the problem of a address competition in services, which contributes to high prices and poor productivity performances in sectors such as energy, telecommunications, rail transport and business services; speed up the liberalisation of the electricity and gas sectors and strengthen the powers of the regulatory authorities responsible for energy and telecommunications; implement without delay and monitor closely the various measures envisaged to the administrative burden for reduce businesses; and II. COUNTRY-SPECIFIC ECONOMIC POLICY GUIDELINES 1. BELGIUM domestic in 1999, acceleration in After a slowdown economic activity is expected in 2000, supported by private demand, consumption and investment, and a continuing positive exports. Employment creation is expected to continue in 2000 and to strengthen further in 2001 as the reduction in labour taxes takes effect. contribution notably from net Budgetary policy Belgium has made further progress towards budgetary adjustment in 1999, as the general government budget deficit fell to 0. 9 per cent of GDP, which is below the target set in the stability programme, and government debt to 114. 4 per cent of GDP. According to the updated stability programme 2000-2003, Belgium will continue its fiscal consolidation effort based on high primary surpluses, aiming at a situation of budgetary balance in 2002 and a debt ratio close to 100 per cent of GDP in 2003. In view of the above, budgetary policy should aim to: i. ii. achieve better budgetary results in 2000 than the 1 per cent of GDP deficit target set in the budget and in the updated stability programme, in the light of the better budgetary results in 1999 and higher GDP growth prospects for 2000 than projected in the budget; contain the real annual growth rate of primary expenditure within the 1. 5 per cent limit set in the updated stability programme, thus allowing a reduction in the tax burden, notably on labour, while preserving the achievement of a lower government deficit target; 17 iv. of the transparency the increase the public and relationships between private sectors, particularly within the Public-Private Partnerships in order to avoid distortions of competition. Capital markets investments. Although reforms have been undertaken Several to improve market efficiency in an increasingly competitive environment. Venture capital is largely dominated by the public sector and characterised by a high percentage of early-stage the and high-tech concentration of efforts on early-stage operations is in general positive, the absence of private in venture capital, and of bridging finance particular, may in the longer run restrict the growth of the venture capital market. In view of the above, Belgium should give high priority to the following: i. make further efforts to encourage private, as opposed to public, venture capital through an improvement of the fiscal environment; in particular, to reducing corporate tax rates and making capital losses deductible. give consideration, Labour markets Belgian labour markets have performed relatively well in terms of employment growth. Starting from a low overall employment rate, especially for women and older workers, labour supply rose steadily. The increase in employment therefore did not translate into much lower unemployment. The unemployment rate continues to be one of the highest among the smaller Member States, and regional differences are pronounced. Shared federal government, responsibilities between regions and require substantial co-ordination. In view of the above, the Belgium should give high priority following: language communities to i. ii. reinforce measures to promote labour mobility between and within regions and encourage social partners to further allow wage negotiations to better reflect local the labour market conditions and/or financial situation of the enterprises, given the pronounced regional differences in unemployment. Social partners and public authorities should also, in their respective areas of responsibility, pay more attention improving to upgrading and skills labour educational attainments of force; and the reinforce active labour market policies in order to create incentives to participate in active measures and to take up new job offers; the active policy measures should be combined with a review of potential disincentive effects of tax and benefit systems, including benefit duration, on employment of older workers and women. 18 2. DENMARK Product markets Economic growth should recover in 2000 since in particular private domestic demand, and consumption, should regain strength in parallel with the brighter outlook for export markets. Unemployment, which at 4. 5 per cent of the labour force at the end of 1999 reached its lowest level since the 1970s, is likely to edge up over the year. Budgetary policy in Denmark improved Government finances strongly in 1999, with the general government surplus reaching 3 per cent of GDP, half a percentage point higher than expected at the adoption of the budget bill. For 2000, the general government surplus is expected to amount to 2. 2 per cent of GDP and, according to the updated increase Danish convergence programme, to thereafter gradually to some 3 per cent of GDP by 2005. Expenditure overruns have regularly occurred at the level of local governments. In view of the above, budgetary policy should aim to: i. ii. adhere to the government’s aim to restrict real growth in government consumption to 1. 2 per cent in the budget for 2000; for this, exercise vigilance at the level of local stronger governments; institutional arrangements, respecting the autonomy of local governments, if there is a risk that this target will not be met; and consider in pursue the decline of both the tax and expenditure ratios as foreseen the updated convergence programme, given the healthy situation of government finances, as this would increase economic to a more incentives and contribute for favourable medium-term outlook growth and employment. if the problem of levels and productivity Denmark is among those countries that have gone the furthest in product market reform, in particular in the area of the network industries. However, there is scope for improvements in price in the Danish inadequate economy competition in certain sectors, such as food and beverages, retail building materials, distribution, is resolved. The Danish commercial R&D track record compares unfavourably with that of the other Nordic countries. In view of the above, Denmark should give high priority to the following: and i. ii. iii. to action take policy continue to strengthen competition policy and make sure that it is enforced in full; give the Competition Council powers to enforce EC Articles 81 and 82; to improve the effort continue the efficiency of the public sector, e. g. by using public tendering more systematically, in the light of the observation that the size of the public sector in Denmark continues to be among the largest in the Union; and increase the effort to raise technology transfers to business and to induce entrepreneurship in high-tech sectors. institutes research from Capital markets Major reforms have been taken to increase market efficiency and to develop risk capital. However, the equity market remains relatively small, especially compared to the bond market. A market for high-growth companies was created in 1998, but relatively few companies are listed. Despite the reforms undertaken, the venture capital market also remains small. In view of the above, Denmark should give high priority to the following: 19 implemented since the mid-1990s. However, given a high employment rate and a low unemployment rate, it might prove very difficult to ensure an adequate labour force in the longer term. Demographic developments will not help in the coming years, nor will the announced introduction of a sixth holiday week. Despite the recent changes in tax rules, the taxation of labour remains high and benefit schemes are large and generous. In view of the above, Denmark should give high priority to the following: i. pursue reforms so as to reduce the overall fiscal pressure on labour, in particular the marginal tax rate on low incomes, and to increase incentives to take up or remain in jobs; monitor closely the reform of early retirement and leave schemes in the light of the need to increase labour supply. i. ii. increase the sources of funds for venture capital investments by further reducing the quantitative constraints on pension funds investment; and give particular attention to the examples of good practice put forward in the October 1999 Risk Capital Communication in the areas of taxation of investment in venture legislation on bankruptcy, and capital, employee promotion innovative stock- ownership options. of schemes, including Labour markets labour market situation has The improved substantially in Denmark in recent years, partly as a result of the comprehensive structural reforms 20 3. GERMANY in the Economic activity clearly accelerated the external second half of 1999, with contribution turning positive again for the first time since mid 1998. With the external environment expected to retain its vigour and domestic demand supported by the expected decline in unemployment, the current year should see clearly higher GDP growth than in 1999. Budgetary policy The consolidation of government finances in Germany continued in 1999, with the general government deficit declining to 1. 1 per cent of GDP compared to a target in the original stability programme of 2 per cent. According to the updated stability programme of 1 February 2000, the deficit is expected to decrease to 1 per cent of GDP in 2000. This modest decline in the deficit ratio - despite an ambitious savings package at the federal level - is due, inter alia, to a deterioration of finances at the regional level and in the social security sector. In 2001, the planned reforms of income and corporate taxes will lead to a deterioration of the general government deficit to an estimated 1½ per cent of GDP. In view of the above, budgetary policy should aim to: i. ii. iii. achieve a deficit outcome below the targeted level of 1 per cent of GDP, in the event of higher economic growth in 2000 than expected in the budget; implement the reforms of income and corporate taxation in 2001 with greatest caution in order to minimise the risk of a the structural lasting deterioration of deficit; elaborate structural reforms of the social security system (especially pension and health) as they are key to sustainable finances in the medium term; and iv. make sure that the debt ratio is put on a downward trend by fully respecting the envisaged deficit targets and pursuing available privatisation opportunities at all levels of government. Product markets Germany is well integrated in the European product markets. However, in spite of recent individual high-profile cases, German companies' international involvement is below what would be expected for a country of its size but with the recent tax reform it may increase. German price the EU average. levels remain also above However, several reforms have recently proved successful the functioning of German product markets, in particular in the area of competition policy and the liberalisation of the above, network Germany should give high priority the to following: industries. In view of improving in i. ii. iii. iv. ensure an increased opening-up of public procurement; continue to reduce State aid, including ad hoc aid and sector-specific aid; introduce competition enhancing rules for to electricity capture the liberalisation of the electricity sector; and transmission fees so as the benefits full of efforts further undertake reduce restrictions and administrative burdens on SMEs, in particular for business services and craft firms. to Capital markets The German financial market has developed dynamically over the last five years, especially in 1999. Particularly successful has been the development of the Neuer Markt, the stock market for high-growth, high-tech companies. As a result of strong public support, as well as of 21 - critically reassess its policy towards the eastern part of the country, where labour market problems are still - 10 years after severe. This especially unification assessment should cover, in particular, the efficiency of transfers, and also how social partners could encourage job creation by means of labour market increased flexibility and adequate wage structures; continue and monitor efforts to bring down gradually the fiscal pressure on labour by reducing taxes and social security contributions. In particular, labour costs should be reduced further at the lowest end of the wage scale, while respecting the need for fiscal consolidation; and all reduce disincentives within the tax and benefit system which discourage labour market participation of groups, especially of older workers; reassess in particular existing policies facilitating early retirement and consider the policy choices most appropriate the early withdrawal of workers from the labour market and to promote employment of older workers. to avoid recent market developments, the German venture capital market strongly with, is growing moreover, a substantial amount invested in early stage. In view of the above, Germany should give high priority to the following: i. give consideration to the examples of good practices given in the October 1999 Risk Capital Communication in the field of taxation, (recently reformed but still very stringent) and support to stock option schemes. bankruptcy laws Labour markets including The German labour market situation improved moderately in 1999, but this was exclusively concentrated on the western part of the country. The ‘Alliance for Jobs’ has set the framework for recent wage moderation, increased opportunities for part-time work for elderly people, to be implemented by the social partners. A far-reaching tax reform, shifting taxation away from labour to eco-taxes, has already been implemented, and there are plans to bring forward further steps of the reform. Pension increases will be slowed down which should help to keep pension contributions stable. In view of the above, Germany should give high priority to the following: i. ii. iii. 22 4. GREECE The recovery in economic activity initiated in 1994 continues at a strong pace; in 1999, real GDP growth in Greece exceeded the EU average for the fourth consecutive year, despite a slight deceleration related to external developments. is The consolidation of expected to affect the labour market positively; the unemployment rate started to fall in 1999 and is expected to follow a downward path in coming years. the growth phase iii. iv. pursue the reform of the social security sector with a view to ensuring long-term viability in the system; in addition, improve the asset management by social security funds combined with the continuation of the of expenditure; and rationalisation control and implement the privatisation scheduled for 2000 and in subsequent years with a view to securing a faster reduction in the debt ratio. Budgetary policy Product markets Partly because of its geographical location, the Greek economy is less integrated in the European product markets than other Member States. Price levels are high, considering Greek living standards, and labour productivity is below the improving. Despite EU average, although significant progress made in privatising public companies and a few measures taken to promote entrepreneurship and innovation, the process of reforms in product markets is rather slow. In view of the above, Greece should give high priority to the following: i. ii. iii. iv. improve the transposition record and the implementation internal market of legislation; speed up the process of liberalisation in the telecommunication, electricity and gas sectors; take concrete measures business start-ups; and to promote take further measures to increase R&D and ICT diffusion and stimulate private sector involvement in R&D financing. in the in 1999 target set Greece made further progress in improving its budgetary situation, as the general government deficit fell to 1. 6 per cent of GDP, below the convergence programme, and the government debt fell to 104. 4 per cent of GDP. The faster reduction in the deficit was due to much higher budget revenues than expected which resulted in more than offsetting an overrun in expenditure. The updated convergence programme provides for a further reduction in the government deficit in 2000 and 2001. Fiscal consolidation is supported by a high primary surplus, part of which is generated by the social security system following the reforms of the 1990s; mainly because of population ageing, further reform of the sector is foreseen. In view of the above, budgetary policy should aim to: i. ii. consider as an upper limit the target set in the budget for the general government deficit in 2000 at 1. 2 per cent of GDP; a better outcome on the revenue side should be reflected in a lower general government deficit; tighten the budgetary policy further in 2001 if inflation pressures emerge; secure expenditure control through clear and binding norms with the aim to reduce the primary current expenditure ratio; 23 Capital markets is open increasingly On the basis of on-going liberalisation, the Greek to capital market competition. The stock market has benefited from reforms introduced in the field of corporate governance and listing conditions, and from the dematerialization of securities. Venture capital investments, on the other hand, remain the lowest in the EU, despite the incentives provided through tax relief and financial support program. This restricts significantly the source of finance available to young high-growth companies. In view of the above, Greece should give high priority to the following: i. the implementation of speed up the actions put forward in the 1998 Risk Capital Action Plan, and give particular consideration to the examples of good practice provided in the October 1999 Communication. Labour markets in an increase Greek labour market performance has not benefited by as much as might have been expected from the prolonged economic recovery. Despite employment, unemployment has also risen in recent years, owing to a growing labour force. Unemployment falling, but considerable structural is now problems remain, including a low employment rate, low part-time and female employment, and high long-term unemployment. Steps have been taken towards structural reforms of the labour market and the implementation of a preventive approach long-term unemployment, although this has been hindered tackling youth and to by the lack of modern and efficient employment services. The tax burden on labour has been reduced. However, the results of reforms to facilitate part-time work and more flexible working hours have been limited so far, owing to difficulties with implementation. Similarly, the possibility of opt-outs from centralised wage settlements has, in practice, not led to greater decentralisation of wage bargaining. In view of the above, Greece should give high priority to the following: take decisive, coherent and measurable to prevent young and adult action into unemployed people from drifting in unemployment; make, long-term particular, to efforts strengthened reform of employment complete services, to implement preventive policies in Employment Guidelines 1 and 2; pursue efforts to reform training and education systems in line with the needs of the productive system; compliance with the ensure full and effective implementation of the labour market reforms agreed in 1998, in particular regarding the extension of part-time work and more flexible working time; and to developments review wage formation systems with the social partners, with a view to adapting wage productivity differentials at geographical, sectoral and company level, ensuring in particular that opting out of sectoral agreements under the territorial employment pacts becomes a practical possibility. i. ii. iii. 24 5. SPAIN In 1999 GDP growth kept its previous robust pace along with strong job creation. Prospects for 2000 remain favourable based on a more moderate development of domestic demand and on a recovery of Spanish exports. However price developments have been worse than expected since the second half of 1999 but are likely to decelerate in the course of 2000 provided wage settlements remain moderate. Budgetary policy In 1999, fiscal consolidation made clear progress: the general government deficit was reduced to 1. 1 per cent of GDP, half a percentage point below the target set in the original stability programme. According to the updated stability programme the general government deficit is expected to be further reduced in 2000 and 2001 and it would turn into a surplus in 2002 and 2003, which would be achieved mainly through restraint of primary current expenditure. This would also permit a reduction in the tax burden. With a view to addressing the ageing population, a Social Security pension fund reserve has been created. In view of the above, budgetary policy should aim to: the problem of i. ii. in targets set achieve and possibly improve upon the the updated budgetary stability programme, given the better-than- expected outturn in 1999; be prepared, already in 2000, to tighten fiscal policy further to counterbalance any possible overheating risk; implement the pending reform of the National Budget Law in the year 2000 with a view to improving the control of primary current expenditure, which is central to the strategy of fiscal consolidation; this should allow non-budgeted expenditures to be limited unforeseeable contingencies; mainly to iii. iv. gradually increase the pension fund reserve created in the 2000 Budget Law to cope with the long-term problem of the ageing population; take additional steps in the new round of talks about reform of the pension system between the Government and the social partners which have to take place in 2000 within the 1995 Pacto de Toledo framework; and continue and respect fully the existing internal stability pact between regions and the State, as territorial governments have an in many fields of expenditure. increasing role Product markets in integrated is moderately well legislation, progress Spain the European product markets. Various measures have been taken to improve competition on transposition of improved product markets: internal market the telecommunications, liberalisation of law and reinforcement of creation of one-stop shops for SMEs. The new Plan for Science and Technology targets a major increase in the ratio of R&D spending to GDP. In view of the above, Spain should give high priority to the following: the competition the in the 1999 reform of the continue competition law; within this reform, give particular attention the capacity of the independent competition authority to investigate cases; to reinforcing continue (railways, coal, shipbuilding) aid; reduce to sector-specific take measures to reinforce the competition framework in sectors such as electricity, gas and retail distribution and to bring the price of water closer to its real cost; and i. ii. iii. 25 iv. to reduce the measures continue administrative burdens, especially for SMEs given the high share of SMEs in business employment, and expand the geographical coverage of the one-stop shops for businesses. Capital markets The capital market is developing rapidly as a result of reforms introduced to support business access and to facilitate investment in unlisted securities, and as a result of the privatisation process and growing household share ownership. However, the venture capital market remains small. In view of the above, Spain should give high priority to the following: i. make further efforts to develop venture capital markets and in particular to increase early-stage investments; give consideration to the examples of good practice put forward in the October 1999 Risk Capital Communication in the areas of legislation on bankruptcy, promotion of innovative employee ownership schemes, promotion of stock markets for small and medium- sized businesses. Labour markets labour market performance has Spanish improved markedly in recent years, with a remarkable fall in unemployment and strong employment growth, especially of part-time employment. Efforts have been made to shift from passive to active labour market policies, to tackling youth and including a reinforcement of the preventive approach long-term unemployment. The tax burden on labour has been reduced, particularly at the lower end of the wage scale. However, unemployment is still the highest in the EU, and considerable structural problems remain, including the duality of the labour market between permanent and temporary contracts, low rates of female participation and employment, and wide regional disparities. There is also some risk of wage pressures developing. In view of the above, Spain should give high priority to the following: i. ii. iii. review, together with the social partners, the wage formation system and the regional-local enforcement of the welfare system and take action to improve the functioning of the housing market in order to promote labour mobility and tackle regional disparities in unemployment; pursue efforts to improve the efficiency of active labour market policies to reduce inflows into long-term unemployment and combine this with a review of tax and benefit systems to improve incentives to hire, to take up work and to participate in active labour market programmes; review the quality and efficiency of technical training in schools; and review further, together with the social partners, tight job protection legislation for employees on permanent contracts and lower barriers to dismissal in order to reduce the weight of temporary contracts and enhance the flexibility of the labour market. 26 6. FRANCE Economic activity strengthened in the middle of 1999 and the expansion seems to be well established at present: growth should continue to be healthy in 2000 allowing strong job creation. Despite above potential growth, inflationary pressures are expected to remain subdued as a result of increased competition and moderate wage increases. Budgetary policy France made visible progress in the improvement of its budgetary position in 1999, as the general government deficit fell to 1. 8 per cent of GDP, half a percentage point below the target set in the original stability programme. According to the updated stability programme, further reductions of the deficit ratio are to be pursued in 2000 and beyond. This would be the result of a tight control of expenditure, which would also allow a reduction in the tax burden. In the medium term, the French public finance, specially the pension system and the sickness insurance, will face an increasing burden resulting from the ageing of population. In view of the above, budgetary policy should aim to: i. ii. reduce the government deficit in 2000 to a level clearly below the one set in the updated stability programme, given the the better-than-planned outcome government deficit in 1999 and the strong growth prospects; for take prompt corrective measures in the event of any significant slippage from the expenditure targets in specific sectors, the which have been established by updated stability programme; implement such corrective measures within the same year or, at the latest, in the following year; iii. iv. give priority to a faster deficit reduction rather than to additional tax cuts in 2000 and 2001, that wider budgetary margins materialise, in order to avoid a budgetary stimulus to already vigorous economic activity; and the event in is orient the reform of the pension system, in 2000, intended to begin which towards of long-term government finances, taking into account including considerations of equity – between generations. sustainability Product markets in integrated is relatively well France the European product markets. Over the recent period, the pace of structural reforms has speeded up, leading to an improvement in the competitive environment and to a reduction of for business. The present more red favourable macro-economic situation offers France a “window of opportunity” for additional reforms. In view of the above, France should give high priority to the following: tape improve its record in transposing internal market directives which is poor and has deteriorated recently; resolve problems in the application of internal market rules; and continue efforts to introduce greater transparency procurement procedures; public in monitor closely and ensure a decrease in the relatively high level of ad hoc aid; widen the liberalisation, already initiated, of network industries, particularly in the energy sector; and continue efforts to simplify formalities for business and to encourage innovation. i. ii. iii. iv. 27 the as new, remained subdued, despite the highest in the Union. The fall in the youth rate has been even more unemployment pronounced substantial measures gradually come into effect. Nominal wage growth has recent improvement in demand for labour. The next wage round will be crucial, as it will also incorporate effects of the gradual introduction of the 35 hours working week. The effective taxation on labour and the net replacement rate the are above EU-average regulatory environment is still relatively heavy. In view of the above, France should give high priority to the following: in France and i. ii. iii. pursue and evaluate policy measures designed to reduce the fiscal pressure on labour, particularly addressing unskilled and low-paid workers; those review benefit schemes and employment protection legislation in order to increase incentives for employees to take up jobs and participate in active measures and for employers to take on workers; and monitor the introduction of the 35 hours working week reform closely so as to avoid labour adverse effects on wage costs, the in supply and work organisation medium term. Capital markets The French capital market is mature and efficient. The stock market developed dynamically in the 1990s, following modernisation of technologies, the creation of a market for high-growth companies, privatisation, and the introduction of fiscal measures to support equity investments. Various measures have been taken to stimulate the development of risk capital. However, the risk capital market, in spite of its recent growth, remains underdeveloped. In view of the above, France should give high priority to the following: i. ii. further facilitate investment by institutional investors in stock markets and in venture capital; and give particular attention to the actions put forward in the October 1999 Risk Capital Communication, as examples of good taxation improve practice framework, reform bankruptcy legislation and to promote the further development of employee ownership schemes. the to Labour markets The labour market situation has improved in France, even if the unemployment rate of 11 per cent of the labour force in 1999 remains one of 28 7. IRELAND Product markets GDP again grew exceptionally well in 1999 and strong, albeit lower, growth is expected in 2000 as final demand growth will remain high. Some of the current acceleration in inflation is attributable to ‘one-off’ factors and underlying inflation may be contained, but there are signs of over-heating especially labour market. Supply constraints may, therefore, threaten both inflation and growth in the short term. the in Budgetary policy the government In 1999, finances, again, recorded a strong surplus put at 2 per cent of GDP. In the stability program, surpluses are foreseen to continue in the coming years. There are now firm signs of upward pressure on inflation in the economy and the emergence of including supply constraints both physical, infrastructure, and in the labour market. In view of the above, budgetary policy should aim to: i. ii. iii. be ready, already in 2000, to use budgetary policy to ensure economic stability given the extent of over-heating in the economy; gear the budget for 2001 to this objective; in the growth real public restrain consumption from the 4. 3 per cent estimated in 1999 to 2. 7 per cent in 2002 as stability in shown programme; and the updated ensure that the objectives of the National Development Plan are accorded high priority, given the necessity of meeting the infrastructural needs of a strongly growing economy, while at the same time achieving the stability objectives of fiscal policy. Ireland’s economy is very well integrated with the rest of the EU, with relatively low prices, in spite of the recently rapid rise in prices of housing and some services, and high productivity. A number of product market reforms have been carried out in recent years. Progress has been made in developing competition in the telecommunication sector, the electricity and gas markets are to be progressively opened to competition and the government has begun to use Public-Private Partnerships to improve the efficiency of public services. Government research expenditure is rather low, but the budgetary resources allocated to R&D are to be increased substantially. In view of the above, Ireland should give high priority to the following: i. ii. give the Competition Authority the power to enforce Articles 81 and 82 of the EC Treaty; permit a real strengthening of competition policy the reform of competition law to be drawn up this year and do not restrict it to procedural matters; and in take measures to liberalise further the transport sector; in particular, introduce competition into urban bus transport and into the railways, e. g. by franchising. Capital markets Capital markets are developing well and stock market capitalisation as a percentage of GDP has doubled over the last five years. However, the number of companies listed has remained small. Several measures have been taken to encourage venture capital, and there has been a positive from government- move of sponsored to private investors. Investments, which were traditionally focused on the latter stage (expansion), have increasingly been directed to the early stages. However the overall level of investments remains low. In view of the above, Ireland should give high priority to the following: funding away 29 monitor wage developments so as to ensure that they are consistent with the wage moderation the maintenance of employment growth; and needed for adopt a comprehensive strategy to increase the participation of women in the labour market, including the removal of tax- benefit disincentives, and put in place measures which facilitate the reconciliation of work and family in particular, flexible leave schemes and a sustained effort to raise the standards of care for children and other dependants. life; pursue, i. ii. i. to make further efforts develop start-up and early-stage venture capital. in particular Labour markets Strong employment growth and unemployment rates approaching historically low levels are the main features of the current Irish labour market. The employment rate matches the rate for the euro area, female participation in the labour force is increasing and recent trends show a major decline in the long-term unemployment rate. While demographic forces will continue to increase the size of the labour force, the overall situation raises the concern that a tightening labour market could restrict economic growth. In view of the above, Ireland should give high priority to the following: 30 8. ITALY From the second half of last year, economic growth in Italy has shown a marked acceleration, and prospects are expected to remain robust in 2000-2001. Growth is fuelled by domestic demand and net exports are improving. Despite flexibility, labour market improvement unemployment has begun to rise again. in Budgetary policy In 1999, Italy reduced the general government deficit to 1. 9 per cent of GDP, slightly better than the original target of 2. 0 per cent. However, the primary surplus was lower than expected (4. 9 per cent of GDP instead of 5. 5 per cent) and the debt remained at the high level of 114. 9 per cent of GDP. The updated stability programme foresees a further reduction of the deficit ratio to 0. 1 per cent in 2003. The reduction in the deficit would be the result of tight control expenditure, which will also permit a reduction in the tax burden. Over the medium term, the Italian public finances, specially the pension system, will face increasing burden as a consequence of population ageing. In view of the above, budgetary policy should aim to: i. ii. iii. achieve better budgetary outcomes than planned in 2000 and 2001 and thus accelerate the reduction in the still high debt/GDP ratio in the light of a cyclical upswing that is probably stronger than assumed stability programme; updated the in as a minimum, achieve a primary surplus of 5. 0 per cent of GDP in 2000 and 2001 stability projected the programme, namely tight control of current primary expenditure; updated through a in contain in the medium term the expected increase ratio of pension expenditures to GDP; to this end, begin as soon as possible a re-assessment of the the in pension system and take further steps to including reform the pension system, promoting funded pension provisions; and the expansion of iv. the planned privatisation carry out programme, respecting deadlines and where possible accelerate it, in particular in the energy and transport sectors; use privatisation reduce receipts government debt further. to Product markets international involvement of Italy is relatively less integrated in the European product markets than other large Member States. The Italian companies is below what would be expected from a country of its size. However, price levels in Italy are significantly below the EU average and productivity performances are similar to that of France and Germany. Several reforms have been introduced and have contributed to improve the functioning of in particular in the area of the privatisation and liberalisation of public utilities and of the reduction of administrative burden on SMEs. In view of the above, Italy should give high priority to the following: the product market, i. ii. in transposing make further progress legislation since non- internal market transposition rates for social affairs remain high relative to other Member States and a number of indicators point to problems in the area of public procurement; increase efforts to reduce further the overall level of non-agricultural State aid and to improve its structure since the level of non-agricultural State aid expressed in percentage of GDP remains among the highest in the EU and the share of regional aid has increased at the expense of other horizontal objectives; 31 iii. iv. pursue efforts to simplify the regulatory environment to develop one-stop shops; and for companies and reinforce initiatives to promote R&D and innovation in the light of the very low ratio of R&D expenditure to GDP. Capital markets Substantial progress has been made towards the development of deeper and more integrated financial markets and the development of risk capital in Italy. Italian equity markets are growing rapidly thanks also to the extensive on-going privatisation programme. Venture capital and private equity have also expanded rapidly in recent years, and the creation of the Nuovo Mercato will contribute these developments. Nevertheless the venture capital market remains underdeveloped. In view of the above, Italy should give high priority to the following: further to i. to encourage capital, improving the efforts continue in development of venture particular by the further taxation framework for risk capital, by institutional investment of facilitating investors in stock markets and venture capital, and by reforming bankruptcy legislation. Labour markets Despite recent modest improvements, the labour market situation remains difficult, with a low employment rate, high structural unemployment and large regional differences. Segmented labour markets, atypical job contracts, a large informal economy and unequal unemployment distribution across groups and regions point to structural problems. Many underlying structures are unfavourable for employment, including a high tax burden on labour, loose benefit systems combined with strict employment protection legislation and a complicated wage bargaining system. While there have been significant efforts to reduce taxation on labour, to modernise administration and to introduce new structures for reforms, none of these measures has yet is a clear need to borne full fruit. There complement these efforts by comprehensive structural measures. In view of the above, Italy should give high priority to the following: the and the protection provided by rebalance benefit employment systems protection legislation and reinforce active labour market measures; combine an improvement of unemployment benefit system with an increase in the employment protection flexibility of legislation and a tightening of eligibility for pension and other benefit rules schemes, whilst ensuring proper job availability requirements and incentives to participate labour market active programmes; in promote labour market flexibility and, in particular, reinforce efforts to promote wage labour in productivity differences across regions; and line with flexibility continue efforts to reduce taxation on labour, and monitor developments closely, especially the effect of temporary tax and social contribution measures targeted at disadvantaged labour market groups and regions. security i. ii. iii. 32 9. LUXEMBOURG Real GDP growth was particularly fast in 1999 despite unfavourable external developments and is expected to remain strong. Unemployment remains very low and there are some upward pressures on inflation. Budgetary policy Due to fast economic growth and the ensuing buoyancy in fiscal revenues, the Luxembourg government repeatedly registered comfortable surpluses since several years. In view of the above, budgetary policy should aim to: i. ii. closely current monitor government in order to facilitate the expenditures achievement of the budgetary objectives while making room for a reduction in the tax burden as planned in the updated stability programme; and combine the implementation of sound reforms, finance policies with public notably in the field of social security, that are needed in order to maintain the long- term viability of the system and prepare for the challenge of an ageing population. Product markets above, Luxembourg should give high priority to the following: i. ii. iii. speed up the transposition of internal market legislation, particularly in transport, motor vehicles, plant-health checks and social affairs; adopt a new competition law permitting a more active competition policy by the authorities, giving them the power to enforce EC Articles 81 and 82; and create the conditions allowing a catching- up to the most recent developments in the information society, in particular given the late start of ICT penetration for a country with a high standard of living. Labour markets The labour market performance of Luxembourg is good, with the lowest unemployment rate and the highest domestic employment rate in the EU, relying heavily on cross border workers. The national employment rate is not outstanding, with low female and older worker participation rates. While there are no major problems in the functioning of labour markets, some underlying tax and benefit structures are not so favourable for encouraging employment. In view of the above, Luxembourg should give high priority to the following: the examine the tax-benefit system with a view to removing disincentives which may in discourage employment, and continue efforts to increase the national employment rate, in that of women and older particular workers. participation i. While the Luxembourg economy is very well- integrated in the European product market and is excellent, its macroeconomic performance towards better structural policies functioning product markets are less well advanced. However, progress is being made. The abolition of the price regulation and regional aid systems, which should take place in the near future, is particularly welcome. In view of the targeted 33 10. NETHERLANDS Product markets Economic activity hardly decelerated in 1999 with respect to the high growth rate achieved in 1998; as a result, employment kept increasing at a rapid pace and registered unemployment fell to levels not seen since the early 1970s. Growth is likely to accelerate in 2000 following the improvement in the external economic situation. Fast growth and a progressively tightening labour market are raising concerns about the evolution of prices and, even more, of wages, which are now increasing in neighbouring countries. significantly faster than Budgetary policy Strong economic growth boosted government revenues in 1999 so that the deficit, which was at the beginning of the year generally expected to rise, eventually turned into a surplus of 0. 5 per cent of GDP. Since the mid-1990s, the Dutch budgetary strategy has consisted in reducing the weight of government expenditure by setting growth ceilings in order to reduce the tax burden and simultaneously the government deficit. A major tax reform is planned for 2001 consisting of a reduction of personal taxes and an increase in indirect taxation. In view of the above, budgetary policy should aim to: i. ii. increase in 2000 the government surplus achieved in 1999 in the light of the strong growth prospects; remain ready to tighten budgetary policy, already if inflationary pressures intensify beyond the acceleration caused by the rise in import prices and especially if the current trend in wage increases continues; and in 2000, monitor closely public expenditure in 2001 so as to ensure that the deterioration in the budgetary position, resulting from the loss of revenues due to the tax reform, remains limited and temporary. to the related The Netherlands is very well integrated into the European economy and its product markets function relatively well. Structural reforms have been effective, even if there are still some problems transposition and implementation of internal market legislation (in transport and public procurement). Competition policy should continue to be reinforced as should the liberalisation of the energy and transport sectors. The private share of R&D funding is relatively low and technology transfer between public and private research still insufficient. In view of the above, the Netherlands should give high priority to the following: make further progress in enforcing the public procurement directives as the share of the value of calls for tenders published in the Official Journal in total public procurement is amongst the lowest in the Union; pursue further the regulatory reform and privatisation process at the basis of the introduction of competition in network industries; in particular, speed up the transposition of internal market directives in the area of transport; adopt a regulation governing access to the cable network in order to avoid dominant positions of cable internet companies services; and telephony and in to further measures take the involvement of the private sector in R&D and transfer between public and private research. to encourage technology raise i. ii. iii. 34 Capital markets Labour markets The Dutch stock market and the venture capital market are mature and competitive. The venture capital market has shown strong growth over recent years as a result, in part, of a favourable taxation environment. However early stage investments remain relatively limited. In view of the above, the Netherlands should give high priority to the following: i. its efforts on encouraging concentrate early stage investments; give consideration to the examples of good practices put forward in the October 1999 Risk Capital Communication, in the area of promotion of ownership schemes, including stock-options. innovative employee Dutch labour market performance has been among the best in the EU in recent years, in large part thanks to the comprehensive strategy of structural reforms pursued. Tax and benefit reforms have reduced the tax burden on labour and have improved work incentives. Measures have been taken to increase labour supply among specific groups, including older people and those on disability schemes. Nevertheless, significant remain, with a high structural proportion of the working-age population in receipt of passive unemployment and disability benefits. In view of the above, the Netherlands should give high priority to the following: imbalances i. to continue efforts to improve the tax-benefit removing a view system with disincentives which may discourage participation in employment, in particular of women and older workers; pursue resolutely the efforts to reduce the high number of persons who remain outside the labour market supported by passive income support schemes. 35 iii. implement the announced pension reform aimed at raising the average retirement age from 2001 onwards and pursue reforms in order to put the predominantly pay-as- you-go financial pension system on a sounder footing. Product markets While Austria is rapidly integrating into the European trading system, its involvement in foreign direct investment and cross-border M&A activity remains below par. Austria has adopted a rather cautious approach to product market reform. Nevertheless, some progress has been made in transposing internal market legislation, in reinforcing competition policy and in liberalising telecommunications. Some initiatives have also been taken to simplify procedures for starting new businesses and the ambitious target of raising R&D spending to 2. 5 per cent of GDP by the year 2005 (up from 1. 6 per cent of GDP in 1998) has been set. In view of the above, Austria should give high priority to the following: i. ii. iii. make further progress in the transposition of the Community’s public procurement guidelines, in particular at the provincial level which has been delayed; accelerate the process of regulatory reform in the energy and transport sectors in order to ensure effective competition in the market place; and take further measures aimed at increasing the involvement of the private sector in R&D and at encouraging technology transfer between public and private research. 11. AUSTRIA Austria is experiencing an acceleration of economic growth due to a well-balanced pick-up of all demand components and in particular robust private consumption. Employment is likely to continue rising and, with labour supply into a remaining elastic, decrease in unemployment. translating partly Budgetary policy Austria made some progress in consolidating its government finances in 1999 as the deficit fell to 2. 0 per cent of GDP, the target set in the original stability programme. Against the background of a marked tax relief in the framework of the reform of income taxes, the updated stability programme targets a general government deficit of 1. 7 per cent of GDP in 2000 and further reductions thereafter. However, this will be attained with the help of sizeable one-off measures. To achieve a government the durable accounts term, the medium and significant structural measures, first and foremost in the pension and health domain, are foreseen in the updated stability programme. In view of the above, budgetary policy should aim to: improvement in longer in i. ii. as a minimum, achieve the target of a general government budget deficit of 1. 7 per cent of GDP in 2000, which would help to establish a clear downward trend in the debt ratio; realise substantial savings on the expenditure side and exercise strict the budgetary expenditure control execution in order to meet the cost of the reform of family assistance; taxes and income in replace the one-off measures taken in 2000 by measures of a permanent nature with a view to putting public finances on a sustainable path; and 36 Capital markets Labour markets The government has undertaken several reforms to stimulate the stock and risk capital markets. However, the stock market remains small, and venture capital low and investment focused on the later stage sector. In view of the above, Austria should give high priority to the following: is also i. ii. the supervisory upgrade framework, improve corporate governance, remove the constraints preventing institutional investors from investing in equity and develop fiscal incentives for equity and risk capital investments; and implementing the actions put forward in the 1998 Risk Capital Action Plan, especially concerning taxation of new firms and capital, legislation on insolvency and bankruptcy and promotion of stock options. in venture investment Austrian labour markets are performing relatively well. Unemployment is low and employment rates are high. However, the employment rate for older workers is below the EU-average, due in part to disincentives arising from the early the retirement system. Another Austrian labour market is the smoothly working co-operation of the social partners, which might be seen as a model for many other countries. In view of the above, Austria should give high priority to the following: feature of i. ii. rapidly implement the announced reforms on increasing the early retirement age and making benefit eligibility stricter which are welcome in the light of a relatively tight labour market; accompany the pension reform measures by further measures targeted at older workers in order to avoid a rising incidence of unemployment for this age group; and continue efforts to reduce the high tax burden on labour, in particular by focusing on problem groups in the labour market. 37 12. PORTUGAL in both domestic and After the slowdown in 1999, exports began to external demand recover in the second half of 1999, pointing to an acceleration of economic activity in 2000. Job creation is expected to remain robust in 2000 but somewhat slower due to a more balanced composition of growth. There is a widening current account imbalance and the indebtedness of the private sector has risen rapidly. iii. Budgetary policy the projected 1. 1 per cent of GDP in the updated stability programme and front- load the overall consolidation effort planned in the programme; and approve, before the end of 2000, the new basic law for the budget, putting budget preparations on a multi-annual basis in order to identify better the medium-term effects of policy decisions; implement urgently a number of reforms with a the budgetary measures announced in the area of health care and a new social security pension law to strengthen the financial term position of the social security sector so as to face the ageing problem better. including both impact, In 1999, the general government deficit declined to 2. 0 per cent of GDP, the target set in the original stability programme. According to the updated stability programme, a reduction of the deficit ratio to 1. 5 per cent is to be achieved in 2000 and to continue thereafter. The deficit reduction in 2000 would be the result of a steep rise in tax revenue, resulting from a more efficient collection of taxes, which would more than offset the planned rise in total expenditure. To underpin the process of fiscal consolidation in the medium stability programme foresees various reform plans, most notably the introduction of a new basic law for the budget, a new law on social security pensions and measures in the sickness insurance. In view of the above, budgetary policy should aim to: the updated term, i. ii. as a minimum, achieve the 1. 5 per cent of GDP deficit target for 2000, which implies a strict control of current primary expenditure which has risen significantly in recent years; in this context, do not use the expenditure amounts frozen in the budget for 2000 if this is required to achieve the deficit target, thus creating a cushion to absorb a possible shortfall in tax revenue; ensure that budgetary policy contributes to a more balanced policy mix to correct the major the Portuguese economy; to this end, aim for a more ambitious deficit ratio target in 2001 than imbalances in Product markets of involvement The Portuguese economy is moderately well integrated in European product markets. The international Portuguese companies is relatively weak. Progress has been made in transposing internal market legislation and in liberalising the telecommunications and energy sectors. However, productivity and R&D levels remain amongst the lowest in the EU. In view of the above, Portugal should give high priority to the following: continue efforts to improve the record in transposing legislation, internal market especially in transport, because, despite progress made, the transposition record remains poor; take action in reduce State aid which has substantially to bring increased and line with competition to legislation European Union and reinforce the independence of Competition authority; law more the i. ii. 38 iii. iv. monitor closely the effectiveness of the various measures simplify administrative procedures and to reduce further their costs in light of the high share of SMEs in business employment; and taken to undertake further efforts to promote R&D and ICT diffusion, in particular create incentives sector involvement in R&D. increase private to Capital markets The combination of an extensive privatisation process, the introduction of the euro, and the shift to all-electronic trading have increased the maturity, depth and efficiency of the Portuguese stock market. Progress has also been made in the implementation of EC services directives. Despite the initiative taken to improve the legal framework for venture capital, venture low and highly capital dependent on the support of public funds. In view of the above, Portugal should give high priority to the following: investment remains financial i. make further efforts to develop venture capital and in particular give consideration to a revision of the tax framework in order to reduce the relative cost of risk capital as compared to other financial instruments. Labour markets the low attainment of Portuguese labour markets are performing better than in many other Member States. The full-time equivalent of the employment rate is among highest in the EU. One of the most serious problems related to the further catching up of the level of is Portuguese economy educational the workforce. Although younger workers’ educational level has improved substantially compared to previous generations, it still lags far behind other Member States. Employment protection is considered to be relatively strict in Portugal, such in that importance. In view of the above, Portugal should give high priority to the following: term contracts are gaining legislation fixed i. ii. improve education and training in order to increase the employability and adaptability of the labour force, and accompany this by an adequate benefit system so as to ensure appropriate incentives to participate in active labour market measures and to take up job offers; and pursue the policy further of implementing a number of laws aimed at improving the performance of labour market, the including the easing of dismissal and job assignment rules and the introduction of higher working time flexibility, with a view to enhancing labour market flexibility. 39 13. FINLAND Product markets is from Rapid economic growth in recent years has been led by buoyant exports centred on high- technology products; domestic demand has recession and recovered the earlier employment though unemployment, mainly structural, remains high. Strong growth together with firm budgetary expenditure control has in highly successful budgetary consolidation. Given an outlook of continuing strong growth, however, overheating has emerged as a significant risk. expanding, resulted Budgetary policy The general government surplus rose to 2. 3 per cent of GDP in 1999 from 1. 3 per cent in 1998. According to the updated stability programme, the surplus should remain above 4 per cent of GDP throughout the period 2000 to 2003, with the main contribution to change being the central government surplus. The actual surplus profile will depend on the timing of reductions in taxes and charges on labour which the government aims to cut by 1½ per cent of GDP by 2003. Surpluses are justified by the need to prepare for a rapidly ageing population. In view of the above, budgetary policy should aim to: i. ii. iii. maintain the tight fiscal stance represented in the 2000 budget, given the increasing overheating risks, and stand ready, already in 2000, to tighten further if the risks materialise more clearly; to increase continue the government surplus through a reduction in government expenditure relative to GDP; to this end, respect firmly the central government expenditure guidelines for the years 2001 to 2004 announced in March 2000; and continue the reductions in the high burden of taxation on labour as in 1999 and 2000 and as part of a restructuring of the tax system with the aim of supporting job creation. Integration of the Finnish economy in European product markets has improved since the country joined the EU. Significant and fast progress has been achieved in the transposition of internal market legislation and in the liberalisation of telecommunications and electricity sectors. The already important R&D effort has been further increased since the mid-1990s. However, there is scope for improvements in price levels and productivity if the problem of inadequate competition in certain sectors is resolved. In view of the above, Finland should give high priority to the following: in the Finnish economy i. ii. take further measures to strengthen competition in a range of sectors, most retail and banking; consider notably reforming the competition law so that the competition authority has the power to implement Articles 81 and 82 of the EC Treaty; and further open up markets for public procurement and public services, which should lead to lower costs and higher quality. Capital markets The Finnish stock market has grown strongly in recent years, both in terms of capitalisation and of number of companies listed. The venture capital market is active and the recent creation of a market for high-growth companies will further favour the development of risk capital. However, further efforts should be made to support the development of risk capital. In view of the above, Finland should give high priority to the following: give particular attention to the examples of good practice put forward in the October 1999 Risk Capital Communication in the areas of legislation on bankruptcy and employee promotion stock- ownership options; and of schemes, innovative including i. 40 ii. to encourage continue with measures investment by institutional investors in equity markets. Labour markets in is, more labour market situation 1999. However, improved The the considerably unemployment rate still remains above the EU average, and importantly, almost completely structural. Other main problems include a high benefit dependency among working-age population, high taxation on labour and a compressed wage distribution. There have been significant efforts to reduce the tax burden on labour and to improve the quality of and intensify active labour market measures. These efforts need to be balanced by reforms of the benefit system so that the latter actively supports the activation programmes and makes the supportive of structures more underlying employment. In view of the above, Finland should give high priority to the following: i. ii. review the overall benefit system with the aim of increasing job availability, making job search more effective, and ensuring sufficient incentives to take up a job offer and to stay in the labour force; and pursue recent policy orientations to reduce the tax burden on labour, and in particular, reduce the marginal effective tax rates on low wages. 41 14. SWEDEN The Swedish economy is expected to continue to grow strongly above trend in 2000, driven both by continued strong domestic demand growth and strong exports. With buoyant demand, in inflationary pressure, combination with lower and growth further unemployment can be expected over the year. However, supply constraints could emerge that will put upward pressure on prices, not least with respect to the tightening of the labour market. employment low Budgetary policy the general government In 1999, surplus remained at 1. 9 per cent of GDP, the same as in 1998. According to the updated convergence programme, continued surpluses of at least 2 per cent of GDP are to be aimed for in 2000 and beyond. This would be the result of continued tight expenditure control, which would also allow a reduction in the revenue-to-GDP ratio. In view of the above, budgetary policy should aim to: i. ii. light of the buoyant tighten the stance of budgetary policy, in the growth environment, so as to support monetary policy in the achievement of price stability, given the increased risk of emerging supply constraints in the near future; maintain tight expenditure control this year and next, on which the budgetary outlook is heavily reliant, thereby leading to a steady decline in the ratio of government expenditure to GDP; and iii. reduce further the tax burden which remains high despite the tax reductions in 2000. Product markets Sweden is increasingly integrated in Community in markets and has an excellent transposing internal market legislation. State aid is record 42 the network to deregulate low; R&D spending is the highest amongst the EU15 Member States; and a great effort has been made industries. However, there is scope for improvements in price levels and productivity in the Swedish economy inadequate competition in certain sectors is resolved. In view of the above, Sweden should give high priority to the following: the problem of if i. ii. iii. continue efforts to remove regulation that in retail hinders or limits competition distribution, and construction pharmaceuticals while taking into account that it is inherently difficult to achieve full- scale competition in a country with a large number of sparsely populated regions; give, as currently envisaged by the government, the Competition authority the power to enforce Articles 81 and 82 of the EC Treaty; pursue initiatives to improve competition in railways, air and bus transport; and pursue vigorously initiatives that have been launched to enhance efficiency in public procurement and the provision of public services. Capital markets in has and growth venture Swedish capital market been The characterised by rapid globalisation, technological change capital investments. The venture capital market is active. It has evolved from having a handful of mostly government players to having a substantial number of private players. However, enterprises in their very early stages and enterprises outside the "growth-sectors" still have difficulties in raising capital. In view of the above, Sweden should give high priority to the following: i. make further efforts to facilitate access to risk capital small in particular companies outside the high-tech industry; for give consideration to the examples of good practice put forward in the October 1999 Risk Capital Communication in the areas of taxation, and promotion of innovative employee ownership schemes, including stock-options. to improve is expected their of ALMPs efficiency, while it is important to continue to target the programmes closely to actual and potential long-term unemployed as well as to the demands of the labour market. In view of the above, Sweden should give high priority to the following: take additional measures to reduce the high tax burden on labour income, in particular for those with a low take-home pay from work; and further adapt the benefit and assistance to clarify eligibility schemes in order limit the benefit duration by criteria, activation the administration efficient incentives to take up a job. strengthen ensure policy, and Labour markets The labour market situation started to improve more markedly in 1999 and the employment rate, in particular the female employment rate, is one of the highest within the Union. Despite the labour taken, measures already remains very high and the benefit schemes generous. The Swedish government appropriately focuses its labour market policy on improving human capital. The current streamlining taxation of i. ii. 43 15. UNITED KINGDOM is expected Growth in the United Kingdom in 1999 exceeded expectations and even stronger, above-trend growth in 2000 but no major resurgence of inflation is expected. The labour market is expected to remain strong and while wage earnings are showing some sign of acceleration, government measures already taken to promote and improve the attractiveness of work should limit the risks of growth translating into greater pressures on the labour market. employment opportunity Budgetary policy in Government finances registered a surplus of 1. 2 per cent of GDP in 1999. The authorities now expect the surplus to be 1. 3 per cent of GDP in financial year 1999-00 compared to the 0. 3 per the update cent of GDP projected convergence programme. The budget announced in March raised expenditure in certain areas; there are also plans for raising, further than previously announced, the share of government investment in GDP, from its current low levels. Nevertheless the in comfortable surplus in 2000-01. In view of the above, budgetary policy should aim to: finances are expected remain to i. ii. keep the the underlying position of government finances broadly unchanged, taking account of cyclical developments in the economy; make sure that any new expenditure or tax initiatives are consistent with this goal; and pursue the policy of substantially raising the ratio of government fixed investment to GDP within the context of firm control of total government expenditure. Product markets The economy of the United Kingdom is very much exposed to international competition. The liberalisation of goods and services markets in the 44 United Kingdom is in many respects further advanced than in the other Member States. However, problems still remain, most notably in transport. Despite significant reforms to improve the functioning of product markets, the United Kingdom faces a serious problem of low productivity. Declining R&D expenditure and innovation intensity may play a part in this. The high failure rate of businesses and skill shortages also give cause for concern. In view of the above, the United Kingdom should give high priority to the following: i. ii. monitor and, if necessary, reinforce the effectiveness of measures been taken or announced to tackle the problems of declining R&D efforts, low innovation intensity, skill shortages and the high failure rate of SMEs; and develop a coherent strategy for transport in order to tackle the problems of road congestion, inadequate investment in the railways and poor service quality in public transport. Capital markets is mature and The UK capital market competitive, and a range of initiatives are underway to develop venture capital markets. Nevertheless, venture capital investment in early- to stage businesses remains investment in management buy-outs/buy-ins. Furthermore, although pension funds are not prevented from investing in venture capital by quantitative their investment in this field remains low. In view of the above, the United Kingdom should give high priority to the following: low compared regulations, prudential i. analyse the reasons which, notwithstanding the absence of quantitative prudential restrictions, prevent pension funds from investing in venture capital, and take actions to stimulate this investment. Labour markets intensified and extended UK labour market performance has been among the best in the EU in recent years. Recent reforms have the ‘welfare to work’ approach. Tax and benefit reforms have lowered marginal tax rates for low- paid workers while providing in-work benefits to families and disabled persons. A strategy for improving child care provision has been established. Various measures have been taken to target high unemployment. However, in the context of a good overall performance, the problem of regions with localities and concentrated areas of unemployment, much of it long-term, stands out. In view of the above, the United Kingdom should give high priority to the following: i. pursue efforts to address the problem of concentrated unemployment in deprived areas and communities, aiming to reduce the proportion of households with no-one at work; and reinforce the preventive strategy against long-term unemployment, with the aim of providing a fresh start within 12 months for unemployed adults in line with the Employment Guidelines. 45