On 21 January the Commission presented its "spring report" in view of the forthcoming European Summit on 25-26 March (EUROPE 22 January p 7 and EUROPE Documents 4 February). This report is based on a certain number of documents, including the communication on the implementation of the broad economic policy guidelines (BEPG) for 2003-05. This communication assesses the progress accomplished in the implementation of the medium-term Community strategy for economic policy. It focuses on three priorities identified by the Council last June: 1) promoting growth, 2) increasing labour market flexibility and 3) guaranteeing the sustainable character of public finance. In light of the analysis carried out, the Commission considers that the response to the political challenges in certain areas in appropriate but that the general progress in reform remains, nonetheless, insufficient. The Commission concludes that the current pace of reform is putting the guidelines at risk in the next two years, which is compromising total completion of the Lisbon defined objectives by 2010. We are publishing different parts of the report in French, English and German.
COMMUNICATION FROM THE COMMISSION
ON THE IMPLEMENTATION OF THE 2003-05 BROAD ECONOMIC POLICY GUIDELINES
(presented in accordance with Article 99 (3) of the EC Treaty)
PART I
General Assessment [Commission Communication]
EXECUTIVE SUMMARY
This Communication presents a first assessment of the follow-up given to the general guidelines in the 2003-05 Broad Economic Policy Guidelines (BEPGs). An assessment on the implementation of the country-specific recommendations is given in the accompanying working document of the Commission services. Together, they constitute the first Implementation Report (IR) following the move to multi-annual guidelines in 2003. The 2003-05 BEPGs laid down the EU's medium-term economic policy strategy with particular attention to the contribution economic policies can make to reach the Lisbon strategic goal. The three key elements of this strategy are:
growth- and stability-oriented macroeconomic policies;
economic reforms to raise Europe's growth potential; and
strengthening sustainability.
Following the move to a better streamlined policy coordination cycle, this Implementation Report is presented as part of the “Implementation Package” together with the draft Joint Employment Report and the Implementation Report on the Internal Market Strategy. Furthermore, as a consequence of the clearer medium-term focus of the policy strategy, this first Implementation Report can only provide a preliminary assessment. It concentrates on policy measures taken and/or envisaged in 2003 in response to the 2003 05 BEPGs. Specific attention is given to the three priority areas highlighted by the Council. The implementation assessment will be stepped up the closer we get to the full review of the BEPGs planned for 2006.
The economic background to this IR is that of a stagnation in the first half of 2003. Despite a clear improvement in economic activity in the third quarter, growth over the year as a whole is expected to have been a modest 0.8 per cent in the EU (and a mere 0.4 per cent in the euro area). The protracted period of low growth has started to take its toll on the labour market. Employment growth came to a halt and unemployment rose to 8.1 per cent in the Union. Headline inflation has been slow to come down, partly due to price increases for oil and fresh food, and rises in indirect taxes. A lack of response of wages to the cyclical slowdown in labour productivity also implied continued pressures on nominal unit labour costs.
Macroeconomic policy was accommodative in 2003. Both the ECB and the national central banks in Denmark, Sweden, and the United Kingdom lowered further their key interest rates, thereby supporting domestic demand. Despite the appreciation of the euro, overall monetary conditions remained accommodative. The free play of automatic stabilisers helped to stabilise the economy. The EU's cyclically-adjusted primary balance remained broadly unchanged, indicating an overall neutral fiscal stance in 2003.
The economic slowdown continued to weigh on public finances and progress seems mixed as regards reaching or maintaining a sound budgetary position. The average nominal budget deficit worsened further in 2003 to 2.7 per cent of GDP. However, differences are sizeable across Member States. Belgium, Denmark, Spain, Austria, Finland and Sweden had a cyclically-adjusted budgetary position close to balance or in surplus in 2002. With the exception of Austria, the other five Member States maintained such a budgetary position in 2003. Nominal deficits deteriorated sharply in several other Member States, with two countries (Germany and France) expected to have deficits exceeding the 3 per cent of GDP limit by a wide margin in 2003. While the economic slowdown is the main factor behind the recent deterioration in the public finances, part of the slippage in 2003 also stems from discretionary measures in some Member States (notably Greece, Austria, and the United Kingdom).
In 2003, only Ireland, the Netherlands and Portugal showed a marked improvement (of more than 0.5 per cent of GDP) of their cyclically-adjusted budget balance (CAB). In the case of Portugal, this is due to substantial one-off measures, which also resulted in keeping the nominal deficit just below the 3 per cent limit in 2003. However, the deficit is expected to deteriorate in 2004 in the absence of further measures, thereby going above the ceiling again. The other two countries with an excessive deficit, Germany and France, made little, if any, progress. Notwithstanding the consolidation measures taken in Germany of about 1 per cent of GDP, the lower-than-expected-growth makes them inadequate to bring the excessive deficit situation to an end in 2004. France has not taken effective action to redress the budgetary imbalances to bring the excessive deficit situation to an end this year.
Nominal wages continued to grow by about 3 per cent in 2003 in the EU (2 ¾ per cent in the euro area), despite the continued slowdown in economic activity. This has put further pressure on profitability and job-creating investment. However, seen in a medium-term perspective, wage trends appear still broadly compatible with price stability.
The labour market performed quite well in the beginning of this economic downturn, reaping the benefits of earlier reforms but also reflecting labour hoarding. The effect of the slowdown started to be felt more strongly in 2003 with employment growth stagnating and a continued rise in unemployment. The increase in the pace of labour market reforms in 2003 appears encouraging, but it needs to accelerate further. In particular, efforts have been made by most Member States to make work pay, even if reforms remain focused on the tax side. Some Member States have taken action to address incentive effects in the benefit systems (Denmark, Germany, France, the Netherlands, and the United Kingdom), which contribute most to the risk of unemployment- and inactivity traps. Several Member States have taken further measures to make the work organisation more adaptable (notably Denmark, Spain, France, Italy, the Netherlands and Sweden) and most Member States aim to foster occupational mobility through lifelong learning initiatives. Active labour market policies have also become better in responding to the individual needs of the unemployed. However and despite some improvements noted or planned in Denmark, Ireland, and the Netherlands, progress appears limited as regards improving the efficiency of ALMPs: e.g. evaluations are not systematically carried out or reported. Progress also appears limited in promoting wage differentiation or addressing the regulatory burden in the labour market. Despite the progress noted with some types of labour market reforms, the Lisbon- and Stockholm employment rate targets risk being missed, unless further and comprehensive reforms are undertaken without delay.
Labour productivity growth continued to disappoint and the gap with the USA widened. Lower labour productivity per hour worked now represents 40 per cent of the difference in GDP per capita between the EU and the USA. The gradual deterioration in labour productivity growth since the mid-1990s can be explained in equal parts by the slowdown in investment and in total factor productivity (which generally include effects from more efficient resource utilisation, technological progress and the natural catching-up process of lesser developed EU countries). ICT and their adoption are a key driver of productivity growth and the differentials between the EU and US productivity trends are strongly influenced by differences in the extent to which ICTs have penetrated the respective economies. This illustrates the need to stimulate market integration, business dynamism, and investment, particularly in knowledge.
Economic reforms are essential to enhance the EU's growth potential, which is necessary to achieve the 'Lisbon targets'. Progress in implementing the guidelines aimed at increasing productivity and business dynamism seems mixed. The functioning of the Internal Market is still hampered by the absence of proper regulation in the areas covered by proposals pending before the Council and the European Parliament (including directives on professional qualifications and on intellectual property rights). The average transposition rate by Member States also deteriorated somewhat in 2003.
Progress has been better in improving the effectiveness of competition policies, where e.g. Belgium, Austria, and the United Kingdom have acted to ensure the effective independence and capabilities of their competition authorities. Market opening in network industries also continues to progress both at EU level (with e.g. the directive laying down common rules for the electricity and gas market and an agreement on the trans-European networks) and at national level, even if the market share of the incumbent often remains very high after liberalisation.
The business environment continues to be hampered by some weaknesses, such as relatively high administrative burdens and the difficulties to find financing (notably venture capital). Nevertheless, several countries (e.g. Belgium, Germany, Greece, Spain, France, Luxembourg, and Austria) took measures to facilitate business start-ups in 2003.
The transition to the knowledge based economy is progressing, albeit slowly, and differences between Member States remain important. The Commission put forward an Action Plan aimed at promoting R&D investments (to 3 per cent of GDP by 2010) where two-thirds are to be financed by the private sector. So far, evolutions remain far from satisfactory with declining R&D spending (as a share of GDP) in e.g. Ireland, the Netherlands, and the United Kingdom. It is also worrying that Member States failed so far to substantially raise investment in human resources, which was also addressed in a Communication from the Commission in November 2003. On the positive side, several Member States are trying to improve the quality and efficiency of their education systems, where e.g. Spain adopted a law on quality in education and Sweden introduced a new system of vocational training.
As regards capital markets, the Risk Capital Action Plan is almost completely implemented. The Financial Services Action Plan is well on the way to full implementation and transposition of the adopted legislative measures into national law has begun. However, a final effort is required to meet the 2005 deadline. Integration of clearing and settlement arrangements has become a clear priority for action at both the EU and the Member State level in 2003. Following corporate scandals in recent years, several Member States have strengthened corporate governance arrangements at the national level, while the Commission has adopted an Action Plan on company law and corporate governance in May 2003. Financial supervision arrangements are being streamlined, both at Member State- and EU level.
Long-term sustainability of public finances, particularly in view of the ageing population, is not yet secured in about half of the Member States, notably Belgium, Germany, Greece, Spain, France, Italy, and Portugal. While significant progress has been made through pension reform measures in some Member States in 2003, in particular in France and Austria, less progress was made in bringing the public debt down. Public debt remained above 60 per cent of GDP in 2003 in six Member States, including in Belgium, Greece, and Italy where it continued to exceed 100 per cent of GDP.
The progress in improving social sustainability is hampered by the deteriorating labour market situation, since jobs play an important role in lifting people out of poverty and social exclusion. Some measures have been undertaken to tackle regional differences in unemployment, and above all, to enhance the efficiency of investments financed by the Structural Funds.
Some progress has been made towards improving environmental sustainability in 2003. At the EU level, the Council extended the coverage of Community legislation in energy taxation (on e.g. minimum taxation levels). Several Member States (e.g. Belgium, the Netherlands, and Sweden) took further measures to promote the use of renewable energy. Other Member States (notably Germany and Austria) took measures in the area of transport pricing. In the United Kingdom, congestion charges were introduced in London, causing a marked change in behaviour. In contrast, and despite the good progress made at the end of the 1990s, no progress was noted as regards reduction of greenhouse gas emissions.
Progress in response to the guidelines for the euro area is mixed. The macroeconomic policy mix appeared broadly compatible with price stability and continued to be supportive to growth. However, the implementation of the budgetary guidelines is worrisome. Only three Member States maintained budgetary positions close to balance or in surplus in 2003 (namely Belgium, Spain and Finland), and three others recorded an improvement in the cyclically-adjusted budget balance of at least 0.5 per cent of GDP (Ireland, the Netherlands and Portugal). Half of the euro area Member States made insufficient progress towards sound public finances in 2003. Finally, progress appears very limited in improving the external representation of the euro area in international fora.
Recognising that this is only the first year in a multi-annual setting, the overall picture that emerges from this review is mixed. The pace of reform (incl. both measures taken and/or envisaged) appears to have improved somewhat as regards the labour market, policies affecting competition, the business environment and the use of new technologies, education, and pensions. Progress is more limited in market integration, investment in knowledge and research, social- and environmental sustainability. The rapid deterioration in budgetary positions in several Member States and the lack of resolve to address the (excessive deficit) situation is a source of great concern. Taken together, it does not appear as if the overall pace of reforms has been stepped up as requested by the Council. There is a clear risk that with the current reform pace, full implementation of the BEPGs can not be secured by 2006, thereby putting the fulfilment of the Lisbon targets by 2010 at risk. The slowdown and the need to consolidate public finances cannot be an excuse for postponing necessary reforms further. Indeed, both fiscal consolidation and structural reforms can be growth supportive even in the short run through positive effects on confidence. Their longer-term positive impact on growth is undisputed.
1. INTRODUCTION
This Communication aims to assess the action taken or envisaged in response to the EU's medium-term economic policy strategy as laid down in the 2003-05 Broad Economic Policy Guidelines (BEPGs) [See Council recommendation of 26 June 2003 on the BEPGs (2003/555/EC), published in the Official Journal No. L195/1 of 1 August 2003]. The BEPGs provide the overarching instrument for economic policy co-ordination in the European Union. Following streamlining of the Union's policy co-ordination processes, the BEPGs focus on key economic policy issues and the measures to be taken over the medium term to effectively address them. Other processes (such as the Internal Market Strategy and the European Employment Strategy) deal with their issues in greater detail. This Implementation Report is presented as a part of an “Implementation Package” with the draft Joint Employment Report and the Implementation Report on the Internal Market Strategy. Together they support the Commission's 2004 Spring Report. It has taken due account of the recent report of the European Employment Taskforce.
The EU's medium-term economic policy strategy is concentrated around:
growth- and stability-oriented macroeconomic policies;
economic reforms to raise Europe's growth potential; and
strengthening sustainability.
The BEPGs concentrate on the contribution that economic policies can make in the medium term to the fulfilment of the strategic goal set in Lisbon in 2000: “to become the most competitive and dynamic knowledge-based economy in the world capable of sustainable economic growth with more and better jobs and greater social cohesion”. An environmental dimension was added to the Lisbon Agenda in 2001.
The Implementation Report provides a key input for the multilateral surveillance of the economic policies of the Member States and the Union as envisaged by the Treaty Article 99 (3). This Implementation Report is the first one following the move to multi-annual guidelines. Recognising that Member States now have three years to address the general guidelines and country-specific recommendations in the BEPGs, an incremental approach will be followed where the implementation assessment becomes gradually more thorough the closer we get to the full review of the BEPGs planned for 2006. This implies that the implementation assessment of this first intermediate year is less detailed and conclusive, and concentrates on policy intentions to a greater extent than future assessments.
Box 1: Follow-up given to the Council's three main priorities
In a cover note to the 2003-05 Broad Economic Policy Guidelines (BEPGs) the Ecofin Council highlighted three main priorities for policy action in the coming year:
1. promoting growth;
2. increasing flexibility in our labour markets; and
3. ensuring sustainability of our public finances.
The Council also stated that the pace of reform must be stepped up and that a timely and effective implementation of the BEPGs is of crucial importance for confidence and growth. Moreover, it indicated that it had a vital role to play, together with the Eurogroup, to jointly monitor and encourage implementation by all policy actors.
Thereafter, the Italian Presidency indicated that the Council will start holding regular implementation discussions throughout the year. A working breakfast was devoted to the follow-up given to the 2003 05 BEPGs so far, notably with regard to the sustainability of public finances on 4 Nov. 2003. Adopting conclusions on this report will be the next opportunity for the Council to return to implementation discussions.
It is not easy to briefly summarise the actual follow-up given to the three priority areas highlighted by the Council, given their very broad nature. For instance, all general guidelines under “growth- and stability-oriented macroeconomic policies” and “economic reforms to raise Europe's growth potential” are more or less directly aimed at improving Europe's growth- performance and potential. The presentation below should therefore not be seen as replacing the more in-depth assessment carried out in the full report.
As regards “giving priority to growth in Europe” and the need to find an appropriate balance of macroeconomic policies, this Implementation Report concludes that such policies have been accommodative to growth. The monetary policy stance was loosened as the ECB cut interest rates by 75 basis points in total in 2003. The budgetary stance remained neutral given the broadly unchanged cyclically-adjusted budget deficit, although the play of automatic stabilisers helped to stabilise the economy.
In addition to sound macroeconomic policies, the Council highlighted the need to step up investments in human and physical capital and to complete the Internal Market. Progress appears mixed. Total investments are expected to have declined in 2003 (by 0.4 per cent in EU15 and 1 per cent in the euro area), albeit at a lower rate than in 2002, and in line with the adverse cyclical conditions. Investment in knowledge and innovation continues to lag behind that of the USA. Moreover, progress in creating a better functioning Internal Market has slowed down. However, the European initiative for growth, which was launched in October 2003, aims to encourage certain trans-European network infrastructure and R&D projects where funding can be provided from the EU budget. The contribution from the Community for trans-frontiers infrastructure investments is limited to 20 per cent of the project's cost. These projects will also benefit from an enhanced co-ordination in respect of planning, environmental impact assessment and financing.
As regards “increasing flexibility in our labour markets”, it appears as if the pace of labour market reforms slightly improved in 2003, but needs to be stepped up further if the Lisbon targets are to be met. Efforts have been made in several Member States to make work pay, even if reforms remain focused on the tax side. Several Member States have also taken further measures to make the work organisation more adaptable and to foster occupational mobility. Active labour market policies (ALMPs) have also become better in responding to the individual needs of the unemployed. In contrast, few measures have been proposed to address incentive effects in benefit schemes, promote wage differentiation, enhance the efficiency of ALMPs in line with evaluations, or address the regulatory burden (e.g. the employment protection legislation).
As regards “ensuring sustainability of our public finances” progress seems to be mixed. Since 2000, the public debt level is increasing in both the EU and in the euro area, and remains well above the reference value of 60 per cent of GDP for the latter. Important pension reforms, on the other hand, were adopted in some Member States in 2003, notably in France and Austria. Several Member States have also tried to improve the interaction between the pension system and the labour market performance, but the employment rate of older workers amounted to only 40 per cent in 2002, with sizeable differences across Member States.
This Communication (Part I of the Implementation Report) is complemented by a working document of the Commission services that provides a first assessment of the implementation of the recommendations given to Member States to address their individual challenges on a country-by-country basis (Part II). As for the general guidelines, the implementation assessment will be stepped up gradually in the coming years.