Community unemployment has increased steadily since the beginning of the 1970s with the exception of the second half of the 1980s, when nine million jobs were created through a combination of appropriate national policies, a favourable external environment and the dynamism resulting from the prospect of the single market. Overall, however, since the early 1970s demographic factors have led to an increase in the number of people seeking jobs, while the number of jobs available stagnated or increased only modestly. Other developed economies have been patently more successful in responding to the challenge of boosting job creation.
The causes of the Community's poor relative performance in this area are numerous and deep-seated. The most important ones can be summed up under the headings of a sub-optimal macroeconomic management of the economy and of an insufficient effort of adaptation to the changes which have taken place in the structure of the Community's economy and in its international environment. The 1980s saw a change of policy orientation. The emphasis shifted towards creating more stable macroeconomic conditions and towards easing the pain associated with structural change rather than slowing it down. This reorientation brought positive results in the second half of the decade, providing sound growth but not enough new jobs. In 1992/93, however, there was a loss of confidence brought on in part by actions outside the economic sphere. This and other errors led the economy into its worst recession.
To the extent that the present problems are the result of inadequate policies in the more or less recent past, there is nothing inevitable in this state of affairs.
In addition, there are a number of factors which are favourable to a rapid return to sustained growth and which can and should be exploited. The Community's achievement in creating the world's largest single market is a major asset on which it will be possible to build once the recovery sets in. The recession, painful as is, has speeded up the process of adaptation of firms to the new environment.
The world economy has continued to grow over recent years and a number of developing countries have experienced very high rates of growth. The presence of new vibrant economies in Asia and soon in Eastern Europe constitutes a huge opportunity and not a threat to our standard of living. These countries will be buying on world markets as much as they will earn with their exports. The rest of the world is now experiencing again positive rates of growth of between two and three per cent while world trade outside the Community is expanding by five to six per cent in real terms. Finally, the price of oil is now back to the low levels recorded in the mid-1980s.
In recent years, comprehensive analyses have been made. They show that there is no miracle remedy, but they point to the existence of a wide range of measures to help growth, competitiveness and employment. The challenge is now to ascertain the order of magnitude of the likely effects of the various measures, to determine their appropriate mix and to implement the preferred strategy with determination. This will not be easy. The factors which have hindered in the past the implementation of the right policies are still largely present. Attacking the sources of the present unemployment problems requires therefore a clean break with the past. This will be possible only if a large consensus on the necessary course of action to be followed can be achieved both within each country, between management and the labour force in industry, and among the members of the European Community.
This chapter will outline the macroeconomic framework which policies must create and within which the structural interventions outlined in the following chapters will be most successful.
In their contributions to the White Paper, the Member States broadly agree on the assessment made. They call for a clear analysis of the serious economic situation with a view to enlisting the help of all those involved in the economic process in finding remedies requiring sacrifices that have to be shared fairly.
The problems of employment and competitiveness - about which governments, the European Council, employers and trade unions have all expressed serious concern - are the result of developments which have been witnessed for a number of years but do not appear to have provoked an adequate political response. The pressures stemming from changes in the world economy are only aggravating the situation. At the same time, production processes and, consequently, the nature of employment have undergone radical change comparable, in certain respects, to the changes brought about by the industrial revolutions. The performance of economies depends on their capacity to adapt to these new circumstances, and it is precisely in this area that the Community is lagging behind.
The macroeconomic framework in the Community is being affected by certain fundamental imbalances which have caused a vicious circle to be created. The current levels of public expenditure, particularly in the social field, have become unsustainable and have used up resources which could have been channelled into productive investment. They have pushed up the taxation of labour and increased the cost of money. At the same time, the constant rise in the labour costs- affecting both its wage and non-wage components and caused, at least in part, by excessively rigid regulation - has hindered job creation. As a result, the level of long-term investment has fallen and the lack of confidence among those involved in the economic process has caused demand to contract.
The vital need to restore a stable macroeconomic framework as a basis for sustainable, job-creating growth is felt by all Member States. They all point to the link between the efforts to redress the economic situation and the process of economic convergence within the framework of economic and monetary union, which is generally viewed as the right instrument for addressing structural problems. A number of Member States advocate use of the economic policy guidelines provided for in the Treaty on European Union as a specific means of tackling these matters.
The level of unemployment in the Community has assumed very serious proportions. After five years of steady decline, the jobless totals in the Community started to rise substantially again at the beginning of the 1990s. In addition, Community unemployment is characterized both by a high rate of long-term unemployment, which now accounts for almost half of the unemployment total, and by its impact among low-skilled people in particular.
Especially worrying is the substantial loss of ground in recent years. There are, of course, identifiable economic reasons for this, in particular the effect of very high interest rates on investment, excessively high budget deficits in some Member States, unsustainable exchange rates and the problems of monetary instability. But the rapidity of the downturn indicates also the importance of the "confidence factor" and the decline in consumer and business confidence linked both to economic pressures and to the uncertainties arising from other causes, in particular the difficult ratification of the Maastricht Treaty. On present trends, a stabilization of the rate of unemployment cannot be expected before the end of 1994. By that date, more than 18 million citizens could be out of work: a figure equal to the total populations of Belgium, Denmark and Ireland.
The difference between the unemployment rates currently experienced in the major economic areas in the world - 11% of the civilian labour force in the Community against rates of about 7% and 2.5% in the United States and Japan respectively - has given rise to questions about the existence of a specific European unemployment problem. An examination of the Community's past performance and a comparison with the other major areas, however, suggest that no hasty negative conclusions should be drawn.
Before the first oil shock unemployment was low and the Community compared favourably with its principal competitors. The rate of unemployment in the Community was lower than that in the United States in each year of the period 1960-80. Even compared to Japan, which has successfully held down unemployment over a long period, the Community's performance started to diverge radically only in the period following the first oil shock.
To understand how the Community's unemployment performance deteriorated over time, it is necessary to take a long-term perspective. To this end, it is useful to distinguish between four main periods: (a) the period up until the first oil shock, (b) the period from the first oil shock to the mid-eighties, (c) the second half of the 1980s and d) the present period of slow growth or outright recession.
(b) During the subsequent period 1974-85 the rate of growth dropped substantially to a figure of 2.0% a year. The employment intensity increased, but not enough to maintain positive rates of increase in employment. As a result, employment creation stagnated (private-sector employment actually declined, but this decline was offset by an increase in the public sector) just at the time when demographic factors led to sharp increases in the labour force (0.7% a year). This inevitably led to a continuous and sharp rise in the rate of unemployment from a figure of less than 3% in 1974 to a peak of 10.8% in 1985.
(c) During the years 1986-90 the fruits of the structural adjustment and policy reorientation which had taken place since the beginning of the 1980s were reaped and the Community experienced stronger rates of growth: 3.2% a year. Even though this average rate of growth was a far cry from that experienced during the 1960s, it was sufficient to generate a very strong increase in jobs since the employment intensity remained at the higher level reached during the previous period. Employment increased by 1.3% a year during this period, and unemployment was reduced from 10.8% in 1985 to 8.3% in 1990.
(d) Since 1991 the rate of increase of GDP slowed down substantially and in 1993 it became negative for the first time since 1975. Unemployment started on its present worrying upward path, which accelerated sharply when employment declined in 1992 and 1993.
By contrast, the United States has been able to respond to an even larger increase in the number of people looking for jobs with a strong increase in employment creation. Japan has also managed to increase its rate of job creation. The increase was less substantial than that recorded in the United States, but was more or less in line with the rate of increase in the country's active population. Where these two regions differ strongly, however, is in the way the increase in job creation was achieved. In the United States the job creation of the last twenty years resulted essentially from a modest rate of output growth and a very high employment content (low average productivity) of that growth. Japan, on the other hand, experienced an employment content of growth lower than that of the Community (a higher average productivity) but was able to couple that with a much stronger rate of output growth.
The macroeconomic causes of unemployment
As the contributions received from the Member States show, it is now largely acknowledged that the decline in the rate of job creation in the Community after the first oil shock is to a very large extent the result of poor macroeconomic policies. Structural and external factors also played a large role, in particular the inadequate adjustment of industrial structures towards new market opportunities both within the Community and elsewhere in the world, but the main explanation for the poor unemployment performance of the Community over the past two decades is to be found in the constraints that unresolved distributional conflicts and insufficient structural adjustment placed on macroeconomic policies.
Low investment is one striking consequence. Lower rates of capital accumulation in turn took their toll of the competitiveness of the Community economy and of its productive capacity, which is now expanding much more slowly than in the past. The potential rate of growth, i.e. the rate of growth at which it can grow for many years without experiencing overheating problems, is now estimated to be much less than it used to be in the 1960s: just over 2% against more than 4%t (see Chart 4).
The present recession is to a large extent a consequence of the combination of a lower potential rate of growth and of policy errors which led to actual rates of growth in excess of the potential rate. At the end of 1987, the fear that the stock exchange crash might provoke a slump led to a substantial loosening of monetary policy worldwide. However, at that time the rate of growth of the Community's economy was already picking up although this was not yet fully reflected in the available statistics. The prospects opened by the single market project and the eventual feeding- through of the positive effects of lower oil prices had just sparked off a period of strong investment expansion which was revealed by the statistics only in the spring of 1988.
The monetary stimulus, therefore, came on top of a positive underlying trend. Given that no compensatory tightening of budgetary policy took place, the Community economy experienced in 1988 a very strong rate of growth: 4.1% (against the 1.3% forecast by the Commission - and many other forecasters - in January 1988). This rate of growth, although not very high in historical terms, was higher than the potential one. Given that the rate of growth remained above potential until 1990, tensions appeared. Inflation accelerated sharply in 1989 and wages followed in 1990. Since the authorities were committed to stability, monetary policy became more restrictive. This unbalanced policy mix had obvious negative consequences for investment and growth. The fiscal impulse resulting from German unification complicated things further. On the one hand, it sustained growth when world demand was faltering but, on the other it imposed an additional compensatory tightening of monetary policy and led to an even more distorted policy mix and a deeper recession.
The conflict between, on the one hand, budgetary and wage trends, which adapted very slowly, and on the other, the continuing pressure exerted by monetary policy constitutes the single most important factor behind the present recession.
The Commission recommends that the Community set itself the objective of creating at least 15 million new jobs, thereby halving the present rate of unemployment by the year 2000. This can only be a target, but it would be of great importance for our citizens, in particular for the young, who see poor prospects of employment ahead of them. A target of this order of magnitude is the minimum required to make a significant dent in the human waste represented by unemployment.
The target, although ambitious, is not out of line with the past performance of the Community economy or with what the performance of other economies would indicate to be possible. Over the next five to ten years, the Community labour supply will probably increase by about half a percentage point a year. Demographic trends will account for most of this increase. The population of working age is expected to increase by around 0.3% a year, a rate substantially lower than that of the last twenty years. In line with past trends, the participation rate (0.7% a year) is also expected to increase once jobs again become available, thus providing the rest of the assumed increase in the labour supply. Half a percentage point a year is therefore the rate of increase in employment the Community needs just to keep unemployment stable. In the period up to the year 2000 this means creating almost five million jobs simply to prevent unemployment from increasing. A reduction in unemployment to about half its present level (i.e. to 5%-6% of the active population) by the year 2000 deadline requires the creation of an additional 10 million jobs.
If, as a result of structural changes, participation rates were to increase faster than what past experience suggests, then either the unemployment target would have to revised downwards or the ambitions regarding employment creation would have to be scaled up.
Achieving the target of creating at least 15 million jobs by the year 2000 implies that, from 1995 onwards, once the present recession is over, employment creation continues at a steady rate of increase of around 2% a year, certainly an impressive and ambitious target.
Between 1984 and 1990, a slightly shorter period of time than the one separating us from the year 2000, the Community economy was able to create more than nine million net new jobs. Between 1988 and 1990, the average annual rate of increase in employment was 1.6%. The proposed target requires a performance better than that of these years, but the difference is not so large as to suggest that it may be unattainable. Other economies have done even better. The United States, for instance, has recorded an annual average rate of increase in employment of 1.9% over the seventeen year period 1974-90!
The immediate policy objective of the Community must be to overcome the recession and start creating jobs again. Section I.6 deals with this objective. The choice of the policies which will have to be implemented to overcome the recession is conditional, to a certain extent, on the medium-term growth pattern which is considered most appropriate to bring about the required increase in employment. It is therefore useful to identify the medium-term growth pattern which is to be aimed at before discussing the policies needed to promote a recovery since the latter must be consistent with the former.
The present recession is resulting in a large net destruction of jobs (about four million jobs lost in 1992-93). But the Community's present unemployment problem has more deep-seated causes. The combination of the current potential rate of growth and of the employment intensity of that growth is not sufficient to generate the necessary increase in the number of jobs. If growth were to return only to a rate close to the current potential rate of growth (just over 2%), the present employment intensity of growth would not even allow increases in employment which kept pace with the increases in the labour supply and consequently unemployment would go on rising.
A higher rate of job creation can be achieved through various combinations of faster growth and higher employment intensity. The contributions received from the Member States and the EFTA countries contain a wide range of measures which help to reduce unemployment. Some measures aim essentially at increasing the rate of growth while others aim to increase its employment conten,with a few producing positive effects in both directions.
It is not necessary, nor would it wise, to seek to lay down in advance what precise combination of growth and of greater employment content of growth should be achieved. Efforts must be undertaken in both directions at the same time. Given the difficulties in making progress in these areas, which both lie outside the direct control of policy makers, there is no risk of going too far in either direction.
However, there are significant differences in the scope for progress towards faster sustainable growth and in the scope for achieving a higher employment intensity. In addition, the social implications can be quite different and there are some important trade-offs. It is therefore right to examine the degree of realism and the implications of the main alternatives: modest growth and very high employment intensity, and stronger growth and higher employment intensity.
Pessimism over the chances of achieving stronger growth and worries over the environmental consequences of such stronger growth lead to predictions that the necessary rate of job creation would only be attained through a relatively modest rate of growth and a much higher employment content of this growth. Some people think it more desirable to aim, for instance, for a combination of a return to rates of growth close to the present potential rate of growth of the Community (just over 2% a year) and the achievement of an employment intensity much higher than the present one (a gap between output growth and employment growth of less than half a percentage point).
This proposition is usually inspired by the performance of the United States. Indeed, between 1973 and 1990 the United States experienced a rate of growth, 2.3% a year, butlabour productivity grew by 0.4% a year, hence a growth in employment of 1.9% a year on average over that period. This growth practically matched growth in the labour supply which was much higher than in Europe and held down unemployment to cyclical fluctuations around a nearly constant average (5.6% in 1972, 5.5% in 1990). During the same period, however, real wages per head grew by 0.4% a year compared with 1.5% a year in the Community.
It is not clear, however, whether an increase in the employment intensity of the order of magnitude required to achieve this growth pattern is actually possible in the European economic and social context.
An increase in the employment intensity of Community growth to match the US performance would require the implementation, on a large scale, of measures increasing the willingness of employers to hire workers and in particular:
In addition, such a growth pattern would have important implications for wage trends. Since more employment would be created for a given rate of growth, the apparent productivity of labour (real GDP per person employed) would by definition be lower. As a consequence, the room for real wage increases would also be smaller. Given the need to improve investment profitability, at least in order to strengthen the present weak competitive position of the Community, gross real wages per head would have to remain practically stable. Furthermore, budgetary consolidation might lead to a decline of average net real wages.
Some other macroeconomic implications must also be stressed. This lower-growth scenario would also be less positive for the rest of the world since it would mean slower increases in imports with detrimental effects on the developing countries' and Eastern European countries' exports and income developments. In addition, there may be some unwelcome social aspects of the specific measures leading to more employment-creating growth.
In particular, the downward widening in the wage distribution would result in a substantial real decrease in the lowest wages. This would not be possible without a reduction in unemployment compensation and social protection schemes. Combined with the expansion of part-time work, this would also, ceteris paribus, widen the existing income distribution towards larger inequality and, at the limit, could create "working poor" unable to survive decently from their wages and thus lead to a form of exclusion just as damaging as unemployment. If the spirit of the European social model is to be kept, compensatory measures will have to be taken (e.g. negative income taxes for the lowest-income groups) with significant budgetary costs.
(b) Stronger growth and more employment intensity
The difficulties and problems mentioned above suggest that the necessary pace of job creation is more likely to be achieved by a growth pattern combining a more modest increase in the employment intensity of growth with a stronger rate of growth. For instance, if from 1995 onwards the Community could achieve an increase in the employment intensity of growth of between half and one percentage point (i.e. a gap between output growth and employment growth of between 1 and 1 ? percentage points against about two points at present) combined with a sustained rate of growth of at least 3% a year, then the unemployment target for the year 2000 would also be achieved. Roughly two thirds of the new jobs would come from stronger growth and about one third from the higher employment intensity of growth.
Real wages per head would be able to increase moderately but, given the resulting increase in employment (2%), the real value of total wages would increase by between 2% and 2 1/2% in real terms. This would be curtailed somewhat by the effects of the necessary budgetary consolidation but would still leave room for a more substantial real improvement in living standards and an adequate increase in private consumption.
Rates of growth of this order of magnitude are consistent with an environmentally sustainable growth pattern. Indeed, they will make it possible to create the resources necessary to reduce present pollution levels. In addition, stronger investment will also have positive environmental effects since it will accelerate the introduction of new, less-polluting techniques.
An increase in the employment intensity of growth of the order of magnitude of the one envisaged in this second scenario, while not being easy to achieve, would not require the drastic measures needed to achieve the performance of the United States. In addition, it could be achieved with the consensus of most of those concerned, thus improving the chances of implementing at the same time the macroeconomic policies required to generate higher growth.
This question of how to increase the employment content of growth is dealt with more specifically in Chapter 8.
Increasing the rate of growth which the economy of the Community can sustain for many years and boosting the employment content of growth requires a strategy based on three inseparable elements:
The necessary actions in the structural area will be discussed in other chapters of the White Paper. This section draws attention to the key macroeconomic factors so as to underline a series of important implications and to help identify some useful intermediate policy targets. Its conclusions help to identify the framework which must be created to guarantee that actions in other areas translate in faster job creation.
More bouyant growth is a necessary component of any strategy aimed at reducing unemployment significantly. The achievement of this goal depends on a series of elements, some of which are outside the direct control of Community policymakers. A healthy world economy and the maintenance of an open trading system are obvious examples. But to a very large and increasing extent, the achievement of faster growth depends on implementing the right policies n the Community.
The real challenge facing policymakers is not just to increase the rate of growth, already a daunting task, but to ensure that the higher rate of growth can be maintained over many years, i.e. to ensure that from 1995 growth remains at the required higher level up to and beyond the year 2000 and that the overheating which appeared in 1989/90 does not arise. This implies increasing the productive capacity of the Community economy, in other words increasing its potential rate of growth.
Given that the capital/output ratio changes very slowly over time, a sustainable rise in production requires an increase in the available stock of capital. In turn, this presupposes an increase in investment leading, over time, to a much higher share of investment in GDP. This might have to increase from the present 19% to somewhere in the 23% to 24% region (see Chart 6). A shift of this magnitude can be accomplished only over many years.
Fortunately, however, the actual rate of growth of the Community can reach the target value of at least 3% faster than the potential rate of growth since during the initial years it will be possible to exploit the spare capacity created by the present period of sub-potential growth.
Economic policy must therefore aim at fostering a higher rate of growth and, at the same time, at encouraging investment so that it will grow faster than consumption. This relatively slower real expansion of consumption is the price that society must pay over the next few years to ensure a more equitable distribution of the access to gainful employment and to ensure its future overall prosperity.
Higher investment would produce positive results over and above the mechanical relationship between capital and output just mentioned. It would, for instance, accelerate the incorporation of new technologies into the production process, thus leading to more efficient and more environmentally sustainable production. The competitiveness of the Community economy would be greatly enhanced.
Creating the conditions for investment-led growth, however, is another difficult task. A necessary, but not sufficient condition is to make sure that investment profitability increases. But improving business confidence is the key element.
An increase in investment, however achieved, has to be accompanied by a corresponding increase in the rate of national saving to prevent the appearance of inflationary pressures and balance-of-payments disequilibria. The Community's current account is presently recording a deficit while its position as an advanced industrialized group warrants a surplus so as to allow it to transfer real resources to the developing world. The necessary increase in the rate of national saving must come essentially from an increase in public saving (reduction of public deficits) since the savings behaviour of the private sector (households and enterprises) is very difficult to influence (see Chart 7, which shows how little it has changed over time). The deterioration in national saving which has taken place in the Community over the last thirty years is due almost entirely to the deterioration of the position of the public sector.
The analyses conducted over many years have identified many policy actions which influence the rate of growth and the employment intensity of growth. Most of these actions have already been tried and have achieved some success. Their implementation is not painless as very often these actions imply a trade-off between sacrifices now and rewards later. It is not surprising, therefore, that their implementation has almost always been discontinued or not pursued for a sufficiently long period of time.
Combination of macroeconomic and structural policies
The actual combination of measures is also important. Very often an appropriate combination yields a result greater than the sum of the gains to be expected from each individual measure. In addition, there are strong interactions between macroeconomic and structural policies. Structural policies enhance the effectiveness of macroeconomic policies through the removal of some of the constraints that limit heir use; the positive effects of structural policies become apparent only in a sound macroeconomic context which allows stronger growth and, finally, implementation of structural policies becomes easier in a context of stronger growth.
The policies required to consolidate growth and to boost its employment content mirror to a large extent those needed to bring the Community economy out of the recession. The seriousness of the present situation increases the likelihood that these policies will be implemented with sufficient determination. But the most serious challenge facing policy makers will be to maintain the awareness of the need to implement appropriate macroeconomic and structural policies even when the recession is over.
Once the best policy mix for the attainment of the medium-term goal of higher growth together with a higher employment intensity is identified, it will be necessary to gauge the extent to which it also contributes to achieving the immediate objective of overcoming the recession. Should it prove insufficient, it will be necessary to examine whether other policy actions of a shorter-term nature are possible without endangering the achievement of the more important medium-term goals. This assessment will be conducted in Section I.6.
(a) Structural policies
The depth of the present crisis is largely due to insufficient progress in adapting the structures of the Community economy to the changing technological, social and international environment. Although a consensus emerged during the 1980s on the need to underpin and speed up structural change instead of trying to slow it down, the pace at which the European economy adjusted to change was able only to match, but not to surpass, that of its major competitors, with the result that vulnerability to cyclical downturns and external shocks remained high. Nevertheless, a mentality in favour of change and willingness to undertake a fundamental reassessment of corporate performance has grown up in Europe over the past decade. In order to achieve optimal results, however, this positive development must now be assisted and fostered by public authorities through the identification and removal of remaining barriers and obstacles to the successful implementation of strategies for change by firms. Only through the structural adaptation of industry can the twin requirements of higher productivity and more jobs be achieved.
Action in the structural area is essentially the responsibility of Member States. However, many of the policy areas that have a decisive impact on structural adjustment and competitiveness are either influenced by various Community policies or dealt with primarily at the Community level. The Community can therefore play a very useful role in implementing appropriate actions in the fields where it has primary responsibility such as trade and competition policies.
A competitive environment is basic to an efficient allocation of resources and stimulates investment innovation and R&D. However, in rapidly changing economic circumstances (globalization of markets, speed and cost of technological change), major restructuring and adaptation by firms is necessary. To meet this challenge, they need to be able to restructure unilaterally or bilaterally in cooperation with other firms (mergers, strategic alliances, etc.). This restructuring can be facilitated and speeded up by the timely and judicious use of the available instruments such as State aids, cooperation between companies, etc. This pro-competitive action by firms and States needs to be distinguished from anti-competitive practices by firms or States that can slow the necessary structural adjustments.
Structural action can similarly help to create the right business and consumer environment by making sure that the legal and regulatory infrastructure that has been created as the basis for the single market operates fairly and efficiently. In particular, the Community can make sure that the regulatory environment in which business and consumers operate is stable and predictable, and places the minimum bureaucratic burden on economic operators, particularly small and medium-sized businesses. Finally, the Community can support, encourage and coordinate efforts by Member States to accelerate the diffusion throughout the European economy of those technologies, like information technologies and biotechnologies, that will shape our society in the future and represent the key factor in shaping global competition in the decades to come. These policy issues will be further examined in the following chapters.
The Community needs an adequate framework in which to develop new market opportunities. In Europe some sectors are traditionally the exclusive preserve of non-market services or public utilities, in particular when it comes to the fulfilment of public needs. Reforms aimed at separating the different functions of public authorities with regard to the supply of such services (producer, purchaser and regulator) in sectors such as health care, telecommunications, etc., should enable the needs of users to be better served at less cost to public finances and with market-creation potential.
In calling for measures to be implemented in the Member States, it is sometimes not very useful to make general statements since the individual situations are very different. Calls for a specific type of action to solve a particular problem in one country where the problem is very serious are resisted by individuals in other countries where the problem never arose or has already largely been solved. The following paragraphs attempt to identify areas for action common to the largest possible number of Member States. The recommendations must be seen as a framework within which Member States will have to identify their individual scope for action.
The necessary structural measures will be discussed in the other chapters of the White Paper. Here it will suffice to mention that action will have to be taken in three main areas:
(b) Macroeconomic policies
The main task facing macroeconomic policymakers is to eliminate the conflicts among policy objectives which have plagued the Community over the last twenty years and, more acutely, in recent years. Eliminating these conflicts will make growth, employment and real convergence compatible again with price stability and nominal convergence and will ensure that progress towards EMU will go hand in hand with stronger employment creation. In a stable and supportive macroeconomic framework market forces will be able to deploy themselves unhindered and the possibilities opened up by the internal market will be exploited.
At the macroeconomic level, the first medium-term objective will be to maintain the stability of monetary policy. Monetary authorities have, in recent years, behaved in a way which is consistent with an inflation target of between 2% and 3%. Budgetary policy and wage behaviour needs to adapt to this objective as soon as possible and to remain compatible with it. Interest rates will come down once inflationary expectations are stabilized and the prospect of lower budget deficits is established.
In addition, it will be essential to make policy coordination more effective and to maintain exchange-rate stability and the EMU perspective. This will help to reinforce the stability of the macroeconomic framework, it will enhance the credibility of policymakers and will shorten the time it takes to reap the full benefits of monetary union. The implementation of a growth-oriented strategy, such as the one presented in this document, will add credibility to the commitment to exchange-rate stability.
Budgetary policy will have to contribute to the medium-term goal of more growth and employment essentially in two ways :( i) achieving debt sustainability and ( ii) contributing to the necessary increase in national saving. The first goal is necessary to reduce the burden that unbalanced budgetary policies exert on monetary policies and on fiscal flexibility. The Maastricht criterion for budget deficits (less than 3% of GDP) will constitute a useful reference point in the pursuit of this first goal. With a return to stronger growth the budget deficit criterion could be met by the Community as a whole by 1997. Individual countries may reach this target sooner or later than the Community average, depending on their starting positions.
In a longer-term perspective, budgetary policy will have to contribute to increased national saving. This will require increasing substantially public saving and will imply budget deficits significantly below the 3% reference value indicated in the Maastricht Treaty (between zero and one percentage point).
An essential element of a budgetary restraint policy will be the adoption of measures to improve the financial situation of the social security system.
Wages
There is a widespread consensus on the need for continued wage moderation and on the positive results it could produce. In their joint opinion of 3 July 1992, the Social Partners at the European level presented a consensus view for appropriate wage developments: "The conduct of wage negotiations is under the responsibility of the social partners. The more credible and socially acceptable economic policies are, the easier the social partners can anticipate low or decreasing inflation rates in the results of their wage negotiations. This would reduce the strain on monetary policy and contribute to the reduction of short-term interest rates. Furthermore, wage developments have to take into account the requirements of the profitability of employment-creating investment, the competitiveness of enterprises on world markets and the implications of full Economic and Monetary Union. The non-inflationary and sustainable growth process, thus generated, would provide the appropriate scope for real wage increases which underlines the interrelation between the European integration process and rising living standards." The difficulties arise when these general principles are translated into actual wage decisions.
There is evidence of inconsistency between the stability objectives of the central banks and past and current wage behaviour which bears part of the responsibility for the continuing high level of short-term interest rates. This can be shown by some simple calculations. Under normal conditions, nominal wages per head could increase by an amount equivalent to the inflation target of the monetary authorities (2%-3%, as noted above) plus that part of the increase in productivity which can be distributed to labour. In the present situation, the increase in productivity results only from a shedding of labour in excess of the decline in production and does not correspond to any distributable creation of wealth. At present, therefore, nominal wages per head should not increase by more than 2%-3% a year. However, notwithstanding a recent substantial decline, current trends in some Member States and in the Community as a whole are still higher than this figure, thus giving cause for concern to monetary authorities.
The elimination of this conflict is a necessary condition for the return to growth in the present situation but, once the Community economy is again on a sustained growth path, it will be important to ensure that wages continue to rise in line with the stability objective and the need to allow for an increase in investment profitability and competitiveness (the rule of thumb of "productivity minus one percentage point" identified in Section I.4). It must be underlined that these EC-wide prescriptions should give room for an appropriate differentiation according to member countries, regions and vocational qualifications.
The first requirement that the policies to be implemented must satisfy to overcome the recession is that of being consistent with the aim of the medium-term growth pattern. Within this framework, overcoming the recession calls above all for a restoration of confidence. Business leaders, the work force and citizens in general must be convinced that the authorities will be able to correct the present imbalances and maintain over many years a sound and stable macroeconomic environment.
This requires measures in both the macroeconomic and structural areas. Macroeconomic policy actions can rapidly change the environment in which businesses operate, but structural actions are essential to the improvement in their confidence. The effects of structural policies will be felt essentially in the medium term, but determined actions are now vital in convincing economic agents that action is under way which will bring results later.
In addition, it will be essential to give a new and visible impetus to the process of cooperation at the international level. Rapid implementation of the provisions of the Maastricht Treaty, conclusion of the Uruguay Round of trade negotiations, and bold new initiatives vis-à-vis the countries of Eastern Europe and of the third world would be very important signals.
As soon as the recovery sets in, the economy will be able to reap fully the benefits of the structural adjustment which has taken place over the last decade and of the completion of the internal market. These structural measures bring substantial efficiency gains which during periods of slow growth remain unexploited.
Improving rapidly the quality of the policy mix
Lower interest rates constitute a powerful instrument to boost the Community's economy in the short term. Interest rates have already come down significantly over the last twelve months. However, given the depth of the present recession, they still remain too high in many countries, especially in the short-term. Under these circumstances, the first requirement is to create the conditions for further substantial reductions in short-term interest rates.This calls essentially for expected budgetary and wage developments to be kept in line with the monetary authorities' stability objectives. Any lowering of short-term rates not warranted by appropriate budgetary and wage behaviour would risk being offset by expectations of higher future inflation and higher long-term rates. On the other hand, if credible plans for budgetary consolidation and agreements leading to more moderate wage increases were to materialize, expectations would be favourably influenced and central banks might be able to lower short-term interest rates in advance of actual developments.
A substantial lowering of short-term interest rates throughout the Community would reduce tensions within the ERM and would improve the financial position of firms and public budgets. The scope for reductions is large: interest rates could come down substantially in Germany if the appropriate policies were implemented while in other countries the reductions could be even larger to the extent that interest-rate differentials could be reduced. A further significant reduction would signal to economic agents that the worst was over, that monetary policy had been loosened as much as possible and that nothing would be gained by further postponing any investment decision which might have been contingent on the availability of the best financing conditions.
A lowering of short-term rates in the Community would exert a positive impact on the competitiveness of European enterprises. Together with the restoration of confidence, this would trigger an export/investment-led cyclical upswing in the Community.
Budgetary policy
Action in the budgetary area depends on an assessment of the likely impact on demand and on business and consumer confidence of changes in the present budgetary stance. In 1991 and 1992, Member States have allowed budget deficits to deteriorate since it was considered that this would lend a measure of support to domestic demand. At the beginning of 1993 additional efforts at the national level took place in the framework of the Edinburgh growth initiative. By mid-1993, however, Member States reached a consensus*1 that no room for manoeuvre in the short term was available: any additional deterioration in budget deficits was more likely to depress overall demand, through its negative effect on confidence, than to support it. On the contrary, they recognized the need for concrete, credible, medium-term consolidation programmes.
The immediate target of these programmes should be to prevent further deterioration in budgetary positions and to create the prospects of consolidation once the recovery sets in. The severity of the necessary adjustment will depend on the specific conditions of each Member State, but efforts in this direction are required in almost all countries. In addition, all governments should attempt to switch expenditure as far as is practicable towards those items which most directly influence growth prospects: education, R & D, infrastructure investments, etc.
Wages
The previous section highlighted the existence of an inconsistency between the inflation target pursued by monetary authorities and actual wage behaviour in many countries. The sooner this inconsistency is eliminated, the sooner short-term interest rates can be reduced. In some cases, however, the gap is so large that progress will inevitably take some time. Tripartite agreements between the social partners and governments should be exploited where possible.
Developing a broad social consensus
The continuation of the EMU process is a key element in securing a stable macroeconomic framework permitting the achievement of higher, sustainable growth. The Community has long acknowledged the negative influence exchange-rate instability has on business confidence and there is a powerful case for arguing that the full benefits of a single market can be reaped only within a monetary union. These considerations have been at the basis of the Treaty on European Union and retain their validity today, notwithstanding the ERM crisis of the last twelve months. A group of countries so closely knit by a web of trade and financial links as the European Community needs a stable monetary environment both internally and externally.
To restore the credibility of the EMU process Member States must re-affirm their commitment to this goal and back up their words with actions. Economic policy coordination between the Member States must be made more effective. This calls essentially for the achievement of as broad a consensus as possible on the policy framework outlined in this document and a share-out in each Member State of the efforts which will be required from all parties (using social dialogue procedures wherever possible). Those in employment must be convinced that the measures called for in this document will work and that the solidarity they show in accepting some sacrifices will result in those now deprived of gainful employment being given a real chance. Increased efforts to improve the situation of public finances in order to meet the criteria set out in the Maastricht Treaty will require an updatng of the convergence programmes, which remain useful instruments for conducting a debate leading to such a consensus. The guidelines for economic policy aimed at dealing with deficiencies identified in this paper should be agreed as a matter of urgency, if business confidence is to be restored.
A Community dimension
The success of such a policy course in restoring growth depends, however, on various factors which are to a greater or lesser extent outside the control of policymakers: in particular, business and consumer confidence and the performance of the Community's main trading partners. It is very likely that, given the severity of the present situation and the size of the budgetary adjustment which will be indispensable in many countries, the recovery will be modest and hesitant. This may require for an intensification of the Community initiatives agreed at the European Council meetings in Edinburgh and in Copenhagen. In a climate of growing business confidence various Community projects, such as for instance the trans-European networks, lend themselves to initiatives which can mobilize large financial resources, essentially from the private sector, to finance useful projects.