Bulletinof the European Communities

Supplement 6/93

Growth , competitiveness,employment

The challenges and ways forwardinto the 21st century

White Paper

COM(93) 7005 December 1993

Parts A and B

Blank pages not reproduced: 4 , 6 , 8 , 36 , 38 , 54 , 56 , 116 , and 144

COMMISSION OF THE EUROPEAN COMMUNITIES

Cataloguing data can be found at the end of this publication

Luxembourg: Office for Official Publications of the European Communities , 1993

ISBN 92-826-7000-7 (Parts A + B)

ISBN 92-826-7071-6 (Part C)

ISBN 92-826-7065-1 (Both volumes)

(9 ECSC-EEC-EAEC, Brussels. Luxembourg, 1993

Reproduction is authorized, except for commercial purposes , provided the source isacknowledged

Printed in Germany

PREAMBLE

This White Paper sets out to foster debate and to assist decision-making at decentralizednational or Community level - so as to lay the foundations for sustainable development ofthe European economies, thereby enabling them to withstand international competition whilecreating the millions of jobs that are needed.

We are convinced that the European economies have a future. Looking at the traditionalbases of prosperity and competitiveness, Europe has preserved its chances. It possesses assetswhich it has only to exploit ~ assets such as its abundant non-physical capital (educationskills, capacity for innovation, traditions), the availability of fmancial capital and highly ef-ficient banking institutions, the soundness of its social model, and the virtues of cooperationbetween the two sides of industry.

Given the scale of the needs that have to be met, both in the European Union and elsewherein the world, recovery must be achieved by developing work and employment and not byendorsing basically Malthusian solutions. Yes, we can create jobs, and we must do .so if wewant to safeguard the future - the future of our children, who must be able to fmd hope andmotivation in the prospect of participating in economic and social activity and of beinginvolved in the society in which they live, and the future of our social protection systemswhich are threatened in the short term by inadequate growth and in the long term by the dete-rioration in the ratio of the people in jobs to those not in employment.

In other words, we are faced with the immense responsibility, while remaining faithful to theideals which have come to characterize and represent Europe, of eroding a new synthesis ofthe aims pursued by society (work as a factor of social integration, equality of opportunity)and the requirements of the economy (competitiveness and job creation).

This major challenge confronts us all. That is why we are arguing, first and foremost, the needto press on with building a unified Europe which will increase our strength through cooper-ation and through the benefits of a large area without frontiers of any kind. That is why weare calling on everyone - and not only political decision-makers and business leaders - tocontribute to the combined effort by seeking to understand the new world and by partici.pating in the joint endeavour.

Nothing would be more dangerous than for Europe to maintain structures and customs whichfoster resignation, refusal of commitment and passivity. Revival requires a society driven bycitizens who are aware of their own responsibilites and imbued with a spirit of solidaritytowards those with whom they form local and national communities ~ communities that areso rich in history and in their common feeling of belonging.

The contribution which the European Union can make is therefore to assist this movement~hich reconc~les our historical loyalties with our wish to take our place in this new world thatIS now emergmg.

PART A

PART B

Growth

Chapter I

SUMMARY

White Paper: The challenges and ways forward into the 2lstcentury

......................................................................................................

The conditions of growth competitiveness and more jobs(preparatory work)

..................................................................................

The macroeconomic framework

............................................................

Chapter 2

n - Competitiveness

Chapter 3

Chapter 4

Chapter 5

Chapter 6

The conditions for growth and greater competitiveness

......................

A - Towards global competitiveness

...................................................

B - Making the most of the internal market

.....,.................................

Trans-European networks

......................................................................

Research and technological development

.............................................

The changing society, the new technologies ........"................................

A - The information society.................................................................

B ~ Biotechnology and its diffusion

.....................................................

C - The audiovisual sector

...................................................................

The Community, an open and reliable partner

.........".........................

m - Employment

Chapter 7 Adaptation of education and vocational training systems

...................

Chapter 8

Chapter 9

Turning growth into jobs

........................................................................

Statutory charges on labour

....................................................................

IV - Towards a new development model

Chapter IO

PART C

Thoughts on a new development model for the Community .......".....

The contributions of the Member States (separate volume)

IOO

103

106

117

123

136

145

PART A

White PaperThe challenges and ways forward

into the 21st century

Why this White Paper?

The one and only reason is unemployment.We are aware of its scale, and of its conse-quences too. The difficult thing, as experi-ence has taught us, is knowing how totackle it.

The Copenhagen European Council inJune invited the European Commission topresent a White Paper on a medium-termstrategy for growth, competitiveness and

employment. That decision followed anin-depth discussion between the Heads ofState or Government based on an analysisby the President of the Commission of theweaknesses of the European economies.

The White Paper draws in large part on thecontributions from the Member States. Ithas also been guided by the discussions often beset by conflict - under way in ourcountries between governments and socialpartners (employers' and trade unionorganizations).

The European Commission is aware of thedifficulty of the task. For if the solutionsalready existed, our countries would surelyhave applied them; if there were a miraclecure, it would not have gone unnoticed.With national situations being so different,any proposal has to be presented with sensi-tivity and caution. That being so, the Com-mission does share the view, expressed bymany Member States, that joint responseswould strengthen the hand of each playerand therefore of the European Union.

There is no miracle cure

Neither protectiomsm, which would besuicidal for the European Union, theworld' largest trading power, andwould run counter to its proclaimedobjectives, in particular that of encoura-ging the economies of the poorestcoun-tries to take off;

. nor a dash for economic freedom: turningon the tap of government spending andcreating money can, like a narcotic, pro-duce a short-lived illusion of well-being.But the return to reality would be all themore painful when we had to repair the

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damage wreaked by inflation andexternal imbalances. The worst damagewould be higher unemployment;

. nor a generalized reduction in workinghours and job-sharing at national level:this would result in a slowing-down ofproduction due to the difficulty ofstriking the right balances between thedemand for skilled workers theoptimum utilization of plant and thesupply of labour;

. nOr a drastic cut in wages to align ourcosts on those of our competitors in the

developing countries: socially unaccept-able and politically untenable, such anapproach would only worsen the crisisby depressing domestic demand, whichalso contributes to growth and the main-tenance of employment.

How has it come to this?

We will not dwell here on the analysis pre-sented in Copenhagen. This has been con-firmed and fleshed out by the national con-tributions and the Commission s research:

competitiveness, growth and employmentare closely interrelated

, .

and have been forsome time.

Over the last 20 years

. the European economy s potential

rate of growth has shrunk (fromaround 4% to around 2.5% a year);

. unemployment has been steadilyrising from cycle to cycle;

. the investment ratio has fallen byfive percentage points;

. our competitive position in relationto the USA and Japan has worsenedas regards:

employmentour shares of export marketsR&D and innovation and its incor-poration into goods brought to themarketthe development of new products.

And yet the Community over the past fewyears enjoyed what all observers agree was

period of growth and restructuringprompted by the 1992 objective. That objec-tive was not an illusion: it swiftly receivedbroad support from all sections of society,and the structural changes it generatedaccount for many of the nine million jobscreated between 1986 and 1990.

The 1992 objective: A tangiblereality. 70 million customs documents done

away with;. A 3% saving on the costs of interna-

tional transport;. Three times more company mergers

and acquisitions in the Communityover the period in question;

. Twice the number of Europeancompanies involved in mergers andacquisitions in the rest of the world;

. A doubling of trade in the Com-munity in sectors previouslyregarded as sheltered from competi-tion;Investment up by one third between1985 and 1990;

. Nine million jobs created between1986 and 1990;

. One half of a percentage point extragrowth each year.

This integration process is not yet completesince certain sectors are being only grad-ually opened up to competition; it doeshowever, amply demonstrate that Europehas been capable of anticipating develop-ments, creating a stimulus and respondingto it.

How, then, can we explain the fact that allthese achievements have not made itpossible at least to cushion the effects of theworld recession? Was the single marketprocess merely a flash in the pan? The truthis that although we have changed, the rest ofthe world has changed even faster.

The present crisis can be understood onlyin the light of the universality of the trends

which have been shaping the globaleconomy and their acceleration since theend of the 1970s.

Changes in the decorIn geopolitical terms. new competitors have emerged and

have shown their ability to incor.porate the latest technical progress;

. the end of communism has openedup new potential for economicgrowth: 120 million people in neigh-bouring countries with a standard ofliving well below our own. But wehave not been able to harness thisfor a new dynamism;

In demographic terms. the ageing of the population and the

transformation of family structures;

In technological terms. the new industrial revolution is well

under way and is causing rapid andfar-reaching changes in technologiesjobs and skills;

. the economy is becoming increas-ingly knowledge-based, manufac-turing activities are being farmedout, services are taking the lionshare, and the possession and trans-mission of information is becomingcrucial to success;

In financial terms. the interdependence of markets

resulting from the freedom of capitalmovements together with new tech-nology is an inescapable fact of lifefor all economic and financial oper-ators

The heart of the problem: Thethree types of unemployment

Since the beginning of the I 970s, unem-ployment in the Community has risensteadily except during the second half of the1980s. Today 17 million people are out ofwork. Over the last 20 years, 80% morewealth has been created but total employ-

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ment has risen by only 9%. To explain thisa distinction must be drawn between thethree different forms of unemployment:

Cyclical unemploymentIn a context in which labour resources are

increasing by some 0.50% a year, any slack-ening in growth immediately triggers asharp rise in unemployment. This is particu-larly so at present when, for the first timesince 1975, Europe has experienced a slow.down in economic activity.

Structural unemploymentAt the end of the 1980s, when the economywas going strong, unemployment still stoodat 12 million.

The explanations for this rigidity of unem-ployment are now clear:

. The role we have come to play in thenew international division of labour hasnot been an optimum one because wehave neglected future growth sectors inconcentrating too much on the rents andpositions established in traditional indus.tries.

. The relatively high cost of unskilledlabour is speeding up the rationalizationof investment and holding back job cre-ation in services. This has resulted in theloss of millions of jobs.

. Our employment systems have aged: bythis term we mean the whole complex ofissues made up nowadays by the labourmarket and employment policy, thepossibilities of flexibility within or out-side enterprises, the opportunities pro-

vided or not provided by the education

and training systems, and social protec-tion.

Finally and more especially, the coun-tries of the south are stirring and com-peting with us - even on our own mar-kets at cost levels which we simplycannot match.

Technological unemploymentThis problem is as old as industrial societyitself, which has continually changed ~albeit not always smoothly - by incorpor-ating technical progress. Nevertheless, the

phenomenon now seems to be undergoing

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a change of scale. This is not to say thattechnological progress in enterprises isdoing away with more jobs than it is crea-ting: for example, the employment situationis on average more favourable in those

firms that have introduced microelectronicsthan in those that have not done so.

It is nevertheless the case that we are onceagain passing through a period in which agap is opening up between the speed of

technical progress, which is concerned pri-marily with how to produce (manufacturingprocesses and work organization) andwhich therefore often destroys jobs, andour capacity to think up new individual orcollective needs which would provide newjob opportunities.

And yet technical progress is presentingopportunities for growth and employmenton condition that we alter our developmentmodel, meet the needs stemming from theupheavals in social life and urban civiliza-tion, preserve our rural areas, and improvethe .environment and the quality of ournatural assets. In so doing, we will pave theways for our entry into the 2lst century.

Ways forward into the21 st century

In order to reverse the disastrous course

which our societies, bedevilled by unem-ployment, are taking, the European Unionshould set itself the target of creating 15million jobs by the end of the century.

It is the economy which can provide thenecessary pointers to .a reappraisal of prin-ciples inherited from an age in which man-power resources were scarce, technologicalinnovation was made possible through imi-tation, and natural resources could beexploited at will. We are thus setting out anumber of broad guidelines which have apredominantly economic basis, although itwill be seen that they cannot be dissociatedfrom the major trends which are affectingsociety itself: an economy that is healthy,open, decentralized, competitive and basedon solidarity. However, these .efforts wouldbe in vain if we did not once again makeemployment policy the centre-piece of ouroverall strategy.

healthy economy

The people of Europe need stability. Thefalse prophets of inflation and of a return toexchange-rate variability represent specialinterests. Their bad money still threatens tooust the good.

The White Paper is, accordingly, consistentwith the guidelines submitted to the Euro-pean Council, in accordance with the newTreaty (Article 103), to mark the beginningof the second stage of European economicunion, which must be successful if a singlecurrency is to be achieved. We must there-fore place our thinking within amacroecon-omic reference framework for both econ-omic and monetary convergence which willincrease the opportunities available to oureconomies.

This strategy could be applied in twophases, the first consisting of pulling out ofthe current recession as quickly as possible

and the second from the roid- 1990s con-sisting of returning to a path of strong andhealthy growth. The macroeconomicpolicies to be implemented for these twophases are set on similar courses but havedifferent points of emphasis.

The gradual reduction in public deficitsdominates the initial phase, subsequentlygiving way to their stabilization around thecommon objective. This will call forincreased efforts to restructure spending and in particular to curb operating expendi-ture in favour of public resources allo-cated to investment.

Stable monetary policies consistent with theaim of low inflation will be a constantbenchmark throughout the period. They

, would lead to further interest-rate cuts thatwould make more attractive the investmentessential to the modernization and competi-tiveness of our economies. Investment ininfrastructures, housing and environmentalimprovement projects would thus be givena particular boost.

Finally, the trends of all categories of incomeshould be made consistent with the objec-tives of monetary stability and cost moder-ation. During the flfSt phase, the task wouldbe to avert an acceleration which wouldfrustrate the reduction of interest rates inthe long term; during the second, it would

be necessary to guarantee an adequate rateof return to permit an increase in the invest-ment ratio and hence in growth.

Growth Path compared(average % change per year)

Percent

1961 1973 1974-1980 1991-1995 1996-1989

_GDP DLabour productivity E!!iEmployment1995-2000

Growth Path

An open economy

Each of the major bursts of growth in theEuropean economies started with a qualita-tive leap in international trade. The mostspectacular contribution probably camefrom the establishment of the multilateraltrading system resulting from the BrettonWoods agreements after the Second WorldWar.

Today we are perhaps seeing the beginningsof an equally important leap forward withthe very rapid integration into world tradeof developing countries and former com-munist countries.

Where is the Growth?(Percentage of world output)

1988-1990 1989-2000

75,

(_GECD DDeveloping countries_Others)

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The Community must be open and prepareitself for this prospect. This is why the con.elusion of the Uruguay Round negotiationsis of such importance for it too. For the firsttime, these negotiations will produce aglobal agreement between industrializedand developing countries containing bal-anced concessions aimed at fair access toall markets.

Among the issues in these negotiations, thetransformation of GAIT into a fullyfledged international institution designated amultilateral trade organization' would guar-antee a sustainable and harmonious develop-ment of international trade. The Communityis attached to this idea: it regards it as themeans of ensuring that GATI has the auth-ority to stand up to hegemony, to face upmore effectively to the imbalances resultingfrom world monetary instability, and toaddress other issues where the existence ofmultilateral rules would be invaluable.There is indeed a need to ensure better con-sistency between the various bodies respon-sible for fostering healthy competition, to

deal with the inequality of the conditions

for direct investment, and to guarantee a fairsharing-out of burdens in the area ofenvironmental protection.

The strengthening of the multilateraltrading system, its effective application andthe transparency of its rules are, for theCommunity, the best guarantee of successwith its own effort to adjust. This is partand parcel of the goal of achieving coherentworld management of the problems posedby development inequalities and the con-centration of poverty in certain regions.

The European Union must first demon-s~ate this openness of mind and recogni-tIon of the unavoidable globalization of theeconomy to its eastern and southern neigh-bourn. Enormous potential exists, but itrequires us to invest massively, to transfer aconsiderable volume of know-how and toopen up our markets more widely. If all ofthese countries manage to pursue reason-able policies of adjustment and moderniza-tion, they will fully benefit from our actionand return those benefits to us in the formof new markets and, consequently, newjobs. Only properly managed interdepend-ence can guarantee a positive outcome foreverybody.

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Decentralized economy

The market economy has a decentralizingeffect. This was the reasoning behind thesingle market' project (Objective 92). Itsaim was not only to achieve economies ofscale but also to set free the dynamism andthe creativity inherent in competition.

Decentralization now also reflects a radicalchange in the organization of our societieswhich are all confronted with the growingcomplexity of economic and social phe-nomena and the legislative or regulatoryframework.

Hence the growing importance of the locallevel at which all the ingredients of politicalaction blend together most successfully.

The information society

. The dawning of a multimedia world(sound text image) representsa radical change comparable withthe first industrial revolution;

. Tomorrow s world is already withus: by the end of the century there

will be 10 times as many TV chan-nels and three times the number ofsubscribers to cable networks. In theUSA it is estimated that six millionpeople are already involved in te1e-working;

. The USA has already taken the lead:200 of its biggest companies alreadyuse information highways;

. At the heart of the developmentmodel for the 2lst century, this issueis a crucial aspect in the survival ordeeline of Europe;

It can provide an answer to the newneeds of European societies: com-munication networks within com-p~nies; widespread teleworking;wIdespread access to scientific andleisure databases; development ofpreventive health care and homemedicine for the elderly.

Hence also the decentralization movementaffecting the business world. SMEs are

often cited as models because they embodyoperational flexibility and a capacity forintegration which the units which make upthe big companies are now trying to imitate.Hierarchical and linear empires are grad-

ually giving way to interactive organiz-ations.

This movement towards decentralizationsupported by the new technologies, istaking us towards a veritable informationsociety. The corollary to decentralization isinformation sharing and communication.

The European dimension would give theinformation society the best possiblechances of taking off. The Commission istherefore proposing, in the context of a

partnership between the public sector andthe private sector, to accelerate the estab-

lishment of 'information highways' (broad-band networks) and develop the corre-sponding services and applications (seeDevelopment theme I).

A more competitive economy

Drawing maximum benefit from thesingle market

While industrial policy continues to be con-troversial no one is in any doubt as to theresponsibility of governments and of theCommunity to create as favourable anenvironment as possible for company com-petitiveness. The single market is now aliving reality. However, where companiesare concerned, progress is needed in threeareas.

The first concerns the body of rules (lawsregulations, standards certification pro-

cesses) which assure the smooth functioningof the market. The rules have to be sup-plemented in line with the initial target(whether they concern pharmaceuticals

intellectual property or company law, for

example). But, above all, how it thendevelops has to be guaranteed against therisk of inconsistency between national andCommunity laws. This means fresh cooper-ation between governments at the legislativedrafting stage. Likewise, care should betaken to ensure that the Community legisla-tion affecting companies is consistentespecially the environmental legislation.

The second condition revolves aroundsmall and medium-sized enterprises. Whilethey are a model of flexibility for big com-panies, they are also increasingly a factor ofcompetitiveness as a result of ' farming-out'and subcontracting. Hence the measurestaken on the initiative of big companies togalvanize their suppliers and clients. How-ever, the 'demography' of SMEs , i.e. theirbirth, growth and regeneration, is also amatter of national policy. In some countriesit will be necessary to adapt their tax sys-tems, rights of succession and access toequity and to simplify intercompany creditregulations and practices. While most of thework has to be done at national level, theCommunity, for its part, must help to fitSMEs into the dynamics of the singlemarket. The immediate task, therefore, is towork towards simplification and informa-tion. A Community initiative will shortly beproposed in this connection.

The third condition concerns the accel-erated establishment of trans-Europeaninfrastructure networks (see DevelopmentTheme II).

The trans-European infrastructure

Why?

. Faster, safer travel at lower cost;

Effective planning in Europe;

. Bridge-building towards EasternEurope.

How?

. Remove regulatory and financialobstacles,

. Get private investors involved inprojects of European interest(applying the provisions of theTreaty, 'declaration of Europeaninterest');

Identify projects on the basis of themaster plans adopted (transport) orin preparation (energy).

In order to establish these networks, pro-mote the information society, and developnew environmental improvement projects

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the Commission proposes to accelerate theadministrative procedures, act as a catalystand use the existing cooperation instru-ments. This represents an investment pro-gramme of ECU 20 billion per annum from1994 to 1999 (see Annex).

Stepping up the research effort andcooperationWithout eschewing competition, the abilityto cooperate and share risks is increasinglybecoming a sign of creativity. Our laws, ourtax systems and our programmes have to beadapted as a result, both at national and atEuropean level. Community competitionpolicy has thus made broad allowance forthese new forms of intercornpany cooper-ation.

Encouraging intercompany cooperationwill gradually become a basic principle andnot just one 'aspect' of Community researchand development policy. This principle willhelp to identify major priorities and to pro-mote meetings between the operatorsinvolved. The Commission will proposethat Member States implement this newform of 'vertical cooperation' on the basisof a restricted number of large joint projectsgeared to the following:

. New information technologies, theimportance of which has already been

emphasized.

Biotechnology, where the early use ofresearch resources will make for greatersynergy between chemical companiesand the big potential users in the healthand agrl-foodstuffs sectors.

EcotechnoIogies, meaning radical inno-vations targeting the causes of pollutionand aiming at environmental efficiencythroughout the production cycle. Eco-technologies will soon provide a majorcompetitive advantage.

An economy characterized bysolidarityThese options show how the dynamism ofthe market can help boost growth.

Experience has also shown, however, thatthe market is not without its failings. ittends to underestimate what is at stake in

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the long term, the speed of the changes itcreates affects the different social categoriesunequally, and it spontaneously promotesconcentration, thereby creating inequalitybetween the regions and the towns. A ware-ness of these insufficiencies has led ourcountries to develop collective solidaritymechaJrlsms. At Community level the SingleEuropean Act has helped to restore the bal-ance in the development of the single

market by way of joint flanking policies aspart of economic and social cohesion.

However, the social welfare system is nowbeing re-examined in many Member Statesto reduce costs through greater responsi-bility. The new model of European societycalls for less passive and more active soli-darity.

Solidarity, first of all, between those whohave jobs and those who do not. This keyconcept has not figured at all in the collec-tive discussions and negotiations of the last10 years. That is why we are proposing asort of European social pact, the principleof which is quite simple but whose detailedarrangements would be adapted to thespe-cific circumstances of each country andeach business; in the spirit of a decen-tralized economy and of subsidiarity, newgains in productivity would essentially beapplied to forward-looking investments andto the creation of jobs.

Solidarity also between generations, with aneye to the repercussions of a demographictrend which will see falling numbers of per-sons of adult working age. It is absolutelyessential that all decisions taken today takeaccount of this demographic dimension.That is why we must not only tackle unem.ployment, which is jeopardizing all oursocial security systems, but also expand

and not reduce, the volume of work whichgenerates wealth and so finances solidarity.

Solidarity, once again, between the moreprosperous regions and the poor struggling regions. Hence the conformationof economic and social cohesion as .anessential pillar of European construction.

Solidarity, lastly and most importantly, inthe fight against social exclusion. If only

one proof were needed that our economieshave not yet reached maturity and thatthere are still needs to be met it would be

the existence in Europe of some 40 roillionpeople below the poverty line. This is amatter for the Member States, but it is alsothe business of each citizen to practiceneighbourly solidarity' .. We need a compre-hensive policy, preventive as well as reme.dial, to combat the poverty which sodegrades men and women and splits societyin two. The areas of action are familiar:renovation of stricken urban areas, con-struction of subsidized housing, adaptationof education systems with extra resourcesfor children from disadvantaged back-grounds, and an active employment policywhich attaches high priority to the searchfor an activity or training accessible toeveryone rather than the registration of andpayment to the unemployed, even thoughin the last resort, this is still essential whereall other means of social reinsertion seemfor the moment, to be exhausted.

Action on jobs

As we have seen, the Community has failedto match the substantial increase in gener-ated wealth with parallel improvements injob opportunities. Looked at more closely,however, the performances of individualStates differ quite considerably. Forinstance, Germany and Spain have enjoyeda comparable rate of growth over the last 15years of around 2.3%, yet their averagelevels of unemployment are 6 and 16%respectively. Over the same period, mean-while, the United Kingdom, France, Bel-

gium and Italy have all had an unemploy-ment rate of around 9% of the active popu-lation, but with growth rates ranging from1.8 to 2.5% on average. These disparities tellus a lot.

In a general manner, they show that growthis not in itself the solution to unemploy-ment, that vigorous action is needed tocreate jobs. However, such action must takeaccount of national circumstances. Morespecifically, the inflexibility of the labourmarket, which is responsible for a large partof Europe s structural unemployment, canbe traced back to specific institutional, legaland contractual circumstances in eachcountry. The educational system, labourlaws, work contracts, contractual negotiationsystems and the social security system formthe pillars of the various 'national employ-

ment systems' and combine to give each ofthem a distinctive appearance. In each casethe entire system must be mobilized toimprove the functioning of the labourmarket. This goes to show, once again, thatthere is no miracle solution; nothing shortof coordinated action by the various playersresponsible for the components of these sys-tems can effect the necessary transforma-tion.

Moreover, in each country the methods ofsocial dialogue will reflect national tradi-tions.

Priorities for action on jobs

lifelong education and training;

. greater flexibility in businesses, bothinternally and externally;

greater expectations fromdecentral-ization and initiative;

. reduction in the relative cost of low-qualified work;

. thorough overhaul of employmentpolicies;

efforts to meet new needs.

Investment in education and training:Knowledge and know-howthroughout life

Our countries' education systems are facedwith major difficulties, and not only of abudgetary nature. These problems arerooted in social ills: the breakdown of thefamily and the demotivation bred by unem-ployment. They also reflect a change in thevery nature of what is being taught. Prepa.ration for life in tomorrow s world cannotbe satisfied by a once-and-for-all acquisi-tion of knowledge and know-how. Every bitas essential is the ability to learn, to com-municate, to work in a group and to assessone s own situation. On the other hand, if

tomorrow s trades require the ability tomake diagnoses and propose improvementsat all levels, the autonomy, independence ofspirit and analytical ability which come ofknowledge will once again be indispens-able.

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Lifelong education is therefore the overallobjective to which the national educationalcommunities can make their own contribu-tions. Difficult choices will have to made between increasing universitycapacity or quality, between higher educa-tion and vocational paths. However, eachcountry should be aiming towards univer-sally accessible advanced vocational training.

As is shown by the Member States' contri-butions, principles and methods of fin-ancing may differ. In some cases, theemphasis is on equal opportunities for allindividuals and the proposed response isthe provision of training capital or chequesfinanced by the redistribution of publicresources. In other cases, advanced voca-tional training is linked to businesses and socontractual mechanisms will be proposedfor training investment or for co-investmentwith the participation of wage-earners. In

any event, public and private efforts mustbe married to create the basis in eachMember State for a genuine right to initialor ongoing training throughout one s life-time. This should be a key area of socialdialogue at European level.

The need for double flexibility both internal and external labour marketsGenerally speaking, the flexibility of thelabour market has deteriorated under theeffects of an accretion of partial measuresdesigned to reduce registered unemploy-ment. All of these measures now need to bere-examined by all the players with a viewto removing obstacles to employment.

The question of labour flexibility needs tobe examined from two angles: that of the

external labour market, where supply meetsdemand, and that of the market internal toeach business, i.e. the human resources at itsdisposal which it adjusts according to itsneeds.

Improving external flexibility meansmaking it possible for more unemployedpersons to meet the identified requirementsof businesses. The first step here is toimprove geographical mobility. This couldbe encouraged by injecting new impetusinto the accommodation market and, in

particular, by removing obstacles to theconstruction of rented accommodation.

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The provision of a framework for exer-

cising the right to advanced vocationaltraining has already been mentioned. Thisis a major pillar of flexibility, which alsocalls for initiatives, sometimes radical, fromthe two sides of industry in cooperationwith the public authorities:

. In certain countries of the north ofEurope the campaign against undeclaredwork involves reducing certain unem-ployment benefits and cutting direct tax-ation on low incomes. However, unem-ployment benefits can only be reducedso far before the poverty line is reached.These limits have already been reachedin several countries;

. In several southern countries, the lawson the conditions under which workerson unlimited contracts may be laid offneed to be made more flexible, withgreater assistance being given to theunemployed and with less recourse toprecarious forms of employment;

. In many countries, in both north andsouth, labour compartmentalization detrimental both to the mobility of the

active population and to the retrainingof the unemployed. Bridging accessneeds to be established through collec-tive negotiation.

Internal flexibility is the result of optimummanagement of a company s humanresources. The aim is to adjust the work-force without making people redundantwherever this can be avoided. Focusing onthe continuity of the link between the com-pany and the worker, it maximizes the

investment in human resources and staffinvolvement. It is up to individual com-panies to improve internal flexibility bymeans of staff versatility, the integratedorganization of work flexible workinghours, and performance-related pay. Tai.lored to the European company model, itshould be central to negotiations within thecompany.

The virtues of decentralization andinitiative

The optimum operation of the labourmarket calls for a large degree of decentral-ization within 'employment areas . In

return, the national authorities should focuson the quality of training and the homo.geneity of qualifications. The successfulexperience of several Member States showsthe importance of effective participation ofthe social partners in the decentralizedmanagement of employment areas.

Likewise, it is only by decentralizedapproach, i.e. at company level, that adjust-ments to working hours can lead toimproved competitiveness, and therebyencourage job creation and job retention.

Thus we can see how at Volkswagenimaginative negotiations based on a four-day week have led to a sensible, sociallyresponsible form of part-time working.More flexible retirement schemes, morediversified working years, and greater pro-vision for part-time working correspond inmany situations to the wishes of salariedstaff and the interest of undertakings whichare concerned to make better use of theircapital. Very often, such 'downward'adjustments in working hours are blockedby inflexible practices which standardizethe working week 'in Europe at between 37and 39 hours. To remove these obstacles, itis necessary, on the basis of the specific pro-visions of each country, to review labourlegislation (role of legislation on workinghours) and contractual practices (overtimepay), and in many cases simplify the way inwhich pension rights are calculated.

Reducing the cost of unskilled andsemi-skilled labour

In eight out of the twelve countries of the

European Union, social security contribu-

tions are relatively more onerous on lowincomes. These countries suffer the mostfrom what is one of the most severe struc-tural causes of unemployment and unde-clared employment in the Community.

Studies have been carried out in severalcountries with very high levels of securitycontributions. These studies show that areduction of 30 to 40% in social securitycontributions for low-paid workers wouldincrease employment by 2%. In other coun-tries, the possibility of replacing existingforms of income guarantee payments with asystem of negative tax deserves close atten-tion.

For all countries of the Union, it is essentialto reduce the cost of unskilled and semi-

skilled labour by an amount equivalent to Ior 2 points of GNP by the year 2000. Theimprovement in tax revenue resulting fromthis measure would offset the cost by up to30%. The remainder should be fmanced bysavings or other revenue. Irrespective of itsintrinsic merits, the CO2/energy tax pro.posed by the Commission is one of the bestways of offsetting reductions in the cost ofemployment. Homogeneous taxation atsource of investment income as proposedby the Commission since 1989 would beanother possibility.

A full-scale overhaul of employmentpolicy

Investing in human resources is not the taskof business alone. It is also the task of gov-ernment. It is no longer possible to leavemasses of unemployed people in Europeunoccupied. Such is, however, the structureof government spending on unemploy-ment: roughly two thirds of public expendi-ture on the unemployed goes on assistanceand the remainder on 'active measures

Employers ' Social Contributions(Comparison at different wage levels)

50 %of_,o

(. ","avomgew".

"',,=, E"",p"'. c.mmiO"..

D3xavom,o_,o

A complete reversal of attitude is requiredthe aim being to prevent long-term unem.ployment. On the one hand, the unem.ployed should be offered, according to howlong they have been unemployed, firsttraining leading to meaningful qualifica-tions, then the possibility of working, poss-

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ibly in the public sector, for a number ofmonths. In exchange, unemployed peoplewho are thus given real assistance inreturning to employment would make apersonal investment in this training andemployment. This, too, is a question of

social dialogue in which the unemployedshould themselves be involved.

Such a substantial change would require aconsiderable increase in public employmentservices, the objective being for everyunemployed person to be monitored per.sonally by the same employment adviser.The job of the employment service wouldbecome more diversified but comprise threemain tasks: provision of information, jobplacement and support.

Contrary to popular opinion, such an over-haul of employment policy would not beprohibitively expensive. For example, it hasbeen calculated that the cost of triplingoperational expenditure on the publicemployment services in the countries of theUnion would mean an increase from 0.17to 0.5% of GNP. Spread over a period

three years, the corresponding expenditurewould be .almost entirely offset by the fall inunemployment, estimated at 100 000 in thefirst year, 400000 in the second year, and amillion in the third year.

Bringing the long-term unemployed -those who have been unemployed for morethan 12 months - back into employment isa difficult but not impossible task; this isdemonstrated by the success of initiatives inseveral countries aimed at creating a realroute back into employment for such

people. These initiatives should be general-ized, in cooperation with various associ-ations and the local authorities.

Finally, active employment policy shouldcross a new threshold in promoting youthemployment. Anyone who leaves the schoolsystem before the age of 18 withoutacquiring a meaningful vocational certifi-cate should be guaranteed a 'Youthstart' . Itis proposed that a scheme should be pro-gressively established at national levelwhich will give everyone access to a recog-nized form of training, whether or notaccompanied by employment experience.Moreover, at Community level

, '

European

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Union civilian voluntary service' could beintroduced, comprising a training elementand public utility work in another MemberState of the Union, to be financed by Euro-pean Social Fund pilot initiatives. Thisinitiative could back up the 'Youthstart'arrangements.

Dealing with new needs

Many needs are still waiting to be .satisfied.They correspond to changes in lifestylesthe transformation of family structures, theincrease in the number of working womenand the new aspirations of the elderly andof very old people. They also stem from theneed to repair damage to the environmentand to renovate the most disadvantagedurban areas.

Sources of new jobs

Local services

. Home help for the elderly and han-dicapped, health care, meal prepara-tion and housework;

. Minding pre-school-age childrenand schoolchildren before and afterschool, including taking them to andfrom school;

. Assistance to young people facingdifficulties, comprising help withschoolwork provision of leisurefacilities, especially sports, and sup-port for the most disadvantaged;

. Acting as caretaker for blocks offlats;

Provision of leisure and culturalfacilities, provided they are therebymade more accessible to all(adjusted opening hours lowerprices, travelling shows, art schoolsetc.

. Local shops kept in business in ruralareas, and also in outlying suburbanareas.

The objection will be voiced that if suchneeds exist, the market should rapidly pro-vide for them. In fact, the development ofboth the supply of and demand for suchnew services comes up against barriers:

. on the demand side there is the problemof price, already referred to in connec-tion with the costs of employment;

. on the supply side there is reticence totake jobs which are perceived .as beingdegrading, because they are oftensynonymous with domestic service andunskilled or selni-skilled work.

As a result, the development of the servicesin question is either left to the undeclaredemployment market, or is publicly funded,which is expensive. A new initiative couldstimulate both demand and supply, thuscreating a ' continuum' of possibilitiesranging from supply totally protected bypublic subsidies to totally competitive

Improvements in the quality of life

. Renovation of old housing with aview to increasing comfort (instal-lation of bathrooms and noise insu-lation) and safety;

. Development of local public trans-port services, which should be mademore comfortable, more frequent,accessible (to the handicapped) andsafe, and the provision of new ser-vices such as shared taxis in ruralareas.

Environmental protection

. Maintenance of natural areas andpublic areas (rubbish clearance,street cleaning, path clearance, etc.

. Water purification and the cleaning-up of polluted areas;

. Monitoring of quality standards;

Energy-saving equipment, particu-larly in housing.

supply. Thus a new 'social economy' wouldbe born, benefiting:

. on the demand side, from incentivessuch as income tax deductibility, or thelocal issuing of 'vouchers' along the linesof luncheon vouchers, issued instead ofproviding the social services normallyprovided by employers and local auth-orities, which can be exchanged for localservices ('service vouchers

. on the supply side, from traditional sub-sidies for the setting-up of undertakingswhich could be increased in cases wherea 'social employer' undertakes to employformerly unemployed people. Specifictraining would be provided to developthe skills needed for these new pro-fessions.

The scope for job creation dependslargely on the existing structures andservices in each country, lifestyles andtax rules.

However, several estimates agree thatsome three million new jobs could becreated in the Community, coveringlocal services, improvements in thequality of life and environmental pro-tection.

Call for action

The analyses out in this document and thepossible solutions identified should guide ustowards a sustainable development modelboth from the viewpoint of the effectivenessof the triangular relationship growth-com-petitiveness-employment and as regards theenvironment and the improvement in thequality of life.

The effort to be made calls for adaptationsin behaviour and policies at all levels: theCommunity level, the national level, andthe local level. Since we are aware of thediffering situations in Member States, wedeemed it preferable not to formulate thepossible solutions in unduly concise terms.It will be for each Member State to takefrom the document the elements it regards

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as making a positive contribution to its ownaction.

Nevertheless, in the Commission s view, theindividual chapters of Part B should pro-vide the basis for work in the various spe-cialized meetings of the Council of Minis-ters. If conclusion along these lines werereached at the forthcoming EuropeanCouncil meeting, this would facilitate andactually set in motion the mobilization ofthe Community institutions in the pursuit ofthe objectives set.

As for Community action proper, it is pro-posed to impart a new impetus or give anew form, but only in accordance with fivepriorities:

. Making the most of the single market;

. Supporting the development and adap-tation of small and medium-sized enter-prises;

. Pursing the social dialogue that has, todate, made for fruitful cooperation andjoint decision-making by the two sides ofindustry, thereby assisting the work ofthe Community;

. Creating the major European infrastruc-ture networks;

. Preparing forthwith and laying the foun-dations for the information society.

These last two priorities hold the key toenhanced competitiveness and will enableus to exploit technical progress in the inter-ests of employment and an improvement inliving conditions.

It needs to be stressed that the implementa-tion of these two priorities in no way calls

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into question the financial decisions taken

as part of Package II by the EdinburghEuropean Council. There is, therefore, noneed to review the ceilings on resources.

Recourse to saving is the only other sourceof fmancing. It would be modest in magni-tude since the borrowings envisaged wouldaccount for less than 2% of total marketISSUes.

For the rest, what we are advocating is notonly economically indispensable but alsofinancially viable and hence carries no riskof adding to national public deficits.

Through these forward-looking measuresthe Community will lay the foundations forsound and lasting economic growth thebenefits of which will far outweigh the costof raising the funds required.

As a parallel development, and this is alsoone of the far-reaching changes made toour growth model, the new-found consist-ency between macroeconomic policy andan active employment policy will eliminateall the behavioural or structural rigiditiesthat are partly to blame for the underem-ployment with which we are having to con-tend. It will t4en be possible to satisfy thenumerous needs that have not yet been metas well as those to which the changes bothin the organization of our societies and inthe organization and sharing-out of workwill give rise.

The Commission thus calls on everyone toconduct a lucid analysis of our strengthsand weaknesses and to adapt behaviour tothe rapid changes taking place in today

world, setting our sights .and focusing ourdetermination on what the future holds.

Development theme

Information networks

1. Why?

Throughout the world, production sys-tems, methods of organizing work andconsumption patterns are undergoingchanges which will have long-termeffects comparable with the first indus-trial revolution.

!his is ~he result of the development of

mformatlon and communications techno-logies. Digital technologies, in particular

have made it possible to combine transmission of information, sound text andimages in a single high-performance system.

The dawn of the multimedia world

This. will have far-reaching effects on pro-ductiOn st~ctures and methods. It will spellchang~s 1!l the way companies areorganiZed, m managers' responsibilities andin relations with workers. Small businesseswill benefit most. Working conditions willbe transformed by the greater flexibilitypossible with r~gard to working hours, theplace of work Itself (teleworking) and ine-vitably,. terms of contract and pay systems.Accordmg to some estimates, six millionAmericans already work at home. Newdata transmission systems will enable com-panies to globalize their activities andstrategies, forging forms of partnership andcooperation on a scale never possiblebefore.

~e change will also affect consump-tiOn patterns.

The need for physical mobility will bereduced by the availability of products andservices combining the advantages of mass

production with consumers' specific, andeven individual, requirements. A new farricher range of novel services in the fo~ofinformation, access to databases, audio-visual, cultural .and leisure facilities will beopened up to everyone. More specifically, itwill be possible to gain access to general

information directly, without any compli-cated technology, via a portable computerconnected, if need be, to a television set ortelephone.

The same phenomenon will affect us ascitizens.

I~ will he possible to make the services pro-vIded by the public authorities faster moreselective and less impersonal, prbvidedmeasl!res ar~ ta~en to. safeguard privacy.Certamservlces m which the public auth-orities have traditionally played a leadingrole (health, education, social security, etc.could be ~rovided far more widely, rapidlyand effectiVely. Market forces will be ableto playa greater part. Doctors, teachers andstudents will have instant access to vastdatabases.

This is not a technological dream forthe next century.

Some aspects of this new society arealready. be~ng put into place; many peopleare begmnmg to reap the benefit. Naturallythese changes will be led by the Triapowers first, but will gradually extend tothe rest of the planet. They will be dictatedabove all, by the needs of the users bothcompanies and consumers alike. Ind~stry isalready beginning to adapt to these newpn?spects. large-scale reorganizations are intram. They are making the traditional dis-tinctions, for example between electronicsinformation technology, telecommunications and the audiovisual sectors increas-inglr obsolete. They are blurring' the bor-derlines between the secondary and tertiary

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sectors, between industry and services. Theyare transforming the balance of power inindustry: the capitalization of Nintendothe video game maker, is already One thirdof IBM's and its turnover is almost twicethat of Microsoft, the leading software pro-ducer. This process has already started inthe USA, where it is giving birth to unpre-cedente~ partnerships and mergers betweencompames.

It will gain ground in Europe. It is forcingthe public authorities to review the regula-

tory framework.

Concern has been expresed aboutemployment, but it is difficult to assessthis factor precisely.

Rapid dissemination of new informationtechnologies can certainly speed up thetransfer of certain manufacturing activitiesto countries with distinctly lower labourcosts.

However, the productivity improve-ments which these technologies willallow throughout industry will also savelarge numbers of jobs which wouldotherwise have been lost.

Weare withnessing rationalization of theservice sector. However, the enormouspotential for new services relating to pro-duction, consumption, culture and leisureacitivities will create large numbers of newjobs.

For example, the services generated byMinitel in France have created more than350000 jobs. The foreseeable growth in thenumber of audiovisual services will con-siderably increase the demand for new pro-grammes. By the turn of the century thereshould be 10 times as many television chan-nels as now and three times the number ofsubscribers to cable networks.

In any event, it would be fruitless tobecome embroiled in a fresh dispute aboutthe 'machine age , as was the case with thefirst industrial revolution. Worldwide dis-semination of new technologies is inevit-able.

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The aim must be not to slow down thischange but, instead, to control it inorder to avoid the dramas whichmarked the adjustments in the last cen-tury but would be unacceptable today.

Above all, these changes have been broughtabout by market pressure and companiesown initiative. The government decisionstaken in the USA and Japan aim at orga-nizing and speeding up the process, by sup-porting companies' efforts. The emphasishas been on establishment of the basicinfrastructure and support for new applica-tions and technological development. TheUS programme to establish the 'NationalInformation Infrastructure' provides for atotal investment of x times the spending Onthe Apollo programme.

It is in Europe s interests to meet thischallenge since the first economieswhich successfully complete thischange, in goods conditions, will holdsignificant competitive advantages.

Compared with its leading competitorsEurope holds .comparative advantages fromthe cultural, social technological andindustrial points of view. Since 1 January1993 its market has been largely integratedalthough too many monopolies and toomuch overregulation persist. Interoper-ability has not yet been achieved.

Already, the States which have taken thelead with deregulation have the fastest

growing markets and falling consumerprices.

Europe s main handicaps are the frag-mentation of the various markets andthe lack of major interoperable links.To overcome them, it is necessary tomoblize resources and channel endeav-ours at European level in a partnershipbetween the public and private sectors.

2. How?

The action plan is based on five priorities:

Priority

1. Promote the use of informationtechnologies

2. Provide basic trans-European ser-vices

3. Create an appropriate regulatoryframework

4. Develop training on new techno-logies

5. Improve industrial and techno-logical performance

Means

launch European projects On applicationsand public services (transport, healthtraining, education and civil protection)and strengthen cooperation betweenadministrations (IDA programme)

promote teleworking

ensure closer involvement of users in thedrafting and implementation of technologypolicies

develop the basic networks (ISDN andbroadband)

ensure network interoperability

ensure closer coordination between tele-communications policies and aid from theStructural Funds

end distortions of competition

guarantee a universal servicespeed up standardization

protect privacy and ensure the security ofinformation and communication systems

extend intellectual property law

encourage acquisition of the basic knowl-edge required in order to use new techno-logies and exploit their potential

ensure widespread use of new technologiesin teaching and training

adapt the training for engineers and resear-chers

increase the RTD effort and adapt it to thenew market conditions (fourth frameworkprogramme)

promote industry and technology watch

take up the results of RTD in industrialapplications

negotiate equitable conditions of access to

the competitive market at world level

The keys to the success of this plan are todefine the measures clearly, to specify atimetable and to put in place the resources.

It is proposed that a task force on Euro-pean information infrastructures be estab-lished with a direct mandate from the Euro-

S. 6/93

pean Council. This task force will have thejob of establishing priorities, deciding onprocedures and deeming the resourcesrequired. It should report to the President

of the European Council by 31 March 1994

so that the plan can be put into action bymid-1994 after consultation with the partiesconcerned and the approval of the Euro-pean Council.

3. Which networks?

The transport network has motorways withseveral lanes, and access roads and serviceareas allowing motorists to drive whereverthey choose.

The communications network will alsohave:

. highways along which information willmove: these will be the broadbandoptical fibre networks

access roads and service areas: these willbe the services (disks, files, databases

electronic mail services and host com-puters);

. highway users who will choose applica-tions for their work or private life.

Europe s telephone networks are already

international, but the digital networks forcarrying information in the form of text

data or images are mainly being developedon a purely national basis.

In order to provide greater access to a

wide range of interactive services andcreate a common information areaaction must be taken:

. to ensure coordinated project man-agement;

. to interconnect the various networksand make them interoperable;

. to invest and innovate in order toprovide a wide range of informationin the shortest possible time.

Such an approach is essential to stimulatethe creation of new markets. New projectsmust be undertaken rapidly and resolutely

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in order to break the vicious circle perpetu-ated by the weaknesses on both the demandand supply sides.

To this .end, the eight strategic projectslisted in the Annex are proposed.

They cover infrastructure, services andapplications alike.

Establishment of a high-speed com-munication network

This infrastructure is necessary for thedevelopment of multimedia services. Itwould use the most advanced data trans-mission technologies (optical fibre) andfully capitalize on the digitization and high-speed transfer of information (high defini-tion, interactive and multifunction systems).

This would extend the integrated servicesdigital networks to be establishedthroughout the Community by the year2000.

Initiation of three programmes todevelop electronic services

These services are necessary for diversifica-tion of the applications on a given infra-structure network:

Electronic images: interactive video ser-vices will revolutionize workingmethods, training and leisure activities.The objective is to ensure Europe-wideinteroperability of these new d fa carte

services by 1997.

Electronic access to information: this willentail bringing together information(administrative, scientific cultural or

other data) in databases to which allusers in the Community should haveaccess.

Electronic mail: the various commercialelectronic document transmission ser-vices must be made interoperable; devel-opment of this service is particularlyimportant to make small firms morecompetitive.

Promotion of four priority applications:teleworking, teletraining, telemedicineand links between administrations.

. Teleworking: Projects are already underway in the Member States. The Com-munity would support pilot programmeson the establishment of a transfrontiernetwork for the management of humanresources.

Teletraining: The objective is to establisha network linking more than 100 univer-sities or colleges by 1996 and givingthem all access to common trainingmodules.

. Telemedicine: By the year 2000multimedia links are to be establishedbetween the main cancer research cen-tres, bone marrow banks and socialsecurity centres.

. Links between administrations: To ensuresmooth operation of the internal market(taxation, customs, statistics), it is essen-tial to improve the interchange of databetween administrations and to providecompanies and the public with easieraccess to this information.

4. What decisions?At the moment, the Council of Ministersand the European Parliament are conti-nuing their discussions on the developmentof data communications (IDA) networks.In the autunm the Commission submittedtwo proposals on telecommunications net.works containing a series of guidelines(master plan) on the integrated services dig-ital network (ISDN) and broadband net-works.

The biggest difficulty encountered in thediscussions concerns the content of thework: some Member States feel that itshould cover the infrastructure only butmost think that it should cover not only theinfrastructure but also the associated ser-vices.

5. Financing options?

The estimated funding needed over the next10 years will be ECU 150 billion. SomeECU 67 billion will be needed between1994 and 1999 for the priority projectsselected. They will be covered mainly byprivate investors. Financial support fromthe national and Community authoritieswill playa marginal role to provide an icen-five, as with other networks.

The Community could provide ECU 5 bil-lion over the entire period from its budgetfor networks, from the Structural Fundsand, in particular, from the research pro-

gramme. This could be supplemented byEIB loans and European Investment Fundguarantees and the new fmancial mech-anisms described in the Annex.

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Trans-European telecommunications networks:

Information highways Target area for Investment requiredStrategic Projects 1994- 1999

(billion ecus)

Interconnected advanced establishment ofnetworks high-speed

communication network

consolidation ofintegrated services digitalnetwork

General electromc electronic acces to

servIces information

electronic mail

electronic images:interactive video services

Telematic applications teleworking

links betweenadministrations

teletrallling

telemedicine

Total

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Development theme

Trans-European transport andenergy networks

1. Why?

Europe s ascendancy in the past was due tothe quality of its communications networkswhich gave its inhabitants easy access tonatural and technical resources. By devel-oping the movement of people and good~,Europe has been able to marry econo~lcprosperity, quality of life and comme~Clalefficiency; it has also been able to remam atthe forefront of technology and to backhighly successful industry, Airbus being agood example. Our transport, energy an~telecommunications systems are clear eVl.dence of this tradition.

We need to continue along this road, to

enter a new phase and to visualize otherfrontiers in the light of the globalization ofmarkets, the growing mobility of capitaland technology and the investment needswhich are becoming apparent in the Eastand the South. The development of trans-European transport, telecommunicationsand energy infrastructure neworks answers

Promoting new or better designedinfrastructures, accessible to all citizens,will permit:

faster safer travel at lower cost, andthus ' an increase in trade, whilereducing costs and distances andcreating scope for other activities;

effective planning in Europe inorder to stem the emergence ofserious socio-economic disequilibriain all Member States;

. bridge-building towards EasternEurope, which is essential in order tomeet the immense investmentrequirement resulting from the stateof decay of communications and toorganize the necessary economiccomplementarities.

this need which all the Member Statesemphasized in their contributions.

This is also a chance to:

. give our industries the opportunity ofengaging in promising medium- andlong-term projects and of developingnew products;

. seek the optimum combination ofexisting transport modes (multimo-dality) in order to enhance performanceand ~t the same time reduce theirenvironmental impact.

Making traffic faster, safer and moreenvironmentally compatible facili.tating and boosting trade, and bringingMember States closer to their easternand southern neighbours would heraldthe advent of the European Union.

These networks are the complement to thesingle market. After the huge collectiveeffort made to eliminate frontiers betweenthe Member States, it is now necessary toincrease physical links, including those withthe most distant countries. This is also a keyfactor in competitiveness, minimizing coststo businesses and private individuals, andoptimizing existing capacities by improvingtheir compatibility.

2. Why now?

Our investment in infrastructures hasbeen slowing down over the last years.

This is particularly true of transport; theresult is rigidities, procedural slowness andmalfunctions, which are blamed by econ-omic circles as being one of the main causesof the current decline in competitiveness.

This can now be remedied with the aid ofthe new provisions of the Treaty on Euro-pean Union (Article 129).

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The fact that not enough attention hasbeen paid to developing infrastructuresis one of the reasons for the deteriora-

tion in the quality of life.

Time wasted because of traffic congestionunder-utilization of the new communica-tions media, environmental damage owingto the failure to use the most efficient tech-nology are all to some extent contributoryfactors in the present malaise of our citiesand the resulting social discord. The same istrue of the thinly-populated rural areaswhose isolation is a threat to their veryexistence.

The rapid progress made in data pro-cessing, environmental engineering, propul-sion methods and new materials completelychange the outlook. We are living with sep-arate, compartmentalized networks, withmeans of transport which are oftenenvironmentally damaging. It will hence-forth be possible to combine different trans-port modes, to use electronics to organizelinks and traffic better, to connect networksin all sectors for which different nationalauthorities are responsible and to integratestringent environmental standards in infra-structure projects. A wholly new generationof projects is emerging, and a completelydifferent development logic.

Countries such as the USA and Japan aremaking significant targeted efforts torenew their infrastructures. New industrialpowers such as Singapore, Taiwan, certainparts of China and Argentina are creatingnetworks which integrate the latest techno-logical advances.

By focusing the necessary resources ontrans-European projects, we shall main-tain our capacity to compete with therest of the world and improve thequality of life in Europe.

Equally, it is inconceivable that we shoulddevelop an economic partnership with thecountries of Central Europe and Russia as

preliminary to a deeper association

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without, at the same time, embarking onbold infrastructure projects. The two arecomplementary.

Finally, potentialinvestroents by theend of the century, which are put atmore than ECU 250 billion, are a keyfactor in the economic recovery ofEurope.

3. How?

Article 129 of the Treaty on EuropeanUnion spells out the Community' s tasksand instruments relating to the estab-lishment of networks.

Within the framework of a system of openand competitive markets, action by theCommunity shall aim at promoting theinterconnection and interoperability of net-works as well as access to such networks. Itshall take account in particular of the needto link island, landlocked and peripheralregions with the central regions of the Com-munity (Article 129b).

It shall establish series of guidelinescovering the objectives, priorities and broadlines of measures (master plans); thesegui-delines shall identify projects of commoninterest; it shall support the fmancial effortsmade by the Member States for the projectsidentified, particularly through feasibilitystudies, loan guarantees or interest ratessubsidies; it may also help coordinate thepolicies pursued by the Member States andcooperate with third countries (ArticleI 29c).

The European Parliament and the Councilof Ministers decide on the guidelines andprojects of common interest by qualifiedmajority; Member States must approve theguidelines and projects that COncern theirterritory.

The Community has two tasks:

. encourage private investors to take agreater part in projects of Europeaninterest;

. reduce, to this end, the financial oradministrative risks involved.

It is therefore recommended that priorityshould be given to projects of Communityinterest, the financial and administrativearrangements for which have been well pre-pared, and for which environmental impactassessments have been carried out.

Project evaluation will concern the fman.cial risks, the possible sources of financing,the legal status (duration of concessions),

management and the environmentalimpact.

An administrative and fmancal actionplan will be drawn up for each projectin order to guarantee investors the nec-

essary predictability and stability.

4. Where are we now?

a) Transport

The plan for high-speed trains had alreadybeen accepted by the Council in 1990, andit will be updated in 1994 for integration ina multimodal perspective.

On 29 October 1993 the Council and theEuropean Parliament approved threemaster plans on:

. combined transport, with work in twostages of 6 and 12 years;

roads, with 55 000 km of trans-Europeanlinks including 12 000 km of motorwayto be built in 10 years;

inland waterways, with the establishment

of an interoperable network in 10 years.

Three other plans will be presented in 1994

on:

. the conventional rail infrastructure, with aview to integrating lines for passengertraffic (regional, urban) and freight inthe intermodal network and to extendinglinks towards Central and EasternEurope;

. the airport infrastructure, with a view toimproving the linking-in of the Com-munity network internationally and of

advancing the opening-up of certainregions of the Community;

. seaports, with a view to promoting intra-Community trade and trade with the restof the world and relieving congestion certain inland links, with beneficialenvironmental effects.

b) Energy

master plan and projects of commoninterest for electricity and gas will be pre.sented at the beginning of 1994.

5. What are the priorities?

The projects will focus above all on thetrans- European transport network. This isthe sector which will require the most sub-stantial investment, and where the gap bet.ween available financial resources andneeds is biggest. The aim is to develop atruly multimodal strategy, which is essentialin order to imprpve the efficiency of the

economy and the quality of life.

It is proposed that major priority pro-jects of Community interest should beselected on the basis of the master plansalready approved, in order to bring allthe countries of the European continentcloser together. These concern:

. new strategic transfrontier links(Brenner rail link, Lyons-Turin raillink, Paris-Barcelona-Madrid raillink, Berlin-Warsaw-Moscow motor-way link);

. improving connections between thevarious transport modes (Heathrow-London-Channel Tunnel link);

. improving interoperability and effi-ciency of networks by installingtraffic management systems (air, sealand) and thus significantly reducingnuisance factors.

The development of energy networksreflects two priorities: the reduction of costsby making better use of existing capacitiesand enhancing security of supply. The rustpriority is more particularly concerned withelectricity, while the second applies to gas.

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This will permit more rational overall use ofthe available energy throughout the wholeEuropean continent.

As far as electricity is concerned, the objec-tive is essentially to increase interconnec-

tion of networks and thus avoid theirsatu-ration in some cases and, in others, providea better service to the more remote areas.

Making better use of existing electricitycapacities will help protect the environ-ment.

With regard to gas, Europe must come toterms with growing consumption which willincreasingly by covered by imports fromthe North Sea, Algeria or Russia.

It is essential, in the interests of econ-omic security, to speed up constructionof trans-European gas pipelinescapable of guaranteeing supplies andcreating avenues for long.term cooper-ation with the producer countries.

Eight major programmes will shortly beproposed to the Council with this in mind.the success of all these projects is closelylinked with the deepening of the internalmarket.

6. Financing options

The financial requirements for the next year can be put at more than ECU 400 bil-lion; by the end of the century alone, theywill probably amount to ECU 250 billion(ECU 220 billion for transport and ECU 30billion for energy).

The total investment involved for the pro-posed projects amounts to ECU 82 billion

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for transport and ECU 13 billion forenergy.

The purpose of the above assessment is tocreate the best possible conditions for fin-ancing by the market in the framework of apublic- and private-sector partnership.

Financing is based on three principles:

financial equilibrium: this can to alarge extent be ensured by privateinvestors;

compatibility with public finances:any contributions from MemberStates will respect the guidelinesrelating to the public debt;

subsidiarity: the Community willsupport feasibility studies, provideloan guarantiees or promote theclosing of missing links in the frame.work of projects of common interest.

With regard to the 26 transport projectsalready examined in the framework of themaster plans (23) or in other Council bodies(3), the Community has already financedfeasibility studies and work to the tune ECU 332 million.

It could provide almost ECU IS billionover the period 1994-99 from its variousinstrument, 1 which would be added to loansof an equivalent amount (growth initiativefacilities).

The eight major energy programmes willrequire ECU 13 billion, of which 10 mustbe provided by the market. The Com-munity could provide ECU 1.2 billion overthat period through the structural policiesand the instruments for interest-rate sub-sidies and financing of feasibility studies.Under these conditions, the Member Statescontribution will be marginal.

Annex

Investing in thecompetitiveness of Europe

The trans-European networks are an essen-tial element for the competitiveness of theEuropean economy and the smooth func-tioning of the single market.

1. Transport and energy networks ECU 250 billion by the year 2000

These networks of transport infrastructureswill enable our citizens to travel morequickly, more safely and more cheaply.They will also form a link to easternEurope and to north Mrica. In total someECU 400 billion of investments in thetransport and energy trans-European net-works will be required in the next 15 yearsof which some ECU 220 billion by 1999.

Article 129b of the Treaty makes clear howto proceed. The Community! establishes aset of guidelines that identify projects of

common interest. It then supports the fman-cial efforts of the Member States (feasibilitystudies, loan guarantees, or interest ratesubsidies). It can also contribute to the

coordination of the Member States' policiesand cooperate with third countries.

The principal guideline networks (schemasdirecteurs) have been proposed by the Com-mission or adopted by the Council and theParliament. The Commission has identifieda series of priority projects for the next fiveyears (25 transport projects amounting toECU 83 billion and 10 energy projectscosting ECU 13 billion) covering the Com-munity, but also extending to centralEurope and north Mrica (energy).

2. Telecommunications - ECU 150billion by the year 2000

A system of information highways for theCommunity will allow the best means to

I The Council decides by qualified majority in co-deci-sion with the European Parliament (Article l89b);guidelines and projects of common interest whichrelate to the territory of a Member State require theapproval of the Member State concerned.

create, manage, access and transfer infor-mation. It involves:

. the creation of infrastructures (cable andland or satellite-based radio communica-tion), including integrated digital net-works ;

. the development of services (electronicimages, databases, electronic mail);

. promoting applications (teleworking,teletraining, telemedecine and linkedadministrations).

The amount of investments that could beput into effect by the end of the century hasbeen estimated at ECU 150 billion.

3. Environment - ECU 174 billion onlarge environmental projects bythe year 2000

The environment is an integral element ofthe trans-European networks, for exampleconcerning combined transport networksdesigned to get traffic off the roads ontorail. The Commission has neverthelessenvironmental programmes of sufficientsize to merit eligibility for financial supportfrom the Community. These concern urbanwaste water treatment and renovation ofwater .supply distribution systems at an esti-mated cost of ECU 280 billion in total over12 years or ECU 140 billion by the end the century. The Community could helpfmance some ECU 25 billion in this area ofenvironmental concern over the periodI 994-99.

4. Financing the trans-Europeannetworks and large environmentalprojects

The major portion of frnance for theseinvestments will be raised at the level of theMember State, either through private inves-tors (especially in the telecoms sector) or viapublic enterprises. The Community canhowever, playa role, as foreseen in theTreaty, by supporting the financial efforts

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of the Member States and mobilizing pri-vate capital I . This requires a panoply offinancial instruments, as set out in the tablebelow, some of which exist already and twoof which are new ('Union Bonds

, '

Convert-ibles ). The new instruments are needed forprojects specifically included in the MasterPlans and complement the lending of theEuropean Investment Bank, which is moregeneral. The budgetary elements remain

1 In addition the ElF can guarantee up to a total ofECU 6 billion of private loans for large infrastruc-ture projects, averaging 1 billion per year to 1999.

within the Edinburgh ceilings. Nationalbudgets would not be required to supportadditional flllancing. In the case of thenew instruments, the capital and interestwould be repaid by the promoters of theprojects, with the Community budgetavailable to back the repayment of theUnion Bonds and the capital of the Euro-pean Investment Fund available in thecase of the Convertibles. There would beno risk of destabilizing the capital marketsgiven that the amounts concerned rep-resent less than I % of the Eurobond andbank credit markets.

Community financing of the trans-European networks

(average financing per year 1994-99)

Source:

Community budget:

of which:TENs

Structural Funds:

Cohesion Fund:

R&D:

Amount in billion reus

(TENs):(environment):

1.35

(TENs):(environment):

1.151.15

(telecommunications) :(transport):

1.0

Em (loans);

Union Bonds I (esp. transport and energy):

Convertibles I guaranteed by ElF (esp. telecoms):

1 See box.

Total 20.

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New facilities

Union Bonds

Union Bonds' for growth would be issued on tap by the Union for long maturities topromote major infrastructure projects of strategic interest covering the trans-Europeannetworks plus cross-border projects with EFTA, Central and Eastern Europe and NorthAfrica. The beneficiaries would be project promoters (public sector agencies, privatecompanies) directly involved in TENs. The EIB would be invited to appraise andadvise the Commission On the overall structure of the fmancial arrangement and act asagent for individual loan contracts.

Convertibles guaranteed by the European Investment Fund

Bonds issued for long maturities by the private or public company promoting the pro-ject, guaranteed by the European Investment Fund. These would be either:

convertible wholly or partly into shares or investment certificates; or

. by accompanied by subscription warrants giving the holder a right to buy shares at acertain price; or

. performance-related through a share in the profits of the company or venture con-cerned.

The maturities of the bonds and of the exchange terms would be coherent between theexpected returns of the project and the exercise period of the option. The ElF wouldcreate a special window for this type of guarantee, especially for major projects linkedto telecommunications networks.

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ARTB

The conditions of growth,co.mpetitiveness and more jobs

(Preparatory work)

- GROWTH

Chapter

The macroeconomicframework

Community unemployment has increasedsteadily since the beginning of the 1970s

with the exception of the second half of the1980s, when nine million jobs were createdthrough a combination of appropriatenational policies, a favourable .externalenvironment and the dynamism resultingfrom the prospect of the single market.Overall, however, since the early I 970sdemographic factors have led to an increasein the number of people seeking jobs, whilethe number of jobs available stagnated orincreased only modestly. Other developedeconomies have been patently more suc-cessful in responding to the challenge ofincreasing job creation.

The causes of the Community s poorrelative performance in this area arenumerous and deep-seated. The mostimportant ones can be summed up underthe headings of a suboptimal macroecon-

omic management of the economy and ofan insufficient effort of adaptation to thechanges which have taken place in the

structure of the Community s economy andin its international environment. The 1980ssaw a change of policy orientation. Theemphasis shifted towards creating morestable macroeconomic conditions andtowards easing the pain associated with

structural change rather than slowing itdown. This reorientation brought positiveresults in the second half of the decade

providing good growth but not enough newjobs. In 1992-93, however, there was a lossof confidence brought on in part by actionsoutside the economic sphere. This and othererrors put the economy into its worst reces.sion.

To the extent that the present problems arethe result of inadequate policies in the moreor less recent past, there is nothing inevitablein this state of affairs.

In addition, there is a number of factorswhich are favourable to a rapid return sustained growth and which can and should

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be exploited. The Community's achieve-ment in creating the world's biggest singlemarket is a major asset on which it will bepossible to build once the recovery sets in.The recession, painful as it is, has speededup the process of adaptation of firms to thenew environment.

The world economy has continued to growover recent years and a number of devel-oping countries have experienced very highrates of growth. The presence of newvibrant economies in Asia and, soon, inEastern Europe constitutes a huge oppor-tunity and not a threat to our standard ofliving. These countries will be 'buying onworld markets as much as they will earnwith their exports. The rest of the world isnow experiencing again positive rates ofgrowth of between 2 and 3% while worldtrade outside the Community is expandingby 5 to 6% in real terms. Finally, the priceof oil is now back to the low levels recordedin the mid- 1980s.

Over recent years, comprehensive analyseshave been made. They show that there is nomiracle remedy, but they point to the exist-ence of a wide range of measures to help

growth, competitiveness and employment.The challenge is now to appreciate the orderof magnitude of the likely effects of thevarious measures, to determine their appro-

priate mix and to implement the preferredstrategy with determination. This will not beeasy. The factors which have hindered in thepast the implementation of the right policiesare largely still present. Attacking thesources of the present unemployment prob-lems requires, therefore, a clean break withthe past. This will only be possible if a largeconsensus on the necessary course of actionto be followed can be developed: withineach country, between management and thelabour force in industry and among themembers of the European Community.

This chapter outlines the macroeconomicframework which policies must create andwithin which the structural interventionsoutlined in the following chapters will be

most successful.

1. Views of the Member States

In their contributions to the White Paperthe Member States broadly agree On theassessment made. They shall call for a clearanalysis of the serious economic situationwith a view to enlisting the help of all thoseinvolved in the economic process in findingremedies requiring sacrifices that have to beshared fairly.

The problems of employment and competi-tiveness about which governments, theEuropean Council, employers and tradeunions have all expressed serious concern

are the result of developments whichhave been witnessed for a number of yearsbut do not appear to have provoked anadequate political response. The pressuresstemming from changes in the worldeconomy are only aggravating the situation.At the same time, production processesand, consequently, the nature of employ-ment have undergone radical change com-parable, in certain respects, to the changesbrought about by the industrial revolutions.The performance of economies depends ontheir capacity to adapt to these new circum-stances, and it is precisely in this area thatthe Community is lagging behind.

The macroeconomic framework in theCommunity is being affected by certainfundamental imbalances which have causeda vicious circle to be created. The currentlevels of public expenditure, particularly inthe social field, have become unsustainableand have used up resources which couldhave been channelled into productiveinvestment. They have pushed up the taxa-tion of labour and increased the cost ofmoney. At the same time, the constant risein the labour cost affecting both its wageand non-wage components and caused, atleast in part, by excessively rigid regulation

has hindered job creation. As a resultthe level of long-term investment has fallenand the lack of confidence among thoseinvolved in the economic process hascaused demand to contract.

The vital need to restore a stable macroecon-omic framework as a basis for sustainable,

job-creating growth is felt by all MemberStates. They all point to the link betweenthe efforts to redress the economic situationand the process of economic convergence

within the framework of economic andmonetary union, which is generally viewedas the right instrument for addressing struc-tural problems. number of MemberStates advocate use of the economic policyguidelines provided for in the Treaty European Union as a specific means oftackling these matters.

2. The problemThe level of unemployment in the Com-munity has reached very serious pro-portions. After five years of steady declinethe jobless totals in the Community startedto rise substantially again at the beginningof the I 990s. In addition, Communityunemployment is characterized both by high rate of long-term unemploymentwhich is nearing almost half of the unem-ployment total, and by its impact in partic-ular among low-skilled people.

Particularly worrying is the substantial lossof ground in the recent past. There are, ofcourse, identifiable economic reasons forthis, in particular the effect of very highinterest rates on investment, excessivelyhigh budget deficits in some MemberStates, unsustainable exchange rates andthe problems of monetary instability. Butthe rapidity of the downturn indicates alsothe importance of the 'confidence factorthe decline in consumer and business con-fidence linked both to economic pressuresand to the uncertainties arising from othercauses, in particular the difficult ratificationof the Maastricht Treaty. On present trendsa stabilization of the rate of unemploymentcannot be expected before the end of 1994.

By that date, more than 18 million citizenscould be out of work: a figure equal to thetotal populations of Belgium, Denmark andIreland.

The difference between the unemploymentrates currently experienced in the majorglobal economic areas 11% of thecivilian labour force in the Communityagainst rates of about 7 and 2.5% in theUSA and Japan respectively has givenrise to questions about the existence of aspecific European unemployment problem.An examination of the Community s pastperformance and a comparison with theother major areas, however, suggests thatno hasty negative conclusions ought to bedrawn.

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Before the first oil-price shock unemploy-ment was low and the Community com-pared well with its principal competitors.The rate of unemployment in the Com-munity was lower than that in the USA ineach year of the period 1960-80. Even com-pared with Japan, which has successfullyheld down unemployment over a longperiod, the Community's performance onlystarted to diverge radically in the period fol-lowing the first oil-price shock.

To understand how the Community'unemployment performance deterioratedover time it is necessary to take a long-termperspective. To this end it is useful to distin-guish between four main periods: (a) theperiod up until the first oil-price shock, (b)the period from the first oil-price shock tothe mid- 1980s, (c) the second half of the1980s, and (d) the present period of slow

growth or outright recession.

(a) The 1960-73 period was highlighted byvery high rates of GDP growth (4.8% ayear). While growth was high, the employ-ment content of that growth was quite low.However, the low rate of job creation (0.3%a year) was not a problem over this periodas the labour supply continued to grow atsimilarly modest rates (also 0.3% a year). Asa result, unemployment in the Communityremained relatively stable over this periodand its average level was 2.6% (see Chart I).

Chart 1

Unemployment in the Community(percentage of the civilian labour force)

, Ja~an60 62 64 66 68 70 72 74 76 78 60 B2 64 as BB 90 92 94

(b) During the subsequent period 1974-the rate of growth dropped substantially toa figure of 2.0% a year. The employmentintensity increased, but not enough maintain positive rates of increase inemployment. As a result, employment cre-ation stagnated (private-sector employment

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actually declined, but this decline was offsetby an increase in the public sector) just atthe time when demographic factors led tosharp increases in the labour force (0.7% ayear). This led inevitably to a continuousand sharp rise in the rate of unemploymentfrom a rate of less than 3% in 1974 to apeak of 10.8% in 1985.

(c) During the years 1986-90, the fruits ofthe structural adjustment and policy re-orientation which had taken place since thebeginning of the 1980s were reaped and theCommunity experienced stronger rates ofgrowth: 3.2% a year. Even if this averagerate of growth was a far cry from thatexperienced during the 1960s, it was suffi-cient to generate a very strong increase injobs since the employment intensityremained at the higher level reached duringthe previous period. Employment increasedby 1.3% .a year during this period, andunemployment was reduced from 10.8% in1985 to 8.3% in 1990.

(d) Since 1991 the rate of increase of GDPslowed down substantially and in 1993 itbecame negative for the first time since1975. Unemployment started its presentworrying upward path which acceleratedsharply when employment declined in 1992and 1993.

This rapid overview of the Community'past employment performance showsclearly that the Community s economy,

with the exception of the period 1986-

has always been characterized by lowemployment creation (see Chart 2 andpoint (b) above) and that the origin of itsunemployment problems go back to the

Chart 2

Job creation in the EC, USA and JapanOndex : 1960-73 = 100)

160

140

120

100

, '

60 60 B2 ~ 66 . mn M D 60 B2 94 as BB 90

beginning of the I 970s, when it provedunable to increase its rate of job creation tomatch the increase in the number of peopleseeking employment.

. By contrast, the USA has been able torespond to an even larger increase in thenumber of people looking for jobs with astrong increase in employment creation.Japan has also managed to increase its rateof job creation. The increase was less sub-stantial than that recorded in the USA, butwas more or less in line with the rate ofincrease in the country s active population.Where these two regions differ strongly,however, is in the way the increase in jobcreation was achieved. In the USA the jobcreation of the last 20 years resulted essen-

tially from a modest rate of output growthand a very high employment content (lowaverage productivity) of that growth. Japanon the other hand, experienced an employ-ment content of growth lower than that ofthe Community (a higher average produc-tivity) but was able to couple that with amuch stronger rate of output growth.

Chart 3

Active population in the EC, USA and Japan(index: 1960-73 = 100)

160

140

120

10060 60 ~ M 60 50 m ft N n n 60 M M 60 60 60 ~ M

The macroeconomic causesof unemployment

As the contributions received from theMember States show, it is now largelyacknowledged that the decline in the rate ofjob creation in the Community after thefirst oil-price shock is to a very large extentthe result of poor macroeconomic policies.Structural and external factors also playeda large role, in particular the inadequateadjustment of industrial structures towardsnew market opportunities both within theCommunity arid elsewhere in the worldbut the main explanation for the poor

unemployment performance of the Com-munity over the past two decades is to befound in the constraints that unresolved dis-tributional conflicts and insufficient struc-tural adjustment placed on macroeconomicpolicies.

Low investment is one striking consequence.Lower rates of capital accumulation in turntook their toll on the competitiveness of theCommunity' s economy and On its produc-tive capacity which is now expanding muchmore slowly than in the past. The potentialrate of growth, i.e. the rate of growth atwhich it can grow for many years withoutexperiencing overheating problems, is nowestimated to be much less than it used to bein the 1960s: just over 2% against more than

5% (see Chart 4).

Chart 4

Actual and potential rate of GDP growthin the Community

6 .

1970 1973 1976 1979 1982 1985 1988 1991 1994

The present recession is, to a large extent, aconsequence of the combination of a lowerpotential rate of growth and of policy errorswhich led to actual rates of growth in excessof the potential rate. At the end of 1987, thefear that the stock exchange crash mightprovoke a slump led to a worldwide sub-stantialloosening of monetary policy. How-ever, at that time the rate of growth of theCommunity' s economy was already pickingup although this was not yet fully reflectedin the available statistics. The prospectsopened by the single market project and theeventual feeding through of the positiveeffects of lower oil prices had just sparkedoff a period of strong investment expansionwhich was revealed by the statistics only inthe spring of 1988.

The monetary stimulus, therefore, came ontop of a positive underlying trend. Given

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that no compensatory tightenirlg of budge-tary policy took place, the Community'

economy experienced in 1988 a very strongrate of growth: 4.1% (against the 1.3% fore-cast by the Commission s services ~ andmany other forecasters - in January 1988).

This rate of growth, although not very highin historical terms, was higher than thepotential one. Given that the rate of growthremained above potential until 1990, ten-

sions appeared. Inflation acceleratedsharply in 1989 and wages followed in1990. Since the authorities were committedto a stability course, monetary policybecame more restrictive. This unbalancedpolicy mix had obvious negative conse-quences for investment and growth. Thefiscal impulse resulting from German unifi-cation complicated things further. On theone hand, it sustained growth when worlddemand was faltering, but, on the otherhand, it imposed an additional COlnpensa-tory tightening of monetary policy and ledto an even more distorted policy mix and adeeper recession.

The conflict between, on the one hand,budgetary and wage trends, which adaptedvery slowly, and, on the other band, the conti-nuing pressure exerted by monetary policyconstitutes the single most important factorbehind the present recession.

Employment intensity

The employment intensity is the relation-ship between the rate of growth of aneconomy and its rate of employmentcreation. Very often it is measured by theso-called 'employment threshold: whichis a purely descriptive measure for theemployment content of growth. Thisthreshold is the percentage change abovewhich the growth rate of GDP leads toincreases in employment. Contrary to awidespread belief the phrase 'growthwithout jobs' is often heard theemployment intensity of growth has notdeteriorated over recent years. In fact itis now higher (the employment thresholdis lower) than in the 1960s and it hashardly changed over the last 15 to 20years (see Chart 5).

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The employment intensity of growth isdetermined by numerous factors, such asthe relative cost of labour (especially forunskilled work) and capital, workingtime including part-time work, the sec-toral composition of employment, tech-nological developments and a largenumber of microeconomic conditions. Itis difficult to isolate the effects onemployment of any of these factors so itis therefore easier to focus on the broadoverall relationship between growth andemployment, i.e. the employmentthreshold.

The employment threshold correspondsby definition to the trend of the apparentlabour productivity of the economy .as awhole. Thus, lowering the employmentthreshold means lowering the overallproductivity of the economy. But there isno contradiction between calls forincreased productivity growth in all sec-tors open to international competitionand at the sarne time calling for mea-sures which increase the weight of sec-tors where productivity increases arelow. In fact, the process whereby theincreased productivity emanating fromthe high-productivity sectors feedsthrough to all sectors of the economy isat the heart of any development model.Productivity must increase to guaranteethe international competitiveness of a

country and to increase the amount ofmaterial wealth distributable among thewhole community. At the same time, as

the wealth of.a country increases, so canthe relative importance of certain sec-tors, with usually a high labour contentwhich help distribute the wealth so cre-ated and at the same time improve theconditions for additional increases in

this wealth.

3. Unemployment can be reduced

The Commission recommends that theCommunity sets itself the objective of crea-tingat least 15 million new jobs, thereby hal-ving the present rate of unemployment by theyear 2000. This can only be a target, but itwould be of great importance for ourcitizens, in particular for the young who see

poor prospects of employment ahead ofthem. A target of this order of magnitude isthe minimum required to make a significantdent in the human waste represented byunemployment.

The target, although ambitious, is not out ofline with the past performance of the Com-munity' s economy or with what the perform-ance of other economies would indicate to bepossible. Over the next five to ten years, theCommunity labour supply will probablyincrease by about half a percentage point ayear. Demographic trends will account formost of this increase. The population ofworking age is expected to increase byaround 0.3% a year, a rate substantiallylower than that of the last 20 years. In linewith past trends, the rate of participation

(0.7% a year) is also expected to increaseonce jobs again become available, thus pro-viding the rest of the assumed increase inthe labour supply. Half a percentage point

a year is therefore the rate of increase inemployment the Community needs just tokeep unemployment stable. To the year2000 this means creating almost five millionjobs only to prevent unemployment fromincreasing. A reduction in unemploymentto about half its present level (i.e. to 5 to 6%of the active population) by the year 2000deadline requires the creation of additional 10 million jobs.

, as a result of structural changes, partici-pation rates were to increase faster thanwhat past experience suggests, then either

the unemployment target would have to berevised downwards or the ambitionsregarding employment creation would haveto be scaled up.

Achieving the target of creating at least million jobs by the year 2000 implies that

from 1995 onwards, once the present reces-sion is overcome, employment creationremains steadily a rate of increase ofaround 2% a year, certainly an impressiveand ambitious target.

Between 1984 and 1990, a slightly shorterperiod of time than the one separating us

from the year 2000, the Communityeconomy was able to create more than ninemillion net new jobs. Between 1988 and1990, the average annual rate of increase inemployment was 1.6%. The proposed target

requires a performance better than that ofthese years, but the difference is not so largeas to suggest that it may be out of reach.Other economies have done even better.The USA, for instance, has recorded anannual average rate of increase in employ-ment of 1.9% over the 17-year period1974-90!

The immediate policy objective of theCommunity must be to overcome the reces-sion and start creating jobs again. Section1.6 deals with this objective. The choice ofthe policies which will have to beimplemented to overcome the recession isconditional, to a certain extent, on themedium-term growth pattern which is COn-sidered most appropriate to bring about therequired increase in employment. It istherefore useful to identify the medium.term growth pattern which is to be aimed atbefore discussing the policies needed topromote a recovery since the latter must beconsistent with the former.

The present recession is resulting in a largenet destruction of jobs (about four million

jobs lost in 1992-93). But the Communitypresent unemployment problem has moredeep-seated causes. The combination of thecurrent potential rate of growth and of theemployment intensity of that growth is notsufficient to generate the necessary increasein the number of jobs. If growth were toreturn only to a rate close to the currentpotential rate of growth Gust over 2%), thepresent employment intensity of growthwould not even allow increases in employ.ment which kept pace with the increases inthe labour supply and consequently unem-ployment would go on rising.

higher rate of job creation can beachieved through various combinations offaster growth and higher employmentintensity. The contributions received fromthe Member States and the EFT A countriescontain a wide range of measures whichhelp to reduce unemployment. Some mea-sures aim essentially at increasing the rateof growth, others aim to increase itsemployment content while a few producepositive effects in both directions.

. It is not necessary, nor would it be wise, toseek to lay down in advance what precisecombination of growth and of greater

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employment content of growth should beachieved. Efforts must be undertaken inboth directions at the same time. Given thedifficulties in making progress in theseareas, which both lie outside the direct con-trol of policy-makers, there is no risk ofgoing too far in either direction.

However, there are si~ficant differencesin the scope for progress towards faster sus-tainable growth and in that towards ahigher employment intensity. In additionthe social implications can be quite dif-ferent and there are some important trade-offs. It is therefore right to examine thedegree of realism and the implications of

the main different alternatives: modestgrowth and very high employmentintensity, and stronger growth and higheremployment intensity.

(a) Modest growth andvety highemployment intensity

Pessimism over the chances of achievingstronger growth and worries over theenvironmental consequences of suchstronger growth lead to predictions that thenecessary rate of job creation would onlybe attained through a relatively modest rateof growth and a much higher employmentcontent of this growth. Some people think itmore desirable to aim, for instance, for a

combination of a return to rates of growthclose to the present potential rate of growthof the Community Gust over 2% a year) andthe achievement of an employmentintensity much higher than the present one(a gap between output growth and employ-ment growth of less than half a percentagepoint).

This proposition is usually inspired by theperformance of the USA. Indeed, between1973 and 1990 the USA experienced a rateof growth, 2.3% per year, but labour pro-ductivitygrew by 0.4% per year, hence agrowth in employment of 1.9% per year onaverage over the 17 years. This growth prac-tically matched a growth in the laboursupply which was much higher than inEurope and held down unemployment tocyclical fluctuations around a nearly con-stant average (5.6% in I 972, 5.5% in I 990).During the same period, however, realwages per head grew by 0.4% a year com-pared with 1.5% a year in the Community.

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It is not clear, however, whether an increasein the employment intensity of the order magnitude required to achieve this growth

pattem is actually possible in the Europeaneconomic and social context.

An increase in the employment intensity ofCommunity growth to match the US per-formance would require the implementa-tion, on a large scale, of measuresincreasing the willingness of employers tohire workers and in particular:

(i) a considerable downward widening ofthe scale of wage costs in order to rein-tegrate those market activities which atpresent are priced out of it;

(ii) a reduction in all other costs associatedwith taking on or maintaining labour

g. social security rules.

The experience of the last 15 to 20 yearssuggests that such an increase may be verydifficult to achieve. During the 1980s, someprogress has been made in reviewing theregulations that hinder job creation andsubstantial wage moderation has loweredthe relative price of labour as a factor ofproduction, but the employment intensityof growth in the Community has hardlychanged (see Chart 5).

ChartS

Employment intensity of growth(Gap between employment and output growth)

-5 w " ~ . n ro ~ M M ~ 00 ~

Probably, the progress that has been madetowards increasing it has only offset otherfactors working in the other direction suchas productivity gains resulting from theintroduction of more efficient productiontechniques and the rationalization madepossible by the completion of the singlemarket.

In addition, such a growth pattern wouldhave important implications for wagetrends. Since more employment would becreated for a given rate of growth, the

apparent productivity of labour (real GDPper person employed) would by defmitionbe lower. As a consequence, the room forreal wage increases would also be smaller.Given the need to improve investmentprofitability, at least to improve the presentweak competitive position of the Com.munity, gross real wages per head wouldhave to remain practically stable. Further-more, budgetary consolidation might leadto a decline of average net real wages.

Some other macroeconomic implicationsmust also be stressed. This lower growthscenario would also be less positive for therest of the world since it would meanslower increases in imports with detrimentaleffects on the developing countries andEast European countries' exports andincome developments. In addition, there

may be some unwelcome social aspects ofthe specific measures leading to a moreemployment-creating growth. In particularthe downward widening in the wage distri-bution would result in a substantial realdecrease in the lowest wages. This wouldnot be possible without a lowering of unem-ployment compensations and social protec-tion schemes. Combined with the expan-sion of part-time work, this would alsoceteris paribus widen the existing incomedistribution towards larger inequality andat the limit, could create 'working poorunable to survive decently from their wagesand thus lead to a form of exclusion just damaging as unemployment. If the spirit ofthe European social model is to be keptcompensatory measures would have to betaken (e.g. negative income taxes for thelowest income groups) with significantbudgetary costs.

(b) Stronger growth and moreemployment intensity

The difficulties and problems abovemen-tioned suggest that the necessary pace ofjob creation is more likely to be achieved bya growth pattern combining a more modestincrease in the employment intensity ofgrowth with a stronger rate of growth. For

instance, if from 1995 onwards the Com-munity could achieve an increase in theemployment intensity of growth of betweenhalf and one percentage point (i.e. a gap bet-ween output growth and employmentgrowth of between I and I Y2 percentagepoints against about 2 points at present)combined with a sustained rate of growthof at least 3% a year, then the unemploy-ment target for the year 2000 would also beachieved. Roughly tWo thirds of the newjobs would come from stronger growth andabout one third from the higher employ-ment intensity of growth.

Real wages per head would be able toincrease moderately, but given the resultingincrease in employment (2%) the real valueof total wages would increase by between 2and 2Y2% in real terms. This would be cur-tailed somewhat by the effects of the neces-sary budgetary consolidation, but wouldstill leave room for a more substantial realimprovement in living standards and adequate increase in private consumption.

Rates of growth of this order of magnitudeare consistent with an environmentally sus-tainable growth pattern. Indeed, they willmake it possible to create the resources toreduce present pollution levels. In additionstronger investment will also have positiveenvironmental effects since it will acceleratethe introduction of new, less-pollutingtechniques.

An increase in the employment intensity ofgrowth of the order of magnitude of the oneenvisaged in this second scenario, while notbeing easy to achieve, would not require thedrastic measures needed to reach the per-formance of the USA. In addition it couldbe achieved with the consensus of most ofthose concerned thus improving thechances of implementing at the same timethe macroeconomic policies required toachieve higher growth.

This question of how to increase theemployment content of growth is dealt withmore specifically in Chapter 8.

4. The road to higher employmentcreation

Increasing the rate of growth which theeconomy of the Community can sustain for

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many years and increasing the employmentcontent of growth requires a strategy basedon three inseparable elements:

(a) the creation and the maintenance of amacroeconomic framework whichinstead of constraining market forces

as has often happened in the recentpast, supports them;

(b) determined actions in the structuralarea aimed at increasing the competi-tiveness of European industry and atremoving the rigidities which arecurbing its dynamism and preventing itfrom reaping the full benefits of theinternal market; an adequate frame-work for the developing of new marketopportunities should be set up;

(c) active policies and structural changes inthe labour market and in the regulationslimiting the expansion of certain sectors(notably the service sector) which willmake it easier to employ people andwhich will therefore increase theemployment content of growth.

The necessary actions in the structural areawill be discussed in other chapters of theWhite Paper. This section draws the atten-tion to the most important macroeconomicfactors so as to underline a series of impor-tant implications and to help identify someuseful intermediate policy targets. Its con-clusions help to identify the frameworkwhich must be implemented to guaranteethat actions in other areas translate in actualfaster job creation.

Faster growth is a necessary component ofany strategy aimed at reducing unemploy-ment significantly. The achievement of thisgoal depends on a series of elements, someof which are outside the direct control ofCommunity policy-makers. A healthyworld economy and the maintenance of anopen trading system are obvious examples.

But to a very large, and actually increasing,extent the achievement of faster growthdepends on implementing the right policieswithin the Community.

The real challenge facing policy-makers isnot just to increase the rate of growth,

already a daunting task, but to ensure thatthe higher rate of growth can be maintainedover many years, i.e. to ensure that from

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1995, growth remains at the required higherlevel up to and beyond the year 2000 andthat the overheating which appeared in1989/90 does not arise. This impliesincreasing the productive capacity of the

Community' s economy, in other wordsincreasing its potential rate of growth.

Given that the capital/output ratio changesvery slowly over time, a sustainableincrease in production requires an increase

in .the available stock of capital. In turn, thispresupposes an increase in investmentleading, over time, to a much higher shareof investment in GDP. This might have toincrease from .the present 19% to somewherein the 23-24% region (see Chart 6). A .shift ofthis magnitude can only be accomplishedover many years.

Chart 6

Investment shares: EC, USA and Japan(percentageofGDP)

USA

oo~ M$ M ro M W ~ 00

~-

00 00 00 ~ M

Fortunately, however, the actual rate ofgrowth of the Community can reach thetarget value of at least 3% faster than thepotential rate of growth since during theinitial years it will be possible to exploit thespare capacity created by the present periodof sub-potential growth.

Economic policy must therefore aim at fos-tering a higher rate of growth and, at the

same time at encouraging investment sothat it will grow faster than consumption.This relatively slower real expansion ofconsumption is the price that society mustpay over the next few years to enSure amore equitable distribution of the access togainful employment and to ensure its futureoverall prosperity.

Higher investment would produce positiveresults over and above the mechanicalrelationship between capital and output justmentioned. It would, for instance, acce1-

erate the incorporation of new technologiesinto the production process thus leading tomore efficient and more environmentallysustainable production. The competitive-ness of the economy of the Communitywould be greatly enhanced.

Creating the conditions for investment-ledgrowth, however, is another difficult task. Anecessary, but not sufficient condition, is tomake sure that investment profitabilityincreases. But improving business con-fidence is the key element.

(i) Increasing investment profitabilityrequires distributing productivityincreases among capital and labour.During most of the 1980s, real wagesincreased in the Community on averageby one percentage point less than pro-ductivity. This could constitute anacceptable rule of thumb to be followedto achieve the necessary improvementin profitability and competitiveness.Together with the expected growth inemployment, such an increase wouldprovide for a steady expansion ofhouseholds' real disposable income andof private consumption.

(ii) Improving business confidence calls for aseries of other actions which range fromthe maintenance of a stable macroecon-omic environment and an adequatelevel of demand growth, to a determi-nation to .continue the process of struc-tural adjustment and the launching ofbold projects which demonstrate thewill and ability of governments to pro-mote growth (further trade liberaliza-tion in the GATT framework and thetotal opening-up of the single markettrans-European networks, far-sightedR&D efforts, other infrastructure pro-jects, etc.

An increase in investment howeverachieved, has to be accompanied by acorresponding increase in the rate ofnational saving to prevent the appearance ofinflationary pressures and balance of pay-ments disequilibria. The Community's cur-rent account is presently recording a deficitwhile its position as an advanced indus-trialized group warrants a surplus so as toallow it to transfer real resources to thedeveloping world. The necessary increase in

the rate of national saving must comeessentially from an increase in public saving(reduction of public deficits) since the sav-ings behaviour of the private sector (house-holds and enterprises) is very difficult toinfluence (see Chart 7 which shows howlittle it has changed over time). The dete-

, riorationin national saving which has takenplace in the Community over the last 30years is due almost entirely to the deteriora.tion of the position of the public sector.

Chart 7

National Saving in the Communityen%duPIB

28 -

~._--

National saving

00 ~ ~ 00 00 ro 22 ~ ro ro 00 22 ~ 00 00 00

5. The p.plicies to reduceunemployment

The analyses conducted over many yearshave identified many policy actions whichinfluence the rate of growth and theemployment intensity of growth. Most ofthese actions have already been tried andhave achieved some success. Theirimplementation is not painless as very oftenthese actions imply a trade-off between sac-rifices now and rewards at a later date. It isnot surprising, therefore that theirimplementation has almost always beendiscontinued or not pursued for a suffi-ciently long period of time.

Combination of macroeconomicand structural policies

The combination of the measures is alsoimportant. Very often an appropriate com-bination yields a result greater than the sumof the gains to be expected from each indi-vidual measure. In addition, there arestrong interactions between macroeconomicand structural policies. Structural policiesincrease the effectiveness of macroecon-omic policies through the removal of someof the constraints that limit their use; the

positive effects of structural policies become

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apparent only in a sound macroeconomiccontext which allows stronger growth andfinally, implementation of structuralpolicies becomes easier in a context ofstronger growth.

The policies required to consolidate growthand to increase its employment contentcoincide to a large extent, with the policieswhich are needed to bring the Communityeconomy out of the recession. The serious-ness of the present situation increases thelikelihood that these policies will beimplemented with sufficient determination.But the most serious challenge facing policy-makers will be to maintain the awareness ofthe need to implement appropriate macrO"

economic and structural policies even whenthe recession is overcome.

Once the best policy mix for the attainmentof the medium-term goal of higher growthwith a higher employment intensity is iden-tified, it will be necessary to assess theextent to which it also contributes toachieving the immediate objective of over-coming the recession. Should it prove insuf-ficient, it will be necessary to examinewhether other policy actions of a shorter-term nature are possible without endan-gering the achievement of the more impor-tant medium-term goals. This assessmentwill be conducted in Section 1.6.

(a) Structural policies

The depth of the present crisis is largely dueto insufficient progress in adapting the struc-tures of the Community's economy to thechanging technological, social and interna-tional environment. Although a consensusemerged during the 1980s on the need toaccompany and accelerate structuralchange instead of trying to slow it downthe pace at which the European economyadjusted to change was only able to matchbut not to surpass, that of its major compe-titors, with the result that vulnerability tocyclical downturns and external shocksremained high. Nevertheless, a mentality infavour of change and willingness to under-take a fundamental reassessment of cor-porate performance has grown up Europe over the past decade. In order toachieve optimal results, however, this posi-tive development must now be assisted andfostered by public authorities through the

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identification and removal of remainingbarriers and obstacles to the successfulimplementation of strategies for change byfirms. Only through the structural adapta.tion of industry can the twin requirements

of higher productivity and more jobs beachieved.

Action in the structural area is essentiallythe responsibility of Member States. How.ever, many of the policy areas that have adecisive impact on structural adjustmentand competitiveness are either influencedby various Community policies or are pri-marily dealt with at the Community level.The Community can therefore playa veryuseful role in implementing appropriateactions in the fields where it has primaryresponsibility such .as trade and competitionpolicies.

A competitive environment is basic to efficient allocation of resources and stimu-lates investment innovation and R&D.However in rapidly changing economic cir-cumstances (globalization of markets, speedand cost of technological change) majorrestructuring and adaptation by firms isnecessary. To meet this challenge they needto be able to restructure unilaterally orbilaterally in cooperation with other firms(mergers strategic alliances, etc.). This

restructuring can be facilitated and speededup by the timely and judicious use of theavailable instruments such as State aidscooperation between companies, etc. Thispro action by firms and States needs to bedistinguished from anti-competitive prac-tices by firms or States that can slow thenecessary structural adjustments.

Structural action can equally help to createthe right business and consumer environ-ment by making sure that the legal andregulatory infrastructure that has been cre-ated as the basis for the single market oper.ates fairly and efficiently. In particular, theCommunity can make sure that the regnla-tory environment in which business and con-

sumers operate is stable and predictable, andplaces the minimum bureaucratic burden oneconomic operators, particularly small andmedium-sized businesses. Finally, the Com-munity can support, encourage and coordi-nate efforts by Member States to acceleratethe diffusion throughout the Europeaneconomy of those technologies, like infor-

mation technologies and biotechnologiesthat will shape our society in the future andrepresent the key factor in shaping global

competition in the decades to come. Thesepolicy issues will be further examined in thefollowing chapters.

The Community needs an adequate frame-work for the developing of new marketopportunities. In Europe some sectors aretraditionally the exclusive preserve of non.market services or public utilities, in partic-ular when it comes to the fulfilment ofpublic needs. Reforms aiming at separatingthe different functions of public authorities

with regard to the supply of such services

as producer, purchaser and regulator, insectors such as health care, telecommunica.tions, etc., should enable the needs of usersto be better served at less cost for public

finances and with market creationpotential.

In recommending actions to implemented in the Member States it issometimes not very useful to make generalstatements since the individual situationsare very different. Calls for a specific typeof action to solve one particular problem in

country, where the problem is veryserious, are resisted by individuals in othercountries where the problem never arose orhas already largely been solved. The fol-lowing paragraphs attempt to identify areasfor action common to the largest possiblenumber of Member States. The recommen-dations must be seen as a framework withinwhich Member States will have to identifytheir individual scope for action.

The necessary structural measures will bediscussed in the other chapters of the WhitePaper. Here it will suffice to mention thataction will have to be taken in three mainareas :

(i) Greater flexibility should be intro-duced in the economy as a whole. Inparticular, the regulatory framework

should become more enterprise-friendly.

(ii) Strategies should be developed tocreate an efficient labour market ableto respond to new competitivesituations.

(ill) The international environment must bekept open to allow the Community toparticipate fully in the development ofthose areas of the world where the big-gest potential of unsatisfied demandpresently exists and which are likely toexperience the highest rates of growthover the next decade.

(b) Macroeconomic policies

The main task facing macroeconomicpolicy-makers is to eliminate the conflictsamong policy objectives which have pla-gued the Community over the last 20 yearsand, more acutely, over recent years. Elimi-nating these conflicts will make growthemployment and real convergence com-patible again with price stability andnominal convergence and will ensure thatprogress towards EMU will go hand inhand with stronger employment creation.In a stable and supportive macroeconomicframework market forces will be able todeploy themselves unhindered and thepossibilities opened up by the internalmarket will be realized.

At the macroeconomic level, the firstmedium-term objective will be to maintainthe stability of monetary policy. Monetaryauthorities have, over recent years, behavedin a way which is consistent with an infla-tion target of between 2 and 3%. It is neces-sary that budgetary policy and wage beha-viour adapt to this objective as soon aspossible and remain compatible with it.Interest rates will come down once infla-tionary expectations are stabilized .andthe perspective of lower budget deficits isestablished.

In addition it will be essential to makepolicy coordination more effective and tomaintain exchange-rate stability and theEMU perspective. This will help to rein.force the stability of the macroeconomicframework, it will increase the credibility ofpolicy-makers and will shorten the delayuntil it will be possible to reap the full bene-fits of monetary union. The implementationof a growth-oriented strategy, such as theone presented in this document will addcredibility to the commitment toexchange-rate stability.

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Budgetary policy will have to contribute the medium-term goal of more growth andemployment essentially in two ways: i)achieving debt sustainabilityand ii) contri-buting to the necessary increase in national

saving. The first goal is necessary to reducethe burden that unbalanced budgetarypolicies exert on monetary policies and onfISCal flexibility. The Maastricht criterionfor budget deficits (less than 3% .of GDP)will constitute a useful reference point inthe pursuit of this first goal. With a returnto stronger growth the budget deficit cri.terion could be met by the Community as awhole by 1997. Individual countries mayreach this target sooner or later than theCommunity average depending on theirstarting positions.

In a longer-term perspective, budgetarypolicy will have to contribute to increasednational saving. This will require increasingsubstantially public saving and will implybudget deficits significantly below the 3%reference value indicated in the MaastrichtTreaty (between zero and one percentage

point).

An essential element of budgetary restraintpolicy will be the adoption of measures toimprove the financial situation of the socialsecurity system.

Wages. There is a widespread consensus onthe need for continued wage moderationand on the positive results it could produce.In their joint opinion of 3 July 1992, thesocial partners at the European level pre-sented a consensus view for appropriatewage developments: The conduct of wagenegotiations is under the responsibility of thesocial partners. The more credible andsocially acceptable economic policies are, theeasier the social partners can anticipate lowor decreasing inflation rates in the results oftheir wage negotiations. This would reducethe strain on monetary policy and contributeto the reduction of short-term interest rates.Furthermore, wage developments have totake into account the requirements of the

profitability of employment-creating invest-ment, the competitiveness of enterprises

world markets and the implications of ./itlleconomic and monetary union. .The non-inflationary and sustainable growth process,thus generated, would provide the appropriatescope for real wage increases which under-

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lines the interrelation between the Europeanintegration process and rising living stan-dards. The difficulties arise when thesegeneral principles are translated into actualwage decisions.

There is evidence of inconsistency betweenthe stability objectives of the central banksand past and current wage behaviour whichbears part of the responsibility for the conti-nuing high level of short-term interest rates.This can be shown by some simple calcula.tions. Under normal conditions, nominalwages per head could increase by anamount equivalent to the inflation target ofthe monetary authorities (2 to 3%, as notedabove) plus that part of the increase in pro-ductivity which can be distributed tolabour. In the present situation, the increasein productivity results only from a sheddingof labour in .excess of the decline in produc-tion and does not correspond to any distri-butable creation of wealth. At presenttherefore, nominal wages per head shouldnot increase by more than 2 to 3% a year.However, notwithstanding a recent substan-tial decline, current trends in some MemberStates and in the Community as a whole arestill higher than this figure thus giving causefor concern to monetary authorities.

The elimination of this conflict is a neces-sary condition for the return to growth inthe present situation, but once the Com-munity' s economy is again on a sustainedgrowth path, it will be important to ensurethat wages continue to increase in line withthe stability objective and the need to allowfor an increase in investment profitabilityand competitiveness (the rule of thumb of'productivity minus one percentage point'idenffied in Section 1.4.). It must be under-lined that these EC-wide prescriptionsshould give room for an appropriate dif-ferentiation according to Member coun-tries, regions and vocational qualifications.

6. Overcoming the recession

The first requirement that the policies to beimplemented must satisfy to overcome therecession is that of being consistent with theaim of the medium-term growth pattern.Within this framework, overcoming the

recession calls above all for a restoration ofconfidence. Business leaders, the workforceand citizens in general must be convinced

that the authorities will be able to correctthe present imbalances and maintain overmany years a sound and stable macroecon-omic environment.

This requires measures in both the macro-economic and structural areas. Macroecon-omic policy actions can rapidly change theenvironment in which businesses operatebut structural actions are essential to theimprovement in their confidence. Theeffects of structural policies will be feltessentially in the medium term, but deter-

mined actions are now vital in convincingeconomic agents that action is under waywhich will bring results later.

In addition it will be essential to give a newand visible impetus to the process ofcooperation at the international level.Rapid implementation of the provisions ofthe Maastricht Treaty, conclusion of the

Uruguay Round of trade negotiations, andbold new initiatives vlS-a-visthe countries ofEastern Europe and of the Third Worldwould be very important signals.

As soon as the recovery sets in, theeconomy will be able to reap fully the bene-fits of the structural adjustment which hastaken place over the last decade and of thecompletion of the internal market. Thesestructural measures bring .substantial effi-ciency gains which during periods of slowgrowth remain unexploited.

Improving rapidly the qualityof the policy mix

Lower interest rates constitute a powerfulinstrument to boost the Communityeconomy in the short term. Interest rateshave already come down significantly overthe last 12 months. However, given thedepth of the present recession they stillremain too high in many countriesespecially at the short-term end. Underthese circumstances, the first requirement isto create the conditions for further substan-tial reductions in short-term interest rates.This calls essentially for .expected budgetaryand wage developments to be kept in linewith the monetary authorities' stabilityobjectives. Any lowering of short-term ratesnot warranted by appropriate budgetaryand wage behaviours would risk beingoffset by expectations of higher future infla-

tion and higher long-term rates. On theother hand, if credible plans for budgetaryconsolidation and agreements leading tomore moderate wage increases were tomaterialize, expectations would be favour-ably influenced and central banks might beable to lower short-term interest rates inadvance of actual developments.

A substantiallowerlng of short-term interestrates throughout the Community wouldreduce tensions within the ERM and wouldimprove the financial position of firms andpublic budgets. The scope for reductions islarge: interest rates could come down sub-stantially in Germany if the appropriatepolicies are implemented while in othercountries the reductions could be evenlarger to the extent that interest rate dif-ferentials can be reduced. A further signifi-cant reduction would signal to economicagents that the worst is over, that monetarypolicy had been loosened as much as it waspossible and that nothing would be gainedby further postponing any investment deci-sion which may have been contingent onthe availability of the best financingconditions.

A lowering of short-term rates in the Com-munity would have a positive impact on thecompetitiveness of European enterprises.Together with the restoration of confidencethis would trigger an export/investment-ledcyclical upswing in the Community.

Budgetary policy

Action in the budgetary area depends on anassessment of the likely impact on demandand on business and consumer confidenceof changes in the present budgetary stance.In 1991 and 1992, Member States haveallowed budget deficits to deteriorate sinceit was considered that this would lend measure of support to domestic demand. Atthe beginning of 1993 additional efforts at

the national level took place in the frame-work of the Edinburgh growth initiative. Bymid- 1993 , however, Member States reacheda consensus 1 that no room for manoeuvrein the short term was available: anyadditional deterioration in budget deficitswas more likely to depress overall demand

1 EPC Opinion of8 July 1993 and EcoFin Councilconclusions of 12 July 1993.

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through its negative effect on confidencethan to support it. On the contrary, theyrecognized the need for concrete, crediblemedium-term consolidation programmes.

The immediate target of these programmesshould be to prevent further deteriorationin budgetary positions and to create theprospects of consolidation once therecovery sets in. The severity of the neces-sary adjustment will depend on the specificconditions of each Member State, butefforts in this direction are required almost all countries. In addition, all govern-ments should attempt to switch expenditureas far as is practicable, towards those itemswhich most directly influence growth pros-pects: education, R&D infrastructureinvestments, etc.

Wages

The previous section highlighted the exist-ence of an inconsistency between the infla-tion target pursued by monetary authoritiesand actual wage behaviour in many coun-tries. The sooner this inconsistency is elimi-nated, the sooner short-term interest ratescan be reduced. In some cases, howeverthe gap is so large that progress will inevit-ably take some time. Tripartite agreementsbetween the social partners and govern-ments should be exploited where possible.

Developing a broad social consensus

The continuation of the EMU process is akey element to secure a stable macroecon-omic framework enabling the achievementof higher, sustainable, growth. The Com-munity has long acknowledged the negativeinfluence exchange-rate instability has onbusiness confidence and there is a powerfulcase for arguing that the full benefits of asingle market can only be reaped in a mon-etary union. These considerations havebeen at the basis of the Treaty on EuropeanUnion and maintain their validity todaynotwithstanding the ERM crisis of the last12 months. A group of countries so closelyknit by a web of trade and financial links asthe European Community needs a stablemonetary environment both internally andexternally.

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To restore the credibility of the EMU pro-cess Member States must retheir commit-ment to this goal and back up their wordswith actions. Economic policy coordinationbetween the Member States must be mademore effective. This calls essentially for thedevelopment of a consensus as broad as

possible On the policy framework outlinedin this document and apportioning in eachMember State the efforts which will berequired from all parties (using social dia.logue procedures wherever possible). Thosein employment must be convinced that themeasures called for in this document willwork and that the solidarity they will showin accepting some sacrifices will effectivelyresult in those now deprived of gainfulemployment being given a real chance.Increased efforts to improve the situation ofthe public finances in order to meet the

criteria set out in the Maastricht Treaty willrequire an update of the convergence pro-

grammes which remain useful instrumentsfor the development of a debate leading tosuch a consensus. The guidelines for econ-omic policy aimed at dealing with deficienciesidentified in this paper should be agreed asamatter of urgency, if business confidence isto be restored.

A Community dimension

The success of such a policy course inrestoring growth depends, however, onvarious factors which are to a greater orlesser extent outside the control of policy-

makers; in particular business and con-sumer confidence and the performance ofthe Community s main trading partners. Itis very likely that given the severity of thepresent situation and the size of the budge-tary adjustment which will be inevitable inmany countries, that the recovery will bemodest and hesitant. This may call for anintensification of the Community initiativesagreed at the European Council meetings inEdinburgh and in Copenhagen. In a cli-mate of growing business confidencevarious Community projects, such as thetrans-European networks, lend themselvesto initiatives which can mobilize large fin-ancial resources, coming essentially fromthe private sector, to fmance useful projects.

- COMPETITIVENESS

Chapter 2

The conditionsfor growth and greatercompetitiveness

A. T awards globalcompetitiveness

For the level of employment in the Com-munity to improve, flrroS must achieveglobal competitiveness on open and com-petitive markets, both inside and outsideEurope. It is the responsibility of thenational and Community authorities to pro-vide industry with a favourable environ-

ment, to open up clear and reliable pros-pects for it and to promote its internationalcompetitiveness. This responsibility is nowenshrined in the Treaty on EuropeanUnion. Back in 1991 the Council of Minis-ters adopted guidelines for a Community in-dustrial policy geared to such an objective.

The globalization of economies and mar-kets, which involves the intensification ofinternational competition through the emer-gence of a potentially unique worldwidemarket for an expanding range of goods

services and factors, brings out the fullimportance of that responsibility on thepart of national and Community authoritiesas regards competitiveness. We mustincreasingly think in terms of competitive

rather than comparative advantages. Com-parative advantages traditionally relate toendowment in factors such as naturalresources and are therefore fairly rigid.Competitive advantages are based on morequalititative factors and can thus beinfluenced, to a large degree, by corporatestrategies and by public policies. In such acontext, factor mobility and the capacity tocombine factors effectively and to organizethe social consensus on the share-out ofvalue-added are becoming much more im-portant than the initial factor endowment.

The Community will be able to improve itsglobal competitiveness considerably provided

it achieves a substantial recovery in its invest-

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ment ratio (see Chapter 1). For this, it enjoyssignificant comparative advantages: thepotential of its labour force and the socialconsensus enabling that potential to beexploited, its valuable scientific and tech-nical know-how, its integrated market, thedensity and quality of its infrastructures, theimproved fmancial structures of its firmsand the diversity of its culture and regions.An economy based on the creation, dis.

semination and exploitation of knowledgewill be one of the dominant features of the2lst century, and against such a back-ground a number of these competitive fac-tors will playa crucial role in generating arecovery in growth and an increase inemployment.

The completion of the Europe-wide fron-tier-free market on 31 December 1992 andthe improvements in its operation envis-aged by the strategic programme will allowfirms to benefit from economies of scalereduce their administrative and financialcosts, have easier and more competitiveaccess to private-sector and public-sectorprocurement, and cooperate more effi-ciently with one another. This will give theCommunity a firm and well-organized basefrom which to tackle the new problemsposed by international competitiveness.

However, the Community will also have toovercome the handicaps which have contrib-uted to the erosion of its competitivenesswithin the Triad (Community, United Statesand Japan) in recent years: Apart from themacroeconomic policy imbalances thathave contributed to the real appreciation ofCommunity currencies, there is firstly, emphasized by the Member States, theproblem that their industries are not suffi-ciently well represented on expanding newmarkets, either in geographical terms or interms of products, with its firms sometimesat a disadvantage in the face of the domi-nant positions held by certain internationalgroups and the growth of strategic alliances.Secondly, the regulatory environment is stilltoo rigid, and administrative and mana-gerial traditions too centralized and com-partmentalized. Lastly, government policiesare often still too defensive and do not take

sufficient account of the new constraintsimposed by global competition.

Four overriding objectives must be pursuedjointly by industry and the authorities if theCommunity' s industrial competitiveness isto generate the highest possible level of

employment:

. Helping European firms to adapt to thenew globalized and interdependent com-petitive situation.

Exploiting the competitive advantages

associated with the gradual shift toaknowledge-based economy.

. Promote a sustainable development ofindustry.

. Reducing the time-lag between the pace of

change in supply and the correspondingadjustments in demand.

This chapter analyses the Communitystrengths and weaknesses when it comes totackling these challenges and then goes .to identify the main components of a policyof global competitiveness.

1. Views of the Member States

Among the factors having a major imp~cton the competitiveness of the Communityeconomy, Member States point particularlyto the following: the negative effects ofpublic deficits on investment; impairedfunctioning of the labour market leadmg whether in terms of cost, skills or flexibilityin the organization of work to a mis-

match between supply of and demand forlabour; inadequate assimilation of newtechnologies combined with failure toexploit properly the results of r~search ~ndtechnological development, leadmg t? dIffi-culties in concentrating the productiOn ofgoods and .services in leading-edge andhigh value-added industries.

A number of Member States report marketrigidities or distortions in res~urce all?ca-tion caused by government mterventiOneither through excessive regulation orthrough various restrictions on competition.Some Member States point to the heavierburden which the ageing of the populationis imposing on the economy, and oneMember State establishes a link betweencompetitiveness and the smaller number

hours worked on average in the Com-munity compared with its main partners.

2. The Community s competitiveposition in a globalizedeconomy: Strengths andweaknesses

Since 1989 the Community has experienceda gradual decline in the growth rate ?f thproduction of goods and servIces.Although the trend in its industrial competi-tiveness is also worrying, it does have con-siderable strengths on which it can draw inorder to redress the position and to manageits transition to the 2lst century success-fully.

Weaknesses

In the fierce competition prevailing onworld markets, Community industry ishandicapped by the deterioration in itscommercial competitiveness, by its failureto establish itself sufficiently on expandingnew markets, by an unduly low level ofR&D investment and by productivity rateswhich still lag behind those of its majorcompetitors. Most Member States agreewith this assessment.

(a) The trade performance of Communityindustry has deteriorated since 1980as the downward trend in the rate ofcover of imports by exports shows (see

Figure I).

Figure 1: Cover of imports by exports

140

130

120

110

100

Source: EUROSTAT

1 In the remainder of the text, the term 'industry' isused to cover the production of both goods and ser-vices.

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In recent years, Community industryhas not only lost market shares as aresult of the growing power of thenewly-industrialized countries, as wasforeseeable, but has also had to giveground to the United States of Americaand Japan.

The situation has deteriorated vis-a-viSthe USA because of the adverse trendof exchange rates. In the case of Japanthe reason is rather a failure to moveinto expanding new markets as quicklyas Japanese industry. The erosion in themarket shares of Community industryhas been accentuated by the growingproportion of world trade accounted

for by the newly-industrialized coun.tries of South-East Asia.

Community industry s trade perform-

ance is fairly uneven. A large part ofindustry (two thirds in terms of activity)lost market shares between 1986 and1991 , either as a result of increasedimport penetration of the Communitymarket or because of losses on theexport front, or through a combinationof the two.

(b) Community industry improved its posi-tion on markets experiencing slow growth(railway equipment, cotton, textile andsewing machinery, miscellaneous tex-tiles, tanning and dressing, animalslaughter and meat preparation, grain

processing and ethyl alcohol distilla.tion), while its performance deterioratedon markets with high value-added suchas office automation, information tech-nology, electronics, and medical andsurgical equipment. Its structure istherefore not yet geared to that expanding new markets. This time-lagis all the more damaging in that thesehigh-value-added markets are charac-

terized by rapid growth in the apparentproductivity of labour, high wages andsalaries, and a diffusion of techno-logical progress into other markets.

Apparent labour productivity in Communitymanufacturing still lags a good way behindthat of US and Japanese industry. There isno sign of any narrowing of the gap (ofmore than 10%) with the USA and, despitethe progress achieved, the gap between

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Europe and Japan is still around 40%.Closing this gap will necessitate in partic-ular a significant recovery in the investmentratio. Productivity growth plays a key rolein international competitiveness while, at

the same time, making for an improvementin domestic living standards. Both the leveland the growth rate of productivity must betaken into account. The factors influencingproductivity growth are technologicaldevelopment, investment the rate ofcapacity utilization, the size and skills of thelabour force, management skills, the organ.ization of production and the use ofresources such as energy and raw materials.

(c) Corporate investment in R&D is onearea in which the Community mustmake major efforts. In recent yearsannual average growth in R&D expen-diture has been highest in Japan (10%).

Next comes the Community (8.1%), fol.lowed by the USA (7.9%). The 1992break in the trend of corporate R&Dexpenditure in the Community (and inJapan) is very worrying in this respect(see Figure 2).

Figure 2: Growth of R&D expenditures

160

150

140

130

120

110

100

Source: DABLE

Strengths

However, Community industry can drawon major strengths to help it adapt to thenew conditions of world competitiveness. Ithas a low level of indebtedness, and itsprofit margins are comparable to those ofits competitors. It has been able to restruc.ture itself in step with the moves to establishthe single market. Its labour force is highlyskilled. It has a high density of efficientinfrastructures.

(a) Community firms have kept control oftheir level of indebtedness in recent

years, albeit at the cost of some ageingof their capital stock. Their indebted-ness is at present much lower than thatof their competitors. Community firmsare thus comparatively less vulnerableto any increases in interest rates, butthey will also benefit comparatively lessfrom further interest-rate reductions(see Figure 3).

Figure 3: Indebtedness of firms

USA

Source: DABLE

Japan

Japanese firms too face major problemsin adapting to the decline in consump-tion and to the adverse effect of the

strengthening yen on the volume oftheir exports.

(b) When the competitive environmentbecame tougher at the end of the 1980sCommunity and US firms cut theirprofit margins significantly. Japanesecompanies, which traditionally operatewith smaller profit margins than theirCommunity competitors, also saw theirprofit margins squeezed, albeit to a

lesser extent. These developments havehad the effect of narrowing the gapsbetween these three trading blocs (seeFigure 4).

However, in both Europe and theUnited States, profit margins differappreciably from one market toanother, much more so in fact than inJapan. In Europe, industries facing rel-atively little international competitionstill achieve high profit marginswhereas in industries more exposed tointernational competition profit mar-

gins have shrunk to worrying levelsand, in some cases, have actually disap-peared.

Figure 4: Trend of profit margins

- E:(;w.

n JJ\f'J\/-L.

Source: DABLE

(c) Labour costs are an important elementunderlying the competitiveness of Euro-pean industry, though by nO means theonly one. Unit labour costs depend onwage and non-wage costs comparedwith labour productivity. Thus highlabour costs can be compensated for byhigh productivity to maintain competi-tive advantage. It is when costs are notaligned with productivity that problemsfor competitiveness arise. In relativeterms, the large rises and falls in unitlabour costs compared with those of theUnion leading competitors whichhave taken place since 1980 have beenreflected by fluctuations in bilateralexchange rates between the ecu and theUS dollar and yen.

Labour costs affect competitiveness dif-ferently with regard to other developedcountries and to those in the process ofindustrialization. Non-cost items suchas quality, delivery, design and cus-tomer focus can assist in maintainingcompetitiveness but attention torelative costs, including labour costs

remains important. Compared withnewly industrializing countries, particu-larly those just entering that path suchas China, the differential in labour costis too great for any significant employ-ment gains to be made in Europe fromwage reductions in manufacturingindustry. Only high productivity andsuperior products will enable Europe tomaintain a competitive advantage.

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3. The main lines of a policy ofglobal competitiveness

fa) Helping European firms to adaptto the new globalized andinterdependent competitivesituation

In the wake of the globalization of econ-omies and markets, it is no longer possibleto divide industry and geographical areas intoclearly identified and relatively independentsegments. European firms are engaged inproduction both within the Communityand on third markets. Their competitorsincreasingly have subsidiaries in the Com-munity. There is a multitude of inter-national agreements between firms: morethan 400 international strategic allianceshave been entered into by large firms ineach of the last five years.

European firms have to compete with inter-national, polyvalent groups. The bound-aries of traditional industrial sectors arebecoming less and less sharply defined.This is particularly evident in the sphere ofmultimedia' activities. Firms engaged in

telecommunications information tech-nology, consumer electronics pro-gramming and network management com-bine and come together in extremely com-plex groups and alliances which will verylargely determine the creation and distribu.tion of assets, including cultural assets, overthe next decade on expanding new marketsof key importance for the future.

Industrial globalization means that new bal-ances must be sought between competitionand cooperation. Four avenues are particu-larly important in devising a policy of

global industrial competitiveness:

(i) Capitalizing on the Community's indus-trial strengths, so as to safeguard pro-ductive and innovatory capacities aswell as a diversified, job-creating

industry that is spread throughoutEurope, particularly on markets with ahigh.growth potential, such as healththe environment, biotechnologiesmultimedia activities and culture. Thisaspect must take account of changes

stemming from the globalization ofmarkets, production and operators and

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from the industrial policies of theCommunity' s main competitors.

(ii) The development of an active policy ofindustrial cooperation, notably with thetransition economies of EasternEurope and with the high-growth econ-omies along the Pacific rim. As far asthe countries in Eastern Europe are con-cerned, much closer industrial cooper-ation is necessary in order to ensure

simultaneously a rapid modernization

of their economies

, .

a better division oflabour within Europe and optimumexploitation of mutual interests.Cooperation must be based on closerlinks between public support and pri-vate initiatives and on speedier pro-gress in establishing the legal frame-

work, investment conditions and guar-

antee arrangements which our firmsrequire. For the industries concernedthis could be accompanied by a transi-tional period to allow the necessary

structural adjustments to be carried outunder the best possible conditions. Asfar as the Pacific area is concerned

increased market penetration by Euro-peanfirms can be greatly facilitated byconcerted efforts on the part of the

public authorities to remove the regula-tory, administrative and indeed cul-tural obstacles which have hithertoimpeded or deterred such penetration.

(iii) The establishment of a coherent andconcerted approach to strategicalliances, the uncontrolled develop.ment of which could result in the cre-ation of oligopolistic situations prejudi-cial to competition at world level. Thegrowing number of industrial and tech-nological alliances will have an impacton all markets. These effects must con-sequently be assessed simultaneouslyand in a concerted manner by the com-petent authorities pending the intro-duction of appropriate internationalrules, particularly in the competitionfield, so that the Community is notplaced at a disadvantage by the strictrules it imposes on itself in this connec-tion. In addition, Community firmsmust be able to rely on flexible instru-ments of cooperation, in legal and taxmatters as well as in others, to allow

them to enter into the alliances that arenecessary to counterbalance the weightof some oftheir US and Japanese com-petitors.

(iv) The targeting of measures to removeobstacles to the smooth functioning ofmarkets in areas that severely penalizeEuropean firms' sales and growthpotential. European firms ' capacity forexporting to, and setting up in, other

countries is sometimes far from beingfully exploited because of the .difficul-ties stemming from the structuralimpermeability of certain markets. Pin-pointing such barriers to growth andintroducing specific measures to removethem may help significantly to improveCommunity industry opportunitiesfor selling its products on the marketsconcerned. This could be modelled, forexample, on the 'trade assessmentmechanism' set up with Japan to iden-tify the nature and causes of the Com-munity s poor trade performance inJapan in those sectors in which Com-munity industry is in a strong competi-tive position at international level.

(b) Exploiting the competitiveadvantages associated with thegradual shift to aknowledge-based economy

The wealth of nations is increasingly basedon the creation and exploitation of knowl-edge. Optimum advantage must be taken ofthis new form of progress available to Com-munity firms since it is an area in which theCommunity enjoys a substantial head start.

The shift towards a knowledge-basedeconomy is reflected in particular in theexternalization of certain activities byindustrial firms and by the faster growth ofservices. It does not mean that manufac-turing industry is declining in importancesince this sector is at the very heart of thisdevelopment and continues to determinethe overall competitiveness of the produc-tive system.

The key elements in competitiveness that arenow of greatest importance are no longerconfined to the relative level of the directcosts of the various factors of production.

They include in particular the quality of

education and training, the efficiency ofindustrial organization, the capacity tomake continuous improvements in produc-tion processes, the intensity of R&D and itsindustrial exploitation, the fluidity of the

conditions under which markets operatethe availability of competitive service infra-structures, product quality and the way inwhich corporate strategies take account ofthe consequences of changes in society,such as improved environmental protec-tion.

Even more crucial is the capacity to incor-porate all of these elements into coherent

strategies. Between 75% and 95% of firmstotal wage and salary bill is now accountedfor by functions linked to organizationrather than to direct production, forexample information technology, engin-eering, training, accounting, marketing andresearch. Organizational capacity is thus oneof the key components of a firm s competi-tiveness.

A number of these factors, such as training,research and services, may be groupedtogether under the heading of 'non-physical'(i.e. knowledge-based) investment, to whichgovernment policies must in future accord atleast the same priority as they do to physicalinvestment. This type of investment becoming the key element in bringing aboutgrowth that is durable, creates skilled jobsand is economical in its use of resources.

This does not entail any increase in publicdeficits, but it does presuppose far-reachingreforms:

. As regards taxes: The relative weight oftaxation borne by the various factors ofcompetitiveness should be adjusted in sucha way as to reduce those components oftaxation which act as employment disin-centives and to increase those conduciveto more efficient and less polluting useof scarce resources.

. As regards the criteria governing the useof national and Community financialinstruments: There should in particularbe a review of the criteria governing theadmissibility of aid to industry, whichunder most existing schemes, encouragesfirms to increase the capital intensity ofproduction and to boost their physical asopposed to their non-physical invest-

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ment in order to improve productiveefficiency. The aim should be to takefuller account of the creation of value-added and the non-physical content ofgrowth.

. As regards the priorities governing the useof public funds: Investment in training,research, the promotion of innovationand, generally speaking, the non-phys.ical components of value-added must betreated at least as favourably as tradi-tional forms of investment. The aimshould be twofold: to promote the emer-

gence of new generations of products thatmake optimum use of all the techno-logies available on the world marketand to encourage the dynamic incorpor-ation of innovation into processes, prod-ucts and organization. An essential pre-condition is that there should be increase in research activities by Com-munityfirms and greater selectivity ingovernment assistance.

. As regards the regulatory framework:More must be done to ensure the effi.cient operation of the single market, not-ably by streamlining and rationalizingrules and regulations so as to make easier to establish new forms of labourorganization and to move away fromTaylorism . A policy that focuses onquality and is consistent with the Com-munity' s approach to standardizationmust be pursued in order to exploit theknow-how of Community firms andavoid market fragmentation.

(c) Promote a sustainabledevelopment of industry

A policy of pollution prevention, in partic-ular through a generalized development of

clean products and processes, will not onlyprevent rapidly increasing clean-up costsbut also stimulate a faster diffusion of R&Dresults. The first-mover advantage that willresult will contribute to a strengthenedoverall competitiveness of Europeanindustry.

The significance of the so-called Eco-industry as a quickly expanding industrialmarket is now widely accepted andaccording to 0 ECD studies, will expandconsiderably this decade. It covers not only

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the supply of goods and services to flfroSfor pollution control or abatement but alsothe expenditures made for the environmentin the general context of improved produc-tion methods or products, as well as the

markets for environmentally-sound prod-

ucts (green products).

In the present context of global competi-

tion, the technologies employed in, and theorganizational requirements for, the suc-cessful introduction of clean technologies

are often similiar to those associated with

the new manufacturing paradigm. The con-cept of lean (e.g. less energy, fewer rawmaterials) constitutes a significant improve-ment regarding the environmental friendli-ness of production processes and fosters thecompetitiveness of the industries concerned.

Moving beyond production processes toproduct markets provides an additionaldimension for industrial competitiveness.

Markets for environmentally-sound prod-

ucts provide an incentive for flrroS sincethey represent in any case a source of

potential profits. As stricter environmentalrequirements are imposed on export mar-kets, the application of clean technologiesbecomes a condition of access to thesemarkets.

To promote the sustainable development ofEuropean industry, the Community should:

(i) increase substantially and coordinateR&D efforts in the field of clean tech-nology;

(ii) develop economic incentives to supportthe diffusion of R&D results into prod-ucts and processes.

(d) Reducing the time-lag betweenthe pace of change in supply andthe corresponding adjustments indemand

As in the case of previous industrial revol-utions, there is an appreciable time-lag bet-ween:

. changes in supply, where faster moderni-zation is now under way through the useof increasingly efficient technologiesresulting in a rapid increase in labour

productivity and thus releasing substan-

tial human resources;

. changes in demand, which are laggingbehind changes in supply because ofcumbersome rigidities in income distri-buti~n, in modes of consumpt~on, in therelatiVely low level of receptiveness toinnovation within the Community, in thegeographical structure of growth and inthe unsatisfactory functioning of mar-kets.

It is imperative that an attempt be made toreduce this time-lag so as to make optimumuse of the human resources released as aresult of the increasing productivity of the

productive system. This can be done only byhelping to broaden the sales opportunitiesfor Community industry through policiesgeared simultaneously to demand, tosupply and to improving the interactionbetween them.

On the demand side, this means:

. Pursuing initiatives aimed at speeding upa concerted recovery in .consumption atworld level and helping to bring about arevival in demand for Communityindustry. The asymmetries stemmingfrom the continuing large differences inthe degree of openness of markets as bet-ween the most open areas, foremostamongst which is the Community, andthose which, for structural or politicalreasons, remain largely protected arereflected in a chronic growth deficit atworld level. Resolute support for initia-tives to bring about a concerted recoveryin demand and for the opening-up andindustrial modernization of the protectedcountries is essential in order to make this 'shortfall' in growth.

. Looking at the various measures liable topromote the emergence of new markets for

goods and services. This is a reference particular to those markets geared toimprovements in environmental protec-tion (on which Community firms areparticularly competitive), to the exploita-tion of biotechnologies and to the cre-ation, management and dissemination ofinformation. In this respect, the emer-gence of ' multimedia' activities thatexploit the scope afforded by the digital-ization of information in all its forms(written word, image and sound) willengender major upheavals that will ben-efit those firms and economies capable

of establishing themselves on these newmarkets. I

On the supply side, we must:

. Encourage continuing structural adjust-ment in Community industry. This meansfacilitating privatization processes whichcan, in large measure, help to speed upsuch adjustments.

Col1lI!1unity industry has not sufficientlyexplOited all the opportunities affordedby the rapid growth of markets in Asia

and Latin America.

. Underpin the dynamism of SMEs. It isclearly more difficult and relatively morecostly for SMEs than for very large flrroSto find their proper place in the glo-

balized economy, to have access toworld technological capital and to availthemselves of the most sophisticatedmanagement techniques and businessservices. The policies in support ofSMEs must, therefore, take account ofthese new constraints and be strength-ened accordingly.

Lastly, better interaction between supply anddemand must be strongly encouraged by:

facilitating partnerships between largefinnsand their subcontractors. Effectivecooperation between component assem-blers and suppliers is one of the essentialpreconditions for reducing the totaltime involved in innovation, optimizingR&D expenditure, reducing overheadsensuring the technical homogeneity oproducts and improving product quality.The steps already taken in this directionby industry are proving extremely posi-

tive and deserve increased support fromthe public authorities;

. improving the interfaces betweenprodu-cers and users. Although wide-rangingthis objective is of particular importancfor research if more rapid and more sen-sitive account is to be taken of marketrequirements in RTD policies and ifthere is to be greater complementaritybetween Eureka and the Communityresearch programmes. The research

I See the chapter on ' The information society'

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effort, which is insufficient overall, must bestepped up, become more focused and bemore effectively exploited as regards itsapplications. Ensuring the broadest possibledissemination of information and facili-tating contacts between all those involvedthrough the establishment of multidiscipli-nary cooperation are both necessary inorder to foster not only competition in thedevelopment of technologies but also effec-tiveness in exploiting them;

stimulating the development of ' clustersof competitive activities that draw on theregional diversity of the Community. Theproliferation within the Community ofclusters' that combine industrial , techno-logical and geographical advantagesmay hold one of the keys to job creation.This requires the active involvement ofall the actors concerned, somethingwhich can be greatly facilitated by struc-tural measures taken at Community andnational level. In this area, as in thepreceding ones, the main emphasis shouldbe on a horizontal, transsectoral andmultidisciplinary approach.

These guidelines are summarized in theattached table.

Conclusion

So as to establish the bases for such a policyof global competitiveness and ensure that

its positive effects on employment comethrough as rapidly as possible, the Com-mission proposes that the EuropeanCouncil adopt the following objectives and

guidelines:

(i) Government intervention in industrymust be refocused on horizontal mea-sures and on growth markets wherethere is strong potential for Europeanindustry to develop, such as health

the environment, biotechnologiesmultimedia activities and culture. Thisalso means that precise and short-termdeadlines should be set for restruc-turing activities whose developmentprospects are not satisfactory in termsof markets.

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(ii) The machinery and criteria for govern-ment intervention that creates conflictbetween the promotion of industrialcompetitiveness and job creation mustbe reviewed. In so doing, the taxburden must be redistributed so as tolighten the burden on labour andincrease the burden on the use ofnatural resources. The criteria forgranting public assistance must bereviewed so as to take better account ofvalue-added and so as not encourage an unjustified increase inthe capital intensity of production. Theregulatory framework must be trans-parent, stable and predictable.

(Hi) The promotion of non-physical, knowl-edge-based investment must be madethe top priority of the general policy insupport of investment. Training,research and know-how in generalmust be treated as proper targets ofinvestment in their own right. The nec-essary consequences should be drawnnotably as regards changes in tax andaccounting rules.

(iv) A dynamic policy of industrial cooper-ation must be set in motion, starting

with the countries of Eastern Europeand with the Pacific area. The detailsof such a policy must be established asa matter of urgency in collaborationwith the private-sector and public-sector operators concerned, on thebasis of clearly identified mutual andreciprocal interests.

(v) Measures must be taken shortly tostrengthen the competitive functioning of

markets. A European approach shouldbe developed that takes account of theproliferation of strategic alliances, par-ticularly in the field of competition, soas to prevent the development of domi-nant positions at world level.Machinery for pinpointing problems

in the functioning of markets and forassessing their industrial implications

must be set up so as to identify andtackle rapidly the obstacles facingEuropean firms against the backdropof global competition.

(vi) The coordination of moves to facilitate arevival in consumption and reinforce the

interaction between changes in supplyand demand at both international andCommunity level must be strength-ened. Priority should be given toemploying all the resources availableand in particular structural policies, inorder to speed up the development ofclusters of competitive activities thatdraw on the Community s regional

advantages. The networks for collabor-

ation between operators (SMEs andlarge firms, producers and userspublic and private actors) must beimproved along multidisciplinary andmultisectoral lines. Lastly, there mustbe a European policy on quality thatcomplements the policy On standardi-zation and is geared to promoting acti-vities with a high value-added.

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Guidelines for a policy of global competitiveness

Objectives Means

1. Helping Europeanfirms to adapt to thenew globalized andinterdependentcompedtive situation

capitalizing on the Community s industrial strengths

. developing an active policy of industrial cooperation

establishing a concerted approach to strategic alliances

targeting measures to ensure the competitive functioning ofmarkets

2. Exploiting thecompeddve advantagesassociated with thegradual shift to aknowledge-basedeconomy

. reforming tax policies so as not to create employment disin-centives and to promote incentives for the efficient use ofscarce resources

. developing a policy to encourage ' non-physical' investment(training, research, technical assistance)

bolstering policies to streamline and rationalize rules andregulations

. reviewing the criteria governing the use of public instrumentsin support of industry so as to enhance their impact on thegrowth of value-added and employment

. launching a European policy aimed at quality

3. Promote a sustainabledevelopment of

industry

. increase substantially and coordinate R&D efforts in the fieldof clean technology

. develop economic incentives to support the diffusion of R&Dresults into products and processes.

4. Reducing the dme-lagbetween the pace change in supply andthe correspondingadjustments in demand

Demand-side measures:. pursuing initiatives aimed at facilitating a concerted revival in

consumption at world level. promoting the emergence of new markets

Supply-side measures:

. encouraging continuing structural adjustment by supportingprivatizations

. underpinning the dynamism of SMEs

Measures to improve the reladonship between supply and demand:

facilitating partnerships between large firms and their subcon-tractors

. improving the interfaces between producers and users

establishing collaboration networks so as to develop clustersof competitive activities

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B. Making the most of theinternal market

The agreement under the Single EuropeanAct to establish an area without internalfrontiers in which the free circulation ofgoods, services, capital and persons ensured represents the single most impor-tant step that the Community has madetowards a rational economy and greaterprosperity. Ensuring that this ambitiousobjective is translated into practical reality

an essential condition for economic growth,competitiveness and employment in theCommunity.

The Community has met most of the originaltargets which it set itself for the establish-ment of a single market. The one out-standing failure to date is the maintenanceof physical controls on the free movementof people, although the economic impact ofthis gap may be limited as the most econ-omically-significant parts of Communitylegislation in this area, i.e. recognition ofthe right of establishment and of pro-fessional qualifications, are already inplace.

The establishment of genuine singlemarket in the Community is not, howevera matter of once-and-for-all enacting Com-munity legislation within a deadline. It is acontinual process of ensuring that, as far aspossible, a single legislative framework gov-erning economic activity is enforced andwhere necessary, developed in a coherentway within a continually changing environ-ment. The decisions of individual enter-prises and citizens are the hard core of aworking single market. The challengebefore the Community now is to make surethat they are not hindered from taking fulladvantage of it and to respond quickly to

any signs if it is not working well.

Views of the Member States

Making the most of the opportunitiesoffered by the single market is perceived inthe Member States' contributions as one ofthe keys to making the European economymore competitive. Liberalizing sectors thathave not yet been opened up to competi-tion (energy and telecommunications in

particular), developing standardization incertain areas, monitoring the application ofsingle market legislation more closely,removing tax barriers and harmonizing cer-tain taxes are seen as priorities. SeveralMember States stress the need for the singlemarket to create a propitious businessenvironment; in this context, they suggeststreamlining existing administrative rulesand procedures, carrying out cost/benefitanalyses before going ahead with new mea-sures, and studying ways and means ofreducing the cost of red tape for businesses.

4. The development of a strategicprogramme

The Commission has therefore decided topublish in parallel with this White Paper astrategic programme for the internal marketwhich provides a comprehensive view ofpriorities for action in this area and whichwill serve as a ' road map' for the develop-ment of the single market.

The strategic programme contains threeparts :

(a) Completing the legislativeprogramme

The Commission will press for early deci-sions on the limited number of measuresidentified in the 1985 White Paper whichhave not yet been agreed, as well as on newproposals aiming at securing the free move-ment of people.

It has to be recognized that the internalmarket is not yet a reality in certain sectorswhere national legislation and the grantingof exclusive rights deny access to themarket and prevent competition in anyform. For energy, telecommunications andpostal services, for example, proposals havebeen made but these may have to be streng-thened in order to achieve liberalizationwhile ensuring that public policy objectivessuch as 'universal service , are fully realizedwhere appropriate. Further liberalization ofthe transport sectors is also needednotwithstanding the considerable progress

in recent years.

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(b) Managing the Community area

This part of the programme is intended toensure that the necessary arrangements arein place to permit adopted legislation to beapplied effectively and efficiently, so thatindividuals and enterprises will be able totake full and fair advantage of the possi-bilities which the internal market offersthem. This is not a bureaucratic exercise. Itis a joint effort by the Community MemberStates and enterprises to avoid unnecessarycosts, to ensure fair competition, to buildup the confidence of both producers and

consumers ~ a condition for economicrecovery ~ and to guarantee that the singlemarket is a practical reality.

The main priorities are effective control ofnational transposition of Community law, areinforcement of administrative cooper-

ation between Member States in theapplication and enforcement of Com-munity law, notification procedures to pre-vent the emergence of new barriers to freemovement the auditing of nationalenforcement measures and measures tofacilitate legal redress where Communitylaw is infringed.

The need for administrative cooperation alsorequires the establishment of an efficientreliable and user-friendly system of com-munication and data exchange betweenadministrations. Until it is operational

unnecessary costs resulting from inefficientadministration will be borne by theeconomy as a whole. What is called for is:

(i) an accelerated, progressive and wide-ranging introduction of an electronicmail network;

(ii) a high degree of coordination betweenthe 13 administrations involved;

(iii) a series of flanking measures in orderto facilitate the operational use andfurther development of the network.

It is proposed that this initiative to establishan effective communications network - anew trans-European network for effectiveadmiJrlstration be taken by the Com-munity public authorities quickly in orderto facilitate the priority objective of the effi-cient management of the internal market

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while contributing directly to reduced costsfor business and the citizen.

(e) Developing the single market

A dynamic view of the single market is nec-essary for the Community' s achievement tobe sustained and preserved. The third partof the strategic programme aims to ensurethat the internal market can develop to meetnew needs and to launch new initiatives toensure that a continental-scale open marketis fully realized. Not all such initiatives willbe of a legislative nature; they also includeclose cooperation between the Commissionand the Member States, and between publicauthorities and the private sector.

The following objectives are identified in thestrategic programme as essential for thispurpose:

(i) improving the evaluation of the effec-tiveness of Community rules including,when appropriate, the need to simplifythem;

(ii) providing a more favourable environ-ment for business. This is the centralpart of the programme, includinginitiatives to ensure greater competi-tion, protection of intellectual prop-erty, cross-border payments and directand indirect taxation, standardization

and quality policy and a package ofmeasures designed to assist small andmedium-sized enterprises to operatemore effectively. The resoluteimplementation of competition policyand control of State aids is one of theessential elements to ensure a greaterflexibility of the system in order toincrease competitiveness;

(iii) promoting the development of trans-European networks;

(iv) ensuring that the development of theinternal market is sustainable. Thecommitment to 'sustainable and non-inflationary growth respecting theenvironment' in the Treaty on Euro-

pean Union must be reflected byaction at Community level to ensurethat measures taken to protect the

environment are fully effective andcompatible with a single market.

(v) ensuring a secure environment for thecitizen, the employee and the con-sumer;

(vi) greater transparency in preparing anynew Community legislation, if it wereshown to be needed.

5. The impact of the internalmarket on growth, competitive-ness and employment

It is impossible today to assess the fulleffect of all the measures designed to bringabout a single market because they are notyet fully in force. Although the internalmarket has not reached its full potential, itscredibility and irrevocability have exertedprofound effects on business behaviour. Onaverage, econometric calculations show thatthe contribution of integration to economicgrowth has accounted for around 0.4% peryear in the period 1986 to I 992.

The following indications also suggest thatthe internal market is acting as the catalystfor a shift in the competitive environment tothe benefit of the consumer and of greaterprosperity in the years ahead:

(i) the removal of border formalities isfacilitating cross-border tradealthough internal market legislation toincrease access to public procurementmarkets and to remove technicaltrade barriers have yet to make theirimpact widely felt;

(ii) the importance of intra-Communitytrade as a share of total trade hassteadily increased (the share ofimports rising from 53.4 to 59.3% ofthe total between 1985 and 1992, andexports from 54.9 to 61.3%);

(iii) the removal of controls on capitalmovements has allowed for a markedincrease in the degree of integration

of some Member States into interna-tional capital markets, which willfacilitate cross-border investment andease credit restrictions in someMember States which had contributedto higher costs of capital in those

countries. Free capital movement alsorepresents a precondition for effective

liberalization of Community financialservices markets. Direct investment

through mergers and acquisitions inother Member States has increasedsharply, the number of cases risingfrom 2 190 in 1987 to 4 553 in 1992;

(iv) the establishment of the internalmarket has been accompanied by asurge in intra-Community foreigndirect investment, which has beenheavily concentrated in those sectorsmost directly concerned by internalmarket liberalization;

(v) the internal market programme hasalso attracted considerable interestfrom overseas investors, particularlyon the part of US, Japanese, andEFT A companies;

(vi) part of this investment has taken theform of a wave of cross-border mer-gers and acquisitions, which con-stitute a strong indication of com-panies' intentions to set up theirpresence on partner country markets;

(vii) in banking and insurance sectorswhere obstacles to cross-border tradewere particularly pronounced, there isevidence of a profound change in thenature of cross-border competition

reflected in a growing number ofbranches and outlets in other Com.munity countries and in an increasingshare of national insurance markets

held by partner country producers;

(viii) portfolio investment in the MemberStates coming from other parts of theCommunity has increased signifi-cantly (between 1983 and 1990 itincreased by five times in the UKdoubled in France and increased byone and a halftimes in Germany);

(ix) there are indications that the removalof non-tariff barriers is already facili-tating intra-Community commerceand competition in the sectors mostaffected by the internal market pro-gramme (transport goods, electricalengineering, COnsumer electronics,office equipment, machine tools).Statistics which suggest that such anevolution is taking place are the

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increase in the proportion of aMember State trade which directed towards other Communitycountries, and the increasing share ofnational consumption which is metby intra-Community imports. Thisdevelopment implies increasedpresence on national markets and, byextension, greater competitive disci-pline on domestic enterprises.

In accordance with the Council resolutionof 7 December 1992 on making the singlemarket work, the Commission will be con-ducting a study from 1994 to 1996 on theimpact of the single market, a period inwhich the relevant Community legislationwill be more widely applied. This study willfocus on individual sectors as well as on thepossible macroeconomic effects.

6. Supporting the development

SMEs so as to make the internalmarket fully effective

For many SMEs, completion of the singlemarket means a change in the environmentin which they operate, although they do notalways see any scope for actively exploitingthe new opportunities available because ofthe lack of a European or international

framework for their markets or productionprocesses.

Unless the confidence of SMEs in the pros-pects opened up by the single market isrestored, an important potential for growthwill go unexploited. The Community musttherefore devise a back-up strategy designedto make it easier for businesses, particularlySMEs, to adapt to the new requirements ofcompetitiveness and thus ensure that econ-omic operators are properly mobilized insupport of growth, competitiveness and

employment. SMEs playa crucial role inthe link between growth and employment.On the usual definition of SMEs (fewerthan 500 employees), they provide morethan two thirds of Community employment(70. , of which 29% is accounted for byfirms with fewer than 10 employees) andgenerate more than two thirds of Com.munity turnover (70.3%) and between 65and 85% of value-added in those countriesfor which data are available. They are con-sidered to be the greatest potential job cre-

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ators. In qualitative terms, SMEs playamajor role in providing young people withtheir flfst jobs, thereby being instrumentalin the training of the labour force, and theyalso help to provide productive employ-

ment for the less sought-after categories ofindividuals on the labour market since theyrecruit disproportionately large numbers ofyoung people, women and unskilled wor-kers and operate wage and productivitystructures of their own.

However, the rate of SME failures, whichaccording to certain indicators, s~ems to beon the increase in most Member States, is aworrying factor as regards the maintenanceand growth of total employment.

Analysis/assessment

However, SMEs are not short of strengthsthat can help them cope with the changes inthe economic situation in the Community,notably the recession in the Europeaneconomy and in the other developed coun-tries.

The strengths of SMEs are, firstly, their

presence on expanding new markets (acti-vities less vulnerable to international com-petition, the service sector, market nichesthe development of particularly innovatorytechnologies) and, secondly, their internalorganization (flexibility due to the dispro-portionately high level of recruitment of

certain labour-force categories, notably

young people and women, and the greaterwillingness to adapt working conditions asand when necessary).

The weaknesses of SMEs will be determinedby their structural capacity to deal with the

complexity of the administrative and legisla-tive environment (administrative and legisla-tive requirements, including those per-formed on behalf of the authorities, such asVAT formalities and the deduction atsource of employees' taxes and socialsecurity contributions; the introduction ofnew environmental or social security rulesand a new standardization/certificationsystem as part of the arrangements forimplementing the single market; barriers tothe carrying-out of certain activities, not-ably in the service sector along the dividingline between market and non-market ser-

vices); to overcome financing difficultiesdespite the increase in the number anddiversity of the financial instruments avail-able to firms; to come to terms with the com-plexity of managing a firm and to developstrategic policies, a problem which stems inparticular from the fact that in small busi-nesses most management functions are per-formed by the head of the business himselfeven though he does not always possess thenecessary specialized skills and knowledgeand that he has to switch between the pro-duction function and the managementfunction.

7. Views of the Member States

In the contributions they sent to the Com-mission for the purpose of preparing the

White Paper, most Member States high-lighted the priority they give to measures toassist the activities and development ofSMEs. Suggestions were made forimproving access by SMEs to sources offinancing, the results of research, andtraining. Other suggestions concerned sup-port aimed at facilitating subcontractingand cooperation between SMEs and theirparticipation in information, advisory andcooperation networks. Some MemberStates also emphasized the need for simpleradministrative procedures and formalitiesincluding those relating to social security,labour or tax rules, and for arrangements topromote job creation by SMEs. This showsthat the Member States are aware of theneed to step up their current efforts, whichthe Community could support through theaction programme adopted on 14 June.However, to meet the expectations ofMember States and firms, a mass effectmust be sought, in partnership with theMember States, so as to enhance the effec-tiveness, coherence and visibility of the mea-sures in support of SMEs. In this context, anumber of specific measures can be laun-ched by the Community under an inte-grated programme.

8. Proposals and remedies

In the light of the above assessment, it isessential to identify a series of back-upmeasures which the Community shouldlaunch with the broad aim of takingaccount of SME requirements within the

single market, bearing in mind the need toincrease competitiveness.

The general objective of such measuresshould be to integrate SMEs more closelyinto the single market so as to underpin theircompetitiveness as they take up the nationalCommunity and international challengesfacing them, with the accompanying dualaim of (i) helping to preserve the number of

jobs in the Community by supportingexisting SMEs and assisting with therenewal of the productive base, and(ii) increasing the number of jobs by sup-

porting firms with a high-growth oremployment potential.

To help enterprises face up to the dual chal-lenge of growth and competitiveness, on theone hand, and employment, on the otheran enterprise pact for employment could beproposed.

As part of an integrated programme, suchmeasures would be grouped together undertwo headings:

(a) Making credible in the short termthe potential available to SMEs inthe single market

Restoring the confidence of firms prior toencouraging them to increase their competi.tiveness and job-creating capacity requires

two types of action:

(i) Identifying and alleviating the constraints

of a tax, social security, administrativefinancial or other nature that hamperthe establishment or continued opera-

tion of SMEs

Concerted action with the Member Statesand the organizations representing SMEscould be proposed with a view to examiningexisting legislation that impedes the creationand development of businesses; actioncould be taken to exchange iriformation onbest practices for simplifying and harmoni-zing legislation and to devise improvementsin priority areas (for example, paymentterms, taxation and the transfer of busi-nesses ).

In view of the difficulties which socialsecurity and labour provisions pose forSMEs, particular attention should be

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focused on these aspects, both in terms ofthe rules applicable and in terms of simpli-fying their application, including the provi-sion of information, so as to promote moreflexible use of the workforce, particularly

by very small businesses.

(ii) Improving the financing of firms

In this area, which is of crucial importancefor SMEs, the first aim should be to givepractical effect to the renewed cal.ls by theHeads of State or Government for anincrease and improvement in the financialresources made available to SMEs (Edin-burgh and Copenhagen facilities, and Brus-sels decisions). Steps should also be takento improve relations between financialinstitutions and SMEs, paving the way formore generous allocation of private financeto SMEs and broader use of the most appro-priate financial instrnments.

(b) Exploiting the dynamics of thesingle market in order fo boostcompetitiveness in the mediumterm

(i) Supporting cooperation between flfms

The Community could step up its efforts tofoster cooperation between firms by pro-viding financing beyond the first stage of thesearch for partners. It has already takensteps aimed mainly at encouraging thesearch for partners and initial contacts be-tween entrepreneurs, but in many casesappropriate back-up (at national or

regional level) for a given period wouldmake it possible to follow up developmentsin a way that could increase the scope forcooperation between SMEs.

Another means of fostering cooperation

would be to provide support for participa-tion by SMEs in enterprise networks aimedat introducing flexible and specialized pro-duction systems. This concerns in particularthe networking of subcontracting firms inthe face of the threats posed by the majorchanges taking place in their relations withtheir main customers.

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(ii) Improving the quality of management inSMEs

A key factor in safeguarding the competi-tiveness of SMEs and hence their long-termemployment potential is an improvement inmanagerial skills in order to remedy thestructural weaknesses of SMEs. The mea-sures already taken in this field could bemade much more effective if coordinatedaction on the part of all intermediariesplaced emphasis on a number of key areasso that SME managers could become awareof the changes they need to make in theirrole.

There is a need to foster, in cooperationwith the Member States and chambers ofcommerce and industry, a demand for infor-mation, training and advice in order to over-

come the specific obstacles in business.Among these initiatives, appropriate advicecould significantly increase the rate of sur-vival among SMEs.

To achieve this, the potential existingamong business intermediaries should beexploited to the full. In this connection, theCommunity could also look into the scopefor improving the supply of direct advice tofirms on the various aspects of their day-to-day management.

(iii) Supporting the development of firmswith a high-growth potential

Among the smallest firms in the economy,the firms most likely to create a largenumber of permanent jobs are those withthe determination and skills to expand theirbusiness either because their markets arenot yet saturated or because they are in asyet uncharted markets. Such firmS are to befound both in manufacturing and in theservice sector; the problem, though, is to

identify them.

Identification will be possible only if thefirms themselves are encouraged voluntarilyto gear up for growth. A number of mea-sures that could be widely applied havebeen tried out in order to encourage SMEsto take the initiative, either by havingrecourse to a synergistic approach (mem.bership of 'business clubs ) or by way of anaudit method (e.

g. '

Euromanagement'Coordination at Community level and

quality control would make it possible toconfer on firms taking part in technologicalaudits recognition that they were capable ofparticipating in national or CommunityRTD programmes.

(iv) Supporting employmentservice SMEs

Recent work on the growth of service acti-vities has highlighted the importance ofimproving productivity in this sector, adevelopment which, far from creating aproblem in terms of employment, would bea decisive factor in ensuring the growth ofservice firms and in the future competitive-

ness of the developed economies. We mustthus turn our attention away fromimproving productivity in the classicalsense to improving performance, that is tosay a combination of quantitative develop-ment and better quality.

growth

Improved performance depends first andforemost on conducting an awareness andmobilization campaign among service firmsand their representative organizations.Through its role of anticipating and sup-porting changes, the Community can, in

cooperation with the partners concerned

assist in identifying and disseminating modelsfor service activities that could bedeveloped in the future but have not yet

been created for want of sufficient knowl-edge among individual creators of marketsand their potential or of the technologicalchanges likely to influence the provision ofservices and the market in services. It canalso support the development of pro-fessionalism in service activities, this beingessential if the growth and employmentpotential in these branches of activity is tobe exploited, notably by identifying pref-

erably within the context of the social dia-logue professional profiles and by pro-viding corresponding vocational trainingleading to the award of approved qualifica-tions.

9. Guidelines for an integratedprogramme to assist SMEs

In order to strengthen, within the frame-work of broader partnerships, the effective.ness, consistency and visibility of the mea-sures to assist SMEs, it is necessary toexamine practical proposals for an inte-grated programme involving a Communityinitiative for SMEs.

As a matter of priority, the integrated pro-gramme should address three objectivesfrom among all the measures set out above;these objectives correspond to measureswhich could not be implemented withoutappropriate financing or the scale of whichwould be restricted by the ability of theMember States or the intermediaries con-cerned to finance their general applicationin full: ,

(i) introduction of new financial facilitiesfor SMEs;

(ii) support for cooperation between firms;

(iii) support for improvements in manage-ment quality.

Such a programme would have to assert theprinciple of partnership between the Com-munity and the Member States in co-fin-ancing projects within the Community,would have to be flexible as regards geo-graphical priorities and would have toensure active cooperation on the part of

SME intermediaries.

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