COUNCIL OF THE EUROPEAN UNION

Brussels, 9 March 2000

6631/00

LIMITE ECOFIN 68 SOC 75 AG 22 MI 37 IND 16 RECH 26 EDUC 39

Draft Contribution of the Council (ECOFIN) to the Special Lisbon European Council on Employment, Economic Reforms and Social Cohesion 23-24 March 2000

1. The European Union is seeking to give additional impetus to a dynamic Europe. High and sustainable economic growth, more and better jobs, and social cohesion are the key objectives. Efficient, integrated and competitive markets, together with macroeconomic stability, are key means. Moreover, efficient markets greatly reinforce the ability to invest in the human and physical capital needed for growth. They are the fundamental source of innovation and dynamism. Economic reform will help to improve market efficiency and will thus benefit EU citizens, as a result of higher growth, incomes and employment, and will reduce social exclusion.

6631/00 DG G

um

EN

2. For the past decade, on the road to economic and monetary union, a great deal of effort at the EU level has been directed towards the promotion of macroeconomic stability and the removal of structural rigidities. Much has been achieved. We have a stability oriented monetary policy supported by sound fiscal policies, in a context of moderate wage developments. The euro has been successfully introduced. The single market is largely complete and the process of liberalisation in important economic sectors is now underway. In order to exploit the full potential of the single market and the euro, the EU needs to take advantage of its favourable growth prospects to accelerate the necessary structural reform.

3. By launching the Cardiff procedure, which provides for an annual examination of national structural policies and the identification of best practice, the European Union has shown its commitment to comprehensive structural reforms. An annual report on structural reforms, endorsed by the ECOFIN Council, on country examinations covering reform efforts on product, services, capital and labour markets, together with the Cardiff report submitted by the Commission, provide evidence of the progress being made and identify the key areas where further efforts are necessary. The ECOFIN Council is ready to further strengthen the Cardiff and Luxembourg procedures by intensifying work on structural performance indicators, and to report by the end of 2000 on those that might be used for assessing the efficiency of European goods, services and labour markets and on the effectiveness of policy measures which are being taken. Specific recommendations, whenever relevant, should be included in the broad economic policy guidelines (BEPG).

6631/00 DG G

um

EN

4. In particular, the European Union needs improvements in the structural conditions of labour markets and the modernisation of social security systems. It needs to improve human capital formation, by adjusting education systems and institutions to the requirements of the "new economy" and a society built on innovation and knowledge. It needs to promote competitive markets, for example by liberalising network industries, so as to promote access to innovative and competitively priced services. In the telecommunications markets, follow-up is needed in areas such as networking, e-signatures and e-commerce. Reform in sectors such as gas, electricity, water, postal services, and transport needs to be speeded up. Competition can be strengthened in the more sheltered markets, especially services not covered by Single Market legislation, by reducing entry and exit barriers. This is especially true for the European-wide business operations of small and medium sized companies.

5. Economic co-ordination within the EU has been greatly improved, and the Euro-11 Group has contributed to the co-ordination of economic policies in the euro-area. The Helsinki European Council highlighted the need to act decisively on our existing procedures the broad economic policy guidelines at the centre, the Stability and Growth Pact, the employment guidelines, and the Cardiff, Luxembourg and Cologne processes by ensuring full implementation and followup. No new processes are needed. The co-ordination and mutual coherence of the existing procedures needs to be enhanced to be fully effective. The broad economic policy guidelines provide an adequate framework for that purpose. The ECOFIN Council will invite the support and advice of other Council formations, in their respective fields of expertise, and will integrate these contributions into the broad economic policy guidelines before they are forwarded to the European Council.

6. From this firm basis we can now move ahead and take on issues of high priority. The European Council might invite the Commission and ECOFIN Council to significantly accelerate reforms in three fields: financial markets, risk capital, and the quality and sustainability of public finances. These reforms will help create more and better jobs.

6631/00 DG G

um

EN

Financial markets

7. Efficient financial markets contribute to growth and employment by better allocating capital and reducing its cost. They facilitate the process of structural reform. In the current context in particular, they play an essential role in supporting an entrepreneurial culture which is ready to develop and finance new ideas, thus promoting both access to and use of new technologies. Sound financial systems are essential for macro-economic stability. Integrated capital and credit markets are important instruments to help absorb fluctuations in economic performance. For these reasons, it is essential to exploit the opportunity provided by the introduction of the euro to push forward the integration of EU financial markets. Indeed, since the introduction of the euro, good progress has been made on the rapid integration of money markets and payments systems. Positive developments in the corporate bond market, and increased integration in equity markets are contributing to the general health and restructuring of EU industry.

8. The Council and the Commission are engaged in important work on financial market developments and on the implementation of the Financial Services Action Plan. An ambitious response is required to ensure that financial markets continue to make a positive contribution to overall macro-economic performance and to structural reform. This calls for fresh impetus on the Action Plan. Moreover, the regulatory and supervisory framework must remain appropriate to the changing environment within which financial markets operate.

6631/00 DG G

um

EN

9. In that respect, priority action is needed on the following issues:

facilitating the widest possible access to investment capital on an EU-wide basis, including for SMEs, by means of a single passport for issuers

facilitating the successful participation of all investors in an integrated market, by adequate investor protection, by clarifying the distinction between sophisticated and retail investors, and by reviewing conduct of business rules, including the rules applying to retail services.

promoting further integration and better functioning of government bond markets through greater consultation and transparency on debt issuing calendars, techniques and instruments, and improved functioning of cross-border sale and repurchase (repo) markets.

improving the efficiency of securities clearing and settlement systems, with the aim of facilitating and promoting sound cross-border activities.

enhancing the comparability of financial statements of companies which need to access to an integrated financial market and allowing EU to respond quickly to developments underway in the international accounting field.

more intensive co-operation between EU financial market regulators and supervisors.

10. The European Council might consider to request the ECOFIN Council to report in June, on the basis of the work of the forums which are active on these issues, on areas where urgent progress is necessary and to set a tight timetable with firm commitments for further action.

6631/00 DG G

um

EN

Risk capital

11. Efficient risk capital markets play a major role in the development of innovative, high-growth SMEs, the creation of new and sustainable jobs, and economic growth. Therefore, the implementation of the Risk Capital Action Plan (RCAP) must be speeded up. As part of this process, the Council underlines the importance of preparation by the Commission of a monitoring and benchmarking mechanism of progress made. This will be presented to the ECOFIN Council. Where relevant, specific recommendations will be included in the broad economic policy guidelines. The Council also draws attention to the review, being carried out in the framework of the eEurope initiative of existing financial instruments for promoting risk capital at national and EU level. This review will examine how these instruments can be better used and, if necessary, further developed to stimulate early-stage financing.

12. In addition to the central role played by Member States and their on-going efforts, the EU must also pursue and broaden its actions in favour of SMEs, according to the commitments in the Amsterdam Special Action Programme (ASAP) and the Cologne European Council conclusions. In this context, note should be taken of the EIB proposals for an expansion of its risk-capital framework, which includes a strong emphasis on early-stage financing, with an improvement of EIB global loans in favour of SMEs.

6631/00 DG G

um

EN

Quality and Sustainability of Public Finances

13. The Member States must use the current growth dividend to pursue fiscal consolidation more actively. With forecast average EU deficits of 0.9% in 1999 and 0.5% in 2000%, the fiscal policy framework in EMU based on the Stability and Growth Pact is clearly working. Member States have achieved or are approaching a position of balanced budgets. In the context of fiscal consolidation, the Member States must take into account other important objectives for public finances, in particular, improving the quality and sustainability of public finances. These are key elements contributing towards sustained economic growth and employment creation.

14. Regarding the quality of public finances, and taking into account Member States specificities and responsibilities, the ECOFIN Council proposes to address two orders of questions: first, alleviating the tax pressure on labour and especially on the relatively unskilled and low-paid; second, the reorientation of government spending towards a greater relative importance of expenditure in capital accumulation both physical and human and to support R&D, innovation and information/communication technologies. Tackling these questions must not jeopardise further progress towards balanced and sustainable fiscal positions or the financial equilibrium of social security schemes.

15. Greater urgency could be attached to the refocusing of tax and benefit systems and their reorientation towards more active measures. This should be done with a view to encouraging unemployed or inactive people to seek and take up work or to improve their employability, and to encourage older workers to remain in the labour market.

6631/00 DG G

um

EN

16. Regarding the sustainability of public finances, this issue needs to be systematically and comprehensively addressed at European level. Member States should using existing procedures report on the long-term sustainability of public finances, how ageing populations will impact on pension and health care expenditure, and policy measures being taken to address the challenge. For a debate at European level to be effective, comparable data and indicators must be collected and developed.

17. To ensure that greater attention is paid to the quality and sustainability of public finances, the European Council of Lisbon might:

request the ECOFIN Council to review the quality of public finances. The ECOFIN Council could be invited to assess the contribution of public finances to growth and employment, in particular whether adequate steps are being taken to reduce the fiscal pressure on labour, to improve the employment incentive effects of tax and benefit systems, to reorient government spending by increasing the relative importance of capital accumulation, to support R&D, innovation and information/communication technologies, and more generally to provide a better service to the citizens at a given level of expenditure.

request the ECOFIN Council to examine the long-term sustainability of public finances, in particular pension systems, pre-funding pension and health care expenditures, and make a progress report to the European Council in December 2000. This assessment should include an assessment as to whether adequate policy measures are being taken to address the challenge.

_____________

6631/00 DG G

um

EN