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Europaudvalget 2001-02 (2. samling)
EUU Alm.del Bilag 463
Offentligt

COUNCIL OF

THE EUROPEAN UNION

Brussels, 6 March 2002

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ECOFIN 100

SOC 127

MI 47

ENV 147

RECH 56

REPORT

from :

to :

Subject :

the (ECOFIN) Council

the European Council (Barcelona, 15/16 March 2002)

Annual Report on Structural Reforms - 2002

The (ECOFIN) Council in its meeting on 5 March 2002 endorsed the Annual Report on Structural

Reforms - 2002 prepared by the EPC

. As a result of its discussion, the Council decided to transmit

this contribution to the European Council in Barcelona.

The text of the EPC report reads as follows:

Annex

This document was received in English only.

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ANNEX

ECONOMIC POLICY COMMITTEE

ECFIN/EPC/117/02-EN

Annual Report on Structural Reforms

2002

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Contents

Preface ........................................................................................................................ 3

Key messages ..................................................................................................... 4

Structural reform in a macroeconomic perspective........................................ 13

2.1. Recent developments and the need for further structural reform................... 13

2.2. Gains in overall performance 1995-2001 ..................................................... 14

2.3. The sustainable growth strategy and structural challenges............................ 15

Network industries .......................................................................................... 18

3.1. Introduction ................................................................................................ 18

3.2. Progress of structural reform in main network industries ............................. 18

3.3. Horizontal issues ......................................................................................... 24

Ageing, pensions and fiscal sustainability ...................................................... 27

Market-based instruments to protect the environment ................................. 32

5.1. Climate change and energy use ................................................................... 32

5.2. Water supply, water quality and wastewater ................................................ 35

5.3. Solid waste and products ............................................................................. 36

Structural reforms in Member States ............................................................. 38

Belgium ............................................................................................................. 39

Denmark ............................................................................................................ 42

Germany ............................................................................................................ 45

Greece................................................................................................................ 49

Spain.................................................................................................................. 52

France ................................................................................................................ 55

Ireland................................................................................................................ 58

Italy ................................................................................................................... 61

Luxembourg....................................................................................................... 65

Netherlands........................................................................................................ 68

Austria ............................................................................................................... 71

Portugal ............................................................................................................. 73

Finland............................................................................................................... 76

Sweden .............................................................................................................. 78

UK ..................................................................................................................... 81

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Preface

The present report is the fourth report on structural reforms prepared by the Economic Policy

Committee. It summarises the results of an annual country by country examination of economic

policies, which the Committee is asked to carry out according to its statutes.

The country examinations are a peer review exercise focussing on progress made in the structural

reform of product, capital and labour markets and long-term aspects of public finance

sustainability. The examinations take a comprehensive look at the whole reform process, provide

"benchmarking" comparisons between countries and evaluate to what extent Member States have

implemented the country specific recommendations addressed to them in the Broad Economic

Policy Guidelines (BEPGs).

The peer review exercise incorporates the “Cardiff process”, launched by the Council in 1998, for

monitoring economic reform in Member States in order to improve the functioning of product and

capital markets in the Community. The national reports on structural reform and the Commission’s

Cardiff report

are therefore an essential basis for the examinations.

The country examinations also assess the performance of Member States’ labour market policies,

which are an essential part of the overall economic policy framework. The examinations build on

the joint analysis prepared in the framework of the Luxembourg process and reflected in the Joint

Employment Report and the Employment Guidelines and focus inter alia on reforms of tax benefit

systems, in view of the importance hereof for other areas of economic policy.

As in previous exercises, the Committee has paid particular attention to a number of priority sub-

jects. The special topics chosen this year reflect the strategic objectives agreed by the Heads of State

and/or Government at the special European Council in Lisbon as well as priorities set by the

European Council in Gothenburg. The Committee has focused on policies to support long-term

sustainability of public finances in the light of ageing, policies to reform and liberalise public utilities

and network industries and policies to integrate economic and environment policies. Separate an-

nexes are devoted to these priority subjects.

This year, the report has been reorganised and reports only horizontal details for the special priority

subjects examined in order to reduce overlap to documents prepared by the Commission. Instead a

separate short chapter has been included for each Member State summarizing the examination of

that Member State.

By looking at a wide range of economic policy areas and by evaluating the implementation of the

BEPGs, the examinations and the present report contribute to the preparation of the multilateral

surveillance by the Council according to Article 99 (3) of the Treaty. The conclusions of the exami-

nations as reflected in this report will support the Commission and the Council in the preparation

and the adoption in Sevilla of new BEPGs, which form the centre of economic policy coordination

within the European Union.

The peer review was carried out in a working group of the EPC under the Chairmanship of Per

Callesen. It involved the 15 Member States, the European Central Bank and the European Com-

mission, which provided substantial analytical input and support for the working group. The pres-

ent report is the key output of the examinations. It was adopted by the EPC on 22 February 2002

and submitted to the ECOFIN Council for transmission to the Heads of State or Government for

their Barcelona meeting.

See Council Decision of 29 September 2000 on the composition and the statutes of the Economic Policy

Committee (2000/604/EC); OJ L 257, 11.10.2000, p. 28

The national reports and the Commission Cardiff report can be found on the website of the Economic

Policy Committee: http://europa.eu.int/comm/economy_finance/epc/index_en.htm

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1. Key messages

Executive summary

The 4

annual country review by the Economic Policy Committee shows that Mem-

ber States made further progress in 2001 on structural reform in product, capital and

labour markets. Over the last several years this process has contributed towards the

improved economic performance of the EU area, including supporting significant,

non-inflationary employment growth and stable macro-economic fundamentals.

Compared to the larger initiatives taken in previous years, however, few significant

reforms were launched in 2001.

Reforms in

product markets

should be speeded up. In particular with respect to

liberalisation and promotion of stronger competition in network industries as well as

in a significant number of other domestic service sectors, increasing the efficiency of

public procurement and public services, and reducing the backlog of implementation

of Community legislation. In

capital markets,

further action must be taken at the

Community level to ensure better integration and competition.

Strong efforts in education are needed to enhance productivity and reap the full

benefits of the

knowledge-based society.

An improved innovation climate is cru-

cial in this respect. Policy efforts should be geared towards improving general

framework conditions (including stronger competition, healthy fiscal and regulatory

environments and flexible labour markets conducive to worker mobility), better in-

novation institutions (including intellectual property protection), enhancing private

R&D, promoting the effectiveness of public R&D and facilitating networking.

labour markets

the recent tax cuts need to be followed up by improvement of

the incentives to employ and, in particular, supply labour embedded in protection

and benefit systems. Measures targeted at improved inclusion of older workers,

women and the long-term unemployed are strongly needed.

Pension systems

need to be adjusted to reward later retirement and take consis-

tently account of increasing life expectancy. The general consolidation of public fi-

nances must be speeded up in many Member States in order to ensure the

sustainability of public finances and pension systems in view of the future demo-

graphic pressure on public expenditures for pensions, health and long-term care.

Environmental policy

should be made more cost-effective through the use of mar-

ket-based instruments in addition to regulation. Further efforts at the Community

level are required in order to facilitate the use and efficiency of, e.g., taxes and

marketable emission permits.

The process of structural reform needs to be revived in order to meet the targets set

by the European Council in the context of the Lisbon growth strategy with respect

to productivity, employment and the sustainability of public finances, social protec-

tion systems and the environment.

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Until 2000 employment grew strongly, but further improvement is necessary, in particular

with respect to reducing high structural unemployment in many Member States. Labour

supply in all Member States is insufficient if the Lisbon and Stockholm employment objec-

tives and national employment aspirations are to be met. Overall productivity growth, and

hence the increase in living standards, has been relatively weak in recent years, although

partly reflecting large employment increases among the low skilled. No further conver-

gence in productivity levels or decreases in the dispersion of prices of tradable products has

been achieved. Capital markets have been further integrated, but the process is hampered

by delayed action at the Community level. Pension systems and budget balances are in

most cases not sufficiently prepared for the challenge of ageing populations.

Therefore the political commitment to structural reform needs to be translated into further

direct and specific action if the ambitious Lisbon targets with respect to employment and

living standards as well as the sustainability of budgets, the environment and social systems

are to be met. Action is needed both in individual Member States and at the Community

level. Economic fundamentals are basically sound, and weaker cyclical conditions should

not diminish the determination to pursue the Lisbon strategy. Continued structural reforms

– interacting with growth- and stability-oriented macro-economic policies – are a key ele-

ment of a speedy recovery and sustained growth.

In the following, the conclusions with respect to previous implementation of reforms and

challenges ahead are summarised. This includes the three special topics covered by the

2002 country review, i.e. a)

network industries,

ageing, pensions and fiscal

sustainability

and c)

market-based instruments to protect the environment.

Overall,

Member States made progress with respect to implementing the 2001 specific Broad Eco-

nomic Policy Guidelines.

Product markets

In product (goods and services) markets, Member States have continued efforts towards

completing the Single Market as well as regulatory reforms. Most measures have been of a

gradual nature, but in the right direction, in broad terms following the progress of previous

years:

•

Some further progress was made towards

compliance with Single Market directives

in almost all Member States. However, some Member States have substantial imple-

mentation backlogs, and only 5 Member States currently fulfil the Stockholm target of

reducing the transposition deficit to less than 1.5 per cent. Rapid progress is therefore

needed to reduce the transposition deficit.

Some overall reductions in

State aid

took place, and aid is also increasingly directed

away from sector-specific aid and

ad hoc

aid to declining industries toward horizontal

measures. This needs to be continued. The transparency of State aid policies has im-

proved with the wider dissemination of State aid data. Care should be taken that the

present cyclical conditions do not lead to a reversion of previous efforts made in this

area.

The efficiency of

public procurement

is addressed through increasing transparency

and competition through EU-wide public tendering, although only a relatively small

share of public procurement is covered so far. This process needs to be intensified.

Also, Member States increasingly make use of Internet portals, and some have moved

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towards co-ordinating the procurement policies of local and central levels of govern-

ments.

•

Administrative

and compliance

burdens

have been reduced to some extent by, e.g.,

simplification of business registration and reporting procedures and the use of elec-

tronic communication with government agencies. The variation between Member

States is still substantial and efficiency needs to be further improved in all Member

States.

Steps have been taken towards strengthening national

competition authorities,

in-

cluding moving towards more independent regulatory bodies and the consolidation of

sector-oriented into horizontal agencies. However, several countries need to pursue

further reforms along these lines in order to make the regulatory framework more ef-

fective.

In many sectors, there is scope for more active and targeted

enforcement of competi-

tion.

In some sectors – including professional services – care should be taken that

measures to safeguard consumer protection and quality do not hamper economic effi-

ciency, transparency and competition. Several Member States are examining these is-

sues, and efforts at the Community level to create an internal market in services should

be intensified.

In some Member States, lack of effective competition in construction and building

materials is evident, although progress has been made for some materials. Stronger ef-

forts at the Community level to

harmonize technical standards

and/or strengthen

mutual recognition

are needed. Cross-border competition should also be encouraged.

•

Network industries

Reforms of utilities in telecommunications and – to a more limited extent – energy and

transportation have succeeded in creating new markets, delivering higher-quality services

and lowering costs. There is no evidence so far of conflict between deregulation – and

hence free choice and cost-effectiveness – and universal service obligations. In some cases,

the consumer price of network services has declined by less than production cost because

of, e.g., reduced cross-subsidisation or higher taxes. However, this does not imply that the

gains to society are lower, but rather that they alleviate the burden of other taxes or prices.

The experience in network liberalisation also indicates the need to pay attention to the

management of the transition process and making sure the intended results are produced.

In this regard better information to consumers about the timeframe of the transition and

the intended improvements with respect to, e.g., quality and cost is crucial.

A liberalised framework is well established in many Member States and proceeding accord-

ing to a specific timetable in others. However, this process needs to be speeded up by ad-

vancing deadlines already set and introducing deadlines where they do not currently exist.

Further action is warranted in most Member States to ensure effective competition and

thus lower prices in already liberalised network industries:

•

Competition in telecommunications is developing favourably in most market segments,

but remains weak at the local loop of fixed networks. Efforts have been taken by sev-

eral Member States to allow entry by third parties. In energy markets, liberalisation has

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proceeded in 2001. However, the pace of market opening and the regulation of net-

work tariffs vary greatly between Member States. At the end of 2001, agreement was fi-

nally reached to speed up liberalisation of postal services at the Community level. A

relatively slow and gradual process is envisaged, which Member States could speed up

ahead of the agreed timetable. A number of Member States have taken the first steps in

opening up passenger railways to competition. However, a detailed assessment of the

experience with railway liberalisation is necessary to determine which model of deregu-

lation and competition provides the best outcome.

•

Typically, concentration has declined markedly along with deregulation in mobile te-

lephony and long-distance telecommunications. However,

incumbent domination

some recently deregulated utilities should be monitored as it may indicate barriers to

competition. Also, Member States should improve price transparency, and hence facili-

tate consumer choice, and effective competition including true contestability of mar-

kets.

The inefficient use and scarcity of

inter-connections

of national electricity and natural

gas networks is an obstacle to competition in some Member States. Ongoing efforts to

eliminate these problems should be intensified.

There is substantial scope for productivity improvements through deregulation and

competition in

postal services

and

transportation.

Problems due to the potential tension between the

dual role of government

as regula-

tor and owner need to be reduced, including addressing issues such as the participation

of government-controlled or -owned firms in public tenders and cross-border competi-

tion. In many cases privatisation, combined with measures ensuring contestable mar-

kets, can contribute to a more transparent and efficient regulatory framework.

•

Capital markets

Modernisation and consolidation has taken place in the financial sector, notably banking,

within and between Member States, including cross-border mergers and acquisitions. This

has led to a strengthening of the financial sector, thereby contributing to the effectiveness

of capital markets and the allocation of financial resources provided competition is effec-

tive.

Member States have continued to reform capital markets, with special emphasis on

strengthening supervision and prudential regulation. Following last year's recommenda-

tions, progress has been achieved in developing risk capital markets, thereby providing

easier access to risk capital for new and innovative companies.

•

Member States have generally moved towards more independent

financial supervi-

sory authorities,

including the provision of discretionary powers to initiate investiga-

tions. Regulators in banking, insurance and other financial services have been com-

bined in some Member States, thus improving the coherence of the regulatory frame-

work.

In a number of Member States

consolidation in the banking sector

has led to an

increase in market concentration. Continued close attention by national supervisory

authorities and central banks – including increased cross-border co-operation – is war-

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ranted to ensure the exploitation of economies of scale without increasing systemic risk

or hampering effective competition.

•

In a number of Member States,

access to risk capital

constitutes a challenge for new

and innovative companies, notably in the start up phase of business development.

However, in response to the recommendations of the Broad Economic Policy Guide-

lines, many Member States continued to improve the framework for venture capital, in-

cluding revisions of bankruptcy law. Also, some Member States have taken steps to-

wards improving the fiscal framework affecting small and medium-sized firms.

At the Community level, action must be taken to speed up the

implementation of the

Financial Sector Action Plan and the Risk Capital Action Plan

and foster the de-

velopment of integrated and effective capital markets. Also, it is vital that the Lam-

falussy group recommendations on a new approach to EU

regulation of securities

markets

are swiftly implemented.

•

Knowledge-based economy

Some progress has been made towards achieving the “knowledge-based society”. However,

large differences between Member States remain, and present efforts need to be accelerated

in order to meet the Lisbon targets, including improving the quality of labour supply:

•

The overall

education level

remains insufficient in many Member States and only lim-

ited progress has been made with respect to reducing the substantial backlog in some

Member States. Enrolment in secondary education has increased somewhat, but remains

too low in many countries. Furthermore, quality problems and high dropout rates per-

sist. In general, sustained employment growth has revealed labour shortages in many

sectors and occupations. Some progress has been made with respect to reducing the

shortage of specialists in ICT, science and engineering, but continued efforts are needed.

•

Efforts to increase

R&D

and innovation are continuing, but public R&D has decreased

in some Member States and commercial use remains insufficient. Private sector R&D

remains low in many Member States and needs to be promoted by better framework

conditions. Better interaction between public and private sector activities needs to be

developed. Better functioning and more competitive product and capital markets will

stimulate private sector R&D and innovation, as will increased mobility of researchers

and the extension of networks between the different institutions involved in R&D and

innovation. In particular the educational system has only in some Member States suc-

cessfully increased the supply of potential researchers. An increased supply of knowl-

edge workers remains a central aim in order to expand R&D activities substantially. The

creation of a cost-efficient Community patent would improve the incentives of private

firms investing in R&D. While direct public support, including tax credits, for private

R&D has been introduced in some Member States, it is too early to assess the overall

benefits and costs of these measures. Member States could look to build on the current

variety of direct and indirect support for private R&D.

•

The structure of publicly funded R&D,

innovation and tertiary education are being

reviewed and reformed in a number of Member States. Improvements are needed with

respect to management, networking, cross-border interaction and efficient use of the

knowledge being created.

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•

Most Member States are promoting

Internet use

in both government and private sec-

tors. Internet and ICT use is increasing rapidly, but still lags behind in some Member

States, where average educational attainment may impede the diffusion of ICT. A fur-

ther obstacle may be high Internet charges due to inadequate competition in telecom-

munications.

Labour markets and tax-benefit systems

The rate of unemployment has become low in a number of Member States and decreased

in most others reflecting both cyclical and structural factors. However, significant structural

unemployment remains in many Member States and the Community at large, and substan-

tial variation between regions, age, gender and skills persists. Furthermore, a large number

of persons remain outside the labour market.

In most Member States, labour supply is insufficient if the Lisbon and Stockholm targets as

well as national ambitions are to be met. Major problems remain unsolved with respect to

employment and participation rates of older workers in most Member States, although

large differences between countries exist. Female participation rates are low in many coun-

tries. New measures in 2001 have focused on further tax reductions in line with previous

years and, to some extent, education and training, whereas efforts in other areas have been

limited.

•

Many Member States have targeted tax cuts at

indirect wage costs or income taxes

for the low paid,

although not on a large scale. These measures have contributed to

higher demand for low skilled workers in a number of Member States and provided ad-

ditional incentives to seek employment. However, budgetary constraints limit the scope

for further tax cuts, and such measures are in any case not sufficient to address remain-

ing problems in labour markets.

•

With considerable variation across Member States, tax reforms have generally contrib-

uted to a reduction of

marginal tax rates,

thus providing stronger incentives to in-

crease work effort. In several Member States cuts in tax rates have been entirely or

partly financed by a broadening of the tax base reducing the disincentives implied by a

given overall level of taxation. In addition, several Member States have reduced marginal

effective tax rates by adjusting social security systems or introducing in-work benefits.

Efforts to reduce distortions and make tax systems more transparent should be contin-

ued.

•

Few steps have been taken to reform

benefit systems.

Eligibility criteria, enforcement

of availability requirements and the duration of benefits have changed little. Further ef-

forts to improve work incentives are clearly warranted, while maintaining a proper bal-

ance with respect to social protection. Otherwise, replacement rates are generally kept at

previous levels, while some recent initiatives contribute to higher replacement rates in

some Member States and somewhat lower rates in others.

•

The legal framework underpinning the

wage formation

process has largely remained

unaffected by labour market reforms. Although responsibility for wage bargaining lies

with social partners as well as individual companies and workers, Member States should

ensure a framework that facilitates stronger responsiveness of wage differences to la-

bour market conditions, including differences across skills and regions, as labour market

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institutions continue to contribute to a compressed wage structure. This includes, e.g.,

adjusting labour market legislation and inviting social partners to participate in an em-

ployment promoting wage formation process.

•

In a number of Member States temporary employment contracts have become substan-

tially more widespread, contributing to job creation and labour market flexibility. This

has especially occurred at the entry level, hence contributing to lower youth unemploy-

ment. Very few Member States have addressed dualism in labour markets by reforming

employment protection

in general. In a few Member States employment protection is

being partially replaced by extended access to, and generosity of, unemployment bene-

fits. While contributing to higher labour market flexibility and the alleviation of outsider

problems, it is crucial that such a shift avoid the creation of unemployment traps and

excessive budgetary costs. Furthermore, such measures will probably necessitate more

emphasis on the enforcement of availability requirements.

•

Efforts have been taken to increase the

participation rate of women,

which has risen

substantially in a number of Member States. Several Member States already meet the

Lisbon objectives, but large differences persist for the EU as a whole. More remains to

be done in order to improve incentives for women to enter the job market or remain ac-

tive in the labour market when raising children. Further reforms of the tax-benefit sys-

tem and expansion of childcare facilities may support progress towards this objective.

Child-care benefits should be designed to promote the participation of women, i.e.

benefits should be employment-conditional or non-means-tested. In some cases more

flexible working hours may help increasing female participation rates.

•

Active labour market policies

in most Member States have focused on education and

retraining programmes aimed at those at risk of becoming disconnected from the labour

market. Furthermore, several countries are moving towards more competition in the

provision of employment services. In very few Member States the cost-effectiveness of

active labour market programs is systematically reviewed, while effective targeting re-

mains a challenge.

•

Some efforts have been made to raise the participation and employment rates of

older

workers.

However these rates are still low or very low in almost all Member States,

hampered by a combination of tradition, insufficient labour market inclusiveness and in

particular a lack of incentives to remain in the labour force. Little progress has been

achieved with respect to increasing the employment of older workers, and hence meet-

ing the Stockholm targets. The incentives of this age group to participate in the labour

market remain limited in many countries, despite generally improved health conditions

and increasing life expectancy. If the Lisbon employment targets and the long-term

sustainability of public finances are to be met, it is necessary to reduce early retirement,

if unrelated to health status, and the use of, e.g., disability or sickness benefit schemes as

passive substitutes for unemployment benefits.

Ageing, pensions and fiscal sustainability

The long-term fiscal consequences of population ageing is a common challenge in all

Member States, but differs considerably across countries, as does the current fiscal posi-

tion. Key elements in a sustainable budget and pension strategy involve the continued con-

solidation of government finances, the promotion of later retirement and reforms of pen-

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sion systems aimed at containing the long-run budgetary cost of population ageing. Very

few changes have been made with respect to income replacement rates in pension systems.

•

Although starting positions differ among Member States, very few have carried out or

prepared comprehensive

pension reform,

e.g., including consistently accounting for

increasing life expectancy, which is necessary to make pension systems more robust.

There is a strong need to assess the effects of measures already taken – including the

impact on government finances and labour force participation among the elderly.

Several Member States have implemented or are planning changes in

retirement bene-

fit provisions

or various tax measures, including in a few cases an increase in the statu-

tory retirement age, which may contribute to a higher effective retirement age. The im-

pact of these measures on retirement incentives and government finances has yet to be

assessed. But it is unlikely that the measures undertaken so far along these lines will

substantially reduce the future increase in pension expenditures. Member States taking

a gradual approach to reducing incentives for early retirement should be encouraged to

speed up such efforts.

In many Member States, the current rate of

fiscal consolidation

is far from sufficient

to prepare for the expected long-term increase in public pension expenditures and the

cost of government financed health care. Efforts should therefore be taken to speed up

the reduction of government debt and adopt appropriate measures to address future

expenditure growth (e.g., pre-funding).

Second and third pillar pension systems

are becoming more widespread as a sup-

plement to public pensions. This may contribute to improved allocation of saving over

the lifetime, the effective functioning of capital markets and may serve important pri-

orities with respect to the future living standards of retired citizens. While potentially

reducing dependency on social benefits, and hence future demands for an expansion of

public pension programmes, increases in second and third pillar pensions can not sub-

stitute for reforms of public pension systems. A sound regulatory environment for sec-

ond and third pillar systems should also be developed taking into account the need to

ensure the sustainability of public finances.

•

Market-based instruments to protect the environment

Among Member States, there is an increasing awareness that making environmental poli-

cies cost-effective implies relying more on market-based instruments in addition to regula-

tory measures. However, further efforts at the Community level are required in order to

pursue these objectives without negative effects on competitiveness.

•

Several Member States have implemented or planned

higher fuel and other energy

taxes,

although these efforts slowed down significantly in the wake of the oil price in-

crease in 1999. In a number of Member States charges for or taxes on the extraction

and use of natural resources should generally be better aligned with total costs, includ-

ing those associated with environmental damage.

There is a broad tendency to

exempt energy intensive sectors

in industry and trans-

portation from energy taxes due to concerns about international competitiveness of

such sectors. This increases the costs of fulfilling environmental targets. Real progress

on this issue – and hence a more cost-effective way of achieving environmental im-

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provements – would be facilitated by action at the Community level on, e.g., minimum

charges.

•

Subsidies or tax credits promoting investment in, and the use of,

environmentally

friendly technologies,

such as the use of renewable energy and energy conservation,

are becoming increasingly widespread. While contributing to positive substitution ef-

fects between, e.g., energy sources, care should be taken that the implied cost reduction

does not increase overall use of energy and other natural resources by reducing the

price of energy-intensive products. Further action should also be taken to phase out

subsidies to fossil fuel production and consumption.

A few Member States are introducing

tradable emission permits

to combat green-

house gas emissions. The scope and efficiency of this concept needs to be developed

further, potentially through the adoption of a Community-wide emissions trading

scheme as suggested by the Commission.

Existing taxes and excise duties,

as well as certain public sector charges, should be

made more compatible with environmental concerns.

•

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2. Structural reform in a macroeconomic perspective

2.1. Recent developments and the need for further structural reform

A sharp cyclical downturn has unfolded over the course of 2001 following a fairly long

period of sustained economic growth and strong employment gains since the mid 1990s.

The slowdown was initiated by international events but was exacerbated by weak domestic

demand in most EU Member States. The macroeconomic fundamentals of the Union re-

main sound.

Compared to previous experience the recovery came to a halt in early 2001 within a

framework of substantially improved financial balances and much lower inflation,

cf. figure

2.1a.

Structural improvements in labour and capital markets, fiscal consolidation, moderate

wage developments and the stability provided by the introduction of the euro have paved

the way for a more favourable position of EU economies. As a result, and against the

background of monetary easing, the slowdown should also be seen as a temporary setback

unless the international political and economic environment deteriorates significantly again.

Figure 2.1a. Inflation, EU-15.

Per cent

Figure 2.1b. Inflation rates, 2001.

Per cent

HICP

NL P IRL E EL

S FIN L EU B

D DK F UK

Wage inflation

HICP ex

Note: HICP ex is HICP excl. energy and unprocessed food.

Source: Commission Services, Eurostat.

Neither the cyclical downturn nor the prospects of an impending recovery should distract

attention from the need for further structural reform, which is strongly indicated by a

number of factors:

•

Even if the slowdown in 2001 was mainly triggered by international developments, skill

shortages, general labour market pressures and capacity constraints were emerging in

most Member States before the turnaround. Also, the underlying inflationary pressures

were somewhat stronger than in previous years. Slower growth in a number of Mem-

ber States would have been necessary in any case.

Unemployment rates are still high and to a significant extent structural in a number of

Member States and regions. Furthermore, most Member States struggle with low par-

ticipation and employment rates among older workers and women.

Compared to the USA, and in view of the opportunities provided by new technologies

and globalisation, overall productivity growth has been disappointing.

•

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•

The long-term challenge of ageing populations reinforces the need to reduce structural

unemployment, promote later retirement, ensure sound public finances and reform

public pension and health care systems.

The structural reform efforts of Member States must be seen in the context of the ambi-

tious targets with respect to performance in areas such as knowledge, employment, social

inclusion and the environment that were introduced at the special Lisbon Council two

years ago and confirmed and extended in Gothenburg and Stockholm. Whereas some pro-

gress towards achieving these targets has been made, much remains to be done.

The continuation and acceleration of the structural reform process – interacting with

growth- and stability-oriented macroeconomic policies – is necessary in order to facilitate

economic recovery as well as further improvements in the economic performance of

Member States along the patterns experienced during the second half of the 1990s.

2.2. Gains in overall performance 1995-2001

EU-15 GDP growth averaged 2,4 per cent over the period 1995-2001, fairly evenly split

between employment growth and increased productivity (GDP per person employed),

cf.

table 2.1.

Table 2.1. Contributions to growth, 1996-2001. EU-15 and USA.

1996

1997

1998

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

Productivity

1,4

1,5

1,3

Employment ................. 0,3

1,0

1,6

GDP ................................ 1,6

2,5

2,9

1) GDP per person employed. Total economy.

2) Commission forecast for 2001.

Source: Commission Services.

EU-15

1999

1,1

1,6

2,6

2000

1,6

1,7

3,3

2001

0,6

1,1

1,7

96-01

1,3

1,2

2,4

96-01

2,2

1,3

3,6

As a result, cumulative employment growth over that period became close to 9 per cent,

only one percentage point lower than employment growth in the USA, despite the signifi-

cantly lower population growth than in the USA. The average unemployment rate de-

creased by more than 3 percentage points in Member States while labour force participa-

tion increased by almost 3 percentage points,

cf. figure 2.2a.

Figure 2.2a. The labour market, EU-15

Per cent

Figure 2.2b. GDP growth rates, 1996-2001

Per cent

Participation rate

Unemployment (r.axis)

IRL L FIN E

P NL EL S UK B DK EU A

1996-00

2001

1) Including Commission estimate for 2001.

Source: Commission Services, Eurostat.

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The strong employment performance was partly due to the elimination of cyclical slack, but

also significant structural labour market improvements due to, e.g., the reduction of labour

costs at the low end of the skill distribution, more extensive use of temporary work con-

tracts, efforts in education, training and active labour market policies as well as generally

sustainable wage developments.

Labour productivity growth has been much less encouraging. On the one hand, improving

labour market conditions have slowed down average labour productivity growth due to

higher employment among those with below average productivity and potentially also some

substitution of labour for capital reflecting the relatively moderate growth of labour costs.

Also some reduction in average hours worked took place, thus reducing output growth per

person employed. On the other hand, a number of structural reforms promoting competi-

tion, the diffusion of new technologies and globalisation have worked to increase produc-

tivity growth.

The net result is substantially lower productivity growth than in the USA over the period.

This should partly be seen as a reversal of the relative performance in the first half of the

1990s, where on average productivity growth in Member States outperformed the USA.

However in the second half of the 1990s the US and the EU shared roughly similar exter-

nal environments and labour market improvements.

The weaker productivity performance of the EU in the second half of the 90s suggests – in

spite of the efforts made so far by Member States – that structural impediments to growth

remain, particularly in areas such as competition, market integration, the diffusion of new

technologies, innovation and the efficient use of human resources.

The average performance of the Union masks significant differences in growth between

Member States,

cf. figure 2.2b above.

To some extent, these differences reflect different cycli-

cal positions and the fact that Member States with relatively low GDP per capita tend to

catch up with high-income Member States. However, it also reflects differences in struc-

tural conditions affecting potential growth rates of Member States.

2.3. The sustainable growth strategy and structural challenges

The special European Council in Lisbon agreed on the objective to make Europe the most

competitive and dynamic knowledge-based economy in the world, capable of sustainable

economic growth with more and better jobs and greater social cohesion. This ambition was

supplemented by the Social Policy Agenda at the Nice European Council, and through the

addition of the environmental dimension at the Gothenburg European Council, Member

States are committed to an overall Sustainable Development Strategy.

Employment

With respect to labour markets, meeting the agreed objectives requires raising the overall

employment rate from an average of 63 per cent today to 70 per cent by 2010, and raising

the female employment rate from 51 to 60 per cent by 2010. For older workers an em-

ployment target of 50 per cent for the 55-64 year old has been agreed.

Member States, where employment rates have already met the Lisbon targets, have typically

set more ambitious national targets exceeding the achievements made so far. The average

employment rate was close to 64 per cent in 2001,

cf. figure 2.3a,

although large differences

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between Member States persist. Several Member States thus already meet the 70 per cent

target, while others are substantially short of the target. Achieving an employment rate of

70 per cent in 2010 will require an average increase roughly comparable to the gains real-

ised from 1995 until 2001, but from a substantially higher starting position. As the remain-

ing scope for increasing employment is more limited in Member States with already high

employment rates, large improvements are needed in Member States with presently lower

employment rates. Also, higher employment must to a larger extent be generated through

improvements in the functioning of labour markets as cyclical slack is currently much lower

than in the mid 90’s .

Figure 2.3a. Employment and participation rates, Figure 2.3b. Employment rates of women and older

2001.

workers, 2001.

Per cent

DK NL S UK P FIN A

D IRL EU F

EL E

DK S FIN UK NL P

Women, 15-64 years

F EU IRL B

L EL E

Older workers, 55-64 years

Unemployment

Employment

1) Estimated values for 2001, age 15-64 years.

Source: Commission Services, Eurostat.

The unemployment rate has become fairly low in a number of Member States, but remains

high or fairly high in seven – mostly large – Member States.

Female employment rates have developed favourably since the mid-1990s. In particular

some Member States with relatively low employment rates for women have experienced

significant improvement,

cf. figure 2.3b and 2.4a.

Facilitating a further increase in female em-

ployment rates is a key requirement in order to satisfy the overall employment rate objec-

tives.

Figure 2.4a. Employment rates, women.

95-01, change

Figure 2.4b. Employment rates, older workers (55-64).

95-01, change

IRL

FIN

IRL

-5

2001, level

-5

2001, level

-5

Note: Level and changes are reported in percentage points. Commission forecast for 2001.

Source: Commission Services, Eurostat.

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Less progress has been made with respect to the employment of older workers. Average

employment rates remain low among the 55-64 year age group. Wide differences between

Member States persist, and in a number of Member States the employment rate of older

workers is very low. With a few exceptions least progress has been made in those Member

States with the lowest levels currently. The large variation across countries in the employ-

ment rates of older workers is only to a modest extent correlated with unemployment con-

ditions. This suggests that employment of older workers, apart from tradition, is deter-

mined by incentives in pension and other social security systems, including early retirement

schemes, more than health and labour market conditions.

Productivity and living standards

Labour productivity increases have also varied substantially between Member States,

cf.

figure 2.5.a.

The average rate of increase since 1995 has been of the order of 1-2 per cent

per year, but with more rapid increases in a number of, mainly smaller, Member States.

Figure 2.5a. Labour productivity. Average annual Figure 2.5b. GDP per hour, USA=100, 2001

growth (production per person employed) 1996-2001

Per cent

Index

150

125

100

150

125

100

IRL EL P FIN L

S DK UK B EU F D

E NL

IRL EL P FIN US L

S DK UK B EU F D

E NL

1) Estimated values for 2001.

Source: Commission Services.

On average, hourly productivity remains generally at 80-90 per cent of the level in the USA,

cf. figure 2.5b.

However, in some Member States hourly productivity is higher than in the

USA, while it is significantly lower in others, although it should be emphasised that the

measurement of productivity is subject to substantial statistical uncertainty.

Relative living standards differ from hourly productivity to the extent that employment

rates and hours worked differ. Compared to the USA, the differences in hourly productiv-

ity explains only one third of the difference in living standards, while the remaining two

thirds are due to – approximately even contributions from – shorter working hours and

lower employment rates in the EU area. At present, average EU income per head com-

prises less than 70 per cent of average US income per head, and this ratio has deteriorated

during the last decade.

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3. Network industries

3.1. Introduction

Overall the national reports on structural reform are unambiguous: Liberalising network

industries and public utilities work. Production is becoming more efficient, prices are lower

than they would have been otherwise, consumers face a greater choice of services and qual-

ity is improved.

And there are no signs that universal service obligations are compromised

in liberalised markets, or that efficiency is achieved at the cost of increased inequality.

However, the reform agenda is far from complete. Despite the favourable results so far,

reforms of network utilities have been relatively few and modest during 2001. This may

indicate a slow-down in the willingness to reform, while there appears to be good reasons

to speed-up the liberalisation of network industries instead.

On the one hand, a coordinated and faster liberalisation process at the community level is

necessary to achieve the objective of a European Single Market. Two key issues must be

addressed at the EU-level. First, co-ordinated action is required to maintain the momentum

in structural reform in terms of opening network industries to competition in all Member

States. Second, common rules – e.g. for cross-border tariffs for electricity – are required to

ensure cross-border trade in the services produced in certain network industries.

On the other hand, several markets need to be formally opened to competition at the na-

tional level, and additional measures are required to ensure effective competition in markets

that have already been liberalised. Member States should be urged to open markets without

necessarily requiring parallel action in other countries, as unilateral market opening will

generally provide positive benefits to domestic consumers, even if the speed of opening in

neighbouring countries is slow. Yet the full benefits of an effective Single Market can only

be achieved with coordinated efforts to ensure full market opening in all Member States.

Although reforms of network industries have been successful, some potential challenges

will have to be dealt with. For instance, the gains from energy market liberalisation may be

threatened by lack of capacity in electricity generation and networks in the medium-term.

Some of these challenges are mentioned below.

3.2. Progress of structural reform in main network industries

There have been few major reforms of network industries during 2001. This partly reflects

that no deadlines for the implementation of EU-directives expired in the past year. Thus,

Member States have generally focused on catching up with transposition backlogs and

measures to improve legislation and regulation enacted previously.

Table 3.1 summarizes the initiatives in key network industries during 2001. As few major

reforms have taken place, most of the initiatives have a relatively limited scope in terms of

liberalisation, which is one of the reservations that must be accounted for when interpret-

In some instances consumers have experienced higher prices. However, this phenomenon is explained by

factors not related to liberalisation

per se.

The existence of cross-subsidies prior to liberalisation may lead to

rebalancing of tariffs to make them more cost reflective. Increased taxation of energy, requirements to pur-

chase energy produced by specific and more expensive technologies for environmental reasons and high oil

prices during most of 2000 and 2001 have in some countries led to higher consumer prices of gas and elec-

tricity.

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ing the table.

However, it clearly appears that most reforms have taken place in energy

sectors and to a lesser extent in telecommunications. This reflects to a large degree that the

liberalisation of telecommunications has been taking place in all Member States for some

years, while the opening of energy markets is more recent. Yet it may be a cause for con-

cern that only few initiatives are reported in other network industries. This is true for the

three sectors – postal services, air transport and railways – included in the table, but also

other sectors.

Table 3.1. Policy measures in 2001

Telecommunic. Energy

Quantitative market opening

Unbundling

TPA regime

Establishment of TSO

Other legislation

Reduc incumb. market share

Other competitive measures

Establishment of regulator

Strengthening of regulator

Restructuring state company

Privatisation

A,EL

Source: National Cardiff reports, 2001.

FIN,EL

D,DK,FIN,P,S

B,E,EL,IRL,L

F,UK

A,EL,IRL,L

DK,EL,I,UK

D,DK,I,P

A,B,D,L,P

B,E,F,I,IRL

FIN,I,UK

A,IRL

(D)

I,IRL

EL,I,NL

IRL

A,E,EL

E,S

IRL

EL,I,IRL

FIN,L,UK

B,NL

Postal

Services

Air

transport

Railways

Telecommunications

Competition in telecommunications is well-established in most market segments, aided by

new technologies that reduce the monopoly position of fixed networks. Yet several Mem-

ber States report insufficient competition in the local loop and vis-à-vis smaller consumers.

This market segment was only recently opened to competition in many Member States.

Thus, in Belgium, Greece, Ireland, Luxembourg and Spain the fixed-line local loop was

unbundled formally in 2001 in accordance with EU regulation, while new measures in rela-

tion to unbundling were introduced in France and the UK. Some countries still have to

overcome technical obstacles to make competition firmly rooted.

However, even countries which have had unbundled local loops for a number of years

experience lack of competition. To address this, Denmark and Sweden introduced meas-

ures to promote number portability, while firmer regulation of the network owner’s access

charges was introduced in Germany. The telecoms regulator was reformed and strength-

ened in Finland and Greece, and reforms are underway in Belgium, Ireland and Portugal.

A Commission survey has revealed some consumer dissatisfaction with quality and prices,

which may be due to a perception that telecoms operators are “cheating”. Several Member

States raise this point and underline the need for regulators to contribute to transparency,

e.g. by publishing price comparison, setting principles for the layout of consumer bills etc.

The table is only intended to give rough indications. First, it contains initiatives initiated, implementation of

past decision as well as decisions taken in 2001 that will only have effect later. Second, it refers to new initia-

tives, but does not account for the point of departure, i.e. a lack of initiatives may indicate that there is no

need. Third, the importance of initiatives may differ significantly.

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While such initiatives might be helpful, it must be acknowledged that the reduction of

transparency is a reflection of the greater choice of services that are offered in telecoms.

Thus, consumers face the same transparency problems in other markets, e.g. banking serv-

ices.

Privatisation of telecommunications companies has been modest in 2001, partly due to

capital market developments for IT-stocks. Austria partly privatised the state company in

the autumn of 2000, and Greece sold a share of 10 per cent in 2001, reducing state owner-

ship to 41 per cent.

Energy – electricity and natural gas

At the end of 2001, the current electricity and gas directives were transposed correctly into

the national legislation of most Member States. During 2001, Belgium and Germany

amended the gas legislation in response to infringement procedures, and Luxembourg

transposed the gas directive. France has still not transposed the gas directive and the case

was referred to the European Court of Justice in May 2001. However, temporary measures

corresponding to the directive’s requirements have been introduced until legislation is final-

ised.

In 2001 the quantitative market opening was increased in several Member States, and some

opted for new deadlines that should lead to faster full liberalisation. Austria’s electricity

market was fully liberalised. Greece officially initiated a gradual market opening, but the

incumbent dominates and new entrants are not expected before 2004-05. Ireland enacted

new legislation that provides for full market opening in 2005. Luxembourg increased mar-

ket opening to 57 per cent. Wholesale electricity trade was fully liberalised in the Nether-

lands, and full market opening is aimed for in 2004.

While Finland’s geographical location prevents competition in the import of gas, new legis-

lation allows for the establishment of a secondary market. Full opening of gas markets will

take place in 2002 in Austria and possibly Greece, while the Danish government has an-

nounced full market opening in 2004. Ireland has proposed to open the gas market more,

but 50 per cent of transport capacity is already used by competitors to the incumbent.

Most Member States have determined or at least announced targets for the complete open-

ing of electricity and gas markets. The exceptions are France in gas and electricity and

Greece, Italy and Portugal in electricity, while Finland, Greece and Portugal have deroga-

tions with respect to gas market opening. In some Member States, full liberalisation is

moreover only expected in the medium term. As delays in market opening imply that the

full benefits of a Single Market for energy services cannot be achieved, it would be prefer-

able if an agreement could be reached on a coordinated and faster path towards competi-

tive markets. The Commission’s proposal for amendments to the electricity and gas direc-

tives from March 2001 provides an appropriate basis for obtaining political agreement in

this respect.

Similarly, the Commission’s proposals for strengthening the qualitative aspects of market

opening should be seriously considered. This includes the potential problems associated

with the use of negotiated, as opposed to regulated, access as this may constitute as a bar-

rier to entry. Also, stronger rules for unbundling network activities might be needed to

avoid the risk of cross-subsidies and other non-competitive practices of vertically inte-

grated utilities.

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Regulated access to transmission and legal unbundling were in 2001 introduced into Den-

mark’s revised gas legislation, and in Italy a new company was formed for the gas infra-

structure, but it is still related to the incumbent. Greece amended gas market legislation,

implying unbundling and a proposal for a new tariff structure. In the UK, stronger unbun-

dling was introduced in electricity. Thus, the same legal person can no longer hold licenses

for both electricity supply and electricity distribution.

A new energy regulator was established in Austria in 2001 and is proposed in Ireland.

Germany allocated more resources to the competition authorities dealing with discrimina-

tory behaviour in the electricity sector. In Belgium and Spain a technical manager of the

transport system (TSO) was appointed in 2001, although measures to achieve full compli-

ance with the EU directive, e.g. independence of the TSO, have not yet been implemented.

Austria awarded licences to two settlement agencies in charge of handling transactions and

pricing of balancing energy.

Besides adapting the legal framework for energy markets, several countries implemented

measures to make competition more effective. The UK established a new wholesale trading

arrangement in electricity in 2001. The arrangement replaced the existing pool and is based

on bilateral contracts, thereby introducing genuine competition. A review after three

months showed that the new arrangement had led to lower prices and higher liquidity. Al-

though somewhat delayed, Italy expects to establish a “Single Buyer” of electricity charged

with acquiring electricity at the lowest costs for those customers without market access.

To reduce the market share of the incumbent in electricity generation, the French incum-

bent had to sell 6 per cent of capacity for a merger transaction to be authorised by the

European Commission. Ireland has carried out virtual independent power producer auc-

tions, which function as a substitute until new power plants are coming on-stream. In Italy,

three electricity generation companies that were demerged from the incumbent are about

to be sold. To strengthen cross-border trade, Belgium and France have established auctions

over import/export electricity capacity. In Spain, an auction covering 25 per cent of Alge-

rian gas imports was held in 2001.

In a majority of Member States measures have been taken or are under consideration to

promote electricity production based on, e.g., renewable energy sources and small-scale

CHP (combined heat and power). In several cases the establishment of these types of al-

ternative generation capacity has been fully liberalised.

Privatisations have been limited in the energy sector. Greece has made a public offering of

the incumbent electricity company and is preparing the sale of the gas company. Bills gov-

erning privatisation of, or restructuring state-owned, energy companies are under debate in

Ireland and the Netherlands. Italy has privatised part of the electricity incumbent, but im-

posed certain restrictions on ownership, cf. below, and plan to make further privatisations

in the energy sector.

While liberalisation of energy markets has led to immediate gains, one crucial challenge lies

ahead. It remains to be seen if and how liberalised markets can supply sufficient investment

in new capacity, be it generation capacity in electricity or networks in electricity and gas.

The risk of capacity constraints is apparently largest in electricity generation. Moreover,

facilitated by inadequate national regulation, the marginal capacity is often only used ineffi-

ciently to meet peak demand for short periods during the year, which may not provide suf-

ficient investment incentives. In California lack of capacity was one explanation for the

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extreme peak prices, but also in other liberalised markets such as the Nordic region ex-

treme prices have been observed for brief periods. Similarly, there are examples that priva-

tised network companies – e.g. the British rail and gas infrastructure companies – seem-

ingly have under-invested in new capacity and maintenance of existing networks.

In the long term, high prices should lead to investment in new capacity, but capacity con-

straints may exist for prolonged time periods. This is partly due to the long time it takes for

an investment project to come on-stream, which in some cases may span a decade. While

the problem is easily identified, it is likely to be more difficult to solve. One obvious solu-

tion would be to introduce measures that could reduce the difference between peak and

average demand. This requires that price variations are transmitted to end-users that can

then act by reducing demand when prices are high. However, today the available technol-

ogy needed is too expensive to be economical for especially smaller consumers, but

technological development may make this a viable option in the future. Meanwhile,

Member States should monitor the development of capacity investment carefully, and

situations might occur where direct public intervention is necessary for a successful out-

come.

Moreover, it should be noted that several Member States are expecting increased invest-

ment as a consequence of liberalisation. Belgium and France foresee investment in new

electricity generation. In Italy new legislation has simplified the requirements for installa-

tion of electricity generation capacity.

Postal services

In December 2001, the Council adopted a common position on the future liberalisation of

postal services. Today the reserved area is defined by weight and price limits of 350 gr./5

times the basic tariff. These are intended to be reduced to 100 gr./3 times the basic tariff in

2003 and 50 gr./2.5 times the basic tariff in 2006. While agreement on a path towards lib-

eralisation is a step in the right direction, the speed is not impressive and it would have

been preferable with a deadline for the full opening of postal markets.

In Sweden and Finland postal services have been fully liberalised for a number of years and

are functioning well. In both countries, the incumbent still dominates the market and effec-

tive competition is primarily taking place in certain niches, i.e. specific types of services and

in densely populated areas around the larger cities. In Finland one operating license has

been granted to a private operator, which has not yet started postal operations. Interest-

ingly, the Swedish and Finnish incumbents have been able to meet all public service obliga-

tions without requiring compensation from either state or competitors. In Spain, local mail,

for instance inside the Madrid area, but not between cities, and direct advertising services

have also been liberalised.

While Member States generally report that competition in non-restricted areas is function-

ing, relatively little was done in the restricted area during 2001. At the end of 2000, Luxem-

bourg transposed the existing postal directive, and a new access regime for mail operation

came into effect in Portugal during 2001. The French government has submitted a bill that

will require the minister to create conditions for effective competition. In the UK, as a first,

albeit small, step in the direction of liberalisation the statutory monopoly of the Consignia

was replaced by a licensing system, and five interim licenses for specific postal services

were issued.

Ireland published legislation in 2001 permitting private equity investment in the postal

company, and the Danish government intends to privatise its postal company.

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Air transport

The current downturn in the airline industry – worsened, but not caused by the terrorist

attacks on 11 September 2001 – has clearly revealed significant structural weaknesses of the

traditional European flag carriers. Having until now survived partly due to direct or indirect

state aid as well as a traditional system of regulation through bilateral air transport agree-

ments, they are now under large pressure from low cost carriers to implement structural

reforms and cost cutting. This is likely to benefit consumers in the medium-term, but fur-

ther policy measures are likely to be needed to achieve all potential benefits. For instance,

concerns have been expressed that the current regulatory framework based on bilateral air

transport agreements prevents an appropriate consolidation of the European airline indus-

try.

Few and seemingly minor changes in air transport regulation have taken place in 2001. Ire-

land established a new Commission for aviation regulation, and required reduction in air-

port charges. In many Member States competition is very limited on domestic flights. In

Sweden this was in 2001 addressed by a ruling of the authorities, preventing points earned

on the dominant airline’s frequent flyer programme from being used on domestic routes

subject to competition. A similar measure has been considered in Denmark, but does not

appear to be implemented. Spain introduced new regulation of slot allocation rules sup-

posed to increase competition in 2001. The Commission is considering a new proposal for

market-based allocation of airport slots, which could provide new impetus to competition.

Austria privatised Vienna Airport late 2000, and Ireland is giving consideration to the in-

volvement of the private sector in the ownership of the State-owned airport company. The

Spanish flag carrier was floated on the stock market in 2001, and Greece is considering

reorganising Olympic Air as part of a privatisation plan.

Railways

Progress in the liberalisation of railways has been limited. Freight transport has been fully

liberalised in several Member States, for instance in Italy in 2001. Moreover, Community

regulation requires that international freight transport be opened for competition in 2003.

Less is happening in passenger transport, although systems of licenses for local/regional

railways have been in place in, e.g., Germany, the Netherlands, Portugal, Sweden and the

UK for a number of years. In 2001, Denmark awarded the first license to a private opera-

tor, which will take over 15 per cent of passenger transport in 2003.

Belgium is currently preparing a reform of railways, including a revision of the legal frame-

work governing the relationship between the state and the railway company. In Germany, a

draft law was presented in 2001 which if enacted will strengthen supervision of competi-

tion in railways and give the regulator a more proactive role. Moreover, a task force has

recommended that a more transparent relationship between the operating and network

division of the national railway company be established. However, it is also recommended

that the network division should not be demerged from the operating company. Corre-

spondingly, an Irish report recommended, due to the scale of the country’s railways, that

the railway activities of the existing national transport company should not be placed in a

separate railway company. By contrast, Italy established a separate infrastructure company

in 2001.

Based on the national reports it appears that Member States are pursuing different models

for railway liberalisation. The key question is if networks should remain as part of the in-

cumbent company – as in telecommunications – or unbundled into a separate company –

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the model chosen in energy markets in many Member States. Both models seem to be as-

sociated with problems, as illustrated by a general dissatisfaction with railway services, and

the mixed experience with liberalisation in, e.g., the Netherlands, Sweden and the UK. This

suggests that further analyses could be useful. One important topic is whether economies

of scope are so strong that unbundling the network from service operations yields inherent

unsatisfactory outcomes, at least with current paradigms for which services that are allo-

cated to the network company.

Belgium, Germany and the UK have published plans for large-scale investment in rail in-

frastructure. PPPs are expected to be a central vehicle to provide for investment in railway

infrastructure in some Member States, including Portugal.

3.3. Horizontal issues

Regulatory authorities – need to be strong

Gradually regulatory authorities are being adapted to the challenges of liberalised markets.

This trend can be found in all Member States and all recently liberalised network industries,

although progress varies considerably. First, the responsibilities of regulators are being ex-

tended and clarified. Second, the powers to enforce legislation are being strengthened.

Third, more resources are allocated to regulators, although there are remarkable differences

between countries.

Fourth, the existing regulators are often merged into fewer regulatory

bodies to correspond with market developments. E.g., regulators are being established for

the entire communications and energy markets, respectively.

Most Member States have opted for sector-specific and independent regulators. There are a

few important exceptions, however. Germany, for instance, has not established an energy

regulator. Instead regulation of network access etc. is governed by Association Agreements,

while public interests are to be handled under the general competition laws. In principle,

the prohibition of cartels and abuse of dominant position encompassed in general competi-

tion legislation could be sufficient. Yet the inherent natural monopoly characteristic of

networks has led to the establishment of sector-specific regulation and regulators in most

countries. Independently of the regulatory set-up, some elements seem to be essential to

ensure effectively competition. First, continuous monitoring and supervision of access tar-

iffs and conditions is likely to be required. Second, extended powers to interfere fast and

effectively in response to uncompetitive practices are likely to be advantageous. Third,

lengthy procedures to settle claims of non-competitive practices will discourage potential

new entrants and have to be avoided.

Dominant incumbents – the need for a Single Market

A common characteristic in most network industries and countries is that the incumbent,

i.e. the company that prior to liberalisation had a national or regional monopoly, maintains

a very dominant market position. This is particularly true in the retail segment.

For instance, the Greek energy regulator employs 10 persons and the Finnish 15. By contrast, the British

employs a staff of 340 and the Swedish 165, cf. Commission Working Paper:

First report in the implementation of

the internal electricity and gas market,

SEC(2001) 1957. Some of these differences can be explained by country-

size, the degree of liberalisation etc. But it also seems as if countries that liberalised early and are more com-

mitted to liberalisation devote more resources to the regulator. While it should be avoided increasing the staff

unnecessarily, these figures suggest that some Member States have found a significant strengthening of regu-

lators necessary to ensure effective competition.

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A large market share can be a sign of lack of competition and must be addressed by moni-

toring and assessment of the functioning of markets. Yet it must also be recognised that

there are significant economies of scale, also in market segments without inherent natural

monopoly characteristics such as networks. Thus, retailing is characterised by high fixed

costs in the form of marketing, development of IT-systems etc.

For especially smaller

Member States this implies that national markets can only support few competitors, if they

are to be cost effective. When considering measures to reduce dominant market share at

the national level, the benefits of increased competition must therefore be weighted against

the potential loss of economies of scale.

This highlights clearly why the objective of a Single Market should be pursued vigorously

also in network industries. By eliminating national borders for trade in network industries, a

market large enough to support enough companies for effective competition can be estab-

lished. National efforts to liberalise network industries should therefore be complemented

by coordinated measures at the EU-level in areas such as cross-border infrastructure and

tarification of cross-border trade in electricity. Cross-border infrastructure – e.g. gas pipe-

line and electricity grids – must be extended to eliminate current capacity constraints. This

requires that Member States set the right incentives for relevant industries to invest in pipe-

lines, grids and generation capacity. Concerning tarification of cross-border trade in elec-

tricity a common framework must be established as the current the lack of a common

framework appears to be a significant barrier to the free flow of services. Finally, it must

also be considered if the principles for setting tariffs for gas transport in individual Member

States need to be made more compatible in order to support the establishment of a Single

Market.

Public ownership in open markets – cause for latent conflicts

Most Member States still have significant direct economic interests in companies in the

newly liberalised network industries. Yet some have embarked on extensive privatisation

programmes as markets are being opened, while others have been much more reluctant to

reduce public ownership. However, it is necessary to monitor and consider the extent to

which continued public ownership can be consistent with well-functioning, liberalised mar-

kets.

First, a conflict may arise as governments become responsible for the functioning of mar-

kets, while owning one or more competing firms. This conflict might be alleviated, how-

ever, through the separation of regulatory and ownership roles via, e.g., independence of

the regulatory authority. Similarly, when liberalisation takes the form of public tendering,

government can end up being both bidder through the state-owned company and respon-

sible for selecting the winning bid. There is a risk that this will lead to accusations of gov-

ernment granting favours to the public companies, which may lead to public distrust in the

market. Moreover, continued public ownership may prove harder to justify if the market is

well functioning as this implies that private firms compete and deliver services just as well

as the public companies. And in most network industries a liberalised and well-functioning

market can be found in at least one Member State.

Second, lack of privatisation – combined with limited liberalisation – in some Member

States has proven to increase public objections to liberalisation in other Member States.

Thus, it is perceived to be unfair that some state-owned companies in the energy sector

While estimates differ, evidence suggests that energy companies engaged in retail sales should have at least

�½ million (some estimates indicate several millions) customers to be cost effective.

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apparently use monopoly profits from domestic markets to purchase utilities in other coun-

tries. Italy has, e.g., responded by introducing limits to voting powers and foreign owner-

ship. This may lead to a variety of problems. Consumers facing domestic state-owned mo-

nopolies may end up paying too high prices. Italian consumers lose because restrictions on

ownership rights may prevent optimal trades of stakes in utilities and lead to lower prices

for the assets that are sold. And consumers across Europe loose if progress towards an

effective Single Market is slowed down.

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4. Ageing, pensions and fiscal sustainability

The Gothenburg European Council noted that a comprehensive approach is needed to

meet the challenges of an ageing society and endorsed three broad principles: safeguarding

the capacity of systems to meet social objectives, maintaining financial sustainability and

meeting changing social needs.

With respect to the objective of financial sustainability, Member States face substantial

long-term budgetary pressures due to population changes. The Ageing Working Group of

the EPC

(AWG) analysed these budgetary pressures on the basis of policies in place or

legislated in mid 2000, the time the study was launched. As documented by the AWG, the

average projected increase in pension and other old-age benefit outlays is approximately 3

per cent of GDP on a pre-tax basis from 2000 until 2050.

However, this masks substantial variation across Member States,

cf. table 4.1.

Thus, in the

UK, pension spending is expected to be almost unchanged, while in Greece, the projected

increase amounts to 12 per cent of GDP. The numerical results of the projection exercise

must be interpreted with some caution as full standardisation is not ensured in terms of,

e.g., the expenditures included and the impact on net tax receipts. The projections are part

of an ongoing analysis which will be further developed and harmonized in the coming

years in order to ensure comprehensiveness and facilitate comparability.

The differences between Member States are accounted for by a number of factors, includ-

ing differences in the demographic outlook, eligibility rules, benefit levels as well as the

underlying development in labour market participation and unemployment.

The AWG projections indicate that spending on health care is likely to increase by, for the

average Member State, approximately 2 per cent of GDP until 2050, thus implying total

demographic pressure on the public expenditure side slightly in excess of 5 per cent of

GDP.

The long-term fiscal outlook implied by population ageing is quite sensitive to, e.g., the

future development of labour force participation and employment rates. In many Member

States, the substantial scope for increasing employment rates has been included in the pro-

jections, but will require additional measures to reduce the structural rate of unemployment

and increase the effective retirement age. Moreover, even the full realization of the ambi-

tious Lisbon targets concerning growth and employment combined with a more favourable

demographic scenario, is likely to reduce budgetary pressure by no more than 1,5 per cent

of GDP on average, i.e. to about 4 per cent of GDP.

This underscores the need for continuing and accelerating the process of fiscal consolida-

tion. In addition several Member States should pursue the implementation of comprehen-

sive reforms aimed at containing the costs of pension benefit and health care programmes

and providing stronger incentives for elderly workers to remain in employment.

Public pension systems may be divided into two broad categories: those providing a basic

income and those where pensions are related to past earnings, while at the same time pre-

serving a minimum pension.

”Budgetary challenges posed by ageing populations”, Economic Policy Committee, October 2001.

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Flat rate pension systems are mainly found in Denmark, Ireland, the Netherlands and the

UK. The other Member States have earnings related systems, but with very different fea-

tures and generosity. This diversity explains the difference in acuity of the pension reform

debates and the greater or lesser recourse on pre-funding by the general budget.

Table 4.1 provides an indicative overview of steps taken in recent years in Member States

to address the public expenditure increases related to ageing by reforming pensions, in-

creasing the incentive for later retirement and pre-funding spending through the build-up

of public funds or government debt reduction.

Table 4.1 Reforms of first pillar pension systems in EU Member States.

Peak change in

pension expendi-

ture

Pension reform

(budget impact)

Reforms of early

retirement

schemes

Prefunding

3,7

Partial

Moderate

4,1

None

Partial

Substantial

5,0

Partial

Little

11,2

Partial (exp. 2002)

None

Moderate

7,9

Partial

Moderate

4,0

None

Partial

Little

IRL

4,4

None

Substantial

2,1

Comprehensive (exp. 2002)

Partial

Moderate

2,2

Partial

Substantial

6,2

None

Partial

Moderate

4,2

Partial

Moderate

4,1

Partial

None

Little

FIN

4,7

Partial

Substantial

2,6

Comprehensive

Partial

Substantial

-1,1

Comprehensive

None

Moderate

Source:

”Budgetary challenges posed by ageing populations”, Economic Policy Committee, October 2001 and the

European Commission.

Notes:

1) Per cent of GDP. No account is taken of future changes in tax revenue. In some Member States

(including DK and NL), maturing 2

and 3

pillar systems are expected to generate substantial

revenue – previously paid for through a loss of tax revenue from deductible contributions – asso-

ciated with income taxable pension benefits, thus to some extent offsetting the increase in spend-

ing.

2) Reforms characterized as “comprehensive” involve large reductions in the future expenditure in-

crease through, e.g., the adjustment of benefits for changes in life expectancy or substantially re-

ducing indexation of benefits compared to wages. “Partial” reforms involve, e.g., increasing the

statutory retirement age, the introduction of a stronger actuarial relationship between the retire-

ment age and pension benefits or small reductions of indexation compared to wages.

3) E.g. phasing out of schemes or increasing the actuarial relationship individual retirement age and

early retirement benefits.

4) Through substantial build-up of separate public pension funds or government debt reduction.

Two Member States (I and S) have prepared or completed comprehensive reforms aimed

at substantially alleviating the fiscal burden associated with population ageing. The final

decision of fully implementing the reform in Italy has not yet been taken, and in this Mem-

ber State the reform will be phased in over a very long period. A key element in these re-

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forms involves moving the pay-as-you-go pension system towards an actuarial basis, where

individual (basic) pension benefits are calculated taking into account life expectancy. Ac-

cordingly, further increases in life expectancy will not like previous systems increase the

overall pensions received compared to contributions made, thereby neutralising the finan-

cial effects for individuals and government.

In the UK most public pension benefits are price indexed. Given present demographic

projections this broadly, with respect to public pension expenditures and replacement rates,

effectually compares to adjusting pensions according to increased life expectancy.

Only one Member State (A) with defined benefit systems has recently increased the statu-

tory retirement age, although the impact on the average age of retirement – and hence the

fiscal consequences of ageing – may be limited. A few Member States (E, I) have increased

the required contribution period or raised the participation requirement for earnings-

related pension benefits. In Germany, the retirement age was raised in 1989 with a long

phase-in, which is still on-going.

In Germany the pension reform of 2001 is a substantial systemic change bringing the pen-

sion formula for the statutory scheme better in line with demographic developments, im-

plying a slight reduction of the replacement rate in the long run, while strengthening the in

practice voluntary funded occupational system, and introducing a private pillar scheme

benefiting from substantial subsidies. The budgetary effect is likely to imply a modest net

reduction of future expenditure increases associated with ageing. A legally binding com-

mitment has been given to act if the mandatory contribution rate is to increase beyond

20/22 per cent in 2020 and 2030 respectively (presently 19 per cent), the nature and budg-

etary effects of which is not decided. The 2001 reform also applies to the civil service pen-

sions scheme, thus contributing to reducing the expected future expenditure increases.

A number of other countries (including A, EL, FIN and NL) are currently discussing pen-

sion reforms, typically following lengthy consultation with social partners. Also, a long im-

plementation phase is often envisioned. However, timely reform is essential in order to

exploit the opportunity provided by the relatively low – and in some cases even decreasing

– demographic pressure over the next 5-10 years.

Some Member States (B, E, F, IRL, NL and P) have recently launched pre-funding

schemes that aim at accumulating reserves that may be used to partly cover the future in-

creases in government pension spending. Compared to the extent of future spending in-

creases, the build-up of assets is typically quite modest, however large in the case of Ire-

land.

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Box 4.1. The effects of different pension indexation rules.

A key role is played by the indexation rule applied to pension benefits after retirement. The

effects of price indexation compared to wage indexation differ substantially between pensions in

flat rate versus earnings related defined benefit systems. In four Member States (DK, IRL, NL

and UK), basic public pension benefits are determined as a flat-rate income, whereas in remain-

ing Member States public benefits are largely earnings related.

In flat rate systems, price indexation of pensions implies lower pension increases – compared to

wage indexation – and lower replacement rates in the long run, thereby also substantially

alleviating public expenditure increases.

In Member States with earnings related pensions, the reference wage used generally increases

along with the general wage level thus providing an unchanged replacement rate over time for

new pensioners. A reduction in indexation – applied either to pensions or previous earnings –

will contribute to containing pension expenditures. Portugal and Spain has recently reduced the

indexation of previous earnings, thus moderating the increase in pension expenditures.

After the point of retirement pensions in the earnings related systems are indexed according to

different rules, in a number of cases (E, I and L) according to consumer prices. Compared to

wage indexation this alleviates the increase in pension expenditures somewhat, but does not

imply systematic changes over time in expenditure ratios. However in the case of increasing life

expectancy the future public expenditure increases will be slightly more effectively contained in

the case of price indexation compared to wage indexation of pensions after the point of retire-

ment.

Another difference between flat rate and earnings related systems is that, other things being

equal, the impact of ageing on government expenditures is somewhat more modest in flat-rate

schemes because pension benefit rights do not automatically increase along with, e.g., labour

force participation or employment.

Initiatives along these lines are equivalent to a general policy of fiscal consolidation and

debt reduction through sustained budget surpluses. Ireland has pursued this strategy suc-

cessfully, which has led to very substantial debt reduction. In four Member States (DK,

FIN, L and S), the structural government surplus already exceeded 1,5 pct. of GDP in

2001, thus contributing substantially to lower public debt. However, on average, the struc-

tural budget balance in EU Member States was –1 pct. of GDP in 2001. This highlights the

need to accelerate and sustain the fiscal consolidation process during the next several years.

Some Member States (including B and P) have increased pension generosity, partly in

combination with other reform initiatives. In Finland and Germany, the rules regarding

accrual of pension rights have been modified for certain groups (including women in part-

time or out of employment). These efforts tend to increase the long-term pressure on gov-

ernment finances implied by population ageing, although the importance is likely to be

small.

A substantial number of Member States (A, D, DK, F, FIN, I, NL, S and L) have at-

tempted to establish a closer actuarial link between the age of retirement and individual

pension or early retirement benefits. The changes imply that – at the margin – individuals

to a higher degree will bear the cost associated with their early retirement decision, thus

providing a stronger incentive to labour force participation among older workers. The ef-

fects are still to be assessed, but are generally likely to be modest.

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The budgetary consequences of the steps taken to promote later retirement are not unam-

biguous, however, as the increased actuarial element is often introduced along with more

flexible rules with respect to the timing of retirement, or higher pension or other benefits,

for those who remain longer on the labour market. Efforts in assessing the importance of

these measures compared to the expected overall expenditure increases in ageing related

expenditures are so far limited and needs to be speeded up.

Second and third pillar pension systems are being expanded in several Member States, es-

pecially those where public pensions are or are getting less generous, partly through agree-

ments between social partners. In addition to the improved opportunities for retirement

savings offered to households, this development may also – through, e.g., investment in

equity markets – contribute to more efficient and liquid capital markets, provided a sound

regulatory regime is in place.

Second and third pillar systems have generally been introduced as supplements to existing,

tax-financed pension schemes. There is accordingly no direct reduction in the fiscal impact

of ageing, but the growth of supplementary pensions may partly offset future demands for

more generous, tax-financed pension or other social benefits.

However, second and third

pillar systems may also adversely influence the retirement decision, although the likely scale

of this effect is difficult to estimate. The development of second pillar systems may also to

some extent increase the cost of labour in the short term.

In some Member States, additional fiscal incentives – in the form of preferential tax treat-

ment or subsidies – to second and third pillar systems (B, D, E, I, NL and the UK) have

been introduced or expanded. These efforts will promote the accumulation of private pen-

sion assets, but could also imply deadweight costs and, through the diversion of assets into

tax-favoured or subsidised forms, lead to a negative long-run influence on the government

budget balance. The overall consequences of such incentive schemes for fiscal

sustainability are therefore uncertain. The benefits and costs of tax and other fiscal incen-

tives for 2

and 3

pillar systems will be further analysed and assessed by the AWG.

A few Member States (A, D and FIN) have taken steps towards aligning (typically more

generous) pension benefit rules for government employees with those prevailing in the

private sector, thus facilitating a more transparent old-age income support system and

eliminating preferential treatment of public sector employees.

Future income tax receipts in some Member States, where significant private pension assets have already

been built up through tax-deductible contributions, will increase due to the taxation of pension benefits. This

represents an effect of postponed taxes as the historical annual loss of tax revenue from net payments to

private pension systems gradually shifts to balance or net payments from these systems.

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5. Market-based instruments to protect the environment

As in other areas, it is important that measures to help protect the environment are well

designed. It is therefore essential that policy development is informed by a systematic

analysis of costs and benefits so that these can be weighed against each other.

The use of market-based instruments has gained increased importance throughout the

years, but only on a very gradual basis. The more traditional command-and-control meas-

ures still seem to be the dominating methods to regulate the effects of economic activity on

environment in many Member States and in most Community legislation.

Two purposes drive the growing interest of marked-based instruments such as environ-

mental taxes:

•

There is an increasing awareness that marked-based instruments can lead to a more

efficient allocation of the costs needed to reach agreed environmental targets com-

pared to traditional command-and-control measures.

The revenues generated by environmental taxes can be used to reduce other taxes, e.g.

as part of a more general “green tax reform” where taxes on labour and corporate

profits are reduced at the same time.

The market-based instruments mainly used are taxes on products and user charges on wa-

ter and waste. Tradable emission permits are used vary scarcely by only a few Member

States – and then only for some quite specific fields. Yet various Member States report that

they are about to examine the possibilities of introducing such schemes.

The following description covers the use of market-based instruments in three environ-

mental fields:

•

Climate change and energy use

Water supply, water quality and waste water

Solid waste and products

5.1. Climate change and energy use

Most targets for the reduction of CO

-emissions have been set in order to reach the com-

mitments in the Kyoto Protocol and the subsequent burden-sharing agreement among the

EU countries. The Member States have each set up a strategy comprising a range of politi-

cal measures to reach this objective as well as other targets related to energy use. The vari-

ous types of instruments used are often mixed in a way that complicates a thorough as-

sessment of the environmental and economic effects of each instrument. It would be ap-

propriate, if the strategies chosen included some intermediate targets, whereupon it can be

evaluated whether the mix of instruments chosen has a reasonable cost-efficiency.

Two main tendencies show up when observing the use of marked-based instruments in this

field. First, the use of economic instruments to reduce CO

-emissions, energy use and im-

prove air quality by reduction of SO

and NO

-emissions is more widespread in the trans-

port sector than in other sectors such as manufacturing and agriculture. Second, taxation of

energy consumption by households is applied much more effectively than taxation of en-

ergy use by the business sector.

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All Member States use some kind of vehicle taxation – as a registration tax and/or an an-

nual tax on car ownership – but there are rather large variations in level and structure. A

few Member States have altered their vehicle taxation schemes to give a larger premium to

purchasers/owners of vehicles with less energy use (apart form a general tendency to tax

heavier vehicles more than light etc.). For example, Denmark has introduced a much lower

registration tax on vehicles running more than 40 km per litre. And Austria, Denmark,

Germany, Luxembourg and the UK use various differentiated schemes for the annual

ownership tax that result in lower taxes on cars with higher energy efficiency.

Fuels for vehicles are taxed in all Member States, albeit at very different levels. In general,

gasoline is taxed at a higher level than diesel, the UK being the only exception to this rule.

In some Member States – mainly the Northern countries (except the UK) – the tax differ-

ences between gasoline and diesel are quite remarkable with almost a double tax level on

gasoline compared to diesel. On one hand, diesel results in relatively larger emissions of

different compounds with negative, local environmental effects (NO

, VOC, particles). On

the other hand, CO

emissions – and hence the impact on global environmental problems

– are lower than for petrol. In addition, in some Member States there is a rebate on diesel

use for road haulage, thereby enlarging the effective difference in taxation, at least for some

purposes, although in some cases this is partly offset by, e.g., higher registration taxes ap-

plicable to diesel vehicles. The UK and Sweden have been the first EU countries to intro-

duce low sulphur diesels. In 2001, Belgium, Germany, Ireland and the Netherlands imple-

mented differentiated fuel excise taxes in favour of low sulphur fuels.

Most Member States tax energy use in households. Not only the level, but also the struc-

ture of taxation differs much. Some Member States operate with a more general CO

-tax in

combination with separate energy taxes on the various fuels. Denmark, Finland, Italy, the

Netherlands and Sweden have introduced special CO

-taxes, where the taxation of various

fuels in principle is proportional to the inherent CO

-generation in the fuels.

Various Member States report that the possibilities of raising fuel taxes seem to depend on

the development of the price of crude oil, which at various times has shown markedly

variations.

In most Member States the use of electricity is taxed – the exceptions being Greece, Ire-

land and Luxembourg. The tax levels differ markedly. Presumably, this can be explained

partly by the large differences in the use of nuclear power and hydraulic power among

Member States. Furthermore, it differs in what way the use of electricity is taxed: a tax di-

rected on the final consumption of electricity or various taxes on the fuels used for the

generation of electricity. The mix of taxation has some impact on the efficiency whereby

the taxes lead to less emission of CO

and other substances with environmental effects.

In general, it is not clear how the various kinds of taxation interfere – for example whether

there is a rationale behind the overall level of energy taxation and CO

-taxes on various fuel

products. In some Member States, the energy tax rate is calculated according to energy

content of the fuels (e.g. Belgium), but this seems not in general to be the case.

There is a broad tendency to either exempt or relieve the taxation on energy intensive busi-

ness sectors. Thereby the main advantage by using economic instruments to get a cost-

effective reduction of emissions is lost. For example, in some Member States where house-

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hold consumption of energy is taxed at one level, there is a general tax rebate on energy

used for commercial purposes.

In general there seems to be much concern about the effects of the taxes on business com-

petitiveness. The Member States that were the first to implement an overall CO

-tax have

taken the competitive pressure into consideration when confronting the task of designing

their CO

-tax system. The result is a tax system whereby energy-intensive sectors are either

exempted or get rebates.

Finland was the first country to introduce a CO

-tax as a form of general energy taxation

(in 1990). Initially, the system had very few reliefs and exemptions. The system gradually

came under pressure due to the effects on the competitiveness of energy-intensive indus-

tries and electricity generators, to some extent because other Member States did not follow

up with similar measures. Therefore the system was altered in 1997 when the CO

-tax was

replaced by taxation of electricity consumption, supplemented by a ceiling system for en-

ergy intensive enterprises. It is not even certain, however, that it is rational for a country to

include tax exemptions or reliefs for energy-intensive sectors, even though there seems to

be an immediate competitive advantage. Confronted with binding national CO

-emission

reduction targets, such special treatments inevitably implicate that stronger reductions

would be required in others sectors – and inevitably in places where reductions would be

more costly to achieve. This is the drawback of not having a cost-effective reduction pol-

icy.

Certainly, it would be more cost-efficient for the entire EU, if energy-intensive sectors were

taxed at a level more in line with the tax rates levied on other. Progress in this field requires

a coordinated effort among Member States. It could thus be facilitated by common action

at the Community level agreeing on minimum levels for the taxation of CO

-emissions as

well as common rules regarding phase-out of exemptions. An alternative to this could be

implementation of an ambitious emissions trading scheme at the European level, as pro-

posed by the Commission in 2001.

In some Member States increases in CO

and energy taxation have been part of “green tax

reforms”, where (some of) the revenue from the increase in green taxes has been returned

to the private sector as part of an overall package. Denmark, Germany, the Netherlands,

Sweden and the UK have made such arrangements in the last decade. The increase in green

tax revenue has been returned mainly in the form of lower taxes on labour income or lower

social contribution rates, thereby giving a positive contribution to the employment stance

of the economy. The overall effect of these initiatives is however difficult to assess, as they

have been implemented as part of a larger package with other measures: Subsidies for in-

vestments in energy-saving equipment, voluntary agreements on energy conservation with

the business sector in change for tax exemptions or rebates, and so forth.

Tradable emission permits are especially well suited in the case of greenhouse gas emissions

because of the global nature of the problem: The environmental effect per unit of green-

house gas emitted is independent of the site of emission.

Denmark has introduced an emissions trading system for CO

-emissions used by power

plants for electricity generation. The UK has planned to introduce a greenhouse gas emis-

sions trading scheme, which will be voluntary for all kind of companies in the economy to

step into. Other Member States are actively examining the possibilities of introducing trad-

able CO

-emission permits schemes (Germany, the Netherlands and Sweden).

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Deregulation or liberalisation of the energy sector can have some implications for the over-

all use of energy and the use of fossil fuels by power plants. Greater competition should be

expected to lead to more efficient use of the resources in power generation and thereby

lower prices on electricity. It is possible that effects like this will counteract the beneficial

environmental effects of higher taxes on energy and CO

. This was the expectation in Swe-

den after the deregulation of the electricity market in 1996. On the other hand, such de-

creases in electricity prices could in principle be met by increases in tax levels.

If energy sector deregulation and the phasing-in of electricity taxes take place simultane-

ously it can have the unfavourable effect that consumers do not appreciate the benefits of

deregulation as they do not experience decreasing prices on electricity. Yet this should not

conceal the fact that such a process is an unconditional social economic benefit, which

among other things gives a revenue gain that can be used to reduce other taxes.

The restructuring of the energy sector following a deregulation or liberalisation can alter

the way taxes bring incentives for both electricity producers and end-users of electricity.

Optimally, such structural changes should be followed by a review of the design of the

energy- and CO

-tax structures.

5.2. Water supply, water quality and wastewater

The amount of water resources varies markedly among the Member States (depending on

population density, weather conditions, and agricultural use), for which reason it is natural

to observe some variations in the scope of central authority control with the pricing of

water supply.

Whether the water is supplied by extraction of ground water or by purification of surface

water, supplier companies have to be financed. This is usually done by charges on the

household and business users of water. Depending on the organizational structure of the

water suppliers, these charges are either paid directly to the supplier company or to the

local authorities – but in itself this should not be seen as taxation.

However, it is possible on top of these charges – which are payments to the supplier com-

pany or the local authority for the service – to levy an additional tax on the use of water. A

few Member States use such taxes as a way to spare the overall extraction of ground water.

Extraction of ground water is taxed on a regional basis in Germany (the Länder) and Bel-

gium (the two regions Flandern and Wallonia). In the Netherlands various levies on ground

water extraction are used on a regional basis. Denmark is the only country having a central

governmental tax on water supply paid directly by households – in this case on the amount

of piped water irrespective of its origin.

Many Member States operate with a regulatory basis, which at the local level ensures some

correspondence between the amount of water used by consumers and firms and the pay-

ment for the service. France and Finland report having a regulatory basis requiring the use

of a kind of “polluter pays” principle for the setting of charges: Thereby the charges should

fully reflect the investment, maintenance and operation costs of the water suppliers, and

should include a further element, if it is needed to regulate the amount of water consump-

tion – depending on water scarcity in the location.

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However, some Member States seem to have a regulatory set-up, which does not even en-

sure that household or firm payments for water supply correspond with the amount of

water used. Arrangements based solely on a fixed connection fee do not give any incentives

for efficient use of water resources. In the absence of pricing mechanisms corresponding

to the amount of water supplied, there is a continued risk of depletion of the water re-

sources.

Almost all Member States charges waste water and various forms of water pollution.

Belgium, Denmark, Germany and the Netherlands have introduced governmental levies –

either central or regional – on industrial and household wastewater sent into the sewage

system.

Remarkably, the UK has actively taken the stance

not

to use charges on water pollution.

Instead the UK favours the use of traditional emission controls, with the rationale that

whether a given amount of pollution will be harmful to the nature is most frequent very

site-specific. After examination of the issue, the British government concluded that a sys-

tem of national pollution charges would be unlikely to deliver the same environmental

benefits as targeted emission controls.

The quality of water is affected much by the use of fertilizers and pesticides in agriculture,

why agricultural policy can be of considerable importance. A range of Member States is

reported to tax agricultural use of pesticides at various degrees (Belgium, Denmark, France,

Finland, Greece and Sweden), but only Sweden has a tax on the use of fertilizers in agricul-

ture.

5.3. Solid waste and products

An increasing number of Member States has introduced taxes on solid waste. In general,

however, administrative regulations based on controls still form the basis of the overall

strategies to handle a proper management of the waste formed.

A range of Member States has introduced a governmental tax on waste brought to landfill

(Austria, Denmark, Finland, France, Greece, Italy, the Netherlands, Sweden and the UK) –

the aim being to improve incentives so that a larger part of the potentially combustible

waste will be brought to combustion instead of landfills. In addition to the tax on landfills,

Denmark has a tax on waste brought to combustion – with a lower level than the tax rate

for waste brought to landfills, thereby keeping incentives for proper handling. If the waste

is used to combustion for electricity or heat production the rate is even lower.

The functioning of the overall waste management systems depends very much on the or-

ganizational structure at the local authority level. Whether a tax on waste will lead to less

waste and/or a better allocation of it for subsequent handling by waste management com-

panies depends on the tax structure and the setting of charges. On the one hand, there

should be a charging structure that has a direct impact on the behaviour of the waste pro-

ducers: households and firms. On the other hand, waste management companies should

have good incentives to reduce overall managements costs and at the same time incentives

to seek the most environmentally favourable treatment of the waste, depending on the kind

of waste. An objective of approaching the ”polluter pays principle” could very well require

a thorough examination of the actual incentives for the various agents in waste manage-

ment.

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It should be noted that the UK is considering the introduction of a tradable landfill permits

scheme. This scheme will, however, only be applied to biodegradable waste, but if intro-

duced it will be an innovative measure in this field.

In addition to the more general taxes on waste, several Member States have introduced

various environmental taxes on special products, which are seen as environmentally haz-

ardous (e.g. packaging, batteries, electrical equipment, solvents). The amount of such prod-

ucts taxes varies markedly among Member States – Belgium and Denmark being the Mem-

ber States with the largest amount of different tax objects – but almost all Member States

levy taxes on some kinds of environmental hazardous products.

In most Member States there is an increased tendency to focus on obligatory recycling of

various products. Especially Germany, the Netherlands and Sweden put much focus on a

more general producer responsibility of products – the rationale being that the costs of

subsequent environmental handling thereby will be internalised in the pricing of the prod-

ucts, in accordance with the “polluter pays principle”. In a range of Member States re-use

or recycling of special products has been made mandatory. However, in general there have

not been comprehensive examinations of whether producer responsibility is the best way

to achieve cost-efficient solutions with regard to the environmental targets, or whether a

system of taxes or tradable permits would be more efficient. Taxes and other economic

instruments are used more frequently in Member States to reach a more environmentally

sound management of waste.

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6. Structural reforms in Member States

This chapter contains a summary – based on the 2002 country examinations -

of the present conditions, future challenges and initiatives taken with respect

to structural conditions and policies in the individual Member States.

The main text highlights the most important issues with respect to ageing and

fiscal sustainability, product and capital markets and labour markets and con-

cludes by raising the most important future structural challenges to be consid-

ered.

The summary tables are organised according to the structural issues being ex-

amined and include three columns. The first column indicates the present

stance of performance and policies with respect to the issues considered. The

second column summarises action taken in 2001. The third column assesses

and repeats the specific recommendations given in the 2001 Broad Economic

Policy Guidelines (BEPG) to the extent recommendations where given in the

policy area considered.

Compared to the previous annual reports the scope is thus widened aiming at

providing an overview of the structural issues in all the areas examined. This

gives a broader perspective with respect to previous achievements and other

initiatives taken when assessing the specific BEPG-recommendations given

and being addressed in 2001.

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Belgium

Belgium enjoyed strong growth up to 2000 followed by a considerable weakening in 2001 triggered by

the international slowdown. Employment, however, increased further in 2001. Inflation was at the EU-

average.

Belgium recorded in 2000 and 2001 its first (small)

budgetary surpluses

in 50 years. The – still very

high – debt to GDP ratio is falling rapidly and estimated to fall below 100 per cent of GDP in 2003.

Strictly controlling the annual increase in primary expenditure will be necessary in order to maintain a

primary surplus at or above 6 per cent of GDP as envisaged by the government in its Stability Pro-

gramme. Debt reduction contributes to the preparation for the

ageing

population for which also budgetary

surpluses and one-off revenues will be collected in a still very small special fund. Limited measures have

been taken so far to reform pension and early retirement systems and promote later retirement. Second

and third pension pillars will be developed.

The

product markets

in Belgium generally work well. The average productivity level is substantially

higher than the EU-average, due to, e.g. a highly qualified labour force in manufacturing and a very open

economy. A low employment rate undoubtedly contributes to the high productivity level, as workers with

relative low productive potentials appear to be broadly out of work. Competition in domestic services is

less advanced and administrative burdens are considered fairly high, even if significant improvement has

taken place. Liberalisation of network industries proceeds slowly and the effect on prices is not yet impor-

tant for consumers. The strong involvement of local authorities in some public services could impede the

liberalisation process. On the whole, the activity of regulatory authorities lacks transparency. Investments

in railways are projected to increase sharply.

Capital markets

develop rapidly in Belgium, notably with

the creation of Euronext. The trend towards concentration in the banking sector should be closely moni-

tored by regulators.

Unemployment is somewhat below the EU-average, but higher than in a number of countries. Employ-

ment has increased strongly over the last five years, but the employment rate is still below the average

EU-level. Large regional disparities and other signs of segmentation persist in the

labour market.

Fe-

male employment rates are low and the employment rate of older workers is very low and hardly increas-

ing. Efforts to improve labour market structures include tax reductions and more active labour market

policies, while little has been done to reform benefit systems and employment protection.

Good progress

has been made with respect to implementing the specific BEPG-recommendations for

2001.

The most important policy areas to be addressed are:

•

Stimulating social partners’ negotiations over

wage moderation and differentiation

and tackle ob-

stacles to labour mobility such as housing registration taxes, traffic congestion and public transport

difficulties

•

Clarifying and strengthening the

regulatory authorities

to enhance competition in product markets

•

Continuing the reduction of administrative burdens

•

Continuing the reduction of

government debt

and increasing the pre-funding of future ageing related

expenditures

•

Accelerating reform of pension systems and

early retirement

programmes to promote later retirement

Position and challenges (B)

Implementation of EU directives

Implementation deficit slightly above

average and many infringement pro-

ceedings.

State aid

High level (mainly railways).

Administrative burdens

are still considered to be high.

Action taken

An action plan and a special Commis-

sioner have helped reducing the trans-

position deficit. However, these efforts

have slowed down and needs to be

pursued further.

Significant efforts have promoted ad-

ministrative and fiscal simplification,

introduced e-government and reforms

of the public administration.

2001 BEPG recommendations

In progress

“Take measures to reduce and simplify the

administrative burden on business.”

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Position and challenges (B)

Competition policy

Belgium has empowered its competi-

tion authority to apply EC law. Prov-

inces and municipalities are very active

in diverse sectors such as distribution

of electricity and gas, waste disposal,

and private partners enjoy preferential

treatment.

Network industries

Household and industrial electricity

prices are significantly above EU aver-

age, as are gas household prices. Full

liberalisation in these sectors is planned

quite late. Close to monopoly positions

in the generation and local monopolies

in the distribution of electricity and gas.

In telecommunication, competition has

intensified on the international calls

segments but local costs remain high

above EU average. In mobile telecom-

munication, while prices are relatively

low, the network is near saturation due

to strict regulations and uncertainty

about the granting of the fourth licence.

Action taken

Regions have undertaken to separate

their transport and sales activities in

energy, but more progress should be

done to clarify public intervention in

economic activities.

2001 BEPG recommendations

Partial

“Increase the transparency of the links

between the public and private sectors at

the local and provincial level, especially

the role of municipalities and their associa-

tions in different sectors such as energy, in

order to avoid distortions of competition

and conflicts of interests. ”

Risk capital and capital markets

have developed over recent years

through the creation of Euronext, the

intervention of new operators like pen-

sion or mutual funds and specific

measures.

Concentration in the banking sector

poses a challenge to the supervisory

authorities, yet in reorganisation.

Human capital and R&D

R&D and patent activity are evolving

in line with the EU average. R&D

business share is however low. Number

of graduates in science and technology

is low despite a high share of popula-

tion with tertiary education.

ICT

The use of ICT is well developed in

households, but slower in business and

schools. Internet charges are high.

Liberalisation of electricity and gas is

proceeding slowly and could be

speeded up. The new independent regu-

lator for eligible consumers will have to

address the distortions caused by lack

of transparency in public-private part-

nerships.

Following the infringement procedure

launched by the Commission, a reform

is in preparation to resolve the conflict

of interest between both shareholder

and regulator roles of government in

telecommunications.

Effective number portability and full

unbundling of the local loop have been

delayed but should start to take off

thanks to cheap unbundled lines and

interconnection charges.

A reform of the railways is scheduled.

The requirement for pension funds to

invest a minimum percentage in Bel-

gian shares is to be removed. The effi-

ciency of corporate taxation will be

increased by rate reductions tax exemp-

tions for reinvested profits, while the

tax base will be broadened. Procedures

in case of co rporate insolvency are to

be adapted in order to limit the negative

consequences of bankruptcy.

Partial

i..“Increase competition in transport and

distribution of gas and electricity and set

up independent transportation network

managers in these sectors in order to

ensure non-discriminatory access.”

ii. “ Ensure that the planned reform of the

railways will increase efficiency and

quality of service and reduce the need for

operating subsidies.”

In progress

“Develop further the risk capital market by

easing quantitative constraints on

institutional investment in equity capital,

by establishing a fiscal framework more

conducive to investment and

entrepreneurship, the latter to be also

encouraged by adjusting bankruptcy

laws. ”

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Action taken

Significant tax reductions including

indirect labour costs for low skilled

have been implemented or are foreseen

during 2001-2006.

Active labour market measures have

been enhanced.

The latest intersectoral agreement al-

lowed somewhat greater scope for

The employment rate has been growing wage differentiation at sectoral level.

Temporary contracts were introduced

steadily during the second half of the

in the construction sector.

nineties but is still below EU average,

mainly because of relatively lower rates The new time-credit system and of the

gradual reduction of the working week

for youth (15-24 years), women above

40 years and in particular older workers needs to be closely observed.

Early retirement schemes have been

(55-64 years).

slightly revised.

The generous unemployment benefit

Tax rates and benefit levels are high.

system has not been modified.

Pension reform limited to supplement-

Ageing and pension reform

The future increase in ageing related

ing state pensions on a sector-based

spending pressures is on average.

level. Creation of a fund to be financed

Public debt reduction is proceeding and with exceptional receipts and budgetary

a reserve fund has been initiated.

surpluses.

Few measures to reform pensions or

promote later retirement until now.

Environment

Negotiable permit system for green-

house gas has been set up.

Position and challenges (B)

Labour market

The unemployment rate is somewhat

below EU average, but large regional

disparities persist. Wage flexibility

remains low. Labour mobility is high to

Brussels but low from Wallonia to

Flanders.

2001 BEPG recommendations

In progress

“… reform further tax and benefit systems

to make work pay, … create adequate

incentives for older people to continue to

work or re-enter the labour market…

revise the special arrangements exempting

older unemployed people … from active

job search … address the main obstacles to

labour mobility and encourage Social

Partners to allow wage-setting Mecha-

nisms to better take into account productiv-

ity and local labour market conditions …

continue to enhance … labour market

flexibility by further relaxing conditions for

fixed term and temporary contracts and

increasing working-time flexibility, while

ensuring that any reduction in working

time has no adverse impact on unit labour

costs and supply. ”

In progress

“ Prepare for … ageing by timely reform of

the pension system, including the identifi-

cation of the budgetary resources to be

allocated annually to the Ageing Fund.”

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Denmark

The international slowdown and the aftermath of a hurricane initiated construction boom in 2000 reduced

growth in 2001 in line with the EU-average. Employment growth levelled off in 2001 and unemployment

is stabilised below EU-average. Inflation is around the EU-average.

The

budget balance

has been in surplus for several years, and surpluses are also projected in forthcoming

years. The new Danish government is implementing a tax freeze, which will slightly and gradually de-

crease the tax burden due to fixed nominal excise duties and property taxes. Expenditures will be reduced

simultaneously, and the medium-term debt reduction strategy is unchanged. The projected future increase

ageing

related expenditures is about average, but due to a return of postponed tax revenues in private

pension funds and a comprehensive debt reduction strategy preparations are advanced.

Average labour productivity has recently improved from being slightly below to being above EU-average.

The average price level is still more than 20 percent above EU-average. Even if to large extent accounted

for by very high indirect taxes this, combined with a trade to GDP ratio that is lower than expected for a

small country, suggests too weak competition in

product markets.

The Competition Authority, the ef-

forts of which have become more targeted and offensive, has identified a large number of sub-sectors

with insufficient competition. The legislative process of liberalisation is well advanced in telecommunica-

tions and electricity, and the new government has announced that other network industries will be liberal-

ised in the coming years, and that privatisation efforts will be speeded up. Due to the large size of the

public sector, measures to enhance efficiency are particularly important.

R&D

investments are on aver-

age, but businesses and consumers adopt new technologies quickly. The use of ICT is very well devel-

oped.

Capital markets

are undergoing substantial changes, and the regulatory framework has been

changed in recent years.

The

labour market

is characterised by a low rate of unemployment and employment rates are among the

highest, in particular among youth and women, whereas employment rates of prime age men and older

workers are less impressive. An important share of working age population receives disability or early

retirement benefits. A substantial number of reforms have addressed these problems, although these have

not been far reaching. Due to unfavourable demographic developments and already low unemployment,

further measures to increase labour supply are necessary if employment is to increase significantly more.

Some progress

has been made with respect to implementing the specific BEPG recommendations for

2001.

The most important policy areas to be addressed are:

•

Developing

competition

in domestic services and construction markets

•

Improving the

regulation of network industries

and considering further liberalisation

•

Improving

public sector efficiency,

e.g., through better tendering and use of new technologies

•

Pursuing reforms of

higher education

to increase performance and meet demands of private sector

•

Reforming the

tax and in particular benefit system

further to foster a higher labour supply and job

participation, notably among older workers

Position and challenges (DK)

Implementation of EU Directives

The transposition deficit is very low.

State aid

Is at the EU-average, but primarily

for horizontal purposes and very little

sector specific and

ad hoc

aid.

Public procurement

The value of tenders in Official Jour-

nal is higher than EU-average. If

relative size of public sector is taken

into account, tendering in local gov-

ernment is low due to very low ten-

dering in health, education and care

Action taken

The deficit has fallen slightly.

The level has been unchanged.

2001 BEPG recommendations

Based on a survey of local authori-

ties, the Competition Authority has

formulated a series of recommenda-

tions on how to expand the use of

tendering as a means to increase

efficiency in the provision of serv-

ices.

In progress

“ Enhance conditions for competition in

public procurement, and heighten com-

petitive pressures in public services

provision at the local level through

benchmarking and increased use of

public tendering.”

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Position and challenges (DK)

sectors.

Administrative burdens

Complex rules with respect to envi-

ronment, health and safety etc.

Action taken

2001 BEPG recommendations

A new deregulation unit has been

established, and the government

intends to remove administrative

demands on in particular SMEs.

Measures to facilitate cartels investi-

Competition policy

The competition authority complies

gations and raise penalties from their

with EU law and has become increas- currently very low level are envis-

ingly active with respect to monitor- aged.

ing and targeted measures. High

Tendering in the construction sector

relative prices due to weak competi- has been opened.

tion in construction, many service

and some manufacturing sectors.

Gas legislation changed and includes

Network industries

provisions for the qualitative market

Liberalisation completed for tele-

opening suggested by the Commis-

communication and advanced for

sion. New government announced

electricity. Limited opening of gas,

intentions to fully liberalise all net-

postal and railways markets. Prices

work industries, including gas in

are generally low by EU-standards.

Concentration is high in some cases, 2004.

and needs to be considered taking

Privatisation of state-owned enter-

into account the relatively small

prises will be regularly considered,

markets size. Public ownership in

and the gas and post incumbents will

most industries. This has caused

some problems in recent tendering of be prepared for privatisation.

part of railways system.

Law enacted that consolidates in one

Risk capital and capital markets

Generally well developed. Significant act all rules that are common to dif-

merger activities.

ferent types of financial institutions.

Corporate tax rate reduced from 32 to

Venture capital markets appears to be 30 per cent. Working group estab-

relatively underdeveloped, especially lished to make recommendations in

regarding early-stage funding. Recent relation to rules on debt rescheduling

analysis, however, suggests that

and restructuring of insolvent firms.

previous data significantly underes-

Larger flexibility in publicly owned

timates the level.

growth fund stimulates risk capital.

To boost commercialisation of re-

Human capital and R&D

R&D expenditure are on average, but search, government envisages meas-

low in private sector. Patenting is on ures to more closely associate public

average, but lower than in neighbour- research with private enterprises.

ing countries. Insufficient supply of

sciences and technology specialists.

Fairly high level of education and

large spending. However, this in-

cludes very high student grants,

which may distort behaviour.

A new tax credit on PC purchases

ICT

Diffusion of ICT to businesses and

and probably broadband access is

consumers is very high.

implemented.

Partial

“Strengthen enforcement of competition

rules in those industries where competi-

tion has been found to be inadequate.”

Partial

“Develop the risk capital market by

further adapting the fiscal framework so

as to facilitate investment and entre-

preneurship, the latter to be also en-

couraged by adjusting bankruptcy laws”

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Position and challenges (DK)

Labour markets

Low unemployment rate and very

high employment rate, yet a signifi-

cant share of working age population

is inactive (ALMPs, early retirement

or disability benefits). A large me-

dium-term challenge of raising em-

ployment rate further to meet fiscal

policy objectives, including increas-

ing labour market participation by

immigrants.

Benefits as well as average and mar-

ginal tax rates on labour are still high.

A low level of employment protec-

tion contributes to large job turn over

and low youth unemployment.

Ageing and pension reform

The future increase in ageing related

spending pressures is on average. The

comprehensive strategy relies primar-

ily on government debt reduction.

Environment

Widespread use of taxes, subsidies

and trading schemes.

Action taken

Final step of previous tax reform

reduces income tax rates somewhat.

Income taxation may be reduced in

2004 if sufficient leverage in public

finances has been achieved. A key

challenge will be to contain the his-

torical upward drift in tax rates and

expenditure in local government

The inflow to disability pensions

continues at much lower levels than

in the past. A further reform is being

implemented. The inflow rate to

early retirement has flattened as ex-

pected due to a previous, but not far-

reaching, reform.

The reduction of public debt has

continued.

No further measures to promote later

retirement were announced.

The level of green taxes increased

slightly in 2001.

2001 BEPG recommendations

Partial

“Reduce further the overall fiscal pres-

sure on labour over the coming years,

especially through lowering high mar-

ginal effective tax rates on low and

medium wage earners to make work pay,

and thus continue reforms of transfer

systems.”

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Germany

Economic growth in Germany deteriorated more than average in the course of the international slowdown

2001, while employment stagnated. Inflation was below the EU-average in 2001. Growth performance

since the unification boom has been negatively affected by the necessary adjustment and consolidation.

Following a

budget surplus

in 2000 (affected by large UMTS proceeds) a deficit of 2.5 per cent of GDP

is estimated for 2001 mainly due to the weakening of economic activities, but also a somewhat higher

than expected increase in expenditures and the tax reform. The future expenditure increases associated

with population

ageing

are potentially higher than the EU-average. A promotion of later retirement and

the pension reform of 2001 – being a large systemic change contributing to some reduction of the net

future budgetary impact of ageing – are steps towards developing a comprehensive strategy in this area.

The average productivity level is a little below the EU average, hiding a large difference between the

Eastern and Western parts of the country. Productivity growth has been weak in recent years. The price

level has converged from above to the EU average.

Product market competition

is fairly advanced, as

the German economy is well integrated into the European economy and due to high levels of competition

in the retail sector. Liberalisation in network industries is advanced, but the fees for the use of local elec-

tricity distribution networks differ considerably. Concerns have been expressed if the reliance on Associa-

tion Agreements and negotiated access to energy networks will

de facto

allow new entries and effective

competition.

R&D

investment and educational standards are high, although enrolment in tertiary educa-

tion is below average. Reforms in education and research are currently being implemented to safeguard

advanced positions in technology and innovation.

Capital markets

are likely to improve as legislation

enhancing transparency of public security offers and take-over procedures came into force in January

2002. Together with the company tax reform, this could provide incentives to reduce the widespread

cross-ownership of German companies and enhance pressures for shareholder value.

labour markets

unemployment is at the EU average. Large regional differences persist with particu-

larly high unemployment in the Eastern part of the country. The employment rate is slightly above the EU

average, although employment has increased significantly less than average in the 1990’s. While the

employment rate of older workers aged 55-59 is relatively high, the employment rate of those aged 60-64

is below the EU average. Education standards and a relatively low youth unemployment rate are labour

market advantages. Policies to reduce structural labour market problems include tax reductions, a fairly

high level of active labour market measures and a particular reliance on consensual central wage negotia-

tions containing wage increases within sustainable levels. Wage differentiation is somewhat limited, but

wage flexibility has been increased in sectoral agreements. The tax measures have increased incentives

also for the low skilled workers, where the incidence of unemployment is particularly large. Improving

incentives in benefit systems remains a major task. Job protection legislation is extensive.

Progress

has been made with respect to implementing the specific BEPG recommendations for 2001.

The most important policy areas to be addressed are:

Continuing to pursue

labour market reforms,

in particular by addressing disincentives imbedded in

transfer systems

Improving transposition record of

single market directives

Continuing reduction of

administrative burdens

and reviewing

employment protection

Monitoring and enforcing competition under Association Agreements in

energy sectors

Strengthening efforts to prepare for the

ageing

population, including public debt reduction, further

promoting later retirement, closely assessing the impact of the pension reform and ensuring the abil-

ity of the reform to contain future net spending increases

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Position and challenges (D)

Implementation of EU directives

Implementation deficit is above aver-

age several infringement proceedings.

State aid

Sector specific and

ad hoc

state aid is

slightly above EU-average.

Public procurement

The value of public tenders published

in the EU Official Journal was the

lowest among Member States in 2000.

Administrative burden

The burdens are perceived to be rela-

tive high according to some indicators

and surveys among German companies.

Competition policy

The competition authorities comply

with community rules.

The German economy is well inte-

grated into the European and world

economies. Falling relative price level

indicates increasing competition.

Network industries

Full formal market opening in tele-

communication and energy has taken

place. A competitive framework is also

in place in other network industries.

Large private and foreign ownership in

network industries.

Action taken

The non-transposition rate declined in

2001, but directives on environment

and plant health are not implemented.

State aid has fallen during a number of

years, a trend that is set to continue

according to plan until 2005.

New regulation entered into force in

2001 implying the transposition of all

Community directives on public pro-

curement.

Several measures have been taken to

reduce the regulatory burden on busi-

ness and offer e-services.

A change in legislation is under prepa-

ration, which should facilitate the

cross-border delivery of handicrafts.

Legal constraints on the professions

have been lifted.

2001 BEPG recommendations

In progress

”Reinforce competition in product markets

by further opening-up of public procure-

ment, continuing the policy of gradual

reductions in State aid, and continuing to

decrease the regulations for the professions

and handicrafts trade. ”

Investigations of fees charged for the

use of electricity distribution networks

is carried out. A test case against a

large network operator has already led

to a decline in transport fees. Other

cases are pending. In order to handle

the increased caseload, a new depart-

ment was created within the federal

Fees for local electricity distribution

competition authority and additional

networks differ considerably. Concerns resources were made available for this

that negotiated third party access in

purpose.

electricity and gas may act as a barrier

A ministerial task force has mediated

to new entry. Effective competition in

and contestability of energy markets

amendments to AA for the electricity

has to be monitored and enforced by

industry to facilitate switching for small

authorities.

customers. It also addresses access fees.

While electricity prices for industry

Prices in telecommunication are some- have come down, consumer prices

what below average, whereas electricity remain above average.

prices for households are relatively

Competition in the railway sector is

being strengthened.

high.

In addition to the tax reform changes in

Risk capital and capital markets

the fiscal and regulatory framework on

Venture capital is well developed, but

risk capital (e.g. the creation of pension

suffered in 2001due to stock market

funds and plans for a modified taxation

developments.

of asset management funds) were

Inward foreign direct investment is low made.

The equity capital program on partici-

compared to the EU average.

pation capital for small high-tech com-

Merger activities in the banking sector panies will be continued.

are weak.

Partial

” Make efforts to reduce the large regional

differences in the fees for the use of local

electricity distribution networks”.

Partial

”Further develop the risk capital market by

continuing efforts to establish a fiscal and

regulatory framework more conducive to

investment and entrepreneurship”.

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Position and challenges (D)

Human capital and R&D

Germany continues to build on its rela-

tively strong position in the knowledge-

based economy. The share of the labour

force with at least upper secondary

education is the highest amongst EU

Member States.

Action taken

R&D investments have risen somewhat

further as a per cent of GDP.

2001 BEPG recommendations

Satisfactory

”Reform the higher education system and

reduce shortages of IT personnel through

education and training”.

The historical relative advantage in

human capital might decrease in the

future as enrolment in tertiary educa-

tion is below average. The recent re-

form of the higher education system

implies the introduction of a perform-

R&D expenditure well above EU-

average, and number of patent applica- ance-linked pay scale for professors

and the creation of positions for so-

tions are twice the EU-level.

called ‘junior professors’.

Measures encourage stronger transfer

of knowledge to the business sector.

New measures resulted in an additional

ICT

Internet access at home and in the work 100,000 IT experts being mobilised by

place is now somewhat above the aver- the end of 2000.

age EU-level. However, the use of

government services on line and inter-

The programme "Bund online 2005" is

net connections in schools is below

being implemented and brings online

average. e-Commerce is well above the all government services suitable for the

EU average,

internet.

All schools got access to the internet.

Labour markets

Unemployment is at the EU average

with large regional differences.

The employment rate is slightly higher

than average. Youth unemployment is

relatively low.

The wage inflation outcome relies

heavily on central wage negotiations

facilitated successfully by tri-partite

institutions in recent years. Wage dif-

ferentiation is somewhat limited.

The tax reform increases work incen-

tives across the board, but few meas-

ures or plans to address the disincen-

tives arising from benefit schemes have

so far been put forward. Employment

protection is extensive.

Marginal tax rates have been cut over

the whole tariff.

Flexibility of working time has been

increased for a significant share of

workers.

Partial

”Target ALMPs better towards those

groups most prone to the risk of long-term

unemployment and ensure that training

better matches the demands of the labour

market. Improve the efficiency of ALMPs,

in particular in the New Länder. Continue

to encourage the wage formation process

to better take into account productivity and

regional labour market conditions”.

Pilot project to reduce social security

contributions for low wage earners. The

government has decided to extend the

Partial

”Complement the income tax reform with

model to the whole country.

“Job

AQTIV”

is a bill strengthening

early activation and job search assis-

tance. Enforcement measures are

strengthened. Training measures and

job-rotation are introduced. However,

the coverage of unemployment insur-

ance is increased.

further reforms of the tax and benefit

system to make work pay. Further steps

should be taken to reduce the still-high

level of non-wage labour costs, in particu-

lar for low wage labour”.

Partial

”Take measures, where appropriate in the

framework of the “Alliance for Jobs”, to

make work contracts and work organisa-

tion more flexible and to improve the

conditions for life-long learning”.

Limited efficiency of large-scale

ALMPs, in particular in the eastern part The trend towards introducing decen-

of the country.

tralised elements of wage bargaining

seems to be continuing.

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DG G

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Position and challenges (D)

Ageing and pension reform

The future increase in ageing related

spending pressures is potentially above

average.

Action taken

The pension reform passed in May is a

substantial systemic change, although

with a likely modest alleviation of the

net future budgetary impact of ageing,

partly because the partial shift from

Government debt needs to be reduced. public to private benefits involve sub-

Steps have been taken towards develop- stantial subsidies for the new private

schemes.

ing a comprehensive pension strategy

including the promotion of later retire- Early retirement schemes are phased

out by the end of 2004. Larger actuarial

ment and reforming the pension sys-

incentives to later retirement have been

tem.

implemented.

A comprehensive strategy with respect

to health care has not been developed.

An ecological tax reform is being im-

Environment

plemented. The promotion of renew-

The use of market-based instruments

including energy taxes is highly devel- able energies is continuing.

oped.

Credit programmes, partial tax reduc-

tions and extension of consumer infor-

mation to improve energy-efficiency in

households and transportation.

2001 BEPG recommendations

6912/02

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DG G

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Greece

Economic growth has been sustained at rates above EU average and was virtually as high in 2001. This

growth is mainly driven by a productivity catch-up, while unemployment rates are still high. Inflation is

above the EU average, but the transmission to a low inflation environment consistent with participation in

the euro appears to be completed with success.

Public finances

have become balanced and the very high government debt level is being reduced. The

consolidation effort needs to be continued forcefully. A major overall tax reform is to be announced in

early 2002 focusing on simplification and tax-base broadening. The underground economy is big. The

challenge of

ageing

is very high in the case of Greece. No significant step has been taken to prepare for

this and a comprehensive strategy has not yet been developed.

The productivity level is still low compared to the EU average. In

product markets

important new steps

have been undertaken to liberalise the electricity and telecommunication markets. The monopoly in the

electricity sector ceased in 2001 at the end of the derogation, but the position of the incumbent is still

dominant in the main network industries. Liberalisation of the coastal shipping sector is planned in 2002.

Full or partial privatisation is part of the strategy in network companies. The competition authority has

been strengthened, but there are constraints on its independent decision-making. The integration of the

Greek product market is not advanced and with a view to its geographic location it is even more impor-

tant to reduce barriers to foreign competition and promote the domestic competitive environment in all

sectors.

R&D

activities are low, and Greece has a backlog in the development of human capital. The use

of ICT is below average. In capital markets the supervisory framework has been reviewed and consolida-

tion in the banking sector has taken place. Venture capital needs to be developed further. Efforts have

been made to enhance the attractiveness of the stock exchange by creating a more integrated operating

framework and increasing transparency in the equity market. However, further efforts might be needed to

improve the attractiveness of the national stock exchange.

labour markets

the employment rate is low and unemployment remains at a high level. The employ-

ment of women is very low, while increasing slowly. The employment rate of older workers is closer to

the EU-average, but stagnating. Taxes on labour remain high compared to the otherwise relatively low tax

pressure in Greece. Minimum wages remain relatively high and labour market regulations have not been

eased significantly. Limited efforts have been undertaken so far to reduce structural unemployment prob-

lems and the problems of low participation rates.

Some progress

has been made with respect to implementing the specific BEPG-recommendations for

2001.

The most important structural policy areas to be addressed are:

Implementing measures to increase

labour market participation

and

reduce structural unem-

ployment

Increasing the

educational attainment rates

in order to improve the quality of labour supply

Continue liberalising and privatising

network industries,

while promoting less concentration and

higher entry

Ensuring the implementation of a

comprehensive tax reform

aiming at simplification and tax-base

broadening

Developing a comprehensive strategy to prepare for the

ageing

population and promote later retire-

ment.

Position and challenges (EL)

Public procurement

Action taken

2001 BEPG recommendations

Partial

“

Continue to reduce the regulatory and

administrative burden on business, en-

hance the performance of the public ad-

ministration and improve the coherence of

the corporate taxation system“.

Several initiatives (e.g. one-stop shops,

business support services) have been

Administrative burdens

undertaken recently. Governance of the

According to a Commission survey, of public sector needs to be reinforced in

order to enhance the performance of the

all businesses in the EU, those in

Greece remain among the most dissatis- administration.

A comprehensive tax reform is planned

fied with their country’s legislation.

for 2002 aimed at simplifications, bet-

The tax system is very complex.

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Position and challenges (EL)

Action taken

ter administration and tax base

broadening.

Resources and responsibility of compe-

tition authority was strengthened.

Ferry transport is liberalised in 2002. A

derogation is however still in place.

Telecommunication and electricity

were liberalised early 2001. Liberalisa-

tion of gas markets before 2006 has

been announced.

Privatisation is underway or envisaged

in all network sectors.

Postal services are being opened up and

restructuring has been successful.

Promoting domestic competition is

particularly important due to location.

Role of government is being reduced.

Apart from publicly financed initiatives

and tax incentives for SME mergers,

quantitative constraints on institutional

investments remain high.

Bankruptcy legislation has not been

reformed.

Implementation of educational reform

programme of 1998 continues with

various specifically targeted measures

(e.g. to reduce the number of school

drop-out etc.).

Knowledge and research permeability

between universities and the business

sector has been strengthened by the

introduction of a new legal framework

for university spin-offs. Fiscal and

financial incentives for R&D exist.

The government has recently set out a

comprehensive strategy for ICT diffu-

sion.

No significant further steps foreseen

since new legislation on labour market

reforms came into force in 2001. The

overall effect of changes in work regu-

lation is ambiguous. However, a ration-

alisation of threshold for dismissals is

planned.

2001 BEPG recommendations

Competition policy

Competition Committee is independent

with a power of initiative, but decisions

may be overruled.

Network industries

The reform process started late, but is

underway.

Markets remain concentrated and barri-

ers to entry should be reduced.

Relatively poor interconnections with

neighbouring countries.

Telecommunication prices are around

the EU-average, while electricity prices

are low.

Risk capital and capital markets

Significant government influence.

Consolidation and mergers are taking

place in the banking sector

The venture capital market is less de-

veloped.

Human capital and R&D

Low investments in R&D and a low

number of patents filed.

Level of educational attainment re-

mains below EU-average. Reforms

continue to take effect. Challenge for

Greece to pursue a coherent strategy

further as investment in human and

knowledge capital is key to real con-

vergence with EU partners.

ICT

Overall internet diffusion low. Number

of pupils with internet access among

lowest of the EU.

Labour market

The unemployment is high and has not

decreased significantly. The employ-

ment rate is low.

Female labour market participation is

low, but has increased somewhat. The

employment rate of older workers is

low. Although not among the lowest in

the EU, the employment rate of older

workers has not increased.

Partial

“Implement

the reform of the sea transport

sector as announced and reinforce compe-

tition in already liberalised utilities“.

Partial

“Speed

up the announced liberalisation of

the gas sector“.

Partial

“Develop

further the risk capital market by

easing quantitative constraints on institu-

tional investment in equity capital, by

establishing a fiscal framework that is

conducive to investment and entrepreneur-

ship, the latter to be also encouraged by

adjusting bankruptcy laws“.

In progress

“Increase

investment in and improve

educational and training systems in order

to enhance the skills of the labour force“.

None

“

Take additional measures to increase

R&D spending“.

In progress

“Continue

to promote the wider diffusion

of ICT and the use of e-commerce“.

In progress

“Ensure

the full implementation of recent

labour market reform packages, and fur-

ther build upon these efforts by loosening

restrictive employment protection legisla-

tion in particular“.

Partial

“Eliminate

major distortions arising from

labour taxes and pension entitlements, thus

improving incentives to work to take up

work in the formal sector“.

High minimum wages, insufficient

wage differentiation and strict em-

ployment legislation. The tax burden on No changes to wage formation process

labour is relatively low, but complex,

foreseen, remains relatively centralised.

progressive and discriminating against

employees.

Key sources of distortions on the labour

market (strong progressiveness in in-

come taxation, heavier burden on de-

pendent employees) not yet addressed.

None

“Ensure

that wages better take into ac-

count productivity and local labour market

conditions, in particular by making opt-

outs included in the territorial employment

pacts a practical possibility“.

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DG G

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Position and challenges (EL)

Ageing and pension reform

The future increase in ageing related

spending pressures is very high.

Government debt is very high.

Pension system continues to inhibit

labour supply by offering generous

benefits and favourable eligibility con-

ditions.

A comprehensive strategy has not been

developed.

Environment

Results and efforts are mixed.

Action taken

No significant progress on pensions

reforms has been made. No official

announcement has been made on new

reform measures.

Reform options currently considered

focus only on parametric reforms.

Fiscal consolidation has improved

strongly compared to the past and the

government debt burden is being re-

duced.

Energy intensity has not improved over

last decade. Relatively little use of

economic instruments.

2001 BEPG recommendations

6912/02

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DG G

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Spain

Spain has recorded strong growth in recent years and in 2001 only a mild growth reduction took place,

and employment increased strongly once more. Within a short period the previously very high unem-

ployment rates have been substantially reduced, even if remaining high. Inflation was above the EU-

average in 2000 and 2001, but decreased somewhat during 2001.

As a result of the strong growth and expenditure reductions, Spain has achieved a remarkable return to a

balanced budget.

The debt level is moderate and decreasing gradually. The challenge of

ageing

is very

large in the case of Spain, and the efforts to address this by reforming pensions have not been sufficient.

A comprehensive assessment of the sufficiency of the present strategy is needed.

Productivity levels are below the EU average and only catching up to a limited extent, as productivity

growth has been very weak in recent years, partly caused by the strong take-up of jobs by workers previ-

ously out of work with potentially lower than average productivity. The Spanish

product market

is rela-

tively well integrated in the European market, but domestic competition is insufficient in some service

sectors. Liberalisation of network industries is advanced, but concentration is high. High administrative

burdens have been substantially reduced. Investments in R&D, patent application and the use of ICT are

below average EU-levels. Education results are weak.

Capital markets

are developing at a high speed.

The

labour market

has strongly improved, although from a very low level of employment. The level of

unemployment is still high and fragmented with large problems relating to regional disparities, long-term

unemployment as well as low or very low employment rates for women, youth, and older workers. The

use of temporary work contracts has contributed strongly to higher employment.

Progress

has been made with respect to implementing the specific BEPG-recommendations for 2001.

The most important policy areas to be addressed are:

•

Progressing further in ensuring competition in

network industries

•

Continuing efforts to reduce dualism in

labour markets

•

Increasing efforts to improve quality and quantity of

education

systems

•

Increasing

participation rates,

particularly among women, young people and older workers

•

Developing a comprehensive strategy to prepare for

ageing

populations including reforming the pen-

sion system

Position and challenges (E)

Implementation of EU directives

Transposition deficit is below average

State aid

Overall aid expenditures are still above

EU average.

Administrative burdens

The cost to create a new company re-

mains high.

Action taken

Considerable efforts have been made.

A number of consumers and environ-

ment directives remain unimplemented.

Aid has fallen slowly and has not yet

been redirected towards horizontal

purposes.

A network of 15 one-stop shops has

been established. Documents have been

simplified and e-government is devel-

oping from a low level. There are plans

to revise legislation to remove adminis-

trative obstacles.

Enforcement of competition law has in

practice been quite vigorous.

The number of staff of the competition

authority has been increased.

2001 BEPG recommendations

In progress

“Continue the implementation of the plan

to simplify the regulatory framework for

SMEs.”

Competition policy

The independent Competition Tribunal

can ask for procedures to be initiated by

the Servicio. The government makes

the final decision in merger cases.

Entry barriers exit in several sectors

due to strict regulation.

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Position and challenges (E)

Network industries

Liberalisation is advanced, but concen-

tration is high. Telecommunication

prices are high, but low for local calls.

Electricity prices are relatively low.

In electricity and gas, full liberalisation

should be completed in 2003. However,

the electricity market is still dominated

by two vertically integrated companies

covering both generation and supply

and interconnections with other coun-

tries are limited.

Risk capital and capital markets

The long-term trend towards increased

liquidity suffered a setback during

2001, with a sharp reversal in the stock

markets, including the Nuevo Mercado.

Action taken

In mobile telephony the government

has launched a number of initiatives to

encourage competition that go beyond

the current minimum requirements of

the Community framework.

Gas distribution is still a near monop-

oly owned by Enagas, but divestments

of activities are required by current

legislation. Ban on construction of new

distribution networks by competitors to

be lifted in 2005.

Efforts have been taken to, e.g., to

reduce entry barriers at the stock mar-

ket, develop electronic trading and

increasing investor protection and pru-

dential supervision.

Spain envisages several incentives to

further develop the risk capital market.

2001 BEPG recommendations

In progress

“Develop further the risk capital market by

further easing constraints on institutional

investors, which may limit their investment

in equity capital, and by establishing a

fiscal framework more conducive to in-

vestment and entrepreneurship, the latter

to be also encouraged by adjusting bank-

ruptcy laws.”

Human capital and R&D

Public expenditure on education is

below EU average. Spain is among

countries with lowest percentage of

population that has attained upper 2nd

education.

Public and business expenditure on

R&D is low and very few patent appli-

cations are taken.

A tax credit for R&D and ICT invest-

ment expenses is provided.

ICT

Investments are lower than average,

particular if excluding telecommunica-

tion equipment. Internet use is lower

than average, but increasing rapidly.

Central government investment in edu-

cation has risen significantly in real

terms and will continue to do so in

2002. The government aims to improve

the quality of the university system

with the draft laws on universities and

professional training and grading. More

could be done to implement a fully

coherent strategy on lifelong learning.

The “National Plan for scientific re-

search and technological development

and innovation ”includes an initiative to

promote training in R&D and innova-

tion, as well as the diffusion of innova-

tion.

A variety of programmes have been

In progress

“Take measures to increase the basic

launched to promote e-Government and

ICT skills … and the supply of highly

ICT in education.

qualified research and ICT person-

nel”.

6912/02

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DG G

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Position and challenges (E)

Labour markets

Strong employment gain have been

made in recent years, however from a

very low level. Unemployment is still

high and structural. Large regional

problems and segmentation as regards

youth and long-term unemployed exist.

Employment rates are low for youth,

women and older workers.

The share of employees on temporary

contracts has fallen slightly, but re-

mains high .

The tax burden on labour is low by EU

standards and taxes on the low-paid are

among the lowest. Unemployment

benefits are reasonably generous for

those who qualify, with replacement

rates at around EU average. Coverage

is low, however, with many people,

particularly the young unemployed,

relying on family support.

The regional benefit schemes for sea-

sonal workers in certain regions limit

inter-regional labour mobility and con-

tribute to structural unemployment

Action taken

The government has encouraged social

partners to agree on a reform of the

collective bargaining system, which

would take better account of productiv-

ity and local labour market conditions.

The National Action Plan for employ-

ment announced some initiatives aimed

at encouraging labour mobility. How-

ever, some of the principal obstacles,

including the housing market and re-

gional benefit schemes, have not been

addressed.

Widespread use of indexation clauses

has not been addressed.

There has been some progress on fol-

low-up and monitoring of active labour

market policies, although this falls

short of the kind of evaluation neces-

sary to ensure that measures are effi-

cient and tailored to the needs of bene-

ficiaries and the labour market.

A significant reform of employment

contracts was approved in 2001

increasing flexibility.

2001 BEPG recommendations

Partial

“Encourage reform of wage formation in

order to better take into account productiv-

ity and local … conditions, and diminish

obstacles to labour mobility, … through

improvements to the functioning of the

housing market and regional benefit

schemes;

Partial

“Increase investment in and improve

education and training, and ensure that

active labour market measures are …

tailored to the needs of those most prone to

the risk of long-term unemployment or

those with lower participation rates … and

to the demands of the labour market

In progress

“Take steps to ensure …an appropriate

balance between flexibility and security, by

means of the effective implementation of

recently approved employment contract

reforms, with a view to early progress in

terms of a reduced share of fixed-term

contracts, greater use of the part-time

contract and a higher share of female

employment..”

Social security rebates are given to

encourage recruitment of certain groups

facing high labour market problems.

A so far small social security fund to

Ageing and pension reform

The future increase in ageing related

finance future liabilities has been cre-

ated.

spending pressures are very high.

The public debt ratio is decreasing and

The strategy is being developed, but

is under the 60 per cent threshold.

pension system and early retirement

schemes have not been reformed. A full The pension system is under revision.

Gradual adjustment improving long-

comprehensive strategy is needed.

term sustainability is envisaged.

Putting a price such as charges and

Environment

Despite water scarcity in the country,

taxes directed at the use of natural

Spain remains one of the biggest water resources and emissions are limited.

consumers in the EU and prices are

Elements of market-based instruments

kept very low.

are primarily focused on tax credits or

Regarding the Kyoto objectives, Spain subsidies. Direct government funding

has not reduced its energy intensity.

of environmental activities has in-

creased significantly.

Partial

“ Increase the public pension fund reserve

created in the 2000 Budget Law to at least

1 per cent of GDP by 2004 … Additionally,

legislate already in 2001 for an overhaul of

the public pension system to ensure its

future viability.”

6912/02

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DG G

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France

France has been hit less than average by the international slowdown, and employment growth continued

in 2001. Inflation is presently somewhat below the EU average, suggesting smaller than average capacity

constraints.

The

budget balance

was in deficit in 2001 affected by automatic stabilisers, tax cuts and a larger expen-

diture growth than planned for. The challenge of

ageing

is of average size and will start to affect public

finances from 2010. This challenge has not been sufficiently addressed yet. The last pension reforms were

in 1993 and 1996 and are still being phased in. Little has been done to promote later retirement.

The productivity level is high and above average, possibly to some extent affected by low employment

rates among low skilled, young people and older workers. Increases in overall productivity have been

relatively weak recently, partly due to large employment gains for the low skilled, but also indicating a

need for stronger efforts in

product markets.

Competition is relatively weak in electricity and gas, but

more developed on the product market as a whole, where special measures have been taken, for example,

to curb the monopsony power of big distributors. Administrative burdens are considered to be high even

if some reductions are taking place. R&D expenditures are higher than average, but are stagnating.

Capi-

tal markets,

especially risk capital, are not sufficiently developed.

Employment gains in recent years have been remarkable. However the

labour market

is still character-

ised by a high unemployment rate and fairly low employment rates. The employment rate among older

workers is very low and has not increased over the recent period. Outsider problems contribute to high

unemployment among youth and low skilled. Structural labour market efforts have concentrated on a

reduction of indirect labour costs for low skilled and to some extent the alleviation of high effective mar-

ginal tax rates. This strategy has been successful, but the further scope is limited due to budgetary con-

straints. Little has been done to reform benefit and job protection systems with a view to increasing em-

ployment. Recent changes suggest mixed effects.

Some progress

has been made with respect to implementing the specific BEPG-recommendations for

2001.

The most important structural policy areas to be addressed are:

•

Increasing

labour supply

and monitoring possible effects of

working-time reductions

•

Speeding up the

liberalisation of network

industries

•

Continuing to alleviate the

administrative burden,

especially for SMEs

•

Developing a comprehensive strategy to prepare for population

ageing

including stronger fiscal con-

solidation and developing the pension reserve fund, considering pension reforms and in particular

promoting later retirement.

Position and challenges (F)

Implementation of EU directives

High implementation deficit and large

number of infringement proceedings

State aid

Close to the EU average

Public procurement

Administrative burdens

Large, particularly on SMEs.

Competition policy

The competition authority is not fully

independent.

Action taken

Deficit reduced in 2001 and a timetable

for 2002 indicates substantial further

progress.

Marked reduction of aid in 2000.

Reform of public procurement code has

been made. Effects to be seen.

The administrative burden on business

was reduced in 2001, in particular by

enhancing e-government.

The authority of the Minister of the

economy has been confirmed. The

power of the Competition Council has

been increased.

2001 BEPG recommendations

In progress

“Continue progress made in transposing

internal market directives.”

Satisfactory

“Continue the reduction of ad hoc State

aid.”

In progress

“Continue efforts to reduce the administra-

tive burden on business by simplifying

procedures and developing new means of

electronic communication with the public

authorities.”

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Position and challenges (F)

Network industries

Telecommunication is well liberalised,

but prices are average.

Electricity prices are lower than aver-

age due to nuclear power. Markets have

opened up, but rather late.

In gas, third-party access, while theo-

retically regulated, still leaves margins

for negotiation. Few consumers

switched which seems to indicate entry

barriers. In addition, the provision of

joint services by EDF and GDF give

them a strong advantage in distribution

services.

Risk capital and capital markets

The development of risk capital re-

mains weak

Action taken

Problems identified in last year’s

BEPGs concerning the slow liberalisa-

tion of the gas and electricity sectors

have not yet been resolved. Liberalisa-

tion follows the minimum rules in the

electricity sector while the transposition

of the European directive of gas mar-

kets is delayed.

Projects include selling off some of

EDF’s capacity (30% in 2003).

2001 BEPG recommendations

None

“Step up efforts to liberalise network

industries, especially the gas and electric-

ity sectors.”

Human capital and R&D

Higher R&D than the average, but

stagnating. Large efforts in public re-

search are not fully exploited for com-

mercial use.

ICT

Record seems a little below average.

Labour markets

The unemployment rate has fallen

substantially while increasing slightly

in 2001. It however remains high and

employment rates are relatively low, in

particular for older workers.

Past efforts have in particular concen-

trated on lower indirect wage costs for

low skilled and contributed to higher

employment by this group. Wage mod-

eration has generally taken place.

However nearly one quarter of the total

increase in employment is accounted

for by publicly funded job creation

schemes and employment subsidies.

Job search conditions are weak.

Ageing and pension reform

The future increase in ageing related

spending is comparable to the EU aver-

age.

Public debt reduction and reserve fund

build up is less than average.

No measures to reform pensions or

promote later retirement.

Large efforts of rationalisation have

been made in the regulation authorities

of financial activities.

Public funding for young high-tech

companies increased and tax

deductibility of capital losses extended.

No special step taken recently.

Partial

“Develop further the risk capital market …

[encourage] entrepreneurship … by adjust-

ing the enforcement of bankruptcy laws.”

The diffusion of IT is encouraged.

Marginal tax rates for people taking a

low wage job have been reduced. The

most important measure is a tax credit,

which benefits full-time rather than

part-time work.

The reduction of unemployment bene-

fits with the length of unemployment

spells was abolished in 2000, implying

a higher average replacement rate. At

the same time, an active and individual-

ised scheme has been implemented to

assist re-employment."

There is a risk that the implementation

of the 35-hour working week might

trigger excessive wage cost increases,

especially for low-skilled labour.

The ambitious target set for the Pension

Reserve Fund is not to be met, unless

significant steps are taken.

Reforms of pensions and of numerous

early retirement schemes are being

considered although they have not

taken place yet. The access to early

retirement has been slightly reduced.

Partial

i. “Consolidate recent reforms of the tax

and benefit system by improving the incen-

tives for older workers to remain in work,

and by addressing remaining disincentives

to take up part-time and full-time work, in

particular for unskilled and low-paid

workers. In this context, particular atten-

tion should be paid to early retirement

schemes and income guarantee schemes”.

ii. “Monitor closely the positive and nega-

tive effects of the implementation of the 35-

hours working week legislation to continue

to ensure that it does not generate any

adverse medium-term effects on wage

costs, labour supply and work organisa-

tion”;

iii. “Reform employment protection legisla-

tion with a view to better combining secu-

rity with greater adaptability to facilitate

access to employment”.

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Position and challenges (F)

Environment

emissions are well below the EU

average due to a high use of nuclear

energy.

Insufficient levels of eco-taxes to en-

able France to meet its Kyoto targets.

Substantial backlog in directives im-

plementation.

Action taken

France should develop its market-based

instruments to decrease its energy-

intensity. It should also fully integrate

the social costs in fuel taxes.

2001 BEPG recommendations

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Ireland

Production and employment growth in Ireland have been unusually large for a decade and remains com-

paratively large also after a strong slowdown in 2001. Recent years have shown clear signs of overheating

with inflation above average. It will be a significant challenge to adjust expectations for increases in

wages and living standards if productivity increases settle at more standard European levels.

The

budget balance

has been in surplus for sustained period and Ireland has moved from a position with

very high debt to a low debt country. The surplus diminished substantially in 2001, but is still solid. The

future increases in ageing related expenditures are around average, but due to the low debt and the devel-

opment of a National Pensions Fund, Ireland is among the best prepared Member States to meet this chal-

lenge. Also the tax burden as a share of GDP is significantly below average.

Output per worker has risen to a level markedly above average EU levels, although hourly productivity is

roughly at the EU average. National income is only marginally above average when profits attributable to

foreign investors are taken into account.

Product markets

are highly integrated, liberalisation of network

industries is proceeding and prices in these sectors are low. However, in some service sectors, and the

network industries, competition is relatively weak and should be further promoted. Investment in

R&D

below average, but Ireland has benefited from very strong foreign inward investment and technology

transfers, thus contributing to strong productivity growth. The use of ICT is around average. Structural

reforms in

capital markets

have recently focused on three main areas: Regulation of markets and inter-

mediaries, where consolidation of regulatory bodies has taken place, the banking system, where state-

owned banks have been privatised, and initiatives to develop the venture capital industry.

Labour market

performance has improved strongly. Unemployment is low and the average employment

rate is now slightly above average EU levels after having been very low historically. Employment has

within in six years expanded by more than 25 per cent. The employment rate of women has expanded

strongly, while that of older workers, although above the EU average, significantly less. Wage formation

is characterised by a high reliance on agreements with social partners facilitated by tax reductions, but

with actual outcomes in recent years being substantially above negotiated levels. Increased differentiation

of wages between sectors could be enhanced. The tax reductions from an already low level have however

also contributed to stronger work incentives. Unemployment benefits and employment protection are

moderate.

Good progress

has been made with respect to implementing the specific BEPG recommendations for

2001.

The most important policy areas to be addressed are:

•

Containing inflationary pressures in

labour

markets and adjusting expectations to potentially

lower future productivity increases

•

Enhancing the capacity related to child care in order release the additional potential

labour sup-

ply

provided by women

•

Further liberalising

network industries

and promoting competition in domestic sectors

•

Continuing to improve the

infrastructure

•

Continuing the well developed strategy to prepare for the

ageing

population

Position and challenges (IRL)

Implementation of EU directives

The transposition deficit is above aver-

age, particularly due to non-

implementation in transportation.

State aid

Sector specific and ad-hoc state aid

below the EU-average in 1997-99.

Public procurement

Value of tenders published in the Offi-

cial Journal is above EU-average. Rela-

tive high share of cross-border pro-

curement.

Action taken

Transposition deficit declined from

2000 to 2001.

2001 BEPG recommendations

Internet-site dedicated to public pro-

curement has been set up.

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Position and challenges (IRL)

Administrative burdens

Low administrative burden on enter-

prises. The net creation rate of enter-

prises was one of highest in the EU in

1995-2000. According to a recent

OECD report Ireland is one of the less

regulated OECD-countries.

Competition policy

The competition authorities are com-

plying with EU legislation

Competition remains weak in certain

sectors of the economy.

Action taken

Further measures are being examined.

2001 BEPG recommendations

Some sector-specific measures under-

taken in 2001. New Competition Bill

grants competition regulator authority

in mergers (except in media). Tough

penalties for violations are introduced.

Restrictions on taxi and liquor licenses,

and on establishment of pharmacies

have been removed or reduced.

Legislation enacted in 2001 provided

Network industries

Liberalisation is proceeding, but con-

for the full liberalisation of the electric-

centration is high and electricity has not ity market by 2005.

been fully liberalised yet. Prices in

telecommunication and particular elec- In the gas sector an integrated energy

tricity (households) are low.

regulator has been proposed.

Competition in the local loop of fixed

networks and in the mobile telephone

market is weak.

Risk capital and capital markets

Restructuring of the banking system

continued with the sale of state-owned

banks.

Human capital and R&D

The average educational level is some-

what below the EU average, but the

proportion of young people obtaining

secondary education is closer to aver-

age.

Private equity investment to be permit-

ted in postal services.

Competition in bus services has been

enhanced.

Government-sponsored seed- and ven-

ture capital fund scheme will focus on

the provision of relatively small

amounts of seed and early-stage capital

to SMEs.

National development plan has allo-

cated additional funding to research,

technological development and innova-

tion over the period 2000-2006.

Assistance is provided for R&D infra-

structure, training and management

within firms.

In progress

“Take measures to introduce more compe-

tition into specific market segments.”

In progress

“Strengthen the application of competition

policy economy-wide.”

In progress

“Continue to implement measures to

progress competition and liberalisation of

transport, electricity and gas sectors,

thereby enabling new entrants to compete

with large State-owned incumbents in the

network industries.”

In progress

“Further develop the risk capital market,

particularly with a view to continuing to

improve access to start-up and early-stage

financing.”

Satisfactory

“Implement the government’s plans for a

substantial increase in R&D expenditure

through programmes to support R&D in

SMEs, to promote co-operative networks

within industry and to develop the national

and regional research infrastructure.”

R&D expenditures and patents are

below EU-average. Foreign firms ac-

Co-operative measures within industry

count for most business R&D (e.g.,

pharmaceuticals and electronics), while are promoted.

public R&D spending is among the

Several other measures aim at improv-

lowest of the EU.

ing the national technology infrastruc-

ture.

Government announced in 2001 a 10-

ICT

ICT diffusion is well developed, but

point plan for communication and e-

ICT expenditure below EU-average.

commerce. E-government is being

developed.

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Position and challenges (IRL)

Labour market

Low unemployment and employment

rate somewhat above average. The

labour market has become very tight.

Employment growth has been further

supported by immigration and favour-

able demographics.

Action taken

Tax reductions seek to facilitate wage

negotiations but contribute also to im-

proved work incentives at the micro

level.

2001 BEPG recommendations

Partial

“Promote wage developments that are

consistent with the maintenance of price

stability.”

Tax reductions for dual-income couples

the participation of women in the labour

and grants for more childcare places

market.”

Wage formation relies heavily on social will support enhancing the labour sup-

ply of married women.

partners and tax reductions.

Relative low benefits, low tax rates and

lax employment protection.

Ageing and pension reform

The future increase in ageing related

spending pressures is on average.

Preparations are advanced due to low

government debt, continuous budget

surpluses and the build up of a govern-

ment pension fund.

Environment

Energy intensity has been reduced

significantly.

An increase of child benefits has am-

biguous labour supply effects.

The employment rate of older workers

is somewhat above average, but could

be promoted further.

In progress

“

Continue to focus measures on increasing

Shift towards more fuel-efficient cars

following a restructuring of vehicle

registration tax.

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Italy

Italy has been hit less than average by the international slowdown in 2001 and employment continued to

increase. Unemployment has fallen moderately in recent years. Inflation is above the EU average, indicat-

ing some capacity constraints.

The

budget balance

shows a low deficit, which is projected to persist in forthcoming years. Announced

future tax cuts are made conditional on fiscal sustainability and need to be carefully assessed before con-

sidered implemented. The very high debt ratio is falling gradually. Italy has taken significant steps to

reform public pensions including consistently accounting for future increases in life expectancy. The

reform is, however, implemented very gradually and not yet fully decided upon. The need for such exten-

sive preparations for the

ageing

population is highlighted not only by the very high public debt level, but

also by a higher than average generosity of public pensions.

The average labour productivity level is significantly above average EU-level, although undoubtedly

affected by the very low employment rates of groups with less than average productivity and potentially

also measurement problems due to the hidden economy. Labour productivity growth has been weak in

recent years. Labour productivity is high in spite of the relatively low efforts and investments in

R&D

and human capital.

Product market

liberalisation is being enhanced and administrative burdens are in-

creasingly being addressed. The use of ICT is increasing, although from a level below average. In

capital

markets

venture capital is not well developed.

The unemployment rate is high and structural, even if important reductions have taken place. The em-

ployment rate is low, influenced by a very low and stagnating participation of older workers and a very

low, but significantly increasing employment rate of women.

Labour markets

are characterised by large

regional differences and segmentation with very large youth and long-term unemployment problems.

These problems have been addressed by reforming employment protection, in particular enhancing the

use of temporary work contracts and targeted fiscal incentives including tax reductions. While gradually

shifting from employment protection to a broader and more generous unemployment benefit system may

reduce labour market dualism and increase flexibility, care should be taken that this is not replaced by

disincentives and budgetary costs. However, the generosity of the unemployment benefit system is ini-

tially substantially below that of other Member States.

Progress

has been made with respect to implementing the specific BEPG-recommendations for 2001.

The most important policy areas to be addressed are:

Enhancing further

educational reforms

aimed at raising educational levels

Pursuing further

labour market reforms

aimed at reducing dualism, but avoid introducing unem-

ployment traps.

Making assessments and following up on measures to increase

competition.

Implementing and accelerating the transition phase of the comprehensive

pension reform

Speeding up efforts to

raise the participation rates

of women and older workers

Continuing to reform taxation and administration in order to reduce

regulatory burdens

and the

underground economy

Position and challenges (I)

Implementation of EU directives

Transposition deficit is slightly below

average, however a very high number

of infringement proceedings opened.

State aid

State aid is around the EU-average.

Public procurement

Openness in terms of tendering pub-

lished in the official EU journal is

slightly below average.

Action taken

A strong reduction in the transposition

deficit has taken place.

Efforts to avoid the high number of

infringement cases opened for violation

of Internal Market Rules need to be

speeded up.

State aid has been reduced. The compo-

sition has improved with priority given

to horizontal and regional aids.

Transparency and open tendering has

increased. E-government has been

promoted. Burdens have been reduced

significantly. Further methods to sim-

lif fi l bli ti

2001 BEPG recommendations

In progress

“

Reduce further the administrative burden

for businesses and continue efforts to

streamline regulations and administrative

procedures”.

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Position and challenges (I)

Action taken

plify fiscal obligations and to reform

company law were approved in 2001.

Administrative burden

Burdens are considered to be high, but Regional tax rates for companies have

been suggested abolished. A system of

have been broadly addressed.

dual income taxation taxing all capital

income at 12.5 per cent is suggested.

Barriers to entry in many markets.

Measures still wait for parliamentary

approval.

Widespread underground economy,

A regional group of evaluators of sub-

which should be tackled by increasing

the efficiency of the tax authority and a mitted projects has been planned (use

reduction and simplification of corpora- of European structural funds).

tion and labour taxes.

The competition authority has been

Competition policy

strengthened and is pursuing an

The institutions comply with Commu-

increasingly active and targeted ap-

nity rules.

proach.

Liberalisation of retail distribution

Regulation of professional services has

remains constrained by interests at the

seen little follow-up. A new regulatory

local level.

framework in retail is being imple-

mented, but liberalisation of shop open-

The need to define a first best-

ing hours has been turned down and

regulatory framework should not post-

barriers to large outlets persist.

pone privatisation plans.

Network industries

Liberalisation is advanced in telecom-

munication and energy, but concentra-

tion and prices are high, in particular in

electricity where oil dependency as

well as insufficient competition con-

tributes to high prices.

Interconnection with other countries is

limited, and its efficient use is ham-

pered by inappropriate regulatory

framework.

Risk capital and capital markets

The venture capital remains among the

least developed.

In electricity the incumbent is broken

up and assets partly sold. The threshold

for customers eligible to choose sup-

plier has been reduced. Interconnection

capacity vis-à-vis Greece has been

increased.

The gas market has been liberalised

beyond minimum rules, but there is de

facto limited choice. Simplification,

unbundling and interconnection capac-

ity is being considered.

Some constraints on investments by

institutional investors were removed.

Tax incentives granted to those who

join supplementary pension funds were

increased. The draft law on bankruptcy

and insolvency has not been adopted by

the Parliament.

2001 BEPG recommendations

None

“Increase competition and remove access

restrictions in the area of professional

services“.

In progress

“Ensure that the liberalisation process in

the energy sector will lower prices for

households and small business users who

are still unable to choose their provider;

ensure the competitive provision of utilities

at the local level in the framework of the

reform of local public services“.

Partial

“Develop further the risk capital market by

easing constraints on institutional invest-

ment in equity capital, and adapting the

fiscal framework so as to facilitate invest-

ment and entrepreneurship, the latter to be

also encouraged by adjusting bankruptcy

laws“.

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Position and challenges (I)

Human capital and R&D

R&D expenditures are low and little

growth of business R&D has been seen

in the 1990s, although private R&D

increased somewhat recently. This

broadly reflects lack of a strong com-

parative advantage in R&D, because of

average lower levels of education.

Measurement problems may account

for part of the recorded backlog, as e.g.

process innovation is not recorded as

well as product innovation.

The need to foster education at secon-

dary and university level is very high

whereas efforts to support demand may

not work well as long as capacity is

constrained.

ICT

Internet diffusion has progressed well,

but due to low investments in software,

hardware and other services, ICT ex-

penditure figures have not increased by

much.

Labour market

High and structural unemployment

even if some reduction has taken place

in recent years. Very low employment

rates for women and older workers,

even if the former has increased.

Large regional differences, but South-

ern Italy has recently contributed sig-

nificantly to the reduction of average

unemployment. Migration from South

to North is limited, but increasing.

Benefit levels are low and wage differ-

entiation might effectually be higher

than recorded. Wage determination

mechanism remains in the domain of

social partners. Wage drift is substan-

tially higher in the North than in the

South.

Employment protection is strict, but is

being loosened.

Ageing and pension reform

Comprehensive reform of pensions

systems is progressing from a very

high level of pensions.

The speed by which a full transforma-

tion to the new system will take place is

very slow.

Public sector debt reduction is fairly

slow and efforts to increase the partici-

pation of older workers are limited.

Action taken

The strategy for R&D focuses on rais-

ing educational achievement levels and

raising the efficiency of the university

system, as completion rates are very

low.

The commercial use of public research

has been promoted through patents.

Tax measures have aimed at increasing

investments in physical and human

capital. New innovative companies can

also replace capital through an insur-

ance policy.

Responsibility for R&D promotion

and education has partly been trans-

ferred to the local level.

Infrastructure and technologies includ-

ing broadband developments and digi-

tal services are being considered.

2001 BEPG recommendations

In progress

“Promote

business sector involvement

in R&D and further encourage the

wider diffusion of ICT and the use of

e-commerce

“.

Good progress in reducing the tax bur-

den on labour. Targeted tax incentives

have also been introduced.

Efforts have been pursued at building a

simpler and more effective tax system,

bringing this close to a flat rate system

where the high rate applies only to very

few. System of tax allowances allows

for a certain degree of progressiveness.

Private employment services have been

liberalised.

The use of temporary work contracts

increased substantially in recent years.

Steps are taken to shift from strict em-

ployment protection to protection in the

unemployment benefit system.

Partial

“Reinforce efforts to let wage develop-

ments better take into account productivity

and local labour market conditions“.

Partial

“Continue to increase labour market

flexibility by combining measures to im-

prove social protection of the unemployed

with an easing of job protection for em-

ployees on permanent contracts“.

In progress

“Continue to bring down the tax burden on

labour by gradually reducing tax and

social security contributions. In particular,

the reduction of the tax wedge on labour

costs should be particularly targeted at the

lowest end of the wage scale as a follow-up

to recent measures, thereby increasing the

employment opportunities for low-skilled

workers, while reducing the budgetary

impact of the tax cuts and complying with

the need for continued progress in public

debt reduction“.

The further pension reform is to be

decided by parliament.

The tax penalty on later retirement for

aged workers has been reduced and the

role of private pension funds has been

enhanced.

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Position and challenges (I)

Environment

Energy taxes are among the highest in

the EU, but regulation seems to be the

instrument most widely used.

Action taken

Greenhouse gas emission certificates

will be introduced in 2002 as well as

tradable certificates between power

plans.

2001 BEPG recommendations

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Luxembourg

The growth performance of Luxembourg has been outstanding. Even in 2001, growth was substantially

above average, although a significant reduction took place. Unemployment is very low, and inflation is

slightly above average. In many respects Luxembourg can be considered to be a special case due to its

size and the importance of the financial sector.

The

budgetary position

is very sound with large surpluses and an absence of public debt. Luxembourg is

accordingly well prepared for population

ageing,

in particular if the average growth rates can keep up

with those of the last years.

Labour productivity

is very high, although probably partly due to foreign workers with high educational

levels and measurement problems related to cross-border flows of workers. Competition on

product

markets

is quite effective due to the geographical size and market integration, but could be increased by

implementing the long announced reform of the competition legislation. Luxembourg has developed a

strong position and great expertise in

capital markets,

the heavy reliance on the banking sector, however,

makes the economy potentially vulnerable to shocks affecting the financial sector.

Labour markets

are characterised by a very low rate of unemployment. Yet employment rates for

women and especially older workers are significantly lower than the EU average. 60 per cent of workers

are foreign of which 30 percentage points are commuting from neighbouring regions in other countries.

Some progress

has been made with respect to implementing the specific BEPG recommendation in 2001.

The most important policy areas to be addressed are:

•

Enhancing the

participation

rate of women and older workers.

•

Completing the legislative process leading to a new

competition policy

and

price liberalisation

•

Strengthening efforts to improve

human capital

Position and challenges (L)

Implementation of EU directives

The transposition deficit is slightly

lower than average.

State aid

State aid is about average

Competition policy

Competition authorities have not yet

been empowered the authority to apply

EU law.

Public procurement

Reform of public procurement, an-

nounced in 2000, is awaiting parlia-

mentary decision.

Administrative burdens

Administrative burdens are relatively

high

Action taken

The transposition deficit has been sig-

nificantly reduced between 2000 and

2001.

Aid has increased recently due to take-

over of railway debt.

Reforms to adapt competition law,

abolish monitored prices and increase

market transparency are currently un-

derway.

Creation of one-stop shop.

Measures to improve SME access to

venture capital and training.

2001 BEPG recommendations

None

“Implement the announced reform of the

competition legislation and thus the aboli-

tion of fixed and monitored prices.”

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Position and challenges (L)

Network industries

Liberalisation is advanced in telecom-

munications, but slow in other network

sectors.

Telecommunications prices are low

compared to the EU average. The

fixed-line market is dynamic with mul-

tiple competitors.

Action taken

Legislation now allows carrier pre-

selection, number portability and un-

bundling of local loop in the fixed line

telephone market.

Gas and electricity are being gradually

liberalised.

2001 BEPG recommendations

Market opening in postal services and

in railways has been transposed into

Mobile telephone market is still a du-

opoly, partly due to limited market size. national law.

Household prices for electricity, and

industrial prices for gas, remain above

the EU average.

Risk capital and capital markets

This market is particular well devel-

oped.

Human capital and R&D

The effectiveness of the education

system is considered to be low accord-

ing to a recent OECD study. The level

of educational attainment of the resi-

dent population is below the EU aver-

age.

Patent applications per capita are

somewhat above average.

ICT

Diffusion of ICT is above average.

Exchange of information between su-

pervisory authorities has been im-

proved.

Labour market

Despite very low unemployment, the

national employment rate is below the

EU average. The employment of

women and in particular older workers

is low and stagnating. Employment

growth has concentrated mainly on

non-residents.

Benefit systems, especially where early

retirement provisions are concerned,

are generous, contributing to rapid

decrease in participation rates after the

age of 55. High unemployment benefits

have been balanced by limited duration

and strict job availability requirements.

Wage formation includes price indexa-

tion.

Ageing and pension reform

The future increase in ageing related

spending pressures is below average. A

substantial part of pension expenditures

benefit non-residents.

Due also to the very solid budget posi-

tion the ageing is well prepared.

The E-Luxembourg program is promot-

ing e-government. E-commerce direc-

tives have been implemented since

august 2000. Internet access in schools

is very high.

The already low taxes are being cut

further reflecting the solid budget bal-

ance.

The government has proposed a revi-

sion of the definition of eligibility for a

disability pension with the aim of re-

stricting access to the scheme and keep-

ing older workers longer in employ-

ment.

Partial

“Make further efforts to increase the

national employment rate, especially for

older workers by increasing the incentives

in early retirement, pre-retirement and

disability pension schemes to remain in

employment, and for women by removing

obstacles to their remaining in employment

or re-entering the labour market.”

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Position and challenges (L)

Environment

Luxembourg has substantially reduced

emissions and further reductions

are likely following, among other

things, voluntary agreement with enter-

prises.

Revenues from energy taxes are to

some extent paid by foreigners because

of substantial tax differentials vis-à-vis

surrounding Member States.

Action taken

2001 BEPG recommendations

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The Netherlands

After a long period of strong increases in economic activity and employment, growth took a sharp down-

turn in 2001 due to the international slowdown. Before the slowdown capacity constraints were emerging

and inflation ran higher than the EU average.

The

budget balance

is in surplus despite the recent tax cuts, and should remain so in the next two years

according to the Dutch Stability Programme. Public debt should thus continue to decrease. The impact of

ageing

on public expenditures is expected to be in the high end compared to most Member States, but the

Netherlands is also reasonably well prepared. At unchanged tax rates and social insurance contributions

about half of the increase in ageing-related expenditures will be financed through higher tax revenues out

of the increasing public and private benefits paid. Efforts to promote later retirement are proceeding

gradually.

Hourly productivity is very high in the Netherlands while the number of average working hours per year

is low. As a result, productivity per worker is below the EU average. Recent productivity increases have

been disappointingly low.

Product market

competition is satisfactory for all tradable goods, the Nether-

lands being one of the most open European economies. However, prices remain high in some non-

tradable products, especially in the housing sector, which is partly due to a lack of competition and strict

planning policies. Having liberalised networks industries at an early stage, low price levels in both tele-

communication and electricity have been obtained. Centralised wage moderation might have contributed

to slow productivity growth.

R&D

expenditures are at the average EU level, but business R&D invest-

ments are low, affected by a lack of science and technology workers in the labour force. The use of ICT is

very well developed. Regarding

capital markets,

in view of increasing concentration in the banking

sector, a Board of Financial Supervisors has been set up in 1999 to reinforce the supervisory framework.

Other measures are aimed to strengthen shareholder and consumer rights.

On the

labour market,

despite remarkable achievements, a fairly high average employment rate and a

very low unemployment rate at 2.2 per cent according to ILO standards, the Dutch economy is still char-

acterised by a substantial untapped reserve of labour (7 per cent of working-age population receive unem-

ployment benefits and social assistance benefits, while 11 per cent receive disability benefits – which are

interacting with the unemployment benefit system - including those with partial disabilities, and 2 per

cent early retirement benefits). Large achievements have been made with respect to increasing employ-

ment rates of women and older workers, but from very low levels. Previous and ongoing significant tax

reductions have also worked to increase labour supply, but further progress needs to address also disin-

centives embedded in benefit systems. In full time equivalents the employment rate is somewhat below

the EU average.

Good progress

has been made with respect to implementing the specific BEPG-recommendations for

2001.

The most important policy areas to be addressed are:

•

Pursuing

tax and benefit

reforms to increase labour supply including implementing recommendations

to actively prevent disability pensions

•

Increasing

competition

in certain non-tradable sectors, especially the housing sector.

•

Enhancing

human capital

and promoting a more technology-oriented education and innovation.

•

Continuing

public debt

reduction and promoting

later retirement

to prepare for the ageing popula-

tion

Position and challenges (NL)

Implementation of EU directives

Transposition deficit is below average.

State aid

Low level of state aid, even if increase

in 1999.

Public procurement

Less than average value of tenders is

published in the EU official journal.

Action taken

The non-transposition rate has been

brought further down.

Further reorientation of funds towards

horizontal and R&D aid could take

place.

The value of tenders published has

increased.

Reduction of administrative burdens by

2001 BEPG recommendations

In progress

“Reinforce the level of competition by

further opening up public procurement”.

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Position and challenges (NL)

Administrative burdens

The administrative burdens are consid-

ered to be reasonable.

Competition policy

Policies are well developed, but the

level of competition in construction and

some service sectors is low.

Network industries

Liberalisation took place early and

prices in telecommunication and elec-

tricity are low. Competition in the gas

sector is not sufficient yet. There are

problems related to efficiency in the

railway sector.

Risk capital and capital markets

Capital markets are well integrated,

partly due to the Euronext stock ex-

change integration with B and F.

Venture capital is well developed, but

still problems related to the early stage

development.

Human capital and R&D

Business expenditures as a percentage

of GDP have fallen below EU average.

There is an insufficiently supply of

researchers.

A tax credit is offered to private R&D.

ICT

The use of ICT is very well developed.

High internet charges may however

hamper further internet penetration.

Labour market

A low unemployment rate and a fairly

high employment rate coexist with high

proportion of active population receiv-

ing unemployment or disability bene-

fits. As indicated by inflationary pres-

sures unemployment is probably well

under structural levels.

Policies are active and well developed

in most areas, however little has been

done to increase work incentives

imbedded in benefit systems.

Eligibility rules and job search re-

quirements are loose.

Ageing and pension reform

The demographic challenge of ageing is

somewhat larger than average, but this

is due to previous financial efforts is

better prepared for than average.

Environment

Comparatively high level of protection

Action taken

action plans on legislation for central

government. E-government is stimu-

lated for contacts between government

and business.

A general competition authority in was

created in 1998.

Wholesale markets in electricity and

gas were liberalised early 2001. The

aim is to liberalise fully in 2004.

Making the regulator independent is

under consideration. Privatisation of

energy suppliers would facilitate the

reduction of incumbents’ market share.

Mergers in banking and insurance con-

tinued in 2001.

Some measures have been taken to

better accompany enterprise creations

(extension of qualification period for

early stage financing). The taxation of

stock options has been reformed.

Efforts have been made with respect to

the development of ties between public

and private research, increasing the

budget for innovation-orientated re-

search programmes and reviewing a

subsidy programmes to private re-

search.

Budgetary resources for ICT training

have been increased, and a task force

launched new projects aiming at reduc-

ing the shortage of ICT experts.

Further tax reductions and in-work

benefits have been introduced. A bonus

for leaving passive benefits is foreseen.

The reform integrating administration

of unemployment and disability bene-

fits is being implemented.

In 2000 a commission recommended a

better targeting of disability pension at

disabled persons and that a more active

preventive approach should be pursued.

The draft bills broadly following these

lines should be implemented.

The public debt reduction continues.

The participation of older workers has

increased from a low level. Early re-

tirement is transferred gradually into

more actuarial schemes and public

support for early retirement will be

phased out.

Some improvements still envisaged

through the use of market instruments.

2001 BEPG recommendations

In progress

“Reinforce the level of competition by

facilitating market entry in electricity, gas,

cable networks and public transport”.

In progress

“Develop the risk capital market by further

adapting the fiscal framework so as to

facilitate investment and entrepreneurship,

the latter to be also encouraged by adjust-

bankruptcy laws”.

In progress

“… increase the supply of qualified

ICT personnel and trained research-

ers”.

In progress

“Take measures to improve the cli-

mate for innovation and to stimulate

further ICT penetration”.

Partial

“Continue reforms of the tax and benefit

system to make work pay. Reforms should

focus on the still high marginal effective

tax rates, especially at the lower end, and

relatively lax eligibility rules, in particular

to foster labour force participation among

older workers and to facilitate the labour

market re-integration of people receiving

passive benefits, including those receiving

disability benefits”.

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Position and challenges (NL)

already achieved.

Action taken

A European approach is however desir-

able.

2001 BEPG recommendations

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Austria

Growth decreased substantially in 2001, affected by the international slowdown. Unemployment remains

one of the lowest and inflation is presently at the EU average.

Austria recorded a balanced

budgetary position

last year as consolidation efforts were speeded up. How-

ever the improvement was due to an increase in the already high tax pressure. The increase in the tax

level was due to broadening of the tax base, which is warranted from a structural point of view, and not

increasing tax rates. The challenge of ageing is large and no comprehensive strategy has been developed.

Public debt reduction has so far been limited. A few efforts have been made to promote later retirement.

Labour productivity has increased in relative terms to a level close to the EU average. Price levels are at

EU-average. Compared to its location and size, the openness of the Austrian market is below average but

has recently increased, thereby fostering competition on

product markets.

Although Austria is quite

advanced in deregulating the network industries, the full effects of liberalisation are still to be seen, pend-

ing on the completion of a satisfactory regulatory framework. In particular,

competition

should benefit

from separating the investigatory authority from government as envisaged. The law and enforcement in

competition policy is not yet applied to EU law, but a planned reform has been developed as a response to

this criticism. R&D expenditures are relatively low, but increasing. The use of ICT is increasing strongly.

Capital markets

remain insufficiently developed, although efforts have been made recently both to de-

velop risk capital through fiscal incentives and to clarify the overall financial regulatory framework.

The

labour market

in Austria is characterised by a remarkably low unemployment rate and a fairly high

overall employment rate. The employment rate among older workers is however very low and has not

increased. Labour demand and labour supply are still hampered among certain categories by large social

contributions and important disincentives on the supply side.

Some progress

has been made with respect to implementing the specific BEPG-recommendations for

2001.

The most important policy areas to be addressed are:

•

Developing a comprehensive strategy to prepare for population ageing, including in particular increas-

ing

older workers’

participation

•

Clarifying the

regulatory competition framework

•

Pursuing efforts to develop the

capital market, including risk capital.

Position and challenges (A)

Implementation of EU directives

Fairly high implementation deficit.

State aid

In line with EU average.

Public procurement

Less than average open advertisement

Recommendations to harmonise Fed-

eral and Regional procurement legisla-

tion date from 1999.

Administrative burdens

Are considered relative high

Competition policy

Austria has not yet empowered its

competition authority to apply EC law.

Enforcement difficulties of regulators’

decisions might also sometimes occur,

as in telecommunication.

Action taken

Some efforts to reduce implementation

backlog has been pursued and should

be pursued further.

No legislative step has been taken so

far, but advertisement is taking place

more openly. A Federal Procurement

Company has taken over the responsi-

bilities of the federal administration in

this field.

Significant steps have been taken in-

cluding the creation of one-stop shops

Independence has been granted to regu-

lators in most fields. Some clarification

of the regulatory context is however

needed in almost all fields.

2001 BEPG recommendations

Partial

i.” Transpose the Community's public

procurement directives and further open up

public procurement to competition, in

particular at the provincial and local

levels;”

ii. “Realise expenditure savings […] in the

area of administrative reform and the

social security sector;”

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Position and challenges (A)

Network industries

Legislative process is well advanced in

electricity, gas and telecommunica-

tions. Telecommunication prices are

somewhat high, but falling.

Risk capital

Is insufficiently developed to respond

to business needs

Capital markets

Low share of equity ownership, high

number of preference shares.

Human capital and R&D

Shortage of ICT experts, and skilled

workers in manufacturing and services.

Available research personnel are in line

with EU average.

Expenditure on R&D below EU aver-

age, in particular in business

ICT

Business expenditures in this field are

below EU average.

This may be due to a lack of competi-

tion, especially in telecommunication.

Labour market

The unemployment rate is low. The

overall employment rate is above aver-

age, but employment rate of older

workers is very low and stagnating.

Action taken

In electricity, full liberalisation has

prompted a fall in prices.

Local loop unbundling is starting.

Some confusion over regulation activ-

ity in telecommunication could lead to

protracted abuse by the incumbent.

Some progress on establishing a fiscal

framework more conducive to invest-

ment and entrepreneurship.

Measures are taken to foster financial

participation of employees.

Creation of the Financial market Su-

pervisory Authority in 2002 in a con-

text of rapid concentration of banks.

The Foreigner Employment Act has

been modified to facilitate the recruit-

ment of foreign ICT experts.

R&D infrastructure is being revised.

The impact of recent programmes to

foster R&D and ICT use are yet to be

seen, even though internet use has

recently increased

2001 BEPG recommendations

In progress

“Develop further the risk capital market by

easing constraints on institutional invest-

ment in equity capital, by establishing a

fiscal framework more conducive to in-

vestment and entrepreneurship.”

In progress

“Implement fully the announced reforms to

promote the development of the knowledge

economy and take measures to increase the

supply of ICT-skilled personnel.”

Eligibility period to obtain unemploy-

ment benefits has been increased for

older workers, which reduces incen-

tives to look for employment.

Impact of new childcare allowance on

female participation is ambiguous.

Agreement over measures to tighten job Recent privatisation/regionalisation of

public employment service could im-

acceptance criteria is desirable.

prove efficiency. Bringing unemployed

benefits and means-tested social assis-

Fairy strong regulation

tance under same administration is also

desirable.

Additional wage-flexibility at firm

level has been introduced and should be

extended and used in practice.

The 2000 pension reform, which in-

Ageing and pension reform

The future increase in ageing related

creased the minimum age for early

spending pressures are higher than

retirement, is expected to limit the

average and pension expenditures are

increase in future federal transfers to

already higher than the EU average.

the statutory pension scheme and pro-

vide some incentives for later retire-

Strong work disincentives encourage

ment.

early retirement.

Austria has announced further reforms,

A comprehensive strategy is not devel- in particular to develop the second and

oped yet.

third pillars.

Regulation should progressively be

Environment

Among the most advanced countries.

replaced by market-based instruments

when possible.

Partial

i. “… in the following years reduce the

high tax burden, in particular on labour

[…]“

ii. “further reform tax and benefit systems

to increase incentives for older workers to

remain

active in the labour market.”

Partial

“In view of long term challenges – notably

resulting from population ageing – con-

tinue reforms in the pension system: in

particular review already in 2001 benefit

levels and reconsider access to invalidity

pensions in order to increase the average

retirement age; in the health care sector:

take measures to counter the rising spend-

ing pressures.”

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Portugal

Portugal has achieved robust growth in production and employment and unemployment is low. The

growth slowdown in 2001 was less than average. Macro-economic risks to the medium-term growth out-

look exist in terms of an eroding level of competitiveness lately and a very large current account deficit.

Inflation was well above average in 2001.

The

budget balance

deteriorated in 2001, partly because of a revenue shortfall due to compliance and

enforcement problems with the 2001 tax reform, the financing elements of which aimed at tax base

broadening and higher efficiency. There are risks associated with weakened competitiveness and adjust-

ments from the very high consumption and investment spending from materialising into weaker growth.

The future fiscal

ageing

burden in Portugal is of average size. Some measures have been taken to reduce

the projected increase in government spending. A comprehensive strategy is not fully developed.

The productivity level is below the EU-average, although it is to some extent affected by the high em-

ployment rate covering also low productive workers. For a catch-up country recent productivity increases

have been disappointingly low, contributing to an eroding level of competitiveness, as wage increases

have not followed suite. A low level of educational levels and attainments remains a key problem and an

obstacle to skill- and technology-intensive growth. The economy is less integrated than average due to its

geographical location. In

product markets,

the move towards liberalisation of the energy and telecom

sectors has been relatively slow, and prices in network industries are relatively high.

R&D

expenditures

and patents are very low, hampered by insufficient human capital build-up. The use of ICT is catching up

from a relatively low level. In

capital markets,

high levels of private bank debt and continued strong

expansion of credit are posing important challenges to financial sector supervision and regulation.

Performance

in labour market

has been strong with further improvements in already relatively high

employment rates and low unemployment. Inflationary pressures until the recent slowdown suggested,

however, overheating indicating that present levels may not be sustainable in the absence of further re-

form. Employment protection legislation is strict, but a large share of self-employees and a strong

concentration of employment in fixed-term contracts have counteracted potential flexibility problem with

respect to employment creation. Yet the expansion of employment on non-permanent contracts implies a

risk of a segmented labour market emerging, and the strict employment protection may have hampered

productivity.

Progress

has been made with respect to implementing the specific BEPG recommendations for 2001.

The most important structural policy areas to be addressed are:

•

Improving the quality and level of

educational attainment

•

Ensuring larger efficiency and

training programmes

and address labour market segmentation

and flexibility

•

Speeding up the liberalisation of

network industries

and ensuring effective competition

•

Improving

investment efficiency

and continuing the reduction of

administrative burdens

•

Speeding up the preparation for the

ageing

population

Position and challenges (P)

Implementation of EU directives

Implementation deficit is somewhat

higher than average

State aid

Is higher than average and is particu-

larly sector specific and ad hoc

Public procurement

Action taken

The implementation deficit has been

reduced substantially in 2001.

Aid has been reduced slightly

2001 BEPG recommendations

Satisfactory

“Continue progress made in transposing

internal market directives”

Partial

“Sustain the progress made in containing

State aids (particularly sector-specific

ones)”

Measures seek to increase information

and simplifying documents thereby

increasing competition for public con-

tracts. Public bids via the internet are

Administrative burden

Administrative burdens remain substan- underway.

tial for new businesses.

A commission for legislative simplifi-

cation has been created.

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Position and challenges (P)

Competition policy

Action taken

New independent competition authority

to be established in 2002. Some final

decisions however taken by the Minis-

ter.

Unbundling of the local telecommuni-

Network industries

cation loop is under way. Some ele-

Liberalisation has taken place some-

ments of the EU Gas directive were

what late, markets are highly concen-

transposed in 2000. Ownership of the

trated and prices are high, particularly

in electricity. Liberalisation of the elec- electricity grid is removed from the

tricity sector has progressed since 1999. former public monopolist.

Telecommunications liberalised in

Railways are being opened up to com-

2000. Liberalisation of gas market due petition.

in 2007 (derogation).

Risk capital and capital markets

The capital market is gradually becom-

ing more internationally integrated.

The already limited venture capital

market suffered from stock market

developments in 2001.

Human capital and R&D

The level of R&D expenditures and

patenting are very low.

Expenditures on education are higher

than during early 1990s, but the educa-

tional achievement rate remains among

the lowest of the EU. There are con-

cerns for low efficiency.

Efforts to eliminate double taxation on

return to venture capital. Public funding

is provided.

Co-ordination among financial supervi-

sors has been strengthened.

Little improvement has been achieved

in the adjustment of the bankruptcy

laws.

The government has started to imple-

ment a reform of the educational sys-

tem.

Measures have been taken in the areas

of secondary and higher education and

for the diffusion of technologies in the

enterprise sector, including actions

targeted at SMEs.

Some increase in R&D spending took

place.

Network links between the business

sector, universities and public research

centres have been strengthened.

A tax credit is provided for R&D.

Many initiatives are taken to increase

the take up of ICT in business, schools

and public administration. Infrastruc-

ture and training is promoted.

The “Internet initiative” aims at con-

necting all schools to the Internet by

end 2001.

The labour market has become very

tight.

2001 BEPG recommendations

Partial

“Step up efforts to liberalise energy sec-

tors, particularly to the benefit of small

business users and households”

Partial

“Develop further the risk capital market by

easing constraints on institutional invest-

ment in equity capital, by establishing a

fiscal framework more conducive to in-

vestment and entrepreneurship, the latter

to be also encouraged by adjusting bank-

ruptcy laws”

In progress

“Enhance efforts to raise the level of R&D

investments, particularly by the business

sector”

ICT

ICT investments have grown to above

EU average, but the share of computer

hardware and software is low.

Household internet penetration stands

at less than half the EU average.

Labour market

Employment is high and unemploy-

ment is low. The employment rate of

older workers is among the highest and

still increasing. High employment

among people over the normal retire-

ment age is a special factor.

In progress

“Further promote the diffusion of ICT, in

particular by taking measures to increase

the supply of skilled ICT personnel”

In progress

“Increase investments in and improve

education and training systems in order to

raise the employability, adaptability and

productivity of the labour force”

Employment growth has been highly

concentrated on fixed contracts, reflect-

ing strict employment protection.

Partial

The low average tax burden on labour

The replacement rate in benefit systems is still below average, but steadily in-

is high. Relatively strict severance pay creasing.

and dismissal requirements hamper

labour mobility.

Efforts to simplify and systemise the

extensive system of active labour mar-

ket policies were launched in 2001. The

efficiency of these policies must be

“Enhance, together with Social Partners,

quality of work and promote modernisation

of the labour market institutions, adapting

labour regulations and continuous train-

ing, in order to minimise the risk of seg-

mentation between regular and atypical

contracts”

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Position and challenges (P)

Ageing and pension reform

The future increase in ageing related

spending pressures is about average.

The debt level is moderate, but stagnat-

ing. A comprehensive preparation for

ageing is not fully developed.

Action taken

evaluated carefully.

A new framework law for social secu-

rity is in place and a number of meas-

ures have been taken to reform the

pension system, although only partly

directed at preparing for the ageing

population.

Pension benefit formula was changed

towards longer contribution period and

the indexation of past wages has been

reduced and the flexibility of retirement

age is increased. On the other hand

minimum pensions are increased.

A capitalization fund has been

strengthened.

Ecological tax reform is underway.

Efforts taken to improve the environ-

ment in the areas of water quality and

waste, but the agricultural sector is

exempt from additional fees on water

use for irrigation or for polluting

ground water.

2001 BEPG recommendations

Environment

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Finland

Economic growth was very strong until 2000. The slowdown in 2001 has been very strong, partly due to a

reversal of the in the case of Finland particularly important ICT-cycle which boosted previous years.

Employment growth was fairly strong in recent years, including 2001. Inflation is a little higher than EU

average.

Substantial surpluses in the

budget balance

imply that fiscal consolidation is well underway, although

necessary as Finland in facing one of the largest

ageing

challenges among Member States. A pension

reform is underway and expected to reduce pension expenditures by 2 per cent of GDP in the long term.

The productivity level is at the EU-average, but the overall price-level remains above the EU average due

to insufficient

product market

competition affecting some sectors, partly as a result of geographical

remoteness of many regions. Finland is advanced in the liberalisation of network industries, in particular

in the telecommunication sector, where prices have decreased significantly. But further efforts are neces-

sary. Very few households have so far changed electricity supplier following liberalisation, which indi-

cates that full benefits still remain to be reaped. Competition can also be further strengthened in the media

sector. Open competition in public procurement has not advanced significantly. In general a more active

and targeted competition policy and enforcement might be pursued. Results in

R&D,

patenting, the use of

ICT and human capital are among the highest in the EU. In

capital markets

reforms have been targeted

at improving the regulatory and supervisory framework. In particular they have focused on new regula-

tions on insider trading. However, the number of business start-ups in Finland remains low.

With respect to the

labour market,

the decline in unemployment has slowed down recently and unem-

ployment stands somewhat above the EU average, considerably higher than the low level experienced

until the early 1990s. The government has recently increased unemployment benefits, to some extent

offsetting the improved work incentives for the low skilled due to tax and other reforms.

Finland has a strong record in environmental and sustainable development as

environmental policy

has

been well developed, e.g. through the use of taxation as an environmental policy instrument.

Some progress

has been made with respect to implementing the specific BEPG recommendations for

2001.

The most important structural policy areas to be addressed are:

•

Pursuing a more active

competition

policy in order to reduce high price levels, including the re-

tail sector.

•

Further developing the set of instruments, in addition to tax measures, used to

reduce unem-

ployment

•

Improving

public procurement

practices

•

Continuing public debt reduction and implementing the reforms of pension systems currently

under consideration in preparation for the rapid

ageing

of the population.

Position and challenges (SF)

Implementation of EU directives

Very low transposition deficit

State aid

Highest level of sector-specific and ad

hoc state aid in the EU, a large share of

which is to agriculture.

Public procurement

Relatively low use of EU-wide tender-

ing. VAT rules have impeded private

service provision.

Administrative burden

One of the most time-consuming proc-

esses in the EU to set up new company.

Fewer business start-ups in Finland

than in most other Member States.

Action taken

Transposition deficit has been further

reduced.

2001 BEPG recommendations

Electronic information exchange to aid

public procurement set up in 2001.

VAT rules have been revised.

Revision of the Companies and Ac-

counting Act in 2001 aims at reducing

burdens. Further improvements are

possible.

In progress

“Enhance compliance with regulations in

public procurement, especially at the local

level, and increase transparency in the

provision of public services in order to

heighten private firms participation.“

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Position and challenges (SF)

Competition policy

Competition law complies in principle

with EU law, but penalties are modest.

Relatively weak competition in retail

sector, construction and media.

Network industries

Telecommunications and electricity

markets have been fully liberalised,

leading to significantly lower prices.

Households have been slow to reap full

benefits.

Risk capital and capital markets

Good progress achieved with financial

market reforms.

Human capital and R&D

Strong human capital base and well

above average expenditures for R&D

expenditure. Large patent uptake. Good

innovation networks between private

companies, universities and capital

markets.

ICT

Among the highest ranking countries in

internet penetration. Among leading

countries in mobile internet technology

worldwide.

Labour markets

High level of structural unemployment,

but fairly high participation rates for all

groups. Substantial regional unem-

ployment disparities remain.

Labour market and pension reforms

underway.

Previously ineffective targeting of

active labour market programmes.

Action taken

Regulatory framework of retail distri-

bution has been further liberalised.

General framework for competitive

oversight improved.

2001 BEPG recommendations

Partial

“Enhance competition in industries such as

distribution, construction, and the media

sector.“

New working group set up recently to

reform capital income and corporate

taxation.

Partial

“Develop

further the risk capital market by

adapting the fiscal framework to make it

more conducive to investment and entre-

preneurship.”

Tax reforms are reducing labour taxes,

but no large reduction in marginal ef-

fective tax rates including for the low

skilled is envisaged. Further tax reduc-

tions in 2002, but tax rates on low and

medium wage earners well above EU

average.

ALMP have been better targeted

through new measures in 2001.

The gross UIB replacement rate is

being increased somewhat.

In progress

“Strengthen efforts to reduce high mar-

ginal effective tax rates especially on low

wage earners and to improve incentives in

benefit, especially pension, schemes to take

up a job offer and to stay in the labour

force.”

“

Increase the efficiency of active labour

market programmes and refocus them to

the needs of those most prone to the risk of

long-term unemployment.”

Ageing and pension reform

The future increase in ageing related

spending pressures is higher than aver-

age.

Preparation through government debt

reduction is advanced, and a pension

reform is to be finalised soon.

Environment

Widespread use of environmental taxes

to reduce CO2 emissions.

A few steps have been taken to increase

In progress

the effective retirement age, but reform

See labour market recommendation above.

momentum should be kept up further.

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Sweden

Growth performance since the deep recession in the early 1990s has been strong even if the international

slowdown triggered a significant reduction in 2001. Unemployment had not yet increased. Inflation is

presently running higher than the EU-average.

The government has set a target of 2 per cent of GDP

budgetary surplus

on average over the business

cycle and the surplus has in recent years been higher than that. Due to the remarkable fiscal consolidation,

the debt to GDP ratio is falling strongly to a level below EU-average. Despite a reduction in the expendi-

ture-to-GDP ratio and significant tax cuts, Sweden retains the highest tax-burden in the EU. Debt reduc-

tion and the recent comprehensive pension reform put Sweden in a good position to absorb the impact of

ageing

on its pension and health care expenditures, which, partly due to the comprehensive pension re-

form, is lower than average.

The productivity level is below the EU-average and the gap has increased slightly during recent years, as

productivity growth has been relatively weak.

Product markets

are probably insufficiently competitive

in view of a very high price level, although this also reflects high indirect taxes and the remote location of

many regions. Public ownership, and the size of the public sector as a whole, could also act as an im-

pediment to competition. Liberalisation of network industries is advanced and prices are low, in particular

electricity prices fostered by a rich supply of hydroelectric power. In sectors such as electricity, gas, tele-

communication or pharmaceuticals, public ownership could imply a conflict between the government’s

roles as shareholder and regulator. Sweden has introduced competition in parts of public service provi-

sion, and employment in private companies providing welfare services has increased. The performance in

R&D, patents and the use of ICT is very advanced. Also venture capital is well developed until the recent

setback in financial markets. In

capital markets,

venture capital activities were very high in 2000, but

declined significantly as stock markets deteriorated.

The Swedish

labour market

is characterised by high employment rates and high ambitions in this re-

spect. The high employment rate of older workers is particularly outstanding, and the employment rate of

women is also high. Unemployment has been stabilised at a low level, although further 2.5-3 per cent of

the labour force participates in active labour market programmes and training programmes.

Good progress

has been made with respect to implementing the specific BEPG-recommendations for

2001.

The most important policy areas to be addressed are:

•

Promoting

competition

in products markets

•

Continuing to improve the

efficiency of the public sector

•

Achieving a better balance between the state’s interests as shareholder and

regulator

•

Furthering better

diversification

of the economy

•

Continuing to

reduce government debt

to prepare for the ageing population

Position and challenges (S)

Implementation of EU Directives

Low transposition deficit

State aid

Well below EU average, most aid is

horizontal or regional

Public procurement

Fairly high advertisement rate, but

some public institutions fail to comply

with existing regulations, particularly at

the local level.

Administrative burdens

Lower than average

Action taken

Transposition deficit has been further

reduced.

The Public Procurement Committee

aims to reform and simplify procure-

ment procedures. Proposal on a dispute

resolution clause of the Competition

Act is under consideration. A planned

database on municipal services will

facilitate benchmarking.

Special efforts to reduce administrative

burden for companies and develop

entrepreneurship

In progress

“Enhance compliance with regulations on

public procurement and enhance competi-

tion in public services provision at local

levels.”

2001 BEPG recommendations

6912/02

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Position and challenges (S)

Competition policy

Competition policy complies with EU

legislation and is pursued actively.

The price level is high above EU aver-

age, partly due to insufficient competi-

tion, especially in food retailing and

construction. SAS remains dominant in

domestic air transportation.

Network industries

telecommunication,

prices have

fallen significantly although difficulties

in unbundling local loop remain.

Energy

markets are relatively open to

competition. The electricity market is

fully deregulated.

Railway

transport deregulated.

Generally, incumbents retained signifi-

cant market share, possibly partly due

to lack of transparency.

Risk capital and capital markets

A high level of venture capital was

obtained until the recent sharp fall in

stock markets.

Human capital and R&D

Investment in R&D is very high.

Education is advanced, although con-

cerns for quality in some areas persist.

ICT

Sweden is front-runner in ICT. How-

ever, diversification of the economy

diversity could be a way to reduce

vulnerability to ICT-driven downturns.

Labour markets

High employment rate above EU aver-

age and Lisbon targets. Unilateral em-

ployment rate target of 80 per cent by

2004 among the 20-64 years. High

female employment and very high

among older workers.

The efficiency of active labour market

policies is uneven, the most successful

involving private sector employment

rather than classroom teaching, and

self-employment grants preferably to

employment subsidies.

Ageing and pension reform

The future increase in ageing related

spending pressures is lower than aver-

age, partly due to a comprehensive

pension reform.

Action taken

A recent court decision bans SAS’ use

of its frequent-flyer programme on

domestic routes. A proposal to enhance

competition has been presented.

In the retail market for pharmaceuti-

cals, the government has maintained

the state-owned monopoly, but is tak-

ing steps to reduce prices. Generally,

the competition regime has been im-

proved and the regulation authority

strengthened.

Improved regulation regarding number

portability and sale of excess network

capacity in telecommunications.

Improved consumer information serv-

ices planned in electricity.

2001 BEPG recommendations

Partial

“Increase competition in areas such as air

transport and pharmaceuticals.”

Progress in improving bankruptcy leg-

islation to encourage reconstruction of

failing companies. Some proposals to

reform corporate taxation. No efforts

yet to promote employee ownership

schemes.

In progress

“Develop further the risk capital market by

adapting the fiscal framework to make it

more conducive to investment and entre-

preneurship, the latter to be also encour-

aged by adjusting bankruptcy laws.”

The Swedish government strives to

make its policies neutral towards the

different sectors.

Tax reforms have generally aimed tax

cuts at low-income groups. Recent

reforms strengthening the eligibility

criteria for unemployment benefits will

promote incentives to work. Measures

designed to make social benefits more

generous could however exert a nega-

tive effect on employment rates for

some groups.

Based on evaluation of experience the

least efficient programmes have been

cut, while targeting active measures at

the most vulnerable groups. Significant

effects, especially with respect to the

weakest groups (e.g. the youth), remain

to be seen.

The 1999 pension reform is the most

comprehensive one in the EU so far,

taking, e.g., variations in life expec-

tancy into account.

In progress

“Pursue reforms of tax and benefit systems

to promote work incentives and, in particu-

lar, reduce the tax burden for low wage

earners.”

In progress

“Ensure the efficiency of the ALMPs and

target them at those most prone to the risk

of long-term unemployment, as well as to

meet the demands of the labour market”

6912/02

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DG G

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Position and challenges (S)

Environment

The use of market-based instruments

including taxes is well developed.

Action taken

2001 BEPG recommendations

6912/02

ANNEX

DG G

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United Kingdom

The UK economy slowed considerably less than most Member States in 2001, and unemployment came

further down before increasing slightly during the year. Inflation is very low, however affected by ex-

change rate developments.

Government finances are healthy, although with a diminishing surplus on the

budget balance.

A strong

projected increase in public investments directed at reducing an infrastructure backlog might turn the

budget into a small deficit. Government debt is low and decreasing. Due to this the UK is well prepared

for the

ageing

population in particular if price indexation of the majority of public pensions is maintained

in the long run.

The average productivity level is somewhat below the average of EU-countries, although the gap has

diminished slightly. The price level is high, however partly due to present exchange rates.

Product mar-

ket

competition works well and the UK is among the front-running Member States as concerns liberalisa-

tion of networks, the reduction of state aid, tendering of public procurement and an active competition

policy. The transposition of single market directives is less encouraging. The early liberalisation of net-

work industries provided substantial consumer benefits, but prices have in recent years fallen slowly

compared to other Member States. The railway system is not working well, which is considered to be the

result of a large historical investment backlog. Many efforts are taken directed at enhancing the quality of

public services. Tax policies are very active and selective and while the many individual tax credits are

well argued, concerns include transparency and tax rates for those activities not enjoying such preferential

treatment.

R&D activities

are at the EU average and the use of ICT is above average. The impact of

extending the R&D tax credit to larger enterprises must be assessed carefully as the key issues are to

ensure a high supply of researchers and the transformation of knowledge into research and value-addition.

With respect to

capital markets,

integration with other EU countries continued, in particular in financial

services and the stock market. The introduction of a single regulatory body – the Financial Services

Authority – has contributed to further promote a level playing field among financial institutions. New

regional venture capital funds have been introduced and designed to correct adverse incentives of fund

managers, however the first half of 2001 saw a steep fall in risk capital investments.

The employment rate in the UK is relatively high and average unemployment is low. Significant unem-

ployment pockets remain concentrated on workless households and in deprived areas.

Labour market

policies include a wide range of measures including in-work tax credits, active labour market policies,

local action teams and stronger public employment services. Benefit levels are low and the level of wage

differentiation is high.

Good progress

has been made with respect to implementing the specific BEPG-recommendations for

2001.

The most important policy areas to be addressed are:

Reducing the backlog in

single market transposition

Improving public/private investment backlog and continue policies aimed at diminishing the

produc-

tivity

gap

Improving

competition

in selected problem areas

Ensuring that the

tax system

remains transparent and assess the outcome of selective tax measures

Continue addressing

labour market

problems in deprived areas and promote later retirement

Position and challenges (UK)

Implementation of EU directives

High transposition deficit

State aid

One of the lowest rates in EU

Action undertaken

Transposition record has deterio-

rated.

Aid and the use of tax credits should

be assessed in combination.

2001 BEPG recommendations

6912/02

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DG G

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Position and challenges (UK)

Public procurement

Good performance. High rate of

tenders published in EU official jour-

nal.

Administrative burdens

Regulatory burden on business is

relatively low. Good progress with

introduction of efficient public policy

management structures.

Competition policy

Institutions are in line with Commu-

nity legislation, and an active tar-

geted approach is pursued.

Action undertaken

Public expenditure system refocused

on outputs and outcomes rather than

inputs. Peer review and cost-benefit

analysis introduced. Performance-pay

for public servants improves incen-

tives.

Competition regime further strength-

ened with a view to introduce more

competition focused tests.

Reports on retail banking, car retail-

ing and postal services are being

considered. Temporary specific

postal licenses have been issued.

New electricity trading arrangement

is considered to be successful.

Access of new operators in telecom-

munications is promoted.

Principle behind rail reform is to link

expenditures to outcomes. Substan-

tial new investments are planned over

the next 10 years.

UK Government intends to consult

on legal change to pension funds

trustees’ duties.

2001 BEPG recommendations

In progress

“Take

measures to address the relatively

low level of productivity, in particular by

increasing competition in sectors such as

retail banking services, car retailing and

postal services“

Network industries

Liberalisation is advanced, but the

initial performance advantage is

fading.

Efficiency problems remain in the

rail sector and water.

Risk capital and capital markets

Good performance in financial serv-

ices reform but further efforts in

developing venture capital markets

possible.

Human capital and R&D

R&D expenditures at average EU-

level. Patent applications are lower.

Partial

“Ensure

that the announced investment

to improve the transport infrastructure

and to improve the quality of public

transport is delivered in practice and

ensure that there is adequate co-

ordination between different public

bodies, regulators and private firms“.

In progress

“

Further encourage the role of pension

funds in the development of the risk

capital market“.

ICT

Expenditures in and the use of ICT is

above the EU-average.

Labour market

The average unemployment rate is

low and the employment rate is rela-

tively high. Concentration of long-

term unemployment and inactivity

continue to be a problem in specific

pockets of the labour market.

R&D tax credit has been extended to

larger companies. A new review will

be issued in 2002 on skills improve-

ment for scientists. Work-permit-

regime for high-skilled foreign work-

ers has been overhauled. The prob-

lem of making better commercial use

of public research is being addressed.

Considerable new resources allocated

In progress

“Take measures to address the relatively

to ICT in schools. Compulsory

low level of productivity by increasing

courses for improving ICT skills.

the supply of skilled ICT personnel.“

Further efforts in public employment

services. Merger of employment

service with service of benefits

agency is a significant step.

In-work tax credits are being ex-

tended.

A range of active measures has been

maintained and reinforced. In several

Low taxes and benefits. Lax em-

areas, reforms could be taken further

ployment protection.

beyond the ‘pilot stage’.

Minimum income guarantee for pen-

Ageing and pension reform

The future increase in ageing related sioners has been extended.

spending pressures is less than aver- Second and third pillar pensions are

age. Public debt is low and the major- widespread and a subsidy has been

ity of pensions are indexed to prices. introduced to promote further use.

In progress

“Reinforce active measures targeted at

those communities and individuals most

prone to the risk of concentrated or long-

term unemployment and inactivity, and

reform passive benefit schemes to pro-

vide people who are able to work with

the opportunities and incentives to do

so“.

6912/02

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DG G

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Position and challenges (UK)

Environment

Comprehensive environmental strat-

egy.

Action undertaken

Introduction of new greenhouse gas

emissions trading instruments.

2001 BEPG recommendations

6912/02

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DG G