Speech Solbes bij Ecofin-Raad (en)

Spring European Council

We had a frank debate today on the progress of the Lisbon strategy. While labour market reforms have started to bear fruit and more than 6 million jobs have been created since 1999, employment creation stopped in 2003 and the interim employment targets set for 2005 will not be met.

Similarly, the productivity gap with the US has widened since 1999 with EU productivity per person employed in 2003 being almost 20% below that in the US. The gradual deterioration in labour productivity growth since the mid-1990s can be explained by the slowdown in business investment, lower Research & Development activity and by a slower diffusion of innovation.

It is therefore essential that the spring European Council gives the Lisbon strategy a fresh impetus. We must take advantage of both the economic recovery and the dynamics of the coming enlargement. The Commission in its Spring Report identified the following priority areas for the upcoming period: (i) improving investments in knowledge and networks, (ii) strengthening competitiveness of European enterprises, and (iii) promoting active ageing.

These three key priorities for future action follow from the analysis in the Implementation Report on the 2003-05 Broad Economic Policy Guidelines and are fully supported by the Economic Policy Committee's annual report on structural reforms.

The overall pace of reforms has not been stepped up as requested by Ecofin Ministers last year. There is a clear risk that, with the current reform pace, full implementation of the guidelines can not be secured by 2006 - thereby also putting the fulfilment of the Lisbon targets by 2010 at risk.

I therefore welcome the Presidency's Key Issues Paper, which highlights the areas on which we should put more emphasis. It is important to be selective - in order to be useful. We should therefore not reinvent the wheel - or the existing strategy every year. But we need to include the ten new Member States in the BEPGs this year and we probably need to take up useful suggestions made by Wim Kok in his recent report.

Budgetary surveillance

As a general observation I would like to point out the optimism about the economy and public finances exhibited by the programmes relative to the Commission forecasts. Optimism is generally a good think in life but necessarily when applied to budgetary projections.

Given the persistent excessive deficit situation the assessment of France's programme has been a particularly sensitive exercise. While broadly sharing the economic and budgetary assumptions underpinning the programme, we see a large risk that the deficit will continue to exceed 3% of GDP in 2005. Our worries are strengthened from the fact that the deficit in 2003 is likely to be close to the 4.2% of GDP forecasted by the Commission rather than the 4.0% included in the programme. In our view, additional adjustments should be planned not only to ensure the correction of the excessive deficit but also to converge more decisively towards a close to balance budgetary position.

On a more positive note we welcome the recent pension reform adopted by France.

Italy's stability programme is ambitious. The major part of the adjustment is projected to take place in the outer years of the programme and would require an unprecedented reduction in primary expenditure, unless the government is prepared to raise fiscal pressure. One-off measures, which exceeded 1½ % of GDP in 2003, are planned to be progressively phased out by 2006, but the measures of a permanent nature that will replace them are not specified. The persisting excess of the budget deficit defined in cash terms over the Maastricht-definition deficit is also a cause for concern.

With regard to the long-term sustainability of public finances, the implementation of the further pension reform proposals, currently under discussion, would be a step in the right direction.

Greece's stability programme targets are also ambitious. In cyclically adjusted terms, the deficit ratio remains high in 2004 and would still be of the order of 1% of GDP in the following years. Moreover, we are concerned that the targets might be missed as the macroeconomic scenario appears optimistic and there is a lack of information on the adjustment measures envisaged.

Ireland's stability programme projects the deficit to broadly stabilise from 2004 onwards at just above 1% of GDP. The deficits partly reflect Ireland's significant programme of public investment as well as the inclusion of so-called "contingency provisions" in the targets for 2005 and 2006. In cyclically-adjusted terms the deficit tends to be around ½% of GDP both at the start and at the end of the period which is a satisfactory development.

Following an economic slowdown of unexpected depth, the situation of public finances in the Netherlands remains difficult, despite the substantial savings measures taken by the government. A risk remains that the general government balance could exceed 3% of GDP in 2004. The government is fully aware of these risks and is committed to take the necessary measures. Following a cumulated adjustment of the order of 1½ of GDP over the period 2003-04, the cyclically adjusted deficit is expected to be at 0.7% of GDP in 2004 and would reach a position of close to balance from 2005 onwards.

After a long series of substantial surpluses, the government balance in Luxembourg is expected to deteriorate quite markedly in the coming period. This largely reflects the delayed impact of the severe economic slowdown in 2001-2003. Nevertheless there is no risk of unsustainable public finances in the long run as the debt ratio will remain very low.

The UK Convergence Programme's central objective continues to be the achievement of sustainable public finances. The UK is undergoing an intensive programme of public investment intended to 'reverse' the historic decline of net public investment relative to GDP.

While the UK's public finances remain relatively sound, some risks appear in the short and in the longer run. First, the update projects a general government deficit of 3.3% of GDP in 2003-04. If confirmed, this could constitute an excessive deficit. Second, in cyclically-adjusted terms, the deficit in 2003-04 is estimated to be 2.4% of GDP. Although the deficits are projected to fall in the subsequent years, in both nominal and cyclically-adjusted terms, they remain around 2% of GDP throughout the later years of the projection period. Of course, the 2004 Budget and the 2004 Spending Review present opportunities to address these issues.