PART I: THE TWO-HANDED STRATEGY

The present state of affairs

There is little doubt that over the years 1984–87 economic conditions in Europe have improved. Inflation has fallen to more comfortable levels. Most current account deficits have been reduced, with some countries achieving significant surpluses. Public finances are now sounder in many countries, with the primary budget (i.e. net of interest payments) more often in surplus than in deficit. After a period when the strength of the dollar made European currencies look weak, the much awaited correction has taken place, now raising fears of a hard landing of the US currency. More importantly, the resumption of growth is widespread in contrast to the experience of the early eighties.

Yet there is no room for complacency for at least two reasons. The first one is the unemployment situation. Double-digit unemployment rates are the rule rather than the exception, and no relief seems in sight, in the near future. As of May 1987, there were 16.1 million unemployed (seasonally adjusted) in the 12 countries of the European Community, that is 11.4% of the labour force. Total unemployment has not changed over the last 12 months. Significant decreases in the UK and Portugal have been matched by increases in most other countries. In Germany, while total unemployment has come down by forty thousand, GDP growth has been negative for the last two quarters. Short-run prospects therefore look bleak, with a genuine danger that unemployment may rise once again.