(1)

Regulation (EU) 2021/241 of the European Parliament and of the Council (2), which established the Recovery and Resilience Facility, entered into force on 19 February 2021. The Recovery and Resilience Facility provides financial support for the implementation of reforms and investment, entailing a fiscal impulse financed by the Union. It contributes to the economic recovery and to the implementation of sustainable and growth-enhancing reforms and investment, in particular to promote the green and digital transitions, while strengthening the resilience and potential growth of the Member States’ economies. It also helps strengthen sustainable public finances and boost growth and job creation in the medium and long term. The maximum financial contribution per Member State under the Recovery and Resilience Facility will be updated in June 2022, in line with Article 11(2) of Regulation (EU) 2021/241.

(2)

On 24 November 2021, the Commission adopted the Annual Sustainable Growth Survey, marking the start of the 2022 European Semester for economic policy coordination. It took due account of the Porto Social Commitment signed on 7 May 2021 to further implement the European Pillar of Social Rights, proclaimed by the European Parliament, the Council and the Commission on 17 November 2017. The European Council endorsed the priorities of the 2022 Annual Sustainable Growth Survey on 25 March 2022. On 24 November 2021, on the basis of Regulation (EU) No 1176/2011 of the European Parliament and of the Council (3), the Commission also adopted the Alert Mechanism Report, in which it did not identify Belgium as one of the Member States for which an in-depth review would be needed. On the same date, the Commission also adopted a recommendation for a Council recommendation on the economic policy of the euro area and a proposal for the 2022 Joint Employment Report, which analyses the implementation of the Employment Guidelines and the principles of the European Pillar of Social Rights. The Council adopted the Recommendation on the economic policy of the euro area (4) (‘2022 Recommendation on the euro area’) on 5 April 2022 and the Joint Employment Report on 14 March 2022.

(3)

Russia’s invasion of Ukraine, in the wake of the global pandemic, has significantly altered the geopolitical and economic context. The impact of the invasion on Member States’ economies has been felt through, inter alia, higher prices for energy, food and raw materials, and weaker growth prospects. The higher energy prices weigh particularly heavily on the most vulnerable households experiencing or at risk of energy poverty as well as on firms most vulnerable to energy prices hikes. The Union is also seeing an unprecedented inflow of people fleeing Ukraine. The economic effects stemming from Russia’s war of aggression have impacted Member States asymmetrically. In this context, on 4 March 2022, Council Directive 2001/55/EC (5) was triggered for the first time by Council Implementing Decision (EU) 2022/382 (6), granting displaced persons from Ukraine the right to legally stay in the Union, as well as access to education and training, the labour market, healthcare, housing and social welfare.

(4)

Taking account of the rapidly changing economic and geopolitical situation, the European Semester resumes its broad economic and employment policy coordination in 2022, while evolving in line with the implementation requirements of the Recovery and Resilience Facility, as outlined in the 2022 Annual Sustainable Growth Survey. The implementation of the adopted recovery and resilience plans is essential for the delivery of the policy priorities under the European Semester, as the plans address all or a significant subset of the relevant country-specific recommendations issued in the 2019 and 2020 European Semester cycles. The 2019 and 2020 country-specific recommendations remain equally relevant also for the recovery and resilience plans revised, updated or amended in accordance with Articles 14, 18 and 21 of Regulation (EU) 2021/241, in addition to any other country-specific recommendations issued up to the date of submission of such revised, updated or amended recovery and resilience plans.

(5)

The general escape clause of the Stability and Growth Pact has been active since March 2020. In its communication of 3 March 2021 entitled ‘One year since the outbreak of COVID-19: fiscal policy response’, the Commission set out its view that the decision on the deactivation or continued application of the general escape clause should be taken as an overall assessment of the state of the economy, with the level of economic activity in the Union or euro area compared to pre-crisis levels (end of 2019) as a key quantitative criterion. Heightened uncertainty and strong downside risks to the economic outlook in the context of war in Europe, unprecedented energy price hikes and continued supply-chain disturbances warrant the extension of the general escape clause of the Stability and Growth Pact through 2023.

(6)

Following the approach in the Council Recommendation of 18 June 2021 (7) on the 2021 Stability Programme of Belgium, the overall fiscal stance is currently best measured as the change in primary expenditure (net of discretionary revenue measures and excluding temporary emergency measures related to the COVID-19 crisis) but including expenditure financed by non-repayable support (grants) from the Recovery and Resilience Facility and other Union funds, relative to medium-term potential growth (8). Going beyond the overall fiscal stance, in order to assess whether national fiscal policy is prudent and its composition is conducive to a sustainable recovery consistent with the green and digital transitions, attention is also paid to the evolution of nationally financed (9) primary current expenditure (net of discretionary revenue measures and excluding temporary emergency measures related to the COVID-19 crisis) and investment.

(7)

On 2 March 2022, the Commission adopted a communication providing broad guidance for fiscal policy in 2023 (‘the fiscal guidance’) aimed at supporting the preparation of Member States’ Stability and Convergence Programmes and thereby strengthening policy coordination. The Commission noted that, on the basis of the macroeconomic outlook of the 2022 winter forecast, transitioning from an aggregate supportive fiscal stance in 2020–2022 to a broadly neutral aggregate fiscal stance, while standing ready to react to the evolving economic situation, would appear appropriate in 2023. The Commission announced that the fiscal recommendations for 2023 should continue to differentiate between Member States and take into account possible cross-country spillovers. The Commission invited the Member States to reflect the guidance in their Stability and Convergence Programmes. The Commission committed to closely monitor the economic developments and adjust its policy guidance as needed and at the latest in its European Semester spring package of late May 2022.

(8)

With respect to the fiscal guidance, the fiscal recommendations for 2023 take into account the worsened economic outlook, the heightened uncertainty and further downside risks, and the higher inflation compared to the Commission’s 2022 winter forecast. Against these considerations, the fiscal response has to expand public investment for the green and digital transitions and energy security, and sustain the purchasing power of the most vulnerable households so as to cushion the impact of the energy price hike and help limit inflationary pressures from second-round effects via targeted and temporary measures. Fiscal policy has to remain agile so as to adjust to the rapidly evolving circumstances, including challenges that arise from Russia’s war of aggression against Ukraine with regard to defence and security, and has to differentiate between Member States according to their fiscal and economic situation, including as regards their exposure to the crisis and the inflow of displaced persons from Ukraine.

(9)

On 30 April 2021, Belgium submitted its national recovery and resilience plan to the Commission, in accordance with Article 18(1) of Regulation (EU) 2021/241. Pursuant to Article 19 of Regulation (EU) 2021/241, the Commission assessed the relevance, effectiveness, efficiency and coherence of the recovery and resilience plan, in accordance with the assessment guidelines set out in Annex V to that Regulation. On 13 July 2021, the Council adopted its Implementing Decision on the approval of the assessment of the recovery and resilience plan for Belgium (10). The release of instalments is conditional on the adoption of a decision by the Commission, in accordance with Article 24(5) of Regulation (EU) 2021/241, stating that Belgium has satisfactorily fulfilled the relevant milestones and targets set out in the Council Implementing Decision. Satisfactory fulfilment presupposes that the achievement of preceding milestones and targets has not been reversed.

(10)

On 30 April 2022, Belgium submitted its 2022 National Reform Programme and its 2022 Stability Programme, in line with the deadline established in Article 4 of Regulation (EC) No 1466/97. To take account of their interlinkages, the two programmes have been assessed together. In accordance with Article 27 of Regulation (EU) 2021/241, the 2022 National Reform Programme also reflects Belgium’s biannual reporting on the progress made in implementing its recovery and resilience plan.

(11)

The Commission published the 2022 country report for Belgium on 23 May 2022. It assessed Belgium’s progress in addressing the relevant country-specific recommendations adopted by the Council in 2019, 2020 and 2021, and took stock of Belgium’s implementation of the recovery and resilience plan, building on the recovery and resilience scoreboard. On the basis of that analysis, the country report identified gaps with respect to those challenges that are not addressed or only partially addressed by the recovery and resilience plan, as well as new and emerging challenges, including those emerging from Russia’s invasion of Ukraine. It also assessed Belgium’s progress in implementing the European Pillar of Social Rights and in achieving the Union headline targets on employment, skills and poverty reduction, as well as progress in achieving the United Nations Sustainable Development Goals.

(12)

On 23 May 2022, the Commission issued a report under Article 126(3) of the Treaty. That report discussed the budgetary situation of Belgium, as its general government deficit in 2021 exceeded the Treaty reference value of 3 % of gross domestic product (GDP), while its general government debt exceeded the 60 %-of-GDP Treaty reference value and did not respect the debt-reduction benchmark. The report concluded that the deficit and debt criteria were not fulfilled. In line with the communication of 2 March 2022, the Commission considered, within its assessment of all relevant factors, that compliance with the debt-reduction benchmark would involve an overly demanding frontloaded fiscal effort that could jeopardise growth. Therefore, in the view of the Commission, compliance with the debt-reduction benchmark is not warranted under the current exceptional economic conditions. As announced, the Commission did not propose to open new excessive-deficit procedures in spring 2022 and will reassess whether it is necessary to propose the opening of such procedures in autumn 2022.

(13)

In its Recommendation of 20 July 2020 (11), the Council recommended Belgium to take in 2020 and 2021 all necessary measures, in line with the general escape clause, to effectively address the COVID-19 pandemic, sustain the economy and support the ensuing recovery. It also recommended Belgium to pursue, when economic conditions allow, fiscal policies aimed at achieving prudent medium-term fiscal positions and ensuring debt sustainability, while enhancing investment. In 2021, according to data validated by Eurostat, Belgium’s general government deficit fell from 9,0 % of GDP in 2020 to 5,5 %. The fiscal policy response by Belgium supported the economic recovery in 2021, while temporary emergency measures declined from 4,4 % of GDP in 2020 to 2,9 % in 2021. The measures taken by Belgium in 2021 were in line with the Council Recommendation of 20 July 2020. The discretionary budgetary measures adopted by the government in 2020 and 2021 were mostly temporary or matched by offsetting measures. At the same time, some of the discretionary measures adopted by the government over the period 2020 to 2021 were not temporary or matched by offsetting measures, mainly consisting of permanent increases in minimum pensions and health sector wages. According to data validated by Eurostat, general government debt fell from 112,8 % of GDP in 2020 to 108,2 % of GDP in 2021.

(14)

The macroeconomic scenario underpinning the budgetary projections in the 2022 Stability Programme is favourable. The government projects real GDP to grow by 3,0 % in 2022 and 1,9 % in 2023. By comparison, the Commission’s 2022 spring forecast projects a lower real GDP growth of 2,0 % in 2022 and 1,6 % in 2023, mainly due to the earlier cut-off date for the macroeconomic projections underlying the 2022 Stability Programme, which was before the start of Russia’s war of aggression against Ukraine. In its 2022 Stability Programme, the government expects that the headline deficit will decrease to 5,2 % of GDP in 2022 and to 3,6 % in 2023. The decrease in 2022 mainly reflects the solid growth in economic activity and the unwinding of most emergency measures. According to the 2022 Stability Programme, the general government debt-to-GDP ratio is expected to (marginally) decrease to 108,0 % in 2022, and to rise to 108,8 % in 2023. Based on policy measures known at the cut-off date of the forecast, the Commission’s 2022 spring forecast projects a government deficit for 2022 and 2023 of 5,0 % of GDP and 4,4 % respectively. In 2022, this is in line with the deficit projected in the 2022 Stability Programme, despite the less favourable macroeconomic scenario in the Commission’s 2022 spring forecast, as the budgetary projections in the 2022 Stability Programme take into account a technical correction reflecting the budget impact of the consequences of Russia’s war of aggression against Ukraine in 2022 only. In 2023, the Commission’s 2022 spring forecast projects a higher general government budget deficit, mainly due to a less favourable macroeconomic scenario and measures not yet specified in the outer years of the 2022 Stability Programme. The Commission’s 2022 spring forecast projects a broadly similar general government debt-to-GDP ratio of 107,5 % in 2022 but a lower ratio of 107,6 % in 2023, reflecting the lower increase in the GDP deflator in the 2022 Stability Programme. According to the Commission’s 2022 spring forecast, the medium-term (10-year average) potential output growth is estimated at 1,4 %. However, that estimate does not include the impact of the reforms that are part of the recovery and resilience plan and can boost Belgium’s potential growth.

(15)

In 2022, the government phased out the majority of measures taken in response to the COVID-19 crisis, such that the temporary emergency measures are projected to decline from 2,9 % of GDP in 2021 to 0,4 % in 2022. The government deficit in 2022 is impacted by the measures adopted to counter the economic and social impact of the increase in energy prices, which in the Commission’s spring 2022 forecast are estimated at 0,5 % of GDP in 2022 and 0 % of GDP in 2023 (12). Those measures mainly consist of lump sum transfers to households and cuts to indirect taxes on energy consumption. Those measures have been announced as temporary and concern 2022. However, in the event that energy prices remain elevated in 2023, some of those measures could be continued. Some of those measures are not targeted, in particular across-the-board transfers to households to support energy consumption and cuts in VAT rates on gas and electricity and excise duties on petrol. The government deficit is also impacted by the cost of offering temporary protection to displaced persons from Ukraine, which in the Commission’s 2022 spring forecast is projected at 0,1 % of GDP in both 2022 and 2023 (13), as well as by the increased cost of defence expenditure (0,1 % of GDP in 2022).

(16)

In its Recommendation of 18 June 2021, the Council recommended that in 2022 Belgium should use the Recovery and Resilience Facility to finance additional investment in support of the recovery while pursuing a prudent fiscal policy. Moreover, it should preserve nationally financed investment. The Council also recommended Belgium to pursue, when economic conditions allow, a fiscal policy aimed at achieving prudent medium-term fiscal positions and ensuring fiscal sustainability in the medium term and, at the same time, to enhance investment to boost growth potential.

(17)

In 2022, according to the Commission’s 2022 spring forecast and including the information incorporated in Belgium’s 2022 Stability Programme, the fiscal stance is projected to be supportive at – 2,4 % of GDP (14). Belgium plans to provide continued support to the recovery by making use of the Recovery and Resilience Facility to finance additional investment as recommended by the Council. The positive contribution to economic activity of expenditure financed by grants under the Recovery and Resilience Facility and other Union funds is projected to increase by 0,2 % percentage points of GDP compared to 2021. Nationally financed investment is projected to provide a neutral contribution to the fiscal stance in 2022 (15). Therefore, Belgium plans to preserve nationally financed investment, as recommended by the Council. At the same time, the growth in nationally financed primary current expenditure (net of new revenue measures) in 2022 is projected to provide an expansionary contribution of 2,1 percentage points to the overall fiscal stance. That significant expansionary contribution includes the additional impact of the measures to address the economic and social impact of the increase in energy prices (0,5 % of GDP) as well as the costs to offer temporary protection to displaced persons from Ukraine (0,1 % of GDP). Furthermore, the increase in government spending due to the automatic indexation of public-sector wages and social benefits, and to a lower extent to higher government consumption of goods and services, is also projected to contribute to the expansionary contribution of nationally financed net primary current expenditure. According to the Commission’s forecast, these measures and drivers of higher expenditure are not fully matched by offsetting measures.

(18)

In 2023, the fiscal stance is projected in the Commission’s 2022 spring forecast at 0,0 % of GDP on a no-policy change assumption (16). Belgium is projected to continue using the grants under the Recovery and Resilience Facility in 2023 to finance additional investment in support of the recovery. The positive contribution to economic activity of expenditure financed by grants under the Recovery and Resilience Facility and other Union funds is projected to remain stable compared to 2022. Nationally financed investment is projected to provide an expansionary contribution to the fiscal stance of 0,1 percentage point in 2023 (17). At the same time, the growth in nationally financed primary current expenditure (net of new revenue measures) in 2023 is projected to provide a broadly neutral contribution of 0,1 percentage point to the overall fiscal stance. This includes the impact from the phasing out of the measures addressing the increased energy prices (0,5 % of GDP).

(19)

In the 2022 Stability Programme, the general government deficit is expected to gradually decline to 3,4 % of GDP in 2024 and to 2,7 % by 2025. Therefore, the general government deficit is planned to go below 3 % of GDP by 2025. These projections are based on a macroeconomic scenario elaborated prior to the Russian invasion of Ukraine, and assume measures not yet specified in the outer years of the 2022 Stability Programme, in particular a so-called ‘flexible budgetary effort’ amounting to 0,8 % of GDP between 2023 and 2025. According to the 2022 Stability Programme, the general government debt-to-GDP ratio is expected to increase by 2025, specifically with an increase to 109,7 % in 2024, and a rise to 110,1 % in 2025. According to the Commission’s analysis, debt sustainability risks appear high over the medium term.

(20)

Under unchanged policies, the rapidly ageing population is expected to worsen the impact of ageing-related expenditure on public finances. The Commission 2021 Ageing Report (18) projects an increase of 3,6 percentage points by 2040 and by 5,4 percentage points of GDP by 2070 in ageing-related spending, mostly due to pension and long-term care expenditure. In its recovery and resilience plan, Belgium has committed to implementing a pension reform, inter alia, to improve the financial and social sustainability of the system and promote convergence amongst different pension schemes. With regard to long-term care, Belgium was already one of the highest spenders in the Union in 2019, and its spending is expected to further increase by 14 % by 2030 and by 2,2 percentage points of GDP by 2070. Reforms to improve the cost-efficient use of the different care settings, in particular to avoid and delay unnecessary or premature institutionalisation, which concerns one in four people in residential care (19), have started, although large regional differences are observed. The COVID-19 crisis has stalled the implementation of planned cost-saving measures. This suggests that there may be scope to further reduce over-institutionalisation while strengthening the use of quality home care services and, addressing financial barriers that limit access to these services for the most-vulnerable groups. A swift and ambitious implementation of reforms would help address sustainability concerns.

(21)

The Belgian tax system is characterised by a high labour tax burden, with relatively high tax rates, and narrow tax brackets. This limits the real progressivity of the tax system and further weakens labour participation. While the 2016 tax reform reduced the tax burden on labour for the lowest-income earners, the tax wedge remains the highest in the Union for those earning the average wage. High labour taxation may also discourage participation in lifelong learning. In addition, some design features of the unemployment benefit system risk undermining incentives to work for jobseekers and may reduce the effectiveness of activation policies. The complexity of social support and limited possibilities to combine income from work and social benefits may also create disincentives to take up work, in particular for those with a low earning potential. Furthermore, partly to temper the high tax rates, tax bases are eroded by numerous exemptions, deductions and reduced rates, which create efficiency losses and introduce distortions. Some features of the tax system contribute to distorting investment choices and lead to overinvestment in certain assets. For instance, rents from immovable property are undertaxed and interest on housing loans for secondary residences are tax-deductible. Moreover, tax incentives for savings and the rigid design of the tax rules applying to long-term savings and pension schemes, create obstacles to a better allocation of capital. The tax on securities accounts, introduced by the law of 17 February 2021, also acts as a disincentive to invest in financial instruments. Moreover, there is scope to develop environmental taxation, by reducing fossil-fuel subsidies and by encouraging investment in the low-carbon economy. For instance, reviewing excise duties on fossil fuels used for heating (e.g. gas oil and natural gas), which are low when compared to electricity, would encourage investment in low-carbon heating solutions. Policy options such as introducing road charging for private vehicles (as for lorries), while ensuring a sufficient level of public transport provision, could be used to address congestion (the average number of hours per year spent in traffic jams is among the highest in the Union). It could also help reduce greenhouse-gas emissions not covered by the emisions trading schemes. Combining a shift away from labour and broadening the tax base could improve the fairness of the tax system, boost employment as well as promote social and environmental objectives.

(22)

In accordance with Article 19(3), point (b), of Regulation (EU) 2021/241 and criterion 2.2 of Annex V, to that Regulation, the recovery and resilience plan includes an extensive set of mutually reinforcing reforms and investments with an indicative timetable for implementation to be completed by 31 August 2026. These help address all or a significant subset of the economic and social challenges outlined in the country-specific recommendations addressed to Belgium by the Council in the European Semester in 2019 and 2020, in addition to any country-specific recommendations issued up to the date of adoption of a recovery and resilience plan. In particular, the recovery and resilience plan of Belgium is expected to help address a significant subset of the challenges identified in the relevant country-specific recommendations. To improve the quality and efficiency of public spending, the recovery and resilience plan of Belgium includes the systematic integration of spending reviews in the budgetary planning cycles of all government levels. Against the background of increasing public pension expenditure, the plan includes a pension reform, which aims, inter alia, at improving the financial and social sustainability of the pension system. The recovery and resilience plan of Belgium also includes several measures to address labour market challenges and strengthen the social and labour market integration of vulnerable groups, such as people with a migrant background, women, youth, people with disabilities and people at risk of digital exclusion. Under the recovery and resilience plan, Belgium will ensure 5G deployment. The recovery and resilience plan of Belgium also contains a reform of the company-car tax scheme, aiming for the full electrification of company-car fleets.

(23)

The implementation of the recovery and resilience plan of Belgium is expected to contribute to making further progress on the green and digital transitions. Measures supporting the climate objectives in Belgium account for 49,6 % of the recovery and resilience plan’s total allocation, while measures supporting digital objectives account for 26,6 % of the recovery and resilience plan’s total allocation. The fully fledged implementation of the recovery and resilience plan, in line with the relevant milestones and targets, will help Belgium swiftly recover from the fallout of the COVID-19 crisis, while strengthening its resilience. The systematic involvement of social partners and other relevant stakeholders remains important for the successful implementation of the recovery and resilience plan, as well as other economic and employment policies going beyond the recovery and resilience plan, to ensure broad ownership of the overall policy agenda.

(24)

Belgium has not yet submitted the Partnership Agreement provided for in Regulation (EU) 2021/1060 of the European Parliament and of the Council (20) or the other cohesion policy programmes provided for in that Regulation. In line with Regulation (EU) 2021/1060, Belgium is to take into account the relevant country-specific recommendations in the programming of the 2021–2027 cohesion policy funds. This is a prerequisite for improving the effectiveness and maximising the added value of the financial support to be received from cohesion policy funds, while promoting coordination, complementarity and coherence between those cohesion policy funds and other Union instruments and funds. The successful implementation of the Recovery and Resilience Facility and cohesion policy programmes also depends on the removal of bottlenecks to investment to support the green and digital transitions and balanced territorial development.

(25)

Beyond the economic and social challenges addressed by the recovery and resilience plan, Belgium faces a number of additional challenges related to its labour market and education system. The record high job vacancy rate in Belgium indicates that employers are finding it increasingly difficult to hire employees with the right skills. Labour shortages concern all skills levels and are persistent in various sectors, including information and communication technologies, education, the care sector and construction. In particular, there are too few graduates in science, technology, engineering and mathematics (STEM), both among upper secondary graduates from vocational programmes and among tertiary graduates. Skills mismatches are also explained by low participation in adult learning, in particular for the low-educated, for whom upskilling could offer better employment opportunities. Under the recovery and resilience plan, individual learning accounts and individual learning rights will be developed for employees. However, the share of expenditure on active labour market policies devoted to training is limited and only a small – although increasing – proportion of jobseekers follow a training related to a job in shortage. Addressing labour shortages and skills mismatches is a key lever for tackling the digital transformation and enabling the green transition, as well as for achieving the 2030 Union headline targets on employment and skills.

(26)

In terms of labour shortages and skills mismatches, there are concerns in particular about the performance and inclusiveness of the education system, also in the light of high public spending on education (21). The gap in educational outcomes is closely linked to students’ socioeconomic and migrant background and is among the largest in the Union, leading to inequalities in education. More than one in three young adults with disabilities do not finish secondary education. Moreover, only 6,2 % of students participated in work-based learning in Belgium in 2019, well below the Union average (29 %). Increasing the labour market relevance of the vocational education and training (VET) systems is particularly warranted in the French Community as only 3 out of the 10 most popular upper secondary VET options prepare for occupations with labour shortages. Overall, concerns in Belgium remain on the attractiveness of VET as a track of excellence, as reflected in the large share of the population with a negative perception of VET. Strengthening the teaching profession would help to retain teachers and reduce a growing shortage of qualified teachers. This poses a particular challenge to disadvantaged schools, risking further increasing existing inequalities in the education system. Despite measures already taken, the attractiveness of the teaching profession would be strengthened by providing better initial education and continuous professional development, and by developing more flexible and attractive career paths.

(27)

In response to the mandate by the Union Heads of State or Government set out in the Versailles Declaration, the Commission’s proposal for a REPowerEU plan aims to phase out the Union’s dependence on fossil-fuel imports from Russia as soon as possible. For this purpose, the Commission intends to identify the most-suitable projects, investments and reforms at national, regional and Union level in dialogue with Member States. These measures aim to reduce overall reliance on fossil fuels and shift fossil-fuel imports away from Russia.

(28)

Around 70 % of Belgium’s gross inland energy consumption is covered by fossil fuel imports. According to 2020 data, dependency on fossil fuel imports from Russia is of 30 % for crude oil (share of total imports), higher than the EU-27 average (26 %) and comparatively lower for natural gas (7 % versus 44 % for the Union) and for coal (39 % versus 54 %) (22). The shares in the energy mix of oil (39 % of gross inland consumption versus 33 %) and natural gas (30 % versus 24 %) are both above the Union average, while the share of coal is lower (5 % versus 11 %). The share of nuclear energy in the energy mix is 16 % of gross inland consumption. Renewable energy accounted for only 13 % of final energy consumption in 2020. Belgium will need to take significant additional steps to accelerate the development of renewable energy sources in order to make progress towards climate neutrality in 2050 and reduce its dependency on imported fossil fuels. The development of onshore wind projects and the related expansion of the power grid are, however, severely hampered by long delays for building permits in particular due to numerous, repetitive and lengthy appeal procedures. Alignment between all governmental levels (federal, regional, local) on the objectives and strategy needed to achieve Belgium’s renewable targets would provide for a clearer framework for investors, and reduce the number of appeals and accelerate renewables deployment and related grid reinforcement. Furthermore, permitting could be made easier by reinforcing the capacity of appeal bodies and adopting further measures to reduce the length of appeal procedures and the likelihood of successive appeals, by easing restrictions in the neighbourhood of airports, radars and military zones, and by updating minimum distance requirements (to wind turbines). The introduction of spatial planning that takes into account the resource potential of territories and higher participation of municipalities in renewable energy generation projects could increase acceptability among local residents.

The potential of rooftop solar (for both small scale and large scale installations) could be better harnessed by adopting framework conditions that are predictable and sufficient to stimulate self-consumption, energy sharing and demand side response. To accommodate the increased level of variable energy sources in the electricity grid, the grid would need to be strengthened and made smarter. New infrastructure and network investments related to gas are recommended to be future-proof where possible, in order to facilitate their long-term sustainability through future repurposing for sustainable fuels.

(29)

Additional means to further boost energy efficiency and reduce energy consumption, emissions and dependency on fossil fuels include investments in the hydrogen value chain, the energy renovation and the decarbonisation of buildings. This implies that subsidies are redirected to low carbon heating sources and that regional bans on oil-fired boiler or gas boiler installations in new buildings are introduced or accelerated. The fuel switch will be made easier if energy consumption is reduced and energy-efficiency improvements are stepped up (by encouraging deeper renovation) and conducted in parallel to the fuel switch. A further increase in ambition in respect of reducing greenhouse-gas emissions and increasing renewables and energy efficiency will be needed in order for Belgium to be in line with the ‘Fit for 55’ objectives. In transport, the high share of private car use accounts for a large part of the oil consumption in Belgium. Promoting ‘soft mobility’ (for example, cycling, shared mobility) and the use of public transport, including through improved public transport services, would help reduce the use of private cars and the related oil consumption.

(30)

While the acceleration of the transition towards climate neutrality and away from fossil fuels will create significant restructuring costs in several sectors, Belgium can make use of the Just Transition Mechanism in the context of cohesion policy to alleviate the socioeconomic impact of the transition in the most affected regions. In addition, Belgium can make use of the European Social Fund Plus, established by Regulation (EU) 2021/1057 of the European Parliament and of the Council (23), to improve employment opportunities and strengthen social cohesion.

(31)

In the light of the Commission’s assessment, the Council has examined the 2022 Stability Programme and its opinion (24) is reflected in recommendation (1).

(32)

In view of the close interlinkages between the economies of euro-area Member States and their collective contribution to the functioning of the economic and monetary union, the Council recommended that the euro-area Member States take action, including through their recovery and resilience plans, to implement the recommendations set out in the 2022 Recommendation on euro area. For Belgium, this is reflected in particular in recommendations (1), (2) and (3).

(1)

Regulation (EU) 2021/241 of the European Parliament and of the Council (2), which established the Recovery and Resilience Facility, entered into force on 19 February 2021. The Recovery and Resilience Facility provides financial support for the implementation of reforms and investment, entailing a fiscal impulse financed by the Union. It contributes to the economic recovery and to the implementation of sustainable and growth-enhancing reforms and investment, in particular to promote the green and digital transitions, while strengthening the resilience and potential growth of the Member States’ economies. It also helps strengthen sustainable public finances and boost growth and job creation in the medium and long term. The maximum financial contribution per Member State under the Recovery and Resilience Facility will be updated in June 2022, in line with Article 11(2) of Regulation (EU) 2021/241.

(2)

On 24 November 2021, the Commission adopted the Annual Sustainable Growth Survey, marking the start of the 2022 European Semester for economic policy coordination. It took due account of the Porto Social Commitment signed on 7 May 2021 to further implement the European Pillar of Social Rights, proclaimed by the European Parliament, the Council and the Commission on 17 November 2017. The European Council endorsed the priorities of the 2022 Annual Sustainable Growth Survey on 25 March 2022. On 24 November 2021, on the basis of Regulation (EU) No 1176/2011 of the European Parliament and of the Council (3), the Commission also adopted the Alert Mechanism Report, in which it did not identify Bulgaria as one of the Member States for which an in-depth review would be needed. On the same date, the Commission also adopted a proposal for the 2022 Joint Employment Report, which analyses the implementation of the Employment Guidelines and the principles of the European Pillar of Social Rights. The Council adopted the Joint Employment Report on 14 March 2022.

(3)

Russia’s invasion of Ukraine, in the wake of the global pandemic, has significantly altered the geopolitical and economic context. The impact of the invasion on Member States’ economies has been felt through, inter alia, higher prices for energy, food and raw materials and weaker growth prospects. The higher energy prices weigh particularly heavily on the most vulnerable households experiencing or at risk of energy poverty as well as on firms most vulnerable to energy prices hikes. The Union is also seeing an unprecedented inflow of people fleeing Ukraine. The economic effects stemming from Russia’s war of aggression have impacted Member States asymmetrically. In this context, on 4 March 2022, Council Directive 2001/55/EC (4) was triggered for the first time by Council Implementing Decision (EU) 2022/382 (5), granting displaced persons from Ukraine the right to legally stay in the Union, as well as access to education and training, the labour market, healthcare, housing and social welfare. Exceptional support is made available to Bulgaria under the Cohesion’s Action for Refugees in Europe (CARE) initiative and through additional pre-financing under the Recovery Assistance for Cohesion and the Territories of Europe (REACT-EU) programme to urgently address reception and integration needs for those fleeing Ukraine.

(4)

Taking account of the rapidly changing economic and geopolitical situation, the European Semester resumes its broad economic and employment policy coordination in 2022, while evolving in line with the implementation requirements of the Recovery and Resilience Facility as outlined in the 2022 Annual Sustainable Growth Survey. The implementation of the adopted recovery and resilience plans is essential for the delivery of the policy priorities under the European Semester, as the plans address all or a significant subset of the relevant country-specific recommendations issued in the 2019 and 2020 European Semester cycles. The 2019 and 2020 country-specific recommendations remain equally relevant also for the recovery and resilience plans revised, updated or amended in accordance with Articles 14, 18 and 21 of Regulation (EU) 2021/241, in addition to any other country-specific recommendations issued up to the date of submission of such revised, updated or amended recovery and resilience plans.

(5)

The general escape clause of the Stability and Growth Pact has been active since March 2020. In its communication of 3 March 2021 entitled ‘One year since the outbreak of COVID-19: fiscal policy response’, the Commission set out its view that the decision on the deactivation or continued application of the general escape clause should be taken as an overall assessment of the state of the economy, with the level of economic activity in the Union or euro area compared to pre-crisis levels (end of 2019) as a key quantitative criterion. Heightened uncertainty and strong downside risks to the economic outlook in the context of war in Europe, unprecedented energy price hikes and continued supply-chain disturbances warrant the extension of the general escape clause of the Stability and Growth Pact through 2023.

(6)

Following the approach in the Council Recommendation of 18 June 2021 (6) delivering a Council opinion on the 2021 Convergence Programme of Bulgaria, the overall fiscal stance is currently best measured as the change in primary expenditure (net of discretionary revenue measures and excluding temporary emergency measures related to the COVID-19 crisis) but including expenditure financed by non-repayable support (grants) from the Recovery and Resilience Facility and other Union funds, relative to medium-term potential growth (7). Going beyond the overall fiscal stance, in order to assess whether national fiscal policy is prudent and its composition is conducive to a sustainable recovery consistent with the green and digital transitions, attention is also paid to the evolution of nationally financed (8) primary current expenditure (net of discretionary revenue measures and excluding temporary emergency measures related to the COVID-19 crisis) and investment.

(7)

On 2 March 2022, the Commission adopted a communication providing broad guidance for fiscal policy in 2023 (‘the fiscal guidance’) aimed at supporting the preparation of Member States’ Stability and Convergence Programmes and thereby strengthening policy coordination. The Commission noted that, on the basis of the macroeconomic outlook of the 2022 winter forecast, transitioning from an aggregate supportive fiscal stance in 2020–2022 to a broadly neutral aggregate fiscal stance, while standing ready to react to the evolving economic situation, would appear appropriate in 2023. The Commission announced that the fiscal recommendations for 2023 should continue to differentiate between Member States and take into account possible cross-country spillovers. The Commission invited the Member States to reflect the guidance in their Stability and Convergence Programmes. The Commission committed to closely monitor the economic developments and adjust its policy guidance as needed and at the latest in its European Semester spring package of late May 2022.

(8)

With respect to the fiscal guidance, the fiscal recommendations for 2023 take into account the worsened economic outlook, the heightened uncertainty and further downside risks, and the higher inflation compared to the Commission’s 2022 winter forecast. Against these considerations, the fiscal response has to expand public investment for the green and digital transitions and energy security, and sustain the purchasing power of the most vulnerable households so as to cushion the impact of the energy price hike and help limit inflationary pressures from second-round effects via targeted and temporary measures. Fiscal policy has to remain agile so as to adjust to the rapidly evolving circumstances, including challenges that arise from Russia’s war of aggression against Ukraine with regard to defence and security, and has to differentiate between Member States according to their fiscal and economic situation, including as regards their exposure to the crisis and the inflow of displaced persons from Ukraine.

(9)

On 15 October 2021, Bulgaria submitted its national recovery and resilience plan to the Commission, in accordance with Article 18(1) of Regulation (EU) 2021/241. Pursuant to Article 19 of Regulation (EU) 2021/241, the Commission assessed the relevance, effectiveness, efficiency and coherence of the recovery and resilience plan, in accordance with the assessment guidelines set out in Annex V to that Regulation. On 4 May 2022, the Council adopted its Implementing Decision on the approval of the assessment of the recovery and resilience plan for Bulgaria (9). The release of instalments is conditional on the adoption of a decision by the Commission, in accordance with Article 24(5) of Regulation (EU) 2021/241, stating that Bulgaria has satisfactorily fulfilled the relevant milestones and targets set out in the Council Implementing Decision. Satisfactory fulfilment presupposes that the achievement of preceding milestones and targets has not been reversed.

(10)

On 29 April 2022, Bulgaria submitted its 2022 National Reform Programme and its 2022 Convergence Programme, in line with the deadline established in Article 8 of Regulation (EC) No 1466/97. To take account of their interlinkages, the two programmes have been assessed together.

(11)

The Commission published the 2022 country report for Bulgaria on 23 May 2022. It assessed Bulgaria’s progress in addressing the relevant country-specific recommendations adopted by the Council in 2019, 2020 and 2021, and took stock of its recovery and resilience plan, building on the recovery and resilience scoreboard. On the basis of that analysis, the country report identified gaps with respect to those challenges that are not addressed or only partially addressed by the recovery and resilience plan, as well as new and emerging challenges, including those emerging from Russia’s invasion of Ukraine. It also assessed Bulgaria’s progress in implementing the European Pillar of Social Rights and in achieving the Union headline targets on employment, skills and poverty reduction, as well as progress in achieving the United Nations Sustainable Development Goals.

(12)

On 23 May 2022, the Commission issued a report under Article 126(3) of the Treaty. That report discussed the budgetary situation of Bulgaria, as its general government deficit in 2021 exceeded the Treaty reference value of 3 % of gross domestic product (GDP). The report concluded that the deficit criterion was not fulfilled. In line with the communication of 2 March 2022, the Commission did not propose to open new excessive-deficit procedures in spring 2022 and will reassess whether it is necessary to propose the opening of such procedures in autumn 2022.

(13)

In its Recommendation of 20 July 2020 (10), the Council recommended Bulgaria to take in 2020 and 2021 all necessary measures, in line with the general escape clause, to effectively address the COVID-19 pandemic, sustain the economy and support the ensuing recovery. It also recommended Bulgaria to pursue, when economic conditions allow, fiscal policies aimed at achieving prudent medium-term fiscal positions and ensuring debt sustainability, while enhancing investment. In 2021, according to data validated by Eurostat, Bulgaria’s general government deficit increased from 4,0 % of GDP in 2020 to 4,1 %. The fiscal policy response by Bulgaria supported the economic recovery in 2021, while temporary emergency measures increased from 2,9 % of GDP in 2020 to 4,3 % in 2021. The measures taken by Bulgaria in 2021 were in line with the Council Recommendation of 20 July 2020. The discretionary budgetary measures adopted by the government in 2020 and 2021 were mostly temporary or matched by offsetting measures. According to data validated by Eurostat, general government debt increased from 24,7 % of GDP in 2020 to 25,1 % of GDP in 2021.

(14)

The macroeconomic scenario underpinning the budgetary projections in the 2022 Convergence Programme is favourable in 2022 and realistic thereafter. The government projects real GDP to grow by 2,6 % in 2022 and 2,8 % in 2023. By comparison, the Commission’s 2022 spring forecast projects a lower real GDP growth of 2,1 % in 2022 and higher real GDP growth of 3,1 % in 2023, mainly due to different employment and investment growth projections. In its 2022 Convergence Programme, the government expects that the headline deficit will increase to 5,3 % of GDP in 2022 while falling to 2,9 % in 2023. The deficit increase in 2022, which is cushioned by the phase-out of some COVID emergency measures, mainly reflects a steep rise in intermediate consumption, business support and energy measures, as well as pension system amendments. According to the 2022 Convergence Programme, the general government debt-to-GDP ratio is expected to increase to 25,5 % in 2022 and to 27,7 % in 2023. Based on policy measures known at the cut-off date of the forecast, the Commission’s 2022 spring forecast projects a government deficit for 2022 and 2023 of 3,7 % of GDP and 2,4 % respectively. This is considerably lower than the 2022 deficit projected in the 2022 Convergence Programme, mainly due to different macroeconomic projections, lower intermediate consumption growth, and higher revenues from taxes on production and imports in 2022. The Commission’s 2022 spring forecast projects a lower general government debt-to-GDP ratio of 25,3 % in 2022 and 25,6 % in 2023. The difference is due to the lower deficits in both years and higher projected economic growth in 2023. According to the Commission’s 2022 spring forecast, the medium-term (10-year average) potential output growth is estimated at 1,8 %. However, that estimate does not include the impact of the reforms that are part of the recovery and resilience plan and can boost Bulgaria’s potential growth.

(15)

In 2022, the government phased out the majority of measures taken in response to the COVID-19 crisis, such that the temporary emergency measures are projected to decline from 4,3 % of GDP in 2021 to 1,8 % in 2022. The government deficit is impacted by the measures adopted to counter the economic and social impact of the increase in energy prices, which in the Commission’s 2022 spring forecast are estimated at 0,9 % of GDP in 2022 and 0,0 % of GDP in 2023 (11). Those measures mainly consist of support programmes for public utilities, industrial end-users of electricity and household gas consumers. Theoe measures have been announced as mostly temporary. However, in the event that energy prices remain elevated in 2023, some of those measures could be continued. Some of those measures are not targeted, in particular the moratorium on energy prices for households. The government deficit is also impacted by the cost of offering temporary protection to displaced persons from Ukraine, which in the Commission’s 2022 spring forecast is projected at 0,1 % of GDP in 2022 and 0,2 % of GDP in 2023 (12).

(16)

In its Recommendation of 18 June 2021, the Council recommended that in 2022 Bulgaria pursue a supportive fiscal stance, including from the impulse provided by the Recovery and Resilience Facility, and preserve nationally financed investment. The Council also recommended Bulgaria to keep the growth of nationally financed current expenditure under control. It also recommended Bulgaria to pursue, when economic conditions allow, a fiscal policy aimed at achieving prudent medium-term fiscal positions and ensuring fiscal sustainability in the medium term and, at the same time, to enhance investment to boost growth potential.

(17)

In 2022, according to the Commission’s 2022 spring forecast and including the information incorporated in Bulgaria’s 2022 Convergence Programme, the fiscal stance is projected to be supportive at – 3,4 % of GDP, as recommended by the Council (13). Bulgaria plans to provide continued support to the recovery by making use of the Recovery and Resilience Facility to finance additional investment as recommended by the Council. The positive contribution to economic activity of expenditure financed by grants under the Recovery and Resilience Facility and other Union funds is projected to increase by 1,1 percentage point of GDP compared to 2021. Nationally financed investment is projected to provide an expansionary contribution to the fiscal stance of 1,1 percentage point of GDP in 2022 (14). Therefore, Bulgaria plans to preserve nationally financed investment, as recommended by the Council. At the same time, the growth in nationally financed primary current expenditure (net of new revenue measures) in 2022 is projected to provide an expansionary contribution of 1,4 percentage points to the overall fiscal stance. That significant expansionary contribution includes the additional impact of the measures to address the economic and social impact of the increase in energy prices (0,2 percentage points of GDP) as well as the costs to offer temporary protection to displaced persons from Ukraine (0,1 percentage point of GDP), while pension system amendments (0,6 % of GDP) and wage increases (0,3 % of GDP) are also projected to contribute to the growth in net current expenditure. Therefore, on the basis of current Commission estimates, Bulgaria does not sufficiently keep under control the growth of nationally financed current expenditure in 2022.

(18)

In 2023, the fiscal stance is projected in the Commission’s 2022 spring forecast at – 1,3 % of GDP on a no-policy-change assumption (15). Bulgaria is projected to continue using the grants under the Recovery and Resilience Facility in 2023 to finance additional investment in support of the recovery. The positive contribution to economic activity of expenditure financed by grants under the Recovery and Resilience Facility and other Union funds is projected to increase by 0,7 percentage points of GDP compared to 2022. Nationally financed investment is projected to provide an expansionary contribution of 0,2 percentage points in 2023 (16). At the same time, the growth in nationally financed primary current expenditure (net of new revenue measures) in 2023 is projected to provide an expansionary contribution of 0,5 percentage points to the overall fiscal stance. This includes the impact from the phasing out of the measures addressing the increased energy prices (0,9 % of GDP), while increased social transfers and wage increases are projected to contribute to the growth in net current expenditure.

(19)

In the 2022 Convergence Programme, the general government deficit is expected to gradually decline to 2,8 % of GDP in 2024 and to 2,4 % by 2025. The general government deficit is thus planned to remain below 3 % of GDP over the Programme horizon. Those projections assume revenue increases from direct taxes and social contributions thanks to higher household income and higher capital transfers thanks to the Recovery and Resilience Facility. According to the 2022 Convergence Programme, the general government debt-to-GDP ratio is expected to increase by 2025, specifically with an increase to 29,1 % in 2024, and a rise to 30,4 % in 2025. According to the Commission’s analysis, debt sustainability risks appear medium over the medium term.

(20)

In accordance with Article 19(3), point (b), of Regulation (EU) 2021/241 and criterion 2.2 of Annex V to that Regulation, the recovery and resilience plan includes an extensive set of mutually reinforcing reforms and investments to be implemented with an indicative timetable for implementation to be completed by 31 August 2026. These help address all or a significant subset of the economic and social challenges outlined in the country-specific recommendations addressed to Bulgaria by the Council in the European Semester in 2019 and 2020, in addition to any country-specific recommendations issued up to the date of adoption of a recovery and resilience plan. In particular, the recovery and resilience plan addresses the country-specific recommendations in the social field with measures to improve social inclusion, which are expected to improve the adequacy and coverage of the minimum income scheme, and with measures to move forward the integration of employment and social services. Other measures addressing the country-specific recommendations focus on skills acquisition, in particular digital skills, on improving the labour market relevance of the education and lifelong learning systems and on widening the offer of healthcare services across Bulgaria. Those measures can help achieve the objectives and make further progress on the European Pillar of Social Rights and its action plan by 2030. Furthermore, the recovery and resilience plan addresses country-specific recommendations by advancing decarbonisation of the energy sector, increasing overall energy efficiency and implementing measures on sustainable transport and digital infrastructure and services. In addition, the plan contains far-reaching measures to improve the efficiency of the public administration and justice system, prevent, detect and correct corruption, improve the business environment, foster investment, and improve the research and innovation system. This will also contribute to supporting Bulgaria in addressing the concerns and observations under the Rule of Law Mechanism.

(21)

The implementation of the recovery and resilience plan of Bulgaria is expected to contribute to making further progress on the green and digital transitions. Measures supporting the climate objectives in Bulgaria account for 58,9 % of the recovery and resilience plan’s total allocation, while measures supporting digital objectives account for 25,8 % of the recovery and resilience plan’s total allocation. The fully fledged implementation of the recovery and resilience plan, in line with the relevant milestones and targets, will help Bulgaria swiftly recover from the fallout of the COVID-19 crisis, while strengthening its resilience. At the same time, further efforts to make full use of public employment services and to provide integrated employment and social support will help to mitigate the impact of the projected demographic change and support a fair green and digital transitions. The systematic involvement of social partners and other relevant stakeholders remains important for the successful implementation of the recovery and resilience plan, as well as other economic and employment policies going beyond the recovery and resilience plan, to ensure broad ownership of the overall policy agenda.

(22)

Bulgaria submitted the Partnership Agreement provided for in Regulation (EU) 2021/1060 of the European Parliament and of the Council (17) on 11 May 2022, while the other cohesion policy programmes have not yet been submitted. In line with Regulation (EU) 2021/1060, Bulgaria is to take into account the relevant country-specific recommendations in the programming of the 2021–2027 cohesion policy funds. This is a prerequisite for improving the effectiveness and maximising the added value of the financial support to be received from cohesion policy funds, while promoting coordination, complementarity and coherence between those cohesion policy funds and other Union instruments and funds. The successful implementation of the Recovery and Resilience Facility and cohesion policy programmes also depends on the removal of bottlenecks to investment to support the green and digital transitions and balanced territorial development.

(23)

In response to the mandate by the Union Heads of State or Government set out in the Versailles Declaration, the Commission’s proposal for a REPowerEU plan aims to phase out the Union’s dependence on fossil-fuel imports from Russia as soon as possible. For this purpose, the Commission intends to identify the most-suitable projects, investments and reforms at national, regional and Union level in dialogue with Member States. In the context of the energy crisis and in accordance with the mandate given by the European Council in March 2022, the Commission and Member States have set up an EU Energy Platform for the voluntary common purchase of gas, LNG and hydrogen. These measures aim to reduce overall reliance on fossil fuels and shift fossil-fuel imports away from Russia.

(24)

Bulgaria has the most carbon-intensive economy in the Union, with greenhouse gas intensity more than four times higher than the Union average. The current share of fossil fuels in Bulgaria’s energy mix is 61,5 %, with nuclear representing a share of 24 % and renewables 14,5 % (lower than the Union renewables average of 19 %). The country was highly dependent on Russia for natural gas until April 2022 (18). In 2020, 75 % of natural gas was imported from Russia, above the Union average of 43,2 %. However, its share in the energy mix was only 13,9 %, lower than the Union average of 24,4 %. Industry remains the largest gas consumer, with a share of 40 %, including non-energy uses, while the share of the power sector has decreased since 2010, from 30 % to 25 % in 2019. District heating relies on natural gas with little margin for improvement as the district heating systems cannot be replaced by alternative sources. While the recovery and resilience plan explores the potential of geothermal energy for heating, additional investment could be envisaged to support the installation of large-scale heat pumps. Coal-fired power generation is fully covered by the domestic production of lignite, and Bulgaria imports limited quantities of coal from Russia for industrial use (0,56 million tons, representing 85 % of total coal imports). On the other hand, Bulgaria is reliant on Russia for crude oil (63 % of its crude oil comes from Russia (19), significantly higher than the Union average of 26 %) and imports 22 % of its refined oil products from Russia, below the Union average of 35 %. Overall, the share of oil in the energy mix was 23,9 % in 2020, below the Union average of 32,7 %. The Bulgarian recovery and resilience plan includes the adoption of a Roadmap to climate neutrality. It includes steps for completing the phase-out of coal and lignite at the latest by 2038 and significant investments and reforms to accelerate the deployment of renewables, while further efforts will be needed to achieve the climate and energy transition objectives.

On renewables, Bulgaria has committed to add at least 3 500 MW of new capacity from renewable energy sources (wind and solar) and create the technical conditions to integrate an additional 4 500 MW into the electricity system by 2026. In addition, the plan includes a reform to remove key impediments to the development of renewable hydrogen technologies and value chains, as well as investments to support the development of pilot projects to produce renewable hydrogen and sustainable biogas. Measures are also envisaged to help households install solar water heating and solar photovoltaic systems. The plan will also define energy poverty. It should be noted that a further increase in ambition in respect of reducing greenhouse-gas emissions and increasing renewables and energy efficiency will be needed in order for Bulgaria to be in line with the ‘Fit for 55’ objectives.

(25)

At the same time, the Bulgarian recovery and resilience plan envisages more than EUR 1 billion of investments in energy efficiency measures intended for public and private building stock. This is bolstered by reforms to tackle barriers to energy efficiency investments and reduce the administrative burden linked to renovation. Nonetheless, Bulgaria should aim to further reduce energy consumption and dependence on fossil fuels to achieve its targets in line with its long-term strategy for renovating the building stock. The national decarbonisation fund to be established in 2023 could support that measure. In parallel, Bulgaria needs to ensure energy interconnections with sufficient capacity including with neighbouring countries. By completing ongoing investments, Bulgaria can capitalise on the advantages of the single market, ensure security of supply and accelerate the diversification of gas routes. New infrastructure related to gas is recommended to be future-proof where possible, in order to facilitate its long-term sustainability through future repurposing for sustainable fuels.

(26)

While the acceleration of the transition towards climate neutrality and away from fossil fuels will create significant restructuring costs in several sectors, Bulgaria can make use of the Just Transition Mechanism in the context of cohesion policy to alleviate the socioeconomic impact of the transition in the most-affected regions. In addition, Bulgaria can make use of the European Social Fund Plus, established by Regulation (EU) 2021/1057 of the European Parliament and of the Council (20), to improve employment opportunities and strengthen social cohesion.

(27)

In the light of the Commission’s assessment, the Council has examined the 2022 Convergence Programme and its opinion (21) is reflected in recommendation (1).

(28)

On 10 July 2020, the Bulgarian lev was included in the European exchange rate mechanism II (ERM II) as a preparatory step towards adopting the euro. To preserve economic and financial stability and achieve a high degree of sustainable economic convergence, the Bulgarian authorities have committed to implement specific policy measures on ensuring the sustainability of the non-banking financial sector and strengthening the governance of State-owned enterprises, as well as the insolvency and the anti-money laundering frameworks. Bulgaria’s progress in fulfilling the necessary requirements for the adoption of the euro will be assessed in the 2022 convergence reports of the European Commission and the European Central Bank,

(1)

Regulation (EU) 2021/241 of the European Parliament and of the Council (2), which established the Recovery and Resilience Facility, entered into force on 19 February 2021. The Recovery and Resilience Facility provides financial support for the implementation of reforms and investment, entailing a fiscal impulse financed by the Union. It contributes to the economic recovery and to the implementation of sustainable and growth-enhancing reforms and investment, in particular to promote the green and digital transitions, while strengthening the resilience and potential growth of the Member States’ economies. It also helps strengthen sustainable public finances and boost growth and job creation in the medium and long term. The maximum financial contribution per Member State under the Recovery and Resilience Facility will be updated in June 2022, in line with Article 11(2) of Regulation (EU) 2021/241.

(2)

On 24 November 2021, the Commission adopted the Annual Sustainable Growth Survey, marking the start of the 2022 European Semester for economic policy coordination. It took due account of the the Porto Social Commitment signed on 7 May 2021 to further implement the European Pillar of Social Rights, proclaimed by the European Parliament, the Council and the Commission on 17 November 2017. The European Council endorsed the priorities of the 2022 Annual Sustainable Growth Survey on 25 March 2022. On 24 November 2021, on the basis of Regulation (EU) No 1176/2011 of the European Parliament and of the Council (3), the Commission also adopted the Alert Mechanism Report, in which it did not identify Czechia as one of the Member States for which an in-depth review would be needed. On the same date, the Commission also adopted a proposal for the 2022 Joint Employment Report, which analyses the implementation of the Employment Guidelines and the principles of the European Pillar of Social Rights. The Council adopted the Joint Employment Report on 14 March 2022.

(3)

Russia’s invasion of Ukraine, in the wake of the global pandemic, has significantly altered the geopolitical and economic context. The impact of the invasion on Member States’ economies has been felt through, inter alia, higher prices for energy, food and raw materials, and weaker growth prospects. The higher energy prices weigh particularly heavily on the most vulnerable households experiencing or at risk of energy poverty as well as on firms most vulnerable to energy prices hikes. The Union is also seeing an unprecedented inflow of people fleeing Ukraine. The economic effects stemming from Russia’s war of aggression have impacted Member States asymmetrically. In this context, on 4 March 2022, Council Directive 2001/55/EC (4) was triggered for the first time by Council Implementing Decion (EU) 2022/382 (5), granting displaced persons from Ukraine the right to legally stay in the Union, as well as access to education and training, the labour market, healthcare, housing and social welfare. Exceptional support is made available to Czechia under the Cohesion’s Action for Refugees in Europe (CARE) initiative and through additional pre-financing under the Recovery Assistance for Cohesion and the Territories of Europe (REACT-EU) programme to urgently address reception and integration needs for those fleeing Ukraine.

(4)

Taking account of the rapidly changing economic and geopolitical situation, the European Semester resumes its broad economic and employment policy coordination in 2022, while evolving in line with the implementation requirements of the Recovery and Resilience Facility, as outlined in the 2022 Annual Sustainable Growth Survey. The implementation of the adopted recovery and resilience plans is essential for the delivery of the policy priorities under the European Semester, as the plans address all or a significant subset of the relevant country-specific recommendations issued in the 2019 and 2020 European Semester cycles. The 2019 and 2020 country-specific recommendations remain equally relevant also for the recovery and resilience plans revised, updated or amended in accordance with Articles 14, 18 and 21 of Regulation (EU) 2021/241, in addition to any other country-specific recommendations issued up to the date of submission of such revised, updated or amended recovery and resilience plans.

(5)

The general escape clause of the Stability and Growth Pact has been active since March 2020. In its communication of 3 March 2021 entitled ‘One year since the outbreak of COVID-19: fiscal policy response’, the Commission set out its view that the decision on the deactivation or continued application of the general escape clause should be taken as an overall assessment of the state of the economy, with the level of economic activity in the Union or euro area compared to pre-crisis levels (end of 2019) as a key quantitative criterion. Heightened uncertainty and strong downside risks to the economic outlook in the context of war in Europe, unprecedented energy price hikes and continued supply-chain disturbances warrant the extension of the general escape clause of the Stability and Growth Pact through 2023.

(6)

Following the approach in the Council Recommendation of 18 June 2021 (6) delivering a Council opinion on the 2021 Convergence Programme of Czechia, the overall fiscal stance is currently best measured as the change in primary expenditure (net of discretionary revenue measures and excluding temporary emergency measures related to the COVID-19 crisis) but including expenditure financed by non-repayable support (grants) from the Recovery and Resilience Facility and other Union funds, relative to medium-term potential growth (7). Going beyond the overall fiscal stance, in order to assess whether national fiscal policy is prudent and its composition is conducive to a sustainable recovery consistent with the green and digital transitions, attention is also paid to the evolution of nationally financed (8) primary current expenditure (net of discretionary revenue measures and excluding temporary emergency measures related to the COVID-19 crisis) and investment.

(7)

On 2 March 2022, the Commission adopted a communication providing broad guidance for fiscal policy in 2023 (‘the fiscal guidance’) aimed at supporting the preparation of Member States’ Stability and Convergence Programmes and thereby strengthening policy coordination. The Commission noted that, on the basis of the macroeconomic outlook of the 2022 winter forecast, transitioning from an aggregate supportive fiscal stance in 2020–2022 to a broadly neutral aggregate fiscal stance, while standing ready to react to the evolving economic situation, would appear appropriate in 2023. The Commission announced that the fiscal recommendations for 2023 should continue to differentiate between Member States and take into account possible cross-country spillovers. The Commission invited the Member States to reflect the guidance in their Stability and Convergence Programmes. The Commission committed to closely monitor the economic developments and adjust its policy guidance as needed and at the latest in its European Semester spring package of late May 2022.

(8)

With respect to the fiscal guidance, the fiscal recommendations for 2023 take into account the worsened economic outlook, the heightened uncertainty and further downside risks, and the higher inflation compared to the Commission’s 2022 winter forecast. Against these considerations, the fiscal response has to expand public investment for the green and digital transitions and energy security, and sustain the purchasing power of the most vulnerable households so as to cushion the impact of the energy price hike and help limit inflationary pressures from second-round effects via targeted and temporary measures. Fiscal policy has to remain agile so as to adjust to the rapidly evolving circumstances, including challenges that arise from Russia’s war of aggression against Ukraine with regard to defence and security, and has to differentiate between Member States according to their fiscal and economic situation, including as regards their exposure to the crisis and the inflow of displaced persons from Ukraine.

(9)

On 1 June 2021, Czechia submitted its national recovery and resilience plan to the Commission, in accordance with Article 18(1) of Regulation (EU) 2021/241. Pursuant to Article 19 of Regulation (EU) 2021/241, the Commission assessed the relevance, effectiveness, efficiency and coherence of the recovery and resilience plan, in accordance with the assessment guidelines set out in Annex V to that Regulation. On 13 July 2021, the Council adopted its Implementing Decision on the approval of the assessment of the recovery and resilience plan for Czechia (9). The release of instalments is conditional on the adoption of a decision by the Commission, in accordance with Article 24(5) of Regulation (EU) 2021/241, stating that Czechia has satisfactorily fulfilled the relevant milestones and targets set out in the Council Implementing Decision. Satisfactory fulfilment presupposes that the achievement of preceding milestones and targets has not been reversed.

(10)

Czechia submitted its 2022 National Reform Programme on 28 April 2022 and its 2022 Convergence Programme on 11 May 2022, beyond the deadline established in Article 8 of Regulation (EC) No 1466/97. To take account of their interlinkages, the two programmes have been assessed together. In accordance with Article 27 of Regulation (EU) 2021/241, the 2022 National Reform Programme also reflects Czechia’s biannual reporting on the progress made in implementing its recovery and resilience plan.

(11)

The Commission published the 2022 country report for Czechia on 23 May 2022. It assessed Czechia’s progress in addressing the relevant country-specific recommendations adopted by the Council in 2019, 2020 and 2021, and took stock of Czechia’s implementation of the recovery and resilience plan, building on the recovery and resilience scoreboard. On the basis of that analysis, the country report identified gaps with respect to those challenges that are not addressed or only partially addressed by the recovery and resilience plan, as well as new and emerging challenges, including those emerging from Russia’s invasion of Ukraine. It also assessed Czechia’s progress in implementing the European Pillar of Social Rights and in achieving the Union headline targets on employment, skills and poverty reduction, as well as progress in achieving the United Nations Sustainable Development Goals.

(12)

On 23 May 2022, the Commission issued a report under Article 126(3) of the Treaty. That report discussed the budgetary situation of Czechia, as its general government deficit in 2021 exceeded the Treaty reference value of 3 % of gross domestic product (GDP). The report concluded that the deficit criterion was not fulfilled. In line with the communication of 2 March 2022, the Commission did not propose to open new excessive-deficit procedures in spring 2022 and will reassess whether it is necessary to propose the opening of such procedures in autumn 2022.

(13)

In its Recommendation of 20 July 2020 (10), the Council recommended Czechia to take in 2020 and 2021 all necessary measures, in line with the general escape clause, to effectively address the COVID-19 pandemic, sustain the economy and support the ensuing recovery. It also recommended Czechia to pursue, when economic conditions allow, fiscal policies aimed at achieving prudent medium-term fiscal positions and ensuring debt sustainability, while enhancing investment. In 2021, according to data validated by Eurostat, Czechia’s general government deficit increased from 5,8 % of GDP in 2020 to 5,9 %. The fiscal policy response by Czechia supported the economic recovery in 2021, while temporary emergency measures declined from 3,1 % of GDP in 2020 to 2,3 % in 2021. The measures taken by Czechia in 2021 were in line with the Council Recommendation of 20 July 2020. The discretionary budgetary measures adopted by the government in 2020 and 2021 were mostly temporary or matched by offsetting measures. At the same time, some of the discretionary measures adopted by the government over the period 2020 to 2021 were not temporary or matched by offsetting measures, mainly consisting of reductions of the personal income tax with an impact of about 1,9 % of GDP. According to data validated by Eurostat, general government debt increased from 37,7 % of GDP in 2020 to 41,9 % of GDP in 2021.

(14)

The macroeconomic scenario underpinning the budgetary projections in the 2022 Convergence Programme is cautious in 2022 and favourable in 2023. The government projects real GDP to grow by 1,2 % in 2022 and 3,6 % in 2023. By comparison, the Commission’s 2022 spring forecast projects a higher real GDP growth of 1,9 % in 2022 and lower GDP growth of 2,7 % in 2023, mainly due to a different outlook for private consumption resulting from different assumptions regarding the use of savings and indexation of salaries. In its 2022 Convergence Programme, the government expects that the headline deficit will decrease to 4,5 % of GDP in 2022 and to 3,2 % in 2023. The decrease mainly reflects the unwinding of most emergency measures and a high nominal GDP growth. According to the Programme, the general government debt-to-GDP ratio is expected to increase to 42,7 % in 2022, and to rise to 43,4 % in 2023. Based on policy measures known at the cut-off date of the forecast, the Commission’s 2022 spring forecast projects a government deficit for 2022 and 2023 of 4,3 % of GDP and 3,9 % respectively. This is in line for 2022 and higher than the 2023 deficit projected in the 2022 Convergence Programme, mainly due to a slightly less optimistic macroeconomic scenario of the Commission’s 2022 spring forecast and due to different assumptions regarding the rate of inflation and its pass-through onto government expenses. The Commission’s 2022 spring forecast projects a similar general government debt-to-GDP ratio, of 42,8 % in 2022 and 44,0 % in 2023. According to the Commission’s 2022 spring forecast, the medium-term (10-year average) potential output growth is estimated at 2,0 %. However, that estimate does not include the impact of the reforms that are part of the recovery and resilience plan and can boost Czechia’s potential growth.

(15)

In 2022, the government phased out the majority of measures taken in response to the COVID-19 crisis, such that the temporary emergency measures are projected to decline from 2,3 % of GDP in 2021 to 0,1 % in 2022. The government deficit is impacted by the measures adopted to counter the economic and social impact of the increase in energy prices, which in the Commission’s 2022 spring forecast are estimated at 0,1 % of GDP in 2022 and are expected to be phased out in 2023 (11). Those measures mainly consist of cuts to indirect taxes on energy consumption. Those measures have been announced as temporary. However, in the event that energy prices remain elevated in 2023, some of those measures could be continued. Some of these measures are not targeted, in particular the across-the-board cuts in excise duties. The government deficit is also impacted by the cost of offering temporary protection to displaced persons from Ukraine, which in the Commission’s 2022 spring forecast is projected at 0,4 % of GDP in 2022 and 0,6 % in 2023 (12).

(16)

In its Recommendation of 18 June 2021, the Council recommended that in 2022 Czechia maintain a supportive fiscal stance, including from the impulse provided by the Recovery and Resilience Facility, and preserve nationally financed investment. The Council also recommended Czechia to pursue, when economic conditions allow, a fiscal policy aimed at achieving prudent medium-term fiscal positions and ensuring fiscal sustainability in the medium term and, at the same time, to enhance investment to boost growth potential.

(17)

In 2022, according to the Commission’s 2022 spring forecast and including the information incorporated in Czechia’s 2022 Convergence Programme, the fiscal stance is projected to be broadly neutral at + 0,1 % of GDP, while Council recommended a supportive stance (13). Czechia plans to provide continued support to the recovery by making use of the Recovery and Resilience Facility to finance additional investment as recommended by the Council. The positive contribution to economic activity of expenditure financed by grants under the Recovery and Resilience Facility and other Union funds is projected to increase by 1,0 percentage point of GDP compared to 2021. Nationally financed investment is projected to provide a contractionary contribution to the fiscal stance of 0,6 percentage points in 2022 (14). Therefore, Czechia does not plan to preserve nationally financed investment. At the same time, the growth in nationally financed primary current expenditure (net of new revenue measures) in 2022 is projected to provide a contractionary contribution of 0,7 percentage points to the overall fiscal stance. This includes the additional impact of the measures to address the economic and social impact of the increase in energy prices (0,03 % of GDP) as well as the costs to offer temporary protection to displaced persons from Ukraine (0,4 % of GDP).

(18)

In 2023, the fiscal stance is projected in the Commission’s 2022 spring forecast at 0,1 % of GDP on a no-policy-change assumption (15). Czechia is projected to continue using the grants under the Recovery and Resilience Facility in 2023 to finance additional investment in support of the recovery. The positive contribution to economic activity of expenditure financed by grants under the Recovery and Resilience Facility and other Union funds is projected to increase by 0,1 percentage point of GDP compared to 2022. Nationally financed investment is projected to provide an expansionary contribution to the fiscal stance of 0,2 percentage points in 2023 (16). At the same time, the growth in nationally financed primary current expenditure (net of new revenue measures) in 2023 is projected to provide a contractionary contribution of 0,4 percentage points to the overall fiscal stance. This includes the impact from the phasing out of the measures addressing the increased energy prices (0,1 % of GDP) and additional costs to offer temporary protection to displaced persons from Ukraine (0,2 % of GDP).

(19)

In the 2022 Convergence Programme, the government deficit is expected to gradually decline to 3,2 % of GDP in 2023, 2,9 % in 2024 and to 2,7 % by 2025. Therefore, the general government deficit is planned to go below 3 % of GDP by 2024. These projections assume limiting the growth of public expenditure – including compensation of employees, intermediate consumption and social transfers in kind – at a pace lower than that of revenue growth and lower than the nominal GDP growth. A decline in public investments as percentage of GDP is also envisaged after the peak in 2023. According to the 2022 Convergence Programme, the general government debt-to-GDP ratio is expected to increase by 2025, specifically with an increase to 44,4 % in 2024, and a rise to 45,4 % in 2025. According to the Commission’s analysis, debt sustainability risks appear medium over the medium term.

(20)

Czechia faces fiscal sustainability risks in the medium and long term. This is the result of an unfavourable starting balance and the costs of ageing. The starting balance is negatively affected by the permanent tax reductions implemented in the past two years (the largest of those reductions resulting from the reduction in the personal income tax base). These have not been offset by corresponding spending cuts and have led to an increase in the structural deficit. Over the medium to long term, additional pressures stem from ageing costs. A projected doubling of the old-age dependency ratio (according to the 2021 Ageing Report issued by the Commission) and the capping of the retirement age, underpin the expected increase in pension expenditure from 8,8 % of GDP in 2030 to 11,4 % by 2050. In addition, public spending on healthcare and long-term care is projected to increase by 0,9 percentage points and 1,7 percentage points of GDP respectively by 2070 due to the ageing population. While the fragmentation of long-term care governance and financing is already covered in the recovery and resilience plan, further addressing ageing-related challenges will be essential to restore the long-term sustainability of public finances. Policy options include raising the retirement age in line with the increase in life expectancy, adjusting the pension indexing rates to reflect the fiscal sustainability of the pension system, incentivising the increase in participation rates of people over the age of 60, or taking other measures to strengthen the labour supply.

(21)

In accordance with Article 19(3), point (b), of Regulation (EU) 2021/241 and criterion 2.2 of Annex V to that Regulation, the recovery and resilience plan includes an extensive set of mutually reinforcing reforms and investments with an indicative timetable for implementation to be completed by 31 August 2026. These help address all or a significant subset of the economic and social challenges outlined in the country-specific recommendations addressed to Czechia by the Council in the European Semester in 2019 and 2020, in addition to any country-specific recommendations issued up to the date of adoption of a recovery and resilience plan. In particular, on energy, Czechia plans to use the Recovery and Resilience Facility to expand the use of renewable energy sources, in particular photovoltaics, improve energy efficiency in residential and public buildings and support the replacement of coal-fired boilers in households. Sustainable transport is promoted by investing in railway infrastructure, clean urban transport and by encouraging the use of low-emission vehicles. Recommendations in the area of research and development (R & D) are addressed by investment geared at strengthening public-private cooperation as well as innovation framework support and financial/non-financial support to innovative firms. The business environment is being improved by several e-government measures, anti-corruption reforms and a comprehensive reform of the procedure for granting building permits, which currently represent major obstacles to investment in Czechia. Key measures to address the labour market recommendations include upskilling and reskilling programmes to prepare the labour force for the green and digital transition, and new childcare facilities for children under three years to boost the number of women working or looking for a job. On education, the recovery and resilience plan aims to boost the digital literacy of pupils and teachers, to provide schools with digital equipment, while ensuring inclusive education through support to disadvantaged schools and tutoring. Healthcare recommendations are addressed through increased cancer prevention and rehabilitation care, the development of an e-health portal to promote integrated care practices, and support to education in healthcare. Further complementary actions include measures to improve long-term care.

(22)

The implementation of the recovery and resilience plan of Czechia is expected to contribute to making further progress on the green and digital transitions. Measures supporting the climate objectives in Czechia account for 42 % of the recovery and resilience plan’s total allocation, while measures supporting digital objectives account for 22 % of the recovery and resilience plan’s total allocation. The fully fledged implementation of the recovery and resilience plan, in line with the relevant milestones and targets, will help Czechia swiftly recover from the fallout of the COVID-19 crisis, while strengthening its resilience. The systematic involvement of social partners and other relevant stakeholders remains important for the successful implementation of the recovery and resilience plan, as well as other economic and employment policies going beyond the recovery and resilience plan, to ensure broad ownership of the overall policy agenda.

(23)

The Commission approved the Partnership Agreement, provided for in Regulation (EU) 2021/1060 of the European Parliament and of the Council (17), of Czechia on 13 May 2022. Czechia submitted seven programmes provided for in that Regulation in December 2021 and January 2022. The Just Transition Programme was submitted on 16 March 2022. In line with Regulation (EU) 2021/1060, Czechia is to take into account the relevant country-specific recommendations in the programming of the 2021–2027 cohesion policy funds. This is a prerequisite for improving the effectiveness and maximising the added value of the financial support to be received from cohesion policy funds, while promoting coordination, complementarity and coherence between those cohesion policy funds and other Union instruments and funds. The successful implementation of the Recovery and Resilience Facility and cohesion policy programmes also depends on the removal of bottlenecks to investments to support the green and digital transitions and balanced territorial development.

(24)

Beyond the economic and social challenges addressed by the recovery and resilience plan, Czechia faces a number of additional challenges related to housing. Housing affordability in Czechia has been among the lowest in the Union in the past five years. Moreover, the low social housing stock cannot meet the demand of all low-income and vulnerable households (it accounted for 0,4 % of total housing stock in 2019 versus 7–8 % on average in the Union), and existing housing allowances are underutilised. In recent years, cohesion policy funding has supported investments in new social housing units, and the new programming period will continue to promote social inclusion, including via social housing. Czechia lacks legislation on social housing as well as a comprehensive framework. This hampers coordination of the fragmented housing policies, and a definition of responsibilities among national and regional bodies. The COVID-19 pandemic and influx of people fleeing Ukraine have further exacerbated these pre-existing challenges.

(25)

In response to the mandate by the Union Heads of State or Government set out in the Versailles Declaration, the Commission’s proposal for a REPowerEU plan aims to phase out the Union’s dependence on fossil-fuel imports from Russia as soon as possible. For this purpose, the Commission intends to identify the most-suitable projects, investments and reforms at national, regional and Union level in dialogue with Member States. These measures aim to reduce overall reliance on fossil fuels and shift fossil-fuel imports away from Russia.

(26)

The scale and pace of Czechia’s green energy transition is insufficient. To reduce dependence on fossil fuels, including natural gas, the acceleration of the roll-out of renewables, with a particular focus on solar energy, wind and heat pumps, is crucial. Granting permits for new installations can be simpler and faster, and the accompanying regulatory framework can be improved. Czechia’s energy intensity is double the Union average, which means it would also benefit from front-loading energy savings by targeting deep renovations. Accelerating investments in the decabornisation of the heating and industrial sectors is another key element. A further increase in ambition in respect of reducing greenhouse-gas emissions, and increasing renewables and energy efficiency targets will be needed in order for Czechia to be in line with the ‘Fit for 55’ objectives.

(27)

According to 2020 data, all imported natural gas comes from Russia (100 % compared to the Union average of 44 %), and the dependency on Russia for crude oil (49 % compared to 26 %) and coal (70 % compared to 54 %) is also significantly above the Union average (18). The shares of natural gas (17,7 % compared to 24,4 %) and oil (20,9 % compared to 32,7 %) in the energy mix are lower than the Union average, while the share of coal is higher (29,6 % compared to 10,8 %). Nuclear makes up 18,2 % of the energy mix compared to 13,1 % for the Union, and renewables and biofuels 13,4 %. Czechia's current 2030 goal for renewables is 22 %, and while the recovery and resilience plan includes investments for the construction of at least 270 MW of photovoltaic power, this represents only a small fraction of the total installed renewables power capacity. Czechia will need to accelerate the rollout of renewables in particular by improving the regulatory and permit frameworks. Simplified authorisation procedures for renewables in a one-stop-shop, increased thresholds for exemptions to building permits and compulsory registration of renewable installation owners as entrepreneurs, and easier access to available grid capacity are examples of measures that would serve this objective. Further supporting measures could include a review of the energy and renewables laws, as well as of the corresponding support schemes (e.g. incentivising energy communities, tariff support for small-scale renewables; auctions for new installations; new support schemes for sectoral targets; renewables in heating and cooling; targeted support for heat pumps, geothermal energy, renewable hydrogen and sustainable bio-methane).

Czechia would also benefit from digitalising and modernising the electricity network in order to accommodate an increased level of intermittent renewables in the grid, coupled with investments in energy storage facilities. Leveraging the existing interconnected gas network and available storage capacity is instrumental to shifting natural gas imports away from Russia. New infrastructure and network investments related to gas are recommended to be future-proof where possible, in order to facilitate their long-term sustainability, through future repurposing for sustainable fuels.

(28)

While the recovery and resilience plan and the 2021–2027 cohesion fund programmes contain significant building renovation investments, further efforts will be needed to address Czechia’s above-average unitary heat consumption in the building sector. There is scope to accelerate and deepen the energy renovation of buildings, consistently apply the ‘energy efficiency first’ principle, invest in renewable heat sources, prepare a national strategy for the decarbonisation of building stock heating, establish a sustainable energy agency at national level, and adopt an auction support scheme for energy efficiency measures in industry and small businesses. Buildings and heating networks connected to coal-based district heating need to be renovated to the highest energy efficiency standards as soon as possible to ensure a cost-effective coal phase-out.

(29)

While the acceleration of the transition towards climate neutrality and away from fossil fuels will create significant restructuring costs in several sectors, Czechia can make use of the Just Transition Mechanism in the context of cohesion policy to alleviate the socioeconomic impact of the transition in the most-affected regions. In addition, Czechia can make use of the European Social Fund Plus, established by Regulation (EU) 2021/1057 of the European Parliament and of the Council (19), to improve employment opportunities and strenghten social cohesion.

(30)

In the light of the Commission’s assessment, the Council has examined the 2022 Convergence Programme and its opinion (20) is reflected in recommendation (1).

(1)

Regulation (EU) 2021/241 of the European Parliament and of the Council (2), which established the Recovery and Resilience Facility, entered into force on 19 February 2021. The Recovery and Resilience Facility provides financial support for the implementation of reforms and investment, entailing a fiscal impulse financed by the Union. It contributes to the economic recovery and to the implementation of sustainable and growth-enhancing reforms and investment, in particular to promote the green and digital transitions, while strengthening the resilience and potential growth of the Member States’ economies. It also helps strengthen sustainable public finances and boost growth and job creation in the medium and long term. The maximum financial contribution per Member State under the Recovery and Resilience Facility will be updated in June 2022, in line with Article 11(2) of Regulation (EU) 2021/241.

(2)

On 24 November 2021, the Commission adopted the Annual Sustainable Growth Survey, marking the start of the 2022 European Semester for economic policy coordination. It took due account of the Porto Social Commitment signed on 7 May 2021 to further implement the European Pillar of Social Rights proclaimed by the European Parliament, the Council and the Commission on 17 November 2017. The European Council endorsed the priorities of the 2022 Annual Sustainable Growth Survey on 25 March 2022. On 24 November 2021, on the basis of Regulation (EU) No 1176/2011 of the European Parliament and of the Council (3), the Commission also adopted the Alert Mechanism Report, in which it did not identify Denmark as one of the Member States for which an in-depth review would be needed. On the same date, the Commission also adopted a proposal for the 2022 Joint Employment Report, which analyses the implementation of the Employment Guidelines and the principles of the European Pillar of Social Rights. The Council adopted the Joint Employment Report on 14 March 2022.

(3)

Russia’s invasion of Ukraine, in the wake of the global pandemic, has significantly altered the geopolitical and economic context. The impact of the invasion on Member States’ economies has been felt through, inter alia, higher prices for energy, food and raw materials, and weaker growth prospects. The higher energy prices weigh particularly heavily on the most vulnerable households experiencing or at risk of energy poverty as well as on firms most vulnerable to energy prices hikes The Union is also seeing an unprecedented inflow of people fleeing Ukraine. The economic effects stemming from Russia’s war of aggression have impacted Member States asymmetrically. In this context, on 4 March 2022, Council Directive 2001/55/EC (4) was triggered for the first time by Council Implementing Decision (EU) 2022/382 (5), granting displaced persons from Ukraine the right to legally stay in the Union, as well as access to education and training, the labour market, healthcare, housing and social welfare.

(4)

Taking account of the rapidly changing economic and geopolitical situation, the European Semester resumes its broad economic and employment policy coordination in 2022, while evolving in line with the implementation requirements of the Recovery and Resilience Facility, as outlined in the 2022 Annual Sustainable Growth Survey. The implementation of the adopted recovery and resilience plans is essential for the delivery of the policy priorities under the European Semester, as the plans address all or a significant subset of the relevant country-specific recommendations issued in the 2019 and 2020 European Semester cycles. The 2019 and 2020 country-specific recommendations remain equally relevant also for the recovery and resilience plans revised, updated or amended in accordance with Articles 14, 18 and 21 of Regulation (EU) 2021/241, in addition to any other country-specific recommendations issued up to the date of submission of such revised, updated or amended recovery and resilience plans.

(5)

The general escape clause of the Stability and Growth Pact has been active since March 2020. In its communication of 3 March 2021 entitled ‘One year since the outbreak of COVID-19: fiscal policy response’, the Commission set out its view that the decision on the deactivation or continued application of the general escape clause should be taken as an overall assessment of the state of the economy, with the level of economic activity in the Union or euro area compared to pre-crisis levels (end of 2019) as a key quantitative criterion. Heightened uncertainty and strong downside risks to the economic outlook in the context of war in Europe, unprecedented energy price hikes and continued supply-chain disturbances warrant the extension of the general escape clause of the Stability and Growth Pact through 2023.

(6)

Following the approach in the Council Recommendation of 18 June 2021 (6) delivering a Council opinion on the 2021 Convergence Programme of Denmark, the overall fiscal stance is currently best measured as the change in primary expenditure (net of discretionary revenue measures and excluding temporary emergency measures related to the COVID-19 crisis) but including expenditure financed by non-repayable support (grants) from the Recovery and Resilience Facility and other Union funds, relative to medium-term potential growth (7). Going beyond the overall fiscal stance, in order to assess whether national fiscal policy is prudent and its composition is conducive to a sustainable recovery consistent with the green and digital transitions, attention is also paid to the evolution of nationally financed (8) primary current expenditure (net of discretionary revenue measures and excluding temporary emergency measures related to the COVID-19 crisis) and investment.

(7)

On 2 March 2022, the Commission adopted a communication providing broad guidance for fiscal policy in 2023 (‘the fiscal guidance’) aimed at supporting the preparation of Member States’ Stability and Convergence Programmes and thereby strengthening policy coordination. The Commission noted that, on the basis of the macroeconomic outlook of the 2022 winter forecast, transitioning from an aggregate supportive fiscal stance in 2020–2022 to a broadly neutral aggregate fiscal stance, while standing ready to react to the evolving economic situation, would appear appropriate in 2023. The Commission announced that the fiscal recommendations for 2023 should continue to differentiate between Member States and take into account possible cross-country spillovers. The Commission invited the Member States to reflect the guidance in their Stability and Convergence Programmes. The Commission committed to closely monitor the economic developments and adjust its policy guidance as needed and at the latest in its European Semester spring package of late May 2022.

(8)

With respect to the fiscal guidance, the fiscal recommendations for 2023 take into account the worsened economic outlook, the heightened uncertainty and further downside risks, and the higher inflation compared to the Commission’s 2022 winter forecast. Against these considerations, the fiscal response has to expand public investment for the green and digital transitions and energy security, and sustain the purchasing power of the most vulnerable households so as to cushion the impact of the energy price hike and help limit inflationary pressures from second-round effects via targeted and temporary measures. Fiscal policy has to remain agile so as to adjust to the rapidly evolving circumstances, including challenges that arise from Russia’s war of aggression against Ukraine with regard to defence and security, and has to differentiate between Member States according to their fiscal and economic situation, including as regards their exposure to the crisis and the inflow of displaced persons from Ukraine.

(9)

On 30 April 2021, Denmark submitted its national recovery and resilience plan to the Commission, in accordance with Article 18(1) of Regulation (EU) 2021/241. Pursuant to Article 19 of Regulation (EU) 2021/241, the Commission assessed the relevance, effectiveness, efficiency and coherence of the recovery and resilience plan, in accordance with the assessment guidelines set out in Annex V to that Regulation. On 13 July 2021, the Council adopted its Implementing Decision on the approval of the assessment of the recovery and resilience plan for Denmark (9). The release of instalments is conditional on the adoption of a decision by the Commission, in accordance with Article 24(5) of Regulation (EU) 2021/241, stating that Denmark has satisfactorily fulfilled the relevant milestones and targets set out in the Council Implementing Decision. Satisfactory fulfilment presupposes that the achievement of preceding milestones and targets has not been reversed.

(10)

On 29 April 2022, Denmark submitted its 2022 National Reform Programme and, on 12 May 2022, its 2022 Convergence Programme, beyond the deadline established in Article 8 of Regulation (EC) No 1466/97. To take account of their interlinkages, the two programmes have been assessed together. In accordance with Article 27 of Regulation (EU) 2021/241, the 2022 National Reform Programme also reflects Denmark’s biannual reporting on the progress made in implementing its recovery and resilience plan.

(11)

The Commission published the 2022 country report for Denmark on 23 May 2022. It assessed Denmark’s progress in addressing the relevant country-specific recommendations adopted by the Council in 2019, 2020 and 2021, and took stock of Denmark’s implementation of the recovery and resilience plan, building on the recovery and resilience scoreboard. On the basis of that analysis, the country report identified gaps with respect to those challenges that are not addressed or only partially addressed by the recovery and resilience plan, as well as new and emerging challenges, including those emerging from Russia’s invasion of Ukraine. It also assessed Denmark's progress in implementing the European Pillar of Social Rights and in achieving the Union headline targets on employment, skills and poverty reduction, as well as progress in achieving the United Nations Sustainable Development Goals.

(12)

In its Recommendation of 20 July 2020 (10), the Council recommended Denmark to take in 2020 and 2021 all necessary measures, in line with the general escape clause, to effectively address the COVID-19 pandemic, sustain the economy and support the ensuing recovery. It also recommended Denmark to pursue, when economic conditions allow, fiscal policies aimed at achieving prudent medium-term fiscal positions and ensuring debt sustainability, while enhancing investment. In 2021, according to data validated by Eurostat, Denmark’s general government balance improved from a deficit of 0,2 % of GDP in 2020 to a surplus of 2,3 % in 2021, helped by non-recurrent tax revenue. The fiscal policy response by Denmark supported the economic recovery in 2021, while temporary emergency measures increased from 2,6 % of GDP in 2020 to 4,0 %. The measures taken by Denmark in 2021 were in line with the Council Recommendation of 20 July 2020. The discretionary budgetary measures adopted by the government in 2020 and 2021 were mostly temporary or matched by offsetting measures. According to data validated by Eurostat, general government debt fell from 42,1 % of GDP in 2020 to 36,7 % of GDP in 2021.

(13)

The macroeconomic scenario underpinning the budgetary projections in the 2022 Convergence Programme is favourable in 2022 and realistic in 2023. The government projects real GDP to grow by 3,4 % in 2022 and 1,9 % in 2023. By comparison, the Commission’s 2022 spring forecast projects a lower real GDP growth of 2,6 % in 2022 and 1,8 % in 2023, mainly due to lower private consumption growth. In its 2022 Convergence Programme, the government expects that the headline surplus will decrease to 0,6 % of GDP in 2022 and to 0,2 % of GDP in 2023. The decrease in 2022 mainly reflects a slowdown in economic activity and non-recurrence of certain tax revenues. According to the 2022 Convergence Programme, the general government debt-to-GDP ratio is expected to decrease to 33,3 % in 2022, and to decline to 32,5 % of GDP in 2023. Based on policy measures known at the cut-off date of the forecast, the Commission’s 2022 spring forecast projects a government surplus for 2022 and 2023 of 0,9 % of GDP and 0,6 % respectively. This is slightly higher than the surplus projected in the 2022 Convergence Programme. The Commission’s 2022 spring forecast projects a higher general government debt-to-GDP ratio, of 34,9 % in 2022 and 33,9 % in 2023. The difference is due to a higher assumed stock-flow adjustment items, in particular support for social housing. According to the Commission’s 2022 spring forecast, the medium-term (10-year average) potential output growth is estimated at 1,9 %. However, that estimate does not include the impact of the reforms that are part of the recovery and resilience plan and can boost Denmark’s potential growth.

(14)

In 2022, the government phased out the majority of measures taken in response to the COVID-19 crisis, such that the temporary emergency measures are projected to decline from 4,0 % of GDP in 2021 to 0,0 % of GDP in 2022. The government deficit is impacted by the measures adopted to counter the economic and social impact of the increase in energy prices, which in the Commission’s 2022 spring forecast are estimated at 0,1 % of GDP in 2022 and 0,0 % of GDP in 2023 (11). Those measures mainly consist of social transfers to lower-income households. Those measures have been announced as temporary. However, in the event that energy prices remain elevated in 2023, some of those measures could be continued. The government deficit is also impacted by the cost of offering temporary protection to displaced persons from Ukraine, which in the Commission’s 2022 spring forecast is projected at 0,2 % of GDP in 2022 and 2023 (12).

(15)

In its Recommendation of 18 June 2021, the Council recommended that in 2022 Denmark maintains a supportive fiscal stance, including from the impulse provided by the Recovery and Resilience Facility, and preserves nationally financed investment. The Council also recommended Denmark to pursue, when economic conditions allow, a fiscal policy aimed at achieving prudent medium-term fiscal positions and ensuring fiscal sustainability in the medium term and, at the same time, to enhance investment to boost growth potential.

(16)

In 2022, according to the Commission’s 2022 spring forecast and including the information incorporated in Denmark’s 2022 Convergence Programme, the fiscal stance is projected to be supportive at – 1,6 % of GDP, as recommended by the Council (13). Denmark plans to provide continued support to the recovery by making use of the Recovery and Resilience Facility to finance additional investment as recommended by the Council. The positive contribution to economic activity of expenditure financed by grants under the Recovery and Resilience Facility and other Union funds is projected to remain stable compared to 2021. Nationally financed investment is projected to provide a neutral contribution to the fiscal stance in 2022 of 0,0 percentage point of GDP (14). Therefore, Denmark plans to preserve nationally financed investment, as recommended by the Council. At the same time, the growth in nationally financed primary current expenditure (net of new revenue measures) in 2022 is projected to provide an expansionary contribution of 1,6 percentage points to the overall fiscal stance. That significant expansionary contribution includes the additional impact of the measures to address the economic and social impact of the increase in energy prices (0,1 % of GDP) as well as the costs to offer temporary protection to displaced persons from Ukraine (0,2 % of GDP). Other increased expenditures include notably defence and security policy related government consumption as well as additional expenditure aiming at accelerating the green transition and ending dependence on imported fossil fuels.

(17)

In 2023, the fiscal stance is projected in the Commission’s 2022 spring forecast at + 1,6 % of GDP on a no-policy change assumption (15). Denmark is projected to continue using the grants under the Recovery and Resilience Facility in 2023 to finance additional investment in support of the recovery. The positive contribution to economic activity of expenditure financed by grants under the Recovery and Resilience Facility and other Union funds is projected to decrease by 0,1 percentage point of GDP compared to 2022, reflecting the frontloaded financial support from the Recovery and Resilience Facility in 2021 and 2022. Nationally financed investment is projected to provide an expansionary contribution to the fiscal stance of 0,4 percentage point compared to 2022 (16). At the same time, the growth in nationally financed primary current expenditure (net of new revenue measures) in 2023 is projected to provide a contractionary contribution of 1,4 percentage points to the overall fiscal stance. This includes the impact from the phasing out of the measures addressing the increased energy prices (0,1 % of GDP) and additional costs to offer temporary protection to displaced persons from Ukraine (0,1 % of GDP). Other drivers include decreased government expenditures on energy consumption.

(18)

In the 2022 Convergence Programme, the general government surplus is expected to gradually stabilise at 0,6 % of GDP in 2024 and to fall to 0,4 % of GDP by 2025. According to the 2022 Convergence Programme, the general government debt-to-GDP ratio is expected to increase to 34,0 % of GDP in 2024, and 33,9 % in 2025. According to the Commission’s analysis, debt sustainability risks appear low over the medium term.

(19)

In Denmark recurrent property taxes are currently capped, hence they do not increase with market prices. They are thereby not able to dampen house price cycles and entail adverse distributional effects. A new property tax system was already approved by the Parliament in 2017 but is still not in place. A surge in house prices and long waiting times for social housing has resulted in a shortage of affordable housing in the main urban areas. Additionally, the share of mortgage loans with a debt-to-income ratio above 4 and loan-to-value ratio above 60 % have increased substantially in the Copenhagen area making such borrowers potentially vulnerable to increases in interest rates or any marked decline in house prices. The Danish Systemic Risk Council has issued recommendations to reduce risks for such mortgage loans, but the recommendations have not been implemented.

(20)

In accordance with Article 19(3), point (b), of Regulation (EU) 2021/241 and criterion 2.2 of Annex V to that Regulation, the recovery and resilience plan includes an extensive set of mutually reinforcing reforms and investments with an indicative timetable for implementation to be completed by 31 August 2026. These address all or a significant subset of the economic and social challenges outlined in the country-specific recommendations addressed to Denmark by the Council in the European Semester in 2019 and 2020, in addition any country-specific recommendations issued up to the date of adoption of a recovery and resilience plan. In particular, the recovery and resilience plan focuses on investments in the green and digital transitions, in particular the clean and efficient production and use of energy, sustainable transport, and research and innovation. Research measures have the potential to broaden the innovation base and involve more companies in research and innovation activities. Some country-specific recommendations, such as ‘focusing investment-related economic policy on education and skills’, and measures to address the shortage of health workers and ensure the effective supervision and enforcement of the anti-money laundering framework, have been addressed outside the recovery and resilience plan. Measures relating to these areas were not incorporated into the recovery and resilience plan.

(21)

The implementation of the recovery and resilience plan of Denmark is expected to contribute to making further progress on the green and digital transitions. Measures supporting the climate objectives in Denmark account for 59 % of the recovery and resilience plan’s total allocation, while measures supporting digital objectives account for 25 % of the recovery and resilience plan’s total allocation. The fully-fledged implementation of the recovery and resilience plan, in line with the relevant milestones and targets, will help Denmark swiftly recover from the fallout of the COVID-19 crisis, and will continue to strengthen its resilience. The systematic involvement of social partners and other relevant stakeholders remains important for the successful implementation of the recovery and resilience plan, as well as other economic and employment policies going beyond the recovery and resilience plan, to ensure broad ownership of the overall policy agenda.

(22)

The Commission approved the Partnership Agreement, provided for in Regulation (EU) 2021/1060 of the European Parliament and of the Council (17), of Denmark on 25 May 2022. Denmark submitted the first cohesion policy programmes on 11 April 2022. In line with Regulation (EU) 2021/1060, Denmark is to take into account the relevant country-specific recommendations in the programming of the 2021–2027 cohesion policy funds. This is a prerequisite for improving the effectiveness and maximising the added value of the financial support to be received from cohesion policy funds, while promoting coordination, complementarity and coherence between those cohesion policy funds and other Union instruments and funds. The successful implementation of the Recovery and Resilience Facility and cohesion policy programmes also depends on the removal of bottlenecks to investment, to support the green and digital transitions and balanced territorial development.

(23)

Beyond the economic and social challenges addressed by the recovery and resilience plan, Denmark faces a number of additional challenges related to reducing dependence on fossil fuels, strengthening the circular economy to support the green transition and making the housing market and indebted households more resilient.

(24)

While the Danish recovery and resilience plan earmarks 59 % of the funds for green initiatives, Denmark is underperforming in some areas of circular economy. Danish rates of circular material use are well below the Union average. The country currently produces the highest amount of municipal waste per capita in the Union with 845 kg/capita/year. While Denmark stands just above the Union average for municipal waste collected for recycling (53,9 % in 2020 compared to the Union average of 47,8 %), it incincerates 45,2 % of its municipal waste, close to double the Union average. Much of the waste in Denmark is incinerated for energy generation, thereby missing out on opportunities to improve resource efficiency. A new strategy on waste management and circular economy and related national programmes and plans for waste and circular economy need to be timely implemented. Losses in terms of lower energy generation due to reduced waste incineration could be compensated by more environmentally friendly methods, including energy efficiency improvements and the use of electric heat pumps.

(25)

In response to the mandate by the Union Heads of State or Government set out in the Versailles Declaration, the Commission’s proposal for a REPowerEU plan aims to phase out the Union’s dependence on fossil fuel imports from Russia as soon as possible. For this purpose, the Commission intends to identify the most-suitable projects, investments and reforms at national, regional and Union level in dialogue with Member States. These measures aim to reduce overall reliance on fossil fuels and shift fossil-fuel imports away from Russia.

(26)

Denmark is committed to achieve a greenhouse-gas emissions reduction target of 70 % compared to 1990 levels by 2030 and a coal phase-out by 2028. To achieve these ambitious targets, the Danish National Energy and Climate Plan envisages substantial investment in additional renewable energy capacity and in energy efficiency. Accelerating the deployment of renewables and renewable hydrogen could be fostered by streamlining and accelerating permitting procedures. While Denmark is committed to increasing renewable energy capacity from offshore wind, further investments in energy transmission networks are needed to ensure that the increasing share of renewable energy can be used efficiently. Investment in energy and electricity interconnection, including offshore hybrid assets, with neighbouring countries would considerably increase security of energy supply and adaptability to regional variances, also in the context of the Russia’s invasion of Ukraine. Denmark’s overall energy dependency on Russian fossil fuel imports is at 21,1 % (24,4 % for the Union average), taking into account secondary dependencies tracing back all re-imports using respective assumptions. In 2020, dependency on fossil fuels from Russia in Denmark’s overall energy mix was lower than the Union average for oil (12 % compared to 36,5 % for the Union average).

While it was higher for coal (97 % compared to 19,3 % for the Union average), the share of coal in Denmark’s energy mix is low (4,3 %). Natural gas makes up 12,8 % of its energy mix, and while Denmark does not import Russian gas directly for domestic use, its dependency through German gas imports implies a significant secondary dependency, higher than the Union average: 65 % of domestic gas consumption is imported from Russia, compared to 41,1 % for the Union average. While, according to 2020 data (18), Denmark’s reliance on Russian oil and gas imports is still significant, but this dependence is projected to be eliminated as of 2023 when the refurbishment of an existing North Sea field will be finalised, and Denmark is expected to be a net gas exporter again. Speeding up ongoing interconnection projects can also foster diversification of energy supply. New infrastructure and network investments related to gas are recommended to be future-proof where possible, in order to facilitate their long-term sustainability through future repurposing for sustainable fuels. Denmark’s ambitions for energy efficiency could be further boosted by corresponding additional investment in decarbonising industry, services, private dwellings and transport. A further increase in ambition in respect of reducing greenhouse-gas emissions and increasing renewables and energy efficiency will be needed for Denmark to be in line with the ‘Fit for 55’ objectives.

(27)

While the acceleration of the transition towards climate neutrality and away from fossil fuels will create significant restructuring costs in several sectors, Denmark can make use of the Just Transition Mechanism in the context of cohesion policy to alleviate the socioeconomic impact of the transition in the most-affected regions. In addition, Denmark can make use of the European Social Fund Plus, established by Regulation (EU) 2021/1057 of the European Parliament and of the Council (19), to improve employment opportunities and strengthen social cohesion.

(28)

In the light of the Commission’s assessment, the Council has examined the 2022 Convergence Programme and its opinion (20) is reflected in recommendation (1),

(1)

Regulation (EU) 2021/241 of the European Parliament and of the Council (3), which established the Recovery and Resilience Facility, entered into force on 19 February 2021. The Recovery and Resilience Facility provides financial support for the implementation of reforms and investment, entailing a fiscal impulse financed by the Union. It contributes to the economic recovery and to the implementation of sustainable and growth-enhancing reforms and investment, in particular to promote the green and digital transitions, while strengthening the resilience and potential growth of the Member States’ economies. It also helps strengthen sustainable public finances and boost growth and job creation in the medium and long term. The maximum financial contribution per Member State under the Recovery and Resilience Facility will be updated in June 2022, in line with Article 11(2) of Regulation (EU) 2021/241.

(2)

On 24 November 2021, the Commission adopted the Annual Sustainable Growth Survey, marking the start of the 2022 European Semester for economic policy coordination. It took due account of the Porto Social Commitment signed on 7 May 2021 to further implement the European Pillar of Social Rights, proclaimed by the European Parliament, the Council and the Commission on 17 November 2017. The European Council endorsed the priorities of the 2022 Annual Sustainable Growth Survey on 25 March 2022. On 24 November 2021, on the basis of Regulation (EU) No 1176/2011, the Commission also adopted the Alert Mechanism Report, in which it identified Germany as one of the Member States for which an in-depth review would be needed. On the same date, the Commission also adopted a recommendation for a Council recommendation on the economic policy of the euro area and a proposal for the 2022 Joint Employment Report, which analyses the implementation of the Employment Guidelines and the principles of the European Pillar of Social Rights. The Council adopted the Recommendation on the economic policy of the euro area (4) (‘2022 Recommendation on the euro area’) on 5 April 2022 and the Joint Employment Report on 14 March 2022.

(3)

Russia’s invasion of Ukraine, in the wake of the global pandemic, has significantly altered the geopolitical and economic context. The impact of the invasion on Member States’ economies has been felt through, inter alia, higher prices for energy, food and raw materials and weaker growth prospects. The higher energy prices weigh particularly heavily on the most vulnerable households experiencing or at risk of energy poverty as well as on firms most vulnerable to energy prices hikes. The Union is also seeing an unprecedented inflow of people fleeing Ukraine. The economic effects stemming from Russia’s war of aggression have impacted Member States asymmetrically. In this context, on 4 March 2022, Council Directive 2001/55/EC (5) was triggered for the first time by Council Implementing Decision (EU) 2022/382 (6), granting displaced persons from Ukraine the right to legally stay in the Union, as well as access to education and training, the labour market, healthcare, housing and social welfare.

(4)

Taking account of the rapidly changing economic and geopolitical situation, the European Semester resumes its broad economic and employment policy coordination in 2022, while evolving in line with the implementation requirements of the Recovery and Resilience Facility, as outlined in the 2022 Annual Sustainable Growth Survey. The implementation of the adopted recovery and resilience plans is essential for the delivery of the policy priorities under the European Semester, as the plans address all or a significant subset of the relevant country-specific recommendations issued in the 2019 and 2020 European Semester cycles. The 2019 and 2020 country-specific recommendations remain equally relevant also for the recovery and resilience plans revised, updated or amended in accordance with Articles 14, 18 and 21 of Regulation (EU) 2021/241, in addition to any other country-specific recommendations issued up to the date of submission of such revised, updated or amended recovery and resilience plans.

(5)

The general escape clause of the Stability and Growth Pact has been active since March 2020. In its communication of 3 March 2021 entitled ‘One year since the outbreak of COVID-19: fiscal policy response’, the Commission set out its view that the decision on the deactivation or continued application of the general escape clause should be taken as an overall assessment of the state of the economy, with the level of economic activity in the Union or euro area compared to pre-crisis levels (end of 2019) as a key quantitative criterion. Heightened uncertainty and strong downside risks to the economic outlook in the context of war in Europe, unprecedented energy price hikes and continued supply-chain disturbances warrant the extension of the general escape clause of the Stability and Growth Pact through 2023.

(6)

Following the approach in the Council Recommendation of 18 June 2021 (7) delivering a Council opinion on the 2021 Stability Programme of Germany, the overall fiscal stance is currently best measured as the change in primary expenditure (net of discretionary revenue measures and excluding temporary emergency measures related to the COVID-19 crisis) but including expenditure financed by non-repayable support (grants) from the Recovery and Resilience Facility and other Union funds, relative to medium-term potential growth (8). Going beyond the overall fiscal stance, in order to assess whether national fiscal policy is prudent and its composition is conducive to a sustainable recovery consistent with the green and digital transitions, attention is also paid to the evolution of nationally financed (9) primary current expenditure (net of discretionary revenue measures and excluding temporary emergency measures related to the COVID-19 crisis) and investment.

(7)

On 2 March 2022, the Commission adopted a communication providing broad guidance for fiscal policy in 2023 (‘the fiscal guidance’) aimed at supporting the preparation of Member States’ Stability and Convergence Programmes and thereby strengthening policy coordination. The Commission noted that, on the basis of the macroeconomic outlook of the 2022 winter forecast, transitioning from an aggregate supportive fiscal stance in 2020–2022 to a broadly neutral aggregate fiscal stance, while standing ready to react to the evolving economic situation, would appear appropriate in 2023. The Commission announced that the fiscal recommendations for 2023 should continue to differentiate between Member States and take into account possible cross-country spillovers. The Commission invited the Member States to reflect the guidance in their Stability and Convergence Programmes. The Commission committed to closely monitor the economic developments and adjust its policy guidance as needed and at the latest in its European Semester spring package of late May 2022.

(8)

With respect to the fiscal guidance, the fiscal recommendations for 2023 take into account the worsened economic outlook, the heightened uncertainty and further downside risks, and the higher inflation compared to the Commission’s 2022 winter forecast. Against these considerations, the fiscal response has to expand public investment for the green and digital transitions and energy security, and sustain the purchasing power of the most vulnerable households so as to cushion the impact of the energy price hike and help limit inflationary pressures from second-round effects via targeted and temporary measures. Fiscal policy has to remain agile so as to adjust to the rapidly evolving circumstances, including challenges that arise from Russia’s war of aggression against Ukraine with regard to defence and security, and has to differentiate between Member States according to their fiscal and economic situation, including as regards their exposure to the crisis and the inflow of displaced persons from Ukraine.

(9)

On 28 April 2021, Germany submitted its national recovery and resilience plan to the Commission, in accordance with Article 18(1) of Regulation (EU) 2021/241. Pursuant to Article 19 of Regulation (EU) 2021/241, the Commission assessed the relevance, effectiveness, efficiency and coherence of the recovery and resilience plan, in accordance with the assessment guidelines set out in Annex V to that Regulation. On 13 July 2021, the Council adopted its Implementing Decision on the approval of the assessment of the recovery and resilience plan for Germany (10). The release of instalments is conditional on the adoption of a decision by the Commission, in accordance with Article 24(5) of Regulation (EU) 2021/241, stating that Germany has satisfactorily fulfilled the relevant milestones and targets set out in the Council Implementing Decision. Satisfactory fulfilment presupposes that the achievement of preceding milestones and targets has not been reversed.

(10)

On 2 May 2022, Germany submitted its 2022 National Reform Programme and, on 27 April 2022, its 2022 Stability Programme, in line with the deadline established in Article 4 of Regulation (EC) No 1466/97. To take account of their interlinkages, the two programmes have been assessed together. In accordance with Article 27 of Regulation (EU) 2021/241, the 2022 National Reform Programme also reflects Germany’s biannual reporting on the progress made in implementing its recovery and resilience plan.

(11)

The Commission published the 2022 country report for Germany on 23 May 2022. It assessed Germany’s progress in addressing the relevant country-specific recommendations adopted by the Council in 2019, 2020 and 2021, and took stock of Germany’s implementation of the recovery and resilience plan, building on the recovery and resilience scoreboard. On the basis of that analysis, the country report identified gaps with respect to those challenges that are not addressed or only partially addressed by the recovery and resilience plan, as well as new and emerging challenges, including those emerging from Russia’s invasion of Ukraine. It also assessed Germany’s progress in implementing the European Pillar of Social Rights and in achieving the Union headline targets on employment, skills and poverty reduction, as well as progress in achieving the United Nations Sustainable Development Goals.

(12)

The Commission carried out an in-depth review under Article 5 of Regulation (EU) No 1176/2011 for Germany and published its results on 23 May 2022. The Commission concluded that Germany is experiencing macroeconomic imbalances. In particular, vulnerabilities relate to a persistent large current account surplus, which reflects subdued investment relative to savings, and has cross-border relevance.

(13)

On 27 April 2022, Germany submitted a new draft budgetary plan for 2022. The Commission has provided an opinion on that plan in accordance with Article 7 of Regulation (EU) No 473/2013 of the European Parliament and of the Council (11).

(14)

On 23 May 2022, the Commission issued a report under Article 126(3) of the Treaty. That report discussed the budgetary situation of Germany, as its general government deficit in 2021 exceeded the Treaty reference value of 3 % of gross domestic product (GDP). The report concluded that the deficit criterion was not fulfilled. In line with the communication of 2 March 2022, the Commission did not propose to open new excessive-deficit procedures in spring 2022 and will reassess whether it is necessary to propose the opening of such procedures in autumn 2022.

(15)

In its Recommendation of 20 July 2020 (12), the Council recommended Germany to take in 2020 and 2021 all necessary measures, in line with the general escape clause, to effectively address the COVID-19 pandemic, sustain the economy and support the ensuing recovery. It also recommended Germany to pursue, when economic conditions allow, fiscal policies aimed at achieving prudent medium-term fiscal positions and ensuring debt sustainability, while enhancing investment. In 2021, according to data validated by Eurostat, Germany’s general government deficit fell from 4,3 % of GDP in 2020 to 3,7 %. The fiscal policy response by Germany supported the economic recovery in 2021, while temporary emergency measures increased from 2,7 % of GDP in 2020 to 4,2 % in 2021. The measures taken by Germany in 2021 were in line with the Council Recommendation of 20 July 2020. The discretionary budgetary measures adopted by the government in 2020 and 2021 were mostly temporary or matched by offsetting measures. At the same time, some of the discretionary measures adopted by the government over the period 2020 to 2021 were not temporary or matched by offsetting measures, mainly consisting of an increase in family allowances like the child allowance and child tax free allowance as well as increased possibilities for depreciation. According to data validated by Eurostat, general government debt increased from 68,7 % of GDP in 2020 to 69,3 % of GDP in 2021.

(16)

The macroeconomic scenario underpinning the budgetary projections in the 2022 Stability Programme is favourable in 2022 and realistic thereafter. The government projects real GDP to grow by 3,6 % in 2022 and 2,3 % in 2023. By comparison, the Commission’s 2022 spring forecast projects a lower real GDP growth of 1,6 % in 2022 and a similar of 2,4 % in 2023. This difference is mainly due to different cut-off dates of the projections, which in the case of the Stability Programme was before the start of Russia’s war of aggression against Ukraine when the growth outlook for 2022 was still more optimistic. In its 2022 Stability Programme, the government expects that the headline deficit will remain at 3¾ % of GDP in 2022 and decrease to 2 % in 2023. The similar level in 2022 mainly reflects continued emergency measures due to the pandemic, increased defence spending and measures against heightened energy prices in reaction to the war in Ukraine together with additional spending and investment in the green transition. According to the 2022 Stability Programme, the general government debt-to-GDP ratio is expected to decrease to 66¾ % in 2022, and to 65¾ % in 2023. Based on policy measures known at the cut-off date of the forecast, the Commission’s 2022 spring forecast projects a government deficit for 2022 and 2023 of 2,5 % of GDP and 1,0 % respectively. This is lower than the deficit projected in the 2022 Stability Programme for 2022 and 2023, mainly due to slightly lower tax revenue projections based on cautious calculations in November 2021 and more optimistic expectations for implementing subsidies and public investment in the Programme. The Commission’s 2022 spring forecast projects a similar general government debt-to-GDP ratio of 66,4 % in 2022 and a lower of 64,5 % in 2023. The difference is due to a similar difference in the deficit forecast. According to the Commission’s 2022 spring forecast, the medium-term (10-year average) potential output growth is estimated at 1,1 %. However, that estimate does not include the impact of the reforms that are part of the recovery and resilience plan and can boost Germany’s potential growth.

(17)

In 2022, the government phased out the majority of measures taken in response to the COVID-19 crisis, such that the temporary emergency measures are projected to decline from 4,2 % of GDP in 2021 to 1,2 % in 2022. The government deficit is impacted by the measures adopted to counter the economic and social impact of the increase in energy prices, which in the Commission’s 2022 spring forecast are estimated at 0,7 % of GDP in 2022 and are expected to be phased out in 2023 (13). Those measures mainly consist of a targeted subsidy for heating costs; advancement in the abolition of the levy for renewable energy (EEG-Umlage); advancement of increase in commuter allowance (Pendlerpauschale); reduction of the energy tax on fuels for three months; one-time payment of energy price lump-sum (Energiepreispauschale) and supplement for every child; one-time lump-sum payment to receivers of social assistance; and monthly ticket for local public transport at a reduced price for three months. Those measures have been announced as temporary. However, in the event that energy prices remain elevated in 2023, some of those measures could be continued. Some of those measures are not targeted, in particular the increase in commuter allowance and the reduction of the energy tax on fuels. The government deficit is also impacted by the cost of offering temporary protection to displaced persons from Ukraine, which in the Commission’s 2022 spring forecast is projected at 0,1 % of GDP in 2022 and 0,2 % in 2023 (14), as well as the increased cost of defence expenditure by 0,4 % of GDP in 2022 and 0,5 % of GDP in 2023.

(18)

In its Recommendation of 18 June 2021, the Council recommended that in 2022 Germany maintain a supportive fiscal stance, including the impulse provided by the Recovery and Resilience Facility, and preserve nationally financed investment. The Council also recommended Germany to pursue, when economic conditions allow, a fiscal policy aimed at achieving prudent medium-term fiscal positions and ensuring fiscal sustainability in the medium term and, at the same time, to enhance investment to boost growth potential.

(19)

In 2022, according to the Commission’s 2022 spring forecast and including the information incorporated in Germany’s 2022 Stability Programme, the fiscal stance is projected to be supportive at – 1,6 % of GDP as recommended by the Council (15). Germany plans to provide continued support to the recovery by making use of the Recovery and Resilience Facility to finance additional investment as recommended by the Council. The positive contribution to economic activity of expenditure financed by grants under the Recovery and Resilience Facility and other Union funds is projected to remain stable compared to 2021. Nationally financed investment is projected to provide an expansionary contribution to the fiscal stance of 0,2 percentage points in 2022 (16). Therefore, Germany plans to preserve nationally financed investment, as recommended by the Council. At the same time, the growth in nationally financed primary current expenditure (net of new revenue measures) in 2022 is projected to provide an expansionary contribution of 1,5 percentage points to the overall fiscal stance. That significant expansionary contribution includes the additional impact of the measures to address the economic and social impact of the increase in energy prices (0,7 % of GDP) as well as the costs to offer temporary protection to displaced persons from Ukraine (0,1 % of GDP), while additional spending for the green transition (0,2 % of GDP) is also projected to contribute to the growth in net current expenditure.

(20)

In 2023, the fiscal stance is projected in the Commission’s 2022 spring forecast at 0,6 % of GDP on a no-policy-change assumption (17). Germany is projected to continue using the grants under the Recovery and Resilience Facility in 2023 to finance additional investment in support of the recovery. The positive contribution to economic activity of expenditure financed by grants under the Recovery and Resilience Facility and other Union funds is projected to decrease by 0,1 percentage point of GDP compared to 2022. Nationally financed investment is projected to provide an expansionary contribution to the fiscal stance of 0,1 percentage point in 2023 (18). At the same time, the growth in nationally financed primary current expenditure (net of new revenue measures) in 2023 is projected to provide a contractionary contribution of 0,7 percentage points to the overall fiscal stance. This includes the impact from the phasing out of the measures addressing the increased energy prices (0,7 % of GDP) and additional costs to offer temporary protection to displaced persons from Ukraine (0,05 % of GDP) compared to 2022.

(21)

In the 2022 Stability Programme, the general government deficit is expected to gradually decline to 1 ¾ % of GDP in 2024 and to 1 % by 2025. Those projections assume increasing government revenues as a percentage of GDP, while government expenditure as a percentage of GDP is expected to remain relatively stable. According to the 2022 Stability Programme, the general government debt-to-GDP ratio is expected to decrease by 2025, specifically with a decrease to 65 ¾ % in 2024, and a decline to 65 % in 2025. According to the Commission’s analysis, debt sustainability risks appear low over the medium term.

(22)

Ageing, and a tightening labour market, will greatly affect Germany in the next years. The statutory retirement age will reach 67 years in 2031, but more adjustments of the pension system are needed to ensure sustainability of the pension system in the long run, while preserving adequacy. Stronger work incentives would be needed also in view of a tightening labour market. The government’s commitment to maintaining a cap on the pension contribution rate in this legislative period and securing the minimum income replacement rate is expected to result in significant fiscal transfers, increasing further the burden on younger generations. State-subsidised private pensions (Riester Rente) have failed to play a substantial role in the pension mix. The returns are low and the administrative costs high. Low-income earners in particular cannot achieve sufficient retirement savings.

(23)

The tax system relies heavily on labour tax revenues while tax bases that are less harmful to inclusive growth remain underused. The labour tax wedge in Germany is one of the highest in the Union. This reduces take-home pay and creates disincentives to increase hours worked for certain groups such as low- and middle-income earners and second earners; this acts against better use of the labour potential even as labour shortages loom. Revenues from environmental taxes are comparatively low, while environmentally harmful subsidies (including tax reductions and tax exemptions) undermine environmental sustainability targets and counteract decarbonisation, energy efficiency and renewable energy deployment.

(24)

In accordance with Article 19(3), point (b), of Regulation (EU) 2021/241 and criterion 2.2 of Annex V to that Regulation, the recovery and resilience plan includes an extensive set of mutually reinforcing reforms and investments with an indicative timetable for implementation to be completed by 31 August 2026. These help address all or a significant subset of the economic and social challenges outlined in the country-specific recommendations addressed to Germany by the Council in the European Semester in 2019 and 2020, in addition to any country-specific recommendations issued up to the date of adoption of a recovery and resilience plan. In particular, it contributes to addressing the need to boost public and private investment, particularly for the green and digital transitions, in sustainable transport, in clean, efficient and integrated energy systems, in the digitalisation of the public administration and health services, in education, and in research and innovation.

(25)

The implementation of the recovery and resilience plan of Germany is expected to contribute to making further progress on the green and digital transitions. Measures supporting the climate objectives in Germany account for 42 % of the recovery and resilience plan’s total allocation, while measures supporting digital objectives account for 52 % of the recovery and resilience plan’s total allocation. The fully fledged implementation of the recovery and resilience plan, in line with the relevant milestones and targets, will help Germany swiftly recover from the fallout of the COVID-19 crisis, while strengthening its resilience. The systematic involvement of social partners and other relevant stakeholders remains essential for the successful implementation of the recovery and resilience plan, as well as other economic and employment policies going beyond the recovery and resilience plan, to ensure broad ownership of the overall policy agenda.

(26)

By 4 April 2022, Germany submitted the cohesion policy programming documents provided for in Regulation (EU) 2021/1060 of the European Parliament and of the Council (19) for all 15 European Regional Development Fund programmes, all 16 European Social Fund Plus programmes and a mixed European Regional Development Fund / European Social Fund Plus programme. The Commission approved the Partnership Agreement with Germany on the use of cohesion policy funds on 19 April 2022. In line with Regulation (EU) 2021/1060, Germany has taken into account the relevant country-specific recommendations in the programming of the 2021–2027 cohesion policy funds. This is a prerequisite for improving the effectiveness and maximising the added value of the financial support to be received from cohesion policy funds, while promoting coordination, complementarity and coherence between those cohesion policy funds and other Union instruments and funds. The successful implementation of the Recovery and Resilience Facility and cohesion policy programmes also depends on the removal of bottlenecks to investment to support the green and digital transitions and balanced territorial development.

(27)

Beyond the economic and social challenges addressed by the recovery and resilience plan, Germany is still lagging in deploying very-high-capacity broadband in rural areas, where stronger investment has the potential to improve productivity growth and the imbalance between savings and investment. Overall, Germany significantly improved very-high-capacity broadband coverage over the last year and is currently above the Union average. However, in rural areas the coverage was 22,5 %, below the Union average of 37,1 %. At the same time, only 15,4 % of households have access to a fibre connection (compared with the Union average of 50 %), which places Germany among the Member States with the lowest fibre coverage, while the top five Union performers have fibre coverage of at least 85 %. The lack of fibre connections is accentuated in rural areas (11,3 % versus 33,8 % Union average). This holds back productivity growth, especially by small and medium-sized businesses, many of which are located in rural and semi-rural areas. Broadband expansion and 5G are not covered in Germany’s recovery and resilience plan. There are schemes at federal and regional level aiming at improving connectivity in grey areas and mobile connectivity in white spots. The coalition agreement contains ambitious goals on the nationwide availability of fibre and 5G to all German households, while the implementation deadline still has to be specified. The increase in civil engineering planning and management capacity in the private sector and in planning and implementation management in the public sector will be crucial for timely delivery. Meeting the targets will also require improvements in the application and permit granting procedures as well as the standardisation of alternative, less time-consuming, installation techniques.

(28)

In response to the mandate by the Union Heads of State or Government set out in the Versailles Declaration, the Commission’s proposal for a REPowerEU plan aims to phase out the Union’s dependence on fossil-fuel imports from Russia as soon as possible. For this purpose, the Commission intends to identify the most-suitable projects, investments and reforms at national, regional and Union level in dialogue with Member States. These measures aim to reduce overall reliance on fossil fuels and shift fossil-fuel imports away from Russia.

(29)

Germany faces challenges related to its dependency on fossil fuels and on energy imports from Russia as well as to the framework conditions for investment in a fully integrated sustainable energy system. According to 2020 data, the dependence on gas imports from Russia is particularly high (65 % (20)) and higher than the Union average (44 %). The dependence on oil imports from Russia is also higher than the Union average (34 % in Germany compared with the Union average of 26 %) (21). More than half of Germany’s energy mix comes from gas (26 %) and oil (35 %). This dependence has direct implications for Germany’s industry, which represents 35 % of the final energy consumption of natural gas. Faster progress with the expansion of transmission and distribution grids and with the deployment of renewable energies is crucial to address those challenges, to meet climate and energy targets and to boost investment relative to savings. Stronger efforts are needed to diversify energy supplies and routes, making use of all available carbon-free sources of energy, in particular through the deployment of renewable electricity and gases, including renewable hydrogen, and of liquefied natural gas. New infrastructure and network investments related to gas are recommended to be future-proof where possible, in order to facilitate their long-term sustainability through future repurposing for sustainable fuels. A further increase in ambition in respect of reducing greenhouse-gas emissions and increasing renewables and energy efficiency will be needed in order for Germany to be in line with the ‘Fit for 55’ objectives. Efforts are needed to accelerate decarbonisation of the industry, improve flexibility options and the response by energy consumers to varying prices, and strengthen energy system integration (22).

Action should also be taken to increase energy efficiency and reduce energy consumption, and to accelerate decarbonisation of the building stock, and the transport sector, which in 2021 failed to meet the annual national emission targets for those sectors. Greater uptake of shared mobility and sustainable public transport can reduce fossil-fuel consumption. The expansion of Germany’s electricity networks has suffered from significant delays. Key obstacles are, among others, the complexity and length of planning, permit and appeal procedures. The delays in the expansion of electricity networks have made it necessary to curtail renewables in certain areas. Furthermore, the delays in extending electricity grids significantly affect the networks of neighbouring Member States since network capacity within Germany is not sufficient to transport the volumes of electricity traded within the respective price zone. The government has committed to increasing the share of renewables in electricity generation to 80 % by 2030 and the German Parliament is currently discussing a legislative proposal for a renewable energy law containing the aim of achieving greenhouse-gas near-neutrality by 2035 in the electricity sector. However, renewable deployment, in particular onshore wind, has suffered from a significant slowdown in recent years due to persisting implementation barriers. The removal of implementation barriers includes taking steps to solve conflicts over land use at an early stage, easing minimum distance rules, improving the use of spatial planning to identify zones for wind energy deployment, and making it easier to obtain permits. Local acceptance can be improved, including through a more streamlined consultation process, increased citizens’ participation and revenue sharing in projects. The expansion of renewables and the increase in energy efficiency will not only reduce energy imports dependency but also significantly lower energy prices. Finally, participation in energy-related cross-border cooperation can be further strengthened, and flexibility and reverse flow capacity can be increased when it comes to existing interconnectivity.

(30)

While the acceleration of the transition towards climate neutrality and away from fossil fuels will create significant restructuring costs in several sectors, Germany can make use of the Just Transition Mechanism in the context of cohesion policy to alleviate the socioeconomic impact of the transition in the most-affected regions. In addition, Germany can make use of the European Social Fund Plus, established by Regulation (EU) 2021/1057 of the European Parliament and of the Council (23), to improve employment opportunities and strengthen social cohesion.

(31)

In the light of the Commission’s assessment, the Council has examined the 2022 Stability Programme and its opinion (24) is reflected in recommendation (1).

(32)

In view of the close interlinkages between the economies of euro-area Member States and their collective contribution to the functioning of the economic and monetary union, the Council recommended that the euro-area Member States take action, including through their recovery and resilience plans, to implement the recommendations set out in the 2022 Recommendation on the euro area. For Germany, this is reflected in particular in recommendations (1), (2) and (3).

(33)

In the light of the Commission’s in-depth review and its assessment, the Council has examined the 2022 National Reform Programme and the 2022 Stability Programme. Its recommendations under Article 6 of Regulation (EU) No 1176/2011 are reflected in recommendations (1), (2), (3) and (4). Recommendations (1), (2) and (3) also contribute to the implementation of the 2022 Recommendation on the euro area, in particular the first and the fourth euro-area recommendations. Fiscal policies referred to in recommendation (1) and policies referred to in recommendations (2), (3) and (4) help address, inter alia, imbalances linked to the current-account surplus in as much as higher investment is concerned,

(1)

Regulation (EU) 2021/241 of the European Parliament and of the Council (2), which established the Recovery and Resilience Facility, entered into force on 19 February 2021. The Recovery and Resilience Facility provides financial support for the implementation of reforms and investment, entailing a fiscal impulse financed by the Union. It contributes to the economic recovery and to the implementation of sustainable and growth-enhancing reforms and investment, in particular to promote the green and digital transitions, while strengthening the resilience and potential growth of the Member States’ economies. It also helps strengthen sustainable public finances and boost growth and job creation in the medium and long term. The maximum financial contribution per Member State under the Recovery and Resilience Facility will be updated in June 2022, in line with Article 11(2) of Regulation (EU) 2021/241.

(2)

On 24 November 2021, the Commission adopted the Annual Sustainable Growth Survey, marking the start of the 2022 European Semester for economic policy coordination. It took due account of the Porto Social Commitment signed on 7 May 2021 to further implement the European Pillar of Social Rights, proclaimed by the European Parliament, the Council and the Commission on 17 November 2017. The European Council endorsed the priorities of the 2022 Annual Sustainable Growth Survey on 25 March 2022. On 24 November 2021, on the basis of Regulation (EU) No 1176/2011 of the European Parliament and of the Council (3), the Commission also adopted the Alert Mechanism Report, in which it did not identify Estonia as one of the Member States for which an in-depth review would be needed. On the same date, the Commission also adopted a recommendation for a Council recommendation on the economic policy of the euro areaand a proposal for the 2022 Joint Employment Report, which analyses the implementation of the Employment Guidelines and the principles of the European Pillar of Social Rights. The Council adopted the Recommendation on the economic policy of the euro area (4) (‘2022 Recommendation on the euro area’) on 5 April 2022 and the Joint Employment Report on 14 March 2022.

(3)

Russia’s invasion of Ukraine, in the wake of the global pandemic, has significantly altered the geopolitical and economic context. The impact of the invasion on Member States’ economies has been felt through, inter alia, higher prices for energy, food and raw materials, and weaker growth prospects. The higher energy prices weigh particularly heavily on the most vulnerable households experiencing or at risk of energy poverty as well as on firms most vulnerable to energy prices hikes. The Union is also seeing an unprecedented inflow of people fleeing Ukraine. The economic effects stemming from Russia’s war of aggression have impacted Member States asymmetrically. In this context, on 4 March 2022, Council Directive 2001/55/EC (5) was triggered for the first time by Council Implementing Decion (EU) 2022/382 (6), granting displaced persons from Ukraine the right to legally stay in the Union, as well as access to education and training, the labour market, healthcare, housing and social welfare. Exceptional support is made available to Estonia under the Cohesion’s Action for Refugees in Europe (CARE) initiative and through additional pre-financing under the Recovery Assistance for Cohesion and the Territories of Europe (REACT-EU) programme to urgently address reception and integration needs for those fleeing Ukraine.

(4)

Taking account of the rapidly changing economic and geopolitical situation, the European Semester resumes its broad economic and employment policy coordination in 2022, while evolving in line with the implementation requirements of the Recovery and Resilience Facility, as outlined in the 2022 Annual Sustainable Growth Survey. The implementation of the adopted recovery and resilience plans is essential for the delivery of the policy priorities under the European Semester, as the plans address all or a significant subset of the relevant country-specific recommendations issued in the 2019 and 2020 European Semester cycles. The 2019 and 2020 country-specific recommendations remain equally relevant also for the recovery and resilience plans revised, updated or amended in accordance with Articles 14, 18 and 21 of Regulation (EU) 2021/241, in addition to any other country-specific recommendations issued up to the date of submission of such revised, updated or amended recovery and resilience plans.

(5)

The general escape clause of the Stability and Growth Pact has been active since March 2020. In its communication of 3 March 2021 entitled ‘One year since the outbreak of COVID-19: fiscal policy response’, the Commission set out its view that the decision on the deactivation or continued application of the general escape clause should be taken as an overall assessment of the state of the economy, with the level of economic activity in the Union or euro area compared to pre-crisis levels (end of 2019) as a key quantitative criterion. Heightened uncertainty and strong downside risks to the economic outlook in the context of war in Europe, unprecedented energy price hikes and continued supply-chain disturbances warrant the extension of the general escape clause of the Stability and Growth Pact through 2023.

(6)

Following the approach in the Council Recommendation of 18 June 2021 (7) delivering a Council opinion on the 2021 Stability Programme of Estonia, the overall fiscal stance is currently best measured as the change in primary expenditure (net of discretionary revenue measures and excluding temporary emergency measures related to the COVID-19 crisis but including expenditure financed by non-repayable support (grants) from the Recovery and Resilience Facility and other Union funds, relative to medium-term potential growth (8). Going beyond the overall fiscal stance, in order to assess whether national fiscal policy is prudent and its composition is conducive to a sustainable recovery consistent with the green and digital transitions, attention is also paid to the evolution of nationally-financed (9) primary current expenditure (net of discretionary revenue measures and excluding temporary emergency measures related to the COVID-19 crisis) and investment.

(7)

On 2 March 2022, the Commission adopted a communication providing broad guidance for fiscal policy in 2023 (‘the fiscal guidance’) aimed at supporting the preparation of Member States’ Stability and Convergence Programmes and thereby strengthening policy coordination. The Commission noted that, on the basis of the macroeconomic outlook of the 2022 winter forecast, transitioning from an aggregate supportive fiscal stance in 2020–2022 to a broadly neutral aggregate fiscal stance, while standing ready to react to the evolving economic situation, would appear appropriate in 2023. The Commission announced that the fiscal recommendations for 2023 should continue to differentiate between Member States and take into account possible cross-country spillovers. The Commission invited the Member States to reflect the guidance in their Stability and Convergence Programmes. The Commission committed to closely monitor the economic developments and adjust its policy guidance as needed and at the latest its European Semester spring package of late May 2022.

(8)

With respect to the fiscal guidance, the fiscal recommendations for 2023 take into account the worsened economic outlook, the heightened uncertainty and further downside risks, and the higher inflation compared to the Commission’s 2022 winter forecast. Against these considerations, the fiscal response has to expand public investment for the green and digital transition and energy security, and sustain the purchasing power of the most vulnerable households so as to cushion the impact of the energy price hike and help limit inflationary pressures from second round effects via targeted and temporary measures. Fiscal policy has to remain agile so as to adjust to the rapidly evolving circumstances, including challenges that arise from Russia’s war of aggression against Ukraine with regard to defence and security, and has to differentiate between Meber States according to their fiscal and economic situation, including as regards their exposure to the crisis and the inflow of displaced persons from Ukraine.

(9)

On 18 June 2021, Estonia submitted its national recovery and resilience plan to the Commission, in accordance with Article 18(1) of Regulation (EU) 2021/241. Pursuant to Article 19 of Regulation (EU) 2021/241, the Commission assessed the relevance, effectiveness, efficiency and coherence of the recovery and resilience plan, in accordance with the assessment guidelines set out in Annex V to that Regulation. On 29 October 2021, the Council adopted its Implementing Decision on the approval of the assessment of the recovery and resilience plan for Estonia (10). The release of instalments is conditional on the adoption of a decision by the Commission, in accordance with Article 24(5) of Regulation (EU) 2021/241, stating that Estonia has satisfactorily fulfilled the relevant milestones and targets set out in the Council Implementing Decision. Satisfactory fulfilment presupposes that the achievement of preceding milestones and targets has not been reversed.

(10)

On 29 April 2022, Estonia submitted its 2022 National Reform Programme and its 2022 Stability Programme, in line with the deadline established in Article 4 of Regulation (EC) No 1466/97. To take account of their interlinkages, the two programmes have been assessed together. In accordance with Article 27 of Regulation (EU) 2021/241, the 2022 National Reform Programme also reflects Estonia’s biannual reporting on the progress made in implementing of its recovery and resilience plan.

(11)

The Commission published the 2022 country report for Estonia on 23 May 2022. It assessed Estonia’s progress in addressing the relevant country-specific recommendations adopted by the Council in 2019, 2020 and 2021, and took stock of Estonia’s implementation of the recovery and resilience plan, building on the recovery and resilience scoreboard. On the basis of that analysis, the country report identified gaps with respect to those challenges that are not addressed or only partially addressed by the recovery and resilience plan, as well as new and emerging challenges, including those emerging from Russia’s invasion of Ukraine. It also assessed Estonia’s progress in implementing the European Pillar of Social Rights and in achieving the Union headline targets on employment, skills and poverty reduction, as well as progress in achieving the United Nations Sustainable Development Goals.

(12)

On 23 May 2022, the Commission issued a report under Article 126(3) of the Treaty. That report discussed the budgetary situation of Estonia, as its general government deficit in 2022 is planned to exceed the Treaty reference value of 3 % of gross domestic product (GDP). The report concluded that the deficit criterion was not fulfilled. In line with the communication of 2 March 2022, the Commission did not propose to open new excessive-deficit procedures in spring 2022 and will reassess whether it is necessary to propose the opening of such procedures in autumn 2022.

(13)

In its Recommendation of 20 July 2020 (11), the Council recommended Estonia to take in 2020 and 2021 all necessary measures, in line with the general escape clause, to effectively address the COVID-19 pandemic, sustain the economy and support the ensuing recovery. It also recommended Estonia to pursue, when economic conditions allow, fiscal policies aimed at achieving prudent medium-term fiscal positions and ensuring debt sustainability, while enhancing investment. In 2021, according to data validated by Eurostat, Estonia’s general government deficit fell from 5,6 % of GDP in 2020 to 2,4 %. The fiscal policy response by Estonia supported the economic recovery in 2021, while temporary emergency measures increased from 2,3 % of GDP in 2020 to 2,7 % in 2021. The measures taken by Estonia in 2021 were in line with the Council Recommendation of 20 July 2020. The discretionary budgetary measures adopted by the government in 2020 and 2021 were mostly temporary or matched by offsetting measures. At the same time, some of the discretionary measures adopted by the government over the period 2020 to 2021 were not temporary or matched by offsetting measures, mainly consisting of increases to pensions, targeted salary increases (teachers, medical, cultural and police staff) and expenditure programmes for healthcare, research and development (R&D), the military and information and communication technologies (ICT). According to data validated by Eurostat, general government debt fell from 19,0 % of GDP in 2020 to 18,1 % of GDP in 2021.

(14)

The macroeconomic scenario underpinning the budgetary projections in the 2022 Stability Programme is cautious. The government projects real GDP to decline by 1,0 % in 2022 and grow by 1,2 % in 2023. By comparison, the Commission’s 2022 spring forecast projects real GDP growth of 1,0 % in 2022 and 2,4 % in 2023. The Commission forecasts stronger private consumption growth backed by a high level of accumulated savings and by robust expected wage dynamics. In its 2022 Stability Programme, the government expects that the headline deficit will increase to 5,3 % of GDP in 2022 and decrease to 4,8 % in 2023. The increase in 2022 mainly reflects the new expenditure measures to mitigate energy prices and additional social and security related spending as well as the costs to offer temporary protection to displaced persons from Ukraine. According to the 2022 Stability Programme, the general government debt-to-GDP ratio is expected to increase to 20,7 % in 2022, and thereafter to rise to 24,1 % in 2023. Based on policy measures known at the cut-off date of the forecast, the Commission’s 2022 spring forecast projects a government deficit for 2022 and 2023 of 4,4 % of GDP and 3,7 % respectively. This is lower than the deficit projected in the 2022 Stability Programme, mainly due to the stronger GDP forecast underlying the Commission’s projections and more moderate growth of investment expenditure projected by the Commission. The Commission’s 2022 spring forecast projects a general government debt-to-GDP ratio of 20,9 % in 2022 and 23,5 % in 2023, similar to the 2022 Stability Programme’s projections. According to the Commission’s 2022 spring forecast, the medium-term (10-year average) potential output growth is estimated at 3,1 %. However, that estimate does not include the impact of the reforms that are part of the recovery and resilience plan and can boost Estonia’s potential growth.

(15)

In 2022, the government phased out the majority of measures taken in response to the COVID-19 crisis, such that the temporary emergency measures are projected to decline from 2,7 % of GDP in 2021 to 0,8 % in 2022. The government deficit is impacted by the measures adopted to counter the economic and social impact of the increase in energy prices, which in the Commission’s spring 2022 forecast are estimated at 0,7 % of GDP in 2022 and are expected to be phased out in 2023 (12). Those measures mainly consist of social transfers to poorer households, price caps on electricity and heating prices and lowering electricity and gas network charges for consumers. These measures have been announced as temporary. However, in the event that energy prices remain elevated in 2023, some of those measures could be maintained. Some of those measures are not targeted, in particular the general price cap on energy prices for households, lowering network charges and across-the-board cuts in excise duties (effective from 2020). The government deficit is also impacted by the cost of offering temporary protection to displaced persons from Ukraine, which in the Commission 2022 spring forecast is projected at 0,4 % of GDP in 2022 and 0,6 % in 2023 (13), as well as the increased cost of defence expenditure by 0,6 % of GDP in 2023.

(16)

In its Recommendation of 18 June 2021, the Council recommended that in 2022 Estonia maintain a supportive fiscal stance, including from the impulse provided by the Recovery and Resilience Facility, and preserve nationally financed investment. The Council also recommended Estonia to pursue, when economic conditions allow, a fiscal policy aimed at achieving prudent medium-term fiscal positions and ensuring fiscal sustainability in the medium term and, at the same time, to enhance investment to boost growth potential.

(17)

In 2022, according to the Commission’s 2022 spring forecast and including the information incorporated in Estonia’s 2022 Stability Programme, the fiscal stance is projected to be supportive, at – 2,4 % of GDP, as recommended by the Council (14). Estonia plans to provide continued support to the recovery by making use of the Recovery and Resilience Facility to finance additional investment as recommended by the Council. The positive contribution to economic activity of expenditure financed by grants under the Recovery and Resilience Facility and other Union funds is projected to increase by 0,1 percentage point compared to 2021. Nationally financed investment is projected to provide an expansionary contribution to the fiscal stance of 0,6 percentage points in 2022 (15). Therefore, Estonia plans to preserve nationally financed investment, as recommended by the Council. At the same time, the growth in nationally financed primary current expenditure (net of new revenue measures) in 2022 is projected to provide an expansionary contribution of 1,4 percentage points to the overall fiscal stance. That significant expansionary contribution includes, amongst others, increases in wages and social transfers as well as the additional impact of the measures to address the economic and social impact of the increase in energy prices (0,5 % of GDP) and of the costs to offer temporary protection to displaced persons from Ukraine (0,4 % of GDP).

(18)

In 2023, the fiscal stance is projected in the Commission’s 2022 spring forecast at 0,2 % of GDP on a no-policy-change assumption (16). Estonia is projected to continue using the grants under the Recovery and Resilience Facility in 2023 to finance additional investment in support of the recovery. The positive contribution to economic activity of expenditure financed by grants under the Recovery and Resilience Facility and other Union funds is projected to increase by 0,4 percentage points of GDP compared to 2022. Nationally financed investment is projected to provide an expansionary contribution to the fiscal stance of 0,3 percentage points in 2023 (17). At the same time, the growth in nationally financed primary current expenditure (net of new revenue measures) in 2023 is projected to provide a contractionary contribution of 0,4 percentage points to the overall fiscal stance. This includes the impact from the phasing out of the measures addressing the increased energy prices (0,7 % of GDP) and additional costs to offer temporary protection to displaced persons from Ukraine (0,1 % of GDP).

(19)

In the 2022 Stability Programme, the general government deficit is expected to gradually decline to 3,8 % of GDP in 2024 and to 2,9 % by 2025. Therefore, the general government deficit is planned to go below 3 % of GDP by 2025. These projections assume some additional fiscal consolidation measures that are not yet specified. According to the 2022 Staility Programme, the general government debt-to-GDP ratio is expected to increase by 2025, specifically with an increase to 27,7 % in 2024, and arise to 29,2 % in 2025. According to the Commission’s analysis, debt sustainability risks appear low over the medium term.

(20)

In accordance with Article 19(3), point (b), of Regulation (EU) 2021/241 and criterion 2.2 of Annex V, to that Regulation, the recovery and resilience plan includes an extensive set of mutually reinforcing reforms and investments with an indicative timetable for implementation to be completed by 31 August 2026. These help address all or a significant subset of the economic and social challenges outlined in the country-specific recommendations addressed to Estonia by the Council in the European Semester in 2019 and 2020, in addition any country-specific recommendations issued up to the date of adoption of a recovery and resilience plan. In particular, the recovery and resilience plan focuses on the green and digital transitions, with measures to improve energy efficiency and develop renewable energy; increase the sustainability of transport and mobility; support companies in the twin transition, in particular start-ups and small and medium-sized enterprises; further digitalise public services; and increase the labour market relevance of the education and training system, especially with regard to green and digital skills. The recovery and resilience plan also contains measures to improve the accessibility and resilience of the health system and envisages some improvements to the social safety net and access to social services.

(21)

The implementation of the recovery and resilience plan of Estonia is expected to contribute to making further progress on the green and digital transitions. Measures supporting the climate objectives in Estonia account for 41,5 % of the recovery and resilience plan’s total allocation, while measures supporting digital objectives account for 21,5 % of the recovery and resilience plan’s total allocation. The fully fledged implementation of the recovery and resilience plan, in line with the relevant milestones and targets, will help Estonia swiftly recover from the fallout of the COVID-19 crisis, while strengthening its resilience. The systematic involvement of social partners and other relevant stakeholders remains important for the successful implementation of the recovery and resilience plan, as well as other economic and employment policies going beyond the recovery and resilience plan, to ensure broad ownership of the overall policy agenda.

(22)

Estonia submitted the Partnership Agreement provided for in Regulation (EU) 2021/1060 of the European Parliament and of the Council (18) on 18 April 2022 but the other cohesion policy programmes provided for in that Regulation have not yet been submitted. In line with Regulation (EU) 2021/1060, Estonia is to take into account the relevant country-specific recommendations in the programming of the 2021–2027 cohesion policy funds. This is a prerequisite for improving the effectiveness and maximising the added value of the financial support to be received from cohesion policy funds, while promoting coordination, complementarity and coherence between those cohesion policy funds and other Union instruments and funds. The successful implementation of the Recovery and Resilience Facility and cohesion policy programmes also depends on the removal of bottlenecks to investment to support the green and digital transitions and balanced territorial development.

(23)

Beyond the economic and social challenges addressed by the recovery and resilience plan, Estonia faces a number of additional challenges related to long-term care and the adequacy of the social safety net, particularly for the unemployed.

(24)

The adequacy of the social safety net has improved in Estonia but the at-risk-of-poverty and social exclusion rate remains high for older persons, people with disabilities and unemployed people. Unemployed people are less protected from falling into poverty due to the restrictive criteria for receiving unemployment benefits, in particular the thresholds for employment and income before unemployment. As a result, in 2021 only around 50 % of all registered unemployed people received unemployment benefits, 37 % of newly registered unemployed received unemployment insurance benefits and only 26 % received the fixed unemployment allowance. Extending the unemployment benefits coverage and relaxing the minimum criteria to access unemployment benefits can be effective to increase social protection, in particular of those with short work spells and in non-standard forms of work.

(25)

The Estonian population is ageing but the provision of long-term care is inadequate to meet demand due to deficiencies in the organisation and financing of long-term care. Fragmentation in the organisation and financing of long-term care between the social and healthcare sector and the State and local governments leads to an uneven provision of home and community services. Furthermore, the share of expenditure paid by those who need care (‘out-of-pocket payments’), was the second highest in the Union in 2019. Public expenditure on long-term care was only 0,4 % of GDP in 2019 (compared to the Union average of 1,7 %). A lack of common standards for long-term care and a shortage of care workers undermine the quality of service provision. Reforming long-term care by focusing on efficient and sustainable funding, access to integrated health and social services, setting quality standards, and ensuring a sufficiently large and skilled care workforce would increase the quality of life of those in need for care and reduce the high care burden on family members.

(26)

In response to the mandate by the Union Heads of State or Government set out in the Versailles Declaration, the Commission’s proposal for a REPowerEU plan aims to phase out the Union’s dependence on fossil-fuel imports from Russia as soon as possible. For this purpose, the Commission intends to identify the most-suitable projects, investments and reforms at national, regional and Union level in dialogue with Member States. These measures aim to reduce overall reliance on fossil fuels and shift fossil-fuel imports away from Russia.

(27)

Estonia currently imports a limited share of its energy supply for electricity and heat production, but remains largely dependent on imports from Russia for the small share of gas (8 %) and for refined oil products in its energy mix (19). Alongside the continued phase out of the use of oil shale as an energy source, Estonia would benefit from increasing energy efficiency, upgrading its energy infrastructure (including the electricity grid), and ensuring energy interconnections with sufficient capacity, including cross-border interconnections with neighbouring Member States. New infrastructure and network investments related to gas are recommended to be future-proof where possible, in order to facilitate their long-term sustainability, through future repurposing for sustainable fuels. Finland signed a ten-year lease agreement for a floating liquefied natural gas (LNG) terminal on 20 May 2022 and Estonia has a cooperation agreement with Gasgrid Finland to have access to it. Completing the ongoing synchronisation with the continental power grid of the Union, ensuring sufficient capacity for the interconnections with neighbouring Member States and joint renewable energy projects should remain a policy priority.

Further diversification of energy sources – including in transport – and acceleration of renewable energy production could be achieved through lifting non-financial barriers to the planning and permitting of renewable energy installations, increasing the capacity of sustainable biomethane production and accelerating the deployment of renewable hydrogen-based solutions while ensuring sustainable valorisation of biomass. Electrification of the main railway lines, supported by Union funds, is already ongoing or planned, but electrifying the whole network would contribute to faster decarbonisation of transport. The already high greenhouse gas emissions from road transport have continued to rise in recent years, due to the intensive use of mainly fuel-inefficient vehicles. Estonia is one of the few Member States that do not levy annual taxes on road vehicles such as passenger cars and light trucks. Increasing incentives to encourage the renewal of the stock of vehicles towards less polluting ones would help the transition to greener transport modes. Where needed, appropriate safeguards could mitigate the impact on low-income car owners. Energy consumption could be reduced by efficient building renovations with an integrated approach, including renewable energy installations and combined heating and power systems. A further increase in ambition in respect of reducing greenhouse-gas emissions and increasing renewable energy and energy efficiency will be needed to achieve the ‘Fit for 55’ objectives.

(28)

While the acceleration of the transition toward climate neutrality and away from fossil fuels will create significant restructuring costs in several sectors, Estonia can make use of the Just Transition Mechanism in the context of cohesion policy to alleviate the socio-economic impact of the transition in the most-affected regions. In addition, Estonia can make use of the European Social Fund Plus, established by Regulation (EU) 2021/1057 of the European Parliament and of the Council (20), to improve employment opportunities and strengthen social cohesion.

(29)

In the light of the Commission’s assessment, the Council has examined the 2022 Stability Programme and its opinion (21) is reflected in recommendation (1).

(30)

In view of the close interlinkages between the economies of euro-area Member States and their collective contribution to the functioning of the economic and monetary union, the Council recommended that the euro-area Member States take action, including through their recovery and resilience plans, to implement the recommendations set out in the 2022 Recommendation on the euro area. For Estonia, this is reflected in particular in recommendations (1), (2) and (3),

(1)

Regulation (EU) 2021/241 of the European Parliament and of the Council (3), which established the Recovery and Resilience Facility, entered into force on 19 February 2021. The Recovery and Resilience Facility provides financial support for the implementation of reforms and investment, entailing a fiscal impulse financed by the Union. It contributes to the economic recovery and to the implementation of sustainable and growth-enhancing reforms and investment, in particular to promote the green and digital transitions, while strengthening the resilience and potential growth of the Member States’ economies. It also helps strengthen sustainable public finances and boost growth and job creation in the medium and long term. The maximum financial contribution per Member State under the Recovery and Resilience Facility will be updated in June 2022, in line with Article 11(2) of Regulation (EU) 2021/241.

(2)

On 24 November 2021, the Commission adopted the Annual Sustainable Growth Survey, marking the start of the 2022 European Semester for economic policy coordination. It took due account of the Porto Social Commitment signed on 7 May 2021 to further implement the European Pillar of Social Rights, proclaimed by the European Parliament, the Council and the Commission on 17 November 2017. The European Council endorsed the priorities of the 2022 Annual Sustainable Growth Survey on 25 March 2022. On 24 November 2021, on the basis of Regulation (EU) No 1176/2011, the Commission also adopted the Alert Mechanism Report, in which it identified Ireland as one of the Member States for which an in-depth review would be needed. On the same date, the Commission also adopted a recommendation for a Council recommendation on the economic policy of the euro area and a proposal for the 2022 Joint Employment Report, which analyses the implementation of the Employment Guidelines and the principles of the European Pillar of Social Rights. The Council adopted the Recommendation on the economic policy of the euro area (4) (‘2022 Recommendation on the euro area’) on 5 April 2022 and the Joint Employment Report on 14 March 2022.

(3)

Russia’s invasion of Ukraine, in the wake of the global pandemic, has significantly altered the geopolitical and economic context. The impact of the invasion on Member States’ economies has been felt through, inter alia, higher prices for energy, food and raw materials, and weaker growth prospects. The higher energy prices weigh particularly heavily on the most vulnerable households experiencing or at risk of energy poverty as well as on firms most vulnerable to energy prices hikes. The Union is also seeing an unprecedented inflow of people fleeing Ukraine. The economic effects stemming from Russia’s war of aggression have impacted Member States asymmetrically. In this context, on 4 March 2022, Council Directive 2001/55/EC (5) was triggered for the first time by Council Implementing Decision (EU) 2022/382 (6), granting displaced persons from Ukraine the right to legally stay in the Union, as well as access to education and training, the labour market, healthcare, housing and social welfare.

(4)

Taking account of the rapidly changing economic and geopolitical situation, the European Semester resumes its broad economic and employment policy coordination in 2022, while evolving in line with the implementation requirements of the Recovery and Resilience Facility, as outlined in the 2022 Annual Sustainable Growth Survey. The implementation of the adopted recovery and resilience plans is essential for the delivery of the policy priorities under the European Semester, as the plans address all or a significant subset of the relevant country-specific recommendations issued in the 2019 and 2020 European Semester cycles. The 2019 and 2020 country-specific recommendations remain equally relevant also for recovery and resilience plans revised, updated or amended in accordance with Articles 14, 18 and 21 of Regulation (EU) 2021/241, in addition to any other country-specific recommendations issued up to the date of submission of such revised, updated or amended recovery and resilience plans.

(5)

The general escape clause of the Stability and Growth Pact has been active since March 2020. In its communication of 3 March 2021 entitled ‘One year since the outbreak of COVID-19: fiscal policy response’, the Commission set out its view that the decision on the deactivation or continued application of the general escape clause should be taken as an overall assessment of the state of the economy, with the level of economic activity in the Union or euro area compared to pre-crisis levels (end of 2019) as a key quantitative criterion. Heightened uncertainty and strong downside risks to the economic outlook in the context of war in Europe, unprecedented energy price hikes and continued supply-chain disturbances warrant the extension of the general escape clause of the Stability and Growth Pact through 2023.

(6)

Following the approach in the Council Recommendation of 18 June 2021 (7) delivering a Council opinion on the 2021 Stability Programme of Ireland, the overall fiscal stance is currently best measured as the change in primary expenditure (net of discretionary revenue measures and excluding temporary emergency measures related to the COVID-19 crisis) but including expenditure financed by non-repayable support (grants) from the Recovery and Resilience Facility and other Union funds, relative to medium-term potential growth (8). Going beyond the overall fiscal stance, in order to assess whether national fiscal policy is prudent and its composition is conducive to a sustainable recovery consistent with the green and digital transitions, attention is also paid to the evolution of nationally financed (9) primary current expenditure (net of discretionary revenue measures and excluding temporary emergency measures related to the COVID-19 crisis) and investment.

(7)

On 2 March 2022, the Commission adopted a communication providing broad guidance for fiscal policy in 2023 (‘the fiscal guidance’) aimed at supporting the preparation of Member States’ Stability and Convergence Programmes and thereby strengthening policy coordination. The Commission noted that, on the basis of the macroeconomic outlook of the 2022 winter forecast, transitioning from an aggregate supportive fiscal stance in 2020–2022 to a broadly neutral aggregate fiscal stance, while standing ready to react to the evolving economic situation, would appear appropriate in 2023. The Commission announced that the fiscal recommendations for 2023 should continue to differentiate between Member States and take into account possible cross-country spillovers. The Commission invited the Member States to reflect the guidance in their Stability and Convergence Programmes. The Commission committed to closely monitor the economic developments and adjust its policy guidance as needed and at the latest in its European Semester spring package of late May 2022.

(8)

With respect to the fiscal guidance, the fiscal recommendations for 2023 take into account the worsened economic outlook, the heightened uncertainty and further downside risks, and the higher inflation compared to the Commission’s 2022 winter forecast. Against these considerations, the fiscal response has to expand public investment for the green and digital transitions and energy security, and sustain the purchasing power of the most vulnerable households so as to cushion the impact of the energy price hike and help limit inflationary pressures from second-round effects via targeted and temporary measures. Fiscal policy has to remain agile so as to adjust to the rapidly evolving circumstances, including challenges that arise from Russia’s war of aggression against Ukraine with regard to defence and security, and has to differentiate between Member States according to their fiscal and economic situation, including as regards their exposure to the crisis and the inflow of displaced persons from Ukraine.

(9)

On 28 May 2021, Ireland submitted its national recovery and resilience plan to the Commission, in accordance with Article 18(1) of Regulation (EU) 2021/241. Pursuant to Article 19 of Regulation (EU) 2021/241, the Commission assessed the relevance, effectiveness, efficiency and coherence of the recovery and resilience plan, in accordance with the assessment guidelines set out in Annex V to that Regulation. On 8 September 2021, the Council adopted its Implementing Decision on the approval of the assessment of the recovery and resilience plan for Ireland (10). The release of instalments is conditional on the adoption of a decision by the Commission, in accordance with Article 24(5) of Regulation (EU) 2021/241, stating that Ireland has satisfactorily fulfilled the relevant milestones and targets set out in the Council Implementing Decision. Satisfactory fulfilment presupposes that the achievement of preceding milestones and targets has not been reversed.

(10)

On 4 May 2022, Ireland submitted its 2022 National Reform Programme and, on 29 April 2022, its 2022 Stability Programme, in line with the deadline established in Article 4 of Regulation (EC) No 1466/97. To take account of their interlinkages, the two programmes have been assessed together. In accordance with Article 27 of Regulation (EU) 2021/241, the 2022 National Reform Programme also reflects Ireland’s biannual reporting on the progress made in implementing its recovery and resilience plan.

(11)

The Commission published the 2022 country report for Ireland on 23 May 2022. It assessed Ireland’s progress in addressing the relevant country-specific recommendations adopted by the Council in 2019, 2020 and 2021, and took stock of Ireland’s implementation of the recovery and resilience plan, building on the Recovery and Resilience Scoreboard. On the basis of that analysis, the country report identified gaps with respect to those challenges that are not addressed or only partially addressed by the recovery and resilience plan, as well as new and emerging challenges, including those emerging from Russia’s invasion of Ukraine. It also assessed Ireland’s progress in implementing the European Pillar of Social Rights and in achieving the Union headline targets on employment, skills and poverty reduction, as well as progress in achieving the United Nations Sustainable Development Goals.

(12)

The Commission carried out an in-depth review under Article 5 of Regulation (EU) No 1176/2011 for Ireland and published its results on 23 May 2022. The Commission concluded that Ireland is no longer experiencing imbalances related to high private, government and external debt. Important progress has been made in reducing government and private indebtedness as well as net external liabilities, both before and since the pandemic.

(13)

In its Recommendation of 20 July 2020 (11), the Council recommended Ireland to take in 2020 and 2021 all necessary measures, in line with the general escape clause, to effectively address the COVID-19 pandemic, sustain the economy and support the ensuing recovery. It also recommended Ireland to pursue, when economic conditions allow, fiscal policies aimed at achieving prudent medium-term fiscal positions and ensuring debt sustainability, while enhancing investment. In 2021, according to data validated by Eurostat, Ireland’s general government deficit fell from 5,1 % of GDP in 2020 to 1,9 %. The fiscal policy response by Ireland supported the economic recovery in 2021, while temporary emergency measures declined from 3,3 % of GDP in 2020 to 2,7 % in 2021. The measures taken by Ireland in 2021 were in line with the Council Recommendation of 20 July 2020. The discretionary budgetary measures adopted by the government in 2020 and 2021 were mostly temporary or matched by offsetting measures. According to data validated by Eurostat, general government debt fell from 58,4 % of GDP in 2020 to 56,0 % of GDP in 2021.

(14)

The macroeconomic scenario underpinning the budgetary projections in the 2022 Stability Programme is realistic. The government projects real GDP to grow by 6,4 % in 2022 and 4,4 % in 2023. By comparison, the Commission’s 2022 spring forecast projects a lower real GDP growth of 5,4 % in 2022 and a similar GDP growth of 4,4 % in 2023, mainly due to lower personal consumption and lower export projections in 2022. In its 2022 Stability Programme, the government expects that the headline deficit will decrease to 0,4 % of GDP in 2022 and will turn to a surplus of 0,2 % in 2023. The decrease in 2022 mainly reflects strong growth in economic activity and the unwinding of most emergency measures. According to the 2022 Stability Programme, the general government debt-to-GDP ratio is expected to decrease to 50,1 % in 2022, and to decline to 46,3 % in 2023. Based on policy measures known at the cut-off date of the forecast, the Commission’s 2022 spring forecast projects a government deficit of 0,5 % of GDP for 2022 and a surplus of 0,4 % of GDP in 2023. This is in line with the government balance projected in the 2022 Stability Programme. The Commission’s 2022 spring forecast projects a similar general government debt-to-GDP ratio, of 50,3 % in 2022 and 45,5 % in 2023. According to the Commission’s 2022 spring forecast, the medium-term (10-year average) potential output growth is estimated at 6,6 %. However, that estimate does not include the impact of the reforms that are part of the recovery and resilience plan and can boost Ireland’s potential growth.

(15)

In 2022, the government phased out the majority of measures taken in response to the COVID-19 crisis, such that the temporary emergency measures are projected to decline from 2,7 % of GDP in 2021 to 0,6 % in 2022. The government deficit is impacted by the measures adopted to counter the economic and social impact of the increase in energy prices, which in the Commission’s 2022 spring forecast are estimated at 0,2 % of GDP in 2022 and 0,0 % of GDP in 2023 (12). Those measures mainly consist of social transfers to poorer households and cuts to indirect taxes on energy consumption. Those measures have been announced as mostly temporary. However, in the event that energy prices remain elevated in 2023, some of those measures could be continued. Some of those measures are not targeted, in particular the payment to all domestic electricity accounts and across-the-board cuts in excise duties. The government deficit is also impacted by the cost of offering temporary protection to displaced persons from Ukraine, which in the Commission’s 2022 spring forecast is projected at 0,1 % of GDP in 2022 and 0,1 % in 2023 (13).

(16)

In its Recommendation of 18 June 2021, the Council recommended that in 2022 Ireland pursue a supportive fiscal stance, including from the impulse provided by the Recovery and Resilience Facility, and preserve nationally financed investment. The Council also recommended Ireland to pursue, when economic conditions allow, a fiscal policy aimed at achieving prudent medium-term fiscal positions and ensuring fiscal sustainability in the medium term, and at the same time, to enhance investment to boost growth potential.

(17)

In 2022, according to the Commission’s 2022 spring forecast and including the information incorporated in its 2022 Stability Programme, the fiscal stance is projected to be supportive at – 0,3 % of GDP, as recommended by the Council (14). Ireland plans to provide continued support to the recovery by making use of the Recovery and Resilience Facility to finance additional investment as recommended by the Council. The positive contribution to economic activity of expenditure financed by grants under the Recovery and Resilience Facility and other Union funds is projected to remain stable compared to 2021. Nationally financed investment is projected to provide an expansionary contribution to the fiscal stance of 0,3 percentage points in 2022 (15). Therefore, Ireland plans to preserve nationally financed investment, as recommended by the Council. At the same time, the growth in nationally financed primary current expenditure (net of new revenue measures) in 2022 is projected to provide a broadly neutral contribution of 0,0 percentage points to the overall fiscal stance. This includes the additional impact of the measures to address the economic and social impact of the increase in energy prices (0,2 % of GDP).

(18)

In 2023, the fiscal stance is projected in the Commission 2022 spring forecast at + 1,8 % of GDP on a no-policy-change assumption (16). Ireland is projected to continue using the grants under the Recovery and Resilience Facility in 2023 to finance additional investment in support of the recovery. The positive contribution to economic activity of expenditure financed by grants under the Recovery and Resilience Facility and other Union funds is projected to remain stable compared to 2022. Nationally financed investment is projected to provide a neutral contribution to the fiscal stance of 0,0 percentage points in 2023 (17). At the same time, the growth in nationally financed primary current expenditure (net of new revenue measures) in 2023 is projected to provide a contractionary contribution of 1,8 percentage points to the overall fiscal stance. This includes the impact from the phasing-out of the measures addressing the increased energy prices (0,2 % of GDP).

(19)

In the 2022 Stability Programme, the general government balance is expected to reach a surplus of 1,2 % of GDP in 2024 and 1,4 % by 2025. The general government deficit is thus planned to remain below 3 % of GDP over the programme horizon. These projections assume a cap on core expenditure growth at 5 % per year. According to the 2022 Stability Programme, the general government debt-to-GDP ratio is expected to decrease by 2025, specifically with a decrease to 43,8 % in 2024, and a decline to 40,7 % in 2025. According to the Commission’s analysis, debt-sustainability risks appear to be low over the medium term.

(20)

The overall deficit of the pension system is expected to grow in the long term as a result of pension expenditure rising from 4,6 % of GDP in 2019 to 7,6 % in 2070. An independent pension commission made several recommendations to shore up the fiscal sustainability of the State pension system.

(21)

In accordance with Article 19(3), point (b), of Regulation (EU) 2021/241 and criterion 2.2 of Annex V to that Regulation, the recovery and resilience plan includes an extensive set of mutually reinforcing reforms and investments with an indicative timetable for implementation to be completed by 31 August 2026. These help address all or a significant subset of the economic and social challenges outlined in the country-specific recommendations addressed to Ireland by the Council in the European Semester in 2019 and 2020, in addition to any country-specific recommendations issued up to the date of adoption of a recovery and resilience plan. In particular, the plan focuses on reforms and investments that facilitate the green and digital transitions, as well as on active labour-market integration support and upskilling. The investments also help frontload mature public-investment projects, promote private investment and use more direct funding instruments to stimulate research and innovation. Furthermore, the recovery and resilience plan commits to reforms with regard to social and affordable housing, pensions, healthcare and regulatory barriers to entrepreneurship, while also introducing measures that are expected to partly address challenges related to anti-money laundering and aggressive tax planning.

(22)

The implementation of the recovery and resilience plan of Ireland is expected to contribute to making further progress on the green and digital transitions. Measures supporting the climate objectives in Ireland account for 42 % of the recovery and resilience plan’s total allocation, while measures supporting digital objectives account for 32 % of the recovery and resilience plan’s total allocation. The fully fledged implementation of the recovery and resilience plan, in line with the relevant milestones and targets, will help Ireland swiftly recover from the fallout of the COVID-19 crisis, while strengthening its resilience. The systematic involvement of social partners and other relevant stakeholders remains important for the successful implementation of the recovery and resilience plan, as well as other economic and employment policies going beyond the recovery and resilience plan, to ensure broad ownership of the overall policy agenda.

(23)

Ireland has not yet formally submitted the Partnership Agreement provided for in Regulation (EU) 2021/1060 of the European Parliament and of the Council (18) or the other cohesion policy programmes provided for in that Regulation. In line with Regulation (EU) 2021/1060, Ireland is to into account the relevant country-specific recommendations in the programming of the 2021–2027 cohesion policy funds. This is a prerequisite for improving the effectiveness and maximising the added value of the financial support to be received from cohesion policy funds, while promoting coordination, complementarity and coherence between those cohesion policy funds and other Union instruments and funds. The successful implementation of the Recovery and Resilience Facility and cohesion policy programmes also depends on the removal of bottlenecks to investment to support the green and digital transitions and balanced territorial development.

(24)

Beyond the economic and social challenges addressed by the recovery and resilience plan, Ireland faces a number of additional challenges related to the circular economy and waste water. Waste generation in Ireland is almost 25 % higher than the Union average, making it the fifth largest generator of municipal waste per capita in the Union. Progress made on increasing recycling rates has slowed over recent years, while incineration has significantly increased. The circular use of materials in Ireland was 1,8 % in 2020, well below the Union average of 12,8 %. More incentives and investment are needed for Ireland to implement a more ambitious waste and circular economy strategy, while avoiding the creation of excessive incineration capacity. Greater efforts are needed to support circular business models that cover the entire life cycle of materials in order to reduce waste and lower resource consumption. While some progress has been made in facilitating investment in waste-water management, less than 50 % of waste water in Ireland is treated in compliance with Union law. The most significant impediment to surface water quality in Ireland stems from excessive nutrients from both untreated waste water and agriculture. Significant upgrades in infrastructure are needed, as is a more robust approach to controlling water contamination from agricultural activities. Appropriate waste-water infrastructure is also key to improving the quality of life and health conditions of the general public. Moreover, adequate waste-water infrastructure helps improve regional development, generates sustainable growth and jobs, and is beneficial for tourism.

(25)

In response to the mandate by the Union Heads of State or Government set out in the Versailles Declaration, the Commission’s proposal for a REPowerEU plan aims to phase out the Union’s dependence on fossil-fuel imports from Russia as soon as possible. For this purpose, the Commission intends to identify the most-suitable projects, investments and reforms at national, regional and Union level in dialogue with Member States. These measures aim to reduce overall reliance on fossil fuels and shift fossil-fuel imports away from Russia.

(26)

According to 2020 data, Ireland does not import crude oil or gas from Russia. Ireland’s dependence on Russian coal (22 % of coal imports) is lower than the Union average, in a context where the weight of solid fossil fuels in the energy mix (7,6 %) is also lower than in the Union average. While Ireland has a more limited exposure to Russian oil and gas than the Union average, the current geopolitical situation and high energy prices increase the urgency for Ireland to step up its efforts to meet the renewable targets laid down in the national energy and climate plan. Ireland’s climate action plan includes the ambitious goal of transforming the country’s energy system by 2030. This will enable Ireland to achieve a 51 % reduction in total greenhouse-gas emissions between 2018 and 2030. The necessary reforms and the magnitude of this transformation will be considerable, from securing the necessary public and private investment to delivering commitments on time. A comprehensive upgrade of Ireland’s energy infrastructure is required to benefit fully from renewable energy sources and achieve Ireland’s climate objectives. Creating an investment framework conducive to facilitating and incentivising investment in the green energy transition will be key to reducing dependence on fossil fuels. For renewables, challenges persist in the planning and permit system, particularly on the long duration of planning permission procedures and the lengthy and costly appeal procedures. Improving the efficiency of the planning and permit system by ensuring that appropriate resources are available at all stages of planning processes and by streamlining the overall framework could speed up large-scale developments, thereby accelerating the green transition. In addition, expanding and reinforcing the electricity grid and supporting infrastructure at key locations will be pivotal to reducing congestion and improving its stability. In particular, new electricity transmission interconnectors to neighbouring countries will support greater security of energy supply. Increased storage capacity and the mass roll-out of charging points for electric vehicles will also be needed. In addition, the development of a national renewable hydrogen strategy would also help diversify the energy mix.

(27)

Energy-efficiency measures will play a key role in reducing energy consumption. High energy savings are necessary to achieve not only Ireland’s climate objectives, but also the Union-wide target of reducing net greenhouse-gas emissions by 55 %. While the climate action plan is on the right track, Ireland has so far lagged behind in terms of greenhouse-gas emission reductions. By applying the ‘energy efficiency first’ principle and pursuing deep energy savings in buildings, Ireland could reduce its dependence on energy imports. Higher levels of electric vehicles could take advantage of domestic electricity generation rather than relying on fuel imports. As the climate action plan includes a target of one million electric vehicles on Irish roads by 2030, a significant rollout of electric charging points is needed. A further increase in ambition in respect of reducing greenhouse-gas emissions and increasing renewables and energy efficiency will be needed in order for Ireland to be in line with the ‘Fit for 55’ objectives.

(28)

While the acceleration of the transition towards climate neutrality and away from fossil fuels will create significant restructuring costs in several sectors, Ireland can make use of the Just Transition Mechanism in the context of cohesion policy to alleviate the socioeconomic impact of the transition in the most-affected regions. In addition, Ireland can make use of the European Social Fund Plus, established by Regulation (EU) 2021/1057 of the European Parliament and of the Council (19), to improve employment opportunities and strengthen social cohesion.

(29)

In the light of the Commission’s assessment, the Council has examined the 2022 Stability Programme and its opinion (20) is reflected in recommendation (1).

(30)

In view of the close interlinkages between the economies of euro-area Member States and their collective contribution to the functioning of the economic and monetary union, the Council recommended that the euro-area Member States take action, including through their recovery and resilience plans, to implement the recommendations set out in the 2022 Recommendation on the euro area. For Ireland, this is reflected in particular in recommendations (1) and (2),

(1)

Regulation (EU) 2021/241 of the European Parliament and of the Council (3), which established the Recovery and Resilience Facility, entered into force on 19 February 2021. The Recovery and Resilience Facility provides financial support for the implementation of reforms and investment, entailing a fiscal impulse financed by the Union. It contributes to the economic recovery and to the implementation of sustainable and growth-enhancing reforms and investment, in particular to promote the green and digital transitions, while strengthening the resilience and potential growth of the Member States’ economies. It also helps strengthen sustainable public finances and boost growth and job creation in the medium and long term. The maximum financial contribution per Member State under the Recovery and Resilience Facility will be updated in June 2022, in line with Article 11(2) of Regulation (EU) 2021/241.

(2)

On 24 November 2021, the Commission adopted the Annual Sustainable Growth Survey, marking the start of the 2022 European Semester for economic policy coordination. It took due account of the Porto Social Commitment signed on 7 May 2021 to further implement the European Pillar of Social Rights, proclaimed by the European Parliament, the Council and the Commission on 17 November 2017. The European Council endorsed the priorities of the 2022 Annual Sustainable Growth Survey on 25 March 2022. On 24 November 2021, on the basis of Regulation (EU) No 1176/2011, the Commission also adopted the Alert Mechanism Report, in which it identified Greece as one of the Member States for which an in-depth review would be needed. On the same date, the Commission also adopted a recommendation for a Council recommendation on the economic policy of the euro area and a proposal for the 2022 Joint Employment Report, which analyses the implementation of the Employment Guidelines and the principles of the European Pillar of Social Rights. The Council adopted the Recommendation on the economic policy of the euro area (4) (‘2022 Recommendation on the euro area’) on 5 April 2022 and the Joint Employment Report on 14 March 2022.

(3)

Russia’s invasion of Ukraine, in the wake of the global pandemic, has significantly altered the geopolitical and economic context. The impact of the invasion on Member States’ economies has been felt through, inter alia, higher prices for energy, food and raw materials and weaker growth prospects. The higher energy prices weigh particularly heavily on the most vulnerable households experiencing or at risk of energy poverty as well as on firms most vulnerable to energy prices hikes. The Union is also seeing an unprecedented inflow of people fleeing Ukraine. The economic effects stemming from Russia’s war of aggression have impacted Member States asymmetrically. In this context, on 4 March 2022, Council Directive 2001/55/EC (5) was triggered for the first time by Council Implementing Decision (EU) 2022/382 (6), granting displaced persons from Ukraine the right to legally stay in the Union, as well as access to education and training, the labour market, healthcare, housing and social welfare.

(4)

Taking account of the rapidly changing economic and geopolitical situation, the European Semester resumes its broad economic and employment policy coordination in 2022, while evolving in line with the implementation requirements of the Recovery and Resilience Facility, as outlined in the 2022 Annual Sustainable Growth Survey. The implementation of the adopted recovery and resilience plans is essential for the delivery of the policy priorities under the European Semester, as the plans address all or a significant subset of the relevant country-specific recommendations issued in the 2019 and 2020 European Semester cycles. The 2019 and 2020 country-specific recommendations remain equally relevant also for the recovery and resilience plans revised, updated or amended in accordance with Articles 14, 18 and 21 of Regulation (EU) 2021/241, in addition to any other country-specific recommendations issued up to the date of submission of such revised, updated or amended recovery and resilience plans.

(5)

The general escape clause of the Stability and Growth Pact has been active since March 2020. In its communication of 3 March 2021 entitled ‘One year since the outbreak of COVID-19: fiscal policy response’, the Commission set out its view that the decision on the deactivation or continued application of the general escape clause should be taken as an overall assessment of the state of the economy, with the level of economic activity in the Union or euro area compared to pre-crisis levels (end of 2019) as a key quantitative criterion. Heightened uncertainty and strong downside risks to the economic outlook in the context of war in Europe, unprecedented energy price hikes and continued supply-chain disturbances warrant the extension of the general escape clause of the Stability and Growth Pact through 2023.

(6)

Following the approach in the Council Recommendation of 18 June 2021 (7) on the 2021 Stability Programme of Greece, the overall fiscal stance is currently best measured as the change in primary expenditure (net of discretionary revenue measures and excluding temporary emergency measures related to the COVID-19 crisis) but including expenditure financed by non-repayable support (grants) from the Recovery and Resilience Facility and other Union funds, relative to medium-term potential growth (8). Going beyond the overall fiscal stance, in order to assess whether national fiscal policy is prudent and its composition is conducive to a sustainable recovery consistent with the green and digital transitions, attention is also paid to the evolution of nationally financed (9) primary current expenditure (net of discretionary revenue measures and excluding temporary emergency measures related to the COVID-19 crisis) and investment.

(7)

On 2 March 2022, the Commission adopted a communication providing broad guidance for fiscal policy in 2023 (‘the fiscal guidance’) aimed at supporting the preparation of Member States’ Stability and Convergence Programmes and thereby strengthening policy coordination. The Commission noted that, on the basis of the macroeconomic outlook of the 2022 winter forecast, transitioning from an aggregate supportive fiscal stance in 2020–2022 to a broadly neutral aggregate fiscal stance, while standing ready to react to the evolving economic situation, would appear appropriate in 2023. The Commission announced that the fiscal recommendations for 2023 should continue to differentiate between Member States and take into account possible cross-country spillovers. The Commission invited the Member States to reflect the guidance in their Stability and Convergence Programmes. The Commission committed to closely monitor the economic developments and adjust its policy guidance as needed and at the latest in its European Semester spring package of late May 2022.

(8)

With respect to the fiscal guidance, the fiscal recommendations for 2023 take into account the worsened economic outlook, the heightened uncertainty and further downside risks, and the higher inflation compared to the Commission’s 2022 winter forecast. Against these considerations, the fiscal response has to expand public investment for the green and digital transitions and energy security, and sustain the purchasing power of the most vulnerable households so as to cushion the impact of the energy price hike and help limit inflationary pressures from second-round effects via targeted and temporary measures. Fiscal policy has to remain agile so as to adjust to the rapidly evolving circumstances, including challenges that arise from Russia’s war of aggression against Ukraine with regard to defence and security, and has to differentiate between Member States according to their fiscal and economic situation, including as regards their exposure to the crisis and the inflow of displaced persons from Ukraine.

(9)

On 27 April 2021, Greece submitted its national recovery and resilience plan to the Commission, in accordance with Article 18(1) of Regulation (EU) 2021/241. Pursuant to Article 19 of Regulation (EU) 2021/241, the Commission assessed the relevance, effectiveness, efficiency and coherence of the recovery and resilience plan, in accordance with the assessment guidelines set out in Annex V to that Regulation. On 13 July 2021, the Council adopted its Implementing Decision on the approval of the assessment of the recovery and resilience plan for Greece (10). The release of instalments is conditional on the adoption of a decision by the Commission, in accordance with Article 24(5) of Regulation (EU) 2021/241, stating that Greece has satisfactorily fulfilled the relevant milestones and targets set out in the Council Implementing Decision. Satisfactory fulfilment presupposes that the achievement of preceding milestones and targets has not been reversed.

(10)

On 30 April 2022, Greece submitted its 2022 National Reform Programme and, on 29 April 2022, its 2022 Stability Programme, in line with Article 4 of Regulation (EC) No 1466/97. To take account of their interlinkages, the two programmes have been assessed together. In accordance with Article 27 of Regulation (EU) 2021/241, the 2022 National Reform Programme also reflects Greece’s biannual reporting on the progress made in implementing its recovery and resilience plan.

(11)

The Commission published the 2022 country report for Greece on 23 May 2022. It assessed Greece’s progress in addressing the relevant country-specific recommendations adopted by the Council in 2019, 2020 and 2021, and took stock of Greece’s implementation of the recovery and resilience plan, building on the recovery and resilience scoreboard. On the basis of that analysis, the country report identified gaps with respect to those challenges that are not addressed or only partially addressed by the recovery and resilience plan, as well as new and emerging challenges, including those emerging from Russia’s invasion of Ukraine. It also assessed Greece’s progress in implementing the European Pillar of Social Rights and in achieving the Union headline targets on employment, skills and poverty reduction, as well as progress in achieving the United Nations Sustainable Development Goals.

(12)

The Commission carried out an in-depth review under Article 5 of Regulation (EU) No 1176/2011 for Greece and published its results on 23 May 2022. The Commission concluded that Greece is experiencing excessive macroeconomic imbalances. Vulnerabilities relate to high government debt, incomplete external rebalancing and high non-performing loans in a context of low potential growth and high unemployment.

(13)

On 23 May 2022, the Commission issued a report under Article 126(3) of the Treaty. That report discussed the budgetary situation of Greece, as its general government deficit in 2021 exceeded the Treaty reference value of 3 % of gross domestic product (GDP). The report concluded that the deficit criterion was not fulfilled. In line with the communication of 2 March 2022, the Commission did not propose to open new excessive-deficit procedures in spring 2022 and will reassess twhether it is necessary to propose the opening of such procedures in autumn 2022.

(14)

In its Recommendation of 20 July 2020 (11), the Council recommended Greece to take in 2020 and 2021 all necessary measures, in line with the general escape clause, to effectively address the COVID-19 pandemic, sustain the economy and support the ensuing recovery. It also recommended Greece to pursue, when economic conditions allow, fiscal policies aimed at achieving prudent medium-term fiscal positions and ensuring debt sustainability, while enhancing investment. In 2021, according to data validated by Eurostat, Greece’s general government deficit fell from 10,2 % of GDP in 2020 to 7,4 %. The fiscal policy response by Greece supported the economic recovery in 2021, while temporary emergency measures declined from 7,6 % of GDP in 2020 to 7,2 % in 2021. The measures taken by Greece in 2021 were in line with the Council Recommendation of 20 July 2020. The discretionary budgetary measures adopted by the government in 2020 and 2021 were temporary or matched by offsetting measures. According to data validated by Eurostat, general government debt fell from 206,3 % of GDP in 2020 to 193,3 % of GDP in 2021.

(15)

The macroeconomic scenario underpinning the budgetary projections in the 2022 Stability Programme is realistic for 2022 and favourable for 2023. The 2022 Stability Programme projects real GDP to grow by 3,1 % in 2022 and 4,8 % in 2023. By comparison, the Commission’s 2022 spring forecast projects higher real GDP growth of 3,5 % in 2022 and lower real GDP growth of 3,1 % in 2023. The difference between the forecasts is mainly driven by the different assumptions on the pace of absorption of Union funds as well as on the impact of the military aggression of Russia against Ukraine, particularly on private consumption. In its 2022 Stability Programme, the government expects that the headline deficit will decrease to 4,4 % of GDP in 2022 and to 1,4 % in 2023. The decrease in 2022 mainly reflects the ongoing recovery in economic activity and the unwinding of most emergency measures. According to the 2022 Stability Programme, the general government debt-to-GDP ratio is expected to decrease strongly to 180,2 % in 2022, and to decline to 168,6 % in 2023. Based on policy measures known at the cut-off date of the forecast, the Commission's 2022 spring forecast projects a government deficit for 2022 and 2023 of 4,3 % of GDP and 1,0 % respectively. This is broadly in line with the deficit projected in the 2022 Stability Programme. Notwithstanding the difference in real GDP growth, the Commission's 2022 spring forecast assumes more dynamic price and wage growth for both 2022 and 2023, thereby projecting higher revenues from personal income taxation. The Commission's 2022 spring forecast projects a higher general government debt-to-GDP ratio of 185,7 % in 2022 and 180,4 % in 2023. The difference is due to different estimation of differences between cash and accrual fiscal balances as well as different assumption on net accumulation of financial assets. According to the Commission's 2022 spring forecast, the current estimate of the medium-term (10-year-average) potential output growth is – 0,3 %. However, that estimate partially reflects the past period of deep economic recession experienced by Greece and does not include the impact of the reforms that are part of the recovery and resilience plan and can boost Greece’s potential growth.

(16)

In 2022, the government phased out the majority of measures taken in response to the COVID-19 crisis, such that the temporary emergency measures are projected to decline from 7,2 % of GDP in 2021 to 1,8 % in 2022. The government deficit is impacted by the measures adopted to counter the economic and social impact of the increase in energy prices, which in the Commission's 2022 spring forecast are estimated at 1,1 % of GDP in 2022 and no fiscal impact in 2023 as they are planned to be phased out (12). This impact on the deficit is partially offset by higher revenues from the emission allowances. Those measures mainly consist of subsidies to energy users, social transfers to poorer households and cuts to indirect taxes on transport services. Those measures have been announced as temporary. Following the submission of Greece’s Stability Programme and the cut-off date of the Commission's 2022 spring forecast, the government announced a new package of measures for 2022, which aim to address the consequences of increased energy prices. In the event that energy prices remain elevated in 2023, some of those measures could be continued. The government deficit is also impacted by the cost of offering temporary protection to displaced persons from Ukraine, which in the Commission's 2022 spring forecast is projected at 0,1 % of GDP in 2022 and 0,1 % in 2023 (13).

(17)

In its Recommendation of 18 June 2021, the Council recommended that in 2022 Greece should use the Recovery and Resilience Facility to finance additional investment in support of the recovery while pursuing a prudent fiscal policy. Moreover, it should preserve nationally financed investment. The Council also recommended Greece to pursue, when economic conditions allow, a fiscal policy aimed at achieving prudent medium-term fiscal positions and ensuring fiscal sustainability in the medium term and, at the same time, to enhance investment to boost growth potential.

(18)

In 2022, according to the Commission’s 2022 spring forecast and including the information incorporated in Greece’s 2022 Stability Programme, the fiscal stance is projected to be supportive at – 3,3 % of GDP (14). Greece plans to provide continued support to the recovery by making use of the Recovery and Resilience Facility to finance additional investment as recommended by the Council. The positive contribution to economic activity of expenditure financed by grants under the Recovery and Resilience Facility and other Union funds is projected to increase by 0,2 percentage points of GDP compared to 2021. Nationally financed investment is projected to provide an expansionary contribution to the fiscal stance of 0,8 percentage points in 2022 (15). Therefore, Greece plans to preserve nationally financed investment, as recommended by the Council. At the same time, the growth in nationally financed primary current expenditure (net of new revenue measures) in 2022 is projected to provide an expansionary contribution of 2,2 percentage points to the overall fiscal stance. That significant expansionary contribution includes the additional impact of the measures to address the economic and social impact of the increase in energy prices (0,6 % of GDP) as well as the costs to offer temporary protection to displaced persons from Ukraine (0,1 % of GDP), while the increased expenditure for pensions and social benefits is also projected to contribute (0,6 % of GDP) to the growth in net current expenditure. According to the Commission’s forecast, discretionary measures are not fully matched by offsetting measures.

(19)

In 2023, the fiscal stance is projected in the Commission's 2022 spring forecast at + 1,5 % of GDP on a no-policy-change assumption (16). Greece is projected to continue using the grants under the Recovery and Resilience Facility in 2023 to finance additional investment in support of the recovery. The positive contribution to economic activity of expenditure financed by grants under the Recovery and Resilience Facility and other Union funds is projected to decrease by 0,3 percentage points of GDP compared to 2022, reflecting the starting phase of the new programming period for other Union funds. Nationally financed investment is projected to provide an expansionary contribution to the fiscal stance of 0,6 percentage points in 2023 (17). At the same time, growth in nationally financed primary current expenditure (net of new revenue measures) in 2023 is projected to provide a contractionary contribution of 1,7 percentage points to the overall fiscal stance. This includes the impact from the phasing out of the measures addressing the increased energy prices of 1,1 % of GDP.

(20)

In the 2022 Stability Programme, the general government deficit is expected to gradually decline to 0,4 % of GDP in 2024 and to 0,1 % by 2025. Therefore, the general government deficit is planned to remain below 3 % of GDP over the Programme horizon. Those projections assume that the economic recovery will continue and factor in the prolongation of growth-friendly reductions in the solidarity surcharge applied on top of the personal income tax, and in the social solidarity contributions. According to the 2022 Stability Programme, the general government debt-to-GDP ratio is expected to decrease further, specifically with a decrease to 155,2 % in 2024, and a decline to 146,5 % in 2025. According to the Commission’s analysis, debt sustainability risks appear high over the medium term.

(21)

Building on reforms undertaken as part of the recovery and resilience plan, modifications in Greece’s tax policy framework could help address the investment gap. More specifically, the introduction of a wider advance tax-ruling system could strengthen legal certainty for investors and reinforce ongoing efforts to simplify the tax system. Further, building on best practice from other Member States, a review of the existing annual lump-sum tax on the self-employed (on top of personal income tax) could improve the structure of the tax burden on the self-employed, encourage voluntary tax compliance, and support investments. Greece is continuing to take steps to modernise its public administration, but its overall performance remains low, which is partially due to the challenge of attracting and maintaining high-calibre staff. The recovery and resilience plan contains measures aiming to improve the effectiveness of the public administration, with a particular focus on improving its digital services. Beyond the measures that are part of its recovery and resilience plan, Greece is progressing in setting up an integrated human resources management system with digital organisational charts for public-sector entities and job descriptions for all posts now in place. This is expected to facilitate the allocation of resources according to identified and prioritised needs. At the same time, while the number of permanent officials has been kept broadly stable thanks to the one-in-one-out hiring rule that remains in place, there has been a steep increase in temporary staff by nearly 25 % since 2018. The increase in the size of the public administration could reverse the efforts made to move Greece’s wage bill (compared to GDP) towards the Union average. Beyond the fiscal risk, given that the selection process for temporary posts is not as thorough as for permanent posts, this could weaken the integrity of the new selection process put in place for permanent civil servants. The continuation of the one-in-one-out hiring rule for permanent staff, which has been complemented by setting a ceiling for temporary staff that is being applied as of 2022, sets an overall framework for strengthening central control of hirings and enabling staffing numbers to move towards pre-pandemic levels.

If the expected reduction in overall staffing levels is realised, this could allow for remuneration levels to be adjusted for specific posts and entities deemed critical and where the public administration is facing difficulties in attracting and maintaining qualified staff. This could entail linking the job description to a supplementary wage grid or establishing a special wage grid for specific public sector entities (e.g. market regulators), as such systematic approaches would not risk undermining the unified wage grid and are consistent with prudent fiscal policy. Finally, while the recovery and resilience plan does include measures to strengthen active labour market policies, there remains scope for further action to increase the employability of young people and women, to support an inclusive labour market built on more and better jobs.

(22)

In accordance with Article 19(3), point (b), of Regulation (EU) 2021/241 and criterion 2.2 of Annex V to that Regulation, the recovery and resilience plan includes an extensive set of mutually reinforcing reforms and investments with an indicative timetable for implementation to be completed by 31 August 2026. These help address all or a significant subset of the economic and social challenges outlined in the country-specific recommendations addressed to Greece by the Council in the European Semester in 2019 and 2020, in addition to any country-specific recommendations issued up to the date of adoption of a recovery and resilience plan. In particular, those recommendations address the quality and sustainability of public finances; accessibility and resilience of the health system; active labour market policies; policies supporting public investment in education, skills and employability; research and development; safe, smart, sustainable and resilient transport and logistics; clean and efficient production and use of energy, including renewable energy and interconnection projects; environmental infrastructure; renewal of urban areas; and the digital transformation of the public administration and businesses. The recovery and resilience plan also includes a significant number of measures addressing challenges with regard to fiscal structural policies, social welfare, financial stability, labour and product markets, and the modernisation of public administration, all of which follow up, broaden and complement post-programme commitments. The recovery and resilience plan also contains measures to improve competitiveness and promote private investment by improving the business environment and simplifying the regulatory framework. Those reforms are complemented by a loan facility that is intended to incentivise private investment in transformative sectors of the economy, including the green transition and digital transformation.

(23)

The implementation of the recovery and resilience plan of Greece is expected to contribute to making further progress on the green and digital transitions. Measures supporting the climate objectives in Greece account for 37,5 % of the recovery and resilience plan’s total allocation, while measures supporting digital objectives account for 23,3 % of the recovery and resilience plan’s total allocation. The fully fledged implementation of the recovery and resilience plan, in line with the relevant milestones and targets, will help Greece swiftly recover from the fallout of the COVID-19 crisis, while strengthening its resilience. The systematic involvement of social partners and other relevant stakeholders remains important for the successful implementation of the recovery and resilience plan, as well as other economic and employment policies going beyond the recovery and resilience plan, to ensure broad ownership of the overall policy agenda.

(24)

Greece's recovery and resilience plan sets out a comprehensive management framework for coordinating, implementing and monitoring the investment and reform measures. However, the actual implementation of the recovery and resilience plan will crucially hinge on the administrative and implementation capacity of the implementing bodies and will need to be closely monitored. The technical services of the regional and local administration, including municipal companies, are expected to contribute to the implementation of a number of components, and their administrative capacity, in particular for the smaller municipalities, is usually limited and it would be important for additional support from the central level to be made available when needed. Respecting strict time schedules, reacting quickly to blockages and finding solutions will be critical for the smooth implementation of the recovery and resilience plan. A high-level inter-ministerial working group to address bottlenecks may be useful. Finally, in terms of overall coordination, the Recovery and Resilience Facility Agency, which is part of the Ministry of Finance, will have a key role, and sufficient resources are expected to be assigned to it, while the close collaboration of the Recovery and Resilience Facility Agency and the General Secretariat for Coordination (which is responsible for coordinating the reform measures) is essential.

(25)

The Commission approved the Partnership Agreement, provided for in Regulation (EU) 2021/1060 of the European Parliament and of the Council (18), of Greece on 29 July 2021. In October and November 2021 Greece submitted its 21 cohesion policy programmes to the Commission. In line with Regulation (EU) 2021/1060, Greece has taken into account the relevant country-specific recommendations in the programming of the 2021–2027 cohesion policy funds. This is a prerequisite for improving the effectiveness and maximising the added value of the financial support to be received from cohesion policy funds, while promoting coordination, complementarity and coherence between those cohesion policy funds and other Union instruments and funds. The successful implementation of the Recovery and Resilience Facility and cohesion policy programmes also depends on the removal of bottlenecks to investment to support the green and digital transitions and balanced territorial development.

(26)

Following its successful completion of the financial assistance programme under the European Stability Mechanism in 2018, Greece has been subject to enhanced surveillance in accordance with Regulation (EU) No 472/2013 of the European Parliament and of the Council (19). Enhanced surveillance has served to monitor the implementation of specific commitments given by Greece to the Eurogroup on 22 June 2018 to complete key structural reforms started under the programme. The implementation of those commitments, by agreed deadlines up to mid-2022, serves as a basis for debt relief; thus, Greece has entered the final year of that arrangement. As reported in the 14th enhanced surveillance report published on 23 May 2022, despite the difficult circumstances of the pandemic and more recently the economic impact of Russia’s military aggression against Ukraine, Greece has effectively implemented the bulk of the policy commitments, which has improved the resilience of the Greek economy and strengthened its financial stability. Nevertheless, some elements remain to be fully completed. This is particularly the case for completing the national cadastre, which would further improve Greece’s business climate. Progress has been significant in the past years, and the full cadastre is expected to be completed by December 2022. The implementation of the cadastre has been supported by Union Structural Funds. More recently, the Recovery and Resilience Facility provides support for digitalising registrations and deeds of property rights. In the context of the cadastre project, Greece also needs to finalise the cadastral mapping, the operationalisation of the cadastre agency, and the ratification of the forest maps covering the whole country.

(27)

Beyond the economic and social challenges addressed by the recovery and resilience plan, Greece faces a number of additional challenges related to healthcare. Out-of-pocket payments in Greece are still high and account for more than a third of total healthcare spending (35 %) (20). They are largely linked to pharmaceutical co-payments and direct payments for services outside the benefits package. In turn, this is linked to what is still relatively high (compared to the Union average) public spending on pharmaceuticals and to relatively low (compared to the Union average) spending on therapeutic care, especially on outpatients. A well-functioning primary healthcare system covering the whole population and with an effective gatekeeping function can increase efficiency and access to healthcare goods and services. In this respect, the full implementation of the amendments of the primary healthcare system that are expected to be adopted in the context of enhanced surveillance will be critical for a well-functioning healthcare system. The reform follows previous efforts to establish a comprehensive primary healthcare system, which have, however, encountered implementation challenges. To this end, expanding the stock of family doctors to achieve full population coverage and population registration will be key to ensuring adequate and equal access to healthcare for the population.

(28)

In response to the mandate by the Union Heads of State or Government set out in the Versailles Declaration, the Commission's proposal for a REPowerEU plan aims to phase out the Union’s dependence on fossil-fuel imports from Russia as soon as possible. For this purpose, the Commission intends to identify the most-suitable projects, investments and reforms at national, regional and Union level in dialogue with Member States. These measures aim to reduce overall reliance on fossil fuels, and shift fossil-fuel imports away from Russia.

(29)

According to 2020 data, oil and gas make up 50 % and 24 % of Greece’s energy mix, respectively. Greece’s dependency on Russia for both its oil (21) and gas imports is slightly below the Union average with 18 % compared to the Union average of 26 % for crude oil and 39 % compared to 44 % respectively for gas (22). 87 % of its coal imports come from Russia, but it domestically sources a large amount of lignite. To reduce its gas dependency from Russia and diversify its energy mix away from fossil fuels, including achieving its commitment to phase out of all lignite-based electricity production by 2028, a number of measures could be further pursued that build and go beyond the investments and reforms that are part of Greece’s recovery and resilience plan. Greece could accelerate the expansion of renewable energy and speed up the establishment of an organised market platform facilitating bilateral power purchasing agreements for renewable electricity. Permitting reforms included in Greece's recovery and resilience plan will reduce obstacles to investment in the renewable energy sector. There is scope for Greece to start developing hydrogen infrastructure, in particular in Greek ports, to facilitate the transport of hydrogen. Planned infrastructure investments by the network operators could be expedited and expanded in scope, in particular the installation of sub-stations. In addition, the average time needed by the network operators to process and finalise the terms of connection for new renewable energy installations could be reduced. Additional electricity interconnections with neighbouring countries would allow for increased renewable energy to be taken on by the grid. Greece needs to accelerate the diversification of gas routes by swiftly completing existing investments at an advanced phase.

New infrastructure and network investment related to gas is recommended to be future-proof where possible, in order to facilitate their long-term sustainability through future repurposing for sustainable fuels. Greece could also expand the scope and ambition of existing energy saving measures and reduce the high level of energy poverty (17,1 % in 2020), including by using cohesion policy funds, where appropriate, for example to renovate building stock. Existing market barriers limiting the scope of renovations for specific segments could be mitigated through targeted legislative and financial incentives. A further increase in ambition in respect of reducing greenhouse-gas emissions and increasing renewable energy and energy efficiency will be needed in order for Greece to be in line with the ‘Fit for 55’ objectives’. In addition, there is a need to speed up decarbonisation in the transport sector, which remains heavily reliant on oil, by promoting sustainable mobility, including public transport and railway projects.

(30)

While the acceleration of the transition towards climate neutrality and away from fossil fuels will create significant restructuring costs in several sectors, Greece can make use of the Just Transition Mechanism in the context of cohesion policy to alleviate the socioeconomic impact of the transition in the most-affected regions. In addition, Greece can make use of the European Social Fund Plus, established by Regulation (EU) 2021/1057 of the European Parliament and of the Council (23), to improve employment opportunities and strengthen social cohesion.

(31)

In the light of the Commission’s assessment, the Council has examined the 2022 Stability Programme and its opinion (24) is reflected in recommendation (1).

(32)

In view of the close interlinkages between the economies of euro-area Member States and their collective contribution to the functioning of the economic and monetary union, the Council recommended that the euro-area Member States take action, including through their recovery and resilience plans, to implement the recommendations set out in the 2022 Recommendation on the euro area. For Greece, this is reflected in particular in recommendations (1) and (2).

(33)

In the light of the Commission’s in-depth review and its assessment, the Council has examined the 2022 National Reform Programme and the 2022 Stability Programme. Its recommendations under Article 6 of Regulation (EU) No 1176/2011 are reflected in recommendations (1), (2) and (4). Recommendations (1) and (2) also contribute to the implementation of the 2022 Recommendation on the euro area, in particular the first, second and fourth euro-area recommendations. Fiscal policies referred to in recommendations (1) and (2) help address, inter alia, imbalances linked to the high government debt and the incomplete external rebalancing, while also facilitating addressing the high unemployment and low potential growth. Policies referred to in recommendation (4) help address, inter alia, vulnerabilities linked to high external debt in the longer term,

(1)

Regulation (EU) 2021/241 of the European Parliament and of the Council (3), which established the Recovery and Resilience Facility, entered into force on 19 February 2021. The Recovery and Resilience Facility provides financial support for the implementation of reforms and investment, entailing a fiscal impulse financed by the Union. It contributes to the economic recovery and to the implementation of sustainable and growth-enhancing reforms and investment, in particular to promote the green and digital transitions, while strengthening the resilience and potential growth of the Member States’ economies. It also helps strengthen sustainable public finances and boost growth and job creation in the medium and long term. The maximum financial contribution per Member State under the Recovery and Resilience Facility will be updated in June 2022, in line with Article 11(2) of Regulation (EU) 2021/241.

(2)

On 24 November 2021, the Commission adopted the Annual Sustainable Growth Survey, marking the start of the 2022 European Semester for economic policy coordination. It took due account of the Porto Social Commitment signed on 7 May 2021 to further implement the European Pillar of Social Rights proclaimed by the European Parliament, the Council and the Commission on 17 November 2017. The European Council endorsed the priorities of the 2022 Annual Sustainable Growth Survey on 25 March 2022. On 24 November 2021, on the basis of Regulation (EU) No 1176/2011, the Commission also adopted the Alert Mechanism Report, in which it identified Spain as one of the Member States for which an in-depth review would be needed. On the same date, the Commission also adopted a recommendation for a Council recommendation on the economic policy of the euro area and a proposal for the 2022 Joint Employment Report, which analyses the implementation of the Employment Guidelines and the principles of the European Pillar of Social Rights. The Council adopted the Recommendation on the economic policy of the euro area (4) (‘2022 Recommendation on the euro area’) on 5 April 2022 and the Joint Employment Report on 14 March 2022.

(3)

Russia’s invasion of Ukraine, in the wake of the global pandemic, has significantly altered the geopolitical and economic context. The impact of the invasion on Member States’ economies has been felt through, inter alia, higher prices for energy, food and raw materials, and weaker growth prospects. The higher energy prices weigh particularly heavily on the most vulnerable households experiencing or at risk of energy poverty as well as on firms most vulnerable to energy prices hikes. The Union is also seeing an unprecedented inflow of people fleeing Ukraine. The economic effects stemming from Russia’s war of aggression have impacted Member States asymmetrically. In this context, on 4 March 2022, Council Directive 2001/55/EC (5) was triggered for the first time by Council Implementing Decision (EU) 2022/382 (6), granting displaced persons from Ukraine the right to legally stay in the Union, as well as access to education and training, the labour market, healthcare, housing and social welfare.

(4)

Taking account of the rapidly changing economic and geopolitical situation, the European Semester resumes its broad economic and employment policy coordination in 2022, while evolving in line with the implementation requirements of the Recovery and Resilience Facility, as outlined in the 2022 Annual Sustainable Growth Survey. The implementation of the adopted recovery and resilience plans is essential for the delivery of the policy priorities under the European Semester, as the plans address all or a significant subset of the relevant country-specific recommendations issued in the 2019 and 2020 European Semester cycles. The 2019 and 2020 country-specific recommendations remain equally relevant also for the recovery and resilience plans revised, updated or amended in accordance with Articles 14, 18 and 21 of Regulation (EU) 2021/241, in addition to any other country-specific recommendations issued up to the date of submission of such revised, updated or amended recovery and resilience plans.

(5)

The general escape clause of the Stability and Growth Pact has been active since March 2020. In its communication of 3 March 2021 entitled ‘One year since the outbreak of COVID-19: fiscal policy response’, the Commission set out its view that the decision on the deactivation or continued application of the general escape clause should be taken as an overall assessment of the state of the economy, with the level of economic activity in the Union or euro area compared to pre-crisis levels (end of 2019) as a key quantitative criterion. Heightened uncertainty and strong downside risks to the economic outlook in the context of war in Europe, unprecedented energy price hikes and continued supply-chain disturbances warrant the extension of the general escape clause of the Stability and Growth Pact through 2023.

(6)

Following the approach in the Council Recommendation of 18 June 2021 (7) delivering a Council opinion on the 2021 Stability Programme of Spain, the overall fiscal stance is currently best measured as the change in primary expenditure (net of discretionary revenue measures and excluding temporary emergency measures related to the COVID-19 crisis) but including expenditure financed by non-repayable support (grants) from the Recovery and Resilience Facility and other Union funds, relative to medium-term potential growth (8). Going beyond the overall fiscal stance, in order to assess whether national fiscal policy is prudent and its composition is conducive to a sustainable recovery consistent with the green and digital transitions, attention is also paid to the evolution of nationally financed (9) primary current expenditure (net of discretionary revenue measures and excluding temporary emergency measures related to the COVID-19 crisis) and investment.

(7)

On 2 March 2022, the Commission adopted a communication providing broad guidance for fiscal policy in 2023 (‘the fiscal guidance’) aimed at supporting the preparation of Member States’ Stability and Convergence Programmes and thereby strengthening policy coordination. The Commission noted that, on the basis of the macroeconomic outlook of the 2022 winter forecast, transitioning from an aggregate supportive fiscal stance in 2020–2022 to a broadly neutral aggregate fiscal stance, while standing ready to react to the evolving economic situation, would appear appropriate in 2023. The Commission announced that the fiscal recommendations for 2023 should continue to differentiate between Member States and take into account possible cross-country spillovers. The Commission invited the Member States to reflect the guidance in their Stability and Convergence Programmes. The Commission committed to closely monitor the economic developments and adjust its policy guidance as needed and at the latest in its European Semester spring package of late May 2022.

(8)

With respect to the fiscal guidance, the fiscal recommendations for 2023 take into account the worsened economic outlook, the heightened uncertainty and further downside risks, and the higher inflation compared to the Commission’s 2022 winter forecast. Against these considerations, the fiscal response has to expand public investment for the green and digital transitions and energy security, and sustain the purchasing power of the most vulnerable households so as to cushion the impact of the energy price hike and help limit inflationary pressures from second-round effects via targeted and temporary measures. Fiscal policy has to remain agile so as to adjust to the rapidly evolving circumstances, including challenges that arise from Russia’s war of aggression against Ukraine with regard to defence and security, and has to differentiate between Member States according to their fiscal and economic situation, including as regards their exposure to the crisis and the inflow of displaced persons from Ukraine.

(9)

On 30 April 2021, Spain submitted its national recovery and resilience plan to the Commission, in accordance with Article 18(1) of Regulation (EU) 2021/241. Pursuant to Article 19 of Regulation (EU) 2021/241, the Commission assessed the relevance, effectiveness, efficiency and coherence of the recovery and resilience plan, in accordance with the assessment guidelines set out in Annex V to that Regulation. On 13 July 2021, the Council adopted its Implementing Decision on the approval of the assessment of the recovery and resilience plan for Spain (10). The release of instalments is conditional on the adoption of a decision by the Commission, in accordance with Article 24(5) of Regulation (EU) 2021/241, stating that Spain has satisfactorily fulfilled the relevant milestones and targets set out in the Council Implementing Decision. Satisfactory fulfilment presupposes that the achievement of preceding milestones and targets has not been reversed.

(10)

On 30 April 2022, Spain submitted its 2022 National Reform Programme and, on 29 April 2022, its 2022 Stability Programme, in line with the deadline established in Article 4 of Regulation (EC) No 1466/97. To take account of their interlinkages, the two programmes have been assessed together. In accordance with Article 27 of Regulation (EU) 2021/241, the 2022 National Reform Programme also reflects Spain’s biannual reporting on the progress made in implementing its recovery and resilience plan.

(11)

The Commission published the 2022 country report for Spain on 23 May 2022. It assessed Spain’s progress in addressing the relevant country-specific recommendations adopted by the Council in 2019, 2020 and 2021, and took stock of Spain’s implementation of the recovery and resilience plan, building on the recovery and resilience scoreboard. On the basis of that analysis, the country report identified gaps with respect to those challenges that are not addressed or only partially addressed by the recovery and resilience plan, as well as new and emerging challenges, including those emerging from Russia’s invasion of Ukraine. It also assessed Spain’s progress in implementing the European Pillar of Social Rights and in achieving the Union headline targets on employment, skills and poverty reduction, as well as progress in achieving the United Nations Sustainable Development Goals.

(12)

The Commission carried out an in-depth review under Article 5 of Regulation (EU) No 1176/2011 for Spain and published its results on 23 May 2022. The Commission concluded that Spain is experiencing imbalances. In particular, vulnerabilities relate to high external, government and private debt, in a context of high unemployment, and have cross-border relevance.

(13)

On 23 May 2022, the Commission issued a report under Article 126(3) of the Treaty. That report discussed the budgetary situation of Spain, as its general government deficit in 2021 exceeded the Treaty reference value of 3 % of gross domestic product (GDP). The report concluded that the deficit criterion was not fulfilled. In line with the communication of 2 March 2022, the Commission did not propose to open new excessive-deficit procedures in spring 2022 and will reassess whether it is necessary to propose the opening of such procedures in autumn 2022.

(14)

In its Recommendation of 20 July 2020 (11), the Council recommended Spain to take in 2020 and 2021 all necessary measures, in line with the general escape clause, to effectively address the COVID-19 pandemic, sustain the economy and support the ensuing recovery. It also recommended Spain to pursue, when economic conditions allow, fiscal policies aimed at achieving prudent medium-term fiscal positions and ensuring debt sustainability, while enhancing investment. In 2021, according to data validated by Eurostat, Spain’s general government deficit fell from 10,3 % of GDP in 2020 to 6,9 %. The fiscal policy response by Spain supported the economic recovery in 2021, while temporary emergency measures declined from 3,9 % of GDP in 2020 to 2,8 % in 2021. The measures taken by Spain in 2021 were in line with the Council Recommendation of 20 July 2020. The discretionary budgetary measures adopted by the government in 2020 and 2021 were mostly temporary or matched by offsetting measures. At the same time, some of the discretionary measures adopted by the government over the period 2020–2021 were not temporary or matched by offsetting measures, mainly consisting of current transfers to regions to cover new healthcare needs. According to data validated by Eurostat, general government debt fell from 120,0 % of GDP in 2020 to 118,4 % of GDP in 2021.

(15)

The macroeconomic scenario underpinning the budgetary projections in the 2022 Stability Programme is realistic. The government projects real GDP to grow by 4,3 % in 2022 and 3,5 % in 2023. By comparison, the Commission’s 2022 spring forecast projects a lower real GDP growth of 4,0 % in 2022 and 3,4 % in 2023. In its 2022 Stability Programme, the government expects that the headline deficit will decrease to 5,0 % of GDP in 2022 and to 3,9 % in 2023. The decrease in 2022 mainly reflects the strong growth in economic activity, the tax revenue increase and the unwinding of most emergency measures. According to the 2022 Stability Programme, the general government debt-to-GDP ratio is expected to decrease to 115,2 % in 2022, and to decline to 112,4 % in 2023. Based on policy measures known at the cut-off date of the forecast, the Commission’s 2022 spring forecast projects a government deficit for 2022 and 2023 of 4,9 % of GDP and 4,4 % respectively. This is in line with the deficit projected in the 2022 Stability Programme. The Commission’s 2022 spring forecast projects a similar general government debt-to-GDP ratio, of 115,1 % in 2022 and 113,7 % in 2023. The difference is partly due to the higher primary deficit projected for 2023. According to the Commission’s spring 2022 forecast, the medium-term (10-year average) potential output growth is estimated at 0,8 %. However, that estimate does not include the impact of the reforms that are part of the recovery and resilience plan and can boost Spain’s potential growth.

(16)

In 2022, the government phased out the majority of measures taken in response to the COVID-19 crisis, such that the temporary emergency measures are projected to decline from 2,8 % of GDP in 2021 to 0,4 % in 2022. The government deficit is impacted by the measures adopted to counter the economic and social impact of the increase in energy prices, which in the Commission’s 2022 spring forecast are estimated at 0,4 % of GDP in 2022 and 0,0 % of GDP in 2023 (12). Those measures mainly consist of social transfers to households, cuts to indirect taxes on energy consumption, subsidies to energy production and transfers to affected industries. Those measures have been announced as temporary. However, in the event that energy prices remain elevated in 2023 some of those measures could be continued. Some of those measures are not targeted, in particular the suspension of the tax on energy production or the reduction of the special tax on electricity. The government deficit is also impacted by the cost of offering temporary protection to displaced persons from Ukraine, which in the Commission’s 2022 spring forecast is projected at 0,1 % of GDP in 2022 and 0,1 % in 2023 (13).

(17)

In its Recommendation of 18 June 2021, the Council recommended that in 2022 Spain should use the Recovery and Resilience Facility to finance additional investment in support of the recovery while pursuing a prudent fiscal policy. Moreover, it should preserve nationally financed investment. The Council also recommended Spain to pursue, when economic conditions allow, a fiscal policy aimed at achieving prudent medium-term fiscal positions and ensuring fiscal sustainability in the medium term and, at the same time, to enhance investment to boost growth potential.

(18)

In 2022, according to the Commission’s 2022 spring forecast and including the information incorporated in its 2022 Stability Programme, the fiscal stance is projected to be supportive at – 2,2 % of GDP (14). Spain plans to provide continued support to the recovery by making use of the Recovery and Resilience Facility to finance additional investment as recommended by the Council. The positive contribution to economic activity of expenditure financed by grants under the Recovery and Resilience Facility and other Union funds is projected to increase by 0,9 percentage point of GDP compared to 2021. Nationally financed investment is projected to provide an expansionary contribution to the fiscal stance of 0,4 percentage point in 2022 (15). Therefore, Spain plans to preserve nationally financed investment, as recommended by the Council. At the same time, the growth in nationally financed primary current expenditure (net of new revenue measures) in 2022 is projected to provide an expansionary contribution of 1,2 percentage points to the overall fiscal stance. That significant expansionary contribution includes the additional impact of the measures to address the economic and social impact of the increase in energy prices (0,3 % of GDP) as well as the costs to offer temporary protection to displaced persons from Ukraine (0,1 % of GDP), while the higher increase in consumer prices compared to the GDP deflator is projected to affect the expansionary contribution of nationally financed primary current expenditure in 2022 by increasing spending on government consumption of goods and services. Based on the Commission’s forecast, those measures are not fully matched by offsetting measures.

(19)

In 2023, the fiscal stance is projected in the Commission’s 2022 spring forecast at 0,0 % of GDP on a no-policy change assumption (16). Spain is projected to continue using the grants under the Recovery and Resilience Facility in 2023 to finance additional investment in support of the recovery. The positive contribution to economic activity of expenditure financed by grants under the Recovery and Resilience Facility and other Union funds is projected to remain stable in 2023 compared to 2022. Nationally financed investment is projected to provide a contractionary contribution to the fiscal stance of 0,1 percentage point in 2023 (17). At the same time, the growth in nationally financed primary current expenditure (net of new revenue measures) in 2023 is projected to provide a broadly neutral contribution of + 0,1 percentage point to the overall fiscal stance. This includes the impact from the phasing out of the measures addressing the increased energy prices (0,4 % of GDP).

(20)

In the 2022 Stability Programme, the general government deficit is expected to gradually decline to 3,3 % of GDP in 2024 and to 2,9 % by 2025. Therefore, the general government deficit is planned to go below 3 % of GDP by 2025. According to the 2022 Stability Programme, the general government debt-to-GDP ratio is expected to decrease by 2025, specifically with a decrease to 110,8 % in 2024 and a further decline to 109,7 % in 2025. According to the Commission’s analysis, debt sustainability risks appear high over the medium term.

(21)

In accordance with Article 19(3), point (b), of Regulation (EU) 2021/241 and criterion 2.2 of Annex V to that Regulation, the recovery and resilience plan includes an extensive set of mutually reinforcing reforms and investments with an indicative timetable for implementation to be completed by 31 August 2026. These help address all or a significant subset of the economic and social challenges outlined in the country-specific recommendations addressed to Spain by the Council in the European Semester in 2019 and 2020, in addition to any country-specific recommendations issued up to the date of adoption of a recovery and resilience plan. In particular, the recovery and resilience plan is expected to contribute substantially to addressing the country-specific recommendations on promoting public and private investment to help the recovery. In doing so, it is expected to address the country-specific recommendations on investment in innovation and the digital and green transitions of the country. The recovery and resilience plan also includes measures to reduce the high share of temporary contracts in the private and public sectors and to reinforce active labour market policies. The recovery and resilience plan is expected to help address the existing fragmentation of unemployment assistance, which resulted in gaps. It is also expected to contribute to the provision of labour market-relevant skills and qualifications that are expected to accompany Spain’s green and digital transitions. Access to digital learning can be significantly boosted by the recovery and resilience plan through investment in devices and skills, but also by developing online courses. Educational outcomes may also improve as a result of investments at various stages of the education cycle. Measures in the recovery and resilience plan also have the potential to help address country-specific recommendations asking Spain to improve the coverage and adequacy of its minimum income schemes and family support. The recovery and resilience plan is also expected to strengthen public procurement frameworks and contribute to a better business environment. Moreover, measures in the recovery and resilience plan seeking a more effective public spending and tax system may contribute to fiscal sustainability.

(22)

The implementation of the recovery and resilience plan of Spain is expected to contribute to making further progress on the green and digital transitions. Measures supporting the climate objectives in Spain account for 40 % of the recovery and resilience plan’s total allocation, while measures supporting digital objectives account for 28 % of the recovery and resilience plan’s total allocation. The fully-fledged implementation of the recovery and resilience plan, in line with the relevant milestones and targets, will help Spain swiftly recover from the fallout of the COVID-19 crisis, while strengthening its resilience. The systematic involvement of social partners and other relevant stakeholders remains important for the successful implementation of the recovery and resilience plan, as well as other economic and employment policies going beyond the recovery and resilience plan, to ensure broad ownership of the overall policy agenda.

(23)

Spain has not yet formally submitted the Partnership Agreement or the other cohesion policy programmes provided for in Regulation (EU) 2021/1060 of the European Parliament and of the Council (18). In line with Regulation (EU) 2021/1060, Spain is to take into account the relevant country-specific recommendations in the programming of the 2021–2027 cohesion policy funds. This is a prerequisite for improving the effectiveness and maximising the added value of the financial support to be received from cohesion policy funds, while promoting coordination, complementarity and coherence between those cohesion policy funds and other Union instruments and funds. The successful implementation of the Recovery and Resilience Facility and cohesion policy programmes also depends on the removal of bottlenecks to investment to support the green and digital transitions and balanced territorial development.

(24)

Beyond the economic and social challenges addressed by the recovery and resilience plan, Spain faces a number of additional challenges related to accelerating the green transition, increasing energy interconnections, increasing the availability of social and affordable energy-efficient housing and promoting the circular economy. Policies to increase recycling rates and promote the circular economy can help limit the import of goods, contributing to improve external imbalances. In the medium and long run, meeting renewable and energy-efficiency targets and increasing energy interconnections can also be conducive to reducing dependence on fossil fuels and the high external debt.

(25)

Spain would benefit from further decoupling economic growth from resource use to meet more ambitious Union targets, including the ‘Fit for 55’ package. In this regard, the country’s recycling rate for municipal waste and circular material use rate fall below the Union average, while the share of waste being landfilled is well above it. Sustained coordination across different levels of government and additional investment can help Spain meet separate collection and recycling obligations. Achieving recycling targets has been cascaded downwards to lower levels of government. However, instruments to enforce them may not be sufficiently effective. Hence, additional reforms could reinforce coordination between the different levels of government, including for a common interpretation of provisions and for the planning and use of waste treatment infrastructure. Further support from the Technical Support Instrument, established by Regulation (EU) 2021/240 of the European Parliament and of the Council (19), can help spread best practice. Additional investments to strengthen Spain’s recycling capacity may be warranted, including to promote the circular economy in specific sectors. Moreover, innovation and investment to promote the circular economy are key to ensuring higher resource efficiency. Spain also suffers from water scarcity and needs to develop further the potential of water reuse, including from a circular economy perspective.

(26)

In response to the mandate by the Union Heads of State or Government set out in the Versailles Declaration, the Commission’s proposal for a REPowerEU plan aims to phase out the Union’s dependence on fossil-fuel imports from Russia as soon as possible. For this purpose, the Commission intends to identify the most-suitable projects, investments and reforms at national, regional and Union level in dialogue with Member States. These measures aim to reduce overall reliance on fossil fuels and shift fossil-fuel imports away from Russia.

(27)

According to 2020 data (20), Spain’s dependence on Russia is at 2 % for oil and 10 % for gas, well below Union averages (26 % and 44 %, respectively). Spain’s dependence on Russian coal is similar to the rest of the Union (55 %), but in a context where the share of solid fossil fuels in the energy mix (2,8 %) is much lower than the Union average. Although it has limited exposure to Russian oil and gas, the current geopolitical situation and high energy prices increase the urgency for Spain to further step up its efforts to meet the renewables targets laid down in its National Energy and Climate Plan. Building on the National Energy and Climate Plan, additional measures to support renewable deployment (with a focus on decentralised installations and self-consumption, including by further streamlining permitting procedures and improving access to the grid) and complementary investment (in storage, network infrastructure, electrification of buildings and transport, and renewable hydrogen) can help further decarbonise the economy, including industry, transport and housing, and reduce both reliance on fossil fuels and exposure to international prices.

The effective integration of Spain into the single energy market requires increasing its energy interconnections. In particular, further electricity interconnections with neighbouring countries could support greater integration of renewable capacity of the Iberian Peninsula in the single energy market. Additional cross-border hydrogen-ready gas infrastructure may further contribute to diversify gas supply in the Union internal market and help tap into the long-term potential for renewable hydrogen. New infrastructure and network investments related to gas are recommended to be future-proof where possible, in order to facilitate their long-term sustainability through future repurposing for sustainable fuels.

(28)

Further progress in decentralised renewable energy production and deep renovations in both residential and non-residential buildings, particularly in mid-size cities, could be achieved by putting in place appropriate financing schemes, upskilling and training of workers in the construction sector, awareness raising campaigns and technical assistance to support the use of grants and financial instruments for renovations. Also, deploying additional energy efficient social and affordable housing, in particular in areas with pronounced shortages and stressed markets, could be helpful for containing energy consumption, more decisively addressing the green transition and supporting vulnerable households. A further increase in ambition in respect of reducing greenhouse-gas emissions and increasing renewable energy and energy efficiency will be needed in order for Spain to be in line with the ‘Fit for 55’ objectives.

(29)

While the acceleration of the transition towards climate neutrality and away from fossil fuels will create significant restructuring costs in several sectors, Spain can make use of the Just Transition Mechanism in the context of cohesion policy to alleviate the socioeconomic impact of the transition on the most-affected regions. In addition, Spain can make use of the European Social Fund Plus, established by Regulation (EU) 2021/1057 of the European Parliament and of the Council (21), to improve employment opportunities and strengthen social cohesion.

(30)

In the light of the Commission’s assessment, the Council has examined the 2022 Stability Programme and its opinion (22) is reflected in recommendation (1).

(31)

In view of the close interlinkages between the economies of euro-area Member States and their collective contribution to the functioning of the economic and monetary union, the Council recommended that the euro-area Member States take action, including through their recovery and resilience plans, to implement the recommendations set out in the 2022 Recommendation on the euro area. For Spain, this is reflected in particular in recommendations (1) and (2).

(32)

In the light of the Commission’s in-depth review and its assessment, the Council has examined the 2022 National Reform Programme and the 2022 Stability Programme. Its recommendations under Article 6 of Regulation (EU) No 1176/2011 are reflected in recommendations (1), (2) and (4). Recommendations (1) and (2) also contribute to the implementation of the 2022 Recommendation on the euro area, in particular the first and fourth euro-area recommendations. Fiscal policies referred to in recommendation (1) help address, inter alia, imbalances linked to high government debt. Policies referred to in recommendation (2) help inter alia the reduction of government, private, and external debt as the full implementation of the recovery and resilience plan will support growth while strengthening the resilience of the economy. Policies referred to in recommendation (4) help address, inter alia, vulnerabilities linked to high external debt in the longer term, in a context of high unemployment,

(1)

Regulation (EU) 2021/241 of the European Parliament and of the Council (2), which established the Recovery and Resilience Facility, entered into force on 19 February 2021. The Recovery and Resilience Facility provides financial support for the implementation of reforms and investment, entailing a fiscal impulse financed by the Union. It contributes to the economic recovery and to the implementation of sustainable and growth-enhancing reforms and investment, in particular to promote the green and digital transitions, while strengthening the resilience and potential growth of the Member States’ economies. It also helps strengthen sustainable public finances and boost growth and job creation in the medium and long term. The maximum financial contribution per Member State under the Recovery and Resilience Facility will be updated in June 2022, in line with Article 11(2) of Regulation (EU) 2021/241.

(2)

On 24 November 2021, the Commission adopted the Annual Sustainable Growth Survey, marking the start of the 2022 European Semester for economic policy coordination. It took due account of the Porto Social Commitment signed on 7 May 2021 to further implement the European Pillar of Social Rights, proclaimed by the European Parliament, the Council and the Commission on 17 November 2017. The European Council endorsed the priorities of the 2022 Annual Sustainable Growth Survey on 25 March 2022. On 24 November 2021, on the basis of Regulation (EU) No 1176/2011, the Commission also adopted the Alert Mechanism Report, in which it identified France as one of the Member States for which an in-depth review would be needed. On the same date, the Commission also adopted a recommendation for a Council recommendation on the economic policy of the euro area and a proposal for the 2022 Joint Employment Report, which analyses the implementation of the Employment Guidelines and the principles of the European Pillar of Social Rights. The Council adopted the Recommendation on the economic policy of the euro area (3) (‘2022 Recommendation on the euro area’) on 5 April 2022 and the Joint Employment Report on 14 March 2022.

(3)

Russia’s invasion of Ukraine, in the wake of the global pandemic, has significantly altered the geopolitical and economic context. The impact of the invasion on Member States’ economies has been felt through, inter alia, higher prices for energy, food and raw materials, and weaker growth prospects. The higher energy prices weigh particularly heavily on the most vulnerable households experiencing or at risk of energy poverty as well as on firms most vulnerable to energy prices hikes. The Union is also seeing an unprecedented inflow of people fleeing Ukraine. The economic effects stemming from Russia’s war of aggression have impacted Member States asymmetrically. In this context, on 4 March 2022, Council Directive 2001/55/EC (4) was triggered for the first time by Council Implementing Decision (EU) 2022/382 (5), granting displaced persons from Ukraine the right to legally stay in the Union, as well as access to education and training, the labour market, healthcare, housing and social welfare.

(4)

Taking account of the rapidly changing economic and geopolitical situation, the European Semester resumes its broad economic and employment policy coordination in 2022, while evolving in line with the implementation requirements of the Recovery and Resilience Facility, as outlined in the 2022 Annual Sustainable Growth Survey. The implementation of the adopted recovery and resilience plans is essential for the delivery of the policy priorities under the European Semester, as the plans address all or a significant subset of the relevant country-specific recommendations issued in the 2019 and 2020 European Semester cycles. The 2019 and 2020 country-specific recommendations remain equally relevant also for recovery and resilience plans revised, updated or amended in accordance with Articles 14, 18 and 21 of Regulation (EU) 2021/241, in addition to any other country-specific recommendations issued up to the date of submission of such revised, updated or amended recovery and resilience plans.

(5)

The general escape clause of the Stability and Growth Pact has been active since March 2020. In its communication of 3 March 2021 entitled ‘One year since the outbreak of COVID-19: fiscal policy response’, the Commission set out its view that the decision on the deactivation or continued application of the general escape clause should be taken as an overall assessment of the state of the economy, with the level of economic activity in the Union or euro area compared to pre-crisis levels (end of 2019) as a key quantitative criterion. Heightened uncertainty and strong downside risks to the economic outlook in the context of war in Europe, unprecedented energy price hikes and continued supply-chain disturbances warrant the extension of the general escape clause of the Stability and Growth Pact through 2023.

(6)

Following the approach in the Council Recommendation of 18 June 2021 (6) delivering a Council opinion on the 2021 Stability Programme of France, the overall fiscal stance is currently best measured as the change in primary expenditure (net of discretionary revenue measures and excluding temporary emergency measures related to the COVID-19 crisis) but including expenditure financed by non-repayable support (grants) from the Recovery and Resilience Facility and other Union funds, relative to medium-term potential growth (7). Going beyond the overall fiscal stance, in order to assess whether national fiscal policy is prudent and its composition is conducive to a sustainable recovery consistent with the green and digital transitions, attention is also paid to the evolution of nationally financed (8) primary current expenditure (net of discretionary revenue measures and excluding temporary emergency measures related to the COVID-19 crisis) and investment.

(7)

On 2 March 2022, the Commission adopted a communication providing broad guidance for fiscal policy in 2023 (‘the fiscal guidance’) aimed at supporting the preparation of Member States’ Stability and Convergence Programmes and thereby strengthening policy coordination. The Commission noted that, on the basis of the macroeconomic outlook of the 2022 winter forecast, transitioning from an aggregate supportive fiscal stance in 2020–2022 to a broadly neutral aggregate fiscal stance, while standing ready to react to the evolving economic situation, would appear appropriate in 2023. The Commission announced that the fiscal recommendations for 2023 should continue to differentiate between Member States and take into account possible cross-country spillovers. The Commission invited the Member States to reflect the guidance in their Stability and Convergence Programmes. The Commission committed to closely monitor the economic developments and adjust its policy guidance as needed and at the latest in its European Semester spring package of late May 2022.

(8)

With respect to the fiscal guidance, the fiscal recommendations for 2023 take into account the worsened economic outlook, the heightened uncertainty and further downside risks, and the higher inflation compared to the Commission’s 2022 winter forecast. Against these considerations, the fiscal response has to expand public investment for the green and digital transitions and energy security, and sustain the purchasing power of the most vulnerable households so as to cushion the impact of the energy price hike and help limit inflationary pressures from second-round effects via targeted and temporary measures. Fiscal policy has to remain agile so as to adjust to the rapidly evolving circumstances, including challenges that arise from Russia’s war of aggression against Ukraine with regard to defence and security, and has to differentiate between Member States according to their fiscal and economic situation, including as regards their exposure to the crisis and the inflow of displaced persons from Ukraine.

(9)

On 28 April 2021, France submitted its national recovery and resilience plan to the Commission, in accordance with Article 18(1) of Regulation (EU) 2021/241. Pursuant to Article 19 of Regulation (EU) 2021/241, the Commission assessed the relevance, effectiveness, efficiency and coherence of the recovery and resilience plan, in accordance with the assessment guidelines set out in Annex V to that Regulation. On 13 July 2021, the Council adopted its Implementing Decision on the approval of the assessment of the recovery and resilience plan for France (9). The release of instalments is conditional on the adoption of a decision by the Commission, in accordance with Article 24(5) of Regulation (EU) 2021/241, stating that France has satisfactorily fulfilled the relevant milestones and targets set out in the Council Implementing Decision. Satisfactory fulfilment presupposes that the achievement of preceding milestones and targets has not been reversed.

(10)

On 4 May 2022, France submitted its 2022 National Reform Programme. It did not submit its Stability Programme. In accordance with Article 27 of Regulation (EU) 2021/241, the 2022 National Reform Programme also reflects France’s biannual reporting on the progress made in implementing its recovery and resilience plan.

(11)

The Commission published the 2022 country report for France on 23 May 2022. It assessed France’s progress in addressing the relevant country-specific recommendations adopted by the Council in 2019, 2020 and 2021, and took stock of France’s implementation of the recovery and resilience plan, building on the recovery and resilience scoreboard. On the basis of that analysis, the country report identified gaps with respect to those challenges that are not addressed or only partially addressed by the recovery and resilience plan, as well as new and emerging challenges, including those emerging from Russia’s invasion of Ukraine. It also assessed France's progress in implementing the European Pillar of Social Rights and in achieving the Union headline targets on employment, skills and poverty reduction, as well as progress in achieving the United Nations Sustainable Development Goals.

(12)

The Commission carried out an in-depth review under Article 5 of Regulation (EU) No 1176/2011 for France and published its results on 23 May 2022. The Commission concluded that France is experiencing macroeconomic imbalances. In particular, vulnerabilities relate to high government debt and weak competitiveness, which have cross-border relevance, in a context of low productivity growth.

(13)

On 23 May 2022, the Commission issued a report under Article 126(3) of the Treaty. That report discussed the budgetary situation of France, as its general government deficit in 2021 exceeded the Treaty reference value of 3 % of gross domestic product (GDP), while its general government debt exceeded the 60 %-of-GDP Treaty reference value and did not respect the debt-reduction benchmark. The report concluded that the deficit and debt criteria were not fulfilled. In line with the communication of 2 March 2022, the Commission considered, within its assessment of all relevant factors, that compliance with the debt-reduction benchmark would involve an overly demanding frontloaded fiscal effort that could jeopardise growth. Therefore, in the view of the Commission, compliance with the debt-reduction benchmark is not warranted under the current exceptional economic conditions. As announced, the Commission did not propose to open new excessive-deficit procedures in spring 2022 and will reassess whether it is necessary to propose the opening of such procedures in autumn 2022.

(14)

In its Recommendation of 20 July 2020 (10), the Council recommended France to take in 2020 and 2021 all necessary measures, in line with the general escape clause, to effectively address the COVID-19 pandemic, sustain the economy and support the ensuing recovery. It also recommended France to pursue, when economic conditions allow, fiscal policies aimed at achieving prudent medium-term fiscal positions and ensuring debt sustainability, while enhancing investment. In 2021, according to data validated by Eurostat, France’s general government deficit fell from 8,9 % of GDP in 2020 to 6,5 %. The fiscal policy response by France supported the economic recovery in 2021, while temporary emergency measures declined from 3,3 % of GDP in 2020 to 2,6 % in 2021. The measures taken by France in 2021 were in line with the Council Recommendation of 20 July 2020. The discretionary budgetary measures adopted by the government in 2020 and 2021 were mostly temporary or matched by offsetting measures. At the same time, some of the discretionary measures adopted by the government over the period 2020 to 2021 were not temporary or matched by offsetting measures, mainly consisting of a permanent reduction in taxes on production as of 2021 and the increase of civil servant wages, mainly in the healthcare system. According to data validated by Eurostat, general government debt fell from 114,6 % of GDP in 2020 to 112,9 % of GDP in 2021.

(15)

Based on policy measures known at the cut-off date of the forecast, the Commission’s 2022 spring forecast projects a government deficit for 2022 and 2023 of 4,6 % of GDP and 3,2 % respectively. The Commission’s 2022 spring forecast projects a general government debt-to-GDP ratio of 111,2 % in 2022 and 109,1 % in 2023. According to the Commission’s analysis, debt sustainability risks appear high over the medium term. According to the Commission’s spring 2022 forecast, the medium-term (10-year average) potential output growth is estimated at 1,0 %. However, that estimate does not include the impact of the reforms that are part of the recovery and resilience plan and can boost France’s potential growth.

(16)

In 2022, the government phased out the majority of measures taken in response to the COVID-19 crisis, such that the temporary emergency measures are projected to decline from 2,6 % of GDP in 2021 to 0,4 % in 2022. The government deficit is impacted by the measures adopted to counter the economic and social impact of the increase in energy prices, which in the Commission’s 2022 spring forecast are estimated at 0,7 % of GDP in 2022 and are expected to be phased out in 2023 (11). Those measures mainly consist of social transfers to poorer households, cuts to indirect taxes on energy consumption, price caps on retail and wholesale prices, subsidies to energy-intensive enterprises. Those measures have been announced as temporary. However, in the event that energy prices remain elevated in 2023, some of those measures could be continued. Some of those measures are not targeted, in particular the general price cap on electricity and gas prices as well as an outright subsidised discount on fuels. The government deficit is also impacted by the cost of offering temporary protection to displaced persons from Ukraine, which in the Commission’s 2022 spring forecast is projected at 0,1 % of GDP in 2022 and 0,1 % in 2023 (12).

(17)

In its Recommendation of 18 June 2021, the Council recommended that in 2022 France should use the Recovery and Resilience Facility to finance additional investment in support of the recovery while pursuing a prudent fiscal policy. Moreover, it should preserve nationally financed investment. The Council also recommended France to pursue, when economic conditions allow, a fiscal policy aimed at achieving prudent medium-term fiscal positions and ensuring fiscal sustainability in the medium term and, at the same time, to enhance investment to boost growth potential.

(18)

In 2022, according to the Commission’s 2022 spring forecast, the fiscal stance is projected to be supportive at – 1,7 % of GDP (13). France plans to provide continued support to the recovery by making use of the Recovery and Resilience Facility to finance additional investment as recommended by the Council. The positive contribution to economic activity of expenditure financed by grants under the Recovery and Resilience Facility and other Union funds is projected to decrease by 0,2 percentage point of GDP compared to 2021. This decrease in 2022 is due to the frontloaded financial support from the Recovery and Resilience Facility in 2021. Nationally financed investment is projected to provide a neutral contribution to the fiscal stance in 2022 (14). Therefore, France plans to preserve nationally financed investment, as recommended by the Council. At the same time, the growth in nationally financed primary current expenditure (net of new revenue measures) in 2022 is projected to provide an expansionary contribution of 1,6 percentage points to the overall fiscal stance. That significant expansionary contribution includes the additional impact of the measures to address the economic and social impact of the increase in energy prices (0,5 % of GDP) as well as the costs to offer temporary protection to displaced persons from Ukraine (0,1 % of GDP).

Other current expenditure measures include those put forward in the recovery and resilience plan to address the economic consequences of the conflict in Ukraine, such as direct subsidies to ad hoc sectors (0,1 % of GDP), and the increase of civil servant wages (0,1 % of GDP). On the revenue side, the cut in the corporate income tax rate (0,1 % of GDP) and of the housing taxes (0,1 % of GDP) are also projected to contribute to the expansionary fiscal stance. The higher increase in consumer prices compared to the GDP deflator is projected to affect the expansionary contribution of nationally financed primary current expenditure in 2022 by increasing public consumption and social benefits. According to the Commission’s 2022 spring forecast, those measures and drivers of higher expenditure are not fully matched by offsetting measures.

(19)

In 2023, the fiscal stance is projected in the Commission’s 2022 spring forecast at + 0,9 % of GDP on a no-policy change assumption (15). France is projected to continue using the grants under the Recovery and Resilience Facility in 2023 to finance additional investment in support of the recovery. The positive contribution to economic activity of expenditure financed by grants under the Recovery and Resilience Facility and other Union funds is projected to decrease by 0,1 percentage point of GDP compared to 2022, reflecting the frontloaded financial support from the Recovery and Resilience Facility in 2021 and 2022. Nationally financed investment is projected to provide a neutral contribution to the fiscal stance in 2023 (16). At the same time, the growth in nationally financed primary current expenditure (net of new revenue measures) in 2023 is projected to provide a contractionary contribution of 0,7 percentage point to the overall fiscal stance. This includes the impact from the phasing out of the measures addressing the increased energy prices (0,7 % of GDP). Therefore, the contractionary contribution of nationally financed current expenditure relies on the phasing out of the measures to address the impact of the increase in energy prices as currently planned.

(20)

The current pension system in France is complex, consisting of more than 40 co-existing schemes. These schemes apply to different groups of workers and functions according to different sets of rules. Based on Eurostat data, at 14,6 % of GDP in 2019, public pension expenditure in France was the third highest in the Union. The high cost is related to a relatively high replacement ratio (i.e. pension compared to final annual wages), life expectancy, a relatively early effective retirement age (around 62 years) and an elevated number of pension beneficiaries out of the total population. According to both the Commission 2021 Ageing report and the latest annual report by France’s Pensions Advisory Council (Conseil d’orientation des retraites), after some decline projected until 2024, pension expenditures are projected to increase moderately between 2025 and around 2030, by about 0,2 percentage point of GDP. High total public expenditure, with pension expenditure being one of the main items, contributes to the accumulation of public debt despite a heavy tax burden, leading France to face high fiscal sustainability risks over the medium term. Over the longer term, pension expenditure would start declining steadily until 2070, mainly due to the indexation of pension benefits to inflation, which offsets the effect of the increase in the dependency ratio due to ageing. The simplification of the pension system, by unifying the different regimes, would help improve its transparency and fairness, while entailing positive effects on labour mobility and the efficiency of labour allocation, and could underpin fiscal sustainability. In 2018, the French government initiated a reform process with the objective of unifying the rules of the multiple pension regimes. The reform was halted with the outbreak of the COVID-19 pandemic. In presenting the objectives of the French recovery and resilience plan, the government confirmed its commitment to pursue an ambitious reform of the pension system, aiming to improve its fairness and sustainability.

(21)

In accordance with Article 19(3), point (b), of Regulation (EU) 2021/241 and criterion 2.2 of Annex V to that Regulation, the recovery and resilience plan includes an extensive set of mutually reinforcing reforms and investments with an indicative timetable for implementation to be completed by 31 August 2026. These help address all or a significant subset of the economic and social challenges outlined in the country-specific recommendations addressed to France by the Council in the European Semester in 2019 and 2020, in addition to any country-specific recommendations issued up to the date of adoption of a recovery and resilience plan. The implementation of the French recovery and resilience plan is well underway. France’s first payment request was positively assessed by the Commission, taking into account the opinion of the Economic and Financial Committee, leading to a disbursement of EUR 7,4 billion in financial support (net of pre-financing) on 4 March 2022. The related 38 milestones and targets cover reforms in the areas of public finance, the labour market, health and long-term care. Investment has been made in energy efficiency of buildings (public, private, and social housing), sustainable transport (purchasing clean vehicles), decarbonising industry, youth employment and education. Several research strategies in key green and digital technologies were validated and calls for projects will be launched in 2022 and 2023.

(22)

The implementation of the recovery and resilience plan of France is expected to contribute to making further progress on the green and digital transitions. Measures supporting the climate objectives in France account for 46,0 % of the recovery and resilience plan’s total allocation (with major investment in energy renovation of buildings), while measures supporting digital objectives account for 21,3 % of the recovery and resilience plan’s total allocation. The fully fledged implementation of the recovery and resilience plan, in line with the relevant milestones and targets, will help France swiftly recover from the fallout of the COVID-19 crisis, while strengthening its resilience. The systematic involvement of social partners and other relevant stakeholders remains important for the successful implementation of the recovery and resilience plan, as well as other economic and employment policies going beyond the recovery and resilience plan, to ensure broad ownership of the overall policy agenda.

(23)

The Commission approved the Partnership Agreement, provided for in Regulation (EU) 2021/1060 of the European Parliament and of the Council (17), of France on 2 June 2022. France submitted most of the cohesion policy programmes before 17 March 2022. In line with Regulation (EU) 2021/1060, France is to take into account the relevant country-specific recommendations in the programming of the 2021–2027 cohesion policy funds. This is a prerequisite for improving the effectiveness and maximising the added value of the financial support to be received from cohesion policy funds, while promoting coordination, complementarity and coherence between those cohesion policy funds and other Union instruments and funds. The successful implementation of the Recovery and Resilience Facility and cohesion policy programmes also depends on the removal of bottlenecks to investment to support the green and digital transitions and balanced territorial development.

(24)

Beyond the economic and social challenges addressed by the recovery and resilience plan, France faces a number of additional challenges related to the shortage of skills and the deployment of renewable energy. Enhancing the skills of workers would contribute to increasing labour productivity and consequently to improving the overall competitiveness of the French economy.

(25)

Labour shortages are on the rise and employers report the lack of skilled workers as the main barrier to recruitment in more than 50 % of cases, in particular for jobs requiring technical skills, such as those needed for the green and digital transitions (industry, construction). Current investment in the upskilling and reskilling of workers takes time to pay off and its effectiveness could be undermined by the low level of basic skills of more than one fifth of 15-year-old pupils, who then tend to benefit less from training later on in life. Low performance in mathematics (with French pupils scoring lowest among the 22 participating Member States in Trends in International Results in Mathematics and Science in Grade 4 (TIMSS) 2019) and science is of specific concern, given the shortages of technical skills. In addition, evaluations indicate that the low-skilled tend to benefit less from training that leads to a qualification.

(26)

Despite good outcomes overall, high socioeconomic inequalities and territorial disparities in the French education system impact the level of basic skills. According to the Programme for International Student Assessment (PISA), France is one of the Member States where socioeconomic background most influences pupils’ performance. Indicators show that 35,3 % of disadvantaged 15-year-olds and 44,5 % of first-generation migrant pupils do not have sufficient basic skills in reading, compared to 20,9 % on average. To address this issue, in 2017 France introduced a pilot reform consisting of ‘halving class sizes’ in early years of education for students in priority areas, to enable pupils to benefit from more personalised support in an atmosphere conducive to learning. In 2021, the French Court of Auditors highlighted shortcomings in the school system, especially impacting the learning outcomes of disadvantaged pupils, and called for greater autonomy and evaluation of schools. Lower rates of participation in continuous training by teachers and high student-to-teacher ratios may exacerbate socioeconomic inequalities. Science teachers working in disadvantaged areas tend to have lower levels of certification to a larger extent than in other Member States. The 2018 reforms of the vocational education and training systems, including apprenticeship, as well as significant incentives for employers, boosted the number of apprentices, with a positive impact on employment rates for graduates.

(27)

In response to the mandate by the Union Heads of State or Government set out in the Versailles Declaration, the Commission’s proposal for a REPowerEU plan aims to phase out the Union’s dependence on fossil-fuel imports from Russia as soon as possible. For this purpose, the Commission intends to identify the most-suitable projects, investments and reforms at national, regional and Union level in dialogue with Member States. These measures aim to reduce overall reliance on fossil fuels and shift fossil-fuel imports away from Russia.

(28)

According to 2020 data (18), France’s import dependency on Russian oil, gas and coal is 9 %, 17 % and 34 % respectively, below the EU-27 average. France has a more limited exposure to Russian fossil fuels than the Union average in large part because the French energy mix relies chiefly on nuclear energy (40,6 % of its gross inland energy consumption). The weight of fossil fuels in the energy mix is lower than the EU-27 average: oil, gas and solid fossil fuels (including coal) represent 28,6 %, 15,4 % and 2,3 % of gross inland energy consumption respectively in France. In addition, France has 4 LNG terminals, allowing for a more diversified source of gas imports. Nevertheless, the current geopolitical situation and high energy prices are increasing the urgency for France to further step up its efforts to meet renewable energy targets laid down in its national energy and climate plan. Renewable energy represented 19,1 % of France’s gross final energy consumption in 2020, below the target of 23 % set in its national energy and climate plan. A further increase in ambition in respect of reducing greenhouse-gas emissions and increasing renewables and energy efficiency will be needed in order for France to be in line with the ‘Fit for 55’ objectives. The rapid decarbonisation of industrial processes and building heating can be helped by increased public support for technologies such as small- and large-scale heat pumps and geothermal energy, including support for district heating networks, as well as the faster deployment of sustainable anaerobic digestion (‘méthanisation’) and other technologies linked to the sustainable production of sustainable biogases such as biomethane. Such investment would also help reduce dependence on natural gas imports from Russia. An accelerated phase-out of remaining fossil fuel subsidies would improve the competitiveness of renewable energy compared to fossil fuel alternatives. Investment in renewable energy, both utility-scaled and decentralised, can also strengthen macroeconomic resilience and competitiveness by increasing energy security and innovation in the energy sector.

(29)

The deployment of utility-scale renewable energy projects in France, in particular onshore and offshore wind farms and solar photovoltaic projects, suffers from restrictive regulation and high administrative and permitting barriers. Under-investment in the electricity grid at national level has also led to a scarcity of access points, increasing grid connection costs and delays in grid connection that can currently last up to several months. Onshore wind farms are not permitted to be built within 5–30 km of surrounding meteorological, military and civil aviation radars, leading to some 45 % of new projects struggling to find suitable locations. Procedures should be improved to avoid safety-related military obstructions at a very late stage of a project’s development. An approval process involving national, regional and local administrations means that frequent requests for updating urban planning documents must be reflected in lower-level documents as well, generating additional administrative burdens. The permitting process could be accelerated by allocating to it more human and financial resources in central administrations at regional levels (i.e. for decentralised State services) as well as competent authorities and grid operators, closer involvement of regional and local administrations in spatial planning, and swifter application of tendering procedures. Reinforcing mechanisms for public participation and decentralisation would reduce third-party complaints, a source of major delays in commissioning new projects. A stable regulatory framework at national level would provide more investor certainty, particularly for longer-term planning.

(30)

Boosting energy efficiency and reducing energy consumption will help reduce emissions and reliance on fossil fuels. In France, the construction and use of buildings represents 25 % of all greenhouse-gas emissions. The recovery and resilience plan dedicates a full component to energy renovation for buildings, helping tackle associated challenges with a broad, cross-cutting approach. Measures cover all types of buildings, with a priority for public buildings, but also significant action to renovate the private building stock and social housing, and to increase the energy efficiency of small businesses. In the context of its national resilience and recovery plan, France is reinforcing the support mechanisms for renewable heating in buildings, e.g. by increasing the ‘heat fund’ by EUR 150 million and the subsidy for installing renewables-based heating by EUR 1 000. The French National Low-Carbon Strategy (Stratégie Nationale Bas Carbone) defines an ambitious trajectory to reduce emissions from buildings and achieve complete decarbonisation of the energy consumed in buildings by 2050. The current scheme called ‘Ma Prime Renov’, targeted at households, mainly subsidises single renovation actions. To encourage more significant energy-efficiency gains, the policy framework could be improved to incentivise deep renovation and help France further increase the energy efficiency of its building stock. The climate and resilience law adopted in August 2021 aims to reduce energy consumption in many ways, e.g. by providing bonuses for electric bicycles and creating low-emission zones in metropolitan areas.

(31)

Further support for cross-border electricity interconnectors (under development or planned) remains of crucial importance for the integration of large shares of renewables. Frontloading investment in energy infrastructure, both domestic and cross-border, will help reduce dependence on fossil fuel and in particular Russian gas. New infrastructure and network investments are recommended to be future-proof where possible, in order to facilitate their long-term sustainability through future repurposing for sustainable fuels. Interconnections are crucial for an efficient functioning of the internal energy market by pooling resources to achieve overall security of supply.

(32)

While the acceleration of the transition towards climate neutrality and away from fossil fuels will create significant restructuring costs in several sectors, France can make use of the Just Transition Mechanism in the context of cohesion policy to alleviate the socioeconomic impact of the transition in the most-affected regions. In addition, France can make use of the European Social Fund Plus, established by Regulation (EU) 2021/1057 of the European Parliament and of the Council (19), to improve employment opportunities and strengthen social cohesion.

(33)

The Council has examined France’s fiscal policies, taking into account the Commission’s 2022 spring forecast, and its assessment is reflected in particular in recommendation (1).

(34)

In view of the close interlinkages between the economies of euro-area Member States and their collective contribution to the functioning of the economic and monetary union, the Council recommended that the euro-area Member States take action, including through their recovery and resilience plans, to implement the recommendations set out in the 2022 Recommendation on the euro area. For France, this is reflected in all four recommendations.

(35)

In the light of the Commission’s in-depth review and its assessment, the Council has examined the 2022 National Reform Programme. Its recommendations under Article 6 of Regulation (EU) No 1176/2011 are reflected in recommendations (1), (2) and (3). Recommendations (1), (2) and (3) also contribute to the implementation of the 2022 Recommendation on the euro area, in particular the first, second and fourth euro-area recommendations. Fiscal policies referred to in recommendation (1) help address, inter alia, imbalances linked to high government debt. Policies referred to in recommendation (2) help reduce, inter alia, government indebtedness and improve competitiveness, as the full implementation of the recovery and resilience plan will support growth while strengthening the resilience of the economy. Policies referred to in recommendation (3) help address, inter alia, imbalances linked to competitiveness,

(1)

Regulation (EU) 2021/241 of the European Parliament and of the Council (3), which established the Recovery and Resilience Facility, entered into force on 19 February 2021. The Recovery and Resilience Facility provides financial support for the implementation of reforms and investment, entailing a fiscal impulse financed by the Union. It contributes to the economic recovery and to the implementation of sustainable and growth-enhancing reforms and investment, in particular to promote the green and digital transitions, while strengthening the resilience and potential growth of the Member States’ economies. It also helps strengthen sustainable public finances and boost growth and job creation in the medium and long term. The maximum financial contribution per Member State under the Recovery and Resilience Facility will be updated in June 2022, in line with Article 11(2) of Regulation (EU) 2021/241.

(2)

On 24 November 2021, the Commission adopted the Annual Sustainable Growth Survey, marking the start of the 2022 European Semester for economic policy coordination. It took due account of the Porto Social Commitment signed on 7 May 2021 to further implement the European Pillar of Social Rights, proclaimed by the European Parliament, the Council and the Commission on 17 November 2017. The European Council endorsed the priorities of the 2022 Annual Sustainable Growth Survey on 25 March 2022. On 24 November 2021, on the basis of Regulation (EU) No 1176/2011, the Commission also adopted the Alert Mechanism Report, in which it identified Croatia as one of the Member States for which an in-depth review would be needed. On the same date, the Commission adopted a proposal for the 2022 Joint Employment Report, which analyses the implementation of the Employment Guidelines and the principles of the European Pillar of Social Rights. The Council adopted the Joint Employment Report on 14 March 2022.

(3)

Russia’s invasion of Ukraine, in the wake of the global pandemic, has significantly altered the geopolitical and economic context. The impact of the invasion on Member States’ economies has been felt through, inter alia, higher prices for energy, food and raw materials, and weaker growth prospects. The higher energy prices weigh particularly heavily on the most vulnerable households experiencing or at risk of energy poverty as well as on firms most vulnerable to energy prices hikes. The Union is also seeing an unprecedented inflow of people fleeing Ukraine. The economic effects stemming from Russia’s war of aggression have impacted Member States asymmetrically. In this context, on 4 March 2022, Council Directive 2001/55/EC (4) was triggered for the first time by Council Implementing Decision (EU) 2022/382 (5), granting displaced persons from Ukraine the right to legally stay in the Union, as well as access to education and training, the labour market, healthcare, housing and social welfare.

(4)

Taking account of the rapidly changing economic and geopolitical situation, the European Semester resumes its broad economic and employment policy coordination in 2022, while evolving in line with the implementation requirements of the Recovery and Resilience Facility as outlined in the 2022 Annual Sustainable Growth Survey. The implementation of the adopted recovery and resilience plans is essential for the delivery of the policy priorities under the European Semester, as the plans address all or a significant subset of the relevant country-specific recommendations issued in the 2019 and 2020 European Semester cycles. The 2019 and 2020 country-specific recommendations remain equally relevant also for the recovery and resilience plans revised, updated or amended in accordance with Articles 14, 18 and 21 of Regulation (EU) 2021/241, in addition to any other country-specific recommendations issued up to the date of submission of such revised, updated or amended recovery and resilience plans.

(5)

The general escape clause of the Stability and Growth Pact has been active since March 2020. In its communication of 3 March 2021 entitled ‘One year since the outbreak of COVID-19: fiscal policy response’, the Commission set out its view that the decision on the deactivation or continued application of the general escape clause should be taken as an overall assessment of the state of the economy, with the level of economic activity in the Union or euro area compared to pre-crisis levels (end of 2019) as a key quantitative criterion. Heightened uncertainty and strong downside risks to the economic outlook in the context of war in Europe, unprecedented energy price hikes and continued supply-chain disturbances warrant the extension of the general escape clause of the Stability and Growth Pact through 2023.

(6)

Following the approach in the Council Recommendation of 18 June 2021 (6) delivering a Council opinion on the 2021 Convergence Programme of Croatia, the overall fiscal stance is currently best measured as the change in primary expenditure (net of discretionary revenue measures and excluding temporary emergency measures related to the COVID-19 crisis) but including expenditure financed by non-repayable support (grants) from the Recovery and Resilience Facility and other Union funds, relative to medium-term potential growth (7). Going beyond the overall fiscal stance, in order to assess whether national fiscal policy is prudent and its composition is conducive to a sustainable recovery consistent with the green and digital transitions, attention is also paid to the evolution of nationally financed (8) primary current expenditure (net of discretionary revenue measures and excluding temporary emergency measures related to the COVID-19 crisis) and investment.

(7)

On 2 March 2022, the Commission adopted a communication providing broad guidance for fiscal policy in 2023 (‘the fiscal guidance’) aimed at supporting the preparation of Member States’ Stability and Convergence Programmes and thereby strengthening policy coordination. The Commission noted that, on the basis of the macroeconomic outlook of the 2022 winter forecast, transitioning from an aggregate supportive fiscal stance in 2020–2022 to a broadly neutral aggregate fiscal stance, while standing ready to react to the evolving economic situation, would appear appropriate in 2023. The Commission announced that the fiscal recommendations for 2023 should continue to differentiate between Member States and take into account possible cross-country spillovers. The Commission invited the Member States to reflect the guidance in their Stability and Convergence Programmes. The Commission committed to closely monitor the economic developments and adjust its policy guidance as needed and at the latest in its European Semester spring package of late May 2022.

(8)

With respect to the fiscal guidance, the fiscal recommendations for 2023 take into account the worsened economic outlook, the heightened uncertainty and further downside risks, and the higher inflation compared to the Commission’s 2022 winter forecast. Against these considerations, the fiscal response has to expand public investment for the green and digital transitions and energy security, and sustain the purchasing power of the most vulnerable households so as to cushion the impact of the energy price hike and help limit inflationary pressures from second-round effects via targeted and temporary measures. Fiscal policy has to remain agile so as to adjust to the rapidly evolving circumstances, including challenges that arise from Russia’s war of aggression against Ukraine with regard to defence and security, and has to differentiate between Member States according to their fiscal and economic situation, including as regards their exposure to the crisis and the inflow of displaced persons from Ukraine.

(9)

On 14 May 2021, Croatia submitted its national recovery and resilience plan to the Commission, in accordance with Article 18(1) of Regulation (EU) 2021/241. Pursuant to Article 19 of Regulation (EU) 2021/241, the Commission assessed the relevance, effectiveness, efficiency and coherence of the recovery and resilience plan, in accordance with the assessment guidelines set out in Annex V to that Regulation. On 20 July 2021, the Council adopted its Implementing Decision on the approval of the assessment of the recovery and resilience plan for Croatia (9). The release of instalments is conditional on the adoption of a decision by the Commission, in accordance with Article 24(5) of Regulation (EU) 2021/241, stating that Croatia has satisfactorily fulfilled the relevant milestones and targets set out in the Council Implementing Decision. Satisfactory fulfilment presupposes that the achievement of preceding milestones and targets has not been reversed.

(10)

On 28 April 2022, Croatia submitted its 2022 National Reform Programme and, on 29 April 2022, its 2022 Convergence Programme, in line with the deadline established in Article 8 of Regulation (EC) No 1466/97. To take account of their interlinkages, the two programmes have been assessed together. In accordance with Article 27 of Regulation (EU) 2021/241, the 2022 National Reform Programme also reflects Croatia’s biannual reporting on the progress made in implementing its recovery and resilience plan.

(11)

The Commission published the 2022 country report for Croatia on 23 May 2022. It assessed Croatia’s progress in addressing the relevant country-specific recommendations adopted by the Council in 2019, 2020 and 2021, and took stock of Croatia’s implementation of the recovery and resilience plan, building on the recovery and resilience scoreboard. On the basis of that analysis, the country report identified gaps with respect to those challenges that are not addressed or only partially addressed by the recovery and resilience plan, as well as new and emerging challenges, including those emerging from Russia’s invasion of Ukraine. It also assessed Croatia’s progress in implementing the European Pillar of Social Rights and in achieving the Union headline targets on employment, skills and poverty reduction, as well as progress in achieving the United Nations Sustainable Development Goals.

(12)

The Commission carried out an in-depth review under Article 5 of Regulation (EU) No 1176/2011 for Croatia and published its results on 23 May 2022. The Commission concluded that Croatia is no longer experiencing macroeconomic imbalances. In particular, important progress has been made in reducing private indebtedness and net external liabilities, while government debt remains high but has resumed the downward trajectory that delivered marked improvements before the pandemic.

(13)

In its Recommendation of 20 July 2020 (10), the Council recommended Croatia to take in 2020 and 2021 all necessary measures, in line with the general escape clause, to effectively address the COVID-19 pandemic, sustain the economy and support the ensuing recovery. It also recommended Croatia to pursue, when economic conditions allow, fiscal policies aimed at achieving prudent medium-term fiscal positions and ensuring debt sustainability, while enhancing investment. In 2021, according to data validated by Eurostat, Croatia’s general government deficit decreased from 7,3 % of GDP in 2020 to 2,9 %. The fiscal policy response by Croatia supported the economic recovery in 2021, while temporary emergency measures declined from 3,3 % of GDP in 2020 to 2,1 % in 2021. The measures taken by Croatia in 2021 were in line with the Council Recommendation of 20 July 2020. The discretionary budgetary measures adopted by the government in 2020 and 2021 were mostly temporary or matched by offsetting measures. At the same time, some of the discretionary measures adopted by the government in 2021 were not temporary or matched by offsetting measures, mainly consisting of reduction of the personal and corporate income tax amounting in total to 0,5 % of GDP. According to data validated by Eurostat, general government debt fell from 87,3 % of GDP in 2020 to 79,8 % of GDP in 2021.

(14)

The macroeconomic scenario underpinning the budgetary projections in the 2022 Convergence Programme is cautious in 2022 and favourable thereafter. The government projects real GDP to grow by 3,0 % in 2022 and 4,4 % in 2023. By comparison, the Commission’s 2022 spring forecast projects a higher real GDP growth of 3,4 % in 2022 and a lower growth of 3,0 % in 2023, with the difference mainly reflecting a lower expectation in 2022 by the Croatian authorities concerning growth in real household consumption. In its 2022 Convergence Programme, the government expects that the headline deficit will slightly decrease to 2,8 % of GDP in 2022 and to 1,6 % in 2023. The slight decrease in 2022 mainly reflects the growth in economic activity and the unwinding of most emergency measures. According to the 2022 Convergence Programme, the general government debt-to-GDP ratio is expected to decrease to 76,2 % in 2022, and to decline to 71,7 % in 2023. Based on policy measures known at the cut-off date of the forecast, the Commission's 2022 spring forecast projects a government deficit for 2022 and 2023 of 2,3 % of GDP and 1,8 % respectively. This is lower than the deficit projected for 2022 and higher then the deficit projected for 2023 in the Convergence Programme, mainly due to a lower level of expenditure expected by the Commission in 2022 for gross fixed capital formation and other expenditure. Furthermore, the Commission forecast entails somewhat lower level shift in both revenues and expenditures attributed to a difference in the inflation outlook. The Commission's 2022 spring forecast projects a lower general government debt-to-GDP ratio of 75,3 % in 2022 and a higher level 73,1 % in 2023. According to the Commission's 2022 spring forecast, the medium-term (10-year average) potential output growth is estimated at 2,2 %. However, that estimate does not include the impact of the reforms that are part of the recovery and resilience plan and can boost Croatia’s potential growth.

(15)

In 2022, the government phased out the majority of measures taken in response to the COVID-19 crisis, such that the temporary emergency measures are projected to decline from 2,1 % of GDP in 2021 to 0,4 % in 2022. The government deficit in 2022 is impacted by the measures adopted to counter the economic and social impact of the increase in energy prices, which in the Commission's 2022 spring forecast are estimated at 0,4 % of GDP in 2022 and 0,2 % of GDP in 2023 (11). Those measures mainly consist of social transfers to poorer households, support for companies and cuts to indirect taxes on energy consumption. Those measures are mostly temporary. However, in the event that energy prices remain elevated in 2023, some of those measures could be continued. Some of those measures are not targeted, in particular the across-the-board cuts to indirect taxes on energy. The government deficit is also impacted by the cost of offering temporary protection to displaced persons from Ukraine, which in the Commission’s 2022 spring forecast is projected at 0,1 % of GDP in 2022 and 0,1 % in 2023 (12).

(16)

In its Recommendation of 18 June 2021, the Council recommended that in 2022 Croatia maintain a supportive fiscal stance, including the impulse provided by the Recovery and Resilience Facility, and preserve nationally financed investment. The Council also recommended Croatia to keep the growth of nationally financed current expenditure under control. It also recommended Croatia to pursue, when economic conditions allow, a fiscal policy aimed at achieving prudent medium-term fiscal positions and ensuring fiscal sustainability in the medium term and, at the same time, to enhance investment to boost growth potential.

(17)

In 2022, according to the Commission’s 2022 spring forecast and including the information incorporated in Croatia’s 2022 Convergence Programme, the fiscal stance is projected to be supportive at – 1,8 % of GDP, as recommended by the Council (13). Croatia plans to provide continued support to the recovery by making use of the Recovery and Resilience Facility to finance additional investment as recommended by the Council. The positive contribution to economic activity of expenditure financed by grants under the Recovery and Resilience Facility and other Union funds is projected to increase by 0,5 percentage points of GDP compared to 2021. Nationally financed investment is projected to provide an expansionary contribution to the fiscal stance of 0,4 percentage points in 2022 (14). Therefore, Croatia plans to preserve nationally financed investment, as recommended by the Council. At the same time, the growth in nationally financed primary current expenditure (net of new revenue measures) in 2022 is projected to provide an expansionary contribution of 1,0 percentage points to the overall fiscal stance. That significant expansionary contribution includes the additional impact of the measures to address the economic and social impact of the increase in energy prices (0,4 % of GDP) as well as the costs to offer temporary protection to displaced persons from Ukraine (0,1 % of GDP), while higher intermediate consumption expenditure, in part reflecting the increase in inflation, is also projected to contribute to the growth in net current expenditure. Therefore, on the basis of current Commission estimates, Croatia does not sufficiently keep under control the growth of nationally financed current expenditure in 2022.

(18)

In 2023, the fiscal stance is projected in the Commission's 2022 spring forecast at – 0,7 % of GDP on a no-policy-change assumption (15). Croatia is projected to continue using the grants under the Recovery and Resilience Facility in 2023 to finance additional investment in support of the recovery. The positive contribution to economic activity of expenditure financed by grants under the Recovery and Resilience Facility and other Union funds is projected to increase by 0,5 percentage points compared to 2022. Nationally financed investment is projected to provide a slightly expansionary contribution to the fiscal stance of 0,1 percentage point in 2023 (16). At the same time, the growth in nationally financed primary current expenditure (net of new revenue measures) in 2023 is projected to provide a broadly neutral contribution of – 0,2 percentage points to the overall fiscal stance. This includes the impact from the phasing out of some measures addressing the increased energy prices (0,2 % of GDP). Therefore, the broadly neutral contribution of nationally financed current expenditure relies partially on the phasing out of the measures to address the impact of the increase in energy prices as currently planned.

(19)

In the 2022 Convergence Programme, the general government deficit is expected to gradually decline to 1,6 % of GDP in 2024 and to 1,2 % by 2025. Therefore, the general government deficit is planned to remain below 3 % of GDP by 2025. According to the 2022 Convergence Programme, the general government debt-to-GDP ratio is expected to decrease by 2025, specifically with a decrease to 68,9 % in 2024, and a decline to 66,9 % in 2025. According to the Commission’s analysis, debt sustainability risks appear medium over the medium term.

(20)

In accordance with Article 19(3), point (b), of Regulation (EU) 2021/241 and criterion 2.2 of Annex V to that Regulation, the recovery and resilience plan includes an extensive set of mutually reinforcing reforms and investments with an indicative timetable for implementation to be completed by 31 August 2026. These help address all or a significant subset of the economic and social challenges outlined in the country-specific recommendations addressed to Croatia by the Council in the European Semester in 2019 and 2020, in addition to any country-specific recommendations issued up to the date of adoption of the recovery and resilience plan. In particular, the recovery and resilience plan addresses the country-specific recommendations with reforms to reinforce the budgetary framework, active labour market policy measures and an education reform to improve access to education and the quality and labour-market relevance of education. The challenges faced by the Croatian healthcare system are addressed by measures to improve the efficiency, quality, accessibility, and financial sustainability, which was especially stricken by the COVID-19 pandemic. Furthermore, the recovery and resilience plan addresses country-specific recommendations in those areas by advancing the decarbonisation of the energy sector, increasing overall energy efficiency, and focusing investments on sustainable transport and digital infrastructure and services. Moreover, the recovery and resilience plan contains far-reaching measures to improve the efficiency of the public administration and justice system, to prevent, detect and correct corruption, to improve the business environment and support investment in and the policy relevance of research and innovation.

(21)

The implementation of the recovery and resilience plan of Croatia is expected to contribute to making further progress on the green and digital transitions. Measures supporting the climate objectives in Croatia account for 40,3 % of the recovery and resilience plan’s total allocation, while measures supporting digital objectives account for 20,4 % of the recovery and resilience plan’s total allocation. The fully fledged implementation of the recovery and resilience plan, in line with the relevant milestones and targets, will help Croatia swiftly recover from the fallout of the COVID-19 crisis, while strengthening its resilience. The systematic involvement of social partners and other relevant stakeholders remains important for the successful implementation of the recovery and resilience plan, as well as other economic and employment policies going beyond the recovery and resilience plan, to ensure broad ownership of the overall policy agenda.

(22)

Croatia submitted the Partnership Agreement provided for in Regulation (EU) 2021/1060 of the European Parliament and of the Council (17) on 1 July 2022, while the other cohesion policy programmes have not yet been submitted. This is a prerequisite for improving the effectiveness and maximising the added value of the financial support to be received from cohesion policy funds, while promoting coordination, complementarity and coherence between those cohesion policy funds and other Union instruments and funds. The successful implementation of the Recovery and Resilience Facility and cohesion policy programmes also depends on the removal of bottlenecks to investment to support the green and digital transitions and balanced territorial development.

(23)

In response to the mandate by the Union Heads of State or Government set out in the Versailles Declaration, the Commission’s proposal for a REPowerEU plan aims to phase out the Union’s dependence on fossil-fuel imports from Russia as soon as possible. For this purpose, the Commission intends to identify the most-suitable projects, investments and reforms at national, regional and Union level in dialogue with Member States. These measures aim to reduce overall reliance on fossil fuels and shift fossil-fuel imports away from Russia.

(24)

Croatia has committed to a phase-out of coal for electricity production by 2033. In 2020, Croatia reached a share of 28 % of energy from renewable sources in gross final energy consumption, exceeding its target of 20 %. Croatia needs to accelerate decarbonisation efforts, including in the industry, reduce energy import dependency from Russia, and take measures to foster integration in the single market. In 2021, imports of Russian gas accounted for 22 % of total natural gas supply, whereas 57 % was imported through the new liquefied natural gas (LNG) terminal (operating since the beginning of 2021). Gas and oil represent 30,3 % and 33,7 % of the Croatian energy mix, respectively. Any new infrastructure and network investments related to gas are recommended to be future-proof where possible, in order to facilitate their long-term sustainability through future repurposing for sustainable fuels. As regards developing renewable, secure and affordable energy, considerable potential remains in wind and solar energy, which represent around 2,1 % of the energy mix (with shares of 13 % and 1 % of the total installed electricity-generation capacity, respectively), and in geothermal energy sources. Key aspects to improve the efficiency of the energy system, security of supply and market integration are: streamlining permit procedures for renewables, supporting the development of energy communities and frontloading investments in renewables, including by households and for small-scale systems. Further upgrades to electricity transmission and distribution grids will be required to support the green transition, while investments in electricity storage will be key to managing an energy system with a high share of renewables. Improvements are also necessary in the heating and cooling sector, most notably by transitioning from fossil-based district and individual heating systems to renewable energy sources directly or through electricity generation.

(25)

As regards energy efficiency, measures are necessary to step up the renovation of the building stock, the supply of energy-efficient housing, in particular social housing, and the replacement of gas and oil boilers with heat pumps and other more efficient and green solutions. In addition, more action is needed to reduce the oil dependence of Croatia’s transport sector, particularly by increasing the use of public transport and further greening it, using intelligent transport systems, deploying electric and hydrogen charging stations and transportation more broadly, investing in mobility infrastructure and increasing the uptake of zero- and low-emission vehicles. A further increase in ambition in respect of reducing greenhouse-gas emissions and increasing renewable energy and energy efficiency will be needed in order for Croatia to be in line with the ‘Fit for 55’ objectives.

(26)

While the acceleration of the transition towards climate neutrality and away from fossil fuels will create significant restructuring costs in several sectors, Croatia can make use of the Just Transition Mechanism in the context of the cohesion policy to alleviate the socioeconomic impact of the transition in the most-affected regions. In addition, Croatia can make use of the European Social Fund Plus, established by Regulation (EU) 2021/1057 of the European Parliament and of the Council (18), to improve employment opportunities and strengthen social cohesion.

(27)

In the light of the Commission’s assessment, the Council has examined the 2022 Convergence Programme and its opinion (19) is reflected in recommendation (1).

(28)

On 10 July 2020, the Croatian kuna was included in the European exchange rate mechanism II (ERM II) as a preparatory step towards adopting the euro. To preserve economic and financial stability and achieve a high degree of sustainable economic convergence, the Croatian authorities have committed to implement specific policy measures on anti-money laundering, the business environment, public-sector governance and the judiciary. Croatia’s progress in fulfilling the necessary requirements for the adoption of the euro has been positively assessed in the 2022 convergence reports of the European Commission and the European Central Bank,

(1)

Regulation (EU) 2021/241 of the European Parliament and of the Council (3), which established the Recovery and Resilience Facility, entered into force on 19 February 2021. The Recovery and Resilience Facility provides financial support for the implementation of reforms and investment, entailing a fiscal impulse financed by the Union. It contributes to the economic recovery and to the implementation of sustainable and growth-enhancing reforms and investment, in particular to promote the green and digital transitions, while strengthening the resilience and potential growth of the Member States’ economies. It also helps strengthen sustainable public finances and boost growth and job creation in the medium and long term. The maximum financial contribution per Member State under the Recovery and Resilience Facility will be updated in June 2022, in line with Article 11(2) of Regulation (EU) 2021/241.

(2)

On 24 November 2021, the Commission adopted the Annual Sustainable Growth Survey, marking the start of the 2022 European Semester for economic policy coordination. It took due account of the Porto Social Commitment signed on 7 May 2021 to further implement the European Pillar of Social Rights, proclaimed by the European Parliament, the Council and the Commission on 17 November 2017. The European Council endorsed the priorities of the 2022 Annual Sustainable Growth Survey on 25 March 2022. On 24 November 2021, on the basis of Regulation (EU) No 1176/2011, the Commission also adopted the Alert Mechanism Report, in which it identified Italy as one of the Member States for which an in-depth review would be needed. On the same date, the Commission also adopted a recommendation for a Council recommendation on the economic policy of the euro area and a proposal for the 2022 Joint Employment Report, which analyses the implementation of the Employment Guidelines and the principles of the European Pillar of Social Rights. The Council adopted the Recommendation on the economic policy of the euro area (4) (‘2022 Recommendation on the euro area’) on 5 April 2022 and the Joint Employment Report on 14 March 2022.

(3)

Russia’s invasion of Ukraine, in the wake of the global pandemic, has significantly altered the geopolitical and economic context. The impact of the invasion on Member States’ economies has been felt through, inter alia, higher prices for energy, food and raw materials, and weaker growth prospects. The higher energy prices weigh particularly heavily on the most vulnerable households experiencing or at risk of energy poverty as well as on firms most vulnerable to energy prices hikes. The Union is also seeing an unprecedented inflow of people fleeing Ukraine. The economic effects stemming from Russia’s war of aggression have impacted Member States asymmetrically. In this context, on 4 March 2022, Council Directive 2001/55/EC (5) was triggered for the first time by Council Implementing Decision (EU) 2022/382 (6), granting displaced persons from Ukraine the right to legally stay in the Union, as well as access to education and training, the labour market, healthcare, housing and social welfare.

(4)

Taking account of the rapidly changing economic and geopolitical situation, the European Semester resumes its broad economic and employment policy coordination in 2022, while evolving in line with the implementation requirements of the Recovery and Resilience Facility, as outlined in the 2022 Annual Sustainable Growth Survey. The implementation of the adopted recovery and resilience plans is essential for the delivery of the policy priorities under the European Semester, as the plans address all or a significant subset of the relevant country-specific recommendations issued in the 2019 and 2020 European Semester cycles. The 2019 and 2020 country-specific recommendations remain equally relevant also for the recovery and resilience plans revised, updated or amended in accordance with Articles 14, 18 and 21 of Regulation (EU) 2021/241, in addition to any other country-specific recommendations issued up to the date of submission of such revised, updated or amended recovery and resilience plans.

(5)

The general escape clause of the Stability and Growth Pact has been active since March 2020. In its communication of 3 March 2021 entitled ‘One year since the outbreak of COVID-19: fiscal policy response’, the Commission set out its view that the decision on the deactivation or continued application of the general escape clause should be taken as an overall assessment of the state of the economy, with the level of economic activity in the Union or euro area compared to pre-crisis levels (end of 2019) as a key quantitative criterion. Heightened uncertainty and strong downside risks to the economic outlook in the context of war in Europe, unprecedented energy price hikes and continued supply-chain disturbances warrant the extension of the general escape clause of the Stability and Growth Pact through 2023.

(6)

Following the approach in the Council Recommendation of 18 June 2021 (7) delivering a Council opinion on the 2021 Stability Programme of Italy, the overall fiscal stance is currently best measured as the change in primary expenditure (net of discretionary revenue measures and excluding temporary emergency measures related to the COVID-19 crisis) but including expenditure financed by non-repayable support (grants) from the Recovery and Resilience Facility and other Union funds, relative to medium-term potential growth (8). Going beyond the overall fiscal stance, in order to assess whether national fiscal policy is prudent and its composition is conducive to a sustainable recovery consistent with the green and digital transitions, attention is also paid to the evolution of nationally financed (9) primary current expenditure (net of discretionary revenue measures and excluding temporary emergency measures related to the COVID-19 crisis) and investment.

(7)

On 2 March 2022, the Commission adopted a communication providing broad guidance for fiscal policy in 2023 (‘the fiscal guidance’) aimed at supporting the preparation of Member States’ Stability and Convergence Programmes and thereby strengthening policy coordination. The Commission noted that, on the basis of the macroeconomic outlook of the 2022 winter forecast, transitioning from an aggregate supportive fiscal stance in 2020–2022 to a broadly neutral aggregate fiscal stance, while standing ready to react to the evolving economic situation, would appear appropriate in 2023. The Commission announced that the fiscal recommendations for 2023 should continue to differentiate between Member States and take into account possible cross-country spillovers. The Commission invited the Member States to reflect the guidance in their Stability and Convergence Programmes. The Commission committed to closely monitor the economic developments and adjust its policy guidance as needed and at the latest in its European Semester spring package of late May 2022.

(8)

With respect to the fiscal guidance, the fiscal recommendations for 2023 take into account the worsened economic outlook, the heightened uncertainty and further downside risks, and the higher inflation compared to the Commission’s 2022 winter forecast. Against these considerations, the fiscal response has to expand public investment for the green and digital transitions and energy security, and sustain the purchasing power of the most vulnerable households so as to cushion the impact of the energy price hike and help limit inflationary pressures from second-round effects via targeted and temporary measures. Fiscal policy has to remain agile so as to adjust to the rapidly evolving circumstances, including challenges that arise from Russia’s war of aggression against Ukraine with regard to defence and security, and has to differentiate between Member States according to their fiscal and economic situation, including as regards their exposure to the crisis and the inflow of displaced persons from Ukraine.

(9)

On 30 April 2021, Italy submitted its national recovery and resilience plan to the Commission, in accordance with Article 18(1) of Regulation (EU) 2021/241. Pursuant to Article 19 of Regulation (EU) 2021/241, the Commission assessed the relevance, effectiveness, efficiency and coherence of the recovery and resilience plan, in accordance with the assessment guidelines set out in Annex V to that Regulation. On 13 July 2021, the Council adopted its Implementing Decision on the approval of the assessment of the recovery and resilience plan for Italy (10). The release of instalments is conditional on the adoption of a decision by the Commission, in accordance with Article 24(5) of Regulation (EU) 2021/241, stating that Italy has satisfactorily fulfilled the relevant milestones and targets set out in the Council Implementing Decision. Satisfactory fulfilment presupposes that the achievement of preceding milestones and targets has not been reversed.

(10)

On 27 April 2022, Italy submitted its 2022 National Reform Programme and, on 27 April 2022, its 2022 Stability Programme, in line with the deadline established in Article 4 of Regulation (EC) No 1466/97. To take account of their interlinkages, the two programmes have been assessed together. In accordance with Article 27 of Regulation (EU) 2021/241, the 2022 National Reform Programme also reflects Italy’s biannual reporting on the progress made in implementing its recovery and resilience plan.

(11)

The Commission published the 2022 country report for Italy on 23 May 2022. It assessed Italy’s progress in addressing the relevant country-specific recommendations adopted by the Council in 2019, 2020 and 2021, and took stock of Italy’s implementation of the recovery and resilience plan, building on the recovery and resilience scoreboard. On the basis of that analysis, the country report identified gaps with respect to those challenges that are not addressed or only partially addressed by the recovery and resilience plan, as well as new and emerging challenges, including those emerging from Russia’s invasion of Ukraine. It also assessed Italy’s progress in implementing the European Pillar of Social Rights and in achieving the Union headline targets on employment, skills and poverty reduction, as well as progress in achieving the United Nations Sustainable Development Goals.

(12)

The Commission carried out an in-depth review under Article 5 of Regulation (EU) No 1176/2011 for Italy and published its results on 23 May 2022. The Commission concluded that Italy is experiencing excessive macroeconomic imbalances. In particular, Italy continues to face vulnerabilities relating to high government debt and weak productivity growth, in a context of labour market fragilities and some weaknesses in the financial sector.

(13)

On 23 May 2022, the Commission issued a report under Article 126(3) of the Treaty. That report discussed the budgetary situation of Italy, as its general government deficit in 2021 exceeded the Treaty reference value of 3 % of gross domestic product (GDP), while its general government debt exceeded the 60 %-of-GDP Treaty reference value and did not respect the debt-reduction benchmark. The report concluded that the deficit and debt criteria were not fulfilled. In line with the communication of 2 March 2022, the Commission considered, within its assessment of all relevant factors, that compliance with the debt-reduction benchmark would involve an overly demanding frontloaded fiscal effort that could jeopardise growth. Therefore, in the view of the Commission, compliance with the debt-reduction benchmark is not warranted under the current exceptional economic conditions. As announced, the Commission did not propose to open new excessive-deficit procedures in spring 2022 and will reassess whether it is necessary to propose the opening of such procedures in autumn 2022.

(14)

In its Recommendation of 20 July 2020 (11), the Council recommended Italy to take in 2020 and 2021 all necessary measures, in line with the general escape clause, to effectively address the COVID-19 pandemic, sustain the economy and support the ensuing recovery. It also recommended Italy to pursue, when economic conditions allow, fiscal policies aimed at achieving prudent medium-term fiscal positions and ensuring debt sustainability, while enhancing investment. In 2021, according to data validated by Eurostat, Italy’s general government deficit decreased from 9,6 % of GDP in 2020 to 7,2 %. The fiscal policy response by Italy supported the economic recovery in 2021, with temporary emergency measures amounting to 3,5 % of GDP, (down from 4,4 % of GDP in 2020). The measures taken by Italy in 2021 were in line with the Council Recommendation of 20 July 2020. The discretionary budgetary measures adopted by the government in 2020 and 2021 were mostly temporary or matched by offsetting measures. At the same time, some of the discretionary measures adopted by the government over the period 2020 to 2021 were not temporary or matched by offsetting measures, mainly consisting of a reduction of social security contributions in poorer regions, an extension of the tax credit on employment income and the introduction of a family allowance. According to data validated by Eurostat, general government debt fell from 155,3 % of GDP in 2020 to 150,8 % of GDP in 2021.

(15)

The macroeconomic scenario underpinning the budgetary projections in the 2022 Stability Programme is favourable in 2022 and realistic thereafter. The government projects real GDP to grow by 3,1 % in 2022 and 2,4 % in 2023. By comparison, the Commission’s 2022 spring forecast projects a lower real GDP growth of 2,4 % in 2022 and 1,9 % in 2023, mainly due to more prudent projections for domestic demand. In its 2022 Stability Programme, the government expects that the headline deficit will decrease to 5,6 % of GDP in 2022, and to 3,9 % in 2023 (12). The decrease in 2022 mainly reflects the growth in economic activity and the unwinding of most emergency measures. According to the 2022 Stability Programme, the general government debt-to-GDP ratio is expected to decrease to 147,0 % in 2022 and to decline to 145,2 % in 2023. Based on policy measures known at the cut-off date of the forecast, the Commission’s 2022 spring forecast projects a government deficit for 2022 and 2023 of 5,5 % of GDP and 4,3 % respectively. Compared to the 2022 Stability Programme, the deficit projected in the Commission’s 2022 spring forecast is almost the same in 2022 but higher in 2023, mainly due to lower economic growth. At the same time, the Commission’s 2022 spring forecast does not include the additional support measures for 2022 announced in the 2022 Stability Programme, as details were not available before the cut-off date. The Commission’s 2022 spring forecast projects a higher general government debt-to-GDP ratio, of 147,9 % in 2022 and 146,8 % in 2023. The difference is due to the higher deficit and lower economic growth. According to the Commission’s 2022 spring forecast, the medium-term (10-year average) potential output growth is estimated at 0,4 %. However, that estimate does not include the impact of the reforms that are part of the recovery and resilience plan and can boost Italy’s potential growth.

(16)

In 2022, the government phased out the majority of measures taken in response to the COVID-19 crisis, such that the temporary emergency measures are projected to decline from 3,5 % of GDP in 2021 to 1,1 % in 2022. The government deficit is impacted by the measures adopted to counter the economic and social impact of the increase in energy prices, which in the Commission’s 2022 spring forecast are estimated at 0,5 % of GDP in 2022 and phased out in 2023 (13). Those measures mainly consist of social transfers to poorer households, cuts to indirect taxes on energy consumption and subsidies to energy companies. Those measures have been announced as temporary. However, in the event that energy prices remain elevated in 2023, some of those measures could be continued. Some of those measures are not targeted, in particular the across-the-board cuts in indirect taxes on energy consumption (VAT and fixed levies). The government deficit is also impacted by the cost of offering temporary protection to displaced persons from Ukraine, which in the Commission’s 2022 spring forecast is projected at 0,1 % of GDP in 2022 and 2023 (14).

(17)

In its Recommendation of 18 June 2021, the Council recommended that in 2022 Italy should use the Recovery and Resilience Facility to finance additional investment in support of the recovery while pursuing a prudent fiscal policy. Moreover, it should preserve nationally financed investment. The Council also recommended Italy to limit the growth of nationally financed current expenditure. It also recommended Italy to pursue, when economic conditions allow, a fiscal policy aimed at achieving prudent medium-term fiscal positions and ensuring fiscal sustainability in the medium term and, at the same time, to enhance investment to boost growth potential.

(18)

In 2022, according to the Commission’s 2022 spring forecast and including the information incorporated in Italy’s 2022 Stability Programme, the fiscal stance is projected to be supportive at – 2,7 % of GDP (15). Italy plans to provide continued support to the recovery by making use of the Recovery and Resilience Facility to finance additional investment as recommended by the Council. The positive contribution to economic activity of expenditure financed by grants under the Recovery and Resilience Facility and other Union funds is projected to increase by 0,9 % of GDP compared to 2021. Nationally financed investment is projected to provide an expansionary contribution to the fiscal stance of 0,3 percentage point in 2022 (16). Therefore, Italy plans to preserve nationally financed investment, as recommended by the Council. The growth in nationally financed primary current expenditure (net of new revenue measures) in 2022 is projected to provide an expansionary contribution of 1,3 percentage points to the overall fiscal stance. This significant expansionary contribution includes the additional impact of the measures to address the economic and social impact of the increase in energy prices (0,2 % of GDP) (17) as well as the costs to offer temporary protection to displaced persons from Ukraine (0,1 % of GDP). The growth in current expenditure also reflects higher expenditure on compensation of government sector employees, due to the renewal of public contracts for the period 2019-2021, for which a substantial part (amounting to ¼ % of GDP) will be recorded in 2022, while additional resources are also budgeted for the healthcare sector (0,1 % of GDP). On the revenue side, the reduction of personal income taxes and the regional tax on productive activities (0,4 % of GDP) are also projected to contribute to the expansionary fiscal stance. Therefore, on the basis of current Commission estimates, Italy does not sufficiently limit the growth of net nationally financed current expenditure in 2022.

(19)

In 2023, the fiscal stance is projected in the Commission’s 2022 spring forecast at – 1,2 % of GDP on a no-policy change assumption (18). Italy is projected to continue using the grants under the Recovery and Resilience Facility in 2023 to finance additional investment in support of the recovery. The positive contribution to economic activity of expenditure financed by grants under the Recovery and Resilience Facility and other Union funds is projected to increase by 0,7 percentage point of GDP compared to 2022. Nationally financed investment is projected to provide an expansionary contribution to the fiscal stance of 0,2 percentage point in 2023 (19). At the same time, the growth in nationally financed primary current expenditure (net of new revenue measures) in 2023 is projected to provide a broadly neutral contribution of – 0,2 percentage point to the overall fiscal stance. This includes the impact from the phasing out of the measures addressing the increased energy prices (0,5 % of GDP). At the same time, an increase in social transfers (0,4 % of GDP), due to their indexation to the inflation rate of the previous year, and additional resources budgeted for the healthcare sector (0,1 % of GDP), which are not matched by offsetting measures, are also projected to contribute to the growth in net current expenditure. Therefore, the broadly neutral contribution of nationally financed current expenditure relies on the phasing out of the measures to address the impact of the increase in energy prices as currently planned.

(20)

In the 2022 Stability Programme, the general government deficit is expected to gradually decline to 3,3 % of GDP in 2024 and to 2,8 % by 2025. Therefore, the general government deficit is planned to go below 3 % of GDP by 2025. These projections assume a reduction in total expenditure by around 3 percentage points of GDP and a decrease in total revenue by around 2 percentage points of GDP between 2023 and 2025. According to the 2022 Stability Programme, the general government debt-to-GDP ratio is expected to decrease by 2025, specifically falling to 143,4 % in 2024 and to 141,4 % in 2025. According to the Commission’s analysis, debt sustainability risks appear high over the medium term.

(21)

In accordance with Article 19(3), point (b), of Regulation (EU) 2021/241 and criterion 2.2 of Annex V to that Regulation, the recovery and resilience plan includes an extensive set of mutually reinforcing reforms and investments to be implemented with an indicative timetable for implementation to be completed by 31 August 2026. These address all or a significant subset of the economic and social challenges outlined in the country-specific recommendations addressed to Italy by the Council in the European Semester in 2019 and 2020, in addition to any country-specific recommendations issued up to the date of adoption of a recovery and resilience plan. In particular, the effective and swift implementation of the recovery and resilience plan has the potential to bring enduring structural changes and therefore have a lasting impact on the Italian economy and society. A wide range of reforms in key policy areas are expected to address long-standing barriers to economic growth. In particular, the recovery and resilience plan contains reforms aimed at fostering structural changes to the functioning of the public administration and judicial system and at improving the overall business environment. Planned reforms and investments in the education, skills development and research sectors have the potential to enhance human capital and research capacities in the long run. The envisaged labour market reforms and investments to improve employment prospects, in particular of young people and women, have the potential to raise labour supply, provide equal access to skills, and ultimately support economic growth. Reforms in sectors like transport and water management are expected to structurally improve economic efficiency, inter alia, through a more systematic use of competitive procedures to assign the services contracts.

(22)

The implementation of the recovery and resilience plan of Italy is expected to contribute to making further progress on the green and digital transitions. Measures supporting the climate objectives in Italy account for 37,5 % of the recovery and resilience plan’s total allocation, while measures supporting digital objectives account for 25 % of the plan’s total allocation. The fully-fledged implementation of the recovery and resilience plan, in line with the relevant milestones and targets, will help Italy swiftly recover from the fallout of the COVID-19 crisis, while strengthening its resilience. The systematic involvement of social partners and other relevant stakeholders remains important for the successful implementation of the recovery and resilience plan, as well as other economic and employment policies going beyond the plan, to ensure broad ownership of the overall policy agenda.

(23)

Italy submitted the cohesion policy programming documents on 17 January 2022 for the Partnership Agreement, provided for in Regulation (EU) 2021/1060 of the European Parliament and of the Council (20), and has submitted its first cohesion policy programmes, provided for in that Regulation, to the European Commission. In line with Regulation (EU) 2021/1060, Italy shall take into account the relevant country-specific recommendations in the programming of the 2021–2027 cohesion policy funds. This is a prerequisite for improving the effectiveness and maximising the added value of the financial support to be received from cohesion policy funds, while promoting coordination, complementarity and coherence between these cohesion policy funds and other Union instruments and funds. The successful implementation of the Recovery and Resilience Facility and cohesion policy programmes also depends on the removal of bottlenecks to investment to support the green and digital transitions and balanced territorial development.

(24)

Beyond the economic and social challenges addressed by the recovery and resilience plan, Italy faces a number of additional challenges related to the taxation system. Policies to increase the efficiency of the tax system can help addressing long standing macroeconomic imbalances. In the medium and long run, a more growth friendly and efficient tax system would contribute in reducing the high government debt, help productivity growth, and support job creation, particularly for women.

(25)

Italy’s tax burden on labour is high and the profile of effective marginal tax rates on personal income is characterised by sharp discontinuities. At the end of 2021, Italy has taken steps to address these challenges, in particular by introducing a universal child allowance and reducing personal income taxes. These measures are expected to moderately increase labour supply, especially for women. The tax wedge on labour remains very high at all income levels compared to other Member States. At the same time, other sources of revenues, less detrimental to growth, are underused, leaving room to further reduce the tax burden on labour in a budgetary neutral way. The cadastral values, which serve as the basis for calculating the property tax, are largely outdated. The number and scope of tax expenditures, including for VAT, are high, and action should be taken to streamline them. Finally, despite the relatively high revenues from energy taxes in Italy, their design does not promote sufficiently the transition to cleaner technologies, due also to the extensive use of environmentally-harmful subsidies. These various dimensions are covered by the enabling law for the tax reform, presented by the government at the end of 2021, which, following the adoption, would need to be implemented by legislative decrees.

(26)

In response to the mandate by the Union Heads of State or Government set out in the Versailles Declaration, the Commission’s proposal for a REPowerEU plan aims to phase out the Union’s dependence on fossil fuel imports from Russia as soon as possible. For this purpose, the Commission intends to identify the most-suitable projects, investments and reforms at national, regional and Union level in dialogue with Member States. These measures aim to reduce overall reliance on fossil fuels and shift fossil-fuel imports away from Russia.

(27)

Italy is highly dependent on energy imports from Russia, in particular gas, with 43 % of its gas imported from Russia (slightly below the 44 % Union average) and 42 % of gas in its energy mix. Crude oil dependency on Russia is lower, at 11 %, lower than the Union average of 26 % (oil represents 32 % of Italy’s energy mix) (21). Even though Italy does not face significant problems in the security of supply of natural gas over the short term given its significant storage capacity and the pipeline connections with North Africa and Azerbaijan, Russia’s invasion of Ukraine may pose challenges over the medium and long term. Italy has room to overcome bottlenecks to increase energy transmission capacity both within the country and with neighbouring countries. New infrastructure and network investments related to gas are recommended to be future-proof where possible, in order to facilitate their long-term sustainability through future repurposing for sustainable fuels. Italy is currently diversifying its energy mix by increasing the share of renewables, particularly thanks to solar energy, wind, hydrogen and sustainable biomethane. Still, also in view of the potential challenges stemming from the current geopolitical situation, there is room to speed up and increase the rollout of renewable energy sources laid down in the National Energy and Climate Plan. Italy has room to continue taking measures to facilitate the authorisation of renewable energy projects. In addition, Italy’s objectives in terms of energy efficiency may not be sufficient to address these challenges nor to meet the ambitions of the Fit-for-55 package. The energy efficiency strategy for the building sector mostly relies on temporary measures and should be complemented by a medium- and long-term strategy, including stronger energy efficiency measures in businesses, in particular industry. In addition, there is a need to speed up the decarbonisation of the transport sector, including by accelerating the rollout of charging points for electric vehicles, and advancing key railway, cycling and public transport projects. Further ambition in reducing greenhouse-gas emissions and increasing renewable energy and energy efficiency will be needed in order for Italy to be in line with the ‘Fit for 55’ objectives.

(28)

While the acceleration of the transition towards climate neutrality and away from fossil fuels will create significant restructuring costs in several sectors, Italy can make use of the Just Transition Mechanism in the context of cohesion policy to alleviate the socioeconomic impact of the transition in the most-affected regions. In addition, Italy can make use of the European Social Fund Plus, established by Regulation (EU) 2021/1057 of the European Parliament and of the Council (22), to improve employment opportunities and strengthen social cohesion.

(29)

In the light of the Commission’s assessment, the Council has examined the 2022 Stability Programme and its opinion (23) is reflected in recommendation (1).

(30)

In view of the close interlinkages between the economies of euro-area Member States and their collective contribution to the functioning of the economic and monetary union, the Council recommended that the euro-area Member States take action, including through their recovery and resilience plans, to implement the recommendations set out in the 2022 Recommendation on the euro area. For Italy, this is reflected in particular in recommendations (1) and (2).

(31)

In the light of the Commission’s in-depth review and its assessment, the Council has examined the 2022 National Reform Programme and the 2022 Stability Programme. Its recommendations under Article 6 of Regulation (EU) No 1176/2011 are reflected in recommendations (1) and (2). Recommendations (1) and (2) also contribute to the implementation of the 2022 Recommendation on the euro area, in particular the first, second and fourth euro-area recommendations. Fiscal policies referred to in recommendation (1) help address, inter alia, imbalances linked to high government debt. Policies referred to in recommendation (2) help address, inter alia, imbalances related to high government debt and protracted weak productivity dynamics, in a context of labour market fragilities and some weaknesses in the financial sector,

(1)

Regulation (EU) 2021/241 of the European Parliament and of the Council (3), which established the Recovery and Resilience Facility, entered into force on 19 February 2021. The Recovery and Resilience Facility provides financial support for the implementation of reforms and investment, entailing a fiscal impulse financed by the Union. It contributes to the economic recovery and to the implementation of sustainable and growth-enhancing reforms and investment, in particular to promote the green and digital transitions, while strengthening the resilience and potential growth of the Member States’ economies. It also helps strengthen sustainable public finances and boost growth and job creation in the medium and long term. The maximum financial contribution per Member State under the Recovery and Resilience Facility will be updated in June 2022, in line with Article 11(2) of Regulation (EU) 2021/241.

(2)

On 24 November 2021, the Commission adopted the Annual Sustainable Growth Survey, marking the start of the 2022 European Semester for economic policy coordination. It took due account of the Porto Social Commitment signed on 7 May 2021 to further implement the European Pillar of Social Rights, proclaimed by the European Parliament, the Council and the Commission on 17 November 2017. The European Council endorsed the priorities of the 2022 Annual Sustainable Growth Survey on 25 March 2022. On 24 November 2021, on the basis of Regulation (EU) No 1176/2011, the Commission also adopted the Alert Mechanism Report, in which it identified Cyprus as one of the Member States for which an in-depth review would be needed. On the same date, the Commission also adopted a recommendation for a Council recommendation on the economic policy of the euro area and a proposal for the 2022 Joint Employment Report, which analyses the implementation of the Employment Guidelines and the principles of the European Pillar of Social Rights. The Council adopted the Recommendation on the economic policy of the euro area (4) (‘2022 Recommendation on the euro area’) on 5 April 2022 and the Joint Employment Report on 14 March 2022.

(3)

Russia’s invasion of Ukraine, in the wake of the global pandemic, has significantly altered the geopolitical and economic context. The impact of the invasion on Member States’ economies has been felt through, inter alia, higher prices for energy, food and raw materials, and weaker growth prospects. The higher energy prices weigh particularly heavily on the most vulnerable households experiencing or at risk of energy poverty as well as on firms most vulnerable to energy prices hikes. The Union is also seeing an unprecedented inflow of people fleeing Ukraine. The economic effects stemming from Russia’s war of aggression have impacted Member States asymmetrically. In this context, on 4 March 2022, Council Directive 2001/55/EC (5) was triggered for the first time by Council Implementing Decision (EU) 2022/382 (6), granting displaced persons from Ukraine the right to legally stay in the Union, as well as access to education and training, the labour market, healthcare, housing and social welfare.

(4)

Taking account of the rapidly changing economic and geopolitical situation, the European Semester resumes its broad economic and employment policy coordination in 2022, while evolving in line with the implementation requirements of the Recovery and Resilience Facility, as outlined in the 2022 Annual Sustainable Growth Survey. The implementation of the adopted recovery and resilience plans is essential for the delivery of the policy priorities under the European Semester, as the plans address all or a significant subset of the relevant country-specific recommendations issued in the 2019 and 2020 European Semester cycles. The 2019 and 2020 country-specific recommendations remain equally relevant also for recovery and resilience plans revised, updated or amended in accordance with Articles 14, 18 and 21 of Regulation (EU) 2021/241, in addition to any other country-specific recommendations issued up to the date of submission of such revised, updated or amended recovery and resilience plans.

(5)

The general escape clause of the Stability and Growth Pact has been active since March 2020. In its communication of 3 March 2021 entitled ‘One year since the outbreak of COVID-19: fiscal policy response’, the Commission set out its view that the decision on the deactivation or continued application of the general escape clause should be taken as an overall assessment of the state of the economy, with the level of economic activity in the Union or euro area compared to pre-crisis levels (end of 2019) as a key quantitative criterion. Heightened uncertainty and strong downside risks to the economic outlook in the context of war in Europe, unprecedented energy price hikes and continued supply-chain disturbances warrant the extension of the general escape clause of the Stability and Growth Pact through 2023.

(6)

Following the approach in the Council Recommendation of 18 June 2021 (7) delivering a Council opinion on the 2021 Stability Programme of Cyprus, the overall fiscal stance is currently best measured as the change in primary expenditure (net of discretionary revenue measures and excluding temporary emergency measures related to the COVID-19 crisis) but including expenditure financed by non-repayable support (grants) from the Recovery and Resilience Facility and other Union funds, relative to medium-term potential growth (8). Going beyond the overall fiscal stance, in order to assess whether national fiscal policy is prudent and its composition is conducive to a sustainable recovery consistent with the green and digital transitions, attention is also paid to the evolution of nationally financed (9) primary current expenditure (net of discretionary revenue measures and excluding temporary emergency measures related to the COVID-19 crisis) and investment.

(7)

On 2 March 2022, the Commission adopted a communication providing broad guidance for fiscal policy in 2023 (‘the fiscal guidance’) aimed at supporting the preparation of Member States’ Stability and Convergence Programmes and thereby strengthening policy coordination. The Commission noted that, on the basis of the macroeconomic outlook of the 2022 winter forecast, transitioning from an aggregate supportive fiscal stance in 2020–2022 to a broadly neutral aggregate fiscal stance, while standing ready to react to the evolving economic situation, would appear appropriate in 2023. The Commission announced that the fiscal recommendations for 2023 should continue to differentiate between Member States and take into account possible cross-country spill overs. The Commission invited the Member States to reflect the guidance in their Stability and Convergence Programmes. The Commission committed to closely monitor the economic developments and adjust its policy guidance as needed and at the latest in its European Semester spring package of late May 2022.

(8)

With respect to the fiscal guidance, the fiscal recommendations for 2023 take into account the worsened economic outlook, the heightened uncertainty and further downside risks, and the higher inflation compared to the Commission’s 2022 winter forecast. Against these considerations, the fiscal response has to expand public investment for the green and digital transitions and energy security, and sustain the purchasing power of the most vulnerable households so as to cushion the impact of the energy price hike and help limit inflationary pressures from second-round effects via targeted and temporary measures. Fiscal policy has to remain agile so as to adjust to the rapidly evolving circumstances, including challenges that arise from Russia’s war of aggression against Ukraine with regard to defence and security, and has to differentiate between Member States according to their fiscal and economic situation, including as regards their exposure to the crisis and the inflow of displaced persons from Ukraine.

(9)

On 17 May 2021, Cyprus submitted its national recovery and resilience plan to the Commission, in accordance with Article 18(1) of Regulation (EU) 2021/241. Pursuant to Article 19 of Regulation (EU) 2021/241, the Commission assessed the relevance, effectiveness, efficiency and coherence of the recovery and resilience plan, in accordance with the assessment guidelines set out in Annex V to that Regulation. On 20 July 2021, the Council adopted its Implementing Decision on the approval of the assessment of the recovery and resilience plan for Cyprus (10). The release of instalments is conditional on the adoption of a decision by the Commission, in accordance with Article 24(5) of Regulation (EU) 2021/241, stating that Cyprus has satisfactorily fulfilled the relevant milestones and targets set out in the Council Implementing Decision. Satisfactory fulfilment presupposes that the achievement of preceding milestones and targets has not been reversed.

(10)

On 5 May 2022, Cyprus submitted its 2022 National Reform Programme and, on 2 May 2022, its 2022 Stability Programme, in line with Article 4 of Regulation (EC) No 1466/97. To take account of their interlinkages, the two programmes have been assessed together. In accordance with Article 27 of Regulation (EU) 2021/241, the 2022 National Reform Programme also reflects Cyprus’s biannual reporting on the progress made in implementing its recovery and resilience plan.

(11)

The Commission published the 2022 country report for Cyprus on 23 May 2022. It assessed Cyprus’s progress in addressing the relevant country-specific recommendations adopted by the Council in 2019, 2020 and 2021, and took stock of Cyprus’s implementation of the recovery and resilience plan, building on the Recovery and Resilience Scoreboard. On the basis of that analysis, the country report identified gaps with respect to those challenges that are not addressed or only partially addressed by the recovery and resilience plan, as well as new and emerging challenges, including those emerging from Russia’s invasion of Ukraine. It also assessed Cyprus’s progress in implementing the European Pillar of Social Rights and in achieving the Union headline targets on employment, skills and poverty reduction, as well as progress in achieving the United Nations Sustainable Development Goals.

(12)

The Commission carried out an in-depth review under Article 5 of Regulation (EU) No 1176/2011 for Cyprus and published its results on 23 May 2022. The Commission concluded that Cyprus is experiencing excessive macroeconomic imbalances. In particular, the large current-account deficit deteriorated significantly during the COVID-19 crisis, placing an additional burden on the already high external, public and private debt, while non-performing loans in the financial sector remain high despite significant reduction.

(13)

In its Recommendation of 20 July 2020 (11), the Council recommended Cyprus to take in 2020 and 2021 all necessary measures, in line with the general escape clause, to effectively address the COVID-19 pandemic, sustain the economy and support the ensuing recovery. It also recommended Cyprus to pursue, when economic conditions allow, fiscal policies aimed at achieving prudent medium-term fiscal positions and ensuring debt sustainability, while enhancing investment. In 2021, according to data validated by Eurostat, Cyprus’s general government deficit decreased from 5,8 % of GDP in 2020 to 1,7 %. The fiscal policy response by Cyprus supported the economic recovery in 2021, while temporary emergency measures decreased from 3,6 % of GDP in 2020 to 3,0 % in 2021. The measures taken by Cyprus in 2021 were in line with the Council Recommendation of 20 July 2020. The discretionary budgetary measures adopted by the government in 2020 and 2021 were temporary or matched by offsetting measures. According to data validated by Eurostat, general government debt fell from 115,0 % of GDP in 2020 to 103,6 % of GDP in 2021.

(14)

The macroeconomic scenario underpinning the budgetary projections in the 2022 Stability Programme is realistic. The government projects real GDP to grow by 2,7 % in 2022 and 3,8 % in 2023. By comparison, the Commission’s 2022 spring forecast projects a lower real GDP growth of 2,3 % in 2022 and 3,5 % in 2023, mainly due to an expected weaker external demand in the Commission’s forecast, thus a negative contribution of net exports compared to a muted one in the 2022 Stability Programme. In its 2022 Stability Programme, the government expects that Cyprus will reach a balanced budgetary position in 2022 and a budgetary surplus of 0,4 % of GDP in 2023. The improvement in 2022 mainly reflects the unwinding of most emergency measures. According to the 2022 Stability Programme, the general government debt-to-GDP ratio is expected to decrease to 93,9 % in 2022, and to decline to 88,2 % by 2023. Based on policy measures known at the cut-off date of the forecast, the Commission’s 2022 spring forecast projects a government deficit for 2022 and 2023 of 0,3 % of GDP and 0,2 % respectively. This is lower than the balances projected in the 2022 Stability Programme, mainly due to more conservative tax revenue projections in the Commission’s forecast. The Commission’s 2022 spring forecast projects a broadly similar general government debt-to-GDP ratio, of 93,9 % in 2022 and 88,8 % in 2023. According to the Commission’s 2022 spring forecast, the current estimate of the medium-term (10-year average) potential output growth is 2,6 %. However, that estimate does not include the impact of the reforms that are part of the recovery and resilience plan and can boost Cyprus’s potential growth.

(15)

In 2022, the government phased out the majority of measures taken in response to the COVID-19 crisis, such that the temporary emergency measures are projected to decline from 3,0 % of GDP in 2021 to 0,4 % in 2022. The government deficit is impacted by the measures adopted to counter the economic and social impact of the increase in energy prices, which in the Commission’s 2022 spring forecast are estimated at 0,2 % of GDP in 2022 and expected to be phased out in 2023 (12). Those measures mainly consist of social transfers to poorer households, cuts to indirect taxes on energy consumption and price caps on retail and wholesale prices. Those measures have been announced as temporary. However, in the event that energy prices remain elevated in 2023, some of those measures could be continued. Some of those measures are not targeted, in particular the reduction of the tax rate for household electricity bills, the reduction of the price of consumer tariffs and the reduction of excise duties on petroleum. The government deficit is also impacted by the cost of offering temporary protection to displaced persons from Ukraine, which in the Commission’s 2022 spring forecast is projected at 0,1 % of GDP in 2022 and 0,2 % in 2023 (13).

(16)

In its Recommendation of 18 June 2021, the Council recommended that in 2022 Cyprus maintain a supportive fiscal stance, including from the impulse provided by the Recovery and Resilience Facility, and preserve nationally financed investment. The Council also recommended Cyprus to pursue, when economic conditions allow, a fiscal policy aimed at achieving prudent medium-term fiscal positions and ensuring fiscal sustainability in the medium term and, at the same time, to enhance investment to boost growth potential.

(17)

In 2022, according to the Commission’s 2022 spring forecast and including the information incorporated in Cyprus’s 2022 Stability Programme, the fiscal stance is projected to be contractionary, at + 0,9 % of GDP, while the Council recommended a supportive fiscal stance (14). Cyprus plans to provide continued support to the recovery by making use of the Recovery and Resilience Facility to finance additional investment as recommended by the Council. The positive contribution to economic activity of expenditure financed by grants under the Recovery and Resilience Facility and other Union funds is projected to increase by 0,7 percentage points of GDP compared to 2021. Nationally financed investment is projected to provide a contractionary contribution to the fiscal stance of 0,6 percentage points in 2022 (15). Therefore, Cyprus does not plan to preserve nationally financed investment. At the same time, the growth in nationally financed primary current expenditure (net of new revenue measures) in 2022 is projected to provide a contribution of 1,1 percentage points to the overall fiscal stance. This includes the additional impact of the measures to address the economic and social impact of the increase in energy prices (0,1 % of GDP) as well as the costs to offer temporary protection to displaced persons from Ukraine (0,1 % of GDP).

(18)

In 2023, the fiscal stance is projected in the Commission’s 2022 spring forecast at + 0,1 % of GDP on a no-policy-change assumption (16). Cyprus is projected to continue using the grants under the Recovery and Resilience Facility in 2023 to finance additional investment in support of the recovery. The positive contribution to economic activity of expenditure financed by grants under the Recovery and Resilience Facility and other Union funds is projected to increase by 0,3 percentage points of GDP compared to 2022. Nationally financed investment is projected to provide a contractionary contribution to the fiscal stance of 0,1 percentage points in 2023 (17). At the same time, the growth in nationally financed primary current expenditure (net of new revenue measures) in 2023 is projected to provide a broadly neutral contribution of 0,1 percentage points to the overall fiscal stance. This includes the impact from the phasing-out of the measures addressing the increased energy prices (0,2 % of GDP) and additional costs to offer temporary protection to displaced persons from Ukraine (0,1 % of GDP).

(19)

In the 2022 Stability Programme, the general government surplus is expected to gradually increase to 1,5 % of GDP in 2024 and to 1,7 % by 2025. Therefore, the general government deficit is planned to remain below 3 % of GDP within the Programme horizon. These projections assume that certain public expenditure, in particular subsidies, will decrease and that the growth of others, including intermediate consumption and social transfers in kind, will be limited. A decline in public investments as a percentage of GDP is also envisaged after the peak in 2022. According to the 2022 Stability Programme, the general government debt-to-GDP ratio is expected to decrease by 2025, specifically with a decrease to 81 % in 2024, and a decline to 76,7 % in 2025. According to the Commission’s analysis, debt-sustainability risks appear to be medium over the medium term.

(20)

In accordance with Article 19(3), point (b), of Regulation (EU) 2021/241 and criterion 2.2 of Annex V to that Regulation, the recovery and resilience plan includes an extensive set of mutually reinforcing reforms and investments with an indicative timetable for implementation to be completed by 31 August 2026. These help address all or a significant subset of the economic and social challenges outlined in the country-specific recommendations addressed to Cyprus by the Council in the European Semester in 2019 and 2020, in addition to any country-specific recommendations issued up to the date of adoption of a recovery and resilience plan. In particular, they relate to public finances and healthcare, the labour market and social policy, education and skills, public and private investment and the green and digital transitions, as well as structural reforms to improve the functioning of the public sector, fight corruption and facilitate the reduction of non-performing loans in the banking sector.

(21)

The implementation of the recovery and resilience plan of Cyprus is expected to contribute to making further progress on the green and digital transitions. Measures supporting the climate objectives in Cyprus account for 41 % of the recovery and resilience plan’s total allocation, while measures supporting digital objectives account for 23 % of the recovery and resilience plan’s total allocation. The fully-fledged implementation of the recovery and resilience plan, in line with the relevant milestones and targets, will help Cyprus swiftly recover from the fallout of the COVID-19 crisis, while strengthening its resilience. The systematic involvement of social partners and other relevant stakeholders remains important for the successful implementation of the recovery and resilience plan, as well as other economic and employment policies going beyond the recovery and resilience plan, to ensure broad ownership of the overall policy agenda.

(22)

Cyprus submitted the Partnership Agreement, provided for in Regulation (EU) 2021/1060 of the European Parliament and of the Council (18), and the other cohesion policy programmes on 30 December 2021. In line with Regulation (EU) 2021/1060, Cyprus is to take into account the relevant country-specific recommendations in the programming of the 2021–2027 cohesion policy funds. This is a prerequisite for improving the effectiveness and maximising the added value of the financial support to be received from cohesion policy funds, while promoting coordination, complementarity and coherence between those cohesion policy funds and other Union instruments and funds. The successful implementation of the Recovery and Resilience Facility and cohesion policy programmes also depends on the removal of bottlenecks to investment to support the green and digital transitions and balanced territorial development.

(23)

Beyond the economic and social challenges addressed by the recovery and resilience plan, Cyprus faces an additional challenge related to the governance of State-owned entities (SOEs). The governance system shows gaps with respect to international standards (e.g. the guidelines on corporate governance of SOEs of the Organisation for Economic Co-operation and Development and the World Bank Toolkit for Corporate Governance of SOEs), which weighs on Cyprus’s productivity and business environment. In particular, increased transparency of and higher accountability for financial performance and public objectives would increase SOEs’ efficiency and effectiveness. So would implementation of best practices such as a merit-based and transparent process for nominations to SOE management bodies and a shift of the SOE ownership function from the policy-oriented line ministries to a dedicated central body. Opening up commercially viable markets where SOEs currently have a dominant position (e.g. in the energy market) would make these markets more efficient, accelerate the green and digital transitions, and help diversify the economy. Taking action on SOEs would make governance in Cyprus more effective and the market for local and foreign businesses fairer and more transparent. This is in line with the objectives of the long-term strategy for Cyprus and the action plan underpinning it (under the ‘Modernise state-owned enterprises and create the right incentives for innovation and efficiency’ initiative area). Policies aimed at improving SOE governance can be conducive to reducing government debt, as better SOE governance would increase public-sector efficiency. It can also help improve the business environment and increase potential growth.

(24)

In response to the mandate by the Union Heads of State or Government set out in the Versailles Declaration, the Commission’s proposal for a REPowerEU plan aims to phase out the Union’s dependence on fossil-fuel imports from Russia as soon as possible. For this purpose, the Commission intends to identify the most-suitable projects, investments and reforms at national, regional and Union level in dialogue with Member States. These measures aim to reduce overall reliance on fossil fuels and shift fossil-fuel imports away from Russia.

(25)

The full potential of renewable energy sources in Cyprus could be further unlocked and accelerated, in particular by further streamlining permitting procedures and further investing in solar facilities. Cyprus currently uses no gas, though oil represents 85,6 % of the energy mix. Given the widely fluctuating energy prices on global markets, it is crucial for the sustainability of the Cypriot economy to reduce its heavy reliance on oil. Oil supply is fully dependent on imports, though at only 1 %, oil imports from Russia are well below the Union average of 23 % (19). To diversify energy supplies and reduce import dependence, Cyprus would benefit from expediting the development of gas import infrastructure, which could be hydrogen-compatible in the future, gas interconnection, which will also be hydrogen-ready in the future, and electricity interconnections to facilitate the expansion of renewable energy sources. Moreover, recently discovered offshore gas fields offer a significant opportunity for Cyprus to build further its energy independence in parallel with its efforts to accelerate measures concerning renewables and energy efficiency. New infrastructure and network investments related to gas are recommended to be future-proof where possible, in order to facilitate their long-term sustainability through future repurposing for sustainable fuels. In addition, energy-efficiency policies could be extended and accelerated, including in transport. Energy-efficiency measures are also expected to help address the energy poverty experienced by a high share of the population (20,9 %), including by using cohesion policy funds where appropriate. A further increase in ambition in respect of reducing greenhouse-gas emissions and increasing of renewable energy and energy efficiency will be needed in order for Cyprus to be in line with the ‘Fit for 55’ objectives.

(26)

While the acceleration of the transition towards climate neutrality and away from fossil fuels will create significant restructuring costs in several sectors, Cyprus can make use of the Just Transition Mechanism in the context of cohesion policy to alleviate the socioeconomic impact of the transition in the most-affected regions. In addition, Cyprus can make use of the European Social Fund Plus, established by Regulation (EU) 2021/1057 of the European Parliament and of the Council (20), to improve employment opportunities and strengthen social cohesion.

(27)

In the light of the Commission’s assessment, the Council has examined the 2022 Stability Programme and its opinion (21) is reflected in recommendation (1).

(28)

In view of the close interlinkages between the economies of euro-area Member States and their collective contribution to the functioning of the economic and monetary union, the Council recommended that the euro-area Member States take action, including through their recovery and resilience plans, to implement the recommendations set out in the 2022 Recommendation on the euro area. For Cyprus, this is reflected in particular in recommendations (1) and (2).

(29)

In the light of the Commission’s in-depth review and its assessment, the Council has examined the 2022 National Reform Programme and the 2022 Stability Programme. Its recommendations under Article 6 of Regulation (EU) No 1176/2011 are reflected in recommendations (1), (2), (3) and (4). The recommendations (1) and (2) also contribute to the implementation of the 2022 Recommendation on the euro area, in particular the first and fourth euro-area recommendations. Fiscal policies referred to in recommendation (1) help address, inter alia, imbalances linked to high government debt. Policies referred to recommendation (2) help address, inter alia, imbalances linked to high private debt, by limiting excess borrowing of the private sector. They also address imbalances linked to high government debt and the current-account deficit, by diversifying the economy, as well as imbalances linked to the high stock of non-performing loans. Policies referred to in recommendation (3) help address, inter alia, imbalances linked to high government debt, by increasing government efficiency and long-term growth, and imbalances linked to private and external debt, by increasing long-term growth. Policies referred to in recommendation (4) help address, inter alia, vulnerabilities linked to high external debt in the longer term,

(1)

Regulation (EU) 2021/241 of the European Parliament and of the Council (2), which established the Recovery and Resilience Facility, entered into force on 19 February 2021. The Recovery and Resilience Facility provides financial support for the implementation of reforms and investment, entailing a fiscal impulse financed by the Union. It contributes to the economic recovery and to the implementation of sustainable and growth-enhancing reforms and investment, in particular to promote the green and digital transitions, while strengthening the resilience and potential growth of the Member States’ economies. It also helps strengthen sustainable public finances and boost growth and job creation in the medium and long term. The maximum financial contribution per Member State under the Recovery and Resilience Facility will be updated in June 2022, in line with Article 11(2) of Regulation (EU) 2021/241.

(2)

On 24 November 2021, the Commission adopted the Annual Sustainable Growth Survey, marking the start of the 2022 European Semester for economic policy coordination. It took due account of the Porto Social Commitment signed on 7 May 2021 to further implement the European Pillar of Social Rights, proclaimed by the European Parliament, the Council and the Commission on 17 November 2017. The European Council endorsed the priorities of the 2022 Annual Sustainable Growth Survey on 25 March 2022. On 24 November 2021, on the basis of Regulation (EU) No 1176/2011 of the European Parliament and of the Council (3), the Commission also adopted the Alert Mechanism Report, which did not identify Latvia as one of the Member States for which an in-depth review would be needed. On the same date, the Commission also adopted a recommendation for a Council recommendation on the economic policy of the euro area and a proposal for the 2022 Joint Employment Report, which analyses the implementation of the Employment Guidelines and the principles of the European Pillar of Social Rights. The Council adopted the Recommendation on the economic policy of the euro area (4) (‘2022 Recommendation on the euro area’) on 5 April 2022 and the Joint Employment Report on 14 March 2022.

(3)

Russia’s invasion of Ukraine, in the wake of the global pandemic, has significantly altered the geopolitical and economic context. The impact of the invasion on Member States’ economies has been felt through, inter alia, higher prices for energy, food and raw materials, and weaker growth prospects. The higher energy prices weigh particularly heavily on the most vulnerable households experiencing or at risk of energy poverty as well as on firms most vulnerable to energy prices hikes. The Union is also seeing an unprecedented inflow of people fleeing Ukraine. The economic effects stemming from Russia’s war of aggression have impacted Member States asymmetrically. In this context, on 4 March 2022, Council Directive 2001/55/EC (5) was triggered for the first time by Council Implementing Decion (EU) 2022/382 (6), granting displaced persons from Ukraine the right to legally stay in the Union, as well as access to education and training, the labour market, healthcare, housing and social welfare.

(4)

Taking account of the rapidly changing economic and geopolitical situation, the European Semester resumes its broad economic and employment policy coordination in 2022, while evolving in line with the implementation requirements of the Recovery and Resilience Facility, as outlined in the 2022 Annual Sustainable Growth Survey. The implementation of the adopted recovery and resilience plans is essential for the delivery of the policy priorities under the European Semester, as the plans address all or a significant subset of the relevant country-specific recommendations issued in the 2019 and 2020 European Semester cycles. The 2019 and 2020 country-specific recommendations remain equally relevant also for the recovery and resilience plans revised, updated or amended in accordance with Articles 14, 18 and 21 of Regulation (EU) 2021/241, in addition to any other country-specific recommendations issued up to the date of submission of such revised, updated or amended recovery and resilience plans.

(5)

The general escape clause of the Stability and Growth Pact has been active since March 2020. In its communication of 3 March 2021 entitled ‘One year since the outbreak of COVID-19: fiscal policy response’, the Commission set out its view that the decision on the deactivation or continued application of the general escape clause should be taken as an overall assessment of the state of the economy, with the level of economic activity in the Union or euro area compared to pre-crisis levels (end of 2019) as a key quantitative criterion. Heightened uncertainty and strong downside risks to the economic outlook in the context of war in Europe, unprecedented energy price hikes and continued supply-chain disturbances warrant the extension of the general escape clause of the Stability and Growth Pact through 2023.

(6)

Following the approach in the Council Recommendation of 18 June 2021 (7) delivering a Council opinion on the 2021 Stability Programme of Latvia, the overall fiscal stance is currently best measured as the change in primary expenditure (net of discretionary revenue measures and excluding temporary emergency measures related to the COVID-19 crisis) but including expenditure financed by non-repayable support (grants) from the Recovery and Resilience Facility and other Union funds, relative to medium-term potential growth (8). Going beyond the overall fiscal stance, in order to assess whether national fiscal policy is prudent and its composition is conducive to a sustainable recovery consistent with the green and digital transitions, attention is also paid to the evolution of nationally financed (9) primary current expenditure (net of discretionary revenue measures and excluding temporary emergency measures related to the COVID-19 crisis) and investment.

(7)

On 2 March 2022, the Commission adopted a communication providing broad guidance for fiscal policy in 2023 (‘the fiscal guidance’) aimed at supporting the preparation of Member States’ Stability and Convergence Programmes and thereby strengthening policy coordination. The Commission noted that, on the basis of the macroeconomic outlook of the 2022 winter forecast, transitioning from an aggregate supportive fiscal stance in 2020–2022 to a broadly neutral aggregate fiscal stance, while standing ready to react to the evolving economic situation, would appear appropriate in 2023. The Commission announced that the fiscal recommendations for 2023 should continue to differentiate between Member States and take into account possible cross-country spillovers. The Commission invited the Member States to reflect the guidance in their Stability and Convergence Programmes. The Commission committed to closely monitor the economic developments and adjust its policy guidance as needed and at the latest in its European Semester spring package of late May 2022.

(8)

With respect to the fiscal guidance, the fiscal recommendations for 2023 take into account the worsened economic outlook, the heightened uncertainty and further downside risks, and the higher inflation compared to the Commission’s 2022 winter forecast. Against these considerations, the fiscal response has to expand public investment for the green and digital transitions and energy security, and sustain the purchasing power of the most vulnerable households so as to cushion the impact of the energy price hike and help limit inflationary pressures from second-round effects via targeted and temporary measures. Fiscal policy has to remain agile so as to adjust to the rapidly evolving circumstances, including challenges that arise from Russia’s war of aggression against Ukraine with regard to defence and security, and has to differentiate between Member Sates according to their fiscal and economic situation, including as regards their exposure to the crisis and the inflow of displaced persons from Ukraine.

(9)

On 30 April 2021, Latvia submitted its national recovery and resilience plan to the Commission, in accordance with Article 18(1) of Regulation (EU) 2021/241. Pursuant to Article 19 of Regulation (EU) 2021/241, the Commission assessed the relevance, effectiveness, efficiency and coherence of the recovery and resilience plan, in accordance with the assessment guidelines set out in Annex V to that Regulation. On 13 July 2021, the Council adopted its Implementing Decision on the approval of the assessment of the recovery and resilience plan for Latvia (10). The release of instalments is conditional on the adoption of a decision by the Commission, in accordance with Article 24(5) of Regulation (EU) 2021/241, stating that Latvia has satisfactorily fulfilled the relevant milestones and targets set out in the Council Implementing Decision. Satisfactory fulfilment presupposes that the achievement of preceding milestones and targets has not been reversed.

(10)

Latvia submitted its 2022 National Reform Programme on 22 April 2022 andits 2022 Stability Programme on 26 April 2022, in line with the deadline established in Article 4 of Regulation (EC) No 1466/97. To take account of their interlinkages, the two programmes have been assessed together. In accordance with Article 27 of Regulation (EU) 2021/241, the 2022 National Reform Programme also reflects Latvia’s biannual reporting on the progress made in implementing its recovery and resilience plan.

(11)

The Commission published the 2022 country report for Latvia on 23 May 2022. It assessed Latvia’s progress in addressing the relevant country-specific recommendations adopted by the Council in 2019, 2020 and 2021, and took stock of Latvia’ s implementation of the recovery and resilience plan, building on the recovery and resilience scoreboard. On the basis of that analysis, the country report identified gaps with respect to those challenges that are not addressed or only partially addressed by the recovery and resilience plan, as well as new and emerging challenges, including those emerging from Russia’s invasion of Ukraine. It also assessed Latvia’s progress in implementing the European Pillar of Social Rights and in achieving the Union headline targets on employment, skills and poverty reduction, as well as progress in achieving the United Nations Sustainable Development Goals.

(12)

On 23 May 2022, the Commission issued a report under Article 126(3) of the Treaty. That report discussed the budgetary situation of Latvia, as its general government deficit in 2021 exceeded the Treaty reference value of 3 % of gross domestic product (GDP). The report concluded that the deficit criterion was not fulfilled. In line with the communication of 2 March 2022, the Commission did not propose to open new excessive-deficit procedures in spring 2022 and will reassess whether it is necessary to propose the opening of such procedures in autumn 2022.

(13)

In its Recommendation of 20 July 2020 (11), the Council recommended Latvia to take in 2020 and 2021 all necessary measures, in line with the general escape clause, to effectively address the COVID-19 pandemic, sustain the economy and support the ensuing recovery. It also recommended Latvia to pursue, when economic conditions allow, fiscal policies aimed at achieving prudent medium-term fiscal positions and ensuring debt sustainability, while enhancing investment. In 2021, according to data validated by Eurostat, Latvia’s general government deficit increased from 4,5 % of GDP in 2020 to 7,3 %. The fiscal policy response by Latvia supported the economic recovery in 2021, while temporary emergency measures increased from 2,8 % of GDP in 2020 to 5,2 % in 2021. The measures taken by Latvia in 2021 were in line with the Council Recommendation of 20 July 2020. The discretionary budgetary measures adopted by the government in 2020 and 2021 were mostly temporary or matched by offsetting measures. At the same time, some of the discretionary measures adopted by the government over the period 2020 to 2021 were not temporary or matched by offsetting measures, mainly consisting of a reduction of the social security contribution rate, an increase in the threshold for personal income tax allowance, an increase in wages for medical personnel and teachers as well as an increase of minimum social benefits. According to data validated by Eurostat, general government debt incresed from 43,3 % of GDP in 2020 to 44,8 % of GDP in 2021.

(14)

The macroeconomic scenario underpinning the budgetary projections in the 2022 Stability Programme is realistic in 2022 and cautious thereafter. The government projects real GDP to grow by 2,1 % in 2022 and 2,5 % in 2023. By comparison, the Commission’s 2022 spring forecast projects a similar real GDP growth of 2,0 % in 2022 and a slightly higher growth of 2,9 % in 2023, mainly due to a more positive outlook for private consumption and exports. In its 2022 Stability Programme, the government expects that the headline deficit will decrease to 6,5 % of GDP in 2022 and to 2,8 % in 2023. The large deficit in 2022 mainly reflects measures included in the 2022 budget, namely an increase in income tax allowance, a sizeable investment package and an increase in wages for healthcare, interior and education sector employees. Moreover, broad government support to households and companies to mitigate the rise in energy prices, as well as projected slower growth of tax revenue due to the negative impact on the economy from the Russian invasion of Ukraine, will keep the deficit elevated, despite COVID-19 support to the economy being significantly lower in 2022 than in 2021. According to the 2022 Stability Programme, the general government debt-to-GDP ratio is expected to increase to 45,7 % in 2022, and to decline to 45,2 % in 2023. Based on policy measures known at the cut-off date of the forecast, the Commission’s 2022 spring forecast projects a government deficit for 2022 and 2023 of 7,2 % of GDP and 3,0 % respectively. This is higher than the deficit projected in the 2022 Stability Programme, mainly due to additional policy measures included in the Commission’s 2022 spring forecast, namely the creation of national energy supply security reserves according to recent amendments to the Energy Law (estimated fiscal impact of 0,6 % of GDP in 2022). The creation of the reserves has been credibly announced, but was not known at the time of the preparation of the 2022 Stability Programme. The Commission’s 2022 spring forecast projects general government debt-to-GDP ratio of 47,0 % in 2022 and 46,5 % in 2023, above the 2022 Stability Programme projection. The difference is due to a higher deficit projection and a lower forecast of nominal GDP. According to the Commission’s 2022 spring forecast, the medium-term (10-year average) potential output growth is estimated at 2,3 %. However, that estimate does not include the impact of the reforms that are part of the recovery and resilience plan and can boost Latvia’s potential growth.

(15)

In 2022, the government phased out the majority of measures taken in response to the COVID-19 crisis, such that the temporary emergency measures are projected to decline from 5,2 % of GDP in 2021 to 0,8 % in 2022. The government deficit is impacted by measures adopted to counter the economic and social impact of the increase in energy prices, which in the Commission’s 2022 spring forecast are estimated at 0,9 % of GDP in 2022 and are expected to be phased out in in 2023 (12). Those measures mainly consist of price caps on energy prices to households and entrepreneurs, full-coverage of certain sub-components of electricity tariff by the State, as well as support to particular social groups and poorer households. Those measures have been announced as temporary. However, in the event that energy prices remain elevated in 2023, some of those measures could be continued. Some of those measures are not targeted, in particular the general price caps on energy prices. The government deficit is also impacted by the cost of offering temporary protection to displaced persons from Ukraine, which in the Commission’s 2022 spring forecast is projected at 0,3 % of GDP in 2022 and 0,5 % of GDP in 2023 (13), as well as the increased cost of defence expenditure by 0,1 % of GDP in 2022 and 0,3 % of GDP in 2023.

(16)

In its Recommendation of 18 June 2021, the Council recommended that in 2022 Latvia maintain a supportive fiscal stance, including from the impulse provided by the Recovery and Resilience Facility, and preserve nationally financed investment. The Council also recommended Latvia to keep the growth of nationally financed current expenditure under control and to pursue, when economic conditions allow, a fiscal policy aimed at achieving prudent medium-term fiscal positions and ensuring fiscal sustainability in the medium term and, at the same time, to enhance investment to boost growth potential.

(17)

In 2022, according to the Commission’s 2022 spring forecast and including the information incorporated in Latvia’s 2022 Stability Programme, the fiscal stance is projected to be supportive at – 3,3 % of GDP, as recommended by the Council (14). Latvia plans to provide continued support to the recovery by making use of the Recovery and Resilience Facility to finance additional investment as recommended by the Council. The positive contribution to economic activity of expenditure financed by grants under the Recovery and Resilience Facility and other Union funds is projected to increase by 0,8 % of GDP compared to 2021. Nationally financed investment is projected to provide an expansionary contribution to the fiscal stance of 0,3 percentage points in 2022 (15). Therefore, Latvia plans to preserve nationally financed investment, as recommended by the Council. At the same time, the growth in nationally financed primary current expenditure (net of new revenue measures) in 2022 is projected to provide an expansionary contribution of 1,5 percentage points to the overall fiscal stance. That significant expansionary contribution includes the additional impact of the measures to address the economic and social impact of the increase in energy prices (0,8 % of GDP) as well as the costs to offer temporary protection to displaced persons from Ukraine (0,3 % of GDP). Latvia broadly keeps under control the growth of nationally financed current expenditure in 2022, as the significant expansionary contribution of nationally financed current expenditure in 2022 is mainly due to the measures to address the economic and social impact of the increase in energy prices as well as the costs to offer temporary protection to displaced persons from Ukraine.

(18)

In 2023, the fiscal stance is projected in the Commission’s 2022 spring forecast at + 3,2 % of GDP on a no-policy-change assumption (16). Latvia is projected to continue using the grants under the Recovery and Resilience Facility in 2023 to finance additional investment in support of the recovery. The positive contribution to economic activity of expenditure financed by grants under the Recovery and Resilience Facility and other Union funds is projected to increase by 0,9 percentage points of GDP compared to 2022. Nationally financed investment is projected to provide a contractionary contribution to the fiscal stance of 0,8 percentage points in 2023 (17). At the same time, the growth in nationally financed primary current expenditure (net of new revenue measures) in 2023 is projected to provide a contractionary contribution of 2,7 percentage points to the overall fiscal stance. This includes the impact from the phasing out of the measures addressing the increased energy prices (0,9 % of GDP) and additional costs to offer temporary protection to displaced persons from Ukraine (0,1 % of GDP).

(19)

In the 2022 Stability Programme, the general government deficit is expected to gradually decline to 2,3 % of GDP in 2024 and to 1,7 % by 2025. Therefore, the general government deficit is planned to remain below 3 % of GDP over the programme horizon. These projections assume phasing out of support programmes and solid growth of tax revenue. According to the 2022 Stability Programme, the general government debt-to-GDP ratio is expected to decrease by 2025, specifically with a decrease to 44,5 % in 2024 and to 43,4 % in 2025. According to the Commission’s analysis, debt sustainability risks appear low over the medium term.

(20)

Latvia’s tax revenue as a share of GDP is significantly below the Union average, limiting the funding to public services. Latvia collects the lowest revenue from corporate income taxes in the Union (0,7 % of GDP in 2020), while revenue from property taxes is 1,0 % of GDP compared with the Union average of 2,3 % of GDP. Moreover, while the tax wedge on an average earner is around the Union average, the implicit tax rate on labour is among the lowest in the Union, pointing to considerable scope for increasing the revenue from labour taxation through better collection and higher progressivity. Latvia’s public expenditure on healthcare and social protection are particularly low compared to the Union average, hampering timely and equal access to healthcare and adequate social assistance. As a result, Latvia has some of the highest income inequality, lowest poverty reduction impact of social transfers and worst health outcomes in the Union. Despite recent increases, the minimum income, minimum pensions and disability benefits fall below the poverty line. Limited access to and quality of social assistance and services for vulnerable groups further hinder social inclusion. The long-term care system is underdeveloped, with a limited supply of home care and community-based services. Social housing is scarce and often does not provide adequate living conditions. Furthermore, social assistance varies across municipalities and is often not targeted enough. Higher taxation of property and capital and more progressivity of income taxation offer the best potential for increasing tax revenue as these sources remain underutilised compared to the Union average. Moreover, efforts to reduce the shadow economy should continue beyond the measures planned in the recovery and resilience plan.

(21)

In accordance with Article 19(3), point (b), of Regulation (EU) 2021/241 and criterion 2.2 of Annex V to that Regulation, the recovery and resilience plan includes an extensive set of mutually reinforcing reforms and investments to be implemented with an indicative timetable for implementation to be completed by 31 August 2026. These help address all or a significant subset of the economic and social challenges outlined in the country-specific recommendations addressed to Latvia by the Council in the European Semester in 2019 and 2020, in addition to any country-specific recommendations issued up to the date of adoption of a recovery and resilience plan. In particular, Latvia’s recovery and resilience plan includes measures addressing, to a varying extent, all six broad challenges – fiscal, human capital, public administration, productivity and the digital and green transitions. The recovery and resilience plan includes reforms related to the governance and financing of higher education institutions, the implementation of a comprehensive human resources strategy in healthcare and the introduction of indexation for minimum income benefits. Sizeable investments include the greening of the Riga metropolitan area transport system through, among other things, to the acquisition of clean public vehicles and the energy renovation of both private and public buildings and businesses. Significant investment is also planned to promote regional development: building schools, industrial parks and affordable housing and modernising hospitals. These measures are expected to boost the growth potential of the economy in a sustainable manner.

(22)

The implementation of the recovery and resilience plan of Latvia is expected to contribute to making further progress on the green and digital transitions. Measures supporting the climate objectives in Latvia account for 37,6 % of the recovery and resilience plan’s total allocation, while measures supporting digital objectives account for 21 % of the recovery and resilience plan’s total allocation. The fully fledged implementation of the recovery and resilience plan, in line with the relevant milestones and targets, will help Latvia swiftly recover from the fallout of the COVID-19 crisis, while strengthening its resilience. The systematic involvement of social partners and other relevant stakeholders remains important for the successful implementation of the recovery and resilience plan, as well as other economic and employment policies going beyond the recovery and resilience plan, to ensure broad ownership of the overall policy agenda.

(23)

Latvia submitted the Partnership Agreement provided for in Regulation (EU) 2021/1060 of the European Parliament and of the Council (18) on 25 May 2022 but the other cohesion policy programmes provided for in that Regulation have not yet been submitted. In line with Regulation (EU) 2021/1060, Latvia is to take into account the relevant country-specific recommendations in the programming of the 2021–2027 cohesion policy funds. This is a prerequisite for improving the effectiveness and maximising the added value of the financial support to be received from cohesion policy funds, while promoting coordination, complementarity and coherence between those cohesion policy funds and other Union instruments and funds. The successful implementation of the Recovery and Resilience Facility and cohesion policy programmes also depends on the removal of bottlenecks to investment to support the green and digital transitions and balanced territorial development.

(24)

Beyond the economic and social challenges addressed by the recovery and resilience plan, Latvia faces a number of additional challenges including access to bank credit. Credit flow to the private sector has been negative for most of the last decade. It turned positive in 2016 but the growth rate of credit remained below the growth rate of GDP. In 2020, private sector debt stood at 66,5 % of GDP compared with 78,3 % of GDP 5 years earlier. Small and medium-sized enterprises have found it particularly difficult to get credit, partially due to their higher credit risk, but they also face a relatively high cost of credit and burdensome paperwork. Furthermore, poor liquidity of the assets offered for collateral, make it particularly hard to get credit outside of the Riga region. This presents a significant barrier both for mortgage lending and lending to businesses. Moreover, financing for consumer green technologies could be made more affordable through cheaper and longer-term credit products. Policy efforts have mainly focused on supporting lending by combining it with public grants. However, this comes with a significant cost to the government budget and is therefore not a sustainable way of boosting lending. Easing the credit supply constraints requires general improvements in transparency and trust in the business environment, including a reduction of the shadow economy. Furthermore, there is room for increasing the loan recovery rates, which would reduce the banks’ costs associated with non-performing loans and which could be facilitated by a more efficient legal system. Targeted loan and guarantee schemes could help lower the liquidity risks faced by the banks when accepting collateral in relatively illiquid markets. Public lending schemes for strategically important investments, like the green transition and regional development, could increase effective competition in the banking market or fill a market gap where bank financing is either too expensive or not available. Moreover, public guarantee and lending schemes offer a significantly more cost-efficient way of supporting private borrowing than grant schemes. Besides the barriers to bank financing, the Latvian market for alternative sources of finance is underdeveloped and holds potential for improving firms’ access to finance.

(25)

In response to the mandate by the Union Heads of State or Government set out in the Versailles Declaration, the Commission’s proposal for a REPowerEU plan aims to phase out the Union’s dependence on fossil-fuel imports from Russia as soon as possible. For this purpose, the Commission intends to identify the most-suitable projects, investments and reforms at national, regional and Union level in dialogue with Member States. These measures aim to reduce overall reliance on fossil fuels and shift fossil-fuel imports away from Russia.

(26)

According to 2020 data, oil products (33,8 %) and natural gas (21,6 %) constitute around half of Latvia’s energy mix, the rest consists mainly of renewable energy (44,1 %). Russia supplied all of Latvia’s natural gas imports (higher than the Union average of 44 % of Russian gas import dependence) and was a key source (20 %) of Latvia’s oil product imports (largely in line with the Union average of 26 % of Russian oil import dependence). (19) Latvia’s dependence on Russia’s gas supplies is significantly reduced by its gas connection to Lithuania, which gives Latvia access to Klaipeda’s liquefied natural gas terminal. Latvia is further connected to Estonia and Finland, making the four countries part of the same market for natural gas. A gas storage facility located in Latvia allows for smoothing out the seasonal mismatches in supply and demand and stores a security reserve for the Baltic market. New infrastructure and network investments related to gas are recommended to be future-proof where possible, in order to facilitate their long-term sustainability, through future repurposing for sustainable fuels. Completing the ongoing synchronisation with the continental power grid of the Union, ensuring sufficient capacity for the interconnections with neighbouring Member States and pursuing joint renewables projects should nevertheless remain a policy priority. Besides the improvements to gas infrastructure aimed at securing alternative sources of supply, reducing energy dependence on Russia will require Latvia to accelerate the deployment of renewables and increase energy efficiency, especially in the building and transport sectors. Latvia’s recovery and resilience plan includes measures that aim to facilitate private investments in onshore wind energy.

Their earlier-than-planned implementation, as recently announced by the government, could help accelerate investments in onshore wind energy. However, increasing the share of renewables would also require Latvia to explore opportunities in offshore wind energy. Energy efficiency measures including deep renovation could be reinforced, in particular in buildings, transport and industry. To diversify the energy mix, Latvia is considering investing in nuclear energy in cooperation with neighbouring Member States. A further increase in ambition in respect of reducing greenhouse-gas emissions and increasing renewables and energy efficiency will be needed in order for Latvia to be in line with the ‘Fit for 55’ objectives.

(27)

While the acceleration of the transition towards climate neutrality and away from fossil fuels will create significant restructuring costs in several sectors, Latvia can make use of the Just Transition Mechanism in the context of cohesion policty to alleviate the socio-economic impact of the transition in the most-affected regions. In addition, Latvia can make use of the the European Social Fund Plus, established by Regulation (EU) 2021/1057 of the European Parliament and of the Council (20), to improve employment opporunities and strengthen social cohesion.

(28)

In the light of the Commission’s assessment, the Council has examined the 2022 Stability Programme and its opinion (21) is reflected in particular in recommendation (1).

(29)

In view of the close interlinkages between the economies of euro-area Member States and their collective contribution to the functioning of the economic and monetary union, the Council recommended that the euro-area Member States take action, including through their recovery and resilience plans, to implement the recommendations set out in the 2022 Recommendation on the euro area. For Latvia, this is reflected in particular in recommendations (1), (2) and (3),

(1)

Regulation (EU) 2021/241 of the European Parliament and of the Council (2), which established the Recovery and Resilience Facility, entered into force on 19 February 2021. The Recovery and Resilience Facility provides financial support for the implementation of reforms and investment, entailing a fiscal impulse financed by the Union. It contributes to the economic recovery and to the implementation of sustainable and growth-enhancing reforms and investment, in particular to promote the green and digital transitions, while strengthening the resilience and potential growth of the Member States’ economies. It also helps strengthen sustainable public finances and boost growth and job creation in the medium and long term. The maximum financial contribution per Member State under the Recovery and Resilience Facility will be updated in June 2022, in line with Article 11(2) of Regulation (EU) 2021/241.

(2)

On 24 November 2021, the Commission adopted the Annual Sustainable Growth Survey, marking the start of the 2022 European Semester for economic policy coordination. It took due account of the Porto Social Commitment signed on 7 May 2021 to further implement the European Pillar of Social Rights, proclaimed by the European Parliament, the Council and the Commission on 17 November 2017. The European Council endorsed the priorities of the 2022 Annual Sustainable Growth Survey on 25 March 2022. On 24 November 2021, on the basis of Regulation (EU) No 1176/2011 of the European Parliament and of the Council (3), the Commission also adopted the Alert Mechanism Report, in which it did not identify Lithuania as one of the Member States for which an in-depth review would be needed. On the same date, the Commission also adopted a recommendation for a Council recommendation on the economic policy of the euro area and a proposal for the 2022 Joint Employment Report, which analyses the implementation of the Employment Guidelines and the principles of the European Pillar of Social Rights. The Council adopted the Recommendation on the economic policy of the euro area (4) (‘2022 Recommendation on the euro area’) on 5 April 2022 and the Joint Employment Report on 14 March 2022.

(3)

Russia’s invasion of Ukraine, in the wake of the global pandemic, has significantly altered the geopolitical and economic context. The impact of the invasion on Member States’ economies has been felt through, inter alia, higher prices for energy, food and raw materials, and weaker growth prospects. The higher energy prices weigh particularly heavily on the most vulnerable households experiencing or at risk of energy poverty as well as on firms most vulnerable to energy prices hikes. The Union is also seeing an unprecedented inflow of people fleeing Ukraine. The economic effects stemming from Russia’s war of aggression have impacted Member States asymmetrically. In this context, on 4 March 2022, Council Directive 2001/55/EC (5) was triggered for the first time by Council Implementing Decision (EU) 2022/382 (6), granting displaced persons from Ukraine the right to legally stay in the Union, as well as access to education and training, the labour market, healthcare, housing and social welfare. Exceptional support is made available to Lithuania under the Cohesion’s Action for Refugees in Europe (CARE) initiative and through additional pre-financing under the Recovery Assistance for Cohesion and the Territories of Europe (REACT-EU) programme to urgently address reception and integration needs for those fleeing Ukraine.

(4)

Taking account of the rapidly changing economic and geopolitical situation, the European Semester resumes its broad economic and employment policy coordination in 2022, while evolving in line with the implementation requirements of the Recovery and Resilience Facility, as outlined in the 2022 Annual Sustainable Growth Survey. The implementation of the adopted recovery and resilience plans is essential for the delivery of the policy priorities under the European Semester, as the plans address all or a significant subset of the relevant country-specific recommendations issued in the 2019 and 2020 European Semester cycles. The 2019 and 2020 country-specific recommendations remain equally relevant also for the recovery and resilience plans revised, updated or amended in accordance with Articles 14, 18 and 21 of Regulation (EU) 2021/241, in addition to any other country-specific recommendations issued up to the date of submission of such revised, updated or amended recovery and resilience plans.

(5)

The general escape clause of the Stability and Growth Pact has been active since March 2020. In its communication of 3 March 2021 entitled ‘One year since the outbreak of COVID-19: fiscal policy response’, the Commission set out its view that the decision on the deactivation or continued application of the general escape clause should be taken as an overall assessment of the state of the economy, with the level of economic activity in the Union or euro area compared to pre-crisis levels (end of 2019) as a key quantitative criterion. Heightened uncertainty and strong downside risks to the economic outlook in the context of war in Europe, unprecedented energy price hikes and continued supply-chain disturbances warrant the extension of the general escape clause of the Stability and Growth Pact through 2023.

(6)

Following the approach in the Council Recommendation of 18 June 2021 (7) delivering a Council opinion on the 2021 Stability Programme of Lithuania, the overall fiscal stance is currently best measured as the change in primary expenditure (net of discretionary revenue measures and excluding temporary emergency measures related to the COVID-19 crisis) but including expenditure financed by non-repayable support (grants) from the Recovery and Resilience Facility and other Union funds, relative to medium-term potential growth (8). Going beyond the overall fiscal stance, in order to assess whether national fiscal policy is prudent and its composition is conducive to a sustainable recovery consistent with the green and digital transitions, attention is also paid to the evolution of nationally financed (9) primary current expenditure (net of discretionary revenue measures and excluding temporary emergency measures related to the COVID-19 crisis) and investment.

(7)

On 2 March 2022, the Commission adopted a communication providing broad guidance for fiscal policy in 2023 (‘the fiscal guidance’) aimed at supporting the preparation of Member States’ Stability and Convergence Programmes and thereby strengthening policy coordination. The Commission noted that, on the basis of the macroeconomic outlook of the 2022 winter forecast, transitioning from an aggregate supportive fiscal stance in 2020–2022 to a broadly neutral aggregate fiscal stance, while standing ready to react to the evolving economic situation, would appear appropriate in 2023. The Commission announced that the fiscal recommendations for 2023 should continue to differentiate between Member States and take into account possible cross-country spillovers. The Commission invited the Member States to reflect the guidance in their Stability and Convergence Programmes. The Commission committed to closely monitor the economic developments and adjust its policy guidance as needed and at the latest in its European Semester spring package of late May 2022.

(8)

With respect to the fiscal guidance, the fiscal recommendations for 2023 take into account the worsened economic outlook, the heightened uncertainty and further downside risks, and the higher inflation compared to the Commission’s 2022 winter forecast. Against these considerations, the fiscal response has to expand public investment for the green and digital transitions and energy security, and sustain the purchasing power of the most vulnerable households so as to cushion the impact of the energy price hike and help limit inflationary pressures from second-round effects via targeted and temporary measures. Fiscal policy has to remain agile so as to adjust to the rapidly evolving circumstances, including challenges that arise from Russia’s war of aggression against Ukraine with regard to defence and security, and has to differentiate between Member States according to their fiscal and economic situation, including as regards their exposure to the crisis and the inflow of displaced persons from Ukraine.

(9)

On 14 May 2021, Lithuania submitted its national recovery and resilience plan to the Commission, in accordance with Article 18(1) of Regulation (EU) 2021/241. Pursuant to Article 19 of Regulation (EU) 2021/241, the Commission assessed the relevance, effectiveness, efficiency and coherence of the recovery and resilience plan, in accordance with the assessment guidelines set out in Annex V to that Regulation. On 20 July 2021, the Council adopted its Implementing Decision on the approval of the assessment of the recovery and resilience plan for Lithuania (10). The release of instalments is conditional on the adoption of a decision by the Commission, in accordance with Article 24(5) of Regulation (EU) 2021/241, stating that Lithuania has satisfactorily fulfilled the relevant milestones and targets set out in the Council Implementing Decision. Satisfactory fulfilment presupposes that the achievement of preceding milestones and targets has not been reversed.

(10)

On 27 April 2022, Lithuania submitted its 2022 National Reform Programme and, on 29 April 2022, its 2022 Stability Programme, in line with the deadline established in Article 4 of Regulation (EC) No 1466/97. To take account of their interlinkages, the two programmes have been assessed together. In accordance with Article 27 of Regulation (EU) 2021/241, the 2022 National Reform Programme also reflects Lithuania’s biannual reporting on the progress made in implementing its recovery and resilience plan.

(11)

The Commission published the 2022 country report for Lithuania on 23 May 2022. It assessed Lithuania’s progress in addressing the relevant country-specific recommendations adopted by the Council in 2019, 2020 and 2021, and took stock of Lithuania’s implementation of the recovery and resilience plan, building on the recovery and resilience scoreboard. On the basis of that analysis, the country report identified gaps with respect to those challenges that are not addressed or only partially addressed by the recovery and resilience plan, as well as new and emerging challenges, including those emerging from Russia’s invasion of Ukraine. It also assessed Lithuania’s progress in implementing the European Pillar of Social Rights and in achieving the Union headline targets on employment, skills and poverty reduction, as well as progress in achieving the United Nations Sustainable Development Goals.

(12)

On 23 May 2022, the Commission issued a report under Article 126(3) of the Treary. That report discussed the budgetary situation of Lithuania, as its general government deficit in 2022 is planned to exceed the Treaty reference value of 3 % of gross domestic product (GDP). The report concluded that the deficit criterion was not fulfilled. In line with the communication of 2 March 2022, the Commission did not propose to open new excessive-deficit procedures in spring 2022 and will reassess whether it is necessary to propose the opening of such procedures in autumn 2022.

(13)

In its Recommendation of 20 July 2020 (11), the Council recommended Lithuania to take in 2020 and 2021 all necessary measures, in line with the general escape clause, to effectively address the COVID-19 pandemic, sustain the economy and support the ensuing recovery. It also recommended Lithuania to pursue, when economic conditions allow, fiscal policies aimed at achieving prudent medium-term fiscal positions and ensuring debt sustainability, while enhancing investment. In 2021, according to data validated by Eurostat, Lithuania’s general government deficit fell from 7,3 % of GDP in 2020 to 1,0 %. The fiscal policy response by Lithuania supported the economic recovery in 2021, while temporary emergency measures declined from 3,9 % of GDP in 2020 to 2,8 % in 2021. The measures taken by Lithuania in 2021 were in line with the Council Recommendation of 20 July 2020. The discretionary budgetary measures adopted by the government in 2020 and 2021 were mostly temporary. At the same time, some of the discretionary measures adopted by the government over the period 2020 to 2021 were not temporary or matched by offsetting measures, mainly consisting of higher compensation for public sector employees. According to data validated by Eurostat, general government debt fell from 46,6 % of GDP in 2020 to 44,3 % of GDP in 2021.

(14)

The macroeconomic scenario underpinning the budgetary projections in the 2022 Stability Programme is realistic. The government projects real GDP to grow by 1,6 % in 2022 and 2,5 % in 2023. By comparison, the Commission’s 2022 spring forecast projects a real GDP growth of 1,7 % in 2022 and 2,6 % in 2023. In its 2022 Stability Programme, the government expects that the headline deficit will increase to 4,9 % of GDP in 2022 and decrease to 2,4 % in 2023. The increase in the deficit in 2022 mainly reflects measures to contain the impact of high energy prices, to support lower income households and to accommodate the flows of people fleeing Ukraine. According to the 2022 Stability Programme, the general government debt-to-GDP ratio is expected to decrease to 43,3 % in 2022, and to remain stable in 2023. Based on policy measures known at the cut-off date of the forecast, the Commission's 2022 spring forecast projects a government deficit for 2022 and 2023 of 4,6 % of GDP and 2,3 % respectively. This is in line with the deficit projected in the 2022 Stability Programme. The Commission's 2022 spring forecast projects a similar general government debt-to-GDP ratio of 42,7 % in 2022 and 43,1 % in 2023. According to the Commission's 2022 spring forecast, the medium-term (10-year average) potential output growth is estimated at 3,2 %. However, that estimate does not include the impact of the reforms that are part of the recovery and resilience plan and can boost Lithuania’s potential growth.

(15)

In 2022, the government phased out the majority of measures taken in response to the COVID-19 crisis, such that the temporary emergency measures are projected to decline from 2,8 % of GDP in 2021 to 1,2 % in 2022. The government deficit is impacted by the measures adopted to counter the economic and social impact of the increase in energy prices, which in the Commission's 2022 spring forecast are estimated at 1,2 % of GDP in 2022 and 0,0 % of GDP in 2023 (12). Those measures mainly consist of subsidies to gas and electricity companies, compensation of the value added tax (VAT) applied for heat energy and broader application of other compensations for heat energy. Those measures have been announced as mostly temporary. However, in the event that energy prices remain elevated in 2023, some of those measures could be continued. Some of those measures are not targeted, in particular the subsidies to gas and electricity companies and compensations of heat energy VAT. The government deficit is also impacted by the cost of offering temporary protection to displaced persons from Ukraine, which in the Commission's 2022 spring forecast is projected at 0,2 % in 2022 and 2023 (13), as well as the increased cost of defence expenditure by 0,5 % of GDP in both 2022 and 2023.

(16)

In its Recommendation of 18 June 2021, the Council recommended that in 2022 Lithuania maintain a supportive fiscal stance, including from the impulse provided by the Recovery and Resilience Facility, and preserve nationally financed investment. The Council also recommended Lithuania to keep the growth of nationally financed current expenditure under control. It also recommended Lithuania to pursue, when economic conditions allow, a fiscal policy aimed at achieving prudent medium-term fiscal positions and ensuring fiscal sustainability in the medium term and, at the same time, to enhance investment to boost growth potential.

(17)

In 2022, according to the Commission’s 2022 spring forecast and including the information incorporated in Lithuania’s 2022 Stability Programme, the fiscal stance is projected to be supportive at – 4,2 % of GDP as recommended by the Council (14). Lithuania plans to provide continued support to the recovery by making use of the Recovery and Resilience Facility to finance additional investment as recommended by the Council. The positive contribution to economic activity of expenditure financed by grants under the Recovery and Resilience Facility and other Union funds is projected to increase by 0,5 percentage points of GDP compared to 2021. Nationally financed investment is projected to provide an expansionary contribution to the fiscal stance of 0,3 percentage points in 2022 (15). Therefore, Lithuania plans to preserve nationally financed investment, as recommended by the Council. At the same time, the growth in nationally financed primary current expenditure (net of new revenue measures) in 2022 is projected to provide an expansionary contribution of 3,2 percentage points to the overall fiscal stance. That significant expansionary contribution includes the additional impact of the measures to address the economic and social impact of the increase in energy prices (1,2 % of GDP) as well as the costs to offer temporary protection to displaced persons from Ukraine (0,2 % of GDP), while, among other measures, additional support to lower income households (additional increase of pensions, child benefits, social assistance, minimum level of non-taxable income) is also projected to contribute 0,4 % of GDP to the growth in net current expenditure. Therefore, on the basis of current Commission estimates, Lithuania does not sufficiently keep under control the growth of nationally financed current expenditure in 2022.

(18)

In 2023, the fiscal stance is projected in the Commission 2022 spring forecast at 1,5 % of GDP on a no-policy-change assumption (16). Lithuania is projected to continue using the grants under the Recovery and Resilience Facility in 2023 to finance additional investment in support of the recovery. The positive contribution to economic activity of expenditure financed by grants under the Recovery and Resilience Facility and other Union funds is projected to increase by 0,4 percentage points of GDP in 2023. Nationally financed investment is projected to provide a contractionary contribution to the fiscal stance of 0,5 percentage points in 2023 (17). At the same time, the growth in nationally financed primary current expenditure (net of new revenue measures) in 2023 is projected to provide a contractionary contribution of 1,5 percentage points to the overall fiscal stance. This includes the impact from the phasing out of the measures addressing the increased energy prices (1,2 % of GDP) and additional costs to offer temporary protection to displaced persons from Ukraine (0,1 % of GDP).

(19)

In the 2022 Stability Programme, the government deficit is expected to gradually decline to 1,3 % in 2024 and to 1,0 % by 2025. The general government deficit is thus planned to remain below 3 % of GDP over the Programme horizon. According to the 2022 Stability Programme, the general government debt-to-GDP ratio is expected to decrease by 2025, specifically with a decrease to 42,6 % in 2024, and a decline to 42,5 % in 2025. According to the Commission’s analysis, debt sustainability risks appear low over the medium term.

(20)

The public procurement scoreboard 2020 identified some bottlenecks in the public procurement system in Lithuania: lack of cooperation between purchasing organisations, few or no participants in tenders, and an over-reliance on the price criterion. Broadening the scope of ongoing efforts to foster cooperative public procurement across municipalities, so that the reform would also cover the central government level, would help develop and spread best practices and improve the overall efficiency and effectiveness of the processes. This would also help increase fiscal sustainability.

(21)

In accordance with Article 19(3), point (b), of Regulation (EU) 2021/241 and criterion 2.2 of Annex V to that Regulation, the recovery and resilience plan includes an extensive set of mutually reinforcing reforms and investments with an indicative timetable for implementation to be completed by 31 August 2026. These help address all or a significant subset of the economic and social challenges outlined in the country-specific recommendations addressed to Lithuania by the Council in the European Semester in 2019 and 2020, in addition to any country-specific recommendations issued up to the date of adoption of a recovery and resilience plan. In particular, the recovery and resilience plan strongly focuses on measures to promote digitalisation and the green transition, ensure the quality and efficiency of health services, enhance social protection, prioritise education and innovation, and increase the effectiveness of the public sector.

(22)

The implementation of the recovery and resilience plan of Lithuania is expected to contribute to making further progress on the green and digital transitions. Measures supporting the climate objectives in Lithuania account for 37,8 % of the recovery and resilience plan’s total allocation, while measures supporting digital objectives account for 31,5 % of the recovery and resilience plan’s total allocation. The fully fledged implementation of the recovery and resilience plan, in line with the relevant milestones and targets, will help Lithuania swiftly recover from the fallout of the COVID-19 crisis, while strengthening its resilience. The systematic involvement of social partners and other relevant stakeholders remains important for the successful implementation of the recovery and resilience plan, as well as other economic and employment policies going beyond the recovery and resilience plan, to ensure broad ownership of the overall policy agenda.

(23)

The Commission approved the Partnership Agreement, provided for in Regulation (EU) 2021/1060 of the European Parliament and of the Council (18), of Lithuania on 22 April 2022. Lithuania submitted the cohesion policy programme on 16 March 2022. In line with Regulation (EU) 2021/1060, Lithuania has taken into account the relevant country-specific recommendations in the programming of the 2021–2027 cohesion policy funds. This is a prerequisite for improving the effectiveness and maximising the added value of the financial support to be received from cohesion policy funds, while promoting coordination, complementarity and coherence between those cohesion policy funds and other Union instruments and funds. The successful implementation of the Recovery and Resilience Facility and cohesion policy programmes also depends on the removal of bottlenecks to investment to support the green and digital transitions and balanced territorial development.

(24)

Beyond the economic and social challenges addressed by the recovery and resilience plan, Lithuania faces a number of additional challenges related to primary and preventive care, weaknesses in the planning and delivery of social services and a lack of strategy on social housing. The high levels of avoidable hospital admissions and of treatable and preventable mortality rates demonstrate the need for more preventive actions in Lithuanian healthcare. Moreover, shortages and uneven distribution of health professionals limit access to primary healthcare and long-term care. Beyond the health reforms and investment in Lithuania’s recovery and resilience plan, there is a need to further strengthen primary care and prevention. Lack of collaboration between various ministries and other public bodies and gaps in identifying the needs hinder the integrated provision of social services. The services also insufficiently address the needs of unemployed people. In 2019 (19), Lithuania’s spending on social housing, i.e. EUR 10,31 per inhabitant, is significantly below the Union average of EUR 101,58 (both in constant 2010 prices), leading to persistent shortages and long waiting lists. The quality of the social housing provided also needs to be improved. The recovery and resilience plan includes important measures such as a reform of the minimum income scheme and the tax-benefit system together with increasing the coverage of unemployment social insurance. Those measures are expected to help address some of the key social protection challenges once implemented. However, beyond the measures included in the recovery and resilience plan, further efforts are needed to improve the planning, quality and effectiveness of social services and to address the shortages and insufficient quality of social housing.

(25)

In response to the mandate by the Union Heads of State or Government set out in the Versailles Declaration, the Commission's proposal for a REPowerEU plan aims to phase out the Union’s dependence on fossil-fuel imports from Russia as soon as possible. For this purpose, the Commission intends to identify the most-suitable projects, investments and reforms at national, regional and Union level in dialogue with Member States. These measures aim to reduce overall reliance on fossil fuels, and shift fossil-fuel imports away from Russia.

(26)

Lithuania is highly dependent on imports for its energy supply, as it imports around two thirds of its gross electricity needs and most of its oil and gas. Oil and gas represent three quarters of the country’s energy mix. Until Russia’s invasion of Ukraine, oil and gas were predominantly imported from Russia. In 2020, Lithuania imported 42 % of its natural gas imports from Russia (largely in line with the Union average of 44 %) and 73 % of its crude oil imports from Russia (higher than the Union average of 26 %) (20). The demand for energy is driven by a large transport fleet, with public transport and rail remaining underused, a large stock of energy-inefficient buildings and highly energy-intensive industries, which account for 67 % of the total gas consumption. Additional efforts to reduce energy intensity in those sectors, by promoting industrial transformation, including innovative production processes, and further promoting the use of renewable energy sources, would decrease Lithuania’s dependence on overall energy imports. Lithuania has considerably improved its energy security by developing electricity and gas links with neighbouring Member States and with the liquefied natural gas terminal in Klaipėda. Overall, Lithuania needs to pursue its efforts to further enhance regional cooperation with its neighbours to coordinate further gas imports and the efficient use of regional infrastructures. In this context, the gas interconnector with Poland (GIPL) that is operational as of 1 May 2022, and the enhancement of other gas interconnectors with neighbouring Member States, will help safeguard energy supply in the region. Completing the ongoing synchronisation with the Union continental power grid, ensuring sufficient capacity for the interconnections with neighbouring Member States and pursuing joint renewable projects should nevertheless remain a policy priority. New infrastructure and network investments related to gas are recommended to be future-proof where possible, in order to facilitate their long-term sustainability through future repurposing for sustainable fuels. A further increase in ambition in respect of reducing greenhouse-gas emission and increasing renewable energy and energy efficiency targets will be needed in order for Lithuania to be in line with the ‘Fit for 55’ objectives.

(27)

While the acceleration of the transition towards climate neutrality and away from fossil fuels will create significant restructuring costs in several sectors, Lithuania can make use of the Just Transition Mechanism in the context of cohesion policy to alleviate the socioeconomic impact of the transition in the most-affected regions. In addition, Lithuania can make use of the European Social Fund Plus, established by Regulation (EU) 2021/1057 of the European Parliament and of the Council (21), to improve employment opportunities and strengthen social cohesion.

(28)

In the light of the Commission’s assessment, the Council has examined the 2022 Stability Programme and its opinion (22) is reflected in recommendation (1).

(29)

In view of the close interlinkages between the economies of euro-area Member States and their collective contribution to the functioning of the economic and monetary union, the Council recommended that the euro-area Member States take action, including through their recovery and resilience plans, to implement the recommendations set out in the 2022 Recommendation on the euro area. For Lithuania, this is reflected in particular in recommendations (1) and (2),

(1)

Regulation (EU) 2021/241 of the European Parliament and of the Council (2), which established the Recovery and Resilience Facility, entered into force on 19 February 2021. The Recovery and Resilience Facility provides financial support for the implementation of reforms and investment, entailing a fiscal impulse financed by the Union. It contributes to the economic recovery and to the implementation of sustainable and growth-enhancing reforms and investment, in particular to promote the green and digital transitions, while strengthening the resilience and potential growth of the Member States’ economies. It also helps strengthen sustainable public finances and boost growth and job creation in the medium and long term. The maximum financial contribution per Member State under the Recovery and Resilience Facility will be updated in June 2022, in line with Article 11(2) of Regulation (EU) 2021/241.

(2)

On 24 November 2021, the Commission adopted the Annual Sustainable Growth Survey, marking the start of the 2022 European Semester for economic policy coordination. It took due account of the Porto Social Commitment signed on 7 May 2021 to further implement the European Pillar of Social Rights proclaimed by the European Parliament, the Council and the Commission on 17 November 2017. The European Council endorsed the priorities of the 2022 Annual Sustainable Growth Survey on 25 March 2022. On 24 November 2021, on the basis of Regulation (EU) No 1176/2011 of the European Parliament and of the Council (3), the Commission also adopted the Alert Mechanism Report, in which it did not identify Luxembourg as one of the Member States for which an in-depth review would be needed. On the same date, the Commission also adopted a recommendation for a Council recommendation on the economic policy of the euro area and a the proposal for the 2022 Joint Employment Report, which analyses the implementation of the Employment Guidelines and the principles of the European Pillar of Social RightsThe Council adopted the Recommendation on the economic policy of the euro area (4) (‘2022 Recommendation on the euro area’) on 5 April 2022 and the Joint Employment Report on 14 March 2022.

(3)

Russia’s invasion of Ukraine, in the wake of the global pandemic, has significantly altered the geopolitical and economic context. The impact of the invasion on Member States’ economies has been felt through, inter alia, higher prices for energy, food and raw materials, and weaker growth prospects. The higher energy prices weigh particularly heavily on the most vulnerable households experiencing or at risk of energy poverty as well as on firms most vulnerable to energy prices hikes. The Union is also seeing an unprecedented inflow of people fleeing Ukraine. The economic effects stemming from Russia’s war of aggression have impacted Member States asymmetrically. In this context, on 4 March 2022, Council Directive 2001/55/EC (5) was triggered for the first time by Council Implementing Decision (EU) 2022/382 (6), granting displaced persons from Ukraine the right to legally stay in the Union, as well as access to education and training, the labour market, healthcare, housing and social welfare.

(4)

Taking account of the rapidly changing economic and geopolitical situation, the European Semester resumes its broad economic and employment policy coordination in 2022, while evolving in line with the implementation requirements of the Recovery and Resilience Facility, as outlined in the 2022 Annual Sustainable Growth Survey. The implementation of the adopted recovery and resilience plans is essential for the delivery of the policy priorities under the European Semester, as the plans address all or a significant subset of the relevant country-specific recommendations issued in the 2019 and 2020 European Semester cycles. The 2019 and 2020 country-specific recommendations remain equally relevant also for the recovery and resilience plans revised, updated or amended in accordance with Articles 14, 18 and 21 of Regulation (EU) 2021/241, in addition to any other country-specific recommendations issued up to the date of submission of such revised, updated or amended recovery and resilience plans.

(5)

The general escape clause of the Stability and Growth Pact has been active since March 2020. In its communication of 3 March 2021 entitled ‘One year since the outbreak of COVID-19: fiscal policy response’, the Commission set out its view that the decision on the deactivation or continued application of the general escape clause should be taken as an overall assessment of the state of the economy, with the level of economic activity in the Union or euro area compared to pre-crisis levels (end of 2019) as a key quantitative criterion. Heightened uncertainty and strong downside risks to the economic outlook in the context of war in Europe, unprecedented energy price hikes and continued supply-chain disturbances warrant the extension of the general escape clause of the Stability and Growth Pact through 2023.

(6)

Following the approach in the Council Recommendation of 18 June 2021 (7) delivering a Council opinion on the 2021 Stability Programme of Luxembourg, the overall fiscal stance is currently best measured as the change in primary expenditure (net of discretionary revenue measures and excluding temporary emergency measures related to the COVID-19 crisis) but including expenditure financed by non-repayable support (grants) from the Recovery and Resilience Facility and other Union funds, relative to medium-term potential growth (8). Going beyond the overall fiscal stance, in order to assess whether national fiscal policy is prudent and its composition is conducive to a sustainable recovery consistent with the green and digital transitions, attention is also paid to the evolution of nationally financed (9) primary current expenditure (net of discretionary revenue measures and excluding temporary emergency measures related to the COVID-19 crisis) and investment.

(7)

On 2 March 2022, the Commission adopted a communication providing broad guidance for fiscal policy in 2023 (‘the fiscal guidance’) aimed at supporting the preparation of Member States’ Stability and Convergence Programmes and thereby strengthening policy coordination. The Commission noted that, on the basis of the macroeconomic outlook of the 2022 winter forecast, transitioning from an aggregate supportive fiscal stance in 2020–2022 to a broadly neutral aggregate fiscal stance, while standing ready to react to the evolving economic situation, would appear appropriate in 2023. The Commission announced that the fiscal recommendations for 2023 should continue to differentiate between Member States and take into account possible cross-country spillovers. The Commission invited the Member States to reflect the guidance in their Stability and Convergence Programmes. The Commission committed to closely monitor the economic developments and adjust its policy guidance as needed and at the latest in its European Semester spring package of late May 2022.

(8)

With respect to the fiscal guidance, the fiscal recommendations for 2023 take into account the worsened economic outlook, the heightened uncertainty and further downside risks, and the higher inflation compared to the Commission’s 2022 winter forecast. Against these considerations, the fiscal response has to expand public investment for the green and digital transitions and energy security, and sustain the purchasing power of the most vulnerable households so as to cushion the impact of the energy price hike and help limit inflationary pressures from second-round effects via targeted and temporary measures. Fiscal policy has to remain agile so as to adjust to the rapidly evolving circumstances, including challenges that arise from Russia’s war of aggression against Ukraine with regard to defence and security, and has to differentiate between Member States according to their fiscal and economic situation, including as regards their exposure to the crisis and the inflow of displaced persons from Ukraine.

(9)

On 30 April 2021, Luxembourg submitted its national recovery and resilience plan to the Commission, in accordance with Article 18(1) of Regulation (EU) 2021/241. Pursuant to Article 19 of Regulation (EU) 2021/241, the Commission assessed the relevance, effectiveness, efficiency and coherence of the recovery and resilience plan, in accordance with the assessment guidelines set out in Annex V to that Regulation. On 13 July 2021, the Council adopted its Implementing Decision on the approval of the assessment of the recovery and resilience plan for Luxembourg (10). The release of instalments is conditional on the adoption of a decision by the Commission, in accordance with Article 24(5) of Regulation (EU) 2021/241, stating that Luxembourg has satisfactorily fulfilled the relevant milestones and targets set out in the Council Implementing Decision. Satisfactory fulfilment presupposes that the achievement of preceding milestones and targets has not been reversed.

(10)

On 29 April 2022, Luxembourg submitted its 2022 National Reform Programme and its 2022 Stability Programme, in line with Article 4 of Regulation (EC) No 1466/97. To take account of their interlinkages, the two programmes have been assessed together. In accordance with Article 27 of Regulation (EU) 2021/241, the 2022 National Reform Programme also reflects Luxembourg’s biannual reporting on the progress made in implementing its recovery and resilience plan.

(11)

The Commission published the 2022 country report for Luxembourg on 23 May 2022. It assessed Luxembourg’s progress in addressing the relevant country-specific recommendations adopted by the Council in 2019, 2020 and 2021, and took stock of Luxembourg’s implementation of the recovery and resilience plan, building on the recovery and resilience scoreboard. On the basis of that analysis, the country report identified gaps with respect to those challenges that are not addressed or only partially addressed by the recovery and resilience plan, as well as new and emerging challenges, including those emerging from Russia’s invasion of Ukraine. It also assessed Luxembourg’s progress in implementing the European Pillar of Social Rights and in achieving the Union headline targets on employment, skills and poverty reduction, as well as progress in achieving the United Nations Sustainable Development Goals.

(12)

In its Recommendation of 20 July 2020 (11), the Council recommended Luxembourg to take in 2020 and 2021 all necessary measures, in line with the general escape clause, to effectively address the COVID-19 pandemic, sustain the economy and support the ensuing recovery. It also recommended Luxembourg to pursue, when economic conditions allow, fiscal policies aimed at achieving prudent medium-term fiscal positions and ensuring debt sustainability, while enhancing investment. In 2021, according to data validated by Eurostat, Luxembourg’s general government balance improved from a deficit of 3,4 % of GDP in 2020 to a surplus of 0,9 % in 2021. The fiscal policy response by Luxembourg supported the economic recovery in 2021, while temporary emergency measures declined from 2,4 % of GDP in 2020 to 0,7 %. The measures taken by Luxembourg in 2021 were in line with the Council Recommendation of 20 July 2020. The discretionary budgetary measures adopted by the government in 2020 and 2021 were temporary or matched by offsetting measures. According to data validated by Eurostat, general government debt fell from 24,8 % of GDP in 2020 to 24,4 % of GDP in 2021.

(13)

The macroeconomic scenario underpinning the budgetary projections is cautious in 2022 and realistic thereafter. The 2022 Stability Programme projects real GDP to grow by 1,4 % in 2022 and 2,9 % in 2023. By comparison, the Commission’s 2022 spring forecast projects a real GDP growth of 2,2 % in 2022 and of 2,7 % in 2023. The difference of 0,8 percentage point in 2022 is mainly due to higher expectations for investments and a positive contribution of net exports to real GDP growth in the Commission’s 2022 spring forecast. In its 2022 Stability Programme, the government expects that the headline balance will decrease to a deficit of 0,7 % of GDP in 2022 and to 0,4 % in 2023. The decrease in 2022 mainly reflects higher expenditure on compensation of employees, investments and social benefits, while on the revenue side current taxes on income and wealth are projected to decline. According to the 2022 Stability Programme, the general government debt-to-GDP ratio is expected to increase to 25,4 % in 2022, and to rise to 25,8 % in 2023. Based on policy measures known at the cut-off date of the forecast, the Commission’s 2022 spring forecast projects a government deficit for 2022 of 0,1 % of GDP and a surplus for 2023 of 0,1 %. The Commission’s 2022 spring forecast projects a lower general government debt-to-GDP ratio, of 24,7 % in 2022 and 25,1 % in 2023. According to the Commission’s 2022 spring forecast, the medium-term (10-year average) potential output growth is estimated at 2,6 %. However, that estimate does not include the impact of the reforms that are part of the recovery and resilience plan and can raise Luxembourg’s potential growth.

(14)

In 2022, the government phased out the majority of measures taken in response to the COVID-19 crisis, such that the temporary emergency measures are projected to decline from 0,7 % of GDP in 2021 to 0,1 % in 2022. The government deficit is impacted by the measures adopted to counter the economic and social impact of the increase in energy prices, which in the Commission’s 2022 spring forecast are estimated at 0,8 % of GDP in 2022 and 0,2 % of GDP in 2023 (12). Those measures mainly consist of an energy tax credit, social transfers to low-income households, cuts in indirect taxes on energy consumption, and subsidies on production. At the same time, an agreement was reached with social partners to defer an expected trigger of the inflation indexation mechanism from Summer 2022 to April 2023 and any subsequent tranche to April 2024 at the earliest. Those measures have been announced as mostly temporary. However, in the event that energy prices remain elevated in 2023, some of those measures could be continued. Some of those measures are not targeted, in particular the across-the-board cut in excise duties for fuel in 2022. The government deficit is also impacted by the cost of offering temporary protection to displaced persons from Ukraine, which in the Commission’s 2022 spring forecast is projected at 0,1 % and 0,2 % of GDP in 2022 and 2023 (13).

(15)

In its Recommendation of 18 June 2021, the Council recommended that in 2022 Luxembourg pursues a supportive fiscal stance, including from the impulse provided by the Recovery and Resilience Facility, and preserves nationally financed investment. The Council also recommended Luxembourg to pursue, when economic conditions allow, a fiscal policy aimed at achieving prudent medium-term fiscal positions and ensuring fiscal sustainability in the medium term and, at the same time, to enhance investment to boost growth potential.

(16)

In 2022, according to the Commission’s 2022 spring forecast and including the information incorporated in Luxembourg’s 2022 Stability Programme, the fiscal stance is projected to be supportive at – 1,3 % of GDP as recommended by the Council (14). Luxembourg plans to provide continued support to the recovery, including by making use of the Recovery and Resilience Facility to finance additional investment as recommended by the Council. The positive contribution to economic activity of expenditure financed by grants under the Recovery and Resilience Facility and other Union funds is projected to remain stable compared to 2021. Nationally financed investment is projected to provide an expansionary contribution of 0,1 percentage point to the fiscal stance in 2022 (15). Therefore, Luxembourg plans to preserve nationally financed investment, as recommended by the Council. At the same time, the growth in nationally financed primary current expenditure (net of new revenue measures) in 2022 is projected to provide an expansionary contribution of 1,2 percentage points to the overall fiscal stance. That significant expansionary contribution includes the additional impact of the measures to address the economic and social impact of the increase in energy prices (0,5 % of GDP) as well as the costs to offer temporary protection to displaced persons from Ukraine (0,1 % of GDP), while higher compensation of employees and social transfers are also projected to contribute (0,3 % of GDP) to the growth in net current expenditure.

(17)

In 2023, the fiscal stance is projected in the Commission’s 2022 spring forecast at + 0,5 % of GDP on a no-policy change assumption (16). Luxembourg is projected to continue using the grants under the Recovery and Resilience Facility in 2023 to finance additional investment in support of the recovery. Nationally financed investment is projected to provide an expansionary contribution of 0,1 % of GDP to the fiscal stance in 2023 (17). At the same time, the growth in nationally financed primary current expenditure (net of new revenue measures) in 2023 is projected to provide a contractionary contribution of 0,5 percentage point to the overall fiscal stance. This includes the impact from the phasing out of the measures addressing the increased energy prices (0,3 % of GDP).

(18)

In the 2022 Stability Programme, the general government deficit is expected to gradually decline to 0,3 % of GDP in 2024 and to 0,2 % by 2025. The general government balance is thus planned to remain below 3 % of GDP over the 2022 Stability Programme horizon. These projections assume slightly higher revenues and stable expenditure as a percentage of GDP. According to the 2022 Stability Programme, the general government debt-to-GDP ratio is expected to increase by 2025, specifically with an increase to 26,2 % in 2024, and a stabilisation at 26,2 % in 2025. According to the Commission’s analysis, debt sustainability risks appear low over the medium term.

(19)

The COVID-19 crisis had a smaller impact on government finances than in other Member States, and relevant indicators are expected to improve in 2022. However, the impact of demographic trends on government spending will intensify over the next decades. In particular, this is because the number of pensioners per worker is expected to rise steadily due to the ageing population and the slowdown of net migration flows. Under a ‘no policy change’ scenario, Luxembourg will face one of the Union’s sharpest increases in pension spending, as a share of GDP by 2070. This would lead to a pension spending of around 18 % of GDP (compared to 9 % in 2019), among the highest in the Union. This will cause a significant increase in government debt, putting the sustainability of government finances at risk in the long term. Raising the effective retirement age would have the most beneficial macroeconomic impact, since this factor has the largest potential to reduce pension spending. In turn, a higher rate of older workers in employment would also support economic growth. The recovery and resilience plan does not address the long-term sustainability of the pension system, nor the negative effects of early-retirement schemes and the financial incentives to exit the labour market early, which explains the low employment rate of older workers. An early start with reforms aiming to limit early-retirement schemes and shifting older workers’ preferences to staying in employment for longer would enable a gradual implementation, increasing intergenerational fairness.

(20)

The fight against aggressive tax planning in the Union is essential to: (i) prevent distortion of competition between firms; (ii) ensure fair treatment of taxpayers; and (iii) safeguard government finances. Luxembourg is a small, open economy, with a large integrated financial sector, which in large part explains the existence of large financial flows. However, these large financial flows also reflect the large presence in the country of foreign-controlled companies, which are involved in intra-group financing and treasury activities. A particular point of concern is the absence of withholding taxes or equivalent measures on interest and royalty payments to low- or zero-tax jurisdictions beyond those countries included in the Union list of non-cooperative jurisdictions (18). Outbound payments of interests and royalties from Luxembourg-based companies to non-EU jurisdictions could be subject to little or no taxation if these payments are not taxed or taxed at a low level in the recipient jurisdiction. Luxembourg has taken some steps to fight aggressive tax planning. So far, however, measures have been limited and insufficient to address the outbound payment issue in the tax system, which could be used by multinationals to engage in aggressive tax planning.

(21)

In accordance with Article 19(3), point (b), of Regulation (EU) 2021/241 and criterion 2.2 of Annex V to that Regulation, the recovery and resilience plan includes an extensive set of mutually reinforcing reforms and investments with an indicative timetable for implementation to be completed by 31 August 2026. These help address all or a significant subset of the economic and social challenges outlined in the country-specific recommendations addressed to Luxembourg by the Council in the European Semester in 2019 and 2020, in addition to any country-specific recommendations issued up to the date of adoption of a recovery and resilience plan. In particular, these challenges relate to the health system’s resilience, labour market inclusion and investment in the green and digital transitions, as well as the shortage of affordable housing and the institutional resilience of the anti-money laundering framework. The recovery and resilience plan includes measures to increase the public supply of affordable housing. The recovery and resilience plan also includes investments in renewable energy generation and sustainable transport, helping to progressively decarbonise the economy. Digital public services and a large public research and innovation project in quantum communication technologies would encourage business investment and boost productivity growth in the medium term. On anti-money laundering and counter-terrorist financing, the recovery and resilience plan includes a combination of measures to improve transparency and strengthen the framework for the oversight of financial service providers. The skills strategy and training programmes set out in the recovery and resilience plan, including a dedicated target for older workers, should help improve labour market inclusion.

(22)

The implementation of the recovery and resilience plan of Luxembourg is expected to contribute to making further progress on the green and digital transitions. Measures supporting the climate objectives in Luxembourg account for 61 % of the recovery and resilience plan’s total allocation, while measures supporting digital objectives account for 32 % of the recovery and resilience plan’s total allocation. The fully fledged implementation of the recovery and resilience plan, in line with the relevant milestones and targets, will help Luxembourg swiftly recover from the fallout of the COVID-19 crisis, while strengthening its resilience. The systematic involvement of social partners and other relevant stakeholders remains important for the successful implementation of the recovery and resilience plan, as well as other economic and employment policies going beyond the recovery and resilience plan, to ensure broad ownership of the overall policy agenda.

(23)

Luxembourg has not yet submitted the Partnership Agreement or the other cohesion policy programmes provided for in Regulation (EU) 2021/1060 of the European Parliament and of the Council (19). In line with Regulation (EU) 2021/1060, Luxembourg is to take into account the relevant country-specific recommendations in the programming of the 2021–2027 cohesion policy funds. This is a prerequisite for improving the effectiveness and maximising the added value of the financial support to be received from cohesion policy funds, while promoting coordination, complementarity and coherence between those cohesion policy funds and other Union instruments and funds. The successful implementation of the Recovery and Resilience Facility and cohesion policy programmes also depends on the removal of bottlenecks to investment to support the green and digital transitions and balanced territorial development.

(24)

Beyond the economic and social challenges addressed by the recovery and resilience plan, Luxembourg faces a number of additional challenges, in particular related to growing inequality in the education system. Luxembourg’s education system is characterised by the use of three languages of schooling (Luxembourgish, German and French), as well as by a high number of pupils from diverse socioeconomic and linguistic backgrounds. International test results suggest that pupils’ basic skills are lower than the Union average and are strongly linked to pupils’ socioeconomic and linguistic backgrounds. In the 2018 survey of the Programme for International Student Assessment (PISA) carried out by the Organisation for Economic Co-operation and Development, Luxembourg recorded one of the Union’s largest score gaps in reading between advantaged and disadvantaged students. Inequalities are amplified by the multilingual schooling and the way pupils are separated into different school tracks at an early stage. The education system does not provide all pupils with sufficient multilingual and basic skills to meet the country’s labour market needs. Individualised support for pupils would help achieve full development potential and overall inclusion of all students. In line with the conclusions of the national observatory of school quality of 2020, there is room to improve the education system’s governance, further developing evaluation tools and measurable objectives promoting quality and equality of opportunity on both the formal and non-formal sides of the education system.

(25)

In response to the mandate by the Union Heads of State or Government set out in the Versailles Declaration, the Commission’s roposal for a REPowerEU plan aims to phase out the Union’s dependence on fossil-fuel imports from Russia as soon as possible. For this purpose, the Commission intends to identify the most-suitable projects, investments and reforms at national, regional and Union level in dialogue with Member States. These measures aim to reduce overall reliance on fossil fuels and shift fossil-fuel imports away from Russia.

(26)

Luxembourg’s energy system is characterised by high import dependence and reliance on fossil fuels. According to 2020 data (20), Luxembourg is the Union’s largest net importer of energy relative to population size. It is almost entirely dependent on primary energy imports, with a dependency rate of 92,5 %. By far the dominant primary energy sources are oil and gas; oil represents 68,5 % of the energy consumption, and gas 17,8 %. Luxembourg imports no oil from Russia, while the Union average is 26 % of crude oil imports. However, Russia is still a relatively important source of gas imports as it provides 27 % of Luxembourg’s natural gas imports though this is below the Union average of 44 %. Luxembourg integrated its gas market with that of Belgium. As regards electricity, while there are no major bottlenecks in the short term, further investment will be needed to accompany the transition to renewable energy, in particular in terms of grid reinforcement and upgrades. Industrial gas demand has been flat in recent years and commercial sector gas demand grew moderately. The main growth in gas consumption came from an increase in residential sector consumption. Luxembourg has to address the challenge of insufficient housing supply while achieving its energy and climate targets. There is also a need to renovate the existing building stock. With 20,8 % of the total energy saving potential (in terms of GWh), the residential building and renovation sector represents the second-largest source of cumulative energy saving potential by 2030. Luxembourg increased its renewable energy share from 5 % in 2015 to 12 % in 2020. Nevertheless, it is still one of the Member States with the lowest share. Luxembourg needs strong action to reach its 2030 energy targets of obtaining 25 % of energy from renewables and reducing final energy consumption by 40 % to 44 % compared to 2007. Municipalities will have a key role in this respect. Road traffic congestion weighs on the economy and on environmental sustainability, while transport accounts for a significant share of oil consumption and for 59 % of total greenhouse gas emissions, which compares to a Union average of 24 % in 2019.

Measures targeting more efficient and sustainable transport can thus substantially help to reduce oil dependence. This is reflected in the National Energy and Climate Plan of Luxembourg, which targets 40 % of electric and plug-in vehicles for 2030. Luxembourg has set itself the target of becoming climate neutral by 2050. A further increase in ambition in respect of reducing greenhouse-gas emissions and increasing renewable energy and energy efficiency will be needed in order for Luxembourg to be in line with the ‘Fit for 55’ objectives.

(27)

While the acceleration of the transition towards climate neutrality and away from fossil fuels will create significant restructuring costs in several sectors, Luxembourg can make use of the Just Transition Mechanism in the context of the cohesion policy to alleviate the socioeconomic impact of the transition. In addition, Luxembourg can make use of the European Social Fund Plus, established by Regulation (EU) 2021/1057 of the European Parliament and of the Council (21), to improve employment opportunities and strengthen social cohesion.

(28)

In the light of the Commission's assessment, the Council has examined the 2022 Stability Programme and its opinion (22) is reflected in recommendation (1).

(29)

In view of the close interlinkages between the economies of euro-area Member States and their collective contribution to the functioning of the economic and monetary union, the Council recommended that the euro-area Member States take action, including through their recovery and resilience plans, to implement the recommendations set out in the 2022 Recommendation on the euro area. For Luxembourg this is reflected in particular in recommendations 1, 2 and 3,