ISSN 1977-091X

Official Journal

of the European Union

C 261

European flag  

English edition

Information and Notices

Volume 60
9 August 2017


Notice No

Contents

page

 

I   Resolutions, recommendations and opinions

 

RECOMMENDATIONS

 

Council

2017/C 261/01

Council Recommendation of 11 July 2017 on the 2017 National Reform Programme of Belgium and delivering a Council opinion on the 2017 Stability Programme of Belgium

1

2017/C 261/02

Council Recommendation of 11 July 2017 on the 2017 National Reform Programme of Bulgaria and delivering a Council opinion on the 2017 Convergence Programme of Bulgaria

7

2017/C 261/03

Council Recommendation of 11 July 2017 on the 2017 National Reform Programme of the Czech Republic and delivering a Council opinion on the 2017 Convergence Programme of the Czech Republic

12

2017/C 261/04

Council Recommendation of 11 July 2017 on the 2017 National Reform Programme of Denmark and delivering a Council opinion on the 2017 Convergence Programme of Denmark

16

2017/C 261/05

Council Recommendation of 11 July 2017 on the 2017 National Reform Programme of Germany and delivering a Council opinion on the 2017 Stability Programme of Germany

18

2017/C 261/06

Council Recommendation of 11 July 2017 on the 2017 National Reform Programme of Estonia and delivering a Council opinion on the 2017 Stability Programme of Estonia

23

2017/C 261/07

Council Recommendation of 11 July 2017 on the 2017 National Reform Programme of Ireland and delivering a Council opinion on the 2017 Stability Programme of Ireland

26

2017/C 261/08

Council Recommendation of 11 July 2017 on the 2017 National Reform Programme of Spain and delivering a Council opinion on the 2017 Stability Programme of Spain

31

2017/C 261/09

Council Recommendation of 11 July 2017 on the 2017 National Reform Programme of France and delivering a Council opinion on the 2017 Stability Programme of France

36

2017/C 261/10

Council Recommendation of 11 July 2017 on the 2017 National Reform Programme of Croatia and delivering a Council opinion on the 2017 Convergence Programme of Croatia

41

2017/C 261/11

Council Recommendation of 11 July 2017 on the 2017 National Reform Programme of Italy and delivering a Council opinion on the 2017 Stability Programme of Italy

46

2017/C 261/12

Council Recommendation of 11 July 2017 on the 2017 National Reform Programme of Cyprus and delivering a Council opinion on the 2017 Stability Programme of Cyprus

53

2017/C 261/13

Council Recommendation of 11 July 2017 on the 2017 National Reform Programme of Latvia and delivering a Council opinion on the 2017 Stability Programme of Latvia

58

2017/C 261/14

Council Recommendation of 11 July 2017 on the 2017 National Reform Programme of Lithuania and delivering a Council opinion on the 2017 Stability Programme of Lithuania

62

2017/C 261/15

Council Recommendation of 11 July 2017 on the 2017 National Reform Programme of Luxembourg and delivering a Council opinion on the 2017 Stability Programme of Luxembourg

67

2017/C 261/16

Council Recommendation of 11 July 2017 on the 2017 National Reform Programme of Hungary and delivering a Council opinion on the 2017 Convergence Programme of Hungary

71

2017/C 261/17

Council Recommendation of 11 July 2017 on the 2017 National Reform Programme of Malta and delivering a Council opinion on the 2017 Stability Programme of Malta

75

2017/C 261/18

Council Recommendation of 11 July 2017 on the 2017 National Reform Programme of the Netherlands and delivering a Council opinion on the 2017 Stability Programme of the Netherlands

79

2017/C 261/19

Council Recommendation of 11 July 2017 on the 2017 National Reform Programme of Austria and delivering a Council opinion on the 2017 Stability Programme of Austria

83

2017/C 261/20

Council Recommendation of 11 July 2017 on the 2017 National Reform Programme of Poland and delivering a Council opinion on the 2017 Convergence Programme of Poland

88

2017/C 261/21

Council Recommendation of 11 July 2017 on the 2017 National Reform Programme of Portugal and delivering a Council opinion on the 2017 Stability Programme of Portugal

92

2017/C 261/22

Council Recommendation of 11 July 2017 on the 2017 National Reform Programme of Romania and delivering a Council opinion on the 2017 Convergence Programme of Romania

98

2017/C 261/23

Council Recommendation of 11 July 2017 on the 2017 National Reform Programme of Slovenia and delivering a Council opinion on the 2017 Stability Programme of Slovenia

105

2017/C 261/24

Council Recommendation of 11 July 2017 on the 2017 National Reform Programme of Slovakia and delivering a Council opinion on the 2017 Stability Programme of Slovakia

110

2017/C 261/25

Council Recommendation of 11 July 2017 on the 2017 National Reform Programme of Finland and delivering a Council opinion on the 2017 Stability Programme of Finland

114

2017/C 261/26

Council Recommendation of 11 July 2017 on the 2017 National Reform Programme of Sweden and delivering a Council opinion on the 2017 Convergence Programme of Sweden

119

2017/C 261/27

Council Recommendation of 11 July 2017 on the 2017 National Reform Programme of the United Kingdom and delivering a Council opinion on the 2017 Convergence Programme of the United Kingdom

122


EN

 


I Resolutions, recommendations and opinions

RECOMMENDATIONS

Council

9.8.2017   

EN

Official Journal of the European Union

C 261/1


COUNCIL RECOMMENDATION

of 11 July 2017

on the 2017 National Reform Programme of Belgium and delivering a Council opinion on the 2017 Stability Programme of Belgium

(2017/C 261/01)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty on the Functioning of the European Union, and in particular Articles 121(2) and 148(4) thereof,

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies (1), and in particular Article 5(2) thereof,

Having regard to the recommendation of the European Commission,

Having regard to the resolutions of the European Parliament,

Having regard to the conclusions of the European Council,

Having regard to the opinion of the Employment Committee,

Having regard to the opinion of the Economic and Financial Committee,

Having regard to the opinion of the Social Protection Committee,

Having regard to the opinion of the Economic Policy Committee,

Whereas:

(1)

On 16 November 2016, the Commission adopted the Annual Growth Survey, marking the start of the 2017 European Semester for economic policy coordination. The priorities of the Annual Growth Survey were endorsed by the European Council on 9-10 March 2017. On 16 November 2016, on the basis of Regulation (EU) No 1176/2011 of the European Parliament and of the Council (2), the Commission 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 carried out. On the same date, the Commission also adopted a recommendation for a Council Recommendation on the economic policy of the euro area, which was endorsed by the European Council on 9-10 March 2017. On 21 March 2017, the Council adopted the recommendation on the economic policy of the euro area (‘Recommendation for the euro area’) (3).

(2)

As a Member State whose currency is the euro and in view of the close interlinkages between the economies in the economic and monetary union, Belgium should ensure the full and timely implementation of the Recommendation for the euro area, as reflected in recommendations (1) to (2) below.

(3)

The 2017 country report for Belgium was published on 22 February 2017. It assessed Belgium’s progress in addressing the country-specific recommendations adopted by the Council on 12 July 2016, the follow-up given to the country-specific recommendations adopted in previous years and Belgium’s progress towards its national Europe 2020 targets.

(4)

On 28 April 2017, Belgium submitted its 2017 National Reform Programme and its 2017 Stability Programme. In order to take account of their interlinkages, the two programmes have been assessed at the same time.

(5)

Relevant country-specific recommendations have been addressed in the programming of the European Structural and Investment Funds (ESI Funds) for the 2014-2020 period. As provided for in Article 23 of Regulation (EU) No 1303/2013 of the European Parliament and of the Council (4), where it is necessary to support the implementation of relevant Council recommendations, the Commission may request a Member State to review and propose amendments to Partnership Agreement and relevant programmes. The Commission has provided further details on how it would make use of that provision in guidelines on the application of the measures linking effectiveness of the ESI Funds to sound economic governance.

(6)

Belgium is currently in the preventive arm of the Stability and Growth Pact and subject to the debt rule. In its 2017 Stability Programme, the Government plans a gradual improvement of the headline balance from a deficit of 2,6 % of GDP in 2016 to -0,1 % of GDP in 2020. The medium-term budgetary objective, set at a balanced budgetary position in structural terms, is planned to be reached by 2019. However, the recalculated (5) structural balance still points to a deficit of 0,3 % in 2019. After having peaked at almost 107 % of GDP in 2014 and decreasing to around 106 % of GDP in 2015 and 2016, the general government debt-to-GDP ratio is expected to decline to 99 % by 2020 according to the 2017 Stability Programme. The macroeconomic scenario underpinning those budgetary projections is plausible. At the same time, the measures needed to support the planned deficit targets from 2018 onwards have not been specified, which contributes to the projected deterioration of the structural balance in 2018 under unchanged policies according to the Commission 2017 spring forecast.

(7)

On 22 May 2017, the Commission issued a report under Article 126(3) of the TFEU, as Belgium did not make sufficient progress towards compliance with the debt reduction benchmark in 2016. The report concluded, following an assessment of all the relevant factors, that the debt criterion should be considered as currently complied with. At the same time, additional fiscal measures are to be taken in 2017 to ensure broad compliance with the adjustment path towards the medium-term budgetary objective in 2016 and 2017 together.

(8)

The 2017 Stability Programme indicates that the budgetary impact of the exceptional inflow of refugees and security-related measures in 2016 and 2017 is significant, and provides adequate evidence of the scope and nature of these additional budgetary costs. According to the Commission, the eligible additional expenditure in 2016 amounted to 0,08 % of GDP for the exceptional inflow of refugees and to 0,05 % of GDP for security-related measures. In 2017, the additional impact compared to 2016 of the security-related measures is currently estimated at 0,01 % of GDP. The provisions set out in Articles 5(1) and 6(3) of Regulation (EC) No 1466/97 cater for this additional expenditure, in that the inflow of refugees as well as the severity of the terrorist threat are unusual events, their impact on Belgium’s public finances is significant and sustainability would not be compromised by allowing for a temporary deviation from the adjustment path towards the medium-term budgetary objective. Therefore, the required adjustment towards the medium-term budgetary objective for 2016 has been reduced to take into account additional refugee-related and security-related costs. Regarding 2017, a final assessment, including on the eligible amounts, will be made in spring 2018 on the basis of observed data as provided by the Belgian authorities.

(9)

On 12 July 2016, the Council recommended Belgium to achieve an annual fiscal adjustment of at least 0,6 % of GDP towards the medium-term budgetary objective in 2017. Based on the Commission 2017 spring forecast, there is a risk of some deviation from that requirement in 2017. However, there is still a risk of a significant deviation from the recommended adjustment path towards the medium-term budgetary objective over 2016 and 2017 taken together. This conclusion would not change in case the budgetary impact of the exceptional inflow of refugees and of security measures were deducted from the requirement.

(10)

In 2018, in light of its fiscal situation and in particular of its debt level, Belgium is expected to further adjust towards its medium-term budgetary objective of a balanced budgetary position in structural terms. According to the commonly agreed adjustment matrix under the Stability and Growth Pact, that adjustment translates into a requirement of a nominal growth rate of net primary government expenditure (6) which does not exceed 1,6 % in 2018. It would correspond to an annual structural adjustment of at least 0,6 % of GDP. Under unchanged policies, there is a risk of a significant deviation from that requirement in 2018. Belgium is prima facie not forecast to comply with the debt rule in 2017 and 2018. Overall, the Council is of the opinion that further measures will be needed as of 2017 to comply with the provisions of the Stability and Growth Pact. However, as foreseen in Regulation (EC) No 1466/97, the assessment of the budgetary plans and outcomes should take account of the Member State’s budgetary balance in light of the cyclical conditions. As recalled in the Commission Communication on the 2017 European Semester accompanying these country-specific recommendations, the assessment of the 2018 Draft Budgetary Plan and subsequent assessment of 2018 budget outcomes will need to take due account of the goal of achieving a fiscal stance that contributes to both strengthening the ongoing recovery and ensuring the sustainability of Belgium’s public finances. In that context, the Council takes note that the Commission intends to carry out an overall assessment in line with Regulation (EC) No 1466/97, in particular in light of the cyclical situation of Belgium.

(11)

Effective budget coordination is essential in a federal Member State like Belgium, where a large part of the spending power has been devolved to sub-national governments. In an attempt to improve internal coordination and to transpose the Treaty on Stability, Coordination and Governance in the economic and monetary union (the ‘Fiscal Compact’), the federal government and the regional and community governments concluded a cooperation agreement in 2013, with the aim of defining overall and individual multiannual fiscal paths, to be monitored by the High Council of Finance. However, this process has not succeeded in reaching a formal agreement on fiscal trajectories, nor has it established sufficient safeguards regarding the monitoring role of the High Council of Finance. This lack of coordination on the sharing of effort undermines the viability of the country’s overall trajectory towards its medium-term objective as laid down in the 2017 Stability Programme.

(12)

Despite its potential to stimulate growth in the long run, public investment is very low by European standards, particularly in relation to total public spending. Not only is the public capital stock low, the quality of public infrastructure has also been eroded. Given the very tight budgetary constraints for all levels of government, preserving enough room for investment hinges on restructuring the composition of overall public spending by improving the efficiency of public services and policies and curbing the rapid increase for certain expenditure items.

(13)

Belgium has made substantial progress in reforming its wage-setting system. The revision of the 1996 law regulating wage bargaining aims at safeguarding the cost competitiveness gains realised as a result of the recent wage moderation efforts. The more conservative baseline projections and the built-in prior adjustments in the calculation of the wage norm mean the reformed framework goes a long way in improving Belgium’s cost competitiveness relative to key trading partners within the euro area. In addition, the reform provides more guarantees that government measures to reduce non-wage labour costs will effectively benefit cost competitiveness, and expands the role of the Government in preventing detrimental cost competitiveness trends as a result of excessive inflation. The collective bargaining framework provides for close monitoring of wage and productivity trends and other cost and non-cost competitiveness determinants by the social partner organisations represented in the Central Council for the Economy. As the practice of linking wage developments to inflation is still widespread in many sectors, and in the context of the widening inflation gap between Belgium and its neighbours, changes in unit labour costs will continue to be closely monitored under the European Semester.

(14)

Some progress has been made on the functioning of the labour market. A higher retirement age and further limits on pre-retirement encourage older people to stay in or return to work. Gradual decreases in the tax wedge have helped to boost employment rates. Job creation has been robust, fuelled by economic growth and improved cost competitiveness. This also reflects labour tax cuts and wage moderation that have improved the labour cost competitiveness of Belgian companies. Nevertheless, a number of structural shortcomings remain. Transition rates from unemployment or inactivity to employment are low, and the overall employment rate is still weighed down by the poor performance of specific groups. These include the low-skilled, the young, older workers and people with a migrant background such as non-EU-born workers but also second-generation migrants. The employment outcomes for people with a migrant background, even adjusting for other individual characteristics, are among the worst in the Union. In particular, the employment gap for the non-EU-born is the highest in the Union: their employment rate for the age group 20-64 was 49,1 % in 2016, compared to 70,2 % for native-born people, and was even lower for non-EU-born women (39,1 %). In 2015, the risk of poverty and social exclusion was 50,7 % for non-EU-born residents, compared to 17 % for the native-born. These sizeable employment differentials between specific population groups continue to result in a chronic underutilisation of labour. Although ongoing regional reforms of employment incentive schemes aim to rationalise and tailor the system, the cost-effectiveness of the policy choices made should be monitored on a regular basis. Some design features of the target-group policies may have windfall and displacement effects. Coordination and communication between and within the different policy levels is also key for the effectiveness of targeted policies. Taxes, including social contributions on lower wages and the withdrawal of social benefits upon entering the labour market or increasing hours worked, may create inactivity and low-wage traps.

(15)

Some progress has been made in educational and training reforms aiming to improve equity, key competences and the quality of education. However, despite good average performance compared internationally, the share of top performers among the 15-year-old students declined while the percentage of low-achievers increased. In addition, educational inequalities linked to socioeconomic background are above the Union and OECD averages. The gap in performance based on migrant background is also large and the second generation performs only slightly better than the first, even taking socioeconomic background into account. Addressing educational inequality will thus require a broad policy response going beyond the educational system. The strong growth of the school population, in particular among pupils with a migrant background (their proportion rose from 15,1 % in 2012 to 17,7 % in 2015), will exacerbate the equity challenge. Moreover, Belgium faces an emerging shortage of teachers, and the teachers are not always well prepared or supported to cope with an increasingly diverse school population. The main reasons are the difficulty of attracting the most suitable students and candidates to the profession, the high exit rate of starting teachers, and the unavailability of a proportion of teachers for teaching. Also, at 3 years currently, the course length for initial teacher training is relatively short in Belgium. Education and training reforms are key to improving the labour market participation of low-skilled young people and to supporting the transition to a knowledge-intensive economy.

(16)

The non-cost dimension of competitiveness still requires improvements. Higher productivity gains and broader investment in knowledge-based capital, in particular for adopting digital technologies, are essential in this respect. Although the public research system is of high quality, stronger performance in innovation would require more knowledge diffusion across less productive sectors. All federated entities acknowledge this need, and in recent years have adopted different strategies and measures to promote innovation. However, to foster such developments, more could be done to improve the framework conditions for innovation. Moreover, there seems to be scope for improving the efficiency and effectiveness of public support for research and innovation in Belgium, in particular in evaluating possible crowding-out effects and further simplifying the overall system.

(17)

Limited progress has been made in removing operational and establishment restrictions on retail. Following the Sixth State Reform, which transferred competences on retail establishment to the regions, new regional laws have been put in place simplifying the administrative procedure for authorisation. However, there is a wide margin for interpretation of certain provisions, which risks leading to unjustified market entry barriers. Consumer prices continue to be higher than in neighbouring Member States, beyond the level which could be explained by higher labour costs. A comprehensive strategy to tackle these issues would be necessary to ensure that consumers can benefit from a competitive market and lower prices.

(18)

High regulation in the network industries and some professional services is restricting competition in Belgium, in particular for real estate agents, architects and accountants. Barriers include shareholding and company form restrictions for architects, in addition to the other requirements; the incompatibility rules prohibiting the simultaneous exercise of any other economic activity for all types of accountancy professions; limitations on real estate agents’ access to the profession; and shareholding and voting rights restrictions. Reducing such barriers could generate more intensive competition, resulting in more firms entering the market and benefits for consumers in terms of lower prices. The Commission presented a package of measures to tackle barriers in services markets in January 2017. This package includes various reform recommendations addressed to Belgium to tackle these challenges.

(19)

The transport network represents one of the most pressing investment gaps. There is a growing problem of peak-hour traffic congestion, which undermines the country’s attractiveness for foreign investors and has major economic and environmental costs. Belgium also suffers from serious air pollution problems and is not expected to reach its target of reducing non-ETS emissions by 15 % in 2020 compared to 2005, although it will most probably meet its commitments under the Union climate legislation by making use of the existing flexibility provisions. The most urgent challenges are upgrading basic rail and road transport infrastructure and eliminating missing links between the main economic hubs. At the same time, it is important to tackle peak-hour congestion by improving public transport services, optimising traffic management and eliminating market distortions and adverse tax incentives, such as favourable treatment for company cars. Another challenge relates to the adequacy of domestic power generation and the security of supply in general. Unplanned outages of several nuclear installations had raised concerns about the way to balance electricity demand and supply, while the repeatedly revised timetable for phasing out the nuclear park continues to create a climate that is not conducive to taking long-term investment decisions. Although short-term supply risks have been abated, in particular by the increase of the strategic reserve, and some progress was made in increasing the interconnections, longer-term investment needs are still considerable. In addition to further increases in interconnections, smart grids are needed to develop demand-side management. Given the considerable lead time for projects in the energy sector and the high need for replacement capacity over the next decade, swift action will be required, in particular in the form of a suitable legal framework that also promotes the development of flexible capacities (i.e. generation, storage and demand-side management).

(20)

Belgium has made some progress in reforming the tax system, in particular by shifting taxes from labour to other tax bases, which will gradually reduce the tax wedge on labour. Taxes on labour, including social contributions, are being reduced in several steps between 2016 and 2020. The effects of the ongoing tax reform are beginning to materialise. Nevertheless, the tax system remains complex, with tax bases eroded by specific exemptions, deductions and reduced rates. Some of these involve revenue losses, economic distortions and a heavy administrative burden. The tax shift does not seem to be neutral from a budgetary point of view since labour tax cuts have only been partially compensated by increases in other taxes, including consumption taxes. There is still considerable scope for improving the design of the tax system by further broadening tax bases, allowing for both lower statutory rates and fewer distortions. There is also considerable potential for a ‘green’ tax shift stemming from, among other things, the favourable tax treatment of company cars and fuel cards which impedes further progress in tackling congestion, air pollution and greenhouse gas emissions. The Government envisages changes to the company car system, but the environmental benefit of this reform is likely to be limited.

(21)

In the context of the 2017 European Semester, the Commission has carried out a comprehensive analysis of Belgium’s economic policy and published it in the 2017 country report. It has also assessed the 2017 Stability Programme, the 2017 National Reform Programme and the follow-up given to the recommendations addressed to Belgium in previous years. It has taken into account not only their relevance for sustainable fiscal and socioeconomic policy in Belgium, but also their compliance with Union rules and guidance, given the need to strengthen the Union’s overall economic governance by providing Union-level input into future national decisions.

(22)

In the light of this assessment, the Council has examined the 2017 Stability Programme and its opinion (7) is reflected in particular in recommendation (1) below,

HEREBY RECOMMENDS that Belgium take action in 2017 and 2018 to:

1.

Pursue a substantial fiscal effort in 2018 in line with the requirements of the preventive arm of the Stability and Growth Pact, taking into account the need to strengthen the ongoing recovery and to ensure the sustainability of Belgium’s public finances. Use windfall gains, such as proceeds from asset sales, to accelerate the reduction of the general government debt ratio. Agree on an enforceable distribution of fiscal targets among government levels and ensure independent fiscal monitoring. Remove distortive tax expenditures. Improve the composition of public spending in order to create room for infrastructure investment, including on transport infrastructure.

2.

Ensure that the most disadvantaged groups, including people with a migrant background, have equal opportunities to participate in quality education, vocational training, and the labour market.

3.

Foster investment in knowledge-based capital, in particular with measures to increase digital technologies adoption, and innovation diffusion. Increase competition in professional services markets and retail, and enhance market mechanisms in network industries.

Done at Brussels, 11 July 2017.

For the Council

The President

T. TÕNISTE


(1)  OJ L 209, 2.8.1997, p. 1.

(2)  Regulation (EU) No 1176/2011 of the European Parliament and of the Council of 16 November 2011 on the prevention and correction of macroeconomic imbalances (OJ L 306, 23.11.2011, p. 25).

(3)  OJ C 92, 24.3.2017, p. 1.

(4)  Regulation (EU) No 1303/2013 of the European Parliament and of the Council of 17 December 2013 laying down common provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund, the European Agricultural Fund for Rural Development and the European Maritime and Fisheries Fund and laying down general provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund and the European Maritime and Fisheries Fund and repealing Council Regulation (EC) No 1083/2006 (OJ L 347, 20.12.2013, p. 320).

(5)  Cyclically-adjusted balance net of one-off and temporary measures, recalculated by the Commission using the commonly agreed methodology.

(6)  Net government expenditure comprises total government expenditure excluding interest expenditure, expenditure on Union programmes fully matched by Union funds revenue and non-discretionary changes in unemployment benefit expenditure. Nationally financed gross fixed capital formation is smoothed over a 4-year period. Discretionary revenue measures or revenue increases mandated by law are factored in. One-off measures on both the revenue and expenditure sides are netted out.

(7)  Under Article 5(2) of Regulation (EC) No 1466/97.


9.8.2017   

EN

Official Journal of the European Union

C 261/7


COUNCIL RECOMMENDATION

of 11 July 2017

on the 2017 National Reform Programme of Bulgaria and delivering a Council opinion on the 2017 Convergence Programme of Bulgaria

(2017/C 261/02)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty on the Functioning of the European Union, and in particular Articles 121(2) and 148(4) thereof,

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies (1), and in particular Article 9(2) thereof,

Having regard to Regulation (EU) No 1176/2011 of the European Parliament and of the Council of 16 November 2011 on the prevention and correction of macroeconomic imbalances (2), and in particular Article 6(1) thereof,

Having regard to the recommendation of the European Commission,

Having regard to the resolutions of the European Parliament,

Having regard to the conclusions of the European Council,

Having regard to the opinion of the Employment Committee,

Having regard to the opinion of the Economic and Financial Committee,

Having regard to the opinion of the Social Protection Committee,

Having regard to the opinion of the Economic Policy Committee,

Whereas:

(1)

On 16 November 2016, the Commission adopted the Annual Growth Survey, marking the start of the 2017 European Semester for economic policy coordination. The priorities of the Annual Growth Survey were endorsed by the European Council on 9-10 March 2017. On 16 November 2016, on the basis of Regulation (EU) No 1176/2011, the Commission adopted the Alert Mechanism Report, in which it identified Bulgaria as one of the Member States for which an in-depth review would be carried out.

(2)

The 2017 country report for Bulgaria was published on 22 February 2017. It assessed Bulgaria’s progress in addressing the country-specific recommendations adopted by the Council on 12 July 2016, the follow-up given to the country-specific recommendations adopted in previous years and Bulgaria’s progress towards its national Europe 2020 targets. It also included an in-depth review under Article 5 of Regulation (EU) No 1176/2011, the results of which were also published on 22 February 2017. The Commission’s analysis led it to conclude that Bulgaria is experiencing excessive macroeconomic imbalances. In particular, Bulgaria continues to experience imbalances linked to remaining fragilities in the financial sector and high corporate indebtedness in a context of the high long-term unemployment.

(3)

Bulgaria submitted its 2017 National Reform Programme and its 2017 Convergence Programme on 17 May 2017, after the deadline.

(4)

Relevant country-specific recommendations have been addressed in the programming of the European Structural and Investment Funds (ESI Funds) for the 2014-2020 period. As provided for in Article 23 of Regulation (EU) No 1303/2013 of the European Parliament and of the Council (3), where it is necessary to support the implementation of relevant Council recommendations, the Commission may request a Member State to review and propose amendments to its Partnership Agreement and relevant programmes. The Commission has provided further details on how it would make use of that provision in guidelines on the application of the measures linking effectiveness of the ESI Funds to sound economic governance.

(5)

Bulgaria is currently in the preventive arm of the Stability and Growth Pact. In its 2017 Convergence Programme, the Government, starting from a balanced budgetary position in 2016, plans a headline deficit of 0,6 % of GDP in 2017. The headline deficit is projected to slightly improve to 0,5 % of GDP in 2018 and turn into a small surplus thereafter. The medium-term budgetary objective — a structural deficit of 1 % of GDP — is planned to be achieved with a margin throughout the programme period. According to the 2017 Convergence Programme, the general government debt-to-GDP ratio is expected gradually to decline from 29,5 % of GDP in 2016 to 23,8 % in 2020. The macroeconomic scenario underpinning those budgetary projections is plausible.

(6)

On 12 July 2016, for 2017 the Council recommended Bulgaria to achieve an annual fiscal adjustment of 0,5 % of GDP towards the medium-term budgetary objective. Outturn data indicate that Bulgaria already outperformed its medium-term budgetary objective in 2016. Based on the Commission 2017 spring forecast, the structural balance is forecast to reverse from a surplus of 0,1 % of GDP in 2016 to a deficit of 0,4 % of GDP in 2017 and of 0,3 % of GDP in 2018 on a no-policy-change basis. In spite of this deterioration, the structural balance is projected to remain above the medium-term budgetary objective in both years. Overall, the Council is of the opinion that Bulgaria is projected to comply with the provisions of the Stability and Growth Pact in 2017 and 2018.

(7)

Efforts to improve tax collection are ongoing. Despite improvements, tax compliance remains a challenge. The shadow economy and undeclared work are still high. The tax-related administrative burden has been reduced but is still significant. Measures to cut red tape appear to have produced limited results so far and there are no indications of major improvements in voluntary tax compliance. Under these circumstances, enforcing the rules appears to be key not only for implementing controls but also for strengthening the prevention of tax non-compliance. The Action Plan to the 2015-2017 Single National Strategy for improving tax collection, tackling the shadow economy and reducing compliance costs appears to be a useful tool, especially for evaluating and improving the coordination and efficiency of a number of administrative bodies working in the tax field. An ex post analysis of the impacts of the specific measures could contribute to the proper assessment, planning and targeting of future tax compliance measures. These measures will be included in a comprehensive single national strategy to replace the current strategy which expires at the end of 2017.

(8)

The Bulgarian authorities, in consultation and cooperation with the relevant European bodies, conducted asset quality reviews and stress tests of the banking and insurance sectors, and a review of private pension funds’ assets. While the results confirmed the robustness of the sectors on aggregate, pockets of vulnerabilities were confirmed, including in some systemically-important institutions As the follow-up measures have not yet been fully implemented, the source of the vulnerability remains. Furthermore, some issues, including valuing illiquid financial instruments and assets as well as related-party exposures, were not fully tackled by the three reviews. The supervisors could take a more conservative approach to address these issues. Outstanding issues in the insurance sector also include the treatment of certain reinsurance contracts, some insurance receivables and group-level supervision.

(9)

To tackle the possibility of similar imbalances re-emerging in the future, the measures to improve banking supervision need to be finalised and further efforts to improve non-banking supervision are required. Tackling hard-to-value assets and unsound business practices, including related-party and connected lending, remain key challenges for the authorities. The Bulgarian National Bank has launched a plan to reform and develop banking supervision, based also on the findings of the World Bank and the IMF. This plan is now being implemented, but may need to be amended in light of the findings of the Financial Sector Assessment Programme. The shortcomings in supervision evidenced by the insurance and pension fund reviews highlight the need for the Financial Supervision Commission to develop and implement a comprehensive plan to strengthen supervision, including by improving its own internal governance and functioning. To ensure full credibility, such a plan should draw on international best practices in the area and should be prepared and implemented in close cooperation with the relevant European bodies, incorporating input from third-party service providers as needed.

(10)

Corporate debt remains high (well above that of peer countries), placing a burden on companies’ balance sheets and potentially constraining credit demand and investment over the medium term. To reduce the still-high level of corporate non-performing loans, the Bulgarian authorities should facilitate the workout process for banks by drawing on a comprehensive set of tools. For instance, speeding up the insolvency framework reform would improve the legal environment for dealing with bad debt and provide opportunities for out-of-court restructuring. Beyond the insolvency framework, the toolkit could include supervisory guidance to banks with particularly high levels of non-performing loans. It could also include actions to make data on asset quality more transparent in order to help to deepen the secondary market for non-performing loans.

(11)

Recent labour market developments have been positive, but structural problems remain. The labour force continues to shrink because of population ageing combined with emigration. As the economy is undergoing structural changes, it is essential to tap into the unused labour potential. Currently, the labour market is characterised by a high share of long-term unemployed in total unemployment and a high inactivity rate, limited inclusion of young people in the labour market and skills shortages and mismatches. While the unemployment rate fell below the Union average in 2015, the share of long-term unemployment and the rate of young people not in employment, education or training and the low employment rate of low-skilled people are still major challenges. In the face of these challenges, active labour market policies are insufficiently targeted towards disadvantaged groups and their needs, which hinders their employability. In addition, the insufficient integration of employment and social services for recipients of social benefits can limit their labour market participation.

(12)

Improving educational outcomes and strengthening the provision of quality inclusive mainstream education remains a challenge, with potential consequences for poverty. While the risk of poverty or social exclusion for children has slightly decreased, it remains one of the highest in the Union and is strongly linked to the educational level of the parents. Achievement in basic skills as measured by the 2015 OECD Programme for International Student Assessment (PISA) show that the proportion of underachievers in reading, mathematics and science remains one of highest in the Union. The planned methodology to improve school financing has yet to be developed. This aims to support more equitable outcomes by providing additional support to low-performing schools. Children from families with lower socioeconomic status, particularly Roma families, do not enjoy de facto equal educational opportunities, including in early childhood. Vocational education and training is being reformed, but its quality and the cooperation with business and social partners are insufficient. Dual education continues to be rolled out. In higher education, performance-based funding seeks to improve quality and labour market relevance.

(13)

Limited accessibility, low funding, the emigration of professionals and weak health outcomes continue to be key challenges in the healthcare system. Low health insurance coverage, including the low public coverage of outpatient medical services and high out-of-pocket payments, make it difficult for some people to access healthcare. Recent measures, such as selective contracting of hospital services based on the National Health Map, have the potential to improve access to healthcare and equity if implemented fully.

(14)

Bulgaria’s minimum wage level, while still the lowest in the Union, has increased significantly since 2011. Limited progress has been achieved in setting up an objective mechanism, despite employers and trade unions agreeing on the criteria. The absence of a transparent mechanism which takes into account economic and social criteria, the labour market conditions and the institutional aspect of their application may jeopardise a proper balance between the objectives of supporting employment and competitiveness and safeguarding labour income. Despite some tensions among the social partners during the failed negotiations for minimum social security thresholds for 2017, social dialogue in the country remains in place.

(15)

The high share of people living at risk of poverty or social exclusion remains a major economic and social challenge. Bulgaria is still the poorest Member State in the Union, with disadvantaged groups, such as Roma, children, the elderly, and people in rural areas, being disproportionately affected. After several years of sustained improvements, the at-risk-of-poverty rate for the elderly deteriorated substantially. Elderly women are at particularly high risk of poverty or social exclusion given their typically shorter pension contribution period. While the relative poverty situation of children has improved, poverty levels among this group remain very high. The deinstitutionalisation of children is keeping its momentum with the adoption of the new action plan. However, the process is still lagging behind for adults and people with disabilities. Income inequality represents a significant and growing problem. The ratio of the income of the richest 20 % of households to that of the poorest 20 % rose from 6,1 in 2012 to 7,1 in 2015 and is among the highest in the Union. In Bulgaria, the difference between income inequality before and after taxes and social transfers is among the smallest in the Union. The social protection system, including the general minimum income scheme does not provide adequate levels of support. Coverage of people on social benefits remains low, driven by very restrictive entry requirements. The level of minimum income remains low and has not been updated since 2009 and does not have a transparent adjustment mechanism.

(16)

Measures to improve the public procurement system have been put in place, but their concrete added value still remains to be seen. Appropriate and efficient implementation of the new risk-based ex ante control system needs to be ensured. Enacting the recommendations made in the review of the appeal system remains a challenge since efficient remedies are key to implementing important projects. Once assessed, the administrative capacity of the Public Procurement Agency would have to be adjusted to reflect the Agency’s functions. Furthermore, the administrative capacity of the contracting authorities should be enhanced, including by drawing on methodological support provided by the Public Procurement Agency and centralised and/or ancillary purchasing activities provided by the Central Purchasing Bodies for the central administration, the municipalities and the health sector. The work to introduce e-procurement in order to boost the transparency of public procurement still needs to be finalised. Safeguarding the impartiality of public tenders and preventing possible conflicts of interest continue to be important concerns. Despite the recent reforms aimed at modernising the public administration, the effectiveness and efficiency of public institutions remain limited. A number of legal amendments were finalised in 2016 to put in place the appropriate legal framework, but enforcing and implementing them in an efficient and systematic way is challenging.

(17)

In 2016, Bulgaria adopted significant reforms to address continued concerns about the independence and quality of its judicial system. However, as these reforms have been adopted only recently, it is too early to assess their impact. Further steps are needed in a number of areas. Corruption also remains a major challenge in Bulgaria and continues to weigh on investment, both at national and local level. In 2015, the authorities presented an ambitious strategy to fight against corruption, but its implementation is still in its early stages. Bulgaria’s anti-corruption policy continues to be hampered by weak and fragmented institutions, a weak track record in the prosecution of high-level cases, and faltering parliamentary backing for reform. Under the Cooperation and Verification Mechanism (4), Bulgaria receives recommendations in the areas of judicial reform and the fight against corruption and organised crime. These areas are therefore not covered in the country-specific recommendations for Bulgaria.

(18)

In the context of the 2017 European Semester, the Commission has carried out a comprehensive analysis of Bulgaria’s economic policy and published it in the 2017 country report. It has also assessed the follow-up given to the recommendations addressed to Bulgaria in previous years.

(19)

In the light of this assessment, the Council is of the opinion that Bulgaria is expected to comply with the Stability and Growth Pact.

(20)

In the light of the Commission’s in-depth review and this assessment, the Council recommendations made under Article 6 of Regulation (EU) No 1176/2011 are reflected in recommendations (2) and (3) below,

HEREBY RECOMMENDS that Bulgaria take action in 2017 and 2018 to:

1.

Further improve tax collection and tax compliance, including through a comprehensive set of measures beyond 2017. Step up enforcement of measures to reduce the extent of the informal economy, in particular undeclared work.

2.

Take follow-up measures on the financial sector reviews, in particular concerning reinsurance contracts, group-level oversight, hard-to-value assets and related-party exposures. Improve banking and non-banking supervision through the implementation of comprehensive action plans, in close cooperation with European bodies. Facilitate the reduction of still-high non-performing corporate loans, by drawing on a comprehensive set of tools, including by accelerating the reform of the insolvency framework and by promoting a functioning secondary market for non-performing loans.

3.

Improve the targeting of active labour market policies and the integration between employment and social services for disadvantaged groups. Increase the provision of quality mainstream education, in particular for Roma. Increase health insurance coverage, reduce out-of-pocket payments and address shortages of healthcare professionals. In consultation with social partners, establish a transparent mechanism for setting the minimum wage. Improve the coverage and adequacy of the minimum income.

4.

Ensure efficient implementation of the 2014-2020 National Public Procurement Strategy.

Done at Brussels, 11 July 2017.

For the Council

The President

T. TÕNISTE


(1)  OJ L 209, 2.8.1997, p. 1.

(2)  OJ L 306, 23.11.2011, p. 25.

(3)  Regulation (EU) No 1303/2013 of the European Parliament and of the Council of 17 December 2013 laying down common provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund, the European Agricultural Fund for Rural Development and the European Maritime and Fisheries Fund and laying down general provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund and the European Maritime and Fisheries Fund and repealing Council Regulation (EC) No 1083/2006 (OJ L 347, 20.12.2013, p. 320).

(4)  Commission Decision 2006/929/EC of 13 December 2006 establishing a mechanism for cooperation and verification of progress in Bulgaria to address specific benchmarks in the areas of judicial reform and the fight against corruption and organised crime (OJ L 354, 14.12.2006, p. 58).


9.8.2017   

EN

Official Journal of the European Union

C 261/12


COUNCIL RECOMMENDATION

of 11 July 2017

on the 2017 National Reform Programme of the Czech Republic and delivering a Council opinion on the 2017 Convergence Programme of the Czech Republic

(2017/C 261/03)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty on the Functioning of the European Union, and in particular Articles 121(2) and 148(4) thereof,

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies (1), and in particular Article 9(2) thereof,

Having regard to the recommendation of the European Commission,

Having regard to the resolutions of the European Parliament,

Having regard to the conclusions of the European Council,

Having regard to the opinion of the Employment Committee,

Having regard to the opinion of the Economic and Financial Committee,

Having regard to the opinion of the Social Protection Committee,

Having regard to the opinion of the Economic Policy Committee,

Whereas:

(1)

On 16 November 2016, the Commission adopted the Annual Growth Survey, marking the start of the 2017 European Semester for economic policy coordination. The priorities of the Annual Growth Survey were endorsed by the European Council on 9-10 March 2017. On 16 November 2016, on the basis of Regulation (EU) No 1176/2011 of the European Parliament and of the Council (2), the Commission adopted the Alert Mechanism Report, in which it did not identify the Czech Republic as one of the Member States for which an in-depth review would be carried out.

(2)

The 2017 country report for the Czech Republic was published on 22 February 2017. It assessed the Czech Republic’s progress in addressing the country-specific recommendations adopted by the Council on 12 July 2016, the follow-up given to the country-specific recommendations adopted in previous years and the Czech Republic’s progress towards its national Europe 2020 targets. The Commission’s analysis leads it to conclude that the Czech Republic is not experiencing macroeconomic imbalances.

(3)

The Czech Republic submitted its 2017 National Reform Programme on 25 April 2017 and its 2017 Convergence Programme on 28 April 2017. In order to take account of their interlinkages, the two programmes have been assessed at the same time.

(4)

Relevant country-specific recommendations have been addressed in the programming of the European Structural and Investment Funds (ESI Funds) for the 2014-2020 period. As provided for in Article 23 of Regulation (EU) No 1303/2013 of the European Parliament and of the Council (3), where it is necessary to support the implementation of relevant Council recommendations, the Commission may request a Member State to review and propose amendments to its Partnership Agreement and relevant programmes. The Commission has provided further details on how it would make use of that provision in guidelines on the application of the measures linking effectiveness of the ESI Funds to sound economic governance.

(5)

The Czech Republic is currently in the preventive arm of the Stability and Growth Pact. In its 2017 Convergence Programme, the Government plans for a budgetary surplus in headline terms over 2016-2020. The medium-term budgetary objective — a structural deficit of 1,0 % of GDP — continues to be met with a margin throughout the programme period. According to the 2017 Convergence Programme, the general government debt-to-GDP ratio is expected to gradually decline to 32,7 % in 2020. The macroeconomic scenario underpinning those budgetary projections is plausible. While risks to the achievement of budgetary targets seem broadly balanced, the pronounced contraction in public investment in 2016 — linked to the start of a new Union funds cycle — could entail a stronger-than-expected rebound of public investment in 2017. Based on the Commission 2017 spring forecast, the structural balance is forecast to decline to around 0 % of GDP in 2017 and -0,2 % of GDP in 2018, remaining above the medium-term budgetary objective. Overall, the Council is of the opinion that Czech Republic is projected to comply with the provisions of the Stability and Growth Pact in 2017 and 2018.

(6)

The Czech Republic continues to show medium fiscal sustainability risks in the long term. These are derived primarily from the projected impact of age-related public spending, in particular in the areas of healthcare and pensions. The projected increase in long-term spending on healthcare is a matter of concern, both in terms of the governance and the cost-effectiveness of the healthcare system, which relies heavily on more expensive inpatient care. Some measures are currently at various stages of implementation, but results are not yet tangible. Recently adopted or planned measures to amend the pension system may, if implemented, worsen public finances in the long term. Firstly, the Parliament adopted legislation giving the Government the power to adjust the pension indexation mechanism more flexibly. The Parliament is also discussing proposals to cap the statutory retirement age at 65 and establish a mechanism for regularly reviewing the pensionable age. Further changes, such as a more generous pension indexation formula and differentiated social insurance rates depending on the number of children, are currently also being discussed.

(7)

The fiscal responsibility law that was adopted by the Parliament in January 2017 aims to address the main shortcomings of the Czech Republic’s fiscal framework, since it was recently evaluated as one of the weakest in the Union. However, an independent fiscal council to oversee the implementation of the rules has yet to be appointed. Furthermore, implementing the newly introduced measures will be crucial in making the fiscal framework more effective and stable.

(8)

The Czech Republic faces challenges in preventing corruption as well as inefficiencies in public procurement. While a number of measures in the Government’s anti-corruption programme have been implemented and other reforms are pending, in practice corruption is not prosecuted systematically. In general, the Czech public procurement practice still lacks sufficient competition, which is reflected by the high number of single-bid procedures and direct awards, in particular in the IT sector. Inefficiencies in training support and the absence of aggregated purchasing structures and competence centres hamper professionalisation and make it harder to achieve good value for money in public procurement. Very limited use of quality as an award criterion is also symptomatic in this respect. The transition to e-procurement is still facing major challenges. These include the need to improve the state-owned e-procurement platform ‘National Electronic Tool’ and to clarify the conditions for continued use of private platforms that are already active on the Czech e-procurement market.

(9)

The business environment in the Czech Republic is weighed down by a heavy regulatory burden and numerous administrative barriers, in particular permitting procedures and tax regulation. In September 2016, the Government presented an amendment to the Construction Act and related legislation, with the aim of accelerating and streamlining the procedure for granting building permits by integrating the environmental impact assessment into it. The amendment is currently under parliamentary scrutiny. Tax compliance costs for businesses continue to be above the Union average. Shortcomings also include frequent amendments to the Tax Code. Addressing tax non-compliance remains a priority for the Czech authorities; however there is no strong focus on simplification. A yet-to-be-presented income tax law aims at simplifying the Tax Code, but a draft is not yet available.

(10)

The use of e-government services in the Czech Republic is one of the lowest in the Union, but has increased from 2015. The Czech authorities have taken steps to improve the availability of e-government services, but many are still in progress and some individual measures have not yet been initiated. Responsibility for the roll-out of services is spread over several ministries and stakeholders perceive limited cross-sector cooperation.

(11)

R & D intensity has increased significantly in recent years, but this is not being matched by corresponding improvements in the quality of R & D outcomes. Reforms to the governance of the R & D system are being pursued, but have not been yet fully implemented. The Government approved a new evaluation methodology (Metodika 17+) in February 2017, which intends to strengthen the mechanisms related to the allocation of funding for basic and applied research. A series of measures is being taken to facilitate stronger links between academia and businesses, building on the structuring effect of the national innovation platforms.

(12)

Educational outcomes are generally good, but basic skills have deteriorated. Performance is strongly influenced by students’ socioeconomic backgrounds. The low educational outcomes of disadvantaged groups, in particular the Roma community, are a clear concern. It is estimated that a very large proportion of Roma children leave school early. A significant number of legislative and administrative measures have been taken to promote inclusive education and are now beginning to be implemented. These are expected to help reduce the gap in educational attainment and achievement between Roma and non-Roma children. The Parliament adopted amendments to the Education Act in March 2016, extending compulsory education to the last year of pre-school education and ensuring that younger children are entitled to a place in a kindergarten. Nevertheless, inequalities in the education system represent a barrier to improving the quality of human capital and also hamper labour market outcomes later in life. Increased requirements of teachers and an ageing teacher population mean that the attractiveness of the teaching profession remains a challenge. This is due in part to comparatively low pay, although salaries have increased in recent years. A new career system for teachers and pedagogical staff, developed to increase the attractiveness of the profession, was finally approved by the Government after several postponements. Continuous professional development opportunities for teachers are being developed with significant support from Union funds, in particular professional development activities related to teaching mixed groups and inclusive education. The higher education reform was adopted by the Parliament in January 2016 and its results need to be monitored. A reform of the funding system of higher education institutions is also planned.

(13)

The unemployment rate in the Czech Republic continues to fall. The tightening labour market conditions are making it more difficult for employers to recruit workers. There is still some potential to offset the shortages by mobilising under-represented groups, such as women with young children, low-skilled workers and members of the Roma community. Increasing the outreach and activation capacities of public employment services, together with appropriate and well-targeted active labour market policies and individualised services, would help boost the participation of untapped groups. The labour market participation of women with young children is hampered by a persistent lack of affordable and quality childcare services, in particular for children up to 3 years old, by long parental leave entitlements, by the limited use of flexible working-time arrangements by both parents and by a low take-up of parental leave by fathers. Some measures have been taken in recent years to address these issues. However, labour market outcomes for low-skilled workers are notably weaker than for all other groups. The Parliament is currently discussing the legislative framework for social housing, which is expected to set national standards and target groups.

(14)

In the context of the 2017 European Semester, the Commission has carried out a comprehensive analysis of the Czech Republic’s economic policy and published it in the 2017 country report. It has also assessed the 2017 Convergence Programme, the 2017 National Reform Programme and the follow-up given to the recommendations addressed to the Czech Republic in previous years. It has taken into account not only their relevance for sustainable fiscal and socioeconomic policy in the Czech Republic, but also their compliance with Union rules and guidance, given the need to strengthen the Union’s overall economic governance by providing Union-level input into future national decisions.

(15)

In the light of this assessment, the Council has examined the 2017 Convergence Programme and is of the opinion (4) that the Czech Republic is expected to comply with the Stability and Growth Pact,

HEREBY RECOMMENDS that the Czech Republic take action in 2017 and 2018 to:

1.

Ensure the long-term sustainability of public finances, in view of the ageing population. Increase the effectiveness of public spending, in particular by fighting corruption and inefficient practices in public procurement.

2.

Remove obstacles to growth, in particular by streamlining procedures for granting building permits and further reducing the administrative burden on businesses, by rolling out key e-government services, by improving the quality of R & D and by fostering employment of underrepresented groups.

Done at Brussels, 11 July 2017.

For the Council

The President

T. TÕNISTE


(1)  OJ L 209, 2.8.1997, p. 1.

(2)  Regulation (EU) No 1176/2011 of the European Parliament and of the Council of 16 November 2011 on the prevention and correction of macroeconomic imbalances (OJ L 306, 23.11.2011, p. 25).

(3)  Regulation (EU) No 1303/2013 of the European Parliament and of the Council of 17 December 2013 laying down common provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund, the European Agricultural Fund for Rural Development and the European Maritime and Fisheries Fund and laying down general provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund and the European Maritime and Fisheries Fund and repealing Council Regulation (EC) No 1083/2006 (OJ L 347, 20.12.2013, p. 320).

(4)  Under Article 9(2) of Regulation (EC) No 1466/97.


9.8.2017   

EN

Official Journal of the European Union

C 261/16


COUNCIL RECOMMENDATION

of 11 July 2017

on the 2017 National Reform Programme of Denmark and delivering a Council opinion on the 2017 Convergence Programme of Denmark

(2017/C 261/04)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty on the Functioning of the European Union, and in particular Articles 121(2) and 148(4) thereof,

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies (1), and in particular Article 9(2) thereof,

Having regard to the recommendation of the European Commission,

Having regard to the resolutions of the European Parliament,

Having regard to the conclusions of the European Council,

Having regard to the opinion of the Employment Committee,

Having regard to the opinion of the Economic and Financial Committee,

Having regard to the opinion of the Social Protection Committee,

Having regard to the opinion of the Economic Policy Committee,

Whereas:

(1)

On 16 November 2016, the Commission adopted the Annual Growth Survey, marking the start of the 2017 European Semester for economic policy coordination. The priorities of the Annual Growth Survey were endorsed by the European Council on 9-10 March 2017. On 16 November 2016, on the basis of Regulation (EU) No 1176/2011 of the European Parliament and of the Council (2), the Commission 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 carried out.

(2)

The 2017 country report for Denmark was published on 22 February 2017. It assessed Denmark’s progress in addressing the country-specific recommendations adopted by the Council on 12 July 2016, the follow-up given to the country-specific recommendations adopted in previous years and Denmark’s progress towards its national Europe 2020 targets.

(3)

On 28 April 2017, Denmark submitted its 2017 National Reform Programme and its 2017 Convergence Programme. In order to take account of their interlinkages, the two programmes have been assessed at the same time.

(4)

Relevant country-specific recommendations have been addressed in the programming of the European Structural and Investment Funds (ESI Funds) for the 2014-2020 period. As provided for in Article 23 of Regulation (EU) No 1303/2013 of the European Parliament and of the Council (3), where it is necessary to support the implementation of relevant Council recommendations, the Commission may request a Member State to review and propose amendments to its Partnership Agreement and relevant programmes. The Commission has provided further details on how it would make use of that provision in guidelines on the application of the measures linking effectiveness of the ESI Funds to sound economic governance.

(5)

Denmark is currently in the preventive arm of the Stability and Growth Pact. In its 2017 Convergence Programme, the Government plans to achieve a headline deficit of 1,9 % of GDP in 2017 and to continue to meet the medium-term budgetary objective — a structural deficit of 0,5 % of GDP — throughout the programme period until 2020. According to the 2017 Convergence Programme, the general government debt-to-GDP ratio is expected to fall to 37,0 % in 2017 and to continue declining to 33,9 % in 2020. The macroeconomic scenario underpinning those budgetary projections is plausible over the programme period. Based on the Commission 2017 spring forecast, the structural balance is forecast to reach a deficit of 0,4 % of GDP in 2017 and 0,1 % of GDP in 2018, broadly in line with the target of the 2017 Convergence Programme and above the medium-term budgetary objective. Overall, the Council is of the opinion that Denmark is projected to comply with the provisions of the Stability and Growth Pact in 2017 and 2018.

(6)

Ensuring labour supply in times of demographic challenge is a precondition for sustainable growth in Denmark. A series of substantial labour market reforms in recent years aims particularly at increasing work incentives and improving the efficiency of active labour market policies. These reforms could contribute to achieving Denmark’s Europe 2020 employment target, to the sustainability of the Danish welfare model and to address the emerging shortage of certain qualifications. Reforms aiming to increase participation and completion rates in vocational education, and a tripartite agreement to create more apprenticeships, are likely to increase the supply of skilled workers. However, the national Europe 2020 target for social inclusion, aiming at reducing the number of people living in very low work intensity households, is far from being achieved. Labour market inclusion and improving the employability of disadvantaged groups remain a challenge. This particularly applies to people with a non-EU migrant background (including those who have resided longer in Denmark), partly due to their on average-lower education performance compared to native-born people. The gap persists into the second generation. The job-integration measures agreed in the 2016 tripartite negotiations could improve the situation for newly arrived refugees, whose situation will have to be closely monitored in the future. However, further measures should still be taken to include other marginalised groups, such as young people with low educational attainment and workers above the age of 60, in the labour market more effectively.

(7)

High productivity growth is fundamental to support economic growth, maintain the relatively high level of welfare in Denmark, and ensure the long-term competitiveness of the country. Although Denmark’s productivity level is high compared to other Member States, productivity growth has been on a downward trend for a prolonged period. Domestically oriented services, in particular, have been characterised by sluggish productivity developments. Denmark has implemented several reforms during the last years, but productivity growth stays low as competition in some services sectors remains weak. Sector-specific restrictions hamper competition, for instance in wholesale and transport services.

(8)

In the context of the 2017 European Semester, the Commission has carried out a comprehensive analysis of Denmark’s economic policy and published it in the 2017 country report. It has also assessed the 2017 Convergence Programme, the 2017 National Reform Programme and the follow-up given to the recommendations addressed to Denmark in previous years. It has taken into account not only their relevance for sustainable fiscal and socioeconomic policy in Denmark but also their compliance with Union rules and guidance, given the need to strengthen the Union’s overall economic governance by providing Union-level input into future national decisions.

(9)

In the light of this assessment, the Council has examined the 2017 Convergence Programme and is of the opinion that Denmark is expected to comply with the Stability and Growth Pact,

HEREBY RECOMMENDS that Denmark take action in 2017 and 2018 to:

1.

Foster competition in the domestically oriented services sector.

Done at Brussels, 11 July 2017.

For the Council

The President

T. TÕNISTE


(1)  OJ L 209, 2.8.1997, p. 1.

(2)  Regulation (EU) No 1176/2011 of the European Parliament and of the Council of 16 November 2011 on the prevention and correction of macroeconomic imbalances (OJ L 306, 23.11.2011, p. 25).

(3)  Regulation (EU) No 1303/2013 of the European Parliament and of the Council of 17 December 2013 laying down common provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund, the European Agricultural Fund for Rural Development and the European Maritime and Fisheries Fund and laying down general provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund and the European Maritime and Fisheries Fund and repealing Council Regulation (EC) No 1083/2006 (OJ L 347, 20.12.2013, p. 320).


9.8.2017   

EN

Official Journal of the European Union

C 261/18


COUNCIL RECOMMENDATION

of 11 July 2017

on the 2017 National Reform Programme of Germany and delivering a Council opinion on the 2017 Stability Programme of Germany

(2017/C 261/05)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty on the Functioning of the European Union, and in particular Articles 121(2) and 148(4) thereof,

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies (1), and in particular Article 5(2) thereof,

Having regard to Regulation (EU) No 1176/2011 of the European Parliament and of the Council of 16 November 2011 on the prevention and correction of macroeconomic imbalances (2), and in particular Article 6(1) thereof,

Having regard to the recommendation of the European Commission,

Having regard to the resolutions of the European Parliament,

Having regard to the conclusions of the European Council,

Having regard to the opinion of the Employment Committee,

Having regard to the opinion of the Economic and Financial Committee,

Having regard to the opinion of the Social Protection Committee,

Having regard to the opinion of the Economic Policy Committee,

Whereas:

(1)

On 16 November 2016, the Commission adopted the Annual Growth Survey, marking the start of the 2017 European Semester for economic policy coordination. The priorities of the Annual Growth Survey were endorsed by the European Council on 9-10 March 2017. On 16 November 2016, on the basis of Regulation (EU) No 1176/2011, the Commission adopted the Alert Mechanism Report, in which it identified Germany as one of the Member States for which an in-depth review would be carried out. On the same date, the Commission also adopted a recommendation for a Council Recommendation on the economic policy of the euro area, which was endorsed by the European Council on 9-10 March 2017. On 21 March 2017, the Council adopted the Recommendation on the economic policy of the euro area (‘Recommendation for the euro area’) (3).

(2)

As a Member State whose currency is the euro and in view of the close interlinkages between the economies in the economic and monetary union, Germany should ensure the full and timely implementation of the Recommendation for the euro area, as reflected in recommendations (1) and (2) below.

(3)

The 2017 country report for Germany was published on 22 February 2017. It assessed Germany’s progress in addressing the country-specific recommendations adopted by the Council on 12 July 2016, the follow-up given to the country-specific recommendations adopted in previous years and Germany’s progress towards its national Europe 2020 targets. It also included an in-depth review under Article 5 of Regulation (EU) No 1176/2011, the results of which were also published on 22 February 2017. The Commission’s analysis led it to conclude that Germany is experiencing macroeconomic imbalances. In particular, the persistently high current-account surplus has cross-border relevance and reflects — besides a strong integration and performance of its highly competitive industry in the international division of labour — excess savings and subdued investment in both the private and the public sector. The current-account surplus increased further in 2015, stayed largely unchanged in 2016 and is expected to remain at a high level. Addressing the surplus can have implications on the rebalancing prospects of the rest of the euro area and the Union because more dynamic domestic demand in Germany can ease deleveraging needs in highly-indebted Member States. Despite low interest rates that create favourable financing conditions, business investment as a share of GDP is still subdued. While the recovery in private consumption has continued, household savings have reached record high levels in the Union. The need for action to reduce the risk of adverse effects on the German economy and, given its size and cross-border relevance, on the economic and monetary union, is particularly important.

(4)

Germany submitted its 2017 Stability Programme on 13 April 2017 and its 2017 National Reform Programme on 28 April 2017. In order to take account of their interlinkages, the two programmes have been assessed at the same time.

(5)

Relevant country-specific recommendations have been addressed in the programming of the European Structural and Investment Funds (ESI Funds) for the 2014-2020 period. As provided for in Article 23 of Regulation (EU) No 1303/2013 of the European Parliament and of the Council (4), where it is necessary to support the implementation of relevant Council recommendations, the Commission may request a Member State to review and propose amendments to its Partnership Agreement and relevant programmes. The Commission has provided further details on how it would make use of that provision in guidelines on the application of the measures linking effectiveness of the ESI Funds to sound economic governance.

(6)

Germany is currently in the preventive arm of the Stability and Growth Pact and subject to the debt rule. In its 2017 Stability Programme, the Government plans a budget surplus of between ¼ and ½ % of GDP over 2017-2021. The medium-term budgetary objective — a structural deficit of 0,5 % of GDP — continues to be met with a margin throughout the programme period. According to the Stability Programme, the general government debt-to-GDP ratio is expected to gradually decline to 57 % in 2021. The macroeconomic scenario underpinning those budgetary projections, which has not been endorsed by an independent body, is plausible.

(7)

Based on the Commission 2017 spring forecast, the structural balance is forecast to register a surplus of 0,6 % of GDP in 2017 and 0,3 % of GDP in 2018, above the medium-term budgetary objective. General government debt is forecast to remain on a firm downward path beyond the requirements of the debt rule. Overall, the Council is of the opinion that Germany is projected to comply with the provisions of the Stability and Growth Pact in 2017 and 2018. At the same time, there remains scope to support domestic demand by using fiscal policy in particular to achieve a sustained upward trend in investment, and by creating conditions for higher real wage growth.

(8)

Public investment as a proportion of GDP has remained largely constant and is below the euro-area average. A public investment backlog persists in particular at municipal level, where net investment remained negative in 2016. This is despite the measures taken over the last few years and significant increases in public investment at general government level in 2015 and 2016. Additional measures were taken in 2016 which should increase the scope for public investment, including at federal state and municipal level. These include a reform of federal fiscal relations that, once adopted, will take effect in 2020. Moreover, extending consulting services on infrastructure investment planning to include municipalities should improve the planning and implementation of infrastructure investment at municipal level. This appears particularly relevant given that infrastructure investment projects in the federal states and municipalities are only executed to a limited extent and are influenced by capacity and planning constraints. The favourable budgetary position generally indicates available fiscal space, for example to provide additional funds to increase public investment at all levels of government.

(9)

Overall public and private education and research expenditure has been rather stable relative to GDP in recent years, but in education it remains below the Union average. Combined total spending on education and research, at 9,1 % in 2015, fell short of the national target of 10 % of GDP. Additional investment in education, research and innovation is crucial for Germany’s future economic success and in particular to effectively integrate recently arrived asylum seekers, refugees and migrants. To achieve the latter, Germany has undertaken considerable efforts, especially in the area of vocational education and training. In the coming years, the efforts across the whole education sector will have to be sustained.

(10)

The German tax system remains complex, tax administration costs are high and several corporate taxation provisions may be hampering private investment. Despite significant reductions, corporate capital costs in Germany are still among the highest in the EU-28. When accounting for the local trade tax (Gewerbesteuer) and the solidarity surcharge, the top statutory tax rate on corporate income reached 30,2 % in 2016. This was substantially above the non-weighted Union average of 22,8 %. The effective average tax rate is 28,2 % compared with a non-weighted average of 21,1 % for the Union. The bias towards debt in corporate taxation was the seventh highest in the Union in 2016. At shareholder level, the extent of the debt bias is similar. This matters in particular for SMEs, which tend to have domestic shareholders. Lowering the capital costs on equity could strengthen private investment and the underdeveloped German venture capital market. Other features of the tax system that might distort financing and investment decisions are the inclusion of non-profit elements in the tax base of the local trade tax, limitations on loss carry-forwards, and tax-induced distortions with respect to the choice of legal form. Further provisions that might reduce the investment-friendliness of the tax system include the depreciation regime, the interest rate used to calculate deductible pension provisions, the taxation of capital gains, and cash accounting for the purpose of value-added taxation. If implemented effectively, the additional general and IT-specific functional authority of the federal tax administration in relation to the states’ tax administrations that was agreed as part of the reform of federal fiscal relations could help in accelerating the modernisation of the tax administration.

(11)

Venture capital investment has increased in Germany, but the market still remains underdeveloped by international standards. In 2015, venture capital investment accounted for about 0,03 % of GDP, which is slightly above the Union average but still below Member States such as Finland, the United Kingdom, Sweden, Ireland or France, and far below non-Union countries such as Israel and the United States. In particular, the venture capital market in Germany appears to be failing to provide bigger later-stage investments. The federal government has taken a number of measures to support venture capital investment. For example, it simplified the taxation of investment funds, improved loss carry-forwards under the corporate income taxation system and expanded the INVEST programme for business angels.

(12)

The shift towards renewable energy necessitates significant investment in electricity transmission and distribution networks. However, planned investment in domestic electricity infrastructure has been significantly delayed. Only around 35 % of the highest voltage grid projects identified in the 2009 Energy Network Expansion Act had been implemented by the end of 2016, mainly owing to public opposition. Of a current total of 6 100 km of power lines planned to be built in the period up to 2024/2025 in accordance with the Federal Requirement Plan Act, which entered into force in 2015, only around 6 % have been approved and only 1 % have been constructed.

(13)

There are still barriers to reaping the full benefits of digitisation. For example, Germany is not performing well in the availability of high-speed and ultra-fast broadband connections, in particular in semi-urban and rural regions. Computer usage by young Germans is comparatively low and many schools lack broadband access. Performance in digital public services is also below the Union average. In particular SMEs need to catch up in terms of digitisation. Only one fifth of SMEs have a digitisation strategy. A network of SME centres of excellence has been set up to strengthen and accelerate the digitisation of SMEs and the ‘Industrie 4.0’ platform brings together all relevant stakeholders. While business R & D investment is growing and Germany is close to achieving its Europe 2020 R & D intensity target, investment is increasingly concentrated in large companies, while the contribution of SMEs is declining. Moreover, an ageing population may also have an impact on entrepreneurial activity in the coming years.

(14)

High regulatory barriers remain in the business services sector and regulated professions. The level of restrictions is higher than the Union average in particular for architects, engineers, lawyers and accountants/tax advisers. In addition, the business churn rate for these professions is significantly lower than the Union average, which seems to indicate relatively low dynamism and competition in professional services in Germany. These barriers include shareholding and company form restrictions for architects and engineers, and multidisciplinary restrictions for architects, engineers and lawyers. Reducing these barriers could generate more intensive competition, resulting in more firms entering the market, and leading to benefits for consumers in terms of lower prices and broader choice. In January 2017 the Commission presented reform recommendations for regulation in professional services, as part of a package of measures to tackle barriers in services markets.

(15)

Employment has continued to rise and unemployment has fallen to historically low levels. However, the increase in employment has been partly due to an increase in part-time work, in particular among women, and has been only partially reflected in aggregate real wage growth, which decelerated in 2016. Disincentives to work for second earners and widespread part-time work are hampering the full use of the labour market potential. Better provision of quality and affordable full-time childcare, all-day schools and the recently reformed long-term care is a crucial lever for increasing female participation in the workforce. Joint taxation of income for married couples and free healthcare insurance coverage for non-working spouses discourage second earners, in many cases women, from taking up a job or increasing the number of hours worked. Moreover, lower labour market attachment is combined with a high gender pay gap of 22 % compared to an Union average of 16,3 % in 2015.

(16)

Despite a slight reduction, mini-jobs remain widespread, with about 4,8 million people having a mini-job as their only job in September 2016. The number of temporary agency workers has tripled since 2005, reaching around 1 million (close to 3 % of total employment) in June 2016. Protection from potential abuses in temporary agency work and work contracts is expected to improve, but developments deserve monitoring. In addition, fixed-term contracts appear to have a comparatively high unadjusted wage gap compared to permanent contracts.

(17)

The tax wedge for low-wage earners is high in comparison with other Member States, thus reducing work incentives, take-home pay and consumption opportunities. Germany increased the minimum personal income tax allowance and child allowances and adjusted the income tax brackets. These measures tend to benefit low and middle income groups, but the overall impact on the tax wedge will be limited. In spite of recent substantial rises in real disposable income, wages and productivity evolutions have been diverging over a long period, leading to a considerable accumulated gap. Higher real wage growth would also contribute to reducing the high external imbalances.

(18)

Germany has made considerable efforts in receiving asylum seekers and in integrating refugees and other migrants. Further improvements appear possible, as in 2016 the number of jobseeking refugees increased to around 9 % of all jobseekers. Labour market integration of people with a migrant background, in particular women, remains a major challenge which, including through the education system, also applies to children born in Germany with parents born outside the Union.

(19)

Not all members of society have benefited equally from the overall positive economic and labour market developments of the last few years. After a period of increases, income inequality moderated only recently, while wealth inequality remains among the highest in the euro area. Moreover, the good labour market performance has not led to a decline in the risk of poverty. The at-risk-of-poverty rate in old age is above the Union average and the number of people at risk of old-age poverty is likely to increase in the coming years. The replacement rate of the statutory pension scheme is forecasted to further decline. At the same time, the rates of enrolment in second or third-pillar pension schemes are too low to compensate for the decrease in the replacement rate of the first pillar for everyone. If not offset, pension adequacy is thus expected to deteriorate. It remains to be seen how effective the recent reforms to improve incentives for later retirement (Flexi-Rente) can be in counteracting the incentives for early retirement introduced in 2014.

(20)

In the context of the 2017 European Semester, the Commission has carried out a comprehensive analysis of Germany’s economic policy and published it in the 2017 country report. It has also assessed the 2017 Stability Programme, the 2017 National Reform Programme and the follow-up given to the recommendations addressed to Germany in previous years. It has taken into account not only their relevance for sustainable fiscal and socioeconomic policy in Germany, but also their compliance with Union rules and guidance, given the need to strengthen the Union’s overall economic governance by providing Union-level input into future national decisions.

(21)

In the light of this assessment, the Council has examined the 2017 Stability Programme and is of the opinion (5) that Germany is expected to comply with the Stability and Growth Pact.

(22)

In the light of the Commission’s in-depth review and this assessment, the Council has examined the 2017 National Reform Programme and the 2017 Stability Programme. Its recommendations made under Article 6 of Regulation (EU) No 1176/2011 are reflected in recommendations (1) and (2) below,

HEREBY RECOMMENDS that Germany take action in 2017 and 2018 to:

1.

While respecting the medium-term objective, use fiscal and structural policies to support potential growth and domestic demand as well as to achieve a sustained upward trend in investment. Accelerate public investment at all levels of government, especially in education, research and innovation, and address capacity and planning constraints for infrastructure investments. Further improve the efficiency and investment-friendliness of the tax system. Stimulate competition in business services and regulated professions.

2.

Reduce disincentives to work for second earners and facilitate transitions to standard employment. Reduce the high tax wedge for low-wage earners. Create conditions to promote higher real wage growth, respecting the role of the social partners.

Done at Brussels, 11 July 2017.

For the Council

The President

T. TÕNISTE


(1)  OJ L 209, 2.8.1997, p. 1.

(2)  OJ L 306, 23.11.2011, p. 25.

(3)  OJ C 92, 24.3.2017, p. 1.

(4)  Regulation (EU) No 1303/2013 of the European Parliament and of the Council of 17 December 2013 laying down common provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund, the European Agricultural Fund for Rural Development and the European Maritime and Fisheries Fund and laying down general provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund and the European Maritime and Fisheries Fund and repealing Council Regulation (EC) No 1083/2006 (OJ L 347, 20.12.2013, p. 320).

(5)  Under Article 5(2) of Regulation (EC) No 1466/97.


9.8.2017   

EN

Official Journal of the European Union

C 261/23


COUNCIL RECOMMENDATION

of 11 July 2017

on the 2017 National Reform Programme of Estonia and delivering a Council opinion on the 2017 Stability Programme of Estonia

(2017/C 261/06)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty on the Functioning of the European Union, and in particular Articles 121(2) and 148(4) thereof,

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies (1), and in particular Article 5(2) thereof,

Having regard to the recommendation of the European Commission,

Having regard to the resolutions of the European Parliament,

Having regard to the conclusions of the European Council,

Having regard to the opinion of the Employment Committee,

Having regard to the opinion of the Economic and Financial Committee,

Having regard to the opinion of the Social Protection Committee,

Having regard to the opinion of the Economic Policy Committee,

Whereas:

(1)

On 16 November 2016, the Commission adopted the Annual Growth Survey, marking the start of the 2017 European Semester for economic policy coordination. The priorities of the Annual Growth Survey were endorsed by the European Council on 9-10 March 2017. On 16 November 2016, on the basis of Regulation (EU) No 1176/2011 of the European Parliament and of the Council (2), the Commission 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 carried out. On the same date, the Commission also adopted a recommendation for a Council Recommendation on the economic policy of the euro area, which was endorsed by the European Council on 9-10 March 2017. On 21 March 2017, the Council adopted the Recommendation on the economic policy of the euro area (‘Recommendation for the euro area’) (3).

(2)

As a Member State whose currency is the euro and in view of the close interlinkages between the economies in the economic and monetary union, Estonia should ensure the full and timely implementation of the Recommendation for the euro area, as reflected in recommendation (1) below.

(3)

The 2017 country report for Estonia was published on 22 February 2017. It assessed Estonia’s progress in addressing the country-specific recommendations adopted by the Council on 12 July 2016, the follow-up given to the country-specific recommendations adopted in previous years and Estonia’s progress towards its national Europe 2020 targets.

(4)

Estonia submitted its 2017 Stability Programme on 28 April 2017 and its 2017 National Reform Programme on 4 May 2017. In order to take account of their interlinkages, the two programmes have been assessed at the same time.

(5)

Relevant country-specific recommendations have been addressed in the programming of the European Structural and Investment Funds (ESI Funds) for the 2014-2020 period. As provided for in Article 23 of Regulation (EU) No 1303/2013 of the European Parliament and of the Council (4), where it is necessary to support the implementation of relevant Council recommendations, the Commission may request a Member State to review and propose amendments to its Partnership Agreement and relevant programmes. The Commission has provided further details on how it would make use of that provision in guidelines on the application of the measures linking effectiveness of the ESI Funds to sound economic governance.

(6)

Estonia is currently in the preventive arm of the Stability and Growth Pact. In its 2017 Stability Programme, the Government lowered its medium-term budgetary objective from a structural balance to a deficit of 0,5 % of GDP. The Government plans to move from a general government surplus of 0,3 % of GDP in 2016 to a deficit of 0,5 % of GDP in 2017 and 0,8 % of GDP in 2018. According to the estimates of the 2017 Stability Programme, this corresponds to a structural surplus of 0,2 % of GDP in 2017 and a deficit of 0,5 % of GDP in 2018, respecting the medium-term budgetary objective. However, based on the recalculated (5) structural balance, the deficit is projected to amount to 0,1 % of GDP in 2017 and 0,9 % of GDP in 2018, below the new medium-term budgetary objective. According to the 2017 Stability Programme, general government debt-to-GDP ratio is projected to remain below 10 % of GDP in 2017 and 2018. The macroeconomic scenario underpinning those budgetary projections is plausible for 2017 and 2018, but it is favourable for the later years of the programme. At the same time, there are risks linked to the revenue yield assumptions related to the various new tax measures taking effect in 2018.

(7)

Based on the Commission 2017 spring forecast, the structural balance is projected to register a deficit of 0,3 % of GDP in 2017, remaining above the medium-term budgetary objective. In 2018, Estonia is recommended to remain at the medium-term budgetary objective. Under unchanged policies, there is a risk of some deviation from that requirement. Overall, the Council is of the opinion that Estonia needs to stand ready to take further measures to ensure compliance in 2018.

(8)

Estonia has taken action to ensure the provision and accessibility of high-quality services, including social services at local level as part of its local government reform. In particular, Estonia has adopted the Administrative Reform Act with a view to making it easier to create viable local municipalities that can finance their own activities, to plan development and growth, and to offer quality services. It successfully completed the voluntary phase of the merger of local municipalities and it is implementing the Social Welfare Act. Some key steps to complete the local government reform have not yet been taken. The revision of the financing scheme for municipalities is still pending. Further legislative acts on the responsibilities and division of tasks between municipalities and central government are still in preparation. Adopting these proposals is critical to ensuring the provision of quality public services in areas such as education, youth work, health promotion and transport.

(9)

The gender pay gap in Estonia fell from 28,3 % in 2014 to 26,9 % in 2015 but is still the highest in the Union. The Government is taking steps to further narrow the gender pay gap. In particular, the 2016-2023 Welfare Plan has been adopted and is being implemented to tackle gender segregation in the labour market and to fight stereotypes. The modification of the Gender Equality Act to give the labour inspectorates the task of more closely monitoring gender equality in the private sector has still to be adopted. The revision of the parental leave system to allow a more flexible take-up of parental leave is also being considered. The legislative change has not yet been adopted.

(10)

Income inequality in Estonia is high. The ratio of incomes of the richest 20 % of households to that of the poorest 20 % rose from 5,4 in 2012 to 6,2 in 2015, and is now the seventh highest in the Union. The key driver appears to be the high wage dispersion as a result of strong income growth among the higher-skilled. In absolute terms, the incomes of the poorest 10 % of households have lagged behind growth in median incomes, leading to problems with the adequacy of the social safety net. A contributing factor is that benefits (particularly pensions and social assistance) are not keeping pace with the growth in market incomes. This has also resulted in a gradual increase in the at-risk-of-poverty rate from 15,8 % in 2010 to 21,6 % in 2015. Substantial efforts have been undertaken to make the tax system more progressive as of 2018, in particular for low-income earners, by raising the basic allowance of the personal income tax system.

(11)

Business enterprise expenditure in research, technology and innovation increased in 2015 to 0,69 %, but its overall level remains below Union average of 1,3 %. The share of high-technology and knowledge-intensive companies remains limited and the number of new doctoral graduates is low. Wage growth has consistently exceeded productivity growth in recent years, affecting profits and thereby pulling investment growth downwards. Subdued investment in technological development may cause the value-added of exports, especially goods, to increase less than expected, and poses a risk to output growth. The volume of contract research between academia and businesses increased in 2015. However, cooperation between the two sectors remained limited despite the measures taken by the Government. Estonia has further improved its business environment, but the lengthy insolvency proceedings and recovery rate for secured creditors remain barriers to investment. A project to improve the insolvency framework was launched in 2016 to make the process faster and more efficient and to improve the rate of successful applications. However, amendments to the legislative framework have not yet been adopted.

(12)

In the context of the 2017 European Semester, the Commission has carried out a comprehensive analysis of Estonia’s economic policy and published it in the 2017 country report. It has also assessed the 2017 Stability Programme, the 2017 National Reform Programme and the follow-up given to the recommendations addressed to Estonia in previous years. It has taken into account not only their relevance for sustainable fiscal and socioeconomic policy in Estonia, but also their compliance with Union rules and guidance, given the need to strengthen the Union’s overall economic governance by providing Union-level input into future national decisions.

(13)

In the light of this assessment, the Council has examined the 2017 Stability Programme and its opinion (6) is reflected in particular in recommendation (1) below,

HEREBY RECOMMENDS that Estonia take action in 2017 and 2018 to:

1.

Pursue its fiscal policy in line with the requirements of the preventive arm of the Stability and Growth Pact, which entails remaining at its medium-term budgetary objective in 2018. Improve the adequacy of the social safety net. Take measures to reduce the gender pay gap, in particular by improving wage transparency and reviewing the parental leave system.

2.

Promote private investment in research, technology and innovation, including by implementing measures for strengthening the cooperation between academia and businesses.

Done at Brussels, 11 July 2017.

For the Council

The President

T. TÕNISTE


(1)  OJ L 209, 2.8.1997, p. 1.

(2)  Regulation (EU) No 1176/2011 of the European Parliament and of the Council of 16 November 2011 on the prevention and correction of macroeconomic imbalances (OJ L 306, 23.11.2011, p. 25).

(3)  OJ C 92, 24.3.2017, p. 1.

(4)  Regulation (EU) No 1303/2013 of the European Parliament and of the Council of 17 December 2013 laying down common provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund, the European Agricultural Fund for Rural Development and the European Maritime and Fisheries Fund and laying down general provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund and the European Maritime and Fisheries Fund and repealing Council Regulation (EC) No 1083/2006 (OJ L 347, 20.12.2013, p. 320).

(5)  Cyclically-adjusted balance net of one-off and temporary measures, recalculated by the Commission using the commonly agreed methodology.

(6)  Under Article 5(2) of Regulation (EC) No 1466/97.


9.8.2017   

EN

Official Journal of the European Union

C 261/26


COUNCIL RECOMMENDATION

of 11 July 2017

on the 2017 National Reform Programme of Ireland and delivering a Council opinion on the 2017 Stability Programme of Ireland

(2017/C 261/07)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty on the Functioning of the European Union, and in particular Articles 121(2) and 148(4) thereof,

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies (1), and in particular Article 5(2) thereof,

Having regard to Regulation (EU) No 1176/2011 of the European Parliament and of the Council of 16 November 2011 on the prevention and correction of macroeconomic imbalances (2), and in particular Article 6(1) thereof,

Having regard to the recommendation of the European Commission,

Having regard to the resolutions of the European Parliament,

Having regard to the conclusions of the European Council,

Having regard to the opinion of the Employment Committee,

Having regard to the opinion of the Economic and Financial Committee,

Having regard to the opinion of the Social Protection Committee,

Having regard to the opinion of the Economic Policy Committee,

Whereas:

(1)

On 16 November 2016, the Commission adopted the Annual Growth Survey, marking the start of the 2017 European Semester for economic policy coordination. The priorities of the Annual Growth Survey were endorsed by the European Council on 9-10 March 2017. On 16 November 2016, on the basis of Regulation (EU) No 1176/2011, the Commission adopted the Alert Mechanism Report, in which it identified Ireland as one of the Member States for which an in-depth review would be carried out. On the same date, the Commission also adopted a recommendation for a Council Recommendation on the economic policy of the euro area, which was endorsed by the European Council on 9-10 March 2017. On 21 March 2017, the Council adopted the Recommendation on the economic policy of the euro area (‘Recommendation for the euro area’) (3).

(2)

As a Member State whose currency is the euro and in view of the close interlinkages between the economies in the economic and monetary union, Ireland should ensure the full and timely implementation of the Recommendation for the euro area, as reflected in recommendations (1) to (3) below.

(3)

The 2017 country report for Ireland was published on 22 February 2017. It assessed Ireland’s progress in addressing the country-specific recommendations adopted by the Council on 12 July 2016, the follow-up given to the country-specific recommendations adopted in previous years and Ireland’s progress towards its national Europe 2020 targets. It also included an in-depth review under Article 5 of Regulation (EU) No 1176/2011, the results of which were also published on 22 February 2017.

(4)

The Commission’s analysis led it to conclude that Ireland is experiencing macroeconomic imbalances. In particular, these imbalances are characterised by a large stock of external, public and private debt (of both households and non-financial corporations), which makes Ireland vulnerable to adverse shocks. Banks are still facing a high level of non-performing loans but are well capitalised and their profitability, although still low, is improving gradually. Housing prices are increasing and supply constraints persist. Non-financial corporations’ debt stock decreased over 2015, but was still higher than it was at the end of 2014. Household debt stock decreased in 2015 and public debt is on a firm downward trajectory. Ireland’s negative net international investment position had been falling at a fast pace before 2015, but it then reversed, partly due to a level shift in 2015. However, the external sustainability of the domestic sector does not seem to be at risk. The stock of non-performing loans has been declining over the last year but the pace of reduction was slowing down somewhat by the end of 2016. Property prices continued to increase in 2015, but as of now there is no significant evidence of overvaluation. Policy measures have been taken in recent years to address all imbalances highlighted, including in the banking sector (improved regulatory framework, measures to address the high level of non-performing loans). The Government has taken several relevant measures to address the undersupply in the housing market, but it will take time for them to generate effects.

(5)

Ireland submitted its 2017 National Reform Programme on 13 April 2017 and its 2017 Stability Programme on 2 May 2017. In order to take account of their interlinkages, the two programmes have been assessed at the same time.

(6)

Relevant country-specific recommendations have been addressed in the programming of the European Structural and Investment Funds (ESI Funds) for the 2014-2020 period. As provided for in Article 23 of Regulation (EU) No 1303/2013 of the European Parliament and of the Council (4), where it is necessary to support the implementation of relevant Council recommendations, the Commission may request a Member State to review and propose amendments to its Partnership Agreement and relevant programmes. The Commission has provided further details on how it would make use of that provision in guidelines on the application of the measures linking effectiveness of the ESI Funds to sound economic governance.

(7)

Ireland is currently in the preventive arm of the Stability and Growth Pact and subject to the transitional debt rule. In its 2017 Stability Programme, the Government expects the headline deficit to decline slightly to 0,4 % of GDP in 2017 and to continue to gradually decrease thereafter, turning into a surplus of 1,0 % of GDP in 2021. The medium-term budgetary objective — a structural deficit of 0,5 % of GDP — is expected to be met from 2018 onwards. According to the Stability Programme, the general government debt-to-GDP ratio is expected to fall to 72,9 % in 2017 and to continue declining to 65,2 % in 2020. The macroeconomic scenario underpinning those budgetary projections is plausible. At the same time, the measures needed to support the planned deficit targets from 2018 onwards have not been sufficiently specified.

(8)

On 12 July 2016, the Council recommended Ireland to achieve an annual fiscal adjustment of 0,6 % of GDP towards the medium-term budgetary objective in 2017. Based on the Commission 2017 spring forecast, there is a risk of a significant deviation from the recommended fiscal adjustment over 2016 and 2017 taken together.

(9)

In 2018, in light of its fiscal situation and, in particular, of its debt level, Ireland is expected to further adjust towards its medium-term budgetary objective of a structural deficit of 0,5 % of GDP. According to the commonly agreed adjustment matrix under the Stability and Growth Pact, that adjustment translates into a requirement of a nominal growth rate of net primary government expenditure (5) which does not exceed 2,4 % in 2018. It would correspond to an annual structural adjustment of 0,6 % of GDP. The expenditure benchmark reflects an adjustment to correct for a distortion to the 10-year reference rate of potential growth caused by the exceptionally high surge in real GDP growth in 2015. Following the approach taken by the Irish authorities in their Budget 2017 calculations, the Commission has taken the average of potential growth rates in 2014 and 2016. Under unchanged policies, there is a risk of some deviation from the requirement over 2017 and 2018 taken together. At the same time, Ireland is forecast to comply with the transitional debt rule in 2017 and 2018. Overall, the Council is of the opinion that further measures will be needed, in particular in 2017, to comply with the provisions of the Stability and Growth Pact. In view of Ireland’s current cyclical conditions and the heightened external risks, the use of any windfall gains to further reduce the general government debt ratio would be prudent. However, as foreseen in Regulation (EC) No 1466/97, the assessment of the budgetary plans and outcomes should take account of the Member State’s budgetary balance in light of the cyclical conditions. As recalled in the Commission Communication accompanying these country-specific recommendations, the assessment of the 2018 Draft Budgetary Plan and subsequent assessment of 2018 budget outcomes will need to take due account of the goal of achieving a fiscal stance that contributes to both strengthening the ongoing recovery and ensuring the sustainability of Ireland’s public finances. In that context, the Council notes that the Commission intends to carry out an overall assessment in line with Regulation (EC) No 1466/97, in particular in light of the cyclical situation of Ireland.

(10)

Although the economic recovery is robust and output is expected to grow at a solid pace in the years ahead, the outlook has become more uncertain, creating risks for the still fragile public finances. Therefore, more efforts should be taken to make revenue more resilient to economic fluctuations and adverse shocks. To this end, the proposal to introduce a Rainy-Day Fund should be advanced and reliance on highly concentrated and volatile revenue sources should be reduced. A balanced composition of different tax sources and broader tax bases improve revenue stability in the face of economic volatility. However, efforts to broaden the tax base have been limited in recent years and recent tax measures have focused on cuts and reliefs. The announced systematic evaluation of the costs and benefits of reduced VAT rates, which apply to an extensive range of sales, is pending. Recurrent property taxation is considered to be one of the most growth-friendly revenue sources. However, Irish revenues from immovable property only amounted to 1,0 % of GDP in 2014, compared to the Union average of 1,6 %. A gradual indexation of property values would help to smooth the local property tax profile by preventing a sudden increase in tax liabilities when properties are revalued in 2019. The differences in the taxation of diesel and gasoline for road users are environmentally unjustified.

(11)

In the past, comprehensive expenditure reviews have focused primarily on reducing government spending to meet overall fiscal targets. There has been little evaluation of the effectiveness and efficiency of expenditure programmes, which has ultimately weakened the reliability of multi-annual spending plans. An appropriately designed spending review, in line with the common Eurogroup principles, would improve expenditure control and could free up resources for much needed public investment to boost growth. The spending review should, in particular, address the cost-effectiveness of the health sector. Ireland has introduced some important efficiency measures, such as a cost-saving agreement with the pharmaceutical industry, a financial management system, eHealth and activity-based funding. However, more could be done, for example by strengthening the role of primary care as a gatekeeper for Ireland’s overburdened hospitals. Steps towards a universal single-tier health service are fragmented and lack an overarching vision.

(12)

Promoting sustainable and inclusive growth that benefits all groups in society remains a challenge. Unemployment was below the Union average at 6,4 % in April 2017. However, the low work intensity of many households creates concerns that some people are left behind as the recovery continues. From 2013 to 2015, the percentage of the population living in low- or very low-work-intensity households fell by 15 %; the overall unemployment rate over the same period dropped by 28 %. Overall, the welfare system has worked well to contain poverty and inequality and Ireland has taken measures to incentivise employment by tapering the withdrawal of benefits and supplementary payments. However, barriers to inclusive growth still exist. The disparities between the employment rates of low-, medium- and highly-skilled workers are among the highest in the Union. Skills mismatches and skills shortages have emerged in certain areas, while upskilling and reskilling opportunities are insufficient. The labour market and social challenges point to the importance of an integrated approach to training and labour market activation for those furthest from the labour market. Moreover, concerns remain over the quality of childcare provisions, including the availability of full-time services. As a percentage of wages, net childcare costs in Ireland are among the highest in the Union. The availability and cost of quality full-time childcare present barriers to female labour market participation and hinder efforts to reduce child poverty, which has fallen slightly but remains higher than the Union average.

(13)

Infrastructure needs should be addressed in order to promote durable and balanced growth. The economic crisis led to a shift in the composition of general government expenditure away from investment and towards current spending. Years of sharply reduced government investment have had a negative impact on the adequacy and quality of infrastructure. The shift in government expenditure has also affected public-sector support for research and development with possible implications for the competitiveness of SMEs. Ireland ranks 25th in the Union in public research and development investment as a percentage of GDP. The most severe infrastructure shortcomings are in transport, water services and housing. Demand for new housing currently exceeds supply by a wide margin in the country’s main urban areas. As a result, residential property prices and rents continue to increase rapidly, in turn resulting in a recent high increase in housing exclusion and homelessness. There is currently no evidence of overvaluation, but constraints limiting the supply of housing could generate macro-financial risks if they are not resolved. A coherent and timely spatial plan would help to deliver new homes in the right areas.

(14)

The Irish economy presents a division between the mostly small and medium-sized Irish-owned firms and large multinational companies operating in Ireland. Linkages between multinational companies and Irish-owned firms remain limited. Their export performances and profiles are significantly different, while the productivity gap between them is growing wider. Irish-owned firms present a weaker exporting profile than multinationals established in Ireland. Their exports are heavily concentrated by sector and destination, making them more vulnerable to shocks. Investing in innovation would foster the productivity and exporting potential of Irish firms at a time when diversifying exports and export destinations could help stabilise the performance of Irish firms. Public research and development expenditure remains low. Fully implementing measures to increase public research and development, in particular measures to support the innovation capacity of SMEs, depends on the return to a trend of sustained investment. To stimulate innovation by SMEs, innovation policies could be rebalanced towards more direct forms of funding. Support from the Government for business research and development has increasingly relied on research and development tax credits. More targeted policy mixes with more direct funding may better address the needs of Irish young innovative firms and exploit opportunities from the strong investing power of multinational companies. This would serve to facilitate access to global value chains and accelerate knowledge spillovers.

(15)

In an environment of heightened external uncertainty, further progress in reducing non-performing loans is important to ensure the stability of the financial sector. Although progress has been made, high non-performing loans ratios remain a drag on banks’ profitability and an obstacle to the full economic recovery of households and firms. The deleveraging of households and domestic firms continues, but their indebtedness remains one of the highest in the Union at 276,8 % of GDP (September 2016). High corporate debt may hinder firms from borrowing for investment, which in turn also limits banks’ ability to improve their own profitability.

(16)

According to the Central Bank of Ireland, the average non-performing loans ratio of the domestic Irish banks was 14,2 % in September 2016. This is substantially above the Union average of 5,3 %. Non-performing loans of the domestic Irish banks fell by EUR 12,7 billion or 32,7 % year-on-year in September 2016. The pace of resolution of arrears has slowed down somewhat as the remaining long-term arrears are also the most difficult to restructure. The momentum should not be lost: arrears restructuring should be sustainable in the long term and different forms of debt reduction need to be considered. 14 % of the mortgage stock was in arrears at the end of September 2016, while accounts in arrears of over 2 years represented around 70 % of the total mortgage loan balances in arrears greater than 90 days. Commercial real estate loans held by domestic banks and business loans also remain areas of concern, with non-performing loans ratios of 32,6 % and 11,8 % respectively in September 2016. The use of personal insolvency, bankruptcy, examinership and out-of-court arrangements intended to restore households and business to viability remains low and should be better incentivised. After several delays, the central credit register is expected to enter the final phase of its implementation. Its finalisation should be a priority as it will serve as the basis for adequate credit risk assessment of borrowers and ensure prudent future lending.

(17)

Implementation of the 2015 Legal Services Regulation Act (‘the 2015 Act’) started in late 2016. The full implementation of the 2015 Act will be crucial in Ireland’s efforts to increase competition in the sector because it will allow barristers direct access to the profession, as well as the creation of corporate groups by multidisciplinary practices and the operation in Ireland of alternative business models used in other Member States. Independent legal services are an input to all sectors of the economy and their cost has a bearing on Ireland’s competitiveness. Therefore, it is paramount that the implementation of the 2015 Act introduces competition-enhancing and cost-reducing provisions following public consultation processes, or incorporates such provisions in regulations to be issued by the Legal Services Regulatory Authority so as to boost competition and reduce costs.

(18)

In the context of the 2017 European Semester, the Commission has carried out a comprehensive analysis of Ireland’s economic policy and published it in the 2017 country report. It has also assessed the 2017 Stability Programme, the 2017 National Reform Programme and the follow-up given to the recommendations addressed to Ireland in previous years. It has taken into account not only their relevance for sustainable fiscal and socioeconomic policy in Ireland, but also their compliance with Union rules and guidance, given the need to strengthen the Union’s overall economic governance by providing Union-level input into future national decisions.

(19)

In the light of this assessment, the Council has examined the 2017 Stability Programme and its opinion (6) is reflected in particular in recommendation (1) below.

(20)

In the light of the Commission’s in-depth review and this assessment, the Council has examined the 2017 National Reform Programme and the 2017 Stability Programme. Its recommendations made under Article 6 of Regulation (EU) No 1176/2011 are reflected in recommendations (1) and (3) below,

HEREBY RECOMMENDS that Ireland take action in 2017 and 2018 to:

1.

Pursue a substantial fiscal effort in 2018 in line with the requirements of the preventive arm of the Stability and Growth Pact. Use any windfall gains arising from the strong economic and financial conditions, including proceeds from asset sales, to accelerate the reduction of the general government debt ratio. Limit the scope and the number of tax expenditures and broaden the tax base.

2.

Better target government expenditure, by prioritising public investment in transport, water services, and innovation in particular in support of SMEs. Enhance social infrastructure, including social housing and quality childcare; deliver an integrated package of activation policies to increase employment prospects of low-skilled people and to address low work intensity of households.

3.

Encourage a continued and more durable reduction in non-performing loans through resolution strategies that involve write-offs for viable businesses and households, with a special emphasis on resolving long-term arrears.

Done at Brussels, 11 July 2017.

For the Council

The President

T. TÕNISTE


(1)  OJ L 209, 2.8.1997, p. 1.

(2)  OJ L 306, 23.11.2011, p. 25.

(3)  OJ C 92, 24.3.2017, p. 1.

(4)  Regulation (EU) No 1303/2013 of the European Parliament and of the Council of 17 December 2013 laying down common provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund, the European Agricultural Fund for Rural Development and the European Maritime and Fisheries Fund and laying down general provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund and the European Maritime and Fisheries Fund and repealing Council Regulation (EC) No 1083/2006 (OJ L 347, 20.12.2013, p. 320).

(5)  Net government expenditure comprises total government expenditure excluding interest expenditure, expenditure on Union programmes fully matched by Union funds revenue and non-discretionary changes in unemployment benefit expenditure. Nationally financed gross fixed capital formation is smoothed over a 4-year period. Discretionary revenue measures or revenue increases mandated by law are factored in. One-off measures on both the revenue and expenditure sides are netted out.

(6)  Under Article 5(2) of Regulation (EC) No 1466/97.


9.8.2017   

EN

Official Journal of the European Union

C 261/31


COUNCIL RECOMMENDATION

of 11 July 2017

on the 2017 National Reform Programme of Spain and delivering a Council opinion on the 2017 Stability Programme of Spain

(2017/C 261/08)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty on the Functioning of the European Union, and in particular Articles 121(2) and 148(4) thereof,

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies (1), and in particular Article 5(2) thereof,

Having regard to Regulation (EU) No 1176/2011 of the European Parliament and of the Council of 16 November 2011 on the prevention and correction of macroeconomic imbalances (2), and in particular Article 6(1) thereof,

Having regard to the recommendation of the European Commission,

Having regard to the resolutions of the European Parliament,

Having regard to the conclusions of the European Council,

Having regard to the opinion of the Employment Committee,

Having regard to the opinion of the Economic and Financial Committee,

Having regard to the opinion of the Social Protection Committee,

Having regard to the opinion of the Economic Policy Committee,

Whereas:

(1)

On 16 November 2016, the Commission adopted the Annual Growth Survey, marking the start of the 2017 European Semester for economic policy coordination. The priorities of the Annual Growth Survey were endorsed by the European Council on 9-10 March 2017. On 16 November 2016, on the basis of Regulation (EU) No 1176/2011, the Commission adopted the Alert Mechanism Report, in which it identified Spain as one of the Member States for which an in-depth review would be carried out. On the same date, the Commission also adopted a recommendation for a Council Recommendation on the economic policy of the euro area, which was endorsed by the European Council on 9-10 March 2017. On 21 March 2017, the Council adopted the Recommendation on the economic policy of the euro area (‘Recommendation for the euro area’) (3).

(2)

As a Member State whose currency is the euro and in view of the close interlinkages between the economies in the economic and monetary union, Spain should ensure the full and timely implementation of the Recommendation for the euro area, as reflected in recommendations (1) to (3) below.

(3)

The 2017 country report for Spain was published on 22 February 2017. It assessed Spain’s progress in addressing the country-specific recommendations adopted by the Council on 12 July 2016, the follow-up given to the country-specific recommendations adopted in previous years and Spain’s progress towards its national Europe 2020 targets. It also included an in-depth review under Article 5 of Regulation (EU) No 1176/2011, the results of which were also published on 22 February 2017. The Commission’s analysis led it to conclude that Spain is experiencing macroeconomic imbalances which have cross-border relevance. In particular, the current account surpluses are translating into a reduction of Spain’s net external liabilities, which nonetheless remain sizeable and expose the country to shifts in market sentiment. Private-sector debt has decreased significantly, especially for corporations, but household debt remains high. Economic growth has become the main driver of debt reduction, but fiscal sustainability risks remain high in the medium term. The need for action to reduce the risk of adverse effects of imbalances on the Spanish economy and, given its size and cross-border relevance, on the economic and monetary union, is particularly important. The financial sector has continued to show a high degree of stability, supported by its ongoing restructuring, low funding costs and the economic recovery. Job creation has been strong in recent years and unemployment has decreased rapidly, but remains very high. Labour market reforms and wage moderation have been important drivers of strong job creation and competitiveness gains in recent years.

(4)

Spain submitted its 2017 National Reform Programme on 28 April 2017 and its 2017 Stability Programme on 29 April 2017. In order to take account of their interlinkages, the two programmes have been assessed at the same time.

(5)

Relevant country-specific recommendations have been addressed in the programming of the European Structural and Investment Funds (ESI Funds) for the 2014-2020 period. As provided for in Article 23 of Regulation (EU) No 1303/2013 of the European Parliament and of the Council (4), where it is necessary to support the implementation of relevant Council recommendations, the Commission may request a Member State to review and propose amendments to its Partnership Agreement and relevant programmes. The Commission has provided further details on how it would make use of that provision in guidelines on the application of the measures linking effectiveness of the ESI Funds to sound economic governance.

(6)

Spain is currently in the corrective arm of the Stability and Growth Pact. In its 2017 Stability Programme, Spain plans to correct the excessive deficit by 2018, in line with the Council Decision of 8 August 2016 giving notice to Spain to take measures for the deficit reduction judged necessary in order to remedy the situation of excessive deficit (‘Council Decision of 8 August 2016’). The headline deficit is planned to continue declining to 0,5 % of GDP in 2020. The expenditure projections in the 2017 Stability Programme incorporate the materialisation of contingent liabilities related to the motorways and the financial sector, amounting to close to 0,4 % and 0,2 % of GDP in 2017 and 2018, respectively. The medium-term budgetary objective of a balanced budgetary position in structural terms is not planned to be reached within the time horizon of the 2017 Stability Programme. The recalculated structural balance (5) is projected to reach -1,9 % of GDP in 2020. The 2017 Stability Programme projects the government debt-to-GDP ratio to decline to 98,8 % in 2017, 97,6 % in 2018, and 92,5 % in 2020. The 2017 Stability Programme’s macroeconomic assumptions are plausible until 2018 and turn somewhat favourable thereafter. Overall, the planned achievement of the targets continues to rely on the strong economic outlook, which is nevertheless subject to risks. Other risks to the achievement of the fiscal targets relate to uncertainty regarding the impact of the recent tax measures. Moreover, taking into account the assumed materialisation of contingent liabilities (which are not included in the Commission 2017 spring forecast), the 2017 Stability Programme relies on considerably higher expenditure restraint than projected in the Commission forecast in 2017 and 2018. Finally, the measures needed to support the planned deficit targets for 2018 have not yet been specified.

(7)

On 8 August 2016, the Council requested Spain to put an end to the excessive deficit situation by 2018 and, in particular, to reduce the general government deficit to 4,6 % of GDP in 2016, 3,1 % of GDP in 2017 and 2,2 % of GDP in 2018. This improvement in the general government balance was deemed consistent with a deterioration of the structural balance by 0,4 % of GDP in 2016, and a 0,5 % of GDP improvement in both 2017 and 2018, based on the updated Commission 2016 spring forecast. Spain reached a headline deficit of 4,5 % of GDP in 2016, below the target set in the Council Decision of 8 August 2016. The Commission 2017 spring forecast projects the headline deficit to decline to 3,2 % of GDP in 2017 and further to 2,6 % of GDP in 2018 on a no-policy-change basis, 0,1 % and 0,4 % of GDP respectively above the headline deficit targets in the 2017 Stability Programme and those set by the Council. Unlike the 2017 Stability Programme, the forecast does not assume the materialisation of the above-mentioned contingent liabilities. The cumulative fiscal effort over 2016-2017 is expected to be narrowly ensured, while in 2018, on a no-policy-change basis, the fiscal effort is forecast to fall short of what was requested in the Council Decision of 8 August 2016. In addition, in August 2016, the Council requested Spain to take measures to improve its fiscal framework, but the 2017 Stability Programme does not report plans to strengthen the contribution of the Stability Law’s spending rule to the sustainability of public finance. Overall, the Council is of the opinion that further measures will be needed, in particular in 2018, to comply with the provisions of the Stability and Growth Pact and in particular with the terms of the Council Decision of 8 August 2016.

(8)

Spain still lacks a clear and consistent public procurement policy framework that ensures legal compliance, a high level of competition and economic efficiency, namely through effective ex ante and ex post control mechanisms, enhanced transparency and coordination across contracting authorities and entities at all government levels. The Government has put forward some measures in 2017 that would improve the procurement supervision system and are currently awaiting parliamentary approval.

(9)

Spain has made progress in the fight against corruption, in particular regarding transparency of administrative decision-making, and more concretely on enacting legislation on transparency of party financing, asset disclosure and conflicts of interest. The focus now shifts to the implementation of these measures. However, despite a surge in corruption investigations involving cases at the local and regional levels, no tailor-made preventive strategies to mitigate corruption risks have been developed at those government levels nor is there a shared preventive strategy across government levels. Other shortcomings such as gaps in the legislation to protect whistle-blowers, the degree of independence of the recently established Office of Conflicts of Interest and the lack of regulation of lobbying have not been the object of a specific follow-up yet. Another issue concerns the protracted judicial procedure for corruption cases. The Criminal Procedure law was amended in 2015 to limit the time allocated to investigations and reduce undue delays in criminal procedures. This could, however, increase the risk that procedural time limits are not sufficient for handling complex corruption cases, if the provisions that allow for extension periods prove to be restrictive.

(10)

Despite a standard VAT rate in line with the Union average and a low and declining VAT compliance gap, Spain has relatively low VAT revenues. This is mainly due to Spain extensively applying exemptions or reduced rates on various products and services. As a result, Spain recorded the largest policy gap in the Union in 2014 (59 % compared to the Union average of about 44 %). Similarly, Spain’s revenues from environmentally related taxes are among the lowest in the Union, despite some measures taken in recent years, mainly in the energy sector. Taxing pollution and resource use can generate increased revenue and bring important social and environmental benefits. There is also normative dispersion resulting in a heterogeneous approach to certain environmental taxes at the regional level. Regarding expenditure, the Government has commissioned AIReF, Spain’s independent fiscal institution, to carry out a spending review covering all levels of general government. The review can help identify areas where spending needs can be met with a more efficient use of resources.

(11)

Job creation has been strong in recent years, supported by labour market reforms and wage moderation. Unemployment has decreased rapidly, but remains among the highest in the Union, in particular among young and low-skilled people, entailing risks of disengagement from the labour market. Almost half of the unemployed have been without a job for more than a year. Spain is taking measures to support young people, in particular by extending the Youth Guarantee (6) eligibility criteria, and to strengthen individual support to the long-term unemployed. Their effectiveness depends also on the performance of the regional public employment services. There is scope to enhance their cooperation with social services, so as to improve the provision of extended services to jobseekers, in particular the long-term unemployed and beneficiaries of income guarantee schemes. At the same time, cooperation of public employment services with employers could be enhanced, in particular by increasing the share of vacancies handled by the employment services.

(12)

Spain has one of the highest shares of temporary employment in the Union, and many temporary contracts are of very short duration. Transition rates from temporary to permanent contracts are very low in comparison to the Union average. The widespread use of temporary contracts is associated with lower productivity growth (including through lower on-the-job training opportunities), poorer working conditions and higher poverty risks. The recent labour market reforms seem to have had a mildly positive effect in reducing segmentation between permanent and temporary contracts, and the ongoing reinforcement of labour inspections is showing positive results in addressing the abuse of temporary contracts. However, some features of the Spanish labour market may still discourage hiring on permanent contracts, including uncertainty in case of legal dispute following a dismissal, along with comparatively high severance payments for workers on permanent contracts. Moreover, the system of hiring incentives remains scattered and not effectively targeted at the promotion of open-ended employment. Although it has recently established a working group on the quality of employment, Spain has not yet developed a comprehensive plan for fighting labour market segmentation, following the 2014 agreement between the Government and social partners.

(13)

Disparities persist in the eligibility conditions of income guarantee schemes and in the link between activation and protection across regions and schemes. Certain vulnerable groups are left out of the income guarantee arrangements. The limited effectiveness of the schemes is partly explained by large disparities in adequacy and access conditions of the regional minimum income schemes and by the fragmentation of the national benefit system into multiple schemes addressing various categories of jobseekers and managed by different administrations. Fragmentation introduces discontinuity in the support given to those in need of it and hampers the delivery of integrated pathways. In response to the multiple challenges, an ongoing study aims at assessing the effectiveness of the national and regional income support schemes. Family benefits are poorly targeted. Moreover, when taking into account the impact of tax credits, the tax-benefit system is overall slightly regressive. In addition, childcare use strongly increases with family income, suggesting barriers to access for low-income parents. The provision of long-term care services is improving, but it differs across regions and current needs are still not met.

(14)

Weak education outcomes negatively affect the longer-term potential for productivity growth in Spain. Despite significant improvements over the past years, the early school leaving rate remains among the highest in the Union. There are wide regional disparities in early school leaving and students’ performance, in particular regarding basic skills. Teachers’ training and individual students’ support are among the drivers of successful school education in well performing regions. Spain has the second highest grade repetition rate in the Union, which increases the risk of school drop-out, lowers attainment expectations and weighs on education costs. Employability of tertiary graduates remains comparatively low. The reduced mobility of students and academic staff, limited traineeships’ opportunities, lack of incentives and the rigidity of university governance remain obstacles to cooperation with business on education or research.

(15)

To strengthen productivity and competitiveness, Spain would benefit from further promoting research and innovation. However, innovation performance has been declining and is now at a lower level than in 2007, while the country’s gap with the Union average has increased over time. Low innovation performance coincides with declining private R & D expenditure and points to weaknesses in the research and innovation governance framework. The State Agency for Research responsible for managing central government research and innovation funding has become operational in early 2017. Until now, there is no systematic multiannual planning of support programme budgets. Also, the effectiveness of support programmes is not systematically evaluated to enhance their design and implementation. Due to a lack of incentives and the rigidity of university governance, public-private cooperation also remains weak and the mobility of researchers between public and private sector is low. Coordination across government levels is not optimal, and as a result national and regional policies do not operate in full synergy.

(16)

Spanish small firms tend to have significantly lower productivity than their peers in other large Member States. Given the prevalence of small firms in Spain, this has a significant impact on productivity in the economy as a whole. Easing the barriers for businesses to be created, operate and grow, would therefore result in increased investment and productivity. The Spanish Government adopted several measures in recent years aimed at facilitating business creation and growth. The consolidation and full implementation of these reforms is essential to fully reap their benefits. The law on market unity adopted in 2013 has contributed to tackling the additional costs for entrepreneurs caused by the substantial differences and overlaps in business regulations across regions. The increasing use by businesses of the complaint mechanism provided for in that law to seek redress on market access barriers hint at a possible need to further simplify licensing procedures. Coordination between relevant public administrations, including at sectoral conference level, requires more efforts. This is essential to ensure that existing and forthcoming legislation at all levels effectively tackles unnecessary market entry barriers, including for new business models in the collaborative economy. In the retail sector, dual authorisations for retail establishments continue to unnecessarily restrict market entry. Market-access requirements in regional legislation concerning the vehicle-with-driver services sector and short-term rental-accommodation services may unnecessarily hamper the balanced development of the collaborative economy. Spain has taken steps in the first months of 2017 to leverage the market unity law, examples being the recently adopted guide on its implementation and the published catalogue of good and bad practices in applying it.

(17)

Regulation of professional services remains comparatively restrictive. Protectionist rights (‘reserved activities’) are granted selectively to some service providers, excluding others with relevant similar qualifications. In a large number of professions, it is mandatory to be a member of a professional association. The level of restrictiveness is higher in Spain than the Union-weighted average for civil engineers, architects and tourist guides. It is lower than the Union average for patent agents and lawyers, although access to the latter profession is more tightly restricted than for any other profession in Spain. The draft professional services law envisaging, among other things, rationalisation of professional association membership has still not been adopted. This reform also defines increased transparency and accountability of professional bodies, opening up unjustified reserved activities and safeguarding market unity in the access to and exercise of professional services in Spain.

(18)

In the context of the 2017 European Semester, the Commission has carried out a comprehensive analysis of Spain’s economic policy and published it in the 2017 country report. It has also assessed the 2017 Stability Programme, the 2017 National Reform Programme and the follow-up given to the recommendations addressed to Spain in previous years. It has taken into account not only their relevance for sustainable fiscal and socioeconomic policy in Spain, but also their compliance with Union rules and guidance, given the need to strengthen the Union’s overall economic governance by providing Union-level input into future national decisions.

(19)

In the light of this assessment, the Council has examined the 2017 Stability Programme and its opinion (7) is reflected in particular in recommendation (1) below.

(20)

In the light of the Commission’s in-depth review and this assessment, the Council has examined the 2017 National Reform Programme and the 2017 Stability Programme. Its recommendations made under Article 6 of Regulation (EU) No 1176/2011 are reflected in recommendations (1) to (3) below,

HEREBY RECOMMENDS that Spain take action in 2017 and 2018 to:

1.

Ensure compliance with the Council Decision of 8 August 2016, including also measures to strengthen the fiscal and public procurement frameworks. Undertake a comprehensive expenditure review in order to identify possible areas for improving spending efficiency.

2.

Reinforce the coordination between regional employment services, social services and employers, to better respond to jobseekers’ and employers’ needs. Take measures to promote hiring on open-ended contracts. Address regional disparities and fragmentation in income guarantee schemes and improve family support, including access to quality childcare. Increase the labour market relevance of tertiary education. Address regional disparities in educational outcomes, in particular by strengthening teacher training and support for individual students.

3.

Ensure adequate and sustained investment in research and innovation and strengthen its governance across government levels. Ensure a thorough and timely implementation of the law on market unity for existing and forthcoming legislation.

Done at Brussels, 11 July 2017.

For the Council

The President

T. TÕNISTE


(1)  OJ L 209, 2.8.1997, p. 1.

(2)  OJ L 306, 23.11.2011, p. 25.

(3)  OJ C 92, 24.3.2017, p. 1.

(4)  Regulation (EU) No 1303/2013 of the European Parliament and of the Council of 17 December 2013 laying down common provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund, the European Agricultural Fund for Rural Development and the European Maritime and Fisheries Fund and laying down general provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund and the European Maritime and Fisheries Fund and repealing Council Regulation (EC) No 1083/2006 (OJ L 347, 20.12.2013, p. 320).

(5)  Cyclically-adjusted balance net of one-off and temporary measures, recalculated by the Commission using the commonly agreed methodology.

(6)  Council Recommendation of 22 April 2013 on establishing a Youth Guarantee (OJ C 120, 26.4.2013, p. 1).

(7)  Under Article 5(2) of Regulation (EC) No 1466/97.


9.8.2017   

EN

Official Journal of the European Union

C 261/36


COUNCIL RECOMMENDATION

of 11 July 2017

on the 2017 National Reform Programme of France and delivering a Council opinion on the 2017 Stability Programme of France

(2017/C 261/09)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty on the Functioning of the European Union, and in particular Articles 121(2) and 148(4) thereof,

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies (1), and in particular Article 5(2) thereof,

Having regard to Regulation (EU) No 1176/2011 of the European Parliament and of the Council of 16 November 2011 on the prevention and correction of macroeconomic imbalances (2), and in particular Article 6(1) thereof,

Having regard to the recommendation of the European Commission,

Having regard to the resolutions of the European Parliament,

Having regard to the conclusions of the European Council,

Having regard to the opinion of the Employment Committee,

Having regard to the opinion of the Economic and Financial Committee,

Having regard to the opinion of the Social Protection Committee,

Having regard to the opinion of the Economic Policy Committee,

Whereas:

(1)

On 16 November 2016, the Commission adopted the Annual Growth Survey, marking the start of the 2017 European Semester for economic policy coordination. The priorities of the Annual Growth Survey were endorsed by the European Council on 9-10 March 2017. On 16 November 2016, on the basis of Regulation (EU) No 1176/2011, the Commission adopted the Alert Mechanism Report, in which it identified France as one of the Member States for which an in-depth review would be carried out. On the same date, the Commission also adopted a recommendation for a Council Recommendation on the economic policy of the euro area, which was endorsed by the European Council on 9-10 March 2017. On 21 March 2017, the Council adopted the Recommendation on the economic policy of the euro area (‘Recommendation for the euro area’) (3).

(2)

As a Member State whose currency is the euro and in view of the close interlinkages between the economies in the economic and monetary union, France should ensure the full and timely implementation of the Recommendation for the euro area, as reflected in recommendations (1) to (4) below.

(3)

The 2017 country report for France was published on 22 February 2017. It assessed France’s progress in addressing the country-specific recommendations adopted by the Council on 12 July 2016, the follow-up given to the country-specific recommendations adopted in previous years and France’s progress towards its national Europe 2020 targets. It also included an in-depth review under Article 5 of Regulation (EU) No 1176/2011, the results of which were also published on 22 February 2017. The Commission’s analysis led it to conclude that France is experiencing excessive macroeconomic imbalances. In particular, France is characterised by weak competitiveness and high and increasing public debt, in a context of low productivity growth. The need for action to reduce the risk of adverse effects on the French economy and, given its size and cross border relevance, on the economic and monetary union is particularly important.

(4)

On 28 April 2017, France submitted its 2017 National Reform Programme and its 2017 Stability Programme. In order to take account of their interlinkages, the two programmes have been assessed at the same time.

(5)

Relevant country-specific recommendations have been addressed in the programming of the European Structural and Investment Funds (ESI Funds) for the 2014-2020 period. As provided for in Article 23 of Regulation (EU) No 1303/2013 of the European Parliament and of the Council (4), where it is necessary to support the implementation of relevant Council recommendations, the Commission may request a Member State to review and propose amendments to its Partnership Agreement and relevant programmes. The Commission has provided further details on how it would make use of that provision in guidelines on the application of the measures linking effectiveness of the ESI Funds to sound economic governance.

(6)

France is currently in the corrective arm of the Stability and Growth Pact. In its 2017 Stability Programme, the Government plans to correct the excessive deficit by 2017, in line with the Council Recommendation of 10 March 2015 under the excessive deficit procedure, with a headline deficit of 2,8 % of GDP. The headline deficit is planned to decline further to 1,3 % of GDP in 2020. The medium-term budgetary objective — a structural deficit of 0,4 % of GDP — is planned to be achieved by 2019. However, the recalculated (5) structural balance is projected to reach -1,2 % of GDP in 2020 and therefore the medium-term objective would not be reached by the programme horizon. According to the 2017 Stability Programme, the general government debt-to-GDP ratio is expected to decrease from 95,9 % of GDP in 2018 to 93,1 % of GDP in 2020. The macroeconomic scenario underpinning those budgetary projections is plausible. At the same time, the measures needed to support the planned deficit targets from 2018 onwards have not been sufficiently specified.

(7)

On 10 March 2015, the Council recommended France to put an end to the excessive deficit situation by 2017 and to achieve a general government deficit of 2,8 % of GDP, consistent with an improvement in the structural balance of 0,9 % of GDP, in 2017. Based on the Commission 2017 spring forecast, the headline deficit is projected to reach 3,0 % of GDP in 2017, in line with the Treaty reference value, but above the target recommended by the Council. For 2018, under unchanged policies, the headline deficit is projected at 3,2 % of GDP, thus exceeding the Treaty reference value and pointing to risks to the durable correction of the excessive deficit. Moreover, the recommended fiscal effort is not projected to be delivered over the period covered by the excessive deficit procedure as the consolidation strategy pursued by France relies primarily on improving cyclical conditions and a continuation of the low-interest-rate environment, which are outside the control of the authorities.

(8)

For 2018, should a timely and durable correction eventually be achieved, France would become subject to the preventive arm of the Stability and Growth Pact and to the transitional debt rule. In the light of its fiscal situation and in particular of its debt level, France is expected to further adjust towards its medium-term budgetary objective of a structural deficit of 0,4 % of GDP. According to the commonly agreed adjustment matrix under the Stability and Growth Pact, that adjustment translates into a requirement of a nominal growth rate of net primary government expenditure (6) which does not exceed 1,2 % in 2018. It would correspond to an annual structural adjustment of 0,6 % of GDP. Under unchanged policies, there is a risk of a significant deviation from that requirement in 2018. There is also a risk that France will not comply with the transitional debt rule in 2018, as the structural balance is projected to deteriorate by 0,5 % of GDP as opposed to the minimum linear structural adjustment of 0,4 % of GDP. Overall, the Council is of the opinion that France needs to stand ready to take further measures to ensure compliance in 2017 and that further measures will be needed as of 2018 to comply with the provisions of the Stability and Growth Pact. However, as foreseen in Regulation (EC) No 1466/97, the assessment of the budgetary plans and outcomes should take account of the Member State’s budgetary balance in the light of the cyclical conditions. As recalled in the Commission Communication on the 2017 European Semester accompanying these country-specific recommendations, the assessment of the 2018 Draft Budgetary Plan and subsequent assessment of 2018 budget outcomes will need to take due account of the goal of achieving a fiscal stance that contributes to both strengthening the ongoing recovery and ensuring the sustainability of France’s public finances. In that context, the Council notes that the Commission intends to carry out an overall assessment in line with Regulation (EC) No 1466/97, in particular in light of the cyclical situation of France.

(9)

The public expenditure-to-GDP ratio in France is one of the highest in the Union. The expenditure ratio is projected to reach 56,2 % of GDP in 2017, 9,7 percentage points higher than in the Union. France has followed an expenditure-based consolidation strategy that has relied mainly on declining interest rates and cuts in public investment. However, it is unlikely that the low-interest-rate environment will prevail in the medium term and the cut in productive public investment could harm future economic potential. In contrast, the spending reviews have identified a number of possible efficiency gains that have not been implemented. The spending reviews identified a fraction — less than 2 % — of the overall planned expenditure savings of EUR 50 billion over the period 2015-2017. However, only part of them has translated into actual measures in the 2016 budget, while the measures in the 2017 budget Act relied on those already identified in the spending review exercise of 2015. Savings derived from spending reviews could significantly increase by widening the expenditure areas under review and by implementing a multi-annual strategy to fully translate the identified savings into concrete budgetary measures.

(10)

High social security contributions combined with high level of taxes weighing on companies can discourage private investment and hamper companies’ growth and new hires. Policy measures to reduce labour costs have continued to be implemented, with the start in April 2016 of the second phase of reductions in employers’ social security contributions planned under the solidarity and responsibility pact. In addition, the Government has increased for 2017 the tax credit for competitiveness and employment (CICE) from 6 % to 7 %. These measures to reduce the labour tax wedge have improved France’s competitiveness since 2013 but accumulated past losses have not yet been recovered. At the average wage, in 2015 France had the highest employers’ social security contribution in the Union as a share of total labour costs paid by the employer, even though it is on a declining trend. The recent evaluations of these measures highlighted their positive effect on employment and firms’ profit margins but further evaluations are needed to fully assess their impact on wages, investment, employment and firms’ margins. Recent evaluations also suggest that the consolidation of labour cost reduction schemes and their transformation in permanent reductions in social contributions would optimise their effects on employment and investment.

(11)

At 38,4 % as of 1 July 2016, the effective average corporate tax rate was the highest in the Union and other taxes on production are also particularly high. However, France has adopted steps to reduce the statutory corporate income rate to 28 % in 2020. At the same time, the tax burden continues to fall less on consumption than in other Member States. In 2014, France ranked 27th in the Union for tax revenues from consumption as a percentage of total taxation. The VAT system is characterised by a middle-ranking standard rate and low reduced rates applied to a large base. The complexity of the tax system may be a barrier to a well-functioning business environment. France has a high tax burden coupled with many tax breaks, reduced rates and a great number of tax schemes resulting in increased compliance costs and uncertainties, in particular for businesses. Total tax expenditure is sizeable in France at more than 3 % of GDP. The administrative cost to tax authorities of collecting taxes is also high and is above the Union average.

(12)

In 2016, the unemployment rate decreased to 10,1 %. Unemployment is higher among young people, the low-skilled and those not born in the Union. Ongoing governance reforms are key to aligning training opportunities with employment prospects and economic needs. In parallel, jobseekers, less qualified workers and SME employees face persistent difficulties in having access to training. Ensuring their participation and the relevance of training provided may require strengthening existing measures and rebalancing resources. Young people, and among them the least qualified, still face difficulties entering the labour market. In this context, measures taken to support apprenticeships have translated into positive results so far. But the initial vocational education and training offered, specifically when school-based and in some tertiary sectors, is not sufficiently linked to employment opportunities. Moreover, pupils from a disadvantaged background are more often steered towards initial vocational education, which also accounts for the large majority of early drop outs, contributing to high educational inequalities. The impact of socioeconomic status on students’ performance is the highest in the OECD.

(13)

In 2016 only 54,5 % of non-EU-born people of working-age were in employment. The non-EU-born female employment rate (45,4 %) was one of the lowest in the Union. The employment gap between non-EU-born and French-born people increased to 17,5 percentage points in 2016 (23,7 percentage points for women). The poor performance of non-EU-born people pulls down the overall employment rate and represents a chronic underutilisation of labour. Second-generation immigrants also face adverse employment outcomes that are not explained by differences in age, education and skills. Moreover, gaps in educational outcomes are persistent, as second-generation immigrants are only partially catching up. In order to address this challenge, a comprehensive strategy is necessary, including in particular specific measures on language skills, upskilling and training, job counselling and other targeted active labour market policies. Effective access to services is key to promoting labour market participation, as well as action against discriminatory practices affecting the hiring of non-EU-born and second-generation immigrants.

(14)

Since 2013 the French minimum wage has followed its indexation rules. In a context of weak inflation and slowing wage growth, its growth has been lower than reference wages. While the minimum wage is high compared with the median wage, the cost of labour at the minimum wage has been reduced by exemptions from social contributions. Increases in the minimum wage induce wage increases for most categories of workers and risk creating upward wage compression. While indexation of the minimum wage is important to preserve workers’ purchasing power, the current indexation mechanism might contribute to delaying the necessary overall wage adjustment. Moreover, in the current context of high unemployment, there are risks that the cost of labour at the minimum wage hampers employment opportunities for low-skilled people. The group of independent experts annually assesses the minimum wage in France and provides non-binding opinions on its development. Their opinion on ad-hoc hikes has always been respected so far and is playing an important role to control the use of such ad-hoc hikes.

(15)

With the law of August 2016 on labour, social dialogue and professional pathways, France introduced measures aimed at improving firms’ capacity to adjust to economic cycles and at reducing segmentation. The law clarifies rules on economic dismissals, extends the scope of majority company-level agreements and increases the effectiveness of collective bargaining. Persistently high levels of unemployment have put a strain on the sustainability of the unemployment benefit system. In that regard social partners reached in March 2017 an agreement on a new unemployment benefit convention, endorsed by the Government, which aims at reducing the annual deficit by EUR 1,2 billion.

(16)

Although France has improved its overall regulatory performance, the business environment continues to be middle-ranking in comparison to major competitors. In particular, despite continued simplification efforts, businesses are still faced with a high regulatory burden and fast-changing legislation. This is one of the main obstacles to private investment. With the simplification programme, France has taken steps to reduce red tape for businesses, but one fifth of the measures adopted before 2016 had not yet been implemented by May 2017. At the same time, threshold effects continue to affect the development of firms with implications for their economic and market performance. Increased social and fiscal obligations applicable to firms above a certain number of employees may discourage them from expanding to a size that would allow them to export and innovate. These threshold effects can, in turn, affect firms’ productivity, competitiveness and internationalisation. Indeed, according to empirical evidence, the 10- and 50-employee thresholds are particularly costly for employers, while the French economy is characterised by a disproportionally low share of companies above those thresholds, suggesting a link between the two phenomena.

(17)

Competition in services has improved in a number of sectors, but some economically important sectors, such as accountancy, architecture, homecare services, accommodation and food services, taxi and private-hire vehicle services, are still characterised by low competition and/or regulatory obstacles. Barriers remain in place for these services, in particular excessive regulatory requirements, and these discourage entry or limit effective competition. Reducing these barriers could allow existing firms or new ones, making use of new technological and digital developments, to increase their competitiveness and/or enter markets, and lead to benefits for consumers through lower prices and better-quality service. To this end, as part of a package of measures to tackle barriers in services markets, in January 2017 the Commission has launched a mutual evaluation exercise inviting Member States to conduct evaluation of the respective barriers they have in place to limit access to certain professions.

(18)

Innovation in France does not match the performance of Europe’s innovation leaders. A high degree of complexity remains and overall coordination is a challenge. The discrepancy between the amount of public support granted and France’s middling innovation performance raises questions about the efficiency of public support mechanisms. In particular, cooperation between public research and companies is suboptimal and weighs on the economic output of the innovation system.

(19)

In the context of the 2017 European Semester, the Commission has carried out a comprehensive analysis of France’s economic policy and published it in the 2017 country report. It has also assessed the 2017 Stability Programme, the 2017 National Reform Programme and the follow-up given to the recommendations addressed to France in previous years. It has taken into account not only their relevance for sustainable fiscal and socioeconomic policy in France, but also their compliance with Union rules and guidance, given the need to strengthen the Union’s overall economic governance by providing Union-level input into future national decisions.

(20)

In the light of this assessment, the Council has examined the 2017 Stability Programme and its opinion (7) is reflected in particular in recommendation (1) below.

(21)

In the light of the Commission’s in-depth review and this assessment, the Council has examined the 2017 National Reform Programme and the 2017 Stability Programme. Its recommendations made under Article 6 of Regulation (EU) No 1176/2011 are reflected in recommendations (1) to (4) below,

HEREBY RECOMMENDS that France take action in 2017 and 2018 to:

1.

Ensure compliance with the Council recommendation of 10 March 2015 under the excessive deficit procedure. Pursue a substantial fiscal effort in 2018 in line with the requirements of the preventive arm of the Stability and Growth Pact, taking into account the need to strengthen the ongoing recovery and to ensure the sustainability of France’s public finances. Comprehensively review expenditure items with the aim to make efficiency gains that translate into expenditure savings.

2.

Consolidate the measures reducing the cost of labour to maximise their efficiency in a budget-neutral manner and in order to scale up their effects on employment and investment. Broaden the overall tax base and take further action to implement the planned decrease in the statutory corporate-income rate.

3.

Improve access to the labour market for jobseekers, in particular less-qualified workers and people with a migrant background, including by revising the system of vocational education and training. Ensure that minimum wage developments are consistent with job creation and competitiveness.

4.

Further reduce the regulatory burden for firms, including by pursuing the simplification programme. Continue to lift barriers to competition in the services sector, including in business services and regulated professions. Simplify and improve the efficiency of public support schemes for innovation.

Done at Brussels, 11 July 2017.

For the Council

The President

T. TÕNISTE


(1)  OJ L 209, 2.8.1997, p. 1.

(2)  OJ L 306, 23.11.2011, p. 25.

(3)  OJ C 92, 24.3.2017, p. 1.

(4)  Regulation (EU) No 1303/2013 of the European Parliament and of the Council of 17 December 2013 laying down common provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund, the European Agricultural Fund for Rural Development and the European Maritime and Fisheries Fund and laying down general provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund and the European Maritime and Fisheries Fund and repealing Council Regulation (EC) No 1083/2006 (OJ L 347, 20.12.2013, p. 320).

(5)  Cyclically-adjusted balance net of one-off and temporary measures, recalculated by the Commission using the commonly agreed methodology.

(6)  Net government expenditure comprises total government expenditure excluding interest expenditure, expenditure on Union programmes fully matched by Union funds revenue and non-discretionary changes in unemployment benefit expenditure. Nationally financed gross fixed capital formation is smoothed over a 4-year period. Discretionary revenue measures or revenue increases mandated by law are factored in. One-off measures on both the revenue and expenditure sides are netted out.

(7)  Under Article 5(2) of Regulation (EC) No 1466/97.


9.8.2017   

EN

Official Journal of the European Union

C 261/41


COUNCIL RECOMMENDATION

of 11 July 2017

on the 2017 National Reform Programme of Croatia and delivering a Council opinion on the 2017 Convergence Programme of Croatia

(2017/C 261/10)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty on the Functioning of the European Union, and in particular Articles 121(2) and 148(4) thereof,

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies (1), and in particular Article 9(2) thereof,

Having regard to Regulation (EU) No 1176/2011 of the European Parliament and of the Council of 16 November 2011 on the prevention and correction of macroeconomic imbalances (2), and in particular Article 6(1) thereof,

Having regard to the recommendation of the European Commission,

Having regard to the resolutions of the European Parliament,

Having regard to the conclusions of the European Council,

Having regard to the opinion of the Employment Committee,

Having regard to the opinion of the Economic and Financial Committee,

Having regard to the opinion of the Social Protection Committee,

Having regard to the opinion of the Economic Policy Committee,

Whereas:

(1)

On 16 November 2016, the Commission adopted the Annual Growth Survey, marking the start of the 2017 European Semester for economic policy coordination. The priorities of the Annual Growth Survey were endorsed by the European Council on 9-10 March 2017. On 16 November 2016, on the basis of Regulation (EU) No 1176/2011, the Commission adopted the Alert Mechanism Report, in which it identified Croatia as one of the Member States for which an in-depth review would be carried out.

(2)

The 2017 country report for Croatia was published on 22 February 2017. It assessed Croatia’s progress in addressing the country-specific recommendations adopted by the Council on 12 July 2016, the follow-up given to the country-specific recommendations adopted in previous years and Croatia’s progress towards its national Europe 2020 targets. It also included an in-depth review under Article 5 of Regulation (EU) No 1176/2011, the results of which were also published on 22 February 2017. The Commission’s analysis led it to conclude that Croatia is experiencing excessive macroeconomic imbalances. In particular, in 2016, the general government debt ratio moved onto a declining path, but public debt is exposed to currency risk, and fiscal sustainability risks remain high in the medium term. Private-sector debt has been decreasing, but remains high, especially in the corporate sector, and is heavily exposed to currency risk. The financial sector is set to support the recovery, but remains exposed to currency-induced credit risk, and the non-performing loans ratio is still high. The unemployment rate is falling rapidly as a result of moderate job creation and a shrinking labour force. Finally, a cumbersome business environment depresses productive investment and productivity growth.

(3)

On 27 April 2017, Croatia submitted its 2017 National Reform Programme and its 2017 Convergence Programme. To take account of their interlinkages, the two programmes have been assessed at the same time.

(4)

Relevant country-specific recommendations have been addressed in the programming of the European Structural and Investment Funds (ESI Funds) for the 2014-2020 period. As provided for in Article 23 of Regulation (EU) No 1303/2013 of the European Parliament and of the Council (3), where it is necessary to support the implementation of relevant Council recommendations, the Commission may request a Member State to review and propose amendments to its Partnership Agreement and relevant programmes. The Commission has provided further details on how it would make use of that provision in guidelines on the application of the measures linking effectiveness of the ESI Funds to sound economic governance.

(5)

Following the abrogation of the excessive deficit procedure, Croatia is in the preventive arm of the Stability and Growth Pact and subject to the debt rule. In its 2017 Convergence Programme, the Government plans a gradual improvement of the general government balance from -0,8 % of GDP in 2016 to 0,5 % of GDP in 2020. The medium-term budgetary objective, set at -1,75 % of GDP in structural terms, was met with a wide margin in 2016, and the (recalculated (4)) structural balance is planned to be at the medium-term budgetary objective in 2017 and 2018, but with no margin. Thereafter, it is projected to slightly improve again. The Convergence Programme expects the general government debt-to-GDP ratio to continue declining to 72,1 % by 2020, after peaking at 86,7 % of GDP in 2015. The macroeconomic scenario underpinning those budgetary projections is favourable, in particular in view of the negative impact of the financial difficulties facing Croatia’s largest private company, Agrokor, which the programme projections do not consider. The Agrokor crisis also poses direct risks to the budgetary projections. Moreover, the measures needed to support the planned deficit targets from 2017 onwards have not yet been fully specified.

(6)

On 12 July 2016, the Council recommended Croatia to achieve an annual fiscal adjustment of at least 0,6 % of GDP towards the medium-term budgetary objective in 2017. Outturn data showing a sizeable improvement in the headline balance for 2016 indicate that Croatia already reached its medium-term budgetary objective in that year. The Commission 2017 spring forecast projects the structural balance to remain above the medium-term budgetary objective in 2017, in spite of its decline from -0,3 % of GDP in 2016 to -1,7 % of GDP in 2017. In 2018, Croatia is recommended to remain at the medium-term budgetary objective. The Commission 2017 spring forecast expects the structural balance to further decrease to -2,1 % of GDP, pointing to a risk of some deviation from the medium-term budgetary objective. Croatia is forecast to comply with the debt rule in 2017 and 2018. Overall, the Council is of the opinion that Croatia needs to stand ready to take further measures in 2018 to ensure compliance with the provisions of the Stability and Growth Pact.

(7)

Croatia’s fiscal governance framework shows shortcomings. The new fiscal responsibility act, supposed to strengthen the budgetary framework as well as the independence and mandate of the Fiscal Policy Commission, has not yet been adopted. The amendment of the budget act, aimed at strengthening the medium-term budgetary framework and addressing the revisions of budgetary plans at both central and local levels, has been delayed. The reliability of the projections underlying the budgetary plans remains weak.

(8)

Croatia has relatively low revenue from recurrent taxation of immovable property. Revenue is collected by local authority units through charges linked to property, but with considerable variations in their calculation and coverage. It also relies on the less efficient taxation of property transfers. By way of follow-up to repeated country-specific recommendations, as part of the tax reform of late 2016, as of 2018 some local charges and taxes will be replaced by a recurrent property tax calculated on the basis of five parameters which approximate the value of the property. It is considered a first step to a fully-fledged value-based recurrent property tax.

(9)

Croatia’s sovereign financing needs and the exposure of sovereign debt to currency risk highlight the importance of reliable financing sources and prudent risk management. Addressing a country-specific recommendation, in early 2017 a debt management strategy for the central government was adopted, covering 2017-2019. It came three years after the expiry of the previous strategy. The institutional set-up for public debt management, including communication with the markets, risk management and the update of the strategy at regular intervals, is deficient. There is also insufficient consideration of off-budget transactions with potential impact on the debt.

(10)

The labour market has continued to recover recently, but unemployment is still high, with a high share of long-term jobseekers. Along with low and declining activity, this means there is a large untapped labour potential. The decline in activity in 2016 was particularly pronounced among prime-age low-skilled workers and was driven by a shrinking working-age population due to ageing and emigration, both of which have been increasing.

(11)

Inactivity is relatively high among cohorts eligible for early retirement. Short contribution periods result in low current and future pension adequacy and risks of old-age poverty. There are many pathways to early retirement, possible a full five years before the statutory retirement age. Financial incentives to work until that age are weak. Announced measures to encourage longer working lives have not been implemented. Care responsibilities contribute to low labour market participation, of older prime-age women in particular. There is a shortage of formal childcare and there are large regional disparities, with work contracts allowing little flexibility to balance work and care. To date, the statutory pensionable age is 61 years and 9 months for women and 65 years for men. The convergence and increase of the statutory retirement ages is slow, with both sexes to reach a pensionable age of 67 in 2038. Speeding this up is under consideration but has not yet been adopted. The pension system gives entitlement to more favourable conditions to specific categories of workers in occupations classified as arduous and hazardous, and in specific sectors. The Croatian authorities have completed a review of the arduous or hazardous professions, but the rules have not yet been streamlined.

(12)

According to the latest data, in 2015, almost 30 % of the population was exposed to the risk of poverty or social exclusion. The social protection system displays shortcomings in effectiveness and fairness, stemming from inconsistencies in eligibility criteria, fragmented geographical coverage, lack of coordination across authorities in charge, and low transparency. In 2016, only 0,6 % of GDP was spent on the minimum income scheme targeting the poorest households. Reform plans including the institutional reassignment of responsibilities and the harmonisation of eligibility criteria have stalled.

(13)

The acquisition of skills needed in the labour market is an important condition for employability. Participation in adult education is very low, as are expenditure and coverage of active labour market policies, retraining measures and lifelong learning. Training does not sufficiently focus on older and low-skilled workers and the long-term unemployed, who tend to face particular employability challenges. The preparation of legislation to improve the quality of the institutions, programmes and teaching for adult learning has been delayed.

(14)

Sufficient basic skills are essential for people to find and retain good, stable jobs and successfully participate in economic and social life. International survey information points to severe deficiencies in basic skills, applied science and mathematics among Croatian 15-year-old schoolchildren. Since 2015, as part of the implementation of the education, science and technology strategy, a reform of the school curricula was launched to improve on content and teaching of transferable skills. After ambivalent stakeholder reactions, the curricular reform was revised, and implementation has been significantly delayed. The process now needs to continue in line with the original objectives. Croatia recently adopted a vocational education and training (VET) strategy. This is expected to lead to an update of the VET curricula, an increased role of work-based learning, and improved VET teaching quality. The introduction of the system for recognising and validating non-formal and informal learning is pending.

(15)

The territorial and functional fragmentation of public administration weighs on service delivery and the efficiency of public expenditure. Current competences and fiscal relations between levels of government are not conducive to the efficient and fair delivery of public services, in particular in health, education, and social assistance. The comprehensive public administration reform faces delays. Legislation to reallocate tasks between the central and local authorities is pending, as is the streamlining of the system of state agencies. In early 2017 the Croatian authorities announced the establishment of a task force to draw up legislation on subnational government financing.

(16)

Fragmentation in wage setting in public administration continues to impede the transparency of wages and equality of treatment, as well as government control over the public wage bill, with risks of spillovers to the broader economy. In February 2017, the Government adopted common guidelines for negotiating and monitoring collective agreements in the public sector, but the streamlining of the wage-setting frameworks has been postponed to 2018.

(17)

State-owned enterprises are on average less productive than private firms, suggesting weaknesses in their governance. They exert a negative impact on allocative efficiency, and contribute to low productivity growth in the economy. In the past year, steps to open state-owned enterprises to private control advanced slowly. Better monitoring of their performance and boards’ accountability, including of firms owned by local government units, would help improve their management.

(18)

The Croatian Bank for Reconstruction and Development (HBOR) has a key role in implementing the Union financial instruments and the Investment Plan for Europe in particular. To play this role fully, it needs to comply with high standards of transparency and accountability. The Croatian authorities plan an independent asset quality review of its credit portfolio by independent auditors, to be concluded by the end of 2017. Based on the findings, its regulatory framework and governance structures will be revisited.

(19)

Businesses are burdened with high regulatory costs. A high number of parafiscal charges, many of which are statistically treated as taxes, complicate the business environment. Addressing a country-specific recommendation, in summer 2016 the Government decided to abolish 13 and reduce another 11 parafiscal charges, but implementation has been slow. Businesses continue to suffer from a high administrative burden. An action plan for reducing the administrative burden was adopted, covering eight regulatory areas, but implementation is pending.

(20)

Investment recovered in 2016, after a sharp decline during the crisis. But despite favourable macroeconomic and financing conditions, key bottlenecks weigh on a more sustained recovery in investment. The weaknesses of public administration, the cumbersome business environment, slow implementation of the anti-corruption strategy, restrictive regulation in key infrastructure sectors, and the strong presence of the State in the economy weigh on the business climate.

(21)

The modernisation of professional regulation can promote labour mobility and contribute to lower prices for professional services, thereby increasing the growth potential. Croatia’s regulation for service providers and regulated professions has been restrictive, for lawyers in particular. In summer 2016, the Government adopted an action plan to replace and modernise unfit regulation, which however was limited in scope and detail.

(22)

The quality and efficiency of the justice system is a key determinant of the business environment. Despite reduced backlogs, first instance court proceedings are long in commercial, civil and criminal cases. The electronic filing and delivery of court documents has the potential to significantly improve the justice system, but has not yet been rolled out. Commercial judges cannot access registers online: this weighs on the efficiency of insolvency proceedings. Court judgments are only rarely available online, and there is scope to upgrade business processes at first-instance commercial courts.

(23)

The banking sector remains well capitalised, and its profitability recovered in 2016 following the conversion of Swiss franc into euro loans in 2015. The ratio of non-performing loans to gross loans has been declining lately but is still high, among non-financial corporations in particular. The decline appears to be driven by sales, as well as the progressive and automatic provisioning requirements introduced in 2013. As part of the recent tax reform, the Government also introduced a new tax treatment for write-offs of non-performing loans, in response to a country-specific recommendation. Its effects require close monitoring. The efficiency of the recently reformed insolvency framework in facilitating the resolution of non-performing loans also deserves close monitoring.

(24)

In the context of the 2017 European Semester, the Commission has carried out a comprehensive analysis of Croatia’s economic policy and published it in the 2017 country report. It has also assessed the 2017 Convergence Programme, the 2017 National Reform Programme and the follow-up given to the recommendations addressed to Croatia in previous years. It has taken into account not only their relevance for sustainable fiscal and socioeconomic policy in Croatia, but also their compliance with Union rules and guidance, given the need to strengthen the Union’s overall economic governance by providing Union-level input into future national decisions.

(25)

In the light of this assessment, the Council has examined the 2017 Convergence Programme and its opinion (5) is reflected in particular in recommendation (1) below.

(26)

In the light of the Commission’s in-depth review and this assessment, the Council has examined the 2017 National Reform Programme and the 2017 Convergence Programme. Its recommendations made under Article 6 of Regulation (EU) No 1176/2011 are reflected in recommendations (1) to (5) below,

HEREBY RECOMMENDS that Croatia take action in 2017 and 2018 to:

1.

Pursue its fiscal policy in line with the requirements of the preventive arm of the Stability and Growth Pact, which entails remaining at its medium-term budgetary objective in 2018. By September 2017, reinforce budgetary planning and the multiannual budgetary framework, including by strengthening the independence and mandate of the Fiscal Policy Commission. Take the necessary steps for the introduction of the value-based property tax. Reinforce the framework for public debt management, including by ensuring annual updates of the debt management strategy.

2.

Discourage early retirement, accelerate the transition to the higher statutory retirement age and align pension provisions for specific categories with the rules of the general scheme. Improve coordination and transparency of social benefits.

3.

Improve adult education, in particular for older workers, the low-skilled and the long-term unemployed. Accelerate the reform of the education system.

4.

Reduce the fragmentation and improve the functional distribution of competencies in public administration, while enhancing the efficiency and reducing territorial disparities in the delivery of public services. In consultation with social partners, harmonise the wage-setting frameworks across the public administration and public services.

5.

Speed up the divestment of state-owned enterprises and other state assets, and improve corporate governance in the state-owned enterprise sector. Significantly reduce the burden on businesses stemming from costs of regulation and from administrative burdens. Remove regulatory restrictions hampering access to and the practice of regulated professions and professional and business services. Improve the quality and efficiency of the justice system, in particular by reducing the length of civil and commercial cases.

Done at Brussels, 11 July 2017.

For the Council

The President

T. TÕNISTE


(1)  OJ L 209, 2.8.1997, p. 1.

(2)  OJ L 306, 23.11.2011, p. 25.

(3)  Regulation (EU) No 1303/2013 of the European Parliament and of the Council of 17 December 2013 laying down common provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund, the European Agricultural Fund for Rural Development and the European Maritime and Fisheries Fund and laying down general provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund and the European Maritime and Fisheries Fund and repealing Council Regulation (EC) No 1083/2006 (OJ L 347, 20.12.2013, p. 320).

(4)  Cyclically-adjusted balance net of one-off and temporary measures, recalculated by the Commission using the commonly agreed methodology.

(5)  Under Article 5(2) of Regulation (EC) No 1466/97.


9.8.2017   

EN

Official Journal of the European Union

C 261/46


COUNCIL RECOMMENDATION

of 11 July 2017

on the 2017 National Reform Programme of Italy and delivering a Council opinion on the 2017 Stability Programme of Italy

(2017/C 261/11)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty on the Functioning of the European Union, and in particular Articles 121(2) and 148(4) thereof,

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies (1), and in particular Article 5(2) thereof,

Having regard to Regulation (EU) No 1176/2011 of the European Parliament and of the Council of 16 November 2011 on the prevention and correction of macroeconomic imbalances (2), and in particular Article 6(1) thereof,

Having regard to the recommendation of the European Commission,

Having regard to the resolutions of the European Parliament,

Having regard to the conclusions of the European Council,

Having regard to the opinion of the Employment Committee,

Having regard to the opinion of the Economic and Financial Committee,

Having regard to the opinion of the Social Protection Committee,

Having regard to the opinion of the Economic Policy Committee,

Whereas:

(1)

On 16 November 2016, the Commission adopted the Annual Growth Survey, marking the start of the 2017 European Semester for economic policy coordination. The priorities of the Annual Growth Survey were endorsed by the European Council on 9-10 March 2017. On 16 November 2016, on the basis of Regulation (EU) No 1176/2011, the Commission adopted the Alert Mechanism Report, in which it identified Italy as one of the Member States for which an in-depth review would be carried out. On the same date, the Commission also adopted a recommendation for a Council Recommendation on the economic policy of the euro area, which was endorsed by the European Council on 9-10 March 2017. On 21 March 2017, the Council adopted the Recommendation on the economic policy of the euro area (‘Recommendation for the euro area’) (3).

(2)

As a Member State whose currency is the euro and in view of the close interlinkages between the economies in the economic and monetary union, Italy should ensure the full and timely implementation of the Recommendation for the euro area, as reflected in recommendations (1) to (4) below.

(3)

The 2017 country report for Italy was published on 22 February 2017. It assessed Italy’s progress in addressing the country-specific recommendations adopted by the Council on 12 July 2016, the follow-up given to the country-specific recommendations adopted in previous years and Italy’s progress towards its national Europe 2020 targets. It also included an in-depth review under Article 5 of Regulation (EU) No 1176/2011, the results of which were also published on 22 February 2017. The Commission’s analysis led it to conclude that Italy is experiencing excessive macroeconomic imbalances. High government debt and protracted weak productivity dynamics imply risks with cross-border relevance, in a context of high non-performing loans and unemployment. The need for action to reduce the risk of adverse effects on the Italian economy and, given its size and cross-border relevance, on the economic and monetary union, is particularly important.

(4)

On 27 April 2017, Italy submitted its 2017 National Reform Programme and its 2017 Stability Programme. In order to take account of their interlinkages, the two programmes have been assessed at the same time. Italy’s 2017 National Reform Programme includes commitments both for the short and medium term. In the short term, the final adoption of the pending laws concerning competition and the reform of criminal process and the statute of limitations, the implementation of the anti-poverty law as well as measures related to firm-level bargaining, tax shift and privatisation are planned. In the medium term, measures concern public finances, taxation, the labour market, the banking and credit system, competition, public administration and justice, and investment. The 2017 National Reform Programme also covers the challenges identified in the 2017 country report and the Recommendation for the euro area, including the need to relaunch investment and ensure the sustainability of public finances. If fully implemented within the indicated timelines, these measures would help address Italy’s macroeconomic imbalances and country-specific recommendations. Based on the assessment of Italy’s policy commitments, the Commission confirms its previous assessment that at this stage no further steps are warranted in the framework of the macroeconomic imbalances procedure provided for in Regulation (EU) No 1176/2011 and Regulation (EU) No 1174/2011 of the European Parliament and of the Council (4). The implementation of the policy reform agenda will be followed closely by means of specific monitoring.

(5)

Relevant country-specific recommendations have been addressed in the programming of the European Structural and Investment Funds (ESI Funds) for the 2014-2020 period. As provided for in Article 23 of Regulation (EU) No 1303/2013 of the European Parliament and of the Council (5), where it is necessary to support the implementation of relevant Council recommendations, the Commission may request a Member State to review and propose amendments to its Partnership Agreement and relevant programmes. The Commission has provided further details on how it would make use of that provision in guidelines on the application of the measures linking effectiveness of the ESI Funds to sound economic governance.

(6)

Italy is currently in the preventive arm of the Stability and Growth Pact and subject to the debt rule. In its 2017 Stability Programme, the Government plans an improvement in the headline deficit from 2,4 % of GDP in 2016 to 2,1 % in 2017, 1,2 % in 2018, and a broadly balanced budgetary position by 2019. The medium-term budgetary objective, set at a balanced budgetary position in structural terms, is planned to be reached by 2019 and maintained in 2020, whereas the recalculated (6) structural balance points to a small structural deficit (0,3 % of GDP) in both years. After having further increased in 2016 (to 132,6 % of GDP, from 132,1 % in 2015), the general government debt-to-GDP ratio is projected in the 2017 Stability Programme to broadly stabilise in 2017 and to then decline as of 2018, reaching 125,7 % in 2020. The uncertainty on the composition and implementation of the medium-term budgetary strategy of the 2017 Stability Programme entails downside risks for both the growth projections and the achievement of the budgetary targets. In particular, the Commission 2017 spring forecast expects almost the same real GDP growth for 2018 as the 2017 Stability Programme, in spite of a significantly higher deficit. In fact, the Commission forecast does not incorporate a VAT hike (0,9 % of GDP) legislated as a ‘safeguard clause’ to achieve the budgetary targets in 2018, also because the 2017 Stability Programme confirms the intention of not activating it without providing details about alternative compensating measures. Furthermore, the 2017 Stability Programme indicates the intention to find additional room for reducing the tax burden.

(7)

The 2017 Stability Programme indicates that the overall budgetary impact of the exceptional inflow of refugees and security-related measures in 2016 and 2017 is significant and provides adequate evidence of the scope and nature of these additional budgetary costs. According to the Commission, the eligible additional expenditure in 2016 amounted to 0,06 % of GDP for the exceptional inflow of refugees and to 0,06 % of GDP for security-related measures. For 2017, the eligible expenditure related to exceptional inflow of refugees is preliminarily estimated at 0,16 % of GDP (7). Moreover, the Italian authorities invoked the unusual-event clause in 2017 for exceptional seismic activity. The eligible expenditure related to exceptional seismic activity is preliminarily estimated at 0,18 % of GDP in 2017 (8). The provisions set out in Articles 5(1) and 6(3) of Regulation (EC) No 1466/97 cater for this additional expenditure, in that the inflow of refugees, the severity of the terrorist threat and the exceptional seismic activity are unusual events, their impact on Italy’s public finances is significant, and sustainability would not be compromised by allowing for a temporary deviation from the adjustment path towards the medium-term budgetary objective. Therefore, the required adjustment towards the medium-term budgetary objective for 2016 has been reduced by 0,12 % of GDP to take into account additional refugee-related and security-related costs. Regarding 2017, a final assessment, including on the eligible amounts, will be made in spring 2018 on the basis of observed data as provided by the Italian authorities.

(8)

For 2016, Italy was granted a temporary deviation of 0,5 % of GDP from the required adjustment path towards the medium-term budgetary objective to take account of major structural reforms with a positive impact on the long-term sustainability of public finances and a further 0,25 % of GDP to take account of national investment expenditure in projects co-financed by the Union. As regards the investment clause, one of the eligibility criteria is the increase in public investment. Outturn data for 2016 showed a decline in public investment in 2016 compared to 2015 (by EUR 1,6 billion). However, the Council acknowledges that there are specific factors which constrained public investment last year. One factor was uncertainty associated with the transition to the new code of public procurement and concessions, which was revised in line with the 2016 country-specific recommendations. Moreover, and even more importantly, in 2016 there was a sharp fall in investment financed through Union funds as a result of the start of the new programming period, while nationally financed investment marginally increased (by EUR 1,1 billion). Therefore, as nationally financed investment rose in 2016 and the expenditure related to the investment clause did not substitute for it, a temporary deviation of 0,21 % of GDP can be granted to Italy in relation to the investment clause, corresponding to national expenditure eligible for co-financing as reported in the 2017 Stability Programme. Once the overall additional flexibility of 0,83 % of GDP under the unusual event, structural reform and investment clauses is taken into account, the Commission 2017 spring forecast points to some deviation from the recommended adjustment path towards the medium-term objective in 2016.

(9)

On 12 July 2016, the Council recommended Italy to achieve an annual fiscal adjustment of 0,6 % or more of GDP towards the medium-term budgetary objective in 2017. Based on the Commission 2017 spring forecast, there is a risk of a significant deviation from the recommended adjustment path towards the medium-term objective in 2017 and for 2016 and 2017 taken together. However, that conclusion would change to a risk of some deviation if the temporary allowance for the unusual-event clause related to the exceptional inflow of refugees and to the preventive investment plan for the protection of the national territory against seismic risks (preliminarily estimated at 0,34 % of GDP, overall) is deducted from the requirement in 2017.

(10)

In 2018, in the light of its fiscal situation and in particular of its debt level, Italy is expected to further adjust towards its medium-term budgetary objective of a balanced budgetary position in structural terms. According to the commonly agreed adjustment matrix under the Stability and Growth Pact, that adjustment translates into a requirement of a nominal rate of reduction of net primary government expenditure by at least 0,2 % in 2018. It would correspond to an annual structural adjustment of at least 0,6 % of GDP. Under unchanged policies, there is a risk of a significant deviation from the requirement in 2018. Italy is prima facie not forecast to comply with the debt rule in 2017 and 2018. Overall, the Council is of the opinion that Italy needs to stand ready to take further measures to ensure compliance in 2017 and that further measures will be needed in 2018 to comply with the provisions of the Stability and Growth Pact. However, as foreseen in Regulation (EC) No 1466/97, the assessment of the budgetary plans and outcomes should take account of the Member State’s budgetary balance in the light of the cyclical conditions. As recalled in the Commission Communication on the 2017 European Semester accompanying these country-specific recommendations, the assessment of the 2018 Draft Budgetary Plan and subsequent assessment of 2018 budget outcomes will need to take due account of the goal of achieving a fiscal stance that contributes to both strengthening the ongoing recovery and ensuring the sustainability of Italy’s public finances. In that context, the Council notes that the Commission intends to carry out an overall assessment in line with Regulation (EC) No 1466/97, in particular in the light of the cyclical situation of Italy.

(11)

Due to Italy’s prima facie non-compliance with the debt rule in 2015, on 22 February 2017 the Commission issued a report under Article 126(3) of the TFEU, which concluded that ‘Unless the additional structural measures, worth at least 0,2 % of GDP, that the Government committed to adopt at the latest in April 2017 are credibly enacted by that time in order to reduce the gap to broad compliance with the preventive arm in 2017 (and thus in 2016), the current analysis suggests that the debt criterion as defined in the Treaty and in Regulation (EC) No 1467/97 should be considered as currently not complied with. However, a decision on whether to recommend opening an excessive deficit procedure would only be taken on the basis of the Commission 2017 spring forecast, taking into account outturn data for 2016 and the implementation of the fiscal commitments made by the Italian authorities in February 2017.’ In April 2017, the Government adopted the requested additional consolidation measures. Therefore, no further steps are deemed to be necessary for compliance with the debt criterion in 2015 at this stage. The Commission will reassess Italy’s compliance with the debt criterion in autumn 2017, based on notified data for 2016 and the Commission 2017 autumn forecast, which will incorporate new information on budgetary implementation in 2017 and actual budgetary plans for 2018.

(12)

Italy’s high public debt ratio is set to stabilise, but not decrease, due to the worsening of the structural primary balance and current macroeconomic conditions. At more than 130 % of GDP, this implies that significant resources are earmarked to cover debt servicing costs, to the detriment of more growth-enhancing items including education, innovation and infrastructure.

(13)

Italy’s tax system is not supportive of economic growth and efficiency on several grounds. Despite a recent modest reduction, the tax burden on factors of production remains among the highest in the Union. There is scope to shift further towards taxes less detrimental to growth, in a budget-neutral way. The first residence tax was repealed in 2015, which was a step back in the process of achieving a more efficient tax structure. In spite of national legislation requiring it on an annual basis, the long awaited revision of tax expenditures, in particular with respect to the reduced value added tax rates, was further postponed. A reform of outdated cadastral values in line with current market values is still pending. Low tax compliance and the complex tax code increase the burden on compliant firms and households. Recent measures, such as mandatory electronic invoicing and the ‘split payment’ for purchases by government bodies, go in the right direction. However, electronic invoicing is not compulsory for private sector transactions and limits on using cash have recently been raised, so that the use of electronic payments remains well below the Union average, to the detriment of tax compliance.

(14)

As regards the budgetary process, a comprehensive reform was passed in 2016. The Commission will continue to monitor implementation of the reform, which would make the spending review a more integral part of the budgeting process.

(15)

Italy’s framework conditions, public administration and business environment are still affected by a number of structural inefficiencies. These inefficiencies continue to slow down implementation of reforms, deter investment, create uncertainty and open opportunities for rent-seeking. The reforms of the civil justice system adopted over the past years to increase the efficiency of the justice system, improve case management and ensure procedural discipline, are only slowly starting to show results. The length of civil justice proceedings remains a major challenge. Although decreasing slightly at lower instances, both the disposition time and the backlog for civil and commercial lawsuits continue to be among the highest in the Union at all instances. A pending reform of civil proceedings provides for a further tightening of admissibility criteria for appeals, streamlined civil procedures at all instances and disincentives against vexatious litigation.

(16)

Several indicators confirm that corruption is still a major problem in Italy, despite the reforms adopted so far. The long-overdue reform of the statute of limitations to step up the fight against corruption has been pending since 2014. In its current form, the statute of limitations leads to a high proportion of cases getting time-barred after first-instance conviction. Moreover, the national anti-corruption authority has limited financial and human resources to exercise its powers, and the prevention framework remains fragmented.

(17)

A comprehensive enabling law reforming the public administration was adopted in 2015. It has the potential to improve the efficiency and effectiveness of the public administration. However, following the November 2016 Constitutional Court ruling that declared the procedure followed for the adoption of some implementing legislative decrees unconstitutional, the implementation of key parts of the reform is still pending. In particular, the ruling concerns three key areas of the reform: local public services, public employment, and publicly-owned enterprises. New legislative initiatives are needed to reform the local public services and public employment at management level, as the deadline for their decrees expired in November 2016. Regarding publicly-owned enterprises, the decree adopted before the ruling needs to be amended. The reform aims to reduce the number of publicly-owned enterprises, improve their efficiency, and ensure that they operate under the same rules as privately-owned entities. The implementation of the planned privatisations would also contribute to the rationalisation of publicly-owned enterprises.

(18)

Framework conditions for competition also remain unfavourable. In particular, the 2015 annual competition law has not yet been adopted. Significant barriers to competition persist in certain sectors, such as regulated professions, concessions, public procurement and the system of authorisations as well as local public services, including transport. In particular, progress in fostering an efficient, transparent and competition-driven functioning of the public transport market, in particular for railways under government concessions, is still very limited. According to a new indicator developed by the Commission, the level of restrictiveness is higher in Italy than the Union-weighted average for most of the professions analysed. As part of a package of measures to tackle barriers in services markets, in January 2017 specific guidance by profession to address this issue was made in a Communication from the Commission on reform recommendations for regulation in professional services.

(19)

The banking sector’s large stock of non-performing loans remains a drag on bank profits and their ability to generate capital internally. This weighs on credit supply, in particular to small firms. The policy initiatives taken so far have not yet resulted in a significant reduction in non-performing loans. Supervisory guidance on non-performing loan management at national level remains underdeveloped medium-sized and small banks continue to be more vulnerable than large credit institutions. The Commission will therefore monitor the implementation of the corporate governance reform of the largest popolari banks and small mutual banks, which is key to the consolidation of the banking system. Reform measures have been taken recently, but the insolvency and collateral enforcement framework continues to be insufficiently supportive of swift non-performing loan work-out and restructuring, especially in relation to small and micro-firms. A draft enabling law aiming at overhauling and streamlining insolvency and enforcement tools, currently under discussion in Parliament, could help to overcome the existing inefficiencies and contribute to the development of a secondary market for distressed debt in Italy.

(20)

Despite the gradual improvement of the labour market, supported by reforms, long-term and youth unemployment remain high (6,7 % and 38 % respectively in 2016) and more than 1,2 million young people are not in education, employment or training. While the implementation of the Youth Guarantee (9) has progressed a lot, some challenges remain to ensure a more effective and a full-scale implementation. The percentage of Youth Guarantee beneficiaries still in employment, education, apprenticeship or traineeship six months after exit is above the Union average. However, the outreach to the target population is still low and regional differences in the delivery remain significant. The reform of the active labour market policies, including its governance system, is still at an early stage and employment services remain weak, with wide regional disparities. Adult learning is not sufficiently developed, which may negatively weigh on labour market outcomes of low-skilled people.

(21)

The participation of women in the labour market and their labour force potential remains largely underutilised. The female employment rate is one of the lowest in the Union. Some features of the tax-benefit system continue to discourage second earners from participating in the labour force while access to affordable care services (for children and the elderly) remains limited, with wide regional disparities. Paternity leave is among the lowest in the Union.

(22)

Second-level bargaining is not broadly used. This hampers the efficient allocation of resources and the responsiveness of wages to local economic conditions. This is also due to the existing framework rules and practices for collective bargaining, which leave limited scope for local-level bargaining. The agreements signed by social partners since January 2014 setting out procedures and criteria for measuring the representativeness of trade unions, which would reduce uncertainty in industrial relations, have not yet been implemented. Tax rebates on productivity-related pay increases, have not proved effective in extending the use of second-level bargaining significantly.

(23)

The rate of people at risk of poverty or social exclusion is well above the Union average, especially for children and people with a migrant background. There are also substantial regional disparities. Some progress has been made regarding the national anti-poverty strategy. The recently adopted Inclusion Income scheme is a positive step towards establishing a single comprehensive scheme against poverty. Its effectiveness will depend on its proper implementation with the mobilisation of adequate resources (including through the streamlining of various social allocations), appropriate targeting through means-testing and priority allocation to families with children and effective procedures on the ground, both in delivering income support and in providing well integrated services. At this stage, it is unclear whether the financial resources will be sufficient to address Italy’s poverty challenge. Catering for additional resources while respecting the budgetary targets, reducing the fragmentation of the social assistance system, rationalising social spending, and addressing its current bias towards pensions, remain key challenges.

(24)

In the context of the 2017 European Semester, the Commission has carried out a comprehensive analysis of Italy’s economic policy and published it in the 2017 country report. It has also assessed the 2017 Stability Programme, the 2017 National Reform Programme and the follow-up given to the recommendations addressed to Italy in previous years. It has taken into account not only their relevance for sustainable fiscal and socioeconomic policy in Italy, but also their compliance with Union rules and guidance, given the need to strengthen the Union’s overall economic governance by providing Union-level input into future national decisions.

(25)

In the light of this assessment, the Council has examined the 2017 Stability Programme and its opinion (10) is reflected in particular in recommendation (1) below.

(26)

In the light of the Commission’s in-depth review and this assessment, the Council has examined the 2017 National Reform Programme and the 2017 Stability Programme. Its recommendations made under Article 6 of Regulation (EU) No 1176/2011 are reflected in recommendations (1) to (4) below,

HEREBY RECOMMENDS that Italy take action in 2017 and 2018 to:

1.

Pursue a substantial fiscal effort in 2018, in line with the requirements of the preventive arm of the Stability and Growth Pact, taking into account the need to strengthen the ongoing recovery and to ensure the sustainability of Italy’s public finances. Ensure timely implementation of the privatisation programme and use windfall gains to accelerate the reduction of the general government debt-to-GDP ratio. Shift the tax burden from the factors of production onto taxes less detrimental to growth in a budget-neutral way by taking decisive action to reduce the number and scope of tax expenditures, reforming the outdated cadastral system and reintroducing the first residence tax for high-income households. Broaden the compulsory use of electronic invoicing and payments.

2.

Reduce the trial length in civil justice through effective case management and rules ensuring procedural discipline. Step up the fight against corruption, in particular by revising the statute of limitations. Complete reforms of public employment and improve the efficiency of publicly-owned enterprises. Promptly adopt and implement the pending law on competition and address the remaining restrictions to competition.

3.

Accelerate the reduction in the stock of non-performing loans and step up incentives for balance-sheet clean-up and restructuring, in particular in the segment of banks under national supervision. Adopt a comprehensive overhaul of the regulatory framework for insolvency and collateral enforcement.

4.

With the involvement of social partners, strengthen the collective bargaining framework to allow collective agreements to better take into account local conditions. Ensure effective active labour market policies. Facilitate the take-up of work for second earners. Rationalise social spending and improve its composition.

Done at Brussels, 11 July 2017.

For the Council

The President

T. TÕNISTE


(1)  OJ L 209, 2.8.1997, p. 1.

(2)  OJ L 306, 23.11.2011, p. 25.

(3)  OJ C 92, 24.3.2017, p. 1.

(4)  Regulation (EU) No 1174/2011 of the European Parliament and of the Council of 16 November 2011 on enforcement measures to correct excessive macroeconomic imbalances in the euro area (OJ L 306, 23.11.2011, p. 8).

(5)  Regulation (EU) No 1303/2013 of the European Parliament and of the Council of 17 December 2013 laying down common provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund, the European Agricultural Fund for Rural Development and the European Maritime and Fisheries Fund and laying down general provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund and the European Maritime and Fisheries Fund and repealing Council Regulation (EC) No 1083/2006 (OJ L 347, 20.12.2013, p. 320).

(6)  Cyclically-adjusted balance net of one-off and temporary measures, recalculated by the Commission using the commonly agreed methodology.

(7)  This amount is based on the 0,25 % of GDP overall budgetary cost estimated in the 2017 Stability Programme from which the temporary deviations of 0,03 % of GDP and of 0,06 % already granted in 2015 and 2016, respectively, are deducted. In its opinion on the 2017 Draft Budgetary Plan for Italy the Commission announced that it would stand ready to consider an additional deviation due to the persistent exceptional inflow of refugees in Italy also in light of the European Council of October 2016 which recognised ‘the significant contribution, also of financial nature, made by frontline Member States in recent years’.

(8)  In its opinion on the 2017 Draft Budgetary Plan for Italy, the Commission considered that expenditure earmarked for emergency management and the preventive investment plan for the protection of the national territory against seismic risks could be considered of integrated nature. For the following years only positive incremental changes in resources earmarked for this purpose would be considered eligible for further possible temporary deviations.

(9)  Council Recommendation of 22 April 2013 on establishing a Youth Guarantee (OJ C 120, 26.4.2013, p. 1).

(10)  Under Article 5(2) of Regulation (EC) No 1466/97.


9.8.2017   

EN

Official Journal of the European Union

C 261/53


COUNCIL RECOMMENDATION

of 11 July 2017

on the 2017 National Reform Programme of Cyprus and delivering a Council opinion on the 2017 Stability Programme of Cyprus

(2017/C 261/12)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty on the Functioning of the European Union, and in particular Articles 121(2) and 148(4) thereof,

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies (1), and in particular Article 5(2) thereof,

Having regard to Regulation (EU) No 1176/2011 of the European Parliament and of the Council of 16 November 2011 on the prevention and correction of macroeconomic imbalances (2), and in particular Article 6(1) thereof,

Having regard to the recommendation of the European Commission,

Having regard to the resolutions of the European Parliament,

Having regard to the conclusions of the European Council,

Having regard to the opinion of the Employment Committee,

Having regard to the opinion of the Economic and Financial Committee,

Having regard to the opinion of the Social Protection Committee,

Having regard to the opinion of the Economic Policy Committee,

Whereas:

(1)

On 16 November 2016, the Commission adopted the Annual Growth Survey, marking the start of the 2017 European Semester for economic policy coordination. The priorities of the Annual Growth Survey were endorsed by the European Council on 9-10 March 2017. On 16 November 2016, on the basis of Regulation (EU) No 1176/2011, the Commission adopted the Alert Mechanism Report, in which it identified Cyprus as one of the Member States for which an in-depth review would be carried out. On the same date, the Commission also adopted a recommendation for a Council Recommendation on the economic policy of the euro area, which was endorsed by the European Council on 9-10 March 2017. On 21 March 2017, the Council adopted the Recommendation on the economic policy of the euro area (‘Recommendation for the euro area’) (3).

(2)

As a Member State whose currency is the euro and in view of the close interlinkages between the economies in the economic and monetary union, Cyprus should ensure the full and timely implementation of the Recommendation for the euro area, as reflected in recommendations (1) to (5) below.

(3)

The 2017 country report for Cyprus was published on 22 February 2017. It assessed Cyprus’s progress in addressing the country-specific recommendations adopted by the Council on 12 July 2016, the follow-up given to the country-specific recommendations adopted in previous years and Cyprus’s progress towards its national Europe 2020 targets. It also included an in-depth review under Article 5 of Regulation (EU) No 1176/2011, the results of which were also published on 22 February 2017. The Commission’s analysis led it to conclude that Cyprus is experiencing excessive macroeconomic imbalances. In particular, it is essential that it tackles the large stock of imbalances in the form of private, public and external debt overhang, and the high level of non-performing loans.

(4)

Cyprus submitted its 2017 Stability Programme on 27 April 2017 and its 2017 National Reform Programme on 28 April 2017. In order to take account of their interlinkages, the two programmes have been assessed at the same time. Cyprus’s National Reform Programme includes commitments both for the short and the medium term. In particular, it includes measures to reduce private-sector indebtedness, improve the business environment, facilitate access to finance and overhaul the healthcare sector, and commits to reforms of the public sector and the justice system. The National Reform Programme also covers the challenges identified in the 2017 country report and the Recommendation for the euro area, including the need to relaunch investment and ensure the sustainability of public finances. If fully implemented within the indicated timelines, these measures would help address Cyprus’s macroeconomic imbalances and country-specific recommendations. Based on the assessment of Cyprus’s policy commitments, the Commission confirms its previous assessment that at this stage no further steps are warranted in the framework of the macroeconomic imbalance procedure provided for in Regulation (EU) No 1176/2011 and Regulation (EU) No 1174/2011 of the European Parliament and of the Council (4). The implementation of the policy reform agenda will be followed closely by means of specific monitoring.

(5)

Relevant country-specific recommendations have been addressed in the programming of the European Structural and Investment Funds (ESI Funds) for the 2014-2020 period. As provided for in Article 23 of Regulation (EU) No 1303/2013 of the European Parliament and of the Council (5), where it is necessary to support the implementation of relevant Council recommendations, the Commission may request a Member State to review and propose amendments to its Partnership Agreement and relevant programmes. The Commission has provided further details on how it would make use of that provision in guidelines on the application of the measures linking effectiveness of the ESI Funds to sound economic governance.

(6)

Cyprus is currently in the preventive arm of the Stability and Growth Pact and subject to the debt rule. In its 2017 Stability Programme, the Government plans a budgetary surplus in headline terms over 2016-2020 (headline balance around 0,4 % of GDP over the programme period). The medium-term budgetary objective, set at a balanced budgetary position in structural terms, is planned to be reached in 2017. The recalculated (6) structural balance is projected to steadily move away from the medium-term objective in the following years, which is not in line with the requirements of the preventive arm of the Stability and Growth Pact. The general government debt-to-GDP ratio is expected to have reached 107,8 % in 2016 and to decline to 99,7 % in 2018 and further to 88,8 % by 2020. The macroeconomic scenario underpinning those budgetary projections is plausible. The risks associated with the macroeconomic assumptions presented in the Stability Programme are to the downside, mainly linked to the high stock of non-performing loans and a possible deterioration of the external environment.

(7)

On 12 July 2016, following the correction of the excessive deficit, the Council recommended Cyprus to respect the medium-term budgetary objective in 2016 and in 2017. Based on the Commission 2017 spring forecast, Cyprus is compliant with that requirement in 2017 following an overall assessment. For 2018, Cyprus is recommended to remain at the medium-term budgetary objective. Based on the Commission 2017 spring forecast, this is consistent with a maximum nominal growth rate of net primary government expenditure (7) of 0,3 %, corresponding to a structural adjustment of 0,2 % of GDP. Under unchanged policies, Cyprus would be at risk of some deviation from that requirement in 2018 following an overall assessment. Cyprus is forecast to comply with the debt rule in 2017 and 2018. Overall, the Council is of the opinion that Cyprus needs to stand ready to take further measures to ensure compliance in 2018.

(8)

Public debt is on a downward trajectory but its sustainability remains subject to risks. A number of recent fiscal measures as well as delays in the implementation of key structural reforms are expected to lead to a deterioration in the structural balance and risk reducing the scope for growth-enhancing public investments.

(9)

The Cypriot public sector has one of the euro area’s highest wage bills (as a percentage of GDP) and remains characterised by inefficiencies. Under the macroeconomic adjustment programme, a series of reforms aiming to address this issue were designed and agreed with social partners. These included the introduction of a binding permanent mechanism limiting wage growth for public employees and a comprehensive reform of the public administration. However, with the exception of the recently adopted reform law on mobility of public employees, the adoption of these legislative reforms is facing obstacles, in particular after a negative vote by the House of Representatives in December 2016. Pending adoption in its binding form, the mechanism limiting growth of public-sector wages is being implemented under collective bargaining agreements and is applicable until 2018.

(10)

Some reforms have been undertaken to tackle corruption. Recent developments include reforms to professionalise public procurement at local level, and a political party funding law enacted in December 2015. A constitutional amendment enabling asset disclosure for public officials was adopted in 2016. However, the Coordinating Body against Corruption is not adequately staffed, and weaknesses in the disciplinary regime for public servants remain unaddressed.

(11)

Cyprus has been taking measures to reinforce its judicial system but continues to face serious challenges as regards the efficiency thereof. Inefficient court procedures and limited capacity lead to significant delays in processing court cases. This in turn undermines the business environment and, in particular, the functioning of the new foreclosure and insolvency frameworks. The latter have been introduced to help reduce unviable private debt, providing incentives to banks and debtors to agree on restructuring solutions. However, the effectiveness of these tools is impaired by a number of factors, including the aforementioned inefficiencies in the court system, weak administrative capacity and a low level of awareness of the procedures among debtors. Backlogs and delays with issuing and transferring title deeds also remain significant. These contribute to undermining debt reduction efforts and weigh on the recovery of the housing market.

(12)

The level of non-performing loans is declining but remains very high, hampering the proper functioning of the banking sector and impacting credit supply to the real economy. Banks underperform the loan restructuring targets agreed with the Central Bank of Cyprus, pointing to the need to broaden the targeting system and make it more efficient and binding, in particular by setting ambitious targets for the reduction of non-performing loans, consistent with banks’ reduction strategies for non-performing loans. Re-default rates remain high, exposing potential deficiencies in loan restructuring solutions. Risk provisioning levels increased but remain below the euro-area average, underscoring the need to ensure that collateral valuations are reliable and underpin appropriate risk provisioning. The lack of a secondary market for loans and a loan securitisation framework limit the scope for accelerating deleveraging and moving non-performing loans off banks’ balance sheets, which calls for additional regulatory and legislative actions to complete the necessary tools to facilitate banks’ balance-sheet management. In addition, the governance and administrative capacity of insurance and pension-fund supervision remain weak, posing risks to financial stability.

(13)

Cyprus’s economic recovery continues. However, potential growth remains weak, constrained by limited implementation of structural reforms, bottlenecks to investment and shortcomings in the business environment. Growth-enhancing initiatives presented in the action plan for growth are being implemented, albeit rather slowly. A legislative proposal to attract and facilitate strategic investments is still at the draft stage. The Government is working on improving access to finance for medium-sized and small businesses. In order to solve this pressing issue, some new targeted initiatives have been launched, as reported in the National Reform Programme. However, most of these new initiatives on access to finance still remain at a preliminary stage. Privatisation efforts, aimed at attracting productivity-enhancing foreign investments, are facing political opposition and progressing slowly. The reform of the energy sector can also be an important driver for competitiveness, yet there have been delays in its implementation. These concern, in particular, the unbundling of the Electricity Authority of Cyprus and the establishment of the new electricity market, which still hinges upon ensuring the effective independence of the transmission system operator.

(14)

Unemployment is decreasing but remains high, especially among young people and the long-term unemployed. Plans to increase the numbers of counsellors in public employment services and improve their specialisation have not yet been implemented. Moreover, their recruitment is likely to occur on temporary contracts, therefore not addressing the challenge in structural terms. As a consequence, there is still insufficient capacity to meet the needs of jobseekers, especially those having more difficulties to integrate in the labour market, and to put in place outreach measures for their activation. The impact of active labour market programmes and income support schemes continues to be constrained by limited quality assessment and follow-up measures.

(15)

Cyprus maintains a level of spending in education that is above the Union average. However, educational outcomes are low and have even declined compared to previous years. According to the 2015 results of the Programme for International Student Assessment, Cyprus ranks among the lowest in the Union on the level of basic skills in mathematics, science and reading. While recently introduced remedial measures such as a better system for appointing teachers and a modernisation of school curricula are first steps in the right direction, further action to complete planned reforms, including of teachers’ evaluation, could significantly contribute to improving the situation.

(16)

Skills mismatches in the labour market are still largely unaddressed, affecting prospects for long-term sustainable growth. Participation levels are low in upper-secondary vocational education and training and the labour market relevance of higher education is weak, resulting in a high share of tertiary graduates working in occupations that do not necessarily require a tertiary degree.

(17)

The Cypriot healthcare sector remains characterised by a lack of universal coverage and various levels of inefficiency. This limits access to adequate and effective care. Legislation aiming to create a national health system and provide public hospitals with greater autonomy is key to improving the capacity and cost-effectiveness of the healthcare sector but is still pending parliamentary adoption.

(18)

In the context of the 2017 European Semester, the Commission has carried out a comprehensive analysis of Cyprus’s economic policy and published it in the 2017 country report. It has also assessed the 2017 Stability Programme, the 2017 National Reform Programme and the follow-up given to the recommendations addressed to Cyprus in previous years. It has taken into account not only their relevance for sustainable fiscal and socioeconomic policy in Cyprus, but also their compliance with Union rules and guidance, given the need to strengthen the Union’s overall economic governance by providing Union-level input into future national decisions.

(19)

In the light of this assessment, the Council has examined the 2017 Stability Programme and its opinion (8) is reflected in particular in recommendation (1) below.

(20)

In the light of the Commission’s in-depth review and this assessment, the Council has examined the 2017 National Reform Programme and the 2017 Stability Programme. Its recommendations made under Article 6 of Regulation (EU) No 1176/2011 are reflected in recommendations (1) to (4) below,

HEREBY RECOMMENDS that Cyprus take action in 2017 and 2018 to:

(1)

Pursue its fiscal policy in line with the requirements of the preventive arm of the Stability and Growth Pact, which entails remaining at its medium-term budgetary objective in 2018. Use windfall gains to accelerate the reduction of the general government debt ratio. By the end of 2017, adopt key legislative reforms aiming to improve efficiency in the public sector, in particular on the functioning of public administration, governance of state-owned entities and local governments.

(2)

Increase the efficiency of the judicial system by modernising civil procedures, implementing appropriate information systems and increasing the specialisation of courts. Take additional measures to eliminate impediments to the full implementation of the insolvency and foreclosure frameworks, and to ensure reliable and swift systems for the issuance of title deeds and the transfer of immovable property rights.

(3)

Accelerate the reduction of non-performing loans by setting related quantitative and time-bound targets for banks and ensuring accurate valuation of collateral for provisioning purposes. Create the conditions for a functional secondary market for non-performing loans. Integrate and strengthen the supervision of insurance companies and pension funds.

(4)

Accelerate the implementation of the action plan for growth, focusing in particular on fast-tracking strategic investments and improving access to finance, and, by the end of 2017, resume the implementation of the privatisation plan. Take decisive steps towards the ownership unbundling of the Electricity Authority of Cyprus and, in particular, proceed with the functional and accounting unbundling by the end of 2017.

(5)

Speed up reforms aimed at increasing the capacity of public employment services and improving the quality of active labour market policies delivery. Complete the reform of the education system to improve its labour market relevance and performance, including teachers’ evaluation. By the end of 2017, adopt legislation for a hospital reform and universal healthcare coverage.

Done at Brussels, 11 July 2017.

For the Council

The President

T. TÕNISTE


(1)  OJ L 209, 2.8.1997, p. 1.

(2)  OJ L 306, 23.11.2011, p. 25.

(3)  OJ C 92, 24.3.2017, p. 1.

(4)  Regulation (EU) No 1174/2011 of the European Parliament and of the Council of 16 November 2011 on enforcement measures to correct excessive macroeconomic imbalances in the euro area (OJ L 306, 23.11.2011, p. 8).

(5)  Regulation (EU) No 1303/2013 of the European Parliament and of the Council of 17 December 2013 laying down common provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund, the European Agricultural Fund for Rural Development and the European Maritime and Fisheries Fund and laying down general provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund and the European Maritime and Fisheries Fund and repealing Council Regulation (EC) No 1083/2006 (OJ L 347, 20.12.2013, p. 320).

(6)  Cyclically-adjusted balance net of one-off and temporary measures, recalculated by the Commission using the commonly agreed methodology.

(7)  Net government expenditure comprises total government expenditure excluding interest expenditure, expenditure on Union programmes fully matched by Union funds revenue and non-discretionary changes in unemployment benefit expenditure. Nationally financed gross fixed capital formation is smoothed over a 4-year period. Discretionary revenue measures or revenue increases mandated by law are factored in. One-off measures on both the revenue and expenditure sides are netted out.

(8)  Under Article 5(2) of Regulation (EC) No 1466/97.


9.8.2017   

EN

Official Journal of the European Union

C 261/58


COUNCIL RECOMMENDATION

of 11 July 2017

on the 2017 National Reform Programme of Latvia and delivering a Council opinion on the 2017 Stability Programme of Latvia

(2017/C 261/13)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty on the Functioning of the European Union, and in particular Articles 121(2) and 148(4) thereof,

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies (1), and in particular Article 5(2) thereof,

Having regard to the recommendation of the European Commission,

Having regard to the resolutions of the European Parliament,

Having regard to the conclusions of the European Council,

Having regard to the opinion of the Employment Committee,

Having regard to the opinion of the Economic and Financial Committee,

Having regard to the opinion of the Social Protection Committee,

Having regard to the opinion of the Economic Policy Committee,

Whereas:

(1)

On 16 November 2016, the Commission adopted the Annual Growth Survey, marking the start of the 2017 European Semester for economic policy coordination. The priorities of the Annual Growth Survey were endorsed by the European Council on 9-10 March 2017. On 16 November 2016, on the basis of Regulation (EU) No 1176/2011 of the European Parliament and of the Council (2), the Commission adopted the Alert Mechanism Report, in which it did not identify Latvia as one of the Member States for which an in-depth review would be carried out. On the same date, the Commission also adopted a recommendation for a Council Recommendation on the economic policy of the euro area, which was endorsed by the European Council on 9-10 March 2017. On 21 March 2017, the Council adopted the Recommendation on the economic policy of the euro area (‘Recommendation for the euro area’) (3).

(2)

As a Member State whose currency is the euro and in view of the close interlinkages between the economies in the economic and monetary union, Latvia should ensure the full and timely implementation of the Recommendation for the euro area, as reflected in recommendations (1) to (2) below.

(3)

The 2017 country report for Latvia was published on 22 February 2017. It assessed Latvia’s progress in addressing the country-specific recommendations adopted by the Council on 12 July 2016, the follow-up given to the country-specific recommendations adopted in previous years and Latvia’s progress towards its national Europe 2020 targets.

(4)

On 20 April 2017, Latvia submitted its 2017 National Reform Programme and its 2017 Stability Programme. In order to take account of their interlinkages, the two programmes have been assessed at the same time.

(5)

Relevant country-specific recommendations have been addressed in the programming of the European Structural and Investment Funds (ESI Funds) for the 2014-2020 period. As provided for in Article 23 of Regulation (EU) No 1303/2013 of the European Parliament and of the Council (4), where it is necessary to support the implementation of relevant Council recommendations, the Commission may request a Member State to review and propose amendments to its Partnership Agreement and relevant programmes. The Commission has provided further details on how it would make use of that provision in guidelines on the application of the measures linking effectiveness of the ESI Funds to sound economic governance.

(6)

Latvia is currently in the preventive arm of the Stability and Growth Pact. In its 2017 Stability Programme, the Government plans a deterioration of the headline balance from a balanced position in 2016 to a deficit of 0,8 % of GDP and of 1,6 % of GDP in 2017 and 2018 respectively, as a result of a significant tax reform, followed by an improvement to a deficit of 0,5 % of GDP in 2020. The 2017 Stability Programme estimates the structural balance to deteriorate from 0,2 % of GDP in 2016 to -1,7 % of GDP in 2018 and to reach -0,8 % of GDP in 2020. This path is consistent with the medium-term budgetary objective of a structural deficit of 1 % of GDP and the allowed deviations based on the pension reform and the structural reform clause for the healthcare sector. The recalculated (5) structural balance is estimated to increase from -1,9 % of GDP in 2017 to -2,3 % of GDP in 2018, before declining to -0,2 % of GDP in 2020. According to the 2017 Stability Programme, the general government debt-to-GDP ratio is expected to stay around 40 % of GDP in 2017. The programme’s GDP growth projections are broadly in line with the Commission forecast for 2017, but they appear markedly favourable for 2018.

(7)

On 12 July 2016, the Council recommended Latvia to ensure that the deviation from the medium-term budgetary objective in 2017 is limited to the allowances linked to the systemic pension reform and the major structural reform in the healthcare sector. Taking into account these allowances, the structural balance would be allowed to deteriorate by a maximum of 1,0 % of GDP in 2017. Based on the Commission 2017 spring forecast, Latvia is projected to comply with that requirement in 2017. In 2018, Latvia should achieve its medium-term budgetary objective, taking into account the allowances related to the implementation of the systemic pension reform granted for 2016 and related to the structural reform granted for 2017, as temporary deviations are carried forward for a period of 3 years. Based on the Commission 2017 spring forecast, this is consistent with a maximum nominal growth rate of net primary government expenditure (6) of 6,0 % in 2018, corresponding to deterioration in the structural balance of 0,3 % of GDP. Under unchanged policies, Latvia would be at risk of a significant deviation from that requirement. Overall, the Council is of the opinion that further measures will be needed in 2018 to comply with the provisions of the Stability and Growth Pact.

(8)

Income inequality in Latvia is high. The ratio of incomes of the richest 20 % of households to that of the poorest 20 % stood at 6,5 in 2015, among the highest in the Union, although the figure decreased slightly in 2016. The difference between income inequality before and after taxes and social transfers is among the smallest in the Union. Latvia’s tax system is less progressive than those of other Member States, contributing to the high inequality and in-work poverty. The tax wedge on low-wage earners remains among the highest in the Union, while the revenue potential of taxes which are less detrimental to growth is underused. The low tax revenue share in GDP limits resources for sustainable delivery of public services. Despite some progress in fighting tax evasion, tax compliance remains a serious challenge. The 2017 Stability Programme announced the introduction of a tax reform. The key measures include a reduction of the personal income tax rate from 23 % to 20 % for incomes up to 45 000 euros per year, an increase in the income-differentiated basic allowance, an introduction of 0 % corporate income tax rate for reinvested profits and aligning of capital tax rates at 20 %. The reform addresses the country-specific recommendations insofar as the tax wedge on low-income earners is reduced. However, the tax reform is limited in terms of shifting taxation to sources less detrimental to growth and achieving the stated policy objective of increasing tax revenue share in GDP.

(9)

Weaknesses in basic social safety nets contribute to high poverty and inequalities, including for people with disabilities and the elderly. Poverty rates for people with disabilities are among the highest in Europe. The low adequacy of social assistance benefits, which has not improved since 2009, and of pensions does not provide effective protection against poverty and social exclusion. The absence of minimum income level reform, announced in 2014 but never implemented, negatively affects the poorest households, although medium-term plans on minimum income support are in preparation.

(10)

With a declining labour force, employment growth has been weak, while unemployment has been falling only slowly. Employment prospects are better in centres of economic activity and for high-skilled workers, whereas unemployment is more prevalent among the low-skilled and those living in rural areas. In this context, upskilling the workforce will contribute to addressing these issues. However, even though the attractiveness of vocational education has improved, the curriculum reform aligning education with contemporary skills requirements has made limited progress. The regulatory framework for work-based learning has been put in place and an active participation of social partners and companies in its implementation is warranted. Moreover, involvement of the unemployed in active labour market measures is lower than in most other Member States but measures have been taken to improve this situation and they are worth pursuing. The participation in lifelong learning remains low.

(11)

Although the Latvian authorities have successfully initiated relevant reforms of the healthcare system, large out-of-pocket payments, long waiting lines, a low level of public spending and inefficient allocation of services limit access to healthcare. Quota-controlled public spending leads to delayed treatment and patients either have to wait a long time or pay for the service out-of-pocket, which leaves part of the population with unmet healthcare needs. Initial steps have been taken to reform the quality assurance system and progress should continue to improve patient and population outcomes. There is some progress in increasing the efficiency of the healthcare system but further rationalisation of the hospital sector, improved access to outpatient and primary care and a more efficient link between budget allocation and service quality and costs are needed.

(12)

Latvian authorities tend to make regular recourse to public procurement procedures for the purchases made in the healthcare sector, but further efficiency gains could be achieved through regular use of e-procurement and central purchasing, making public expenditure more transparent and efficient.

(13)

Weaknesses in regulatory quality and low public administration efficiency and effectiveness have a negative impact on the business environment. In 2016 the Government presented an ambitious reform plan for a leaner and more professional public sector, aiming at improving efficiency through reductions in staff and centralisation of support functions, strengthening performance-based payment and increasing transparency. This plan is limited to the central administration, while significant efficiency gains may also be realised at municipal level.

(14)

Corruption continues to hamper Latvia’s business environment, and the system for preventing conflicts of interest remains rigid and formalistic, with insufficient verification. Although the reform of the insolvency system has been largely completed, its effective implementation needs to be carefully monitored to address the limited number of restructuring cases and low recovery rate of assets.

(15)

Large-scale reforms of higher education and public research were introduced in the past 3 years to consolidate research institutions and to increase the quality and relevance of their output. However, the governance and the organisational structure of Latvian public research funding remain inefficient, with funding functions scattered between many institutions. Inefficient funding for public research contributes to a very low scientific performance, a lack of skilled human resources in both the public and private sectors and low levels of public-private cooperation. Latvia’s business R & D intensity remains one of the lowest in the Union.

(16)

In the context of the 2017 European Semester, the Commission has carried out a comprehensive analysis of Latvia’s economic policy and published it in the 2017 country report. It has also assessed the 2017 Stability Programme, the 2017 National Reform Programme and the follow-up given to the recommendations addressed to Latvia in previous years. It has taken into account not only their relevance for sustainable fiscal and socioeconomic policy in Latvia, but also their compliance with Union rules and guidance, given the need to strengthen the Union’s overall economic governance by providing Union-level input into future national decisions.

(17)

In the light of this assessment, the Council has examined the 2017 Stability Programme, and its opinion (7) is reflected in particular in recommendation (1) below,

HEREBY RECOMMENDS that Latvia take action in 2017 and 2018 to:

1.

Pursue its fiscal policy in line with the requirements of the preventive arm of the Stability and Growth Pact, which entails achieving its medium-term budgetary objective in 2018, taking into account the allowances linked to the implementation of the systemic pension reform and of the structural reforms for which a temporary deviation is granted. Reduce taxation for low-income earners by shifting it to other sources that are less detrimental to growth and by improving tax compliance.

2.

Improve the adequacy of the social safety net and upskill the labour force by speeding up the curricula reform in vocational education. Increase the cost-effectiveness of and access to healthcare, including by reducing out-of-pocket payments and long waiting times.

3.

Increase efficiency and accountability in the public sector, in particular by simplifying administrative procedures and strengthening the conflict-of-interest prevention regime, including for insolvency administrators.

Done at Brussels, 11 July 2017.

For the Council

The President

T. TÕNISTE


(1)  OJ L 209, 2.8.1997, p. 1.

(2)  Regulation (EU) No 1176/2011 of the European Parliament and of the Council of 16 November 2011 on the prevention and correction of macroeconomic imbalances (OJ L 306, 23.11.2011, p. 25).

(3)  OJ C 92, 24.3.2017, p. 1.

(4)  Regulation (EU) No 1303/2013 of the European Parliament and of the Council of 17 December 2013 laying down common provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund, the European Agricultural Fund for Rural Development and the European Maritime and Fisheries Fund and laying down general provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund and the European Maritime and Fisheries Fund and repealing Council Regulation (EC) No 1083/2006 (OJ L 347, 20.12.2013, p. 320).

(5)  Cyclically-adjusted balance net of one-off and temporary measures, recalculated by the Commission using the commonly agreed methodology.

(6)  Net government expenditure comprises total government expenditure excluding interest expenditure, expenditure on Union programmes fully matched by Union funds revenue and non-discretionary changes in unemployment benefit expenditure. Nationally financed gross fixed capital formation is smoothed over a 4-year period. Discretionary revenue measures or revenue increases mandated by law are factored in. One-off measures on both the revenue and expenditure sides are netted out.

(7)  Under Article 5(2) of Regulation (EC) No 1466/97.


9.8.2017   

EN

Official Journal of the European Union

C 261/62


COUNCIL RECOMMENDATION

of 11 July 2017

on the 2017 National Reform Programme of Lithuania and delivering a Council opinion on the 2017 Stability Programme of Lithuania

(2017/C 261/14)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty on the Functioning of the European Union, and in particular Articles 121(2) and 148(4) thereof,

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies (1), and in particular Article 5(2) thereof,

Having regard to the Recommendation of the European Commission,

Having regard to the resolutions of the European Parliament,

Having regard to the conclusions of the European Council,

Having regard to the opinion of the Employment Committee,

Having regard to the opinion of the Economic and Financial Committee,

Having regard to the opinion of the Social Protection Committee,

Having regard to the opinion of the Economic Policy Committee,

Whereas:

(1)

On 16 November 2016, the Commission adopted the Annual Growth Survey, marking the start of the 2017 European Semester for economic policy coordination. The priorities of the Annual Growth Survey were endorsed by the European Council on 9-10 March 2017. On 16 November 2016, on the basis of Regulation (EU) No 1176/2011 of the European Parliament and of the Council (2), the Commission 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 carried out. On the same date, the Commission also adopted a recommendation for a Council Recommendation on the economic policy of the euro area, which was endorsed by the European Council on 9-10 March 2017. On 21 March 2017, the Council adopted the Recommendation on the economic policy of the euro area (‘Recommendation for the euro area’) (3).

(2)

As a Member State whose currency is the euro and in view of the close interlinkages between the economies in the economic and monetary union, Lithuania should ensure the full and timely implementation of the Recommendation for the euro area, as reflected in recommendation (2) below.

(3)

The 2017 country report for Lithuania was published on 22 February 2017. It assessed Lithuania’s progress in addressing the country-specific recommendations adopted by the Council on 12 July 2016, the follow-up given to the country-specific recommendations adopted in previous years and Lithuania’s progress towards its national Europe 2020 targets.

(4)

Lithuania submitted its 2017 National Reform Programme on 27 April 2017 and its 2017 Stability Programme on 28 April 2017. In order to take account of their interlinkages, the two programmes have been assessed at the same time.

(5)

Relevant country-specific recommendations have been addressed in the programming of the European Structural and Investment Funds (ESI Funds) for the 2014-2020 period. As provided for in Article 23 of Regulation (EU) No 1303/2013 of the European Parliament and of the Council (4), where it is necessary to support the implementation of relevant Council recommendations, the Commission may request a Member State to review and propose amendments to its Partnership Agreement and relevant programmes. The Commission has provided further details on how it would make use of that provision in guidelines on the application of the measures linking effectiveness of the ESI Funds to sound economic governance.

(6)

Lithuania is currently in the preventive arm of the Stability and Growth Pact. In its 2017 Stability Programme, the Government plans an improvement of the headline balance from a deficit of 0,4 % of GDP in 2017 to a surplus of 1,3 % of GDP in 2020. The medium-term budgetary objective — a deficit of 1 % of GDP in structural terms — is planned to be met with a margin throughout the programme period. The allowed adjustment path incorporates the systemic pension reform starting from 2016. In 2017 it reflects additional major structural labour market and pension reforms. According to the 2017 Stability Programme, the general government debt-to-GDP ratio is expected to fall from 40,2 % of GDP in 2016 to 33,8 % in 2020. The macroeconomic scenario underpinning those budgetary projections is plausible. At the same time, the measures needed to support the planned surplus targets from 2018 onwards have not been sufficiently specified.

(7)

In its 2017 Stability Programme, Lithuania requested to avail itself of the temporary deviation of 0,5 % of GDP under the preventive arm pursuant to the ‘Commonly Agreed Position on Flexibility within the Stability and Growth Pact’ endorsed by the ECOFIN Council in February 2016 in view of the planned implementation of major structural reforms with a positive impact on the long-term sustainability of public finances. In particular, this concerns raising the sustainability of the pension system through a reinforced indexation and a gradual increase of the pensionable service. However, the reforms stopped short of establishing an automatic link between retirement age and life expectancy. In addition, the reforms modernise labour relations by introducing new types of employment contracts, shorter periods of notice, lower severance allowances and more flexible working hours. The reforms also strengthen the coverage and adequacy of unemployment and social insurance benefits, expand the scope of active labour market policies and reduce the level of illegal and uninsured employment. The authorities estimate that the reforms are having a positive impact on the sustainability of public finances by generating an average annual pension expenditure savings of up to 3,8 % of GDP in the long run, while the labour market part of the reform may increase an average annual number of the employed by up to 10 %, which seems to be a broadly plausible assumption. Therefore, if fully and timely implemented, this reform will have a positive impact on the sustainability of public finances. On this basis, Lithuania can currently be assessed as qualifying for the requested temporary deviation in 2017, provided that it adequately implements the agreed reforms, which will be monitored under the European Semester. However, in view of the need to ensure a continued respect of the minimum benchmark (i.e. a structural deficit of 1,5 % of GDP) and taking into account the previously granted allowance under the systemic pension reform clause (0,1 % of GDP), Lithuania can currently be assessed as qualifying for an additional temporary deviation of 0,4 % of GDP in 2017, which is slightly below the requested 0,5 % of GDP.

(8)

On 12 July 2016, for 2017 the Council recommended Lithuania to ensure that the deviation from the medium-term budgetary objective is limited to the allowance linked to the systemic pension reform (5). Taking into account the allowances linked to the pension reform granted for 2016 and the temporary deviation linked to the implementation of structural reforms granted for 2017, the structural balance would be allowed to deteriorate by 1,3 % of GDP in 2017. Based on the Commission 2017 spring forecast Lithuania is projected to comply with this requirement in 2017. In 2018, Lithuania should achieve its medium-term objective, taking into account the allowances related to the implementation of the systemic pension reform granted for 2016 and the structural reform granted for 2017, as temporary deviations are carried forward for a period of 3 years. Based on the Commission 2017 spring forecast, this is consistent with a maximum nominal growth rate of net primary government expenditure (6) of 6,4 % in 2018, corresponding to a deterioration in the structural balance of -0,6 % of GDP. Under unchanged policies, Lithuania is projected to comply with this requirement in 2018. Overall, the Council is of the opinion that Lithuania is projected to comply with the provisions of the Stability and Growth Pact in 2017 and 2018.

(9)

Following the latest increase in the non-taxable minimum wage, the tax burden on low-income earners has been substantially reduced over recent years and is now close to the Union average. At the same time, compensating tax increases have been limited and consequently, tax revenue as a share of GDP remains among the lowest in the Union, limiting Lithuania’s ability to address its social challenges. The low tax revenue is due to the relatively large share of the shadow economy and relatively low revenue from environmental and capital taxation.

(10)

Although Lithuania has made progress in recent years to improve VAT collection, its VAT gap is among the highest in the Union. Underreporting of wages adds to the problem of low tax collection. Increasing tax compliance would raise budget revenues and improve the fairness of the tax system and the efficiency of the economy.

(11)

The rise in the old-age dependency ratio is set to intensify and under the existing pension rules expenditure on pensions as a share of GDP is projected to rise by some 50 % by the end of the 2030s. Linking the pension benefits with life expectancy is essential to limit the strain the pension expenditure will put on public finances.

(12)

Lithuania has postponed the entry into force of the new Labour Code and other legislation on the new social model. This gives it an opportunity to ensure a good balance between flexibility and security in its labour relations. The high proportion of people at risk of poverty or social exclusion, together with growing income inequality, remain major challenges for Lithuania. The ratio of the incomes of the richest 20 % of households to that of the poorest 20 % rose from 5,3 in 2012 to 7,5 in 2015 and is the second highest in the Union. This is detrimental to economic growth, macroeconomic stability and development of an inclusive society. At the moment, the social safety net does not effectively address this challenge due to low spending on social protection. Moreover, the difference in income inequality before and after taxes and social transfers is amongst the smallest in the Union. However, the Government has put the fight against poverty and social exclusion high on its agenda. The legislation on the new social model envisages increasing the adequacy and coverage of unemployment benefits, and there are some discussions on improving the adequacy of social assistance. These important decisions still have to be adopted and implemented. To tackle poverty among the elderly, in 2016 Lithuania added an indexation mechanism to its pension legislation which can be used to improve the adequacy of pensions.

(13)

It is important that Lithuania address its skills challenges and tackle the negative effects of its shrinking working age population. The proportion of pupils with insufficient basic skills remains high. Despite high tertiary education attainment rates, higher education is marred by poor quality standards and financial incentives that promote oversize and inefficiency rather than performance. Efforts should be pursued to ensure high quality teaching at all levels of education (including through reforming careers and working conditions). This is crucial to tackling underachievement and educational shortcomings and to ensuring quality in higher education (including by introducing performance-based funding and by consolidating higher education institutions). The persistence of low levels of participation in adult learning in Lithuania is hindering the effectiveness of labour market reforms and the development of a better-skilled workforce. Lithuania has been focusing its efforts on increasing the offer and relevance of publicly provided learning opportunities, but so far this has not yielded tangible results. To achieve higher and sustainable participation rates in adult learning, Lithuania also needs to encourage individuals to take up learning and incentivise more employers to provide learning opportunities for their employees.

(14)

Unemployment among low-skilled and medium-skilled individuals is still above the Union average. Persons with disabilities have a high poverty rate, partly due to their weak labour market integration. Active labour market policy measures currently play a limited role in helping people re-enter the labour market in Lithuania. Lithuania has substantial scope to make its labour market more inclusive, including by offering more support measures to persons with disabilities. This implies, for instance, scaling up supported employment and the Vocational Rehabilitation Programme, and enhancing the availability of rehabilitation budgets. The recently adopted Law on Employment has the potential to improve the provision of active labour market policy measures.

(15)

Lithuania has made progress in recent years in improving social dialogue. Social partners are actively involved in the discussions on the new Labour Code and the new social model, and the Government has put in place the action plan to strengthen the social dialogue. It is aimed at building the capacity of social partners, promoting collective bargaining and improving the social dialogue at all levels.

(16)

In Lithuania, health outcomes continue to have a significant negative impact on the potential available workforce and labour productivity. Although efforts are being made to shift patients to more cost-effective types of healthcare, the health system’s performance continues to be hampered by high reliance on inpatient care and low expenditure on prevention and public health. Out-of-pocket payments are very high, in particular for pharmaceuticals.

(17)

Adverse demographic developments mean that growth will increasingly depend on labour productivity. Over the period 2000-2015 Lithuania had one of the highest labour productivity growth rates among Member States, but recently growth rates have slowed down. Lithuania’s public investment suffers from poor planning and linkage to the country’s strategic goals. Public R & D intensity increased to a value slightly above the Union average in 2015, while business R & D intensity still lags behind. The ‘Lithuanian Science and Innovation Policy Reform Guidelines’ adopted in 2016 aim to address the persisting challenges in research and innovation. They do so by calling for reform of institutional R & D funding; consolidation of research and higher education institutions, science valleys and technology parks; and improved policy coordination, monitoring and evaluation. Lithuania has made some progress in supporting alternative means of finance. It has helped to establish a number of venture capital and seed capital funds. The Parliament has also recently passed a law on crowdfunding.

(18)

The number of bribery cases brought to courts has been on a steady rise in recent years, thus showing Lithuania’s stepped up efforts to fight corruption. However, in some important areas, like healthcare and public procurement the provisions against petty and high-level corruption are not always applied in practice. The healthcare sector suffers from the frequent practice of informal payments to doctors. There is insufficient transparency in public procurement, in particular at the municipal level. In addition, weak whistle-blower arrangements discourage tip-offs about potential irregularities in the public and private sectors. The Government has set tackling the corruption in healthcare sector as a priority in its anti-corruption programme. Also, to reduce corruption risks and conflicts of interest in low-value procurement, the Government has obliged contracting authorities to publish online information on initiated tenders, the successful bidders and the contracts awarded. However, continued monitoring is necessary to ensure implementation of these policies.

(19)

In the context of the 2017 European Semester, the Commission has carried out a comprehensive analysis of Lithuania’s economic policy and published it in the 2017 country report. It has also assessed the 2017 Stability Programme, the 2017 National Reform Programme and the follow-up given to the recommendations addressed to Lithuania in previous years. It has taken into account not only their relevance for sustainable fiscal and socioeconomic policy in Lithuania, but also their compliance with Union rules and guidance, given the need to strengthen the Union’s overall economic governance by providing Union-level input into future national decisions.

(20)

In the light of this assessment, the Council has examined the 2017 Stability Programme and its opinion (7) is reflected in particular in recommendation (1) below,

HEREBY RECOMMENDS that Lithuania take action in 2017 and 2018 to:

1.

Pursue its fiscal policy in line with the requirements of the preventive arm of the Stability and Growth Pact, which entails remaining at its medium term budgetary objective in 2018, taking into account the allowances linked to the implementation of the systemic pension reform and of the structural reforms for which a temporary deviation is granted. Improve tax compliance and broaden the tax base to sources that are less detrimental to growth. Take steps to address the medium-term fiscal sustainability challenge related to pensions.

2.

Address skills shortages through effective active labour market policy measures and adult learning and improve educational outcomes by rewarding quality in teaching and in higher education. Improve the performance of the healthcare system by strengthening outpatient care, disease prevention and affordability. Improve the adequacy of the social safety net.

3.

Take measures to strengthen productivity by improving the efficiency of public investment and strengthening its linkage with the country’s strategic objectives.

Done at Brussels, 11 July 2017.

For the Council

The President

T. TÕNISTE


(1)  OJ L 209, 2.8.1997, p. 1.

(2)  Regulation (EU) No 1176/2011 of the European Parliament and of the Council of 16 November 2011 on the prevention and correction of macroeconomic imbalances (OJ L 306, 23.11.2011, p. 25).

(3)  OJ C 92, 24.3.2017, p. 1.

(4)  Regulation (EU) No 1303/2013 of the European Parliament and of the Council of 17 December 2013 laying down common provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund, the European Agricultural Fund for Rural Development and the European Maritime and Fisheries Fund and laying down general provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund and the European Maritime and Fisheries Fund and repealing Council Regulation (EC) No 1083/2006 (OJ L 347, 20.12.2013, p. 320).

(5)  Lithuania is allowed to deviate from its medium-term budgetary objective in 2017 and 2018 by allowance under the systemic pension reform clause granted for 2016, as temporary deviations are carried forward for a period of 3 years.

(6)  Net government expenditure comprises total government expenditure excluding interest expenditure, expenditure on Union programmes fully matched by Union funds revenue and non-discretionary changes in unemployment benefit expenditure. Nationally financed gross fixed capital formation is smoothed over a 4-year period. Discretionary revenue measures or revenue increases mandated by law are factored in. One-off measures on both the revenue and expenditure sides are netted out.

(7)  Under Article 5(2) of Regulation (EC) No 1466/97.


9.8.2017   

EN

Official Journal of the European Union

C 261/67


COUNCIL RECOMMENDATION

of 11 July 2017

on the 2017 National Reform Programme of Luxembourg and delivering a Council opinion on the 2017 Stability Programme of Luxembourg

(2017/C 261/15)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty on the Functioning of the European Union, and in particular Articles 121(2) and 148(4) thereof,

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies (1), and in particular Article 5(2) thereof,

Having regard to the Recommendation of the European Commission,

Having regard to the resolutions of the European Parliament,

Having regard to the conclusions of the European Council,

Having regard to the opinion of the Employment Committee,

Having regard to the opinion of the Economic and Financial Committee,

Having regard to the opinion of the Social Protection Committee,

Having regard to the opinion of the Economic Policy Committee,

Whereas:

(1)

On 16 November 2016, the Commission adopted the Annual Growth Survey, marking the start of the 2017 European Semester for economic policy coordination. The priorities of the Annual Growth Survey were endorsed by the European Council on 9-10 March 2017. On 16 November 2016, on the basis of Regulation (EU) No 1176/2011 of the European Parliament and of the Council (2), the Commission 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 carried out. On the same date, the Commission also adopted a recommendation for a Council Recommendation on the economic policy of the euro area, which was endorsed by the European Council on 9-10 March 2017. On 21 March 2017, the Council adopted the Recommendation on the economic policy of the euro area (‘Recommendation for the euro area’) (3).

(2)

As a Member State whose currency is the euro and in view of the close interlinkages between the economies in the economic and monetary union, Luxembourg should ensure the full and timely implementation of the Recommendation for the euro area, as reflected in recommendation (2) below.

(3)

The 2017 country report for Luxembourg was published on 22 February 2017. It assessed Luxembourg’s progress in addressing the country-specific recommendations adopted by the Council on 12 July 2016, the follow-up given to the country-specific recommendations adopted in previous years and Luxembourg’s progress towards its national Europe 2020 targets.

(4)

On 28 April 2017, Luxembourg submitted its 2017 National Reform Programme and its 2017 Stability Programme. In order to take account of their interlinkages, the two programmes have been assessed at the same time.

(5)

Relevant country-specific recommendations have been addressed in the programming of the European Structural and Investment Funds (ESI Funds) for the 2014-2020 period. As provided for in Article 23 of Regulation (EU) No 1303/2013 of the European Parliament and of the Council (4), where it is necessary to support the implementation of relevant Council recommendations, the Commission may request a Member State to review and propose amendments to its Partnership Agreement and relevant programmes. The Commission has provided further details on how it would make use of that provision in guidelines on the application of the measures linking effectiveness of the ESI Funds to sound economic governance.

(6)

Luxembourg is currently in the preventive arm of the Stability and Growth Pact. In its 2017 Stability Programme, the Government plans a decrease in the headline surplus from 1,6 % of GDP in 2016 to 0,2 % of GDP in 2017, followed by a steady increase thereafter, reaching a surplus of 1,2 % of GDP in 2021. The medium-term budgetary objective — a structural deficit of 0,5 % of GDP — continues to be met with a margin throughout the programme period. According to the 2017 Stability Programme, the government debt-to-GDP ratio is expected to remain well below the 60 %-of-GDP Treaty reference value. The macroeconomic scenario underpinning those budgetary projections is plausible, with the exception of 2018, when it is markedly favourable, and 2021, when it is markedly cautious. Based on the Commission 2017 spring forecast, the structural balance is forecast to register a surplus of 0,4 % of GDP in 2017 and 0,1 % of GDP in 2018, broadly in line with the 2017 Stability Programme and above the medium-term budgetary objective. Overall, the Council is of the opinion that Luxembourg is projected to comply with the provisions of the Stability and Growth Pact in 2017 and 2018.

(7)

Long-term fiscal sustainability concerns remain given the projected increase in ageing costs. Under the 2012 pension reform, an exercise to monitor and evaluate the sustainability of the pension system should be carried out every 5 years from the adoption of the reform. The Government advanced the first evaluation to 2016. Although the review concluded that the pension system is still recording a recurrent surplus which allowed sizeable pension reserves to be accumulated, the pension system is expected to record a negative operational balance from 2023 in terms of benefits expenditure in relation to contributions. According to the recent revised Eurostat population projections, the projected increase in population will be less significant than previously expected. This will have an impact on the dependency ratio, which will increase faster than previously expected and lead to a higher projected increase in public expenditure for pensions. There has been no progress in linking statutory retirement age to life expectancy, as previously recommended by the Council in 2016. Luxembourg stands out as the only Member State where no increase of the statutory retirement age has been laid down for the period between 2013 and 2060. Luxembourg has the Union’s highest projected increase in the share of dependent population by 2060. Luxembourg has made limited progress on early retirement. In July 2015, a draft law modifying early retirement schemes was presented to Parliament, where it is still pending. Overall, early retirement remains widespread and incentives to work longer remain limited. Following the revision of demographic prospects, Luxembourg faces further risks related to long-term care expenditure. This is already at one of the highest levels among Member States as a share of GDP and is projected to increase from 1,5 % to 3,2 % of GDP by 2060 (more than doubling from the current level). A project of reform of the long-term care insurance is being discussed by the Parliament.

(8)

The Luxembourg authorities have adopted a comprehensive tax reform, which entered into force in January 2017. The reform introduced changes mostly in the area of direct taxation, both for individuals and corporations, aimed at gradually reducing the corporate income tax rate (with the goal of increasing competitiveness) and increasing the progressivity of personal income tax (with the goal of increasing fairness). At the same time, the increase in certain tax expenditures risks narrowing the tax base. To improve the predictability of tax revenues, there is scope to further broaden the tax base. This could be achieved in particular by revisiting the current low taxation on housing and making greater use of alternative sources. This could include ensuring more coherence between environmental taxation and the diversification objectives of the economy.

(9)

The Luxembourg authorities have for several decades actively sought to diversify the economy, acknowledging the risks associated with heavy dependence on the financial sector. Reducing the economy’s reliance on the financial sector remains a central long-term challenge. To tackle this, the diversification analysis needs to be translated into specific measures with a clearly defined timeline. Given the country’s high labour costs, activities with higher added value offer the potential to unlock alternative sources of growth. The successful diversification of Luxembourg’s economy therefore depends to a large extent on sectors that are less sensitive to labour cost levels. These are largely based on research and innovation, which tend to be technology- and knowledge-intensive. Reducing or removing barriers to investment and innovation that limit economic development would unleash the potential for innovation and help diversification. While public investment is above the euro-area average, private investment is underperforming. Sustaining a high level of investment is essential to maintaining growth prospects.

(10)

Further expanding the already successful non-financial service sector could also help diversify the economy. High regulatory barriers remain in the business services sector, in particular for accountants, architects, engineers and lawyers. For all these professions, the business turnover rate is lower than both the Union average and the average rate for the overall economy. Restrictions on these professions may thus be harming the competitiveness of businesses in Luxembourg. These barriers include the wide scope of activities reserved for architects; reserving simple tasks such as payroll activities or preparation of tax declarations for highly qualified professionals; reserving legal advice for lawyers; and legal form and shareholding requirements, incompatibility rules and multidisciplinary restrictions for lawyers which may be disproportionate in relation to core principles, such as the independence of the profession, and to the corresponding supervisory arrangements.

(11)

Targeted active labour market policies and lifelong learning programmes, in particular for older workers, whose employment rate remains among the lowest in the Union, are necessary to avoid negative impacts. Measures have been adopted to improve their employability and labour market attachment. A law on the reclassification of workers with working disabilities has been implemented since 1 January 2016, increasing the possibilities for such workers to remain longer on the labour market. However, a comprehensive strategy, following consultations with social partners, is yet to be put forward. The ‘age pact’, a draft law submitted to Parliament in April 2014 which aims to encourage firms with more than 150 employees to retain older workers, has still not been adopted. Upskilling opportunities through targeted active labour market policies and lifelong learning to support older workers will remain important for the success of such policies. Investment in skills is crucial to reap the full benefits of digitalisation and to maintain competitiveness.

(12)

A substantial package of measures has been enacted to tackle the supply shortage in real estate, but its real impact has yet to be seen. Incapacity to access the land available for construction, which is mostly owned by private individuals, appears to be one of the main obstacles to increasing housing supply. Limited housing supply coupled with solid demand has led to a steady increase in housing prices. This contributes to explaining the trend towards increasing household indebtedness, which is mostly mortgage-related. Moreover, despite substantial investment in transport infrastructure, tackling traffic congestion remains a challenge. This is all the more so as modern work practices, such as teleworking, are discouraged in the case of cross-border workers by the fiscal policies in neighbouring countries. Both housing and mobility challenges are likely to put additional strain on efforts to diversify the economy and increase competitiveness. They could also act as barriers to attracting high-skilled workers into the labour market.

(13)

In the context of the 2017 European Semester, the Commission has carried out a comprehensive analysis of Luxembourg’s economic policy and published it in the 2017 country report. It has also assessed the 2017 Stability Programme, the 2017 National Reform Programme and the follow-up given to the recommendations addressed to Luxembourg in previous years. It has taken into account not only their relevance for sustainable fiscal and socioeconomic policy in Luxembourg, but also their compliance with Union rules and guidance, given the need to strengthen the Union’s overall economic governance by providing Union-level input into future national decisions.

(14)

In the light of this assessment, the Council has examined the 2017 Stability Programme and is of the opinion (5) that Luxembourg is expected to comply with the Stability and Growth Pact,

HEREBY RECOMMENDS that Luxembourg take action in 2017 and 2018 to:

1.

Strengthen the diversification of the economy, including by removing barriers to investment and innovation. Remove regulatory restrictions in the business services sector.

2.

Ensure the long-term sustainability of the pension system, limit early retirement and increase the employment rate of older people.

Done at Brussels, 11 July 2017.

For the Council

The President

T. TÕNISTE


(1)  OJ L 209, 2.8.1997, p. 1.

(2)  Regulation (EU) No 1176/2011 of the European Parliament and of the Council of 16 November 2011 on the prevention and correction of macroeconomic imbalances (OJ L 306, 23.11.2011, p. 25).

(3)  OJ C 92, 24.3.2017, p. 1.

(4)  Regulation (EU) No 1303/2013 of the European Parliament and of the Council of 17 December 2013 laying down common provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund, the European Agricultural Fund for Rural Development and the European Maritime and Fisheries Fund and laying down general provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund and the European Maritime and Fisheries Fund and repealing Council Regulation (EC) No 1083/2006 (OJ L 347, 20.12.2013, p. 320).

(5)  Under Article 5(2) of Regulation (EC) No 1466/97.


9.8.2017   

EN

Official Journal of the European Union

C 261/71


COUNCIL RECOMMENDATION

of 11 July 2017

on the 2017 National Reform Programme of Hungary and delivering a Council opinion on the 2017 Convergence Programme of Hungary

(2017/C 261/16)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty on the Functioning of the European Union, and in particular Articles 121(2) and 148(4) thereof,

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies (1), and in particular Article 9(2) thereof,

Having regard to the recommendation of the European Commission,

Having regard to the resolutions of the European Parliament,

Having regard to the conclusions of the European Council,

Having regard to the opinion of the Employment Committee,

Having regard to the opinion of the Economic and Financial Committee,

Having regard to the opinion of the Social Protection Committee,

Having regard to the opinion of the Economic Policy Committee,

Whereas:

(1)

On 16 November 2016, the Commission adopted the Annual Growth Survey, marking the start of the 2017 European Semester for economic policy coordination. The priorities of the Annual Growth Survey were endorsed by the European Council on 9-10 March 2017. On 16 November 2016, on the basis of Regulation (EU) No 1176/2011 of the European Parliament and of the Council (2), the Commission adopted the Alert Mechanism Report, in which it did not identify Hungary as one of the Member States for which an in-depth review would be carried out.

(2)

The 2017 country report for Hungary was published on 22 February 2017. It assessed Hungary’s progress in addressing the country-specific recommendations adopted by the Council on 12 July 2016, the follow-up given to the country-specific recommendations adopted in previous years and Hungary’s progress towards its national Europe 2020 targets.

(3)

On 2 May 2017, Hungary submitted its 2017 National Reform Programme and its 2017 Convergence Programme. In order to take account of their interlinkages, the two programmes have been assessed at the same time.

(4)

Relevant country-specific recommendations have been addressed in the programming of the European Structural and Investment Funds (ESI Funds) for the 2014-2020 period. As provided for in Article 23 of Regulation (EU) No 1303/2013 of the European Parliament and of the Council (3), where it is necessary to support the implementation of relevant Council recommendations, the Commission may request a Member State to review and propose amendments to its Partnership Agreement and relevant programmes. The Commission has provided further details on how it would make use of that provision in guidelines on the application of the measures linking effectiveness of the ESI Funds to sound economic governance.

(5)

Hungary is currently in the preventive arm of the Stability and Growth Pact and subject to the debt rule. In its 2017 Convergence Programme, the Government plans a deterioration of the headline deficit from 1,8 % in 2016 to 2,4 % in both 2017 and 2018 and a gradual improvement thereafter to 1,2 % of GDP by 2021. The medium-term budgetary objective — a structural deficit of 1,7 % of GDP until 2016 and revised to 1,5 % of GDP as of 2017 — is planned to be met by 2020. However, based on the recalculated (4) structural balance, the medium-term budgetary objective would not be reached over the programme horizon. According to the Convergence Programme, the general government debt-to-GDP ratio is expected to decline gradually to close to 61 % by the end of 2021. The macroeconomic scenario underpinning those budgetary projections is favourable, which poses risks to the implementation of the deficit targets.

(6)

The 2017 Convergence Programme indicates that the budgetary impact of the exceptional inflow of refugees and security-related measures in 2016 and 2017 is significant, and provides adequate evidence of the scope and nature of these additional budgetary costs. According to the Commission, the eligible additional expenditure in 2015 amounted to 0,04 % of GDP for the exceptional inflow of refugees and there is no additional eligible expenditure in relation to refugee inflows in 2016. The eligible additional expenditure concerning security-related measures amounted to 0,04 % of GDP in 2016. In 2017, no further increase in expenditure is expected due to the exceptional inflow of refugees, whereas the additional budgetary impact of the security-related measures is currently estimated at 0,14 % of GDP. The provisions set out in Articles 5(1) and 6(3) of Regulation (EC) No 1466/97 cater for this additional expenditure, in that the inflow of refugees as well as the severity of the terrorist threat are unusual events, their impact on Hungary’s public finances is significant and sustainability would not be compromised by allowing for a temporary deviation from the adjustment path towards the medium-term budgetary objective. Therefore, the required adjustment towards the medium-term budgetary objective for 2016 has been reduced to take into account additional security-related costs. Regarding 2017, a final assessment, including on the eligible amounts, will be made in spring 2018 on the basis of observed data as provided by the Hungarian authorities.

(7)

On 12 July 2016, the Council recommended Hungary to achieve an annual fiscal adjustment of 0,6 % of GDP towards the medium-term budgetary objective in 2017. Based on the Commission 2017 spring forecast, there is a risk of a significant deviation from that requirement in 2017.

(8)

In 2018, in light of its fiscal situation and, in particular, of its debt level, Hungary is expected to further adjust towards its medium-term budgetary objective of a structural deficit of 1,5 % of GDP. According to the commonly agreed adjustment matrix under the Stability and Growth Pact, that adjustment translates into a requirement of a nominal growth rate of net primary government expenditure (5) which does not exceed 2,8 % in 2018. It would correspond to a structural adjustment of 1,0 % of GDP. Under unchanged policies, there is a risk of a significant deviation from that requirement in 2018. At the same time, Hungary is forecast to comply with the debt rule in 2017 and 2018. Overall, the Council is of the opinion that further measures will be needed as of 2017 to comply with the provisions of the Stability and Growth Pact. However, as foreseen in Regulation (EC) No 1466/97, the assessment of the budgetary plans and outcomes should take account of the Member State’s budgetary balance in light of the cyclical conditions. As recalled in the Commission communication accompanying these country-specific recommendations, the assessment of 2018 budget outcomes will need to take due account of the goal of achieving a fiscal stance that contributes to both strengthening the ongoing recovery and ensuring the sustainability of Hungary’s public finances. In that context, the Council notes that the Commission intends to carry out an overall assessment in line with Regulation (EC) No 1466/97, in particular in light of the cyclical situation of Hungary.

(9)

Hungary’s competitiveness and potential growth is held back by low private investment and low productivity. Factors adversely affecting the business environment and corporate investment are linked particularly to weaknesses in institutional performance and governance. Frequent changes in the regulatory and tax environment are one of the biggest barriers to doing business in Hungary, with insufficient stakeholder engagement and evidence-based policymaking. Regulatory barriers in services also tend to limit market dynamics and hamper investment. Restrictive regulations, including in retail, limit competition in the services sector and weigh on the business climate.

(10)

Hungary’s total tax-to-GDP ratio remains well above those of its regional peers and challenges in the tax system remain. The Government has decreased employers’ social security contributions by 5 percentage points in 2017, and a further 2 percentage points reduction is planned for 2018. This measure has significantly reduced the tax wedge for low-income earners but it remains high. This is particularly the case for low-income earners without children, where it is still among the highest in the Union. The tax system remains complex. Despite a declining trend since 2013, sector-specific taxes — some of which remain highly distortive — still tend to complicate the tax system and weaken investor confidence. The complexity and uncertainty of the tax system, associated with high compliance costs and administrative burdens, continue to weigh on investor confidence in Hungary.

(11)

Weaknesses in institutional performance are weighing on the business climate and reducing the economy’s growth potential. In particular, despite recent improvements and the amendment to the Public Procurement Act, progress on strengthening transparency and competition in public procurement is still limited. The current e-procurement strategy is a solid basis to enhance transparency, but its implementation and impact on efficiency and transparency need to be monitored. Corruption risks remain high, adversely impacting the business climate, and there are notable gaps in the measures taken to address the issue. Hungary is also experiencing delays in the implementation of its e-procurement strategy. This is slowing the timely introduction of e-procurement in Hungary, which is crucial for strengthening transparency and increasing competition.

(12)

The situation in the services sector including retail remains particularly challenging in Hungary. Over the past year, the Government continued to intervene on markets previously open to competition and adopted tighter requirements for passenger transport services operated by independent dispatching centres. The Government took no substantial step to ease the regulatory environment in the services sector, in particular regarding retail, public waste-management services, textbook publishing and distribution or mobile payment systems. In the retail sector, clear guidelines on the granting of authorisation to open new shops larger than 400 m2 are missing. This adds to the lack of transparency and predictability in the sector. The continuing existence of the regulatory barriers in services, including in retail, is limiting market dynamics and hampering investment, while also generating uncertainty for investors, in particular international investors.

(13)

To support Hungary’s competitiveness and potential growth in the medium term, structural reforms to promote investment in human capital, particularly in education and healthcare, and to continue improving the functioning of the labour market will be key. Enhancing social fairness will be also essential to deliver more inclusive growth.

(14)

Performance in providing basic skills remains weak by international standards. The 2015 OECD Programme for International Student Assessment (PISA) survey of educational systems showed significantly worsening results and the impact of pupils’ socioeconomic background on education outcomes is one of the highest in the Union. The impact of the school type on education outcomes is very significant. The reduction in teaching hours for science subjects in vocational grammar schools since 2016 is likely to amplify Hungary’s backlog in science skills. The share of early school leavers has been stagnating for the last 5 years and remains especially high among Roma people. The distribution of disadvantaged pupils between schools is uneven, and Roma children increasingly attend Roma-majority schools and classes. Measures are in place to support teacher training, early education and school achievement and to combat early school leaving among Roma. Although steps have been taken to address segregation, they are insufficiently comprehensive and systemic to address the challenge. The growing demand for a highly skilled workforce is not matched by a sufficiently large pool of applicants to tertiary education and adequate completion rates. The modification of the Act on higher education adopted in 2017 may cause the situation to deteriorate further.

(15)

The labour market has developed favourably in recent years, with unemployment returning to its pre-crisis level. Employment reached historical high levels thanks to private-sector job creation and the public work scheme, which is still the largest active labour market policy in Hungary with over 200 000 participants. In recent years, a set of measures have been adopted to facilitate the transition from the scheme to the primary labour market. However, the scheme is still not sufficiently targeted and its effectiveness in reintegrating participants into the open labour market continues to be limited. At the same time, certain sectors face increasing labour shortages. Other active labour market policies are being reinforced, partly with the support of Union funds, but further efforts are needed to facilitate transitions to the primary labour market effectively. The profiling system for the unemployed is operational but not yet fully effective. The gender employment gap has increased in recent years and the impact of parenthood on women’s employment is one of the highest in the Union. Labour market participation is affected by comparatively weak health outcomes and unequal access to healthcare. The participation of social partners in policy-making is limited.

(16)

Some poverty indicators are back down to pre-crisis levels but remain above the Union average. Poverty among children and Roma remains particularly high, although declining. A significant proportion of Roma in employment work in the public works scheme. Their effective integration into the open labour market remains limited so far.

(17)

The adequacy and coverage of social assistance and unemployment benefits is limited. The duration of unemployment benefits is still the lowest in the Union at 3 months, below the average time required by jobseekers to find employment. The 2015 social assistance reform streamlined the benefits system but it does not seem to have guaranteed a uniform and minimally adequate living standard for those in need. With regards to the benefits administered by municipalities, there is a high degree of discretion in the eligibility criteria and the level of entitlements, which creates uncertainty for beneficiaries. The minimum income benefit remains frozen at a low level, but the Hungarian authorities are planning to gradually increase the level of the targeted cash benefits in the coming years. Already in 2017 three of these benefits were slightly increased. Additional targeted measures would help alleviate material deprivation of the most disadvantaged groups, in particular children and Roma.

(18)

In the context of the 2017 European Semester, the Commission has carried out a comprehensive analysis of Hungary’s economic policy and published it in the 2017 country report. It has also assessed the 2017 Convergence Programme, the 2017 National Reform Programme and the follow-up given to the recommendations addressed to Hungary in previous years. It has taken into account not only their relevance for sustainable fiscal and socioeconomic policy in Hungary, but also their compliance with Union rules and guidance, given the need to strengthen the Union’s overall economic governance by providing Union-level input into future national decisions.

(19)

In the light of this assessment, the Council has examined the 2017 Convergence Programme and its opinion (6) is reflected in particular in recommendation (1) below,

HEREBY RECOMMENDS that Hungary take action in 2017 and 2018 to:

1.

Pursue a substantial fiscal effort in 2018 in line with the requirements of the preventive arm of the Stability and Growth Pact, taking into account the need to strengthen the ongoing recovery and to ensure the sustainability of Hungary’s public finances.

2.

Complete the reduction of the tax wedge for low-income earners and simplify the tax structure, in particular by reducing the most distortive sector-specific taxes. Strengthen transparency and competition in public procurement, by implementing a comprehensive and efficient e-procurement system, and strengthen the anti-corruption framework. Strengthen regulatory predictability, transparency and competition in particular in the services sector, notably in retail.

3.

Better target the public works scheme to those furthest away from the labour market and provide effective support to jobseekers in order to facilitate transitions to the labour market, including by reinforcing active labour market policies. Take measures to improve education outcomes and to increase the participation of disadvantaged groups, in particular Roma, in inclusive mainstream education. Improve the adequacy and coverage of social assistance and the duration of unemployment benefits.

Done at Brussels, 11 July 2017.

For the Council

The President

T. TÕNISTE


(1)  OJ L 209, 2.8.1997, p. 1.

(2)  Regulation (EU) No 1176/2011 of the European Parliament and of the Council of 16 November 2011 on the prevention and correction of macroeconomic imbalances (OJ L 306, 23.11.2011, p. 25).

(3)  Regulation (EU) No 1303/2013 of the European Parliament and of the Council of 17 December 2013 laying down common provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund, the European Agricultural Fund for Rural Development and the European Maritime and Fisheries Fund and laying down general provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund and the European Maritime and Fisheries Fund and repealing Council Regulation (EC) No 1083/2006 (OJ L 347, 20.12.2013, p. 320).

(4)  The structural balance as recalculated by the Commission based on the information in the Convergence Programme, following the commonly agreed methodology.

(5)  Net government expenditure comprises total government expenditure excluding interest expenditure, expenditure on Union programmes fully matched by Union funds revenue and non-discretionary changes in unemployment benefit expenditure. Nationally financed gross fixed capital formation is smoothed over a 4-year period. Discretionary revenue measures or revenue increases mandated by law are factored in. One-off measures on both the revenue and expenditure sides are netted out.

(6)  Under Article 9(2) of Regulation (EC) No 1466/97.


9.8.2017   

EN

Official Journal of the European Union

C 261/75


COUNCIL RECOMMENDATION

of 11 July 2017

on the 2017 National Reform Programme of Malta and delivering a Council opinion on the 2017 Stability Programme of Malta

(2017/C 261/17)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty on the Functioning of the European Union, and in particular Articles 121(2) and 148(4) thereof,

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies (1), and in particular Article 5(2) thereof,

Having regard to the recommendation of the European Commission,

Having regard to the resolutions of the European Parliament,

Having regard to the conclusions of the European Council,

Having regard to the opinion of the Employment Committee,

Having regard to the opinion of the Economic and Financial Committee,

Having regard to the opinion of the Social Protection Committee,

Having regard to the opinion of the Economic Policy Committee,

Whereas:

(1)

On 16 November 2016, the Commission adopted the Annual Growth Survey, marking the start of the 2017 European Semester for economic policy coordination. The priorities of the Annual Growth Survey were endorsed by the European Council on 9-10 March 2017. On 16 November 2016, on the basis of Regulation (EU) No 1176/2011 of the European Parliament and of the Council (2), the Commission adopted the Alert Mechanism Report, in which it did not identify Malta as one of the Member States for which an in-depth review would be carried out. On the same date, the Commission also adopted a recommendation for a Council Recommendation on the economic policy of the euro area, which was endorsed by the European Council on 9-10 March 2017. On 21 March 2017, the Council adopted the Recommendation on the economic policy of the euro area (‘Recommendation for the euro area’) (3).

(2)

As a Member State whose currency is the euro and in view of the close interlinkages between the economies in the economic and monetary union, Malta should ensure the full and timely implementation of the Recommendation for the euro area, as reflected in recommendation (2) below.

(3)

The 2017 country report for Malta was published on 22 February 2017. It assessed Malta’s progress in addressing the country-specific recommendations adopted by the Council on 12 July 2016, the follow-up given to the country-specific recommendations adopted in previous years and Malta’s progress towards its national Europe 2020 targets.

(4)

Malta submitted its 2017 National Reform Programme on 18 April 2017 and its 2017 Stability Programme on 2 May 2017. In order to take account of their interlinkages, the two programmes have been assessed at the same time.

(5)

Relevant country-specific recommendations have been addressed in the programming of the European Structural and Investment Funds (ESI Funds) for the 2014-2020 period. As provided for in Article 23 of Regulation (EU) No 1303/2013 of the European Parliament and of the Council (4), where it is necessary to support the implementation of relevant Council recommendations, the Commission may request a Member State to review and propose amendments to its Partnership Agreement and relevant programmes. The Commission has provided further details on how it would make use of that provision in guidelines on the application of the measures linking effectiveness of the ESI Funds to sound economic governance.

(6)

Malta is currently in the preventive arm of the Stability and Growth Pact. In its 2017 Stability Programme, the Government plans to maintain a surplus in headline terms over 2017-2020. The medium-term budgetary objective — a balanced budgetary position in terms of GDP — continues to be met with a positive margin throughout the programme period. According to the Stability Programme, the general government debt-to-GDP ratio is expected to remain below the 60 %-of-GDP Treaty reference value and to gradually decline from 58,3 % of GDP in 2016 to 47,6 % in 2020. The macroeconomic scenario underpinning those budgetary projections is plausible for 2017 and cautious for 2018-2020. At the same time, there are possible implementation risks related to budgetary execution.

(7)

On 12 July 2016, for 2017 the Council recommended Malta to achieve an annual fiscal adjustment of 0,6 % of GDP towards the medium-term budgetary objective. Outturn data indicate that Malta already reached its medium-term budgetary objective in 2016. Based on the Commission 2017 spring forecast, the structural balance is forecast to increase from a surplus of 0,4 % of GDP in 2017 to 0,7 % of GDP in 2018, remaining above the medium-term budgetary objective. Overall, the Council is of the opinion that Malta is projected to comply with the provisions of the Stability and Growth Pact in 2017 and 2018.

(8)

Notwithstanding the achievement of the medium-term objective three years ahead of the target, expenditure increases outpaced potential output growth. If sustained further, this poses a challenge to the sustainability of public finances, especially in the case of unanticipated shocks to revenues. The Maltese authorities carried out spending reviews in some areas of public spending particularly relevant in terms of sustainability — healthcare, education and training and social security. Timely and effective implementation of the ensuing recommendations will determine their effectiveness in achieving their goal. In addition, Malta’s public finances continues to face sustainability risks in the long term due to the projected costs linked to population ageing, such as healthcare, long-term care and pensions. The steep increase in projected age-related expenditure is mainly due to pension expenditure, which is estimated to increase by 3,2 percentage points of GDP by 2060 according to the 2015 Ageing Report. Some of the recently introduced measures are likely to generate savings. However, these savings are unlikely to be sufficient to offset mounting spending pressures and decisively improve long-term sustainability. Further measures could, therefore, be necessary.

(9)

Malta has put forward several measures to address the dual challenge of sustainability and ensuring adequate retirement incomes posed by the pension system. Measures introduced in the 2017 budget are expected to moderately lower the poverty risk for older people and improve somewhat the net replacement rate of the guaranteed minimum pension. Overall, pension adequacy indicators still indicate considerable room for improvement, including on reducing the high gender coverage gap.

(10)

Road traffic congestion has become a barrier to business, and its external (economic and environmental) costs have been estimated at EUR 274 million per year and are projected to increase. In addition, emissions of greenhouse gases from traffic continue growing and Malta is likely to fail to reach its 2020 emission targets. Malta has adopted an ambitious National Transport Strategy with a 2050 horizon and an Operational Transport Master Plan to 2025. They include a diverse set of measures to rationalise the use of private cars, promote alternative mobility solutions and make more efficient use of multimodal and collective transport systems. While those measures are projected to make significant improvements, congestion is still projected to rise and greenhouse gas emissions from transport to decrease only modestly until 2030.

(11)

The financial system is characterised by a significant number of foreign institutions attracted, among other factors, by the favourable tax environment. Malta is the only Member State utilising the full imputation system of company taxation and it offers a refundable tax credit scheme. It has an extensive network of double taxation treaties, and it has an attractive tax residency status for individuals. The supervision of the internationally-oriented business, however, is challenging. The financial sector carries out most of its activities outside Malta. In this context, Malta has invited the IMF and the World Bank to conduct a Financial Sector Assessment Programme by the end of 2018. In addition, Malta is party to the January 2017 EIOPA Decision on the collaboration of the insurance supervisory authorities. The ECB, based on its own assessment and on the draft decision by the Malta Financial Services Authority, has recently decided to withdraw the banking licence of a small internet banking provider that collects deposits also outside Malta.

(12)

Despite progress, further improvements in the efficiency of the justice system remain necessary. Although new measures on second chance and insolvency have been proposed by the Government, lengthy insolvency and discharge procedures harm the quality of the business environment in Malta. Moreover, the framework of debt discharge does not provide for a time limit, thus it lacks legal certainty. To address the shortcomings, an amendment to the Companies Act introduced considerable changes to the legal framework on insolvency, such as the possibility of mediation. The impact of these changes remains to be analysed.

(13)

Labour shortages are emerging across the skills spectrum and the adjustment of skills supply to labour market needs is still incomplete. A substantial share of the Maltese labour force still has low qualifications. While educational attainment is increasing, the rate of early school leaving remains high. Basic skills attainment among young people is still weak. Access and participation in lifelong learning — with the involvement of employers — is improving, including for the low-skilled; but, given the extent of the challenge, efforts need to be sustained. Significant investments in the education and training system are expected to bear fruit, especially if the measures are maintained and improved in the future. Employment rates are steadily improving and the unemployment rate has dropped below 5 %. However, labour market participation is still among the lowest in the Union, in particular for older and low-skilled women, which also points to remaining social exclusion risks for those who are not equipped to adjust to a fast-changing economy. Therefore, current policy investments should continue to be sustained, in particular through the recently established National Skills Council, and further developments are to be closely monitored.

(14)

In the context of the 2017 European Semester the Commission has carried out a comprehensive analysis of Malta’s economic policy and published it in the 2017 country report. It has also assessed the 2017 Stability Programme, the 2017 National Reform Programme and the follow-up given to the recommendations addressed to Malta in previous years. It has taken into account not only their relevance for sustainable fiscal and socioeconomic policy in Malta, but also their compliance with Union rules and guidance, given the need to strengthen the Union’s overall economic governance by providing Union-level input into future national decisions.

(15)

In the light of this assessment, the Council has examined the 2017 Stability Programme and its opinion (5) is reflected in particular in recommendation (1) below,

HEREBY RECOMMENDS that Malta take action in 2017 and 2018 to:

1.

Expand the scope of the ongoing spending reviews to the broader public sector and introduce performance-based public spending.

2.

Ensure the effective national supervision of internationally oriented business by financial institutions licensed in Malta by strengthening cooperation with the host supervisors in the countries where they operate.

Done at Brussels, 11 July 2017.

For the Council

The President

T. TÕNISTE


(1)  OJ L 209, 2.8.1997, p. 1.

(2)  Regulation (EU) No 1176/2011 of the European Parliament and of the Council of 16 November 2011 on the prevention and correction of macroeconomic imbalances (OJ L 306, 23.11.2011, p. 25).

(3)  OJ C 92, 24.3.2017, p. 1.

(4)  Regulation (EU) No 1303/2013 of the European Parliament and of the Council of 17 December 2013 laying down common provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund, the European Agricultural Fund for Rural Development and the European Maritime and Fisheries Fund and laying down general provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund and the European Maritime and Fisheries Fund and repealing Council Regulation (EC) No 1083/2006 (OJ L 347, 20.12.2013, p. 320).

(5)  Under Article 5(2) of Regulation (EC) No 1466/97.


9.8.2017   

EN

Official Journal of the European Union

C 261/79


COUNCIL RECOMMENDATION

of 11 July 2017

on the 2017 National Reform Programme of the Netherlands and delivering a Council opinion on the 2017 Stability Programme of the Netherlands

(2017/C 261/18)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty on the Functioning of the European Union, and in particular Articles 121(2) and 148(4) thereof,

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies (1), and in particular Article 5(2) thereof,

Having regard to Regulation (EU) No 1176/2011 of the European Parliament and of the Council of 16 November 2011 on the prevention and correction of macroeconomic imbalances (2), and in particular Article 6(1) thereof,

Having regard to the recommendation of the European Commission,

Having regard to the resolutions of the European Parliament,

Having regard to the conclusions of the European Council,

Having regard to the opinion of the Employment Committee,

Having regard to the opinion of the Economic and Financial Committee,

Having regard to the opinion of the Social Protection Committee,

Having regard to the opinion of the Economic Policy Committee,

Whereas:

(1)

On 16 November 2016, the Commission adopted the Annual Growth Survey, marking the start of the 2017 European Semester for economic policy coordination. The priorities of the Annual Growth Survey were endorsed by the European Council on 9-10 March 2017. On 16 November 2016, on the basis of Regulation (EU) No 1176/2011, the Commission adopted the Alert Mechanism Report, in which it identified the Netherlands as one of the Member States for which an in-depth review would be carried out. On the same date, the Commission also adopted a recommendation for a Council Recommendation on the economic policy of the euro area, which was endorsed by the European Council on 9-10 March 2017. On 21 March 2017, the Council adopted the Recommendation on the economic policy of the euro area (‘Recommendation for the euro area’) (3).

(2)

As a Member State whose currency is the euro and in view of the close interlinkages between the economies in the economic and monetary union, the Netherlands should ensure the full and timely implementation of the Recommendations for the euro area, as reflected in recommendations (1) and (2) below.

(3)

The 2017 country report for the Netherlands was published on 22 February 2017. It assessed the Netherlands’ progress in addressing the country-specific recommendations adopted by the Council on 12 July 2016, the follow-up given to the country-specific recommendations adopted in previous years and the Netherlands’ progress towards its national Europe 2020 targets. It also included an in-depth review under Article 5 of Regulation (EU) No 1176/2011, the results of which were also published on 22 February 2017. The Commission’s analysis led it to conclude that the Netherlands is experiencing macroeconomic imbalances. The Netherlands shows the largest three-year average current-account surplus in terms of GDP among euro-area Member States. The surplus suggests a suboptimal allocation of resources, leaving opportunities for increased growth and welfare. The disposable income of households is hampered by a high compulsory payment wedge. Private debt is high, specifically the stock of household mortgage debt. The long household balance sheets increase the vulnerability to financial shocks. The need for action to reduce the risk of adverse effects on the Dutch economy and, given its size and cross-border relevance, on the economic and monetary union, is particularly important.

(4)

On 26 April 2017, the Netherlands submitted its 2017 National Reform Programme and its 2017 Stability Programme. In order to take account of their interlinkages, the two programmes have been assessed at the same time.

(5)

Relevant country-specific recommendations have been addressed in the programming of the European Structural and Investment Funds (ESI Funds) for the 2014-2020 period. As provided for in Article 23 of Regulation (EU) No 1303/2013 of the European Parliament and of the Council (4), where it is necessary to support the implementation of relevant Council recommendations, the Commission may request a Member State to review and propose amendments to its Partnership Agreement and relevant programmes. The Commission has provided further details on how it would make use of that provision in guidelines on the application of the measures linking effectiveness of the ESI Funds to sound economic governance.

(6)

The Netherlands is currently in the preventive arm of the Stability and Growth Pact and subject to the debt rule. In its 2017 Stability Programme, the Government plans an increase in the general government surplus from 0,5 % of GDP in 2017 to 1,3 % of GDP in 2020. The medium-term budgetary objective — a structural deficit of 0,5 % of GDP — continues to be met with a margin throughout the programme period. According to the 2017 Stability Programme, the government debt-to-GDP ratio is projected to fall to 58,5 % in 2017, below the 60 %-of-GDP Treaty reference value. The Government plans a further decline in the government debt ratio to 49,3 % of GDP in 2020. The macroeconomic scenario underpinning those budgetary projections is plausible. Based on the Commission 2017 spring forecast, the structural balance is projected to increase from a surplus of 0,2 % of GDP in 2017 to 0,4 % of GDP in 2018, above the medium-term budgetary objective. General government debt is forecast to remain on a firm downward path beyond the requirements of the debt rule. Overall, the Council is of the opinion that the Netherlands is projected to comply with the provisions of the Stability and Growth Pact in 2017 and 2018. At the same time, while respecting the medium-term objective, there remains scope to support potential growth and domestic demand by using fiscal and structural policies, including investment in research and development, and by creating conditions for higher real wage growth, also in the context of persistent external imbalances.

(7)

The recent growth in employment can be largely attributed to an increase in the number of people employed on temporary contracts and of the self-employed. The high and increasing percentage of temporary contracts as well as the rapid increase in self-employment without employees is observed in the context of great differences in applicable labour regulations, labour protection, as well as differences in tax and social security legislation. Although some measures have been taken, some of these factors still create a financial incentive for employees to start working as self-employed or favours hiring them under a temporary contract. This may have particularly distortive effects at the margin of the labour market and may have contributed to the observed moderation in aggregate real wage growth. Self-employed are more often under-insured against disability, unemployment and old age. This could affect the sustainability of the social security system in the long run. The enforcement of measures to tackle bogus self-employment is suspended until 2018. The employment situation of people with a migrant background remains an important challenge. The employment rate for non-EU-born migrants is 20 percentage points lower than for people born in the Netherlands, only a small part of which is explained by differences in age and educational achievement.

(8)

The rise in recent years in the household saving rate was partly due to higher saving in the second pillar of the pension system (mandatory supplementary private schemes), to which the regulatory environment contributed. An appropriate intra- and inter-generational distribution of costs and risks beyond the adopted rules on indexation and financial buffers (financial assessment framework) would help households to allocate their financial means in more growth-friendly ways. The Government announced its intention to substantially reform the second pension pillar in order to improve the coverage and to create a more transparent, more flexible and actuarially fairer system.

(9)

Rigidities and distortive incentives that have built up over decades shape house financing and sectoral savings patterns. Households’ tendency to leverage up gross mortgage debt against housing wealth largely reflects long-standing fiscal incentives, in particular the full tax deductibility of mortgage interest. Despite the strengthening of the economic recovery, no further measures have been taken to address this since 2012.

(10)

Investment declined strongly during the crisis and has recovered only partially since. The weakness in economy-wide investment appears to have a strong cyclical character, and was driven by a downturn in the housing market as well as fiscal consolidation choices. While barriers to investment seem to be minor, procedures to obtain building permits are relatively lengthy. Low investment in renewable energy appears linked to past market dynamics, market uncertainty and regulatory factors. Public and private expenditure on R & D is low given the educational attainment, academic achievement and the level of economic development compared to the top performing Member States. Government expenditure in this area has stagnated since 2014, while private R & D spending remains low. No progress has been made on the related 2016 Council Recommendation.

(11)

In the context of the 2017 European Semester, the Commission has carried out a comprehensive analysis of the Netherlands’ economic policy and published it in the 2017 country report. It has also assessed the 2017 Stability Programme, the 2017 National Reform Programme and the follow-up given to the recommendations addressed to the Netherlands in previous years. It has taken into account not only their relevance for sustainable fiscal and socioeconomic policy in the Netherlands, but also their compliance with Union rules and guidance, given the need to strengthen the Union’s overall economic governance by providing Union-level input into future national decisions.

(12)

In the light of this assessment, the Council has examined the 2017 Stability Programme and is of the opinion (5) that the Netherlands is expected to comply with the Stability and Growth Pact.

(13)

In the light of the Commission’s in-depth review and this assessment, the Council has examined the 2017 National Reform Programme and the 2017 Stability Programme. Its recommendations made under Article 6 of Regulation (EU) No 1176/2011 are reflected in recommendations (1) and (2) to the Netherlands below,

HEREBY RECOMMENDS that the Netherlands take action in 2017 and 2018 to:

1.

While respecting the medium-term objective, use fiscal and structural policies to support potential growth and domestic demand, including investment in research and development. Take measures to reduce the remaining distortions in the housing market and the debt bias for households, in particular by decreasing mortgage interest tax deductibility.

2.

Tackle remaining barriers to hiring staff on permanent contracts. Address the high increase in the self-employed without employees, including by reducing tax distortions favouring self-employment, without compromising entrepreneurship, and by promoting access of the self-employed to affordable social protection. Based on the broad preparatory process already launched, make the second pillar of the pension system more transparent, inter-generationally fairer and more resilient to shocks. Create conditions to promote higher real wage growth, respecting the role of the social partners.

Done at Brussels, 11 July 2017.

For the Council

The President

T. TÕNISTE


(1)  OJ L 209, 2.8.1997, p. 1.

(2)  OJ L 306, 23.11.2011, p. 25.

(3)  OJ C 92, 24.3.2017, p. 1.

(4)  Regulation (EU) No 1303/2013 of the European Parliament and of the Council of 17 December 2013 laying down common provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund, the European Agricultural Fund for Rural Development and the European Maritime and Fisheries Fund and laying down general provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund and the European Maritime and Fisheries Fund and repealing Council Regulation (EC) No 1083/2006 (OJ L 347, 20.12.2013, p. 320).

(5)  Under Article 5(2) of Regulation (EC) No 1466/97.


9.8.2017   

EN

Official Journal of the European Union

C 261/83


COUNCIL RECOMMENDATION

of 11 July 2017

on the 2017 National Reform Programme of Austria and delivering a Council opinion on the 2017 Stability Programme of Austria

(2017/C 261/19)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty on the Functioning of the European Union, and in particular Articles 121(2) and 148(4) thereof,

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies (1), and in particular Article 5(2) thereof,

Having regard to the recommendation of the European Commission,

Having regard to the resolutions of the European Parliament,

Having regard to the conclusions of the European Council,

Having regard to the opinion of the Employment Committee,

Having regard to the opinion of the Economic and Financial Committee,

Having regard to the opinion of the Social Protection Committee,

Having regard to the opinion of the Economic Policy Committee,

Whereas:

(1)

On 16 November 2016, the Commission adopted the Annual Growth Survey, marking the start of the 2017 European Semester for economic policy coordination. The priorities of the Annual Growth Survey were endorsed by the European Council on 9-10 March 2017. On 16 November 2016, on the basis of Regulation (EU) No 1176/2011 of the European Parliament and of the Council (2), the Commission adopted the Alert Mechanism Report, in which it did not identify Austria as one of the Member States for which an in-depth review would be carried out. On the same date, the Commission also adopted a recommendation for a Council Recommendation on the economic policy of the euro area, which was endorsed by the European Council on 9-10 March 2017. On 21 March 2017, the Council adopted the Recommendation on the economic policy of the euro area (‘Recommendation for the euro area’) (3).

(2)

As a Member State whose currency is the euro and in view of the close interlinkages between the economies in the economic and monetary union, Austria should ensure the full and timely implementation of the Recommendation for the euro area, as reflected in recommendation (1) below.

(3)

The 2017 country report for Austria was published on 22 February 2017. It assessed Austria’s progress in addressing the country-specific recommendations adopted by the Council on 12 July 2016, the follow-up given to the country-specific recommendations adopted in previous years and Austria’s progress towards its national Europe 2020 targets.

(4)

Austria submitted its 2017 National Reform Programme on 21 April 2017 and its 2017 Stability Programme on 2 May 2017. In order to take account of their interlinkages, the two programmes have been assessed at the same time.

(5)

Relevant country-specific recommendations have been addressed in the programming of the European Structural and Investment Funds (ESI Funds) for the 2014-2020 period. As provided for in Article 23 of Regulation (EU) No 1303/2013 of the European Parliament and of the Council (4), where it is necessary to support the implementation of relevant Council recommendations, the Commission may request a Member State to review and propose amendments to its Partnership Agreement and relevant programmes. The Commission has provided further details on how it would make use of that provision in guidelines on the application of the measures linking effectiveness of the ESI Funds to sound economic governance.

(6)

Austria is currently in the preventive arm of the Stability and Growth Pact and subject to the debt rule. In its 2017 Stability Programme, the Government expects that the headline deficit will improve to 1,0 % of GDP in 2017 and then reach 0,3 % of GDP in 2021. The medium-term budgetary objective — a structural deficit of 0,45 % of GDP until 2016 and 0,5 % of GDP thereafter — is foreseen to be met in 2019. According to the Stability Programme, the general government debt-to-GDP ratio is expected to gradually decline to 71,0 % in 2021 from 84,6 % in 2016. The macroeconomic scenario underpinning those budgetary projections is favourable, assuming buoyant growth of investment and exports in 2017 and 2018.

(7)

The Stability Programme indicates that the budgetary impact of the exceptional inflow of refugees and security-related measures is significant and provides adequate evidence of the scope and nature of these additional budgetary costs. According to the Commission, the eligible additional expenditure in 2016 amounted to 0,25 % of GDP for the exceptional inflow of refugees and 0,04 % of GDP concerning security-related measures. In 2017, the additional impact compared to 2016 of the security-related measures is currently estimated at 0,01 % of GDP. The provisions set out in Articles 5(1) and 6(3) of Regulation (EC) No 1466/97 cater for this additional expenditure, in that the inflow of refugees as well as the severity of the terrorist threat are unusual events, their impact on Austria’s public finances is significant and sustainability would not be compromised by allowing for a temporary deviation from the adjustment path towards the medium-term budgetary objective. Therefore, the required adjustment towards the medium-term budgetary objective for 2016 has been reduced to take into account additional refugee-related and security-related costs. Regarding 2017, a final assessment, including on eligible amounts, will be made in spring 2018 on the basis of observed data as provided by the Austrian authorities.

(8)

On 12 July 2016, the Council recommended Austria to ensure that the deviation from the medium-term budgetary objective is limited to the allowance linked to the budgetary impact of the exceptional inflow of refugees (5), and to that effect achieve an annual fiscal adjustment of 0,3 % of GDP in 2017 unless the medium-term budgetary objective is respected with a lower effort. Based on the Commission 2017 spring forecast, the structural balance is required to remain stable in 2017, taking into account the granted allowances. The Commission forecast points to a risk of some deviation from that requirement in 2017. In 2018, based on the Commission 2017 spring forecast, Austria should ensure that the nominal growth rate of net primary government expenditure (6) does not exceed 2,2 %, corresponding to an improvement in the structural balance by 0,3 % of GDP (7). Under unchanged policies, Austria would be at risk of some deviation from the requirement in 2018. At the same time, Austria is forecast to comply with the debt rule in 2017 and 2018. Overall, the Council is of the opinion that Austria needs to stand ready to take further measures to ensure compliance in 2017 and 2018.

(9)

Pension spending and healthcare spending pose a medium risk to fiscal sustainability in the medium and long term, due to a rapidly ageing population. Austria’s public expenditure on pensions is relatively high compared to other Member States and is expected to increase by 0,5 percentage points of GDP by 2060. This compares to the Union average which is expected to decrease by 0,2 percentage points of GDP over the same period. The effective retirement age remains low despite recent reforms and is one of the main drivers of higher pension expenditure. Expressed as the average exit age from the labour market it is 62 years and 6 months for men and 61 years for women, which is below the Union average of 63 years and 7 months for men and 62 years and 7 months for women (2014). Furthermore, the current statutory retirement age for women of 60 years is among the lowest in the Union, and it will only start to be harmonised with that of men in 2024. Linking the statutory retirement age to changes in life expectancy would help to ensure pension sustainability in an ageing demographic context, also by contributing to raising the effective retirement age.

(10)

For healthcare, public expenditure is expected to rise significantly in the medium and long term from already high levels, namely by 1,3 percentage points of GDP by 2060 compared to the Union average of 0,9 percentage points. The main driver of the high healthcare spending is the large hospital sector, while the less costly outpatient care is underutilised. The proportion of hospital expenditure in overall healthcare costs is one of the highest in the Union. The recent initiatives aimed at strengthening the provision of primary care therefore need to be thoroughly implemented, including by supporting new financial agreements between healthcare providers and social security funds. Furthermore, Austria’s hospital sector makes insufficient use of effective public procurement such as Union-wide tendering (0,23 % of GDP compared to 0,62 % Union average), procurement aggregation and non-price award criteria.

(11)

The 2017 financial equalisation law has helped to simplify the financial relations between the different layers of government in Austria. Nevertheless, the fiscal framework in Austria remains overly complex in terms of competencies and financial arrangements, and still suffers from misalignments between limited revenue-raising powers and broader spending responsibilities of local and federal state governments.

(12)

While the 2016 tax reform has reduced the tax wedge from 49,5 % to 46,7 %, it remains relatively high compared to the Union average of 40,6 % (figures refer to a single average income earner without children). In the absence of an indexation of tax brackets to inflation, the tax wedge will again gradually increase as an effect of the yearly fiscal drag. By contrast, more growth-friendly sources of revenue, such as recurrent property taxes, are underutilised, mainly because the tax base is outdated. Revenues from recurrent property taxes in Austria are very low, amounting to 0,2 % of GDP compared to the Union average of 1,6 % of GDP in 2014. Similarly, the implicit tax rate on energy in Austria is relatively low, pointing to unexploited potential for environmental taxes, which also include positive behavioural incentives.

(13)

While the labour market performs better in Austria than in most Member States, challenges remain. In particular, women’s labour market potential is underused, as reflected in the high gender pay gap, resulting, inter alia, from a high share of part-time employment. In 2015, the gender pay gap was 21,7 %, compared to the Union average of 16,3 %. The high and above-average proportion of women working part-time is largely driven by care responsibilities for children and the elderly. The number of early childcare places for children under 3 years of age was at 25,5 % in 2015, still significantly below the Barcelona target of 33 %.

(14)

Austria has already exceeded its national Europe 2020 targets for education. However, education outcomes depend considerably on the socioeconomic background as confirmed by the 2015 OECD Programme for International Student Assessment (PISA) results. Furthermore, the education results of pupils with a migrant background are considerably worse than those of pupils without one. In 2016, foreign-born pupils were 2,7 times more likely to leave school before completing upper secondary education than native-born pupils. The integration challenge also affects Austrian-born children of immigrants. Furthermore, Austria faces challenges in integrating a large number of asylum seekers and refugees into its education system.

(15)

Banking-sector developments point towards a steady, albeit slow improvement. The capitalisation of Austrian banks remains below that of its Union peers and their ability to generate profits in the domestic market has been under pressure. Regarding international operations, asset quality and profitability have improved further in several markets in Central, Eastern and South-Eastern Europe, but pockets of vulnerability still remain. Meanwhile, the increase in real estate prices and the revival of mortgage lending underscores the importance of macro-prudential measures.

(16)

Investment growth in Austria returned in 2016 but investment by SMEs and in the service sector continued to show weaknesses. Austria has recognised the role that business creation and firm growth play for new investments (i.e. going beyond replacement investments) and for the corresponding job creation. Austria has therefore set itself ambitious targets to facilitate digital transformation as well as to tackle its traditionally low rate of business creation (7,4 % compared to 10,8 % Union average) and company growth (7,3 % share of high-growth firms compared to 9,2 % Union average). Some specific measures which combine the reduction of investment barriers with improved framework conditions for equity capital funding, entrepreneurship promotion and taxation incentives have already been announced.

(17)

High regulatory barriers remain in the business services sector and regulated professions with the level of restrictions being higher than the Union average in particular for architects and engineers. In addition, for these professions, as well as for lawyers, accountants/tax advisers, patent agents, real estate agents and tourist guides, the business churn rate is significantly lower than the Union average, which seems to indicate relatively low dynamism and competition in professional services in Austria. These barriers include, inter alia, (1) shareholding and company form restrictions for architects, engineers and patent attorneys, (2) multidisciplinary restrictions for architects and engineers, as well as (3) particularly wide scopes of reserved activities for architects, engineers and tourist guides. The reduction of such barriers could generate more intense competition, resulting in more firms entering the market, and leading to benefits for consumers in terms of lower prices. Recommendations to address this issue were made in January 2017 in a Communication from the Commission, as part of a package of measures to tackle barriers in services markets.

(18)

Austria has made considerable efforts in receiving asylum seekers and in integrating refugees as well as other immigrants. Nevertheless, labour market integration of people with a migrant background, in particular women born outside the Union and jobseeking refugees, remains a challenge.

(19)

In the context of the 2017 European Semester, the Commission has carried out a comprehensive analysis of Austria’s economic policy and published it in the 2017 country report. It has also assessed the 2017 Stability Programme, the 2017 National Reform Programme and the follow-up given to the recommendations addressed to Austria in previous years. It has taken into account not only their relevance for sustainable fiscal and socioeconomic policy in Austria, but also their compliance with Union rules and guidance, given the need to strengthen the Union’s overall economic governance by providing Union-level input into future national decisions.

(20)

In the light of this assessment, the Council has examined the 2017 Stability Programme and its opinion (8) is reflected in particular in recommendation (1) below,

HEREBY RECOMMENDS that Austria take action in 2017 and 2018 to:

1.

Pursue its fiscal policy in line with the requirements of the preventive arm of the Stability and Growth Pact, which entails achieving its medium-term budgetary objective in 2018, taking into account the allowance linked to unusual events. Ensure the sustainability of the healthcare system and of the pension system. Rationalise and streamline competencies across the various layers of government and align their financing and spending responsibilities.

2.

Improve labour market outcomes for women through, inter alia, the provision of full-time care services. Improve the educational achievements of disadvantaged young people, in particular those from a migrant background. Foster investment in the services sector by reducing administrative and regulatory barriers, easing market entry and facilitating company growth.

Done at Brussels, 11 July 2017.

For the Council

The President

T. TÕNISTE


(1)  OJ L 209, 2.8.1997, p. 1.

(2)  Regulation (EU) No 1176/2011 of the European Parliament and of the Council of 16 November 2011 on the prevention and correction of macroeconomic imbalances (OJ L 306, 23.11.2011, p. 25).

(3)  OJ C 92, 24.3.2017, p. 1.

(4)  Regulation (EU) No 1303/2013 of the European Parliament and of the Council of 17 December 2013 laying down common provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund, the European Agricultural Fund for Rural Development and the European Maritime and Fisheries Fund and laying down general provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund and the European Maritime and Fisheries Fund and repealing Council Regulation (EC) No 1083/2006 (OJ L 347, 20.12.2013, p. 320).

(5)  Austria is allowed to deviate from its medium-term budgetary objective up to 2017 and 2018 by the additional budgetary impact related to the exceptional inflow of refugees and security-related measures incurred in 2015 and 2016 respectively, as temporary deviations are carried forward in each case for a total period of three years.

(6)  Net government expenditure comprises total government expenditure excluding interest expenditure, expenditure on Union programmes fully matched by Union funds revenue and non-discretionary changes in unemployment benefit expenditure. Nationally financed gross fixed capital formation is smoothed over a 4-year period. Discretionary revenue measures or revenue increases mandated by law are factored in. One-off measures on both the revenue and expenditure sides are netted out.

(7)  For Austria the adjustment requirement in 2018 takes into account the allowance linked to the unusual events granted for 2016, as temporary deviations are carried forward for a period of three years.

(8)  Under Article 5(2) of Regulation (EC) No 1466/97.


9.8.2017   

EN

Official Journal of the European Union

C 261/88


COUNCIL RECOMMENDATION

of 11 July 2017

on the 2017 National Reform Programme of Poland and delivering a Council opinion on the 2017 Convergence Programme of Poland

(2017/C 261/20)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty on the Functioning of the European Union, and in particular Articles 121(2) and 148(4) thereof,

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies (1), and in particular Article 9(2) thereof,

Having regard to the recommendation of the European Commission,

Having regard to the resolutions of the European Parliament,

Having regard to the conclusions of the European Council,

Having regard to the opinion of the Employment Committee,

Having regard to the opinion of the Economic and Financial Committee,

Having regard to the opinion of the Social Protection Committee,

Having regard to the opinion of the Economic Policy Committee,

Whereas:

(1)

On 16 November 2016, the Commission adopted the Annual Growth Survey, marking the start of the 2017 European Semester for economic policy coordination. The priorities of the Annual Growth Survey were endorsed by the European Council on 9-10 March 2017. On 16 November 2016, on the basis of Regulation (EU) No 1176/2011 of the European Parliament and of the Council (2), the Commission adopted the Alert Mechanism Report, in which it did not identify Poland as one of the Member States for which an in-depth review would be carried out.

(2)

The 2017 country report for Poland was published on 22 February 2017. It assessed Poland’s progress in addressing the country-specific recommendations adopted by the Council on 12 July 2016, the follow-up given to the country-specific recommendations adopted in previous years and Poland’s progress towards its national Europe 2020 targets.

(3)

On 28 April 2017, Poland submitted its 2017 National Reform Programme and its 2017 Convergence Programme. In order to take account of their interlinkages, the two programmes have been assessed at the same time.

(4)

Relevant country-specific recommendations have been addressed in the programming of the European Structural and Investment Funds (ESI Funds) for the 2014-2020 period. As provided for in Article 23 of Regulation (EU) No 1303/2013 of the European Parliament and of the Council (3), where it is necessary to support the implementation of relevant Council recommendations, the Commission may request a Member State to review and propose amendments to its Partnership Agreement and relevant programmes. The Commission has provided further details on how it would make use of that provision in guidelines on the application of the measures linking effectiveness of the ESI Funds to sound economic governance.

(5)

Poland is currently in the preventive arm of the Stability and Growth Pact. In its 2017 Convergence Programme, the Government plans a gradual improvement of the headline balance from a deficit of 2,4 % of GDP in 2016 to 1,2 % of GDP in 2020. The medium-term budgetary objective, a deficit of 1 % of GDP in structural terms, is not expected to be reached by 2020, i.e. the programme horizon. According to the 2017 Convergence Programme, the general government debt-to-GDP ratio is expected to increase from 54,4 % of GDP in 2016 to 55,3 % of GDP in 2017 and to decline to 52,1 % by 2020. The macroeconomic scenario underpinning those budgetary projections is favourable.

(6)

On 12 July 2016, for 2017, the Council recommended Poland to achieve an annual fiscal adjustment of 0,5 % of GDP towards the medium-term budgetary objective. Based on the Commission 2017 spring forecast, there is a risk of some deviation from that recommended adjustment in 2017.

(7)

In 2018, in light of its fiscal situation, Poland is expected to further adjust towards its medium-term budgetary objective of a structural deficit of 1 % of GDP. According to the commonly agreed adjustment matrix under the Stability and Growth Pact, that adjustment translates into a requirement of a nominal growth rate of net primary government expenditure (4) that does not exceed 3,7 % in 2018. It would correspond to a structural adjustment of 0,5 % of GDP. Under unchanged policies, there is a risk of a significant deviation from that requirement in 2018. Overall, the Council is of the opinion that Poland needs to stand ready to take further measures in 2017 and that further measures will be needed in 2018 to comply with the provisions of the Stability and Growth Pact. However, as foreseen in Regulation (EC) No 1466/97, the assessment of the budgetary plans and outcomes should take account of the Member State’s budgetary balance in light of the cyclical conditions. As recalled in the Commission Communication on the 2017 European Semester accompanying these country-specific recommendations, the assessment of 2018 budget outcomes will need to take due account of the goal to achieve a fiscal stance that contributes to both strengthening the ongoing recovery and ensuring the sustainability of Poland’s public finances. In that context, the Council notes that the Commission intends to carry out an overall assessment in line with Regulation (EC) No 1466/97, in particular in light of the cyclical situation of Poland.

(8)

The 2017 country report finds that some progress was made in improving tax collection, as Poland undertook a number of reforms aimed at tightening the tax system. Their full impact on tax collection and the costs of tax compliance should be closely monitored. In contrast, Poland made no progress in limiting the extensive use of reduced VAT rates, which have an adverse impact on VAT revenue and are not an effective social policy instrument.

(9)

Poland faces expenditure pressures in various areas, in particular those related to population ageing. This makes it necessary to put mechanisms in place to assess the efficiency and effectiveness of public spending to enable the reallocation of resources. With this in mind, the Government has announced plans to strengthen the budgetary process, in particular with regard to the medium-term budgetary framework and incorporating spending reviews into the budgetary process. Poland is the only Member State without a fully-fledged independent fiscal council and with no known plans to create one, even though it has independent fiscal institutions covering some of its functions.

(10)

A decrease in the working-age population in Poland is expected to limit growth potential in the decades to come. The performance of the Polish labour market has been strong in recent years. Employment rates have continued to increase, but several recent policy measures may reduce labour force participation, especially that of women, the low-skilled and older people. Lowering the statutory retirement age in late 2017 is expected to encourage some older workers to exit the labour force. The Polish social protection system provides only limited incentives to take up work. The new child benefit is expected to reduce poverty and inequality, but it may also have a negative effect on the labour market participation of parents, mostly women. The size of the child allowance and limited means-testing offsets work incentives built into other social benefits. The obligation to attend pre-school for 5-year-olds was removed as of September 2016 and formal childcare enrolment for children under the age of three remains among the lowest in the Union. Despite measures taken, labour market segmentation continues to be high, with negative effects on productivity and the accumulation of human capital. Obstacles to wider use of permanent contracts remain. The codification committee is preparing new draft individual and collective labour codes. This is an opportunity to address these obstacles.

(11)

The average effective retirement age has increased in recent years, but it remains too low. A higher effective retirement age is crucial for economic growth, the adequacy of future pensions and the fiscal sustainability of the pension system. However, the recent decision to lower the statutory retirement age to 60 for women and 65 for men goes in the opposite direction and may negatively affect the effective retirement age. The costly special social insurance system for farmers (KRUS) is another reason for low labour mobility and hidden unemployment in agriculture.

(12)

The education system has significantly improved over the last two decades, with the basic skills of 15-year-olds well above the Union average and one of the lowest early school leaving rates in the Union. Nevertheless, there is still room to improve the way pupils are equipped with skills that are adequate for the rapidly changing labour market. The forthcoming changes concerning primary and secondary education give rise to major organisational challenges and shorten the period of general education, which may have a negative impact on educational equality. Additional changes to adapt vocational education and training to labour market needs have also been announced, but their potential to address existing shortcomings remains to be seen. The Government has launched consultations on the higher education reform to improve the performance of the sector and its labour market relevance. Poland features insufficient participation in adult learning and the average level of older adults’ basic skills is low, hampering their employability.

(13)

Weaknesses in spatial planning increase the administrative burden related to the need for construction permits. Land-use plans cover a limited part of Poland’s territory and are often of low quality. In areas without them, construction permits are granted on the basis of one-off administrative decisions on land development, which create risk and uncertainty for investors. The draft Construction Code aims at consolidating spatial planning processes and easing the administrative burden for investors. The reform offers the chance to improve matters, depending on the final version of the law and its implementation.

(14)

The business environment is generally favourable. However in 2016, investment activity declined significantly due to less use of the Union structural funds, resulting, inter alia, from the transition between programming periods, and increased uncertainty among private investors. Furthermore, business confidence was affected by the increase in the number of regulatory changes and limited public consultations on a number of key laws. Legal certainty and trust in the quality and predictability of regulatory, tax and other policies and institutions are important factors that could allow an increase in the investment rate. The rule of law and an independent judiciary are also essential in this context. Addressing serious concerns related to the rule of law will help improve legal certainty.With the Government aiming to increase its role in the economy, ensuring the economic viability of investment decisions will be important. There continues to be a significant regulatory burden in several areas.

(15)

The road network has developed rapidly thanks to Union funding, but the road fatality rate is still among the highest in the Union, resulting in high social costs. Despite the availability of significant Union funds, the railway sector continues to face major bottlenecks in project implementation. There also remains the challenge of ensuring the long lifetime of railway assets, given a missing multiannual railway infrastructure maintenance programme.

(16)

Around 60 % of Poland’s installed fossil fuels capacity is older than 30 years. It therefore requires significant investment in the coming years. In 2016, the electricity interconnection level was among the lowest in the EU. Together with a significant amount of capacities to be decommissioned and increasing electricity demand, this contributes to the poor outlook in terms of ensuring power generation adequacy. Achievement of the binding national 2020 target for renewable energy is at risk. Following the launch of the liquefied natural gas terminal, Poland has significantly improved the security of its gas supply. It has also developed its national gas transmission and distribution network. However, the work on regionally important gas interconnectors has not advanced according to schedule.

(17)

In the context of the 2017 European Semester, the Commission has carried out a comprehensive analysis of Poland’s economic policy and published it in the 2017 country report. It has also assessed the 2017 Convergence Programme, the 2017 National Reform Programme and the follow-up given to the recommendations addressed to Poland in previous years. It has taken into account not only their relevance for sustainable fiscal and socioeconomic policy in Poland, but also their compliance with Union rules and guidance, given the need to strengthen the Union’s overall economic governance by providing Union-level input into future national decisions.

(18)

In the light of this assessment, the Council has examined the 2017 Convergence Programme and its opinion (5) is reflected in particular in recommendation (1) below,

HEREBY RECOMMENDS that Poland take action in 2017 and 2018 to:

1.

Pursue a substantial fiscal effort in 2018, in line with the requirements of the preventive arm of the Stability and Growth Pact, taking into account the need to strengthen the ongoing recovery and to ensure the sustainability of Poland’s public finances. Take steps to improve the efficiency of public spending and limit the use of reduced VAT rates.

2.

Take steps to increase labour market participation, in particular for women, the low-qualified and older people, including by fostering adequate skills and removing obstacles to more permanent types of employment. Ensure the sustainability and adequacy of the pension system by taking measures to increase the effective retirement age and by starting to reform the preferential pension arrangements.

3.

Take measures to remove barriers to investment, particularly in the transport sector.

Done at Brussels, 11 July 2017.

For the Council

The President

T. TÕNISTE


(1)  OJ L 209, 2.8.1997, p. 1.

(2)  Regulation (EU) No 1176/2011 of the European Parliament and of the Council of 16 November 2011 on the prevention and correction of macroeconomic imbalances (OJ L 306, 23.11.2011, p. 25).

(3)  Regulation (EU) No 1303/2013 of the European Parliament and of the Council of 17 December 2013 laying down common provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund, the European Agricultural Fund for Rural Development and the European Maritime and Fisheries Fund and laying down general provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund and the European Maritime and Fisheries Fund and repealing Council Regulation (EC) No 1083/2006 (OJ L 347, 20.12.2013, p. 320).

(4)  Net government expenditure comprises total government expenditure excluding interest expenditure, expenditure on Union programmes fully matched by Union funds revenue and non-discretionary changes in unemployment benefit expenditure. Nationally financed gross fixed capital formation is smoothed over a 4-year period. Discretionary revenue measures or revenue increases mandated by law are factored in. One-off measures on both the revenue and expenditure sides are netted out.

(5)  Under Article 9(2) of Regulation (EC) No 1466/97.


9.8.2017   

EN

Official Journal of the European Union

C 261/92


COUNCIL RECOMMENDATION

of 11 July 2017

on the 2017 National Reform Programme of Portugal and delivering a Council opinion on the 2017 Stability Programme of Portugal

(2017/C 261/21)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty on the Functioning of the European Union, and in particular Articles 121(2) and 148(4) thereof,

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies (1), and in particular Article 5(2) thereof,

Having regard to Regulation (EU) No 1176/2011 of the European Parliament and of the Council of 16 November 2011 on the prevention and correction of macroeconomic imbalances (2), and in particular Article 6(1) thereof,

Having regard to the recommendation of the European Commission,

Having regard to the resolutions of the European Parliament,

Having regard to the conclusions of the European Council,

Having regard to the opinion of the Employment Committee,

Having regard to the opinion of the Economic and Financial Committee,

Having regard to the opinion of the Social Protection Committee,

Having regard to the opinion of the Economic Policy Committee,

Whereas:

(1)

On 16 November 2016, the Commission adopted the Annual Growth Survey, marking the start of the 2017 European Semester for economic policy coordination. The priorities of the Annual Growth Survey were endorsed by the European Council on 9-10 March 2017. On 16 November 2016, on the basis of Regulation (EU) No 1176/2011, the Commission adopted the Alert Mechanism Report, in which it identified Portugal as one of the Member States for which an in-depth review would be carried out. On the same date, the Commission also adopted a recommendation for a Council Recommendation on the economic policy of the euro area, which was endorsed by the European Council on 9-10 March 2017. On 21 March 2017, the Council adopted the Recommendation on the economic policy of the euro area (‘Recommendation for the euro area’) (3).

(2)

As a Member State whose currency is the euro and in view of the close interlinkages between the economies in the economic and monetary union, Portugal should ensure the full and timely implementation of the Recommendation for the euro area, as reflected in recommendations (1) to (4) below.

(3)

The 2017 country report for Portugal was published on 22 February 2017. It assessed Portugal’s progress in addressing the country-specific recommendations adopted by the Council on 12 July 2016, the follow-up given to the country-specific recommendations adopted in previous years and Portugal’s progress towards its national Europe 2020 targets. It also included an in-depth review under Article 5 of Regulation (EU) No 1176/2011, the results of which were also published on 22 February 2017. The Commission’s analysis led it to conclude that Portugal is experiencing excessive macroeconomic imbalances. In particular, the large stocks of net external liabilities, private and public debt and a high share of non-performing loans constitute vulnerabilities in a context of high but decreasing unemployment and slow productivity growth. Potential growth lags behind its pre-crisis level, affected by persistent bottlenecks and rigidities in the product and labour markets, together with external imbalances. The current account balance shows some improvements, though additional effort is required for a more significant adjustment of net external liabilities. Following a significant adjustment in recent years, unit labour costs started increasing due to sluggish productivity growth and rising wages. Private debt is falling, and government debt has stabilised, in a context of remaining deleveraging needs. The stock of non-performing loans remains high and, together with low profitability and relatively thin capital buffers, they pose risks to banks’ balance sheets. Labour market conditions have improved but youth and long-term unemployment, as well as the share of temporary employees, are still high.

(4)

On 28 April 2017, Portugal submitted its 2017 National Reform Programme and its 2017 Stability Programme. In order to take account of their interlinkages, the two programmes have been assessed at the same time. Portugal’s 2017 National Reform Programme includes commitments both for the short and medium term. In particular, it includes measures to improve the management of public finances and the business environment and to tackle corporate debt. It commits with ambitious reforms to modernise the public administration, increase social protection, upgrade the skill level of the labour force and improve governance in state-owned enterprises. It also covers the challenges identified in the 2017 country report and the Recommendation for the euro area, including the need to relaunch investment and ensure the sustainability of public finances. If fully implemented within the indicated timelines, these measures would help address Portugal’s macroeconomic imbalances and country-specific recommendations. Based on the assessment of Portugal’s policy commitments, the Commission confirms its previous assessment that at this stage no further steps are warranted in the framework of the macroeconomic imbalances procedure. The implementation of the policy reform agenda will be followed closely by means of specific monitoring.

(5)

Relevant country-specific recommendations have been addressed in the programming of the European Structural and Investment Funds (ESI Funds) for the 2014-2020 period. As provided for in Article 23 of Regulation (EU) No 1303/2013 of the European Parliament and of the Council (4), where it is necessary to support the implementation of relevant Council recommendations, the Commission may request a Member State to review and propose amendments to its Partnership Agreement and relevant programmes. The Commission has provided further details on how it would make use of that provision in guidelines on the application of the measures linking effectiveness of the ESI Funds to sound economic governance.

(6)

Following the abrogation of the excessive deficit procedure, Portugal is currently in the preventive arm of the Stability and Growth Pact and subject to the transitional debt rule. In its 2017 Stability Programme, Portugal plans to attain a headline deficit of 1,5 % of GDP and 1,0 % of GDP in 2017 and 2018, respectively, and a further improvement to a surplus of 0,4 % of GDP in 2020. Those plans do not include the potential deficit-increasing impact of bank support measures. The medium-term budgetary objective — a structural surplus of 0,25 % of GDP — is planned to be achieved by 2021. The 2017 Stability Programme projects the general government debt-to-GDP ratio to reach 127,9 % in 2017 and 124,2 % in 2018, which would then be at 117,6 % in 2020. The macroeconomic scenario underpinning those budgetary projections is plausible for 2017 but favourable for the following years. At the same time, the measures needed to support the planned deficit targets from 2017 onwards have not been sufficiently specified.

(7)

On 12 July 2016, the Council recommended Portugal to achieve an annual fiscal adjustment of at least 0,6 % of GDP towards the medium-term budgetary objective in 2017. Based on the Commission 2017 spring forecast, there is a risk of a significant deviation from that recommended adjustment in 2017.

(8)

In 2018, in light of its fiscal situation and in particular of its debt level, Portugal is expected to further adjust towards its medium-term budgetary objective of a structural surplus of 0,25 % of GDP. According to the commonly agreed adjustment matrix under the Stability and Growth Pact, that adjustment translates into a requirement of a nominal growth rate of net primary government expenditure (5) which does not exceed 0,1 % in 2018. It would correspond to a structural adjustment of at least 0,6 % of GDP. Under unchanged policies, there is a risk of a significant deviation from that requirement in 2018. Portugal is prima facie not forecast to comply with the transitional debt rule in 2017 and 2018. Overall, the Council is of the opinion that further measures will be needed as of 2017 to comply with the provisions of the Stability and Growth Pact. However, as foreseen in Regulation (EC) No 1466/97, the assessment of the budgetary plans and outcomes should take account of the Member State’s budgetary balance in light of the cyclical conditions. As recalled in the Commission communication on the 2017 European Semester accompanying these country-specific recommendations, the assessment of the 2018 Draft Budgetary Plan and subsequent assessment of 2018 budget outcomes will need to take due account of the goal of achieving a fiscal stance that contributes to both strengthening the ongoing recovery and ensuring the sustainability of Portugal’s public finances. In that context, the Council notes that the Commission intends to carry out an overall assessment in line with Regulation (EC) No 1466/97, in particular in light of the cyclical situation of Portugal.

(9)

A solid budgetary consolidation relies on the timely and strict implementation of the new budget framework law, reviewing and rationalising public spending and further improving revenue collection. Portugal has started a spending review exercise, mainly based on efficiency measures that involve the health and education ministries, state-owned enterprises and (centralised) public procurement and real estate management. However, this spending review does not yet have a broad coverage since it only covers the central government and focuses on efficiency savings stemming from streamlining services. In the health sector, the Government has adopted measures aimed at promoting disease prevention and public health policies. Moreover, several steps have been taken to make the healthcare sector more efficient and sustainable, for example via centralised procurement or greater use of generics. At the same time, while the hospital reform continues, budgetary planning and implementation in hospitals remains an important issue. Late payments (arrears) continue to increase denoting weaknesses in accounting control mechanisms and managerial practices. Accurate and balanced budgeting, improved controls and effective enforcement of the commitment control law could help reduce arrears and improve efficiency and quality in this sector. High and rising ageing costs still pose a risk to fiscal sustainability. In the medium term, higher fiscal risks are expected to be related largely to the costs of financing pensions. Long-term fiscal risks in the country are assessed as low, largely thanks to pension reforms and assuming a no-policy-change scenario and that there is a further reduction in the reliance of the pension system on budgetary transfers. The restructuring of state-owned enterprises to make them fiscally sustainable has not still been fully addressed. State-owned enterprises supervised by the Ministry of Finance’s monitoring unit (UTAM) had a total indebtedness of EUR 32 billion in the second quarter of 2016. A framework with established targets to guarantee the financial sustainability of state-owned enterprises could help to decrease their dependence on state budget transfers and tackle the large debt stock.

(10)

The Portuguese labour market continued to recover in 2016, with a steady improvement in labour market indicators and in particular a decrease in the unemployment rate. A significant share of new jobs created are on open-ended contracts. However, the stock of temporary contracts remains stable at high levels. High labour market segmentation adversely affects workers’ career prospects and incomes, in particular among the young. In January 2017, Portugal redesigned its employment support programme to promote hiring on open-ended contracts. However, its expected impact on reducing segmentation appears limited, as relatively few people are expected to be covered by that programme. Although recent labour market reforms improved incentives for job creation, some aspects of the legal framework may still discourage firms from hiring workers on open-ended contracts. In particular, employers face uncertain firing costs in cases where individual dismissal of permanent workers is deemed unfair. This is due in part to the possibility of a worker being reinstated if the dismissal is deemed unfair, and to inefficiencies in legal proceedings.

(11)

With the drop in unemployment since 2014, the absolute number of the long-term unemployed is also decreasing. However, more than half of unemployed people have been jobless for a year or more, and this share is not decreasing with the recovery. High levels of long-term and youth unemployment increase the risk that jobless people will disengage from the labour market, gradually losing their skills and employability, thus also weighing negatively on potential growth. Youth unemployment, while still sizeable, is declining owing to a range of measures taken in previous years, including through outreach measures in the context of the Youth Guarantee (6). This may partly explain why the share of young people neither in employment nor in education or training (NEET) is lower than the Union average. Portugal is also taking action to streamline active labour market policies and to address the issue of the youth unemployment. This includes the introduction of employment incentives (through social security rebates) in April 2017, targeted to the hiring of young and long-term unemployed on open-ended contracts. However, to ensure effective activation of the long-term unemployed, it is crucial that public employment services cooperate effectively with social services to better identify and address the needs of this group. An important step in this direction would be to create the announced one-stop shops for employment.

(12)

By following the announced schedule, the Government has increased the minimum wage for the third consecutive year in 2017. The last increase, above expected inflation and average productivity increases is expected to make the minimum wage increasingly binding, as the share of employees covered already amounted to a fifth of the total in 2016. Minimum wage increases contribute to reducing high in-work poverty and may positively impact on aggregate demand. However, they may entail employment risks, in particular for the low-skilled. These risks did not materialise in the current context of recovery, but remain a challenge. The Government is monitoring the impact of minimum wage developments through quarterly reports, which are published and discussed with social partners.

(13)

Portugal has made significant improvements in its school education outcomes, as shown by the most recent results of the OECD Programme for International Student Assessment (PISA). However, the country remains among the OECD countries with the highest rates of grade repetition, which is proven to increase the risk of early school leaving and weighs significantly on education costs. The overall skills level of the labour force remains among the lowest in Europe and hampers the country’s innovation potential and competitiveness. Moreover, digital skills remain a barrier for upgrading the labour force skills. About 22 % of people in the Portuguese labour force have no digital skills (mostly because they do not use the internet regularly), about double the Union average. The Government has taken action to promote adult education and digital skills, namely by establishing the ‘Qualifica’ programme and a national initiative for digital skills (INCoDe2030 Initiative). To ensure they are effective, it will be crucial that they provide quality opportunities for upskilling and reskilling workers, in line with labour market needs. The Government has also taken a number of measures to support cooperation between higher education and the business sector, namely regarding their research outcomes and activities. However, the university structures would need to adapt in order to favour this cooperation.

(14)

Although the situation is improving, the large stock of corporate non-performing loans, together with low profitability, exposure to sovereign debt risks and weak capital buffers remains challenging to the banking sector. The deterioration in the quality of assets, in particular in the corporate sector, weighs on the banking sector’s profitability. It is one of the factors, along with low capital buffers, that impede the productive allocation of credit and investment. Although the level of non-performing loans is declining, the non-performing loan ratio remains high (19,5 % against 19,6 % at the end of 2015) and is still rising for some sectors of the economy, in particular firms active in the construction and real estate sectors of the economy. Some steps have been taken to address the large stock of non-performing loans. However, a comprehensive strategy is still needed to ensure a significant reduction of the impaired debt stock, including fostering the development of secondary markets in order to enable banks to sell parts of their distressed portfolios.

(15)

Credit conditions have been gradually improving on the demand and the supply side but access to finance for SMEs still needs to be improved. The percentage of Portuguese SMEs which did not manage to obtain the full amount of loans requested rose from 34 % to 42 %, against a falling Union average that reached 30 % in 2016. Innovative and competitive firms with strong growth potential would benefit from better access to capital. This would reduce their dependence on debt financing and improve their access to finance, thereby helping firms to scale up and internationalise. The difference in the cost of capital between investments financed by debt and the ones financed through equity in 2016 was the fifth highest in the Union and well above the Union average. Although the changes to the tax regime have reduced incentives to debt financing, it is too early to see any impact on the relatively high debt bias in corporate taxation. In July 2016, the authorities launched the Capitalizar programme designed mainly to encourage private investment. The programme establishes new credit lines for SMEs, creates specialised funds that would participate in private investments and introduces changes to the tax regime to support investment. In parallel, the Government has put in place another programme (Programa Semente) to provide finance to start-ups and small enterprises in their early stages (seed capital). The programme will help them to raise equity finance by offering tax reliefs, up to a maximum of 3 years, to individual investors who purchase new shares in such companies. Both programmes are expected to improve the financing of companies in Portugal, provided that they are swiftly and fully implemented.

(16)

In January 2017, as part of a package of measures to tackle barriers in services markets, the Commission provided guidance to all Member States on national reform needs for regulating professional services with high growth and jobs potential. The reform recommendations address a broad range of requirements based on a comparative analysis following the spirit and the work carried out in the mutual evaluation exercise with Member States in the last 3 years. Portugal has participated actively in this exercise. Portugal explains in its national action plan that, as major reforms and review of the regulated professions have been carried out since 2011, it does not expect major modifications in the coming years. The guidance offered by the Commission complements the 2017 European Semester evaluations by specifically addressing the requirements applicable to those professions. There are significant regulatory and administrative barriers in accessing service provision in several sectors. Some reforms targeting construction and the most restrictive business services, including regulated professions, were agreed during the financial assistance programme, but have been either halted or reversed. The by-laws regulating certain professions are less ambitious than the framework law in terms of opening up those professions to competition. They also raise concerns as regards the direct or indirect effect of restricting competition in the market for professional services.

(17)

Low levels of efficiency and transparency persist in the Portuguese public administration. Competition in public procurement remains limited. Despite progress, there are still shortcomings as regards the transparency and reliability of public procurement data and procedures. Transparency in concession contracts and public-private partnerships is still hindered by contracting authorities lacking the expertise needed to manage complex contracts. The use of direct awards in public procurement remains high. A revision of the Public Procurement Code has recently been put in place and its implementation will be monitored closely by the Commission. Administrative burden and the lack of homogeneous implementing practices across the country are delaying the reform of procedures. Despite some progress, there have been delays in simplifying local and central administrative procedures with little coordination between the various layers of the public administration. The Portuguese authorities have approved a new simplification programme, called Simplex+. This contains a fairly ambitious package of measures for citizens and businesses. These measures are promising and an early implementation of the Simplex+ package needs to be ensured so that the programme can start having an effective impact. Most of the measures included in the package relevant to businesses are now starting to be implemented. The performance of the Portuguese justice system is still below the Union average. In Portugal, efficiency indicators for civil, commercial and tax litigation cases remain poor. This has a negative impact on business dynamics and attracting foreign direct investment. The efficiency of the tax and administrative courts remains challenging in terms of resolution rate, and proceedings are still too long. It still takes up to 40 months to conclude insolvency court proceedings, raising doubts about the efficiency of Sireve frameworks

(18)

Portugal is making progress with increasing transparency and combating corruption in public administration, but there is no overarching strategy. Anti-corruption appears to have become a real priority for the national prosecution services and more efficient processes for case and resource management have been put in place. Yet, it remains to be seen whether these will be reflected by improvements in final conviction rates for high-level corruption and the application of penalties that provide stronger deterrents. On the preventive side, the corruption prevention plans set up in each public institution have so far been largely formalistic. They are not fully adapted to each organisation nor are they complemented by adequate monitoring.

(19)

In the context of the 2017 European Semester, the Commission has carried out a comprehensive analysis of Portugal’s economic policy and published it in the 2017 country report. It has also assessed the 2017 Stability Programme, the 2017 National Reform Programme and the follow-up given to the recommendations addressed to Portugal in previous years. It has taken into account not only their relevance for sustainable fiscal and socioeconomic policy in Portugal, but also their compliance with Union rules and guidance, given the need to strengthen the Union’s overall economic governance by providing Union-level input into future national decisions.

(20)

In the light of this assessment, the Council has examined the 2017 Stability Programme and its opinion (7) is reflected in particular in recommendation (1) below.

(21)

In the light of the Commission’s in-depth review and this assessment, the Council has examined the 2017 National Reform Programme and the 2017 Stability Programme. Its recommendations made under Article 6 of Regulation (EU) No 1176/2011 are reflected in recommendations (1) to (4) below,

HEREBY RECOMMENDS that Portugal take action in 2017 and 2018 to:

1.

Ensure the durability of the correction of the excessive deficit. Pursue a substantial fiscal effort in 2018 in line with the requirements of the preventive arm of the Stability and Growth Pact, taking into account the need to strengthen the ongoing recovery and to ensure the sustainability of Portugal’s public finances. Use windfall gains to accelerate the reduction of the general government debt-to-GDP ratio. Step up efforts to broaden the expenditure review to cover a significant share of general government spending across several policies. Strengthen expenditure control, cost effectiveness and adequate budgeting, in particular in the health sector with a focus on the reduction of arrears in hospitals and ensure the sustainability of the pension system. To increase the financial sustainability of state-owned enterprises set sector-specific efficiency targets in time for the 2018 budget, improving state-owned enterprises’ overall net income and decreasing the burden on the state budget.

2.

Promote hiring on open-ended contracts, including by reviewing the legal framework. Ensure the effective activation of the long-term unemployed. Together with social partners, ensure that minimum wage developments do not harm employment of the low-skilled.

3.

Step up efforts to clean up the balance sheets of credit institutions by implementing a comprehensive strategy addressing non-performing loans, including by enhancing the secondary market for bad assets. Improve the access to capital, in particular for start-ups and small and medium-sized enterprises.

4.

Implement a roadmap to further reduce the administrative burden and tackle regulatory barriers in construction and business services by the end of 2017. Increase the efficiency of insolvency and tax proceedings.

Done at Brussels, 11 July 2017.

For the Council

The President

T. TÕNISTE


(1)  OJ L 209, 2.8.1997, p. 1.

(2)  OJ L 306, 23.11.2011, p. 25.

(3)  OJ C 92, 24.3.2017, p. 1.

(4)  Regulation (EU) No 1303/2013 of the European Parliament and of the Council of 17 December 2013 laying down common provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund, the European Agricultural Fund for Rural Development and the European Maritime and Fisheries Fund and laying down general provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund and the European Maritime and Fisheries Fund and repealing Council Regulation (EC) No 1083/2006 (OJ L 347, 20.12.2013, p. 320).

(5)  Net government expenditure comprises total government expenditure excluding interest expenditure, expenditure on Union programmes fully matched by Union funds revenue and non-discretionary changes in unemployment benefit expenditure. Nationally financed gross fixed capital formation is smoothed over a 4-year period. Discretionary revenue measures or revenue increases mandated by law are factored in. One-off measures on both the revenue and expenditure sides are netted out.

(6)  Council Recommendation of 22 April 2013 on establishing a Youth Guarantee (OJ C 120, 26.4.2013, p. 1).

(7)  Under Article 5(2) of Regulation (EC) No 1466/97.


9.8.2017   

EN

Official Journal of the European Union

C 261/98


COUNCIL RECOMMENDATION

of 11 July 2017

on the 2017 National Reform Programme of Romania and delivering a Council opinion on the 2017 Convergence Programme of Romania

(2017/C 261/22)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty on the Functioning of the European Union, and in particular Articles 121(2) and 148(4) thereof,

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies (1), and in particular Article 9(2) thereof,

Having regard to the recommendation of the European Commission,

Having regard to the resolutions of the European Parliament,

Having regard to the conclusions of the European Council,

Having regard to the opinion of the Employment Committee,

Having regard to the opinion of the Economic and Financial Committee,

Having regard to the opinion of the Social Protection Committee,

Having regard to the opinion of the Economic Policy Committee,

Whereas:

(1)

On 16 November 2016, the Commission adopted the Annual Growth Survey, marking the start of the 2017 European Semester for economic policy coordination. The priorities of the Annual Growth Survey were endorsed by the European Council on 9-10 March 2017. On 16 November 2016, on the basis of Regulation (EU) No 1176/2011 of the European Parliament and of the Council (2), the Commission adopted the Alert Mechanism Report, in which it did not identify Romania as one of the Member States for which an in-depth review would be carried out.

(2)

The 2017 country report for Romania was published on 22 February 2017. It assessed Romania’s progress in addressing the country-specific recommendations adopted by the Council on 12 July 2016, the follow-up given to the country-specific recommendations adopted in previous years and Romania’s progress towards its national Europe 2020 targets.

(3)

On 5 May 2017, Romania submitted its 2017 National Reform Programme and its 2017 Convergence Programme. In order to take account of their interlinkages, the two programmes have been assessed at the same time.

(4)

Relevant country-specific recommendations have been addressed in the programming of the European Structural and Investment Funds (ESI Funds) for the 2014-2020 period. As provided for in Article 23 of Regulation (EU) No 1303/2013 of the European Parliament and of the Council (3), where it is necessary to support the implementation of relevant Council recommendations, the Commission may request a Member State to review and propose amendments to its Partnership Agreement and relevant programmes. The Commission has provided further details on how it would make use of that provision in guidelines on the application of the measures linking effectiveness of the ESI Funds to sound economic governance.

(5)

Between 2009 and 2015, Romania benefited from three balance-of-payments assistance programmes jointly run by the Commission and the International Monetary Fund and supported by the World Bank. Disbursements were only made under the first programme in 2009-2011, while those in 2011-13 and 2013-15 were precautionary. Post-programme surveillance on behalf of the Commission to monitor Romania’s capacity to repay the loans granted under the first programme started in October 2015 and will continue until at least 70 % of the loan, which is due in spring 2018, has been repaid.

(6)

Romania is currently in the preventive arm of the Stability and Growth Pact. In its 2017 Convergence Programme, the Government plans a headline deficit of 2,9 % of GDP both in 2017 and 2018, and its gradual reduction thereafter, to 2,0 % of GDP by 2020. The medium-term budgetary objective, a structural deficit of 1 % of GDP, is not expected to be reached by 2020, which is the programme horizon. The recalculated (4) structural balance is expected to reach -2,6 % by 2020. According to the Convergence Programme, the general government debt-to-GDP ratio is expected to increase from 37,6 % of GDP in 2016 to 38,3 % of GDP in 2018 and then decline to 37,6 % of GDP in 2020. The macroeconomic scenario underpinning those budgetary projections is favourable. The main downward risk to the macroeconomic outlook stems from a lower impact of fiscal and structural measures on near- and medium-term growth prospects. At the same time, the measures needed to support the planned deficit targets have not been sufficiently specified. Moreover, the draft unified wage law poses a significant downward risk to the fiscal forecast.

(7)

On 12 July 2016, the Council recommended Romania to limit the deviation from the medium-term budgetary objective in 2016 and achieve an annual fiscal adjustment of 0,5 % of GDP in 2017 unless the medium-term budgetary objective is respected with a lower effort. Based on 2016 outturn data Romania was found to be in significant deviation from the medium-term budgetary objective. In line with Article 121(4) TFEU and Article 10(2) of Regulation (EC) No 1466/97, the Commission issued a warning to Romania on 22 May 2017 that a significant deviation from the medium-term budgetary objective was observed in 2016. On 16 June 2017, the Council adopted a subsequent Recommendation (5) confirming the need for Romania to take the necessary measures to ensure that the nominal growth rate of net primary government expenditure (6) does not exceed 3,3 % in 2017, corresponding to an annual structural adjustment of 0,5 % of GDP. Based on the Commission 2017 spring forecast, there is a risk of a significant deviation from the recommended adjustment in 2017.

(8)

In 2018, in the light of its fiscal situation, Romania is expected to further adjust towards its medium-term budgetary objective of a structural deficit of 1 % of GDP. According to the commonly agreed adjustment matrix under the Stability and Growth Pact, that adjustment translates into a requirement of a nominal growth rate of net primary government expenditure which does not exceed 4,3 %. It would correspond to a structural adjustment of 0,5 % of GDP. Under unchanged policies, there is a risk of a significant deviation from that requirement in 2018. In addition, the Commission 2017 spring forecast projected a general government deficit of 3,5 % and 3,7 % of GDP for 2017 and 2018, above the 3 %-of-GDP Treaty reference value. Overall, the Council is of the opinion that significant further measures will be needed as of 2017 to comply with the provisions of the Stability and Growth Pact, in light of a strongly deteriorating fiscal outlook, in line with the Recommendation addressed to Romania on 16 June 2017 with a view to correcting the significant deviation from the adjustment path toward the medium-term budgetary objective.

(9)

Romania’s fiscal framework is sound, but is not fully enforced. The 2016 budget substantially departed from the medium-term objective of a structural deficit of 1 % of GDP in breach of the deficit rule in the national fiscal framework. The 2017 budget further deviated from the national fiscal rules. In 2016, as in previous years, the Romanian authorities did not send an update of the fiscal strategy to the parliament by the statutory August deadline. As a result, the medium-term fiscal strategy has not been guiding the annual budget process.

(10)

On the back of comfortable capital buffers and increasing profitability, the health of the banking sector continued to improve in 2016. The Romanian authorities committed to perform a comprehensive asset quality review and stress test of the banking sector in 2018. The law on debt discharge entered into force in May 2016, but risks to the banking sector have been largely mitigated by a ruling of the constitutional court that courts will have to assess whether borrowers comply with the legal provisions on hardship. The CHF-denominated loan conversion law adopted by the parliament in October 2016 was recently judged non-constitutional. However, recurrent legislative initiatives continue to challenge legal predictability, with possible negative impacts on investor sentiment.

(11)

Tax evasion has been prevalent in Romania, reducing tax revenues and tax fairness and distorting the economy. In addressing a country-specific recommendation to strengthen tax compliance and collection, Romania has made limited progress. In 2016, the procedures for VAT registration and reimbursement were amended, and a nationwide roll-out of electronic cash registers connected to the tax authority is underway. From 2017, a special scheme applies to sectors such as the hotel, catering and other related industries, where the duty is established irrespective of revenue bracket. In addition, restrictions were also adopted on self-employment and family businesses, to discourage tax avoidance. An improvement in compliance was observed in 2016 for tax declarations and payments, but the joint tax and labour inspections and audits failed to achieve improved results. Furthermore, the turnover threshold for the tax regime on micro enterprises was substantially increased while the rate was cut, enabling tax compliance to the detriment of budgetary revenues. The sectorial and categorical approaches to business taxation risk imposing an administrative burden on both businesses and the tax authority, and are not conducive to improving tax collection.

(12)

The distribution of disposable household income (accounting for the size of the household) is particularly unequal in Romania, thereby impairing its potential for sustainable and inclusive growth. The richest 20 % of the population have an income over eight times higher than that of the poorest 20 %. This ratio is significantly higher than the Union average. Inequalities are driven to a large extent by unequal access to healthcare, education, services and the labour market. Moreover, the difference between income inequality before and after taxes and social transfers is amongst the smallest in the Union. The social reference index at the basis of the main social benefits has not been updated since its introduction in 2008. Undeclared work, including envelope wages, remains prevalent and continues to weigh on tax revenue, distort the economy, and undermine the fairness and effectiveness of the tax and benefits system. Joint national inspections by the Fiscal Administration and labour inspectorates were undertaken as part of a pilot project, but this has failed to have a systemic impact so far. Resources are not focused on sectors with the highest risks of tax evasion, limited focus is given to envelope wages, and coercive measures prevail over preventive ones.

(13)

Labour market outcomes improved in 2016, when the unemployment rate reached its pre-crisis low. The labour force continues to shrink, as the population is ageing and emigration remains high. Low unemployment is matched by one of the highest inactivity rates in the Union. Employment and activity rates for young people, women, the low-skilled, people with disabilities and Roma in particular are well below the Union average. The number of young people not in employment, education or training remains very high.

(14)

Although declining, the risk of poverty or social exclusion has been very high, in particular for families with children, people with disabilities, Roma, and the rural population. In 2016, a comprehensive anti-poverty package was adopted in a policy shift toward the enhanced provision of services catered to specific groups of the population. It envisages a pilot project setting up integrated services in marginalised communities. A nationwide roll-out would significantly improve the currently low provision of integrated services. Addressing successive country-specific recommendations, the law on the minimum inclusion income was adopted, to enter into force in 2018. The minimum inclusion income increases the adequacy and coverage of social assistance. It combines passive support with compulsory active labour market measures and inspections. Its activation potential is modest though, as the target is to reach 25 % of the beneficiaries by active labour market policy measures by 2021.

(15)

Activation policies have been strengthened in the context of reforming the National Employment Agency. Reforms include more tailor-made support and integrated services for jobseekers and employers. The outreach and service offered to young people not in employment, education or training is being improved. However, activation policies offered to groups furthest away from labour market remain limited and recently proposed activation measures no longer focus on these specific groups. Their scale and link to social services is insufficient to significantly improve labour force participation for these groups in particular.

(16)

Pension adequacy and old-age poverty have significant gender dimensions as, all else being equal, lower retirement ages for women result in lower pension entitlements. Romania is among the very few Member States that do not provide for the convergence of women’s retirement ages to men’s. The law on equalisation of pensionable ages for men and women was submitted to the parliament in 2013. So far it has only been adopted by the Senate.

(17)

Given productivity developments, income convergence and the competitiveness position of Romania, increases in public- and private-sector wages deserve special attention. Public-sector wage increases have the potential to spill over to the private sector, impacting Romania’s competitiveness. Romania’s minimum wage level, while still among the lowest in the Union, has increased significantly in recent years. Ad hoc minimum wage increases have significantly raised the share of workers earning the minimum wage and led to strong compression at the bottom of the wage distribution recently. Addressing a country-specific recommendation, a tripartite working group to establish a mechanism for minimum wage-setting based on objective economic, labour market and social criteria was established in early 2016 but work suffered significant delays and needs to be adequately taken up. Social dialogue remains characterised by low collective bargaining at sector level and by institutional weaknesses that limit the effectiveness of reforms.

(18)

Sufficient basic skills are key to finding and keeping good and stable jobs and successfully participating in economic and social life. International surveys point to severe deficiencies in basic skills among Romanian teenagers. High early school leaving rates, low higher-education attainment and high emigration result in the under-supply of skilled labour. Access to quality mainstream education is limited in rural areas and for Roma children in particular. The difficulty to attract good teachers in rural areas and Roma-predominant schools, coupled with segregation and often discriminatory attitudes, result in lower educational achievement of Roma children. In response to repeated country-specific recommendations, Romania adopted and started implementing a strategy on early school leaving. Recent measures include integrated interventions, a warm-meal pilot programme, improved reimbursement of commuting costs, and social vouchers to encourage poor children’s pre-school education. Project-based measures with Union funding to improve the quality of teaching in disadvantaged schools are planned for autumn 2017, and the modernisation of the curricula, albeit incomplete, is underway. Anti-segregation legislation was improved, including the reinforcement of school inspectorates’ mandate in this area. However, a monitoring methodology is still missing. Further steps are needed for sustained progress in fighting socioeconomic inequalities in education. The Youth Guarantee has only partially reached early school leavers so far and second-chance programmes are not readily available. The vocational education and training system is not sufficiently aligned with labour market needs, and participation in adult learning is very low.

(19)

Romania’s population is exposed to poor health outcomes. Accessible quality healthcare is impaired by shortages of health professionals, under-funding and over-reliance on hospitals, and corruption, affecting people with low income and rural areas in particular. Beside informal payments to medical professionals, corruption concerns public procurement in hospitals, insurance fraud, and bribery for certificates giving entitlement to benefits. Addressing a country-specific recommendation and in the context of ex-ante conditionality for the 2014-2020 Union funding period, Romania took some policy action to shift from inpatient to outpatient care. Regional healthcare plans were developed to identify needs for infrastructure and services, and the implementation of the national health strategy is being monitored. In line with the national anti-corruption strategy 2016-2020, legislation was adopted to revamp the feedback system on informal payments, and health professionals’ salaries were improved. The anti-corruption strategy comprises comprehensive measures in healthcare, including fostering the accountability and transparent recruitment of hospital managers. Nonetheless, the reinforcement of community care, ambulatory care and referral systems is still at an initial stage, informal payments remain prevalent, transparency in hospital management is yet to be ensured, and a national health workforce strategy is pending adoption.

(20)

Romania’s administrative and policy-making capacity has been suffering from opaque processes and decision-making, burdensome administrative procedures, little recourse to quality evidence, weak coordination across sectorial policies, and widespread corruption. Progress in public administration reform has been limited. Organisational structures remain unstable, which affects the independence and effectiveness of public administration. Civil service strategies were launched in 2016, but the legislative framework does not yet incorporate some of their main objectives, especially as regards objective criteria for staff recruitment, assessment and reward of performance. Pay levels are proposed to be harmonised to some extent, but there is no clear link between performance and remuneration at central and local levels. The capacity and authority of the National Agency of Civil Servants still needs to be strengthened. Some of the transparency measures in policy making, initiated in 2016, have been set for reversion. Strategic planning and regulatory impact assessment are not firmly established in administrative practice.

(21)

Insufficient transport infrastructure in quality and quantity has been among the key bottlenecks to economic development in Romania. To confront the associated deficiencies, in response to a country-specific recommendation, Romania adopted the transport master plan in autumn 2016. To speed up investment in road infrastructure, the management of infrastructure investments was split from the authority in charge of infrastructure administration. A body was established in 2016 to reform the railway system, to be operational by mid-2017.

(22)

Romania has had one of the highest investment ratios in the Union lately. However, in 2016, public investment declined, also due to a low implementation of Union funds. High absorption and efficient use of Union funding are critical for Romania to tap its development potential, in key sectors such as transport or waste in particular. The quality of public investment has been impaired by management deficiencies and changing priorities, among other reasons. In response to a country-specific recommendation, little progress was made with strengthening project prioritisation and preparation in public investment. Since August 2016, ministries have been required to consider the investment priorities in their spending plans, but no other steps have been taken to enhance the role of the Ministry of Finance in investment prioritisation and to better coordinate the preparation of public investment projects across ministries. The adoption of the national waste management plan and waste prevention programme expected by the end of 2016 is still pending. The plans are also needed to improve governance and regulatory enforcement to channel national and Union funds to attain Union-level environmental standards.

(23)

Efficient public procurement is key for attaining strategic objectives and addressing key policy challenges to Romania, including efficient public spending, the modernisation of public administration, the fight against corruption, and fostering innovation and sustainable and inclusive growth. It is also instrumental to citizens’ trust in public authorities and democracy. Romania took steps to implement the public procurement strategy and action plan lately. As a follow-up to the public procurement law in force since May 2016, implementing legislation on public procurement and procurement in utilities sectors was adopted in June 2016, the secondary legislation on concession contracts was adopted by the end of 2016, and the national agenda for public procurement provides for corruption prevention and control. However, several key measures in the strategy are still pending, such as reinforced controls and other anti-corruption measures, the complete implementation of e-procurement, and the training of public procurement officers.

(24)

Over 45 % of Romania’s population live in rural areas, which remain far behind urban areas in terms of employment and education, access to services and infrastructure, and material well-being. In response to a country-specific recommendation to improve access to integrated public services, extend basic infrastructure and foster economic diversification in rural areas in particular, in 2016 Romania adopted a comprehensive set of measures on rural development, modernising small farms, supporting non-agricultural SMEs, investment in infrastructure, including social services and education, and formalising employment. Their longer-term success will hinge on the capacity to roll-out the pilot actions on a larger scale, and to effectively target and absorb available Union funding.

(25)

State-owned enterprises (SOEs) play a major role in the economy, in particular in key infrastructure sectors. Weaknesses in SOE governance translate into their lower profitability relative to private counterparts, with negative impacts on public finance. Addressing a country-specific recommendation, Romania achieved substantial progress to improve SOE corporate governance. The by-laws supporting the main legislation on SOE corporate governance were swiftly adopted in autumn 2016. The legislative framework follows good international practice on transparency in the appointment of board members and the management of SOEs, and provides the Ministry of Finance with specific powers of monitoring and enforcement. Measures were also taken to raise awareness of the new rules among local authorities, and budgetary information on SOEs was made public. However, delays in the appointment of professional managers raise concern with regard to further implementation.

(26)

Romania’s competitiveness has been suffering from weaknesses in non-cost competitiveness and structural barriers to the transition to a higher-value-added economy, complex administrative procedures being among these. Addressing a country-specific recommendation in 2016, Romania adopted several legislative acts to simplify administrative procedures and facilitate the relationship between citizens and public administration, albeit limited to a small number of procedures.

(27)

Corruption persists at all levels and remains an obstacle for doing business. Romania made substantial progress on much of the reform of the judicial system and in tackling high-level corruption. However, key steps remain to address concerns in these areas so that reforms are sustainable and irreversible. Some progress was made on developing further measures to prevent and fight corruption, in particular within local government, but significant challenges remain with regard to the effective implementation of the national anti-corruption strategy adopted in 2016. Efforts are required with regard to respect for judicial independence in Romania’s public life, finalising reforms of the criminal and civil codes and ensuring efficiency in the implementation of court decisions. Under the Cooperation and Verification Mechanism, Romania receives recommendations in the areas of judicial reform and the fight against corruption. These areas are therefore not covered in the country-specific recommendations for Romania.

(28)

In the context of the 2017 European Semester, the Commission has carried out a comprehensive analysis of Romania’s economic policy and published it in the 2017 country report. It has also assessed the 2017 Convergence Programme, the 2017 National Reform Programme and the follow-up given to the recommendations addressed to Romania in previous years. It has taken into account not only their relevance for sustainable fiscal and socioeconomic policy in Romania, but also their compliance with Union rules and guidance, given the need to strengthen the Union’s overall economic governance by providing Union-level input into future national decisions.

(29)

In the light of this assessment, the Council has examined the 2017 Convergence Programme and its opinion (7) is reflected in particular in recommendation (1) below,

HEREBY RECOMMENDS that Romania take action in 2017 and 2018 to:

1.

In 2017, ensure compliance with the Council Recommendation of 16 June 2017 with a view to correcting the significant deviation from the adjustment path toward the medium-term budgetary objective. In 2018, pursue a substantial fiscal effort in line with the requirements of the preventive arm of the Stability and Growth Pact. Ensure the full application of the fiscal framework. Strengthen tax compliance and collection. Fight undeclared work, including by ensuring the systematic use of integrated controls.

2.

Strengthen targeted activation policies and integrated public services, focusing on those furthest away from the labour market. Adopt legislation equalising the pension age for men and women. Establish a transparent mechanism for minimum wage-setting, in consultation with social partners. Improve access to quality mainstream education, in particular for Roma and children in rural areas. In healthcare, shift to outpatient care and curb informal payments.

3.

Adopt legislation to ensure a professional and independent civil service, applying objective criteria. Strengthen project prioritisation and preparation in public investment. Ensure the timely full and sustainable implementation of the national public procurement strategy.

Done at Brussels, 11 July 2017.

For the Council

The President

T. TÕNISTE


(1)  OJ L 209, 2.8.1997, p. 1.

(2)  Regulation (EU) No 1176/2011 of the European Parliament and of the Council of 16 November 2011 on the prevention and correction of macroeconomic imbalances (OJ L 306, 23.11.2011, p. 25).

(3)  Regulation (EU) No 1303/2013 of the European Parliament and of the Council of 17 December 2013 laying down common provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund, the European Agricultural Fund for Rural Development and the European Maritime and Fisheries Fund and laying down general provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund and the European Maritime and Fisheries Fund and repealing Council Regulation (EC) No 1083/2006 (OJ L 347, 20.12.2013, p. 320).

(4)  Cyclically-adjusted balance net of one-off and temporary measures, recalculated by the Commission using the commonly agreed methodology.

(5)  Council Recommendation of 16 June 2017 with a view to correcting the significant observed deviation from the adjustment path toward the medium-term budgetary objective in Romania (OJ C 216, 6.7.2017, p. 1).

(6)  Net government expenditure comprises total government expenditure excluding interest expenditure, expenditure on Union programmes fully matched by Union funds revenue and non-discretionary changes in unemployment benefit expenditure. Nationally financed gross fixed capital formation is smoothed over a 4-year period. Discretionary revenue measures or revenue increases mandated by law are factored in. One-off measures on both the revenue and expenditure sides are netted out.

(7)  Under Article 9(2) of Regulation (EC) No 1466/97.


9.8.2017   

EN

Official Journal of the European Union

C 261/105


COUNCIL RECOMMENDATION

of 11 July 2017

on the 2017 National Reform Programme of Slovenia and delivering a Council opinion on the 2017 Stability Programme of Slovenia

(2017/C 261/23)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty on the Functioning of the European Union, and in particular Articles 121(2) and 148(4) thereof,

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies (1), and in particular Article 5(2) thereof,

Having regard to Regulation (EU) No 1176/2011 of the European Parliament and of the Council of 16 November 2011 on the prevention and correction of macroeconomic imbalances (2), and in particular Article 6(1) thereof,

Having regard to the recommendation of the European Commission,

Having regard to the resolutions of the European Parliament,

Having regard to the conclusions of the European Council,

Having regard to the opinion of the Employment Committee,

Having regard to the opinion of the Economic and Financial Committee,

Having regard to the opinion of the Social Protection Committee,

Having regard to the opinion of the Economic Policy Committee,

Whereas:

(1)

On 16 November 2016, the Commission adopted the Annual Growth Survey, marking the start of the 2017 European Semester for economic policy coordination. The priorities of the Annual Growth Survey were endorsed by the European Council on 9-10 March 2017. On 16 November 2016, on the basis of Regulation (EU) No 1176/2011, the Commission adopted the Alert Mechanism Report, in which it identified Slovenia as one of the Member States for which an in-depth review would be carried out. On the same date, the Commission also adopted a recommendation for a Council Recommendation on the economic policy of the euro area, which was endorsed by the European Council on 9-10 March 2017. On 21 March 2017, the Council adopted the Recommendation on the economic policy of the euro area (‘Recommendation for the euro area’) (3).

(2)

As a Member State whose currency is the euro and in view of the close interlinkages between the economies in the economic and monetary union, Slovenia should ensure the full and timely implementation of the Recommendation for the euro area, as reflected in recommendations (1) to (3) below.

(3)

The 2017 country report for Slovenia was published on 22 February 2017. It assessed Slovenia’s progress in addressing the country-specific recommendations adopted by the Council on 12 July 2016, the follow-up given to the country-specific recommendations adopted in previous years and Slovenia’s progress towards its national Europe 2020 targets. It also included an in-depth review under Article 5 of Regulation (EU) No 1176/2011, the results of which were also published on 22 February 2017. The Commission’s analysis led it to conclude that Slovenia is experiencing macroeconomic imbalances. In particular, weaknesses in the banking sector, corporate debt, and fiscal risks constitute vulnerabilities. Stock imbalances are gradually unwinding in light of resumed growth. The corporate sector has undergone a substantial debt reduction, and private investment, including in the form of foreign direct investment, has resumed, although stocks from inbound foreign direct investment remain low compared to regional peers. Public debt has peaked in 2015, and a downward adjustment is expected in the coming years. Progress on the front of banking sector restructuring has coincided with a rapidly falling share of non-performing loans, which is expected to continue to decline. Relevant measures have been taken by the Government to consolidate and restructure the banking sector, and to improve the governance of state-owned enterprises. However, further policy action is needed to address corporate debt and remaining weaknesses in the financial sector, to ensure the long-term sustainability of public finances, and improve the business environment.

(4)

Slovenia submitted its 2017 Stability Programme on 28 April 2017 and its 2017 National Reform Programme on 3 May 2017. In order to take account of their interlinkages, the two programmes have been assessed at the same time.

(5)

Relevant country-specific recommendations have been addressed in the programming of the European Structural and Investment Funds (ESI Funds) for the 2014-2020 period. As provided for in Article 23 of Regulation (EU) No 1303/2013 of the European Parliament and of the Council (4), where it is necessary to support the implementation of relevant Council recommendations, the Commission may request a Member State to review and propose amendments to its Partnership Agreement and relevant programmes. The Commission has provided further details on how it would make use of that provision in guidelines on the application of the measures linking effectiveness of the ESI Funds to sound economic governance.

(6)

Slovenia is currently in the preventive arm of the Stability and Growth Pact and subject to the transitional debt rule. In its 2017 Stability Programme, the Government expects that the headline deficit will improve to 0,8 % of GDP in 2017 and then reach a surplus of 0,4 % of GDP in 2020. The medium-term budgetary objective — a balanced budget in structural terms, which does not respect the requirements of the Stability and Growth Pact — is planned to be reached by 2020. However, based on the recalculated (5) structural balance, the medium-term budgetary objective would not be met by the programme horizon. According to the 2017 Stability Programme, the general government debt-to-GDP ratio is expected to fall to 77,0 % of GDP in 2017 and continue to fall to 67,5 % of GDP in 2020. The macroeconomic scenario underpinning those budgetary projections is plausible. At the same time, the measures needed to support the planned targets from 2017 onwards have not been sufficiently specified.

(7)

The 2017 Stability Programme indicates that the budgetary impact of the exceptional inflow of refugees is significant in 2016 and 2017 and provides adequate evidence of the scope and nature of these additional budgetary costs. According to the Commission, the eligible additional expenditure for the exceptional inflow of refugees in 2016 amounted to 0,07 % of GDP. This amount is unchanged compared to the 2017 Draft Budgetary Plan, which confirmed the projections of the 2016 Stability Programme. For 2017, the Stability Programme included a request for 0,07 % of GDP, of which the Commission will consider the incremental impact amounting to 0,01 % of GDP. The provisions set out in Articles 5(1) and 6(3) of Regulation (EC) No 1466/97 cater for this additional expenditure, in that the inflow of refugees and security-related measures are related to unusual events, their impact on Slovenia’s public finances is significant and sustainability would not be compromised by allowing for a temporary deviation from the adjustment path towards the medium-term budgetary objective. Therefore, the required adjustment towards the medium-term budgetary objective for 2016 has been reduced to take into account those additional budgetary costs. Regarding 2017, a final assessment, including on the eligible amounts, will be made in spring 2018 on the basis of observed data as provided by the Slovenian authorities.

(8)

On 12 July 2016, the Council recommended Slovenia to achieve an annual fiscal adjustment of at least 0,6 % of GDP towards the medium-term budgetary objective in 2017. Based on the Commission 2017 spring forecast, there is a risk of some deviation from that requirement in 2017.

(9)

In 2018, in the light of its fiscal situation and in particular of its debt level, Slovenia is expected to further adjust towards an appropriate medium-term budgetary objective. According to the commonly agreed adjustment matrix under the Stability and Growth Pact, that adjustment translates into a requirement of a nominal growth rate of net primary government expenditure (6) which does not exceed 0,6 %. It would correspond to a structural adjustment of 1 % of GDP. Under unchanged policies, there is a risk of a significant deviation from that requirement in 2018. Slovenia is projected to comply with the debt rule in 2017 and 2018. Overall, the Council is of the opinion that Slovenia needs to stand ready to take further measures in 2017 and that further measures will be needed in 2018 to comply with the provisions of the Stability and Growth Pact. However, as foreseen in Regulation (EC) No 1466/97, the assessment of the budgetary plans and outcomes should take account of the Member State’s budgetary balance in the light of the cyclical conditions. As recalled in the Commission Communication on the 2017 European Semester accompanying these country-specific recommendations, the assessment of the 2018 Draft Budgetary Plan and subsequent assessment of 2018 budget outcomes will need to take due account of the goal to achieve a fiscal stance that contributes to both strengthening the ongoing recovery and ensuring the sustainability of Slovenia’s public finances. In that context, the Council notes that the Commission intends to carry out an overall assessment in line with Regulation (EC) No 1466/97, in particular in the light of the cyclical situation of Slovenia. Furthermore, there is significant uncertainty regarding the cyclical position in the specific case of Slovenia because of the particularly large economic contraction in 2008-2013 and the major structural and financial-sector reforms being implemented.

(10)

The Fiscal Rules Act adopted in July 2015 introduced a medium-term budgetary framework for the general government. In order to make it operational, certain amendments to the Public Finance Act are necessary. Initially the Government committed to having the revised Public Finance Act adopted within six months of the adoption of the Fiscal Rules Act. However, this deadline was repeatedly postponed and the revised act has not yet been submitted to the Parliament for deliberation. The revised Public Finance Act constitutes one of the legal vehicles transposing into national legislation Council Directive 2011/85/EU (7), which Member States were obliged to complete by the end of 2013. The members of the Fiscal Council were appointed on 21 March 2017.

(11)

The high public debt at 79,7 % of GDP in 2016 represents a source of vulnerability for the public finances in Slovenia. The country’s population is ageing faster than that of most Member States. Slovenia faces high risks on the long-term sustainability of public finances and its long-term sustainability gap indicator is the highest of all Member States, stemming from the projected increase in pension-related public spending, healthcare and long-term care expenditure.

(12)

The Government has presented proposals to reform the healthcare system. The draft Healthcare and Health Insurance Act, which is the central piece of the reform, was put to public consultation in February 2017 and is scheduled to be forwarded to the National Assembly by summer 2017. Respecting the envisaged timing is important and should allow the act to become law still in 2017. In December 2016, the proposals to amend the Health Services Act and the Patient Rights Act were presented and the new Pharmacies Act was adopted. Remaining challenges concern the governance and performance of hospitals, primary care as a gatekeeper for inpatient care, hospital payment systems, health technology assessments, and information systems. In addition, the benefits from centralised public procurement of medical products and services remain largely untapped while a new centralised public procurement for medicines is under preparation that could help procurement to become more transparent and cost-efficient. Advancing in long-term care reform is also a significant challenge. To date, there is no integrated long-term care system in Slovenia. A pilot project to determine the long-term care needs is being prepared.

(13)

The White Paper on pensions was adopted by the Government in April 2016 and has opened a public consultation on the future of the pension system. However, concrete legislative proposals are still lacking. Challenges on the way ahead are to ensure the long-term sustainability and adequacy of the pension system by adjusting the statutory pension age to life expectancy gains and promoting later retirement, to boost the coverage of the supplementary pension schemes, to adequately address varying career paths and to reduce old-age poverty risks.

(14)

Labour market and social trends continued to improve. Job creation has picked up and unemployment is decreasing. The rate of people at risk of poverty and social exclusion decreased but remains above the Union average for the elderly. The improving labour market offers an opportunity to provide employment for older workers, but their participation rates remain low. Entering retirement via the unemployment insurance system has become increasingly common in recent years. Long-term unemployment remains above pre-crisis levels and represents more than half of all unemployed. More than 40 % of all long-term unemployed are aged over 50 and almost half of them are unemployed for two years or more. An analysis and an action plan that aims to increase the employment rate of older workers has been prepared and discussed with social partners. Timely implementation of the action plan can help to improve the activation of older workers. The employment rate of low-skilled workers remains low and well below the pre-crisis level and the Union average. The active labour market policy implementation plan adopted in January 2016 continues the current approach, while expenditure in this field remains low. Older and low-skilled workers continue to be underrepresented in active labour market policy measures. Labour market segmentation remains a challenge despite the reform in 2013.

(15)

The level of non-performing loans, while still high, is on a solid downward path. The Bank of Slovenia has implemented a number of measures that are giving banks incentives to reduce their non-performing loans sustainably. Debt reduction pressures have started to ease but credit flows to firms continue to contract. The progress in debt reduction has been uneven across individual firms. The consolidation and restructuring of the banking sector are progressing with the merger of three banks in 2016. Slovenia committed to sell at least 50 % of its shareholding in the largest state-owned bank by 31 December 2017 and another 25 % minus one share by 31 December 2018. Revisions to the legislative framework further reinforced the corporate restructuring capacity of the Bank Asset Management Company. Non-performing loans remain high among SMEs. To address the issue, a systematic approach to SME work out of non-performing loans has been prepared with the help of the World Bank. In addition, the Government adopted a bill to set up a central credit register to enable more efficient risk management and reduce the risk of indebtedness.

(16)

Access to alternative financing sources for a creditworthy business is very limited. The Slovenian Enterprise Fund and the Slovenska izvozna in razvojna banka (SID bank) have mainly introduced new debt instruments for SMEs including measures such as microcredits. One seed capital scheme was implemented in 2016 by the Slovenian Enterprise Fund with under 50 SME beneficiaries. Other alternative financing instruments, including venture capital and equity with use of the ESI Funds, could be a major source of additional financing but remain largely untapped.

(17)

The implementation of the 2015-2020 strategy for the development of public administration is underway, and some progress has been made. However, some specific measures, like the adoption of the Civil Service Act, have been further delayed. The Government programme for reducing the administrative burden is estimated to have created total savings of EUR 365 million between 2009 and 2015 and almost 60 % of 318 measures to reduce the administrative burden have been achieved. However, private investment continues to be hindered by complex and lengthy administrative procedures, especially in construction and spatial planning. While the efficiency and quality of the justice system have further improved, in commercial cases it still takes a long time to schedule first hearings and claims cannot be submitted by electronic means. Despite the adoption of some key anti-corruption reforms like the zero-tolerance-to-corruption programme, the perception of corruption remains negative and appears to influence business decisions. After the initial progress in modernising the regulation of professions, the reforms have slowed down. Lifting restrictive barriers with regard to the regulation of professions could support competition in those professions’ markets.

(18)

State involvement in the economy remains high despite the privatisation programme initiated in 2013. The state is the largest employer, asset manager and corporate debt holder in Slovenia. Combined with weak corporate governance, high state ownership has had considerable fiscal and economic implications. They are estimated at EUR 13 billion or about one third of GDP in 2007-2014, primarily due to financial-sector stabilisation measures and foregone profits of state-owned enterprises compared to their private peers. The performance of state-owned enterprises has started to improve, underpinned by a new corporate governance system, but risks remain. By the end of 2015 results showed an improved profitability of the enterprises under the management of the Slovenian Sovereign Holding, albeit falling short of the intermediate target set in the management strategy. An asset management plan for 2017, quantifying the performance indicators for each separate state-owned enterprise and updating a list of assets for divestment, was approved by the Government in January 2017. At the same time, a revision of the asset management strategy, first approved by the Parliament in 2015, is still pending, with the Government having deferred its decision to the second half of 2017. Although a new president of the management board was appointed at the end of February 2017, the full supervisory board is not yet in place.

(19)

In the context of the 2017 European Semester, the Commission has carried out a comprehensive analysis of Slovenia’s economic policy and published it in the 2017 country report. It has also assessed the 2017 Stability Programme, the 2017 National Reform Programme and the follow-up given to the recommendations addressed to Slovenia in previous years. It has taken into account not only their relevance for sustainable fiscal and socioeconomic policy in Slovenia, but also their compliance with Union rules and guidance, given the need to strengthen the Union’s overall economic governance by providing Union -level input into future national decisions.

(20)

In the light of this assessment, the Council has examined the 2017 Stability Programme and its opinion (8) is reflected in particular in recommendation (1) below.

(21)

In the light of the Commission’s in-depth review and this assessment, the Council has examined the 2017 National Reform Programme and the 2017 Stability Programme. Its recommendations made under Article 6 of Regulation (EU) No 1176/2011 are reflected in recommendations (1) and (3) below,

HEREBY RECOMMENDS that Slovenia take action in 2017 and 2018 to:

1.

Pursue a substantial fiscal effort in 2018 in line with the requirements of the preventive arm of the Stability and Growth Pact, taking into account the need to strengthen the ongoing recovery and to ensure the sustainability of Slovenia’s public finances. Adopt and implement the proposed reform of the healthcare system and adopt the planned reform of long-term care, increasing cost-effectiveness, accessibility and quality care. Fully tap the potential of centralised procurement in the health sector. Adopt the necessary measures to ensure the long-term sustainability and adequacy of the pension system.

2.

Intensify efforts to increase the employability of low-skilled and older workers, particularly through targeted lifelong learning and activation measures.

3.

Improve the financing conditions, including by facilitating a durable resolution of non-performing loans and access to alternative sources of financing. Ensure the full implementation of the bank asset management company strategy. Reduce the administrative burden on business deriving from rules on spatial planning and construction permits and ensure good governance of state-owned enterprises.

Done at Brussels, 11 July 2017.

For the Council

The President

T. TÕNISTE


(1)  OJ L 209, 2.8.1997, p. 1.

(2)  OJ L 306, 23.11.2011, p. 25.

(3)  OJ C 92, 24.3.2017, p. 1.

(4)  Regulation (EU) No 1303/2013 of the European Parliament and of the Council of 17 December 2013 laying down common provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund, the European Agricultural Fund for Rural Development and the European Maritime and Fisheries Fund and laying down general provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund and the European Maritime and Fisheries Fund and repealing Council Regulation (EC) No 1083/2006 (OJ L 347, 20.12.2013, p. 320).

(5)  Cyclically-adjusted balance net of one-off and temporary measures, recalculated by the Commission using the commonly agreed methodology.

(6)  Net government expenditure comprises total government expenditure excluding interest expenditure, expenditure on Union programmes fully matched by Union funds revenue and non-discretionary changes in unemployment benefit expenditure. Nationally financed gross fixed capital formation is smoothed over a 4-year period. Discretionary revenue measures or revenue increases mandated by law are factored in. One-off measures on both the revenue and expenditure sides are netted out.

(7)  Council Directive 2011/85/EU of 8 November 2011 on requirements for budgetary frameworks of the Member States (OJ L 306, 23.11.2011, p. 41).

(8)  Under Article 5(2) of Regulation (EC) No 1466/97.


9.8.2017   

EN

Official Journal of the European Union

C 261/110


COUNCIL RECOMMENDATION

of 11 July 2017

on the 2017 National Reform Programme of Slovakia and delivering a Council opinion on the 2017 Stability Programme of Slovakia

(2017/C 261/24)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty on the Functioning of the European Union, and in particular Articles 121(2) and 148(4) thereof,

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies (1), and in particular Article 5(2) thereof,

Having regard to the recommendation of the European Commission,

Having regard to the resolutions of the European Parliament,

Having regard to the conclusions of the European Council,

Having regard to the opinion of the Employment Committee,

Having regard to the opinion of the Economic and Financial Committee,

Having regard to the opinion of the Social Protection Committee,

Having regard to the opinion of the Economic Policy Committee,

Whereas:

(1)

On 16 November 2016, the Commission adopted the Annual Growth Survey, marking the start of the 2017 European Semester for economic policy coordination. The priorities of the Annual Growth Survey were endorsed by the European Council on 9-10 March 2017. On 16 November 2016, on the basis of Regulation (EU) No 1176/2011 of the European Parliament and of the Council (2), the Commission adopted the Alert Mechanism Report, in which it did not identify Slovakia as one of the Member States for which an in-depth review would be carried out. On the same date, the Commission also adopted a recommendation for a Council Recommendation on the economic policy of the euro area, which was endorsed by the European Council on 9-10 March 2017. On 21 March 2017, the Council adopted the Recommendation on the economic policy of the euro area (‘Recommendation for the euro area’) (3).

(2)

As a Member State whose currency is the euro and in view of the close interlinkages between the economies in the economic and monetary union, Slovakia should ensure the full and timely implementation of the Recommendation for the euro area, as reflected in recommendations (1) to (2) below.

(3)

The 2017 country report for Slovakia was published on 22 February 2017. It assessed Slovakia’s progress in addressing the country-specific recommendations adopted by the Council on 12 July 2016, the follow-up given to the country-specific recommendations adopted in previous years and Slovakia’s progress towards its national Europe 2020 targets.

(4)

On 26 April 2017, Slovakia submitted its 2017 National Reform Programme and its 2017 Stability Programme. In order to take account of their interlinkages, the two programmes have been assessed at the same time.

(5)

Relevant country-specific recommendations have been addressed in the programming of the European Structural and Investment Funds (ESI Funds) for the 2014-2020 period. As provided for in Article 23 of Regulation (EU) No 1303/2013 of the European Parliament and of the Council (4), where it is necessary to support the implementation of relevant Council recommendations, the Commission may request a Member State to review and propose amendments to its Partnership Agreement and relevant programmes. The Commission has provided further details on how it would make use of that provision in guidelines on the application of the measures linking effectiveness of the ESI Funds to sound economic governance.

(6)

Slovakia is currently in the preventive arm of the Stability and Growth Pact. In its 2017 Stability Programme, the Government plans to improve the headline deficit to 1,3 % of GDP in 2017, and gradually further to 0 % of GDP in 2019 and 2020. The medium-term budgetary objective — a structural deficit of 0,5 % of GDP — is expected to be reached in 2018. According to the 2017 Stability Programme, the general government debt-to-GDP ratio is expected to gradually decline to 46 % by 2020. The macroeconomic scenario underpinning those budgetary projections is plausible.

(7)

On 12 July 2016, the Council recommended Slovakia to achieve an annual fiscal adjustment of 0,5 % of GDP towards the medium-term budgetary objective in 2017. Based on the Commission spring 2017 forecast, there is a risk of some deviation from that recommendation in 2017.

(8)

In 2018, in the light of its fiscal situation, Slovakia is expected to further adjust towards its medium-term budgetary objective of a structural deficit of 0,5 % of GDP. According to the commonly agreed adjustment matrix under the Stability and Growth Pact, that adjustment translates into a requirement of a nominal growth rate of net primary government expenditure (5) which does not exceed 2,9 %. It would correspond to a structural adjustment of 0,5 % of GDP. Under unchanged policies, there is a risk of significant deviation from that requirement over the period 2017-2018 taken together. Overall, the Council is of the opinion that Slovakia needs to stand ready to take further measures to ensure compliance in 2017 and that further measures will be needed in 2018 to comply with the provisions of the Stability and Growth Pact. However, as foreseen in Regulation (EC) No 1466/97, the assessment of the budgetary plans and outcomes should take account of the Member State’s budgetary balance in the light of the cyclical conditions. As recalled in the Commission Communication on the 2017 European Semester accompanying these country-specific recommendations, the assessment of the 2018 Draft Budgetary Plan and subsequent assessment of 2018 budget outcomes will need to take due account of the goal of achieving a fiscal stance that contributes to both strengthening the ongoing recovery and ensuring the sustainability of Slovakia’s public finances. In that context, the Council notes that the Commission intends to carry out an overall assessment in line with Regulation (EC) No 1466/97, in particular in the light of the cyclical situation of Slovakia.

(9)

Slovakia’s public finances still face risks in the long term. Healthcare expenditure continues to pose a risk to the long-term sustainability of public finances as increasing the cost-effectiveness of healthcare in Slovakia remains a challenge. Some steps have been taken to rationalise hospital care and lower costs, but concrete results are not yet visible. The 2016 spending review has identified potential savings. Nevertheless, progress on the ground in delivering a comprehensive healthcare and health spending reform has been to date protracted with the introduction of the diagnosis-related groups system for payments and the launching of e-health systems making only slow progress. Meanwhile, the deficit of the public pension system is projected to double in the long term, and the retirement age in Slovakia is among the lowest in the Union. Recent adjustments in the pension system have largely been ad hoc and short-term.

(10)

Tax evasion and tax avoidance have fallen, and efforts are being made to raise voluntary compliance. Improvements in tax collection have significantly reduced what was, in the past, a high VAT gap. Limiting VAT fraud appears to have also had a positive impact on the collection of corporate income tax. The financial administration adopts a focus on improving VAT compliance, especially through auditing. At the same time, non-audit activities to strengthen voluntary tax compliance are being explored.

(11)

Despite improvements in the labour market resulting from robust economic recovery and strong job creation, long-term unemployment remains a problem. The long-term unemployment rate continues to be one of the highest in the Union. It particularly affects marginalised Roma, the low-skilled and young people. In addition, regional disparities persist — the unemployment rate in eastern Slovakia is still twice that in Bratislava. Adult participation in lifelong learning and second-chance education remains low. Despite measures encouraging low-wage earners to work and an ongoing public employment services reform, there are still difficulties in introducing individualised support to the long-term unemployed and to vulnerable groups due among others to a high caseload. The Slovak action plan on the integration of the long-term unemployed, largely financed by the European Social Fund, seeks to remedy this via a comprehensive approach to personalised services. This will be achieved by providing specialised counselling, a new profiling system, cooperation with private employment agencies and the delivery of targeted training programmes designed by employers based on regional labour market needs. Roma participation in the Slovak labour market remains very low and progress in increasing their employment rate is slow. Low levels of education and skills and discrimination are factors contributing to their poor labour market outcomes. The low employment rate of women of childbearing age reflects the long parental leave (up to three years) rarely taken up by men, shortage of childcare facilities, especially for children under the age of three, and a low uptake of flexible working-time arrangements.

(12)

The education system is insufficiently geared to increasing Slovakia’s economic potential. Educational outcomes and the level of basic skills remain disappointing by international standards and have deteriorated further in 2012-2015. Moreover, strong regional differences persist. Poor performance is primarily linked to a strong impact of the socioeconomic and ethnic background of students, to issues of equity, access and inclusiveness as well as to the relatively low attractiveness of the teaching profession. Despite the two-step salary increase for teachers in 2016 (4 % in January and 6 % in September) and further increases planned for 2017-2020, uncompetitive salary conditions and limited continuous teacher training are among the factors that make the profession still largely unattractive, especially to prospective young teachers and those residing in the more developed regions of the country. The recently adopted anti-segregation legislation, on the marginalised Roma community, has yet to be fully implemented to bring about positive change and increase their participation in inclusive mainstream education, with a special focus on early childhood education and care as well as pre-school education.

(13)

Slovakia’s public administration is being modernised, but corruption remains a challenge. Perceptions of corruption remain high and act as a major business impediment. Control mechanisms and the enforcement of anti-corruption rules still appear inadequate, and policy initiatives on whistleblowing and letterbox companies may not be enough to resolve the problem. In addition, public procurement practices fall short of best practices in many areas. Training measures are being developed to equip staff to run a more efficient procurement system. However, conflicts of interest, tailor-made tender specifications and excessive use of the lowest price award criteria remain a concern and result in limited quality-based competition. Weaknesses in public procurement are persistently reported as affecting the efficiency of public-resource allocation.

(14)

A frequently changing legislative environment makes it difficult and costly for companies to comply with legislation and legislative and regulatory processes, and insolvency arrangements are often viewed as insufficiently business-friendly. An interministerial working group for doing business, led by the State Secretary of the Ministry of Economy, was recently set up and is expected to present by June 2017 proposals for measures to improve the business environment. High regulatory barriers remain in the business services sector in Slovakia. Specific guidance per profession to address this issue was provided in January 2017, in a Communication from the Commission on reform recommendations for regulation in professional services, as part of a package of measures to tackle barriers in services markets.

(15)

Improving the effectiveness, including the independence of the justice system, remains a challenge for Slovakia, although efforts are being made to address the shortcomings. However, concerns about the efficiency and independence of the judiciary remain. In addition, public administration is still burdened by inefficiency, insufficient capacity and fragmentation. The adoption of the strategy on Human Resource Management in October 2015 and the recent adoption of the Civil Service Act are positive steps forward. The new, politically independent Civil Service Council will supervise the implementation of the principles of the Civil Service Act as well as the Code of Ethics for Civil Servants. The complex, opaque regulatory framework complicates relations between interested parties in the energy market. Recent changes in setting distribution tariffs indicate continued political and business influence. Independence of the energy price regulator is expected to decrease following the adoption of legislation that grants the Government an exclusive right to name the regulator’s chair and grants the Ministries for the Economy and the Environment the right to step into price-setting proceedings.

(16)

In the context of the 2017 European Semester, the Commission has carried out a comprehensive analysis of Slovakia’s economic policy and published it in the 2017 country report. It has also assessed the 2017 Stability Programme, the 2017 National Reform Programme and the follow-up given to the recommendations addressed to Slovakia in previous years. It has taken into account not only their relevance for sustainable fiscal and socioeconomic policy in Slovakia, but also their compliance with Union rules and guidance, given the need to strengthen the Union’s overall economic governance by providing Union-level input into future national decisions.

(17)

In the light of this assessment, the Council has examined the 2017 Stability Programme and its opinion (6) is reflected in particular in recommendation (1) below,

HEREBY RECOMMENDS that Slovakia take action in 2017 and 2018 to:

1.

Pursue a substantial fiscal effort in 2018 in line with the requirements of the preventive arm of the Stability and Growth Pact, taking into account the need to strengthen the ongoing recovery and to ensure the sustainability of Slovakia’s public finances. Improve the cost-effectiveness of the healthcare system, including by implementing the value-for-money project.

2.

Improve activation measures for disadvantaged groups, including by implementing the action plan for the long-term unemployed and by providing individualised services and targeted training. Enhance employment opportunities for women, especially by extending affordable, quality childcare. Improve the quality of education and increase the participation of Roma in inclusive mainstream education.

3.

Improve competition and transparency in public procurement operations and step up the fight against corruption by stronger enforcement of existing legislation. Adopt and implement a comprehensive plan to lower administrative and regulatory barriers for businesses. Improve the effectiveness of the justice system, including a reduction in the length of civil and commercial cases.

Done at Brussels, 11 July 2017.

For the Council

The President

T. TÕNISTE


(1)  OJ L 209, 2.8.1997, p. 1.

(2)  Regulation (EU) No 1176/2011 of the European Parliament and of the Council of 16 November 2011 on the prevention and correction of macroeconomic imbalances (OJ L 306, 23.11.2011, p. 25).

(3)  OJ C 92, 24.3.2017, p. 1.

(4)  Regulation (EU) No 1303/2013 of the European Parliament and of the Council of 17 December 2013 laying down common provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund, the European Agricultural Fund for Rural Development and the European Maritime and Fisheries Fund and laying down general provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund and the European Maritime and Fisheries Fund and repealing Council Regulation (EC) No 1083/2006 (OJ L 347, 20.12.2013, p. 320).

(5)  Net government expenditure comprises total government expenditure excluding interest expenditure, expenditure on Union programmes fully matched by Union funds revenue and non-discretionary changes in unemployment benefit expenditure. Nationally financed gross fixed capital formation is smoothed over a 4-year period. Discretionary revenue measures or revenue increases mandated by law are factored in. One-off measures on both the revenue and expenditure sides are netted out.

(6)  Under Article 5(2) of Regulation (EC) No 1466/97.


9.8.2017   

EN

Official Journal of the European Union

C 261/114


COUNCIL RECOMMENDATION

of 11 July 2017

on the 2017 National Reform Programme of Finland and delivering a Council opinion on the 2017 Stability Programme of Finland

(2017/C 261/25)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty on the Functioning of the European Union, and in particular Articles 121(2) and 148(4) thereof,

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies (1), and in particular Article 5(2) thereof,

Having regard to Regulation (EU) No 1176/2011 of the European Parliament and of the Council of 16 November 2011 on the prevention and correction of macroeconomic imbalances (2), and in particular Article 6(1) thereof,

Having regard to the recommendation of the European Commission,

Having regard to the resolutions of the European Parliament,

Having regard to the conclusions of the European Council,

Having regard to the opinion of the Employment Committee,

Having regard to the opinion of the Economic and Financial Committee,

Having regard to the opinion of the Social Protection Committee,

Having regard to the opinion of the Economic Policy Committee,

Whereas:

(1)

On 16 November 2016, the Commission adopted the Annual Growth Survey, marking the start of the 2017 European Semester for economic policy coordination. The priorities of the Annual Growth Survey were endorsed by the European Council on 9-10 March 2017. On 16 November 2016, on the basis of Regulation (EU) No 1176/2011, the Commission adopted the Alert Mechanism Report, in which it identified Finland as one of the Member States for which an in-depth review would be carried out. On the same date, the Commission also adopted a recommendation for a Council Recommendation on the economic policy of the euro area, which was endorsed by the European Council on 9-10 March 2017. On 21 March 2017, the Council adopted the Recommendation on the economic policy of the euro area (‘Recommendation for the euro area’) (3).

(2)

As a Member State whose currency is the euro and in view of the close interlinkages between the economies in the economic and monetary union, Finland should ensure the full and timely implementation of the Recommendation for the euro area, as reflected in recommendations (1) to (2) below.

(3)

The 2017 country report for Finland was published on 22 February 2017. It assessed Finland’s progress in addressing the country-specific recommendations adopted by the Council on 12 July 2016, the follow-up given to the country-specific recommendations adopted in previous years and Finland’s progress towards its national Europe 2020 targets. It also included an in-depth review under Article 5 of Regulation (EU) No 1176/2011, the results of which were also published on 22 February 2017. The Commission’s analysis led it to conclude that Finland is not experiencing macroeconomic imbalances.

(4)

On 28 April 2017, Finland submitted its 2017 National Reform Programme and its 2017 Stability Programme. In order to take account of their interlinkages, the two programmes have been assessed at the same time.

(5)

Relevant country-specific recommendations have been addressed in the programming of the European Structural and Investment Funds (ESI Funds) for the 2014-2020 period. As provided for in Article 23 of Regulation (EU) No 1303/2013 of the European Parliament and of the Council (4), where it is necessary to support the implementation of relevant Council recommendations, the Commission may request a Member State to review and propose amendments to its Partnership Agreement and relevant programmes. The Commission has provided further details on how it would make use of that provision in guidelines on the application of the measures linking effectiveness of the ESI Funds to sound economic governance.

(6)

Finland is currently in the preventive arm of the Stability and Growth Pact and subject to the debt rule. In its 2017 Stability Programme, the Government plans a deterioration in the headline balance from -1,9 % of GDP in 2016 to -2,3 % in 2017, followed by steady improvement thereafter, reaching -0,2 % in 2020. The medium-term budgetary objective — a deficit of 0,5 % of GDP in structural terms — is projected to be met from 2019 onwards. However, based on the recalculated (5) structural balance, the medium-term budgetary objective will only be achieved as of 2020. According to the 2017 Stability Programme, the general government debt-to-GDP ratio is expected to peak at 64,7 % in 2017 and to decline to 62,7 % in 2020. The macroeconomic scenario underpinning those budgetary projections appears to be favourable especially regarding 2018 and 2019. The scenario is based on an expectation that employment would expand by close to 2 % per year in 2018-2019 which is significantly more than the annual average increase over the past 10 years (+0,2 %).

(7)

On 22 May 2017, the Commission issued a report under Article 126(3) of the TFEU, as Finland’s general government debt exceeded the 60 %-of-GDP reference value. The report concluded, following an assessment of all the relevant factors, that the debt criterion should be considered as complied with.

(8)

The 2017 Stability Programme indicates that the budgetary impact of the exceptional inflow of refugees is significant and provides adequate evidence of the scope and nature of these additional budgetary costs. According to the 2017 Stability Programme, the costs were 0,34 % of GDP in 2016. According to the Commission, the eligible additional expenditure in 2016 amounted to 0,17 % of GDP. The provisions set out in Articles 5(1) and 6(3) of Regulation (EC) No 1466/97 cater for this additional expenditure, in that the inflow of refugees is an unusual event, its impact on Finland’s public finances is significant and sustainability would not be compromised by allowing for a temporary deviation from the adjustment path towards the medium-term budgetary objective. Therefore, the required adjustment towards the medium-term budgetary objective for 2016 has been reduced to take into account these costs. According to the 2017 Stability Programme, the costs related to the exceptional inflow of refugees are projected to decrease by 0,15 % of GDP in 2017. The Commission will make a final assessment on 2017, including on the eligible amounts, in spring 2018 on the basis of observed data as provided by the Finnish authorities.

(9)

In its 2017 Draft Budgetary Plan, Finland requested to avail itself of the flexibility under the preventive arm pursuant to the ‘Commonly agreed position on Flexibility within the Stability and Growth Pact’ endorsed by the ECOFIN Council in February 2016 in view of the planned implementation of major structural reforms with a positive impact on the long-term sustainability of public finances (request for 0,5 % of GDP flexibility) and national expenditures on projects co-financed by the Union under the ESI Funds (request for 0,1 % of GDP flexibility).

(10)

The request for flexibility for structural reforms refers to reforms in the labour market, in particular the Competitiveness Pact and the pension reform. For more than 90 % of employees, the Pact freezes wages for 12 months, and permanently increases the annual working time by 24 hours without compensation. In addition, employees will permanently pay a larger proportion of the contributions to social security. To compensate for the wage freeze and the increased cost burden for employees, the Government lowered the taxes on earned income permanently as from 2017. The pension reform will raise the lowest statutory retirement age from 63 to 65 by 2027; thereafter, the retirement age will be linked to life expectancy. Both reforms came into force in 2017. As a result of the Competitiveness Pact, improved cost competitiveness could lead to higher employment and an increase in real GDP of some 1,5 %-2 % as presented in the 2017 Draft Budgetary Plan. Given the nature of the measure, there are uncertainties surrounding the estimates for employment or GDP, but they seem to be broadly plausible. Therefore, these reforms will have a positive impact on the sustainability of public finances. Furthermore, the results of the detailed assessment of the output gap estimate for 2017 carried out on the basis of the Commission 2017 spring forecast suggest that Finland meets the minimum benchmark in 2017. As an additional assurance to safeguard the 3 %-of-GDP deficit reference value, the Government has publicly committed to take additional measures in 2017, if necessary, to ensure compliance with the fiscal rules, including the observance of the 3 %-of-GDP Treaty reference value. On this basis, Finland can currently be assessed as qualifying for the requested temporary deviation of 0,5 % of GDP in 2017, provided that it adequately implements the agreed reforms, which will be monitored under the European Semester.

(11)

Regarding the request for flexibility for additional investment, the information provided by the 2017 Stability Programme appears to confirm that Finland’s temporary deviation from the adjustment path towards the medium-term budgetary objective in 2017 is being effectively used for the purposes of increasing investments. Therefore, and also taking into account the above-mentioned elements regarding the minimum benchmark and that the detailed assessment of the output gap estimate confirms that Finland is experiencing bad economic times, Finland can currently be assessed as qualifying for a temporary deviation of 0,1 % of GDP in 2017 to take account of national investment expenditure in projects co-financed by the Union. The Commission will carry out an ex post assessment in order to verify the actual amount of the national expenditure in co-financed investment projects and of the related allowance.

(12)

On 12 July 2016, the Council recommended Finland to achieve an annual fiscal adjustment of at least 0,6 % of GDP towards the medium-term budgetary objective in 2017. The Commission 2017 spring forecast indicates scope for an additional temporary deviation of 0,6 % of GDP in 2017 under the structural and investment clauses while ensuring a continued respect of the minimum benchmark (i.e. a structural deficit of 1,1 % of GDP). On that basis, the structural balance would be allowed to deteriorate by 0,5 % of GDP in 2017. Based on the Commission 2017 spring forecast, Finland would be compliant with the preventive arm requirements. If the current updated estimate of the decrease of the budgetary impact in 2017 stemming from the exceptional inflow of refugees were taken into account, the conclusion of the overall assessment would not change. For 2018, Finland should achieve its medium-term budgetary objective, taking into account the allowance in relation to unusual events (granted for 2016) as well as the allowances related to the implementation of the structural reforms and investments (granted for 2017) (6). Based on the Commission 2017 spring forecast, this is consistent with a maximum nominal growth rate of net primary government expenditure (7) of 1,6 %, corresponding to an annual structural adjustment of 0,1 % of GDP. Under unchanged policies, Finland would be compliant with the preventive arm requirements in 2018. If the current updated estimate of the decrease of the budgetary impact in 2017 stemming from the exceptional inflow of refugees were taken into account, the conclusion of the overall assessment would not change. At the same time, Finland is prima facie forecast not to comply with the debt reduction benchmark in 2017 and 2018. Overall, the Council is of the opinion that Finland needs to stand ready to take further measures to ensure compliance.

(13)

Due to an ageing population and a declining workforce, expenditure on pensions, health and long-term care is set to increase from 23 % of GDP in 2013 to 27 % by 2030. In January 2017, a pension reform entered into force that will raise the lowest statutory retirement age from 63 to 65 by 2027 and will link the statutory retirement age to changes in life expectancy. The costs of social and healthcare services, currently a responsibility of the municipalities, amount to 10 % of GDP. Without a reform of the system, that expenditure is forecast to grow by 4,4 % annually in the coming years in nominal terms and increase as a share of GDP. The reforms’ main aims include the reduction of the long-run sustainability gap in public finances through better control of the costs. This will be achieved through the integration of services, larger entities as providers of services and digitalisation. The first batch of legislative proposals for the social and healthcare service reforms was presented to the Parliament in March 2017. These laws will establish the legal framework for the 18 new counties that will take over responsibility for the social and healthcare services from the municipalities as from 2019. The legislative proposals for the most controversial parts of the reform, in particular on the patients’ freedom to choose their service provider, have been submitted to Parliament in the beginning of May 2017 and will need to be adopted in order to be implemented from 2019 as planned.

(14)

Wage increases have been moderate over recent years. The average year-on-year increase in negotiated wages was 0,7 % in 2014-2016. Due to weak growth of labour productivity, cost competitiveness has improved only gradually. In 2016 the social partners signed the Competitiveness Pact aimed at improving Finland’s cost competitiveness in a stepwise manner in 2017. For more than 90 % of employees, the Competitiveness Pact freezes wages for 12 months and increases annual working time permanently by 24 hours without additional compensation. In addition, employees will permanently pay a larger proportion of social contributions. These measures are expected to support the expansion of exports and employment in the coming years. The upcoming wage negotiation round in the latter half of 2017 will be crucial to secure these expected positive effects as the Competitiveness Pact did not fully close the cost-competitiveness gap with peer economies.

(15)

The labour market situation started to improve gradually in 2016, but challenges remain. Employment in the manufacturing sector declined by 21 % between 2008 and 2015. Other sectors such as construction, real estate and healthcare, are showing signs of labour shortages. This highlights the need for targeted active labour market policies and continued investments in adult learning and in vocational training to enable occupational mobility. The ratio of open vacancies to employment was in 2016 almost as high as in 2007, while the unemployment rate was two percentage points higher. This may reflect mismatches between labour demand and supply, low attractiveness of certain vacant jobs or limited incentives to take up work. Continued efforts are needed to ensure better labour market outcomes for the inactive, especially those in the 25-39 age group, the long-term unemployed and migrants. Ensuring improved social and labour market outcomes of people with migrant background will also require continued investments in their education.

(16)

In terms of activation, the complex benefits system, with its different types of allowances, can result in significant inactivity and low-wage traps, as well as bureaucratic problems when reinstating benefits. It would be crucial that such traps be addressed. To increase the incentives to accept job offers, the obligation for the unemployed to accept a job offer and the obligation to participate in activation schemes have been tightened. In addition, the duration of earnings-related unemployment benefits was reduced. Positive incentives, such as allowing the use of basic unemployment benefit as mobility and wage subsidies to activate jobseekers, were introduced. Further increased incentives to accept work could be complemented with the elimination of existing bureaucratic barriers to take up a job or to become an entrepreneur.

(17)

Non-cost competitiveness acts as a drag on export performance and may limit the attractiveness of Finland for foreign investors. Structural change is unfolding, but has slowed down recently. Progress has been made in opening up services sectors such as retail trade and transport to competition, and proposals have been put forward to increase competition in other domestic service sectors. While international comparisons rank Finland among the leading countries in the world in terms of its business environment and investment appeal, the existing stock of inward investments in Finland is below the Union average when compared to the size of the economy.

(18)

In the context of the 2017 European Semester, the Commission has carried out a comprehensive analysis of Finland’s economic policy and published it in the 2017 country report. It has also assessed the 2017 Stability Programme, the 2017 National Reform Programme and the follow-up given to the recommendations addressed to Finland in previous years. It has taken into account not only the relevance of the programmes and follow-up measures for sustainable fiscal and socioeconomic policy in Finland, but also their compliance with Union rules and guidance, given the need to strengthen the Union’s overall economic governance by providing Union-level input into future national decisions.

(19)

In the light of this assessment, the Council has examined the 2017 Stability Programme and its opinion (8) is reflected in particular in recommendation (1) below,

HEREBY RECOMMENDS that Finland take action in 2017 and 2018 to:

1.

Pursue its fiscal policy in line with the requirements of the preventive arm of the Stability and Growth Pact, which entails achieving its medium-term budgetary objective in 2018, taking into account the allowances linked to unusual events, the implementation of the structural reforms and investments for which a temporary deviation is granted. Ensure timely adoption and implementation of the administrative reform to improve cost-effectiveness of social and healthcare services.

2.

Promote the further alignment of wages with productivity developments, fully respecting the role of social partners. Take targeted active labour market policy measures to address employment and social challenges, provide incentives to accept work and promote entrepreneurship.

3.

Continue to improve the regulatory framework and reduce the administrative burden to increase competition in services and to promote investment.

Done at Brussels, 11 July 2017.

For the Council

The President

T. TÕNISTE


(1)  OJ L 209, 2.8.1997, p. 1.

(2)  OJ L 306, 23.11.2011, p. 25.

(3)  OJ C 92, 24.3.2017, p. 1.

(4)  Regulation (EU) No 1303/2013 of the European Parliament and of the Council of 17 December 2013 laying down common provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund, the European Agricultural Fund for Rural Development and the European Maritime and Fisheries Fund and laying down general provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund and the European Maritime and Fisheries Fund and repealing Council Regulation (EC) No 1083/2006 (OJ L 347, 20.12.2013, p. 320).

(5)  Cyclically-adjusted balance net of one-off and temporary measures, recalculated by the Commission using the commonly agreed methodology.

(6)  Finland is allowed to deviate from its medium-term budgetary objective in 2018 because temporary deviations are carried forward for a period of three years.

(7)  Net government expenditure comprises total government expenditure excluding interest expenditure, expenditure on Union programmes fully matched by Union funds revenue and non-discretionary changes in unemployment benefit expenditure. Nationally financed gross fixed capital formation is smoothed over a 4-year period. Discretionary revenue measures or revenue increases mandated by law are factored in. One-off measures on both the revenue and expenditure sides are netted out.

(8)  Under Article 5(2) of Regulation (EC) No 1466/97.


9.8.2017   

EN

Official Journal of the European Union

C 261/119


COUNCIL RECOMMENDATION

of 11 July 2017

on the 2017 National Reform Programme of Sweden and delivering a Council opinion on the 2017 Convergence Programme of Sweden

(2017/C 261/26)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty on the Functioning of the European Union, and in particular Articles 121(2) and 148(4) thereof,

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies (1), and in particular Article 9(2) thereof,

Having regard to Regulation (EU) No 1176/2011 of the European Parliament and of the Council of 16 November 2011 on the prevention and correction of macroeconomic imbalances (2), and in particular Article 6(1) thereof,

Having regard to the recommendation of the European Commission,

Having regard to the resolutions of the European Parliament,

Having regard to the conclusions of the European Council,

Having regard to the opinion of the Employment Committee,

Having regard to the opinion of the Economic and Financial Committee,

Having regard to the opinion of the Social Protection Committee,

Having regard to the opinion of the Economic Policy Committee,

Whereas:

(1)

On 16 November 2016, the Commission adopted the Annual Growth Survey, marking the start of the 2017 European Semester for economic policy coordination. The priorities of the Annual Growth Survey were endorsed by the European Council on 9-10 March 2017. On 16 November 2016, on the basis of Regulation (EU) No 1176/2011, the Commission adopted the Alert Mechanism Report, in which it identified Sweden as one of the Member States for which an in-depth review would be carried out.

(2)

The 2017 country report for Sweden was published on 22 February 2017. It assessed Sweden’s progress in addressing the country-specific recommendation adopted by the Council on 12 July 2016, the follow-up given to the country-specific recommendations adopted in previous years and Sweden’s progress towards its national Europe 2020 targets. It also included an in-depth review under Article 5 of Regulation (EU) No 1176/2011, the results of which were also published on 22 February 2017. The Commission’s analysis led it to conclude that Sweden is experiencing macroeconomic imbalances. In particular, persistent house price growth from already overvalued levels coupled with a continued rise in household debt poses risks of a disorderly correction. Although banks appear adequately capitalised, a disorderly correction could also affect the financial sector as banks have a growing exposure to household mortgages. In such a case, there could be spill-overs to neighbouring countries since Swedish banking groups are of systemic importance in the Nordic-Baltic region. Awareness of mounting risks among the Swedish authorities is high, and in recent years measures have been taken to rein in mortgage debt growth and increase housing construction. However, policy steps implemented so far have not been sufficient to address overheating in the housing sector. Overall, policy gaps remain in the area of housing-related taxation, the macroprudential framework, and in addressing bottlenecks for new housing supply as well as barriers to efficient usage of the existing housing stock.

(3)

On 28 April 2017, Sweden submitted its 2017 National Reform Programme and its 2017 Convergence Programme. In order to take account of their interlinkages, the two programmes have been assessed at the same time.

(4)

Relevant country-specific recommendations have been addressed in the programming of the European Structural and Investment Funds (ESI Funds) for the 2014-2020 period. As provided for in Article 23 of Regulation (EU) No 1303/2013 of the European Parliament and of the Council (3), where it is necessary to support the implementation of relevant Council recommendations, the Commission may request a Member State to review and propose amendments to its Partnership Agreement and relevant programmes. The Commission has provided further details on how it would make use of that provision in guidelines on the application of the measures linking effectiveness of the ESI Funds to sound economic governance.

(5)

Sweden is currently in the preventive arm of the Stability and Growth Pact. In its 2017 Convergence Programme, the Government plans to achieve a surplus of 0,3 % of GDP in 2017 and to continue to meet the medium-term budgetary objective — a structural deficit of 1 % of GDP — throughout the programme period. According to the 2017 Convergence Programme, the general government debt-to-GDP ratio is expected to fall to 39,5 % in 2017 and to continue declining to 31,4 % in 2020. Robust economic growth and sound public finances are set to be the main drivers behind the declining general government debt-to-GDP ratio. The macroeconomic scenario underpinning those budgetary projections is plausible. Based on the Commission 2017 spring forecast, the structural balance is forecast to show a surplus of 0,4 % of GDP in 2017 and a surplus of 0,8 % of GDP in 2018, above the medium-term budgetary objective. Based on its assessment of the 2017 Convergence Programme and taking into account the Commission 2017 spring forecast, the Council is of the opinion that Sweden is projected to comply with the provisions of the Stability and Growth Pact in 2017 and 2018.

(6)

Household debt has continued to rise from already high levels. Household debt grew by 7,1 % in 2016, approaching 86 % of GDP and about 180 % of disposable income, driven mainly by higher mortgage borrowing linked to continued house price rises. The distribution of debt levels has become increasingly uneven, with an elevated fraction of newly mortgaged households (16,4 % in 2016) borrowing as much as 600 % of their disposable income. The Government has taken some relevant macroprudential measures — including the introduction of a new mortgage amortisation requirement in 2016 — but it remains unclear whether these will have sufficient impact over the medium term. In February 2017, the Government launched a legislative process to enhance the legal mandate of the macroprudential authority, to ensure that in the future the authority can introduce potential macroprudential measures in a timely manner and use a wider range of tools. The legislative amendments are expected to be in force by February 2018. Adjusting fiscal incentives, for example by gradually limiting the tax deductibility of mortgage interest payments or by increasing recurrent property taxes, would help curb household debt growth, but the Government has made no progress on this.

(7)

Sweden has experienced rapid and persistent house price growth since the mid-1990s. House prices have continued to grow rapidly and persistently, especially in the main urban areas. Key drivers include generous tax treatment of home ownership and mortgage debt, accommodative credit conditions coupled with relatively low mortgage amortisation rates, and an ongoing housing supply shortage. This shortage is linked to structural inefficiencies in the housing market. Housing construction has continued to increase, but remains well below new construction needs. The Government’s 22-point housing market plan addresses some underlying factors for housing shortage, including measures to increase the amount of available land for construction, reduce construction costs and shorten planning process lead times. However, some other structural inefficiencies, including weak competition in the construction sector, do not receive appropriate attention. The housing shortage is exacerbated by barriers hindering the efficient use of the existing housing stock. Sweden’s tightly regulated rental market creates lock-in and ‘insider/outsider’ effects, but no significant policy action has been taken to introduce more flexibility in setting rents. In the owner-occupancy market, relatively high capital gains taxes reduce homeowner mobility. A temporary reform of the deferral rules for capital gains taxes on property transaction was introduced, but this will probably have limited effect. Lack of available and affordable housing can also limit labour market mobility and the effective integration of migrants into the labour market, and contribute to intergenerational inequality.

(8)

In 2016 Sweden had one of the highest employment rates in the Union (81,2 %), while recording one of the lowest long-term unemployment rates. However, challenges remain, such as integrating low-skilled people and non-EU migrants into the labour market and reducing the substantial employment gap for non-EU-born women. Sweden has made considerable efforts in the reception of asylum seekers and in the integration of refugees and other immigrants. Further improvements appear possible as in 2016 only one third of participants to the introduction programme were in work or education 90 days after having completed the programme, and a comprehensive approach and governance on the corresponding recognition of qualifications are still missing.

(9)

Basic skills proficiency of 15 year olds has improved after years of deteriorating performance, according to the OECD Programme for International Student Assessment (PISA) 2015 survey. However, the proportion of low achievers is still around the Union average and the performance gap linked to the socioeconomic background of students has widened. The measures launched by the Government to improve school outcomes and equity warrant close monitoring, together with the initiatives aimed at integrating newly-arrived migrant pupils into the school system.

(10)

In the context of the 2017 European Semester, the Commission has carried out a comprehensive analysis of Sweden’s economic policy and published it in the 2017 country report. It has also assessed the 2017 Convergence Programme, the 2017 National Reform Programme and the follow-up given to the recommendations addressed to Sweden in previous years. It has taken into account not only their relevance for sustainable fiscal and socioeconomic policy in Sweden, but also their compliance with Union rules and guidance, given the need to strengthen the Union’s overall economic governance by providing Union -level input into future national decisions.

(11)

In the light of this assessment, the Council has examined the 2017 Convergence Programme and is of the opinion (4) that Sweden is expected to comply with the Stability and Growth Pact.

(12)

In the light of the Commission’s in-depth review and this assessment, the Council has examined the 2017 National Reform Programme and the 2017 Convergence Programme. Its recommendations made under Article 6 of Regulation (EU) No 1176/2011 are reflected in recommendation (1) below,

HEREBY RECOMMENDS that Sweden take action in 2017 and 2018 to:

1.

Address risks related to household debt, in particular by gradually limiting the tax deductibility of mortgage interest payments or by increasing recurrent property taxes, while constraining lending at excessive debt-to-income levels. Foster investment in housing and improve the efficiency of the housing market, including by introducing more flexibility in setting rental prices and revising the design of the capital gains tax.

Done at Brussels, 11 July 2017.

For the Council

The President

T. TÕNISTE


(1)  OJ L 209, 2.8.1997, p. 1.

(2)  OJ L 306, 23.11.2011, p. 25.

(3)  Regulation (EU) No 1303/2013 of the European Parliament and of the Council of 17 December 2013 laying down common provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund, the European Agricultural Fund for Rural Development and the European Maritime and Fisheries Fund and laying down general provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund and the European Maritime and Fisheries Fund and repealing Council Regulation (EC) No 1083/2006 (OJ L 347, 20.12.2013, p. 320).

(4)  Under Article 9(2) of Regulation (EC) No 1466/97.


9.8.2017   

EN

Official Journal of the European Union

C 261/122


COUNCIL RECOMMENDATION

of 11 July 2017

on the 2017 National Reform Programme of the United Kingdom and delivering a Council opinion on the 2017 Convergence Programme of the United Kingdom

(2017/C 261/27)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty on the Functioning of the European Union, and in particular Articles 121(2) and 148(4) thereof,

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies (1), and in particular Article 9(2) thereof,

Having regard to the recommendation of the European Commission,

Having regard to the resolutions of the European Parliament,

Having regard to the conclusions of the European Council,

Having regard to the opinion of the Employment Committee,

Having regard to the opinion of the Economic and Financial Committee,

Having regard to the opinion of the Social Protection Committee,

Having regard to the opinion of the Economic Policy Committee,

Whereas:

(1)

On 16 November 2016, the Commission adopted the Annual Growth Survey, marking the start of the 2017 European Semester for economic policy coordination. The priorities of the Annual Growth Survey were endorsed by the European Council on 9-10 March 2017. On 16 November 2016, on the basis of Regulation (EU) No 1176/2011 of the European Parliament and of the Council (2), the Commission adopted the Alert Mechanism Report, in which it did not identify the United Kingdom as one of the Member States for which an in-depth review would be carried out.

(2)

The 2017 country report for the United Kingdom was published on 22 February 2017. It assessed the United Kingdom’s progress in addressing the country-specific recommendations adopted by the Council on 12 July 2016, the follow-up given to the country-specific recommendations adopted in previous years and United Kingdom’s progress towards its national Europe 2020 targets.

(3)

The United Kingdom submitted its 2017 National Reform Programme on 21 April 2017 and its 2017 Convergence Programme on 27 April 2017. In order to take account of their interlinkages, the two programmes have been assessed at the same time.

(4)

Relevant country-specific recommendations have been addressed in the programming of the European Structural and Investment Funds (ESI Funds) for the 2014-2020 period. As provided for in Article 23 of Regulation (EU) No 1303/2013 of the European Parliament and of the Council (3), where it is necessary to support the implementation of relevant Council recommendations, the Commission may request a Member State to review and propose amendments to its Partnership Agreement and relevant programmes. The Commission has provided further details on how it would make use of that provision in guidelines on the application of the measures linking effectiveness of the ESI Funds to sound economic governance.

(5)

The United Kingdom is currently in the corrective arm of the Stability and Growth Pact. Should a timely and durable correction have been achieved in 2016-17, the United Kingdom will become subject to the preventive arm of the Stability and Growth Pact and to the transitional debt rule in 2017-18. In its 2017 Convergence Programme, the Government expects to have corrected the excessive deficit by the fiscal year 2016-17, in line with the Council Recommendation of 19 June 2015, with a headline deficit of 2,7 % of GDP. The headline deficit is then expected to increase slightly to 2,8 % of GDP in 2017-18 before declining to 1,9 % of GDP in 2018-19. The Convergence Programme does not include a medium-term budgetary objective. According to the Convergence Programme, the general government debt-to-GDP ratio is expected to broadly stabilise around 87,5 % from 2016-17 to 2018-19 before falling to 84,8 % of GDP in 2020-21. The macroeconomic scenario underpinning those budgetary projections is favourable. While the measures needed to support the planned deficit targets are overall well specified, downside risks to the macroeconomic outlook pose a risk to the achievement of the planned deficit reduction.

(6)

On 12 July 2016, the Council recommended that the United Kingdom put an end to the excessive deficit situation by 2016-17 and, following the correction of the excessive deficit, achieve a fiscal adjustment of 0,6 % of GDP in 2017-18 towards the minimum medium-term budgetary objective. Based on the Commission 2017 spring forecast, the headline deficit is projected to have reached 2,7 % of GDP in 2016-17, in line with the target recommended by the Council. In 2017-18, there is a risk of some deviation from the preventive arm requirement.

(7)

In the light of its fiscal situation and, in particular, of its debt level, the United Kingdom is expected to further adjust towards an appropriate medium-term budgetary objective. According to the commonly agreed adjustment matrix under the Stability and Growth Pact, that adjustment translates into a requirement of a nominal growth rate of net primary government expenditure (4) which does not exceed 1,8 %. It would correspond to an annual structural adjustment of 0,6 % of GDP. Under unchanged policies, there is a risk of some deviation from that requirement over the period 2017-18 and 2018-19 taken together. At the same time, the United Kingdom is prima facie not projected to comply with the transitional debt rule in 2017-18 but is forecast to comply in 2018-19. Overall, the Council is of the opinion that the United Kingdom needs to stand ready to take further measures as of 2017-18 to comply with the provisions of the Stability and Growth Pact. However, as foreseen in Regulation (EC) No 1466/97, the assessment of the budgetary plans and outcomes should take account of the Member State’s budgetary balance in the light of the cyclical conditions. As recalled in the Commission Communication accompanying these country-specific recommendations, the future assessment will need to take due account of the goal of achieving a fiscal stance that contributes to both strengthening the ongoing recovery and ensuring the sustainability of the United Kingdom’s public finances. In that context, the Council notes that the Commission intends to carry out an overall assessment in line with Regulation (EC) No 1466/97, in particular in the light of the cyclical situation of the United Kingdom.

(8)

Private investment has been consistently well below the Union average and public investment marginally below. Productivity is significantly below the G7 average and has stagnated since 2008. The Government is putting a strong policy emphasis on raising investment to boost productivity growth. A key challenge is addressing significant shortcomings in the capacity and quality of the United Kingdom’s infrastructure networks. Road congestion is high and rail capacity is increasingly inadequate in places in the face of rapidly growing demand. There is also an increasingly urgent need for higher investment in new energy generation and supply capacity. The National Infrastructure Delivery Plan sets out ambitious plans to improve the UK’s economic infrastructure and a number of investment decisions on major transport and energy projects were made in 2016. However, concerns remain over whether adequate public and private investment can be secured to address infrastructure backlogs in a timely and cost-effective way. The United Kingdom has a major challenge to increase housing supply. A chronic shortage of housing contributes to high and rising house prices and has significant economic and social costs, especially around poles of economic growth. The reformed planning system, and a range of complementary housing policies, are together somewhat more supportive of increased residential construction. Nevertheless, a number of constraints on housing supply remain, including very strict and complex regulation of the land market and residential construction, and new housing supply is still not keeping up with the growth in demand.

(9)

Labour market headline figures continue to be positive, with low long-term and youth unemployment overall. However the levels of inactivity, and part-time and low-wage employment have room for improvement. Earnings growth remains modest, linked to weak productivity growth. Concerns about skills supply, utilisation and progression remain. There have been significant policy developments focusing on skills and progression via reforms to technical education and apprenticeships. Quality in apprenticeships will need focus on both the qualification level undertaken and the subject area in which it is taken. Other, strategically important, funded routes for skills enhancement, particularly for people over 25, would expand the skills offer available to the State, to business and to individuals seeking career progression. There are also challenges related to the supply of childcare and social care, which contribute to the high rate of female part-time employment. Childcare reforms to date have been constant but gradual. A step-change is likely with the full roll-out of some initiatives in the next 2 years. The participation of children less than 3 years old in formal childcare is relatively low. While recent measures improve to some extent the availability and affordability of childcare for children aged 3 and 4, they do not address the issue of childcare supply for children under 3 years old. As a result of previously announced reforms and cutbacks, in particular to in-work support, social policy outcomes including child poverty may come under pressure in the near-to-medium term, particularly in a context of higher inflation. The number of children in poverty who live in working households is a particular cause for concern.

(10)

In the context of the 2017 European Semester, the Commission has carried out a comprehensive analysis of United Kingdom’s economic policy and published it in the 2017 country report. It has also assessed the 2017 Convergence Programme, the 2017 National Reform Programme and the follow-up given to the recommendations addressed to the United Kingdom in previous years. It has taken into account not only their relevance for sustainable fiscal and socioeconomic policy in the United Kingdom but also their compliance with Union rules and guidance, given the need to strengthen the Union’s overall economic governance by providing Union-level input into future national decisions.

(11)

In the light of this assessment, the Council has examined the 2017 Convergence Programme and its opinion (5) is reflected in particular in recommendation (1) below,

HEREBY RECOMMENDS that United Kingdom take action in 2017 and 2018 to:

1.

Pursue a substantial fiscal effort in 2018-19 in line with the requirements of the preventive arm of the Stability and Growth Pact, taking into account the need to strengthen the ongoing recovery and to ensure the sustainability of the United Kingdom’s public finances.

2.

Take further steps to boost housing supply, including through reforms to planning rules and their implementation.

3.

Address skills mismatches and provide for skills progression, including by continuing to strengthen the quality of apprenticeships and providing for other funded ‘further education’ progression routes.

Done at Brussels, 11 July 2017.

For the Council

The President

T. TÕNISTE


(1)  OJ L 209, 2.8.1997, p. 1.

(2)  Regulation (EU) No 1176/2011 of the European Parliament and of the Council of 16 November 2011 on the prevention and correction of macroeconomic imbalances (OJ L 306, 23.11.2011, p. 25).

(3)  Regulation (EU) No 1303/2013 of the European Parliament and of the Council of 17 December 2013 laying down common provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund, the European Agricultural Fund for Rural Development and the European Maritime and Fisheries Fund and laying down general provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund and the European Maritime and Fisheries Fund and repealing Council Regulation (EC) No 1083/2006 (OJ L 347, 20.12.2013, p. 320).

(4)  Net government expenditure comprises total government expenditure excluding interest expenditure, expenditure on Union programmes fully matched by Union funds revenue and non-discretionary changes in unemployment benefit expenditure. Nationally financed gross fixed capital formation is smoothed over a 4-year period. Discretionary revenue measures or revenue increases mandated by law are factored in. One-off measures on both the revenue and expenditure sides are netted out.

(5)  Under Article 9(2) of Regulation (EC) No 1466/97.