The European economy is expanding robustly and the positive economic outlook is matched by an improved labour market and social situation. This reflects the reforms undertaken by Member States in recent years and provides a window of opportunity to further strengthen the resilience of the EU's economies and societies.Nevertheless, the recovery is not benefitting everybody in society equally and structural weaknesses are holding back growth and convergence in some Member States. That is why EU countries should use this momentum to further strengthen the foundations of their economies.
Today's 27 Country Reports (for all Member States except Greece, which is under a stability support programme) provide the annual analysis by Commission staff on the economic and social situation in Member States, including progress made in implementing Country-Specific Recommendations over the years. This analysis builds on intense dialogue at technical and political level with the Member States, as well as with stakeholders at all levels, as part of the European Semester of policy coordination.
For 12 Member States selected last November for an in-depth review, the Country Reports include an assessment of possible macroeconomic imbalances and the package provides an update of the categorisation of countries under the so-called Macroeconomic Imbalances Procedure.
For the first time, the Country Reports put a special emphasis on mainstreaming the priorities of the European Pillar of Social Rights, proclaimed in November 2017. A specific focus is put this year on analysing skills challenges and how social safety nets operate at national level. Data from the Social Scoreboard are also used to keep track of employment and social performances.
This European Semester 2018 winter package follows the publication in November of the 2018 Annual Growth Survey and the recommendation on the economic policy of the euro area, which set the priorities for the year ahead at European level. It now shifts the focus to the national dimension of the Semester and provides the underpinning for Member States to develop their annual national programmes by mid-April. Together with the Country Reports, the national programmes will be the basis for the Commission's proposals for the next round of Country-Specific Recommendations in May.
Vice-President Valdis Dombrovskis, responsible for the Euro and Social Dialogue, also in charge of Financial Stability, Financial Services and Capital Markets Union, said: "Strong economies are those that keep addressing their weaknesses, even when times are good. Now that Europe's economy is growing at its fastest pace for a decade, this is precisely what our strategy should be, both at EU and national level."
Commissioner Pierre Moscovici, responsible for Economic and Financial Affairs, Taxation and Customs, said: "Eleven EU countries are still experiencing macroeconomic imbalances, which makes them vulnerable in case of shocks. Today, the European Commission notes that these imbalances are being corrected thanks to ongoing reforms and economic recovery, making Europe stronger. This is good news! The number of countries under this procedure has been falling since the crisis and today, we reward progress in Bulgaria, France, Portugal and Slovenia with a positive change of category. More efforts are needed in all countries. For millions of Europeans, life remains a daily struggle, which is why all governments must do more to tackle inequality, unemployment and job insecurity.”
Commissioner Marianne Thyssen, in charge of Employment, Social Affairs, Skills and Labour Mobility, said: "With the proclamation of the European Pillar of Social Rights, we have put investing in skills, reducing inequalities, social fairness and inclusive growth on top of the agenda. We now need to keep track of the performance of the Member States on the principles and rights included in the Pillar, to make them a reality on the ground.”
Progress with Country-Specific Recommendations
As every year, the Country Reports assess Member States' progress in tackling their main economic and social challenges and in implementing past Country-Specific Recommendations (CSRs). Looking at progress over the years, Member States achieved at least "some progress" with regard to more than two-thirds of the recommendations.
Reform implementation has been solid in some key areas.Since the outset of the European Semester in 2011, Member States have made most progress in financial services and in fiscal policy and fiscal governance. Significant progress has also been made in addressing access to finance, in employment protection legislation and frameworks for labour contracts. Policy highlights for all Member States are included in the Country Reports.
Today, the Commission also adopted the 2018 Work Programme for the Structural Reforms Support Programme (SRSP) that will provide support to Member States to carry out reforms, especially those prioritised in the Country-Specific Recommendations.
In 2018, more than 140 projects will be supported in 24 Member States.
Addressing macroeconomic imbalances
Last November, the Commission launched in-depth reviews for 12 Member States to analyse whether they were experiencing macroeconomic imbalances and to assess the gravity of these imbalances. The 12 Member States examined in depth this year were all identified to experience imbalances or excessive imbalances last year. The Commission has now concluded that 11 out of the 12 Member States examined are facing either imbalances (8) or excessive imbalances (3). The summary of the in-depth reviews outcome is as follows:
- Croatia, Cyprus and Italy are experiencing excessive economic imbalances.
- Bulgaria, France, Germany, Ireland, the Netherlands, Portugal, Spain and Sweden are experiencing economic imbalances. For Bulgaria, France and Portugal this is a de-escalation from excessive imbalances last year.
- Slovenia is no longerexperiencing economic imbalances.
For Bulgaria and Portugal the Commission underlined that further efforts remain necessary to achieve a sustainable correction of the imbalances.
European Pillar of Social Rights
The social dimension of the European Semester has been further enriched this year by mainstreaming the priorities of the European Pillar of Social Rights. The Country Reports also make use of the data gathered via the Social Scoreboard to keep track of employment and social performances. Situations and priorities naturally vary, and the analysis takes account of this diversity. Areas of particular concerns in some Member States include the provision of adequate skills, persistent gender employment gap, high labour market segmentation and the risk of in-work poverty, the low impact of social transfers on poverty reduction, sluggish wage growth and ineffective social dialogue.
The Country Reports provide the Commission's assessment of the situation in each Member State and a basis for all stakeholders to engage. The Council is expected to discuss the reports together with the results of the in-depth reviews. The Commission will hold bilateral meetings with the Member States on their respective reports. The Vice-Presidents and Commissioners will visit Member States to meet governments, national parliaments, social partners and other stakeholders and discuss the findings from the reports.
The next step for Member States is to present their economic and social policy priorities in their national reform programmes and stability and/or convergence programmes (setting out budgetary priorities) by mid-April in the light of the challenges identified, also taking into account the priorities of the 2018 Annual Growth Survey and the recommendation on the economic policy of the euro area. The Commission recommends that these programmes be drawn up with the support of National Parliaments and of all key stakeholders, such as social partners, regional and local authorities, and civil society organisations as appropriate.
The Commission will propose a new set of Country-Specific Recommendations in May.
The Winter Semester Package is part of the annual cycle of policy coordination at EU level, the European Semester. It follows the publication in November of the 2018 Annual Growth Survey and the euro area recommendation, which set the priorities for the year ahead at European level. It now shifts the attention to the national dimension of the European Semester.
It is based on the latest data from the Commission's Winter Interim 2018 Economic Forecast and it builds on the analyses and recommendations of the European Semester Autumn Package 2017. The Country Reports provide the underpinning for the Member States to develop their national programmes by mid-April and for the Commission's upcoming Country-Specific Recommendations later in spring.
APPENDIX – FINDINGS FROM IN-DEPTH-REVIEWS BY MEMBER STATE* [updated on 07/03/2018 at 19:15]
Bulgaria is experiencing imbalances. Vulnerabilities in the financial sector are coupled with high indebtedness and non-performing loans in the corporate sector, in a context of incomplete labour market adjustment. Meanwhile, the net external position has improved, mainly due to the current account surplus. The authorities have made progress in implementing the recommendations addressed after the asset quality and balance sheet reviews, but the legacy issues linked to weak governance, asset quality and supervision have not yet been fully dealt with. The robust growth has supported continuous private deleveraging and further decreases in non-performing loan ratios, but stocks of non-performing loans in the corporate sector are still high. Labour market improvement has continued despite persistent structural issues, such as the high share of young people not in employment, education or training and labour shortages and mismatches. Some measures have been taken to tackle the main sources of imbalances, but further progress is needed to address remaining vulnerabilities in the financial sector, including further improving banking and non-banking supervision, dealing with hard-to-value assets and group level supervision, and completing the reform of the insolvency framework.
Croatia is experiencing excessive imbalances. Vulnerabilities are linked to high levels of public, private and external debt, all largely denominated in foreign currency, in a context of low potential growth. Strong growth, above its estimated potential, is helping to reduce stock imbalances: public, private and external debt ratios are declining at a fast pace. The negative net external position remains large, but has been improving due to a current account surplus. Strong growth supported further debt reduction, and the pace of deleveraging is set to slow down, as credit flows to households and corporates turn positive. Government debt peaked in 2014, and is currently on a declining path, driven by both strong GDP growth and a reduction in the headline deficit. The banking sector is increasingly profitable and the stock of non-performing loans continued to decline. Still, the foreign currency exposure (mainly euro) of corporations and households remains a source of vulnerability. While the economic environment is improving, there has been little advancement in the adoption of policy measures aimed at addressing macroeconomic imbalances, including by raising the still low growth potential.
Cyprus is experiencing excessive imbalances. A very high share of non-performing loans burdens the financial sector and high stock of private, public, and external debt hangs on the economy, in a context of still relatively high, even though declining, unemployment and weak potential growth. The current account is still negative and widening, and is not adequate to guarantee a sustainable evolution of the large net external liabilities stock. Private debt is only slowly decreasing, and credit flows to the private sector are picking up despite very high levels of private debt. Loan restructuring efforts by banks, the strong cyclical upturn, and the implementation of past reforms have allowed a reduction of non-performing loans, but their stock remains very high. Poor contract enforcement, inefficiencies in the judicial system, bottlenecks in the implementation of the foreclosure and insolvency legislation as well as weak repayment discipline hamper private sector deleveraging and the reduction of non-performing loans. A prudent fiscal stance and an active debt management policy accelerated public debt reduction. Renewed reform momentum is needed, notably to help reduce public debt, improve competitiveness, accelerate the reduction of non-performing loans and raise potential growth.
France is experiencing imbalances. Vulnerabilities stem from high public debt and weak competitiveness dynamics in a context of low productivity growth, which carry cross-border relevance. Moderate wage growth supports on-going improvements in cost competitiveness. Subdued productivity growth is instead acting as a headwind. Labour market's low responsiveness to changing demand and supply conditions and some elements of the business environment still weigh on non-cost competitiveness. The government debt-to-GDP ratio rose further in 2017, but it is forecast to stabilise in 2018 and 2019. Previously adverse trends have thus abated, economic conditions are improving and reform efforts are gaining momentum. Recently announced and undertaken policy actions can carry both domestic and cross-border positive effects in the medium term. Progress on several fronts including labour markets and taxation has been achieved, while announced initiatives to improve the business environment, vocational education and training, unemployment benefit, and pension systems have still to materialise. Further action is warranted for ensuring a better access to the labour market for the jobseekers, simplifying the tax system and reviewing government expenditure to ensure sustainability of public finances and enhance growth potential.
Germany is experiencing imbalances. The persistently high current account surplus has cross-border relevance and reflects a subdued level of investment relative to saving in both the private and the public sector. The surplus, which is largely with non-EU countries, has slightly narrowed since 2016 and is expected to gradually decline due to a pick-up in domestic demand in the coming years whilst remaining at historically high levels over the forecast horizon. While there is currently a shift towards more domestic demand-driven growth, both consumption and investment remain muted as a share of GDP despite the favourable cyclical and financing conditions and the infrastructure investment needs for which there is fiscal space. While a number of measures have been taken to strengthen public investment, these efforts have not yet resulted in a sustainable upward trend in public investment as a share of GDP. Progress in addressing recommendations in other areas has also been limited.
Ireland is experiencing imbalances. Large stocks of private and public debt and net external liabilities constitute vulnerabilities. However, the improvements have been substantial. Strong productivity growth in past years has implied improved competitiveness and a positive current account balance entailing a rapid reduction in the high stock of net foreign liabilities. Strong economic growth continues to support private deleveraging but the stock of private debt remains high, although the strong influence of the activities of multinational enterprises needs to be taken into account when evaluating corporate debt, and household debt appears broadly in line with fundamentals. Government debt is projected to remain on a downward trajectory, and the deficit is moving closer to balance. House prices are growing at a rapid pace, albeit from likely undervalued levels, thereby also strengthening households' balance sheets. Banks are well recapitalised and their profitability is improving gradually. The stock of NPLs, although remaining high, continues to decrease. Policy action addressing these vulnerabilities has been taken, but some measures will take time to generate the expected effects.
Italy is experiencing excessive imbalances. High government debt and protracted weak productivity dynamics imply risks with cross-border relevance looking forward, in a context of still high level of non-performing loans and unemployment. The government debt ratio is set to stabilise but has not yet embarked on a firm downward path due to the worsening of the structural primary balance. External competitiveness has improved, but weak productivity growth, linked to structural obstacles which continue to hamper an efficient allocation of productive factors across the economy, accelerating unit labour costs and the general low inflation environment are making it challenging to reverse past large competitiveness losses. Market pressures on the banking sector have abated, following, among other measures, the government's support for capitalisation of a few distressed banks. The stock of non-performing loans has only recently started to decrease, and still weighs on banks' capital needs, profits, and lending policies. The reform momentum has somehow slowed, but some progress has been made in addressing recommendations. Several measures are now in the pipeline, notably in the fields of labour and social policies, civil justice and business environment.
The Netherlands is experiencing imbalances. The high stock of private debt and the large current account surplus constitute sources of imbalances, with cross-border relevance. The large current account surplus, which mainly reflects structural features of the economy and policy settings regarding non-financial corporations and is partly explained by deleveraging pressures, has increased recently but is forecast to decline somewhat. The private debt-to-GDP ratio has only very gradually decreased in the last years, supported by economic growth. At the same time, nominal household debt is increasing again, as the ongoing recovery in the housing market is driving up nominal mortgage debt levels. Recent reform announcements, such as the speeding-up of the reduction of mortgage interest deductibility and the fiscal stimulus should contribute to support aggregate demand.
Portugal is experiencing imbalances. 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 low productivity growth. A prudent current account position and the maintenance of competitiveness gains are required to ensure the adjustment of net external liabilities. Private debt ratios continue to decline from high levels due to both resumed nominal growth and slightly negative credit flows, and the government debt-to-GDP ratio is projected to have entered a decreasing trend, in a context of persistent deleveraging needs. Financial sector interventions contributed to reduce stability risks, although banks remain penalised by low profitability and a large stock of non-performing loans, which have nonetheless started declining. Higher productivity growth is key for improved prospects in competitiveness, deleveraging and potential growth. Unemployment has been decreasing at a strong pace for several years. Policy gaps remain, notably in terms of implementing the measures outlined to reduce non-performing loans and to improve the business environment. The adoption and implementation of several reform plans, including measures to tackle labour market segmentation or fiscal-structural reforms to improve the sustainability of public finances, will need to be monitored.
Slovenia is experiencing no imbalances. Risks arising from weaknesses in the banking sector, corporate indebtedness and short-term fiscal situation have receded. Government debt has peaked in 2015 and has been on a downward trend since then. The corporate sector underwent a substantial deleveraging, which weakened investment and potential growth. However, investment is now accelerating, and foreign direct investment inflows have recovered considerably in the most recent years. Banking sector restructuring has coincided with a rapidly falling share of non-performing loans. Policy action which contributed to the unwinding of imbalances has been taken, but measures to enhance the sustainability of the pension, health care and long-term care systems remain a key priority.
Spain is experiencing imbalances. Large stocks of external and internal debt, both public and private, continue to constitute vulnerabilities in a context of high unemployment and have cross-border relevance. The external rebalancing is advancing, thanks to the current account surpluses recorded since 2013. However, net external liabilities remain high and Spain will have to record sustained current account surpluses for an extended period of time before the net external liabilities reach prudent levels. Private sector debt reduction is also progressing, supported by favourable growth conditions, but deleveraging needs are still present. A healthier financial sector supports economic activity, and the non-performing loans ratio decreased further. Despite the strong nominal GDP growth, government debt as a share of GDP has only just begun to slowly decrease, with deficits forecast to narrow over time. Unemployment has continued its rapid decline, but remains very high and the high degree of labour market segmentation impedes faster labour productivity growth. Policy progress has been especially made between 2012 and 2015, and recently only limited progress has been made in addressing recommendations. Challenges remain, in particular concerning fiscal governance, active labour market policies and improving innovation and skills to boost non-cost competiveness.
Sweden is experiencing imbalances. Overvalued house price levels coupled with a continued rise in household debt poses risks of a disorderly correction. The already high household debt remains on an upward path. House prices have been growing at fast and virtually uninterrupted pace for about 20 years. Negative growth has been recorded in the last quarter of 2017. Still, valuation indicators suggest that house prices remain very high relative to fundamentals. 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 given the systemic financial interlinkages. Awareness of mounting risks among the authorities is high, and in recent years measures have been taken to rein in mortgage debt growth and raise housing construction. However, policy steps implemented so far have not been sufficient to address overvaluation in the housing sector, and key policy gaps remain, particularly in relation to tax incentives for home ownership as well as the functioning of housing supply and the rental market.
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