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Q&A: Country-specific recommendations 2014

Commission Européenne - MEMO/14/388   02/06/2014

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European Commission

MEMO

Brussels, 2 June 2014

Q&A: Country-specific recommendations 2014

What are country-specific recommendations (CSRs)?

Country-specific recommendations (CSRs) offer tailored advice to Member States on how to boost growth and jobs, while maintaining sound public finances. They are published every spring, following months of analysis by the Commission. They focus on what can realistically be achieved in the next 12-18 months to make growth stronger, more sustainable and more inclusive, in line with the Europe 2020 strategy, the EU's long-term growth and jobs plan.

They are based on the general priorities identified in the Commission's Annual Growth Survey last November and on the information Member States submitted in April in their medium-term budgetary plans and economic reform programmes.

The recommendations will be discussed and endorsed by EU leaders and ministers in June and formally adopted by EU finance ministers in July, as part of the European Semester, the EU's calendar for economic policy coordination.

What progress have Member States made since the 2013 CSRs?

Stronger rules introduced during the crisis – particularly through the European Semester – are helping Member States to improve their economies and create the basis for more sustainable growth.

  • Growth has returned, including in most of the countries affected by the crisis. Only Cyprus and Croatia are expected to see their economies shrink this year and by 2015, all EU economies are expected to be growing again.

  • Public finances continue to improve. In 2014, budget deficits in the EU are expected to fall below the 3% of GDP limit for the first time since the crisis hit. The Commission recommends that Austria, Belgium, the Czech Republic, Denmark, Slovakia and the Netherlands exit the Excessive Deficit Procedure, bringing the number of countries in the procedure to 11 (from 24 in 2011).

  • Reforms in the most vulnerable countries are paying off. Ireland exited its financial assistance programme in December 2013, Spain in January 2014 and Portugal in May 2014. Greece is forecast to return to growth in 2014, while the situation in Cyprus has stabilised. Thanks to its determined pursuit of economic reforms, Latvia was able to join the euro in January.

  • Rebalancing is taking place, with current account positions improving in a number of countries. In March 2014, for the first time since the Macroeconomic Imbalances Procedure was introduced, the Commission concluded that two countries (Denmark and Malta) are no longer experiencing imbalances, and that Spain is no longer experiencing excessive imbalances.

  • The outlook is for a modest rise in employment from this year onwards, and a decline in unemployment to 10.4% by 2015, as labour market developments typically lag behind GDP by half a year or more. Major reforms to improve the resilience of the labour market have been introduced in several Member States, including Spain, Portugal, Italy and France.

What are the main challenges facing Member States in 2014-15?

The recovery is still unevenly spread and fragile, and needs to be strengthened through continued structural reforms of our economies. The emphasis this year has shifted from addressing the urgencies of the crisis to strengthening the conditions for sustainable growth and employment in a post-crisis economy.

  • Tackling unemployment and the social consequences of the crisis: The crisis has had a severe and lasting impact on the level of unemployment in the EU, which remained dramatically high at 10.8% in 2013, with differences ranging from 4.9% in Austria to 27.3% in Greece. The situation is particularly worrying for young people and the long-term unemployed. In some Member States, disposable income has declined and nearly a quarter of the EU population is now considered to be at risk of poverty or social exclusion.

  • Reducing debt: Having risen significantly since 2008 as a result of the crisis, public debt is forecast to peak this year and needs to be put on a downward path, particularly in Belgium, Ireland, Greece, Spain, Italy, Cyprus and Portugal, where it remains above 100% of GDP. However, while reducing debt, it will be important to preserve growth-enhancing expenditure in areas such as education, research, infrastructure or innovation, which is underlined in recommendations for the Czech Republic, Italy, The Netherlands, Poland, the United Kingdom and Spain. Managing the costs of ageing – particularly pensions and healthcare – is also a challenge for public finances, and recommendations on this have been made to 19 Member States.

  • Shifting to growth-friendlier taxation: Many countries have relied on tax rises rather than spending cuts during the crisis and the overall tax burden has risen. Because there is limited room for manoeuvre when it comes to public finances, a number of recommendations focus on shifting taxation from labour to more recurrent property, consumption and environmental taxes, as they are less detrimental to growth. The need to address tax compliance and fight fraud is also highlighted.

  • Boosting private investment: Bank funding remains tight in Italy, Greece, Spain, Lithuania, Slovenia, Croatia and Cyprus, especially for small and medium-sized enterprises, indicating a need to further stabilise the banking sector and find alternative forms of finance – for instance, loan guarantee schemes or corporate bonds.

  • Making our economies more competitive: Progress on structural reforms of key sectors remains limited compared to 2013, and the Commission has made a number of recommendations in 2014 on the services sector, energy and transport infrastructure, R&D systems and competition law.

What do the recommendations say about employment, poverty and social inclusion?

On the basis of a new scoreboard of key employment and social indicators (IP/13/893), the Commission's recommendations draw attention to reforms needed to support job creation, strengthen the resilience of labour markets and address poverty and social inclusion.

Young people have been particularly affected by the crisis. The EU youth unemployment rate increased sharply – more than 7.5 percentage points between 2008 and 2013 (from 15.8% to 23.4%) - and it is currently nearly 2.5 times higher than the adult rate. Contrary to the Commission's recommendations, some countries, including Bulgaria, Greece, Italy, Slovakia and Romania, have cut public spending on education in recent years. To support the transition from school to work, the Commission has been making recommendations on public employment services, education, training, and apprenticeships, including a Youth Guarantee.

There also needs to be a greater focus on fighting long-term unemployment and helping people into jobs, including by stepping up public employment services and by favouring sustainable, quality jobs. This has been highlighted in recommendations to Bulgaria, Germany, Estonia, Ireland, Greece, Italy, Luxembourg, Spain, Portugal, Slovakia, Finland, Sweden and the UK. Encouraging women to take up work is also crucial in Austria, Germany, Ireland, Italy, Malta and Poland. This challenge is linked to providing quality and affordable childcare.

To support job creation, wages need to be able to respond to the economic environment and remain in line with productivity. To encourage this, a number of countries have taken steps to decentralise their wage-setting systems (France, Italy, Portugal and Spain) but in others more needs to be done, particularly on wage indexation (Luxembourg and Belgium). Minimum wages can also function as an anchor for wage developments and have been highlighted in Bulgaria, Romania, Slovenia, Portugal, Germany and France.

In order to fight poverty and social exclusion, the Commission puts a particular focus on the coverage, adequacy and design of unemployment benefits and social assistance in Bulgaria, Croatia, Hungary, Italy, Latvia, Lithuania, Portugal and Romania. The aim is to strike a balance between supporting people back to work and ensuring adequate income support where there is growing poverty.

Why should Member States implement a Youth Guarantee?

The Youth Guarantee is a new approach to tackling youth unemployment based on the successful approach applied in Austria and Finland. The Youth Guarantee ensures all people under 25 – registered with employment services or not – get a good-quality job offer, apprenticeship, traineeship, or a place in further education within four months of leaving school or becoming unemployed.

Providing a comprehensive Youth Guarantee — and not just a set of temporary ad hoc measures — is a major structural reform to help young people transition from education to the labour market. Member States' public employment services are key to the success of the Youth Guarantee. All Member States endorsed the principle of the Youth Guarantee in April 2013, and every country has since submitted a plan outlining how this will happen in practice. Member States are making significant efforts to implement their plans but Spain, Italy, Slovakia, Croatia, Portugal, Poland, Bulgaria and Ireland still face particular challenges, which is why they are highlighted in the country-specific recommendations.

The most significant source of EU money to help Member States to implement the Youth Guarantee is the European Social Fund, with over €10 billion a year from 2014-20. To top this up, there is a new €6 billion Youth Employment Initiative for Member States with regions where youth unemployment rates exceed 25% (in 2012). Currently Member States are preparing Operational Programmes through which these funds will be committed over the next two years.

Details on each Member State's implementation of the Youth Guarantee are available at: http://ec.europa.eu/social/main.jsp?catId=1094&langId=en

What do the CSRs say about public finances and what does this have to do with the Excessive Deficit Procedure?

Budgetary surveillance is part and parcel of the European Semester, and is reflected in the CSRs for all countries.

The CSRs reflect decisions made under the Stability and Growth Pact, the EU's rulebook for sound public finances. There is good news this year for six countries currently in the Excessive Deficit Procedure, the corrective arm of the Pact: the Commission has recommended closing the procedure for Austria, Belgium, Czech Republic, Denmark, the Netherlands and Slovakia. This will bring the number of countries with deficits above 3% of GDP down to 11 from 24 in 2011. In addition, the Commission has concluded that two countries, Poland and Croatia, have taken effective action in response to their Council recommendations under the EDP (MEMO/13/995; MEMO/13/1124).

In a separate report, the Commission has concluded that Finland's planned and forecast breach of the EU's 60% of GDP public debt limit does not merit the launch of an EDP since the excess is due to the country’s contributions to solidarity operations for euro area countries.

An increasing number of Member States are moving into the preventive arm of the Stability and Growth Pact, under which they are required to maintain efforts to ensure sound public finances. While the pace of consolidation has slowed down since the crisis (from an average structural effort of 1% of GDP in the last three years to around 0.3% of GDP expected in 2014-17), it will remain important to stick to medium-term budgetary targets. The Commission has drawn attention to this in recommendations to Austria, Belgium, Bulgaria, Czech Republic, Estonia, Finland, Hungary, Italy, Lithuania, Luxembourg, Latvia and the Netherlands.

For more information on ongoing and closed Excessive Deficit Procedures, see: http://ec.europa.eu/economy_finance/economic_governance/sgp/corrective_arm/index_en.htm.

What do the CSRs say about taxation?

The structure of tax systems is crucial for maintaining sound public finances, and this year recommendations on taxation are issued to all but four Member States (Denmark, Estonia, Finland and Slovenia).

Strong emphasis is put on the need to reduce the high tax burden on labour (which, at 46.5% in the euro area, is higher than non-European OECD countries). In total, 12 Member States are asked to put more effort into shifting the tax burden away from labour to other, less distortive taxes such as consumption, pollution and recurrent property taxes: Austria, Belgium, Czech Republic, France, Germany, Hungary, Italy, Latvia, Lithuania, the Netherlands, Romania and Spain. This can be accompanied by measures to increase financial incentives to work and reduce the relatively high cost of labour for low-skilled workers.

In order to improve the efficiency of their tax systems, 11 countries have received recommendations to broaden their tax bases: Belgium, Croatia, Germany, Spain, France, Ireland, Italy, Luxembourg, Hungary, Poland and the UK. This may include reviewing VAT exemptions or reduced rates, when there is no proof of their efficiency, possibly in conjunction with a reduction of the standard VAT rate.

The recommendations also focus on improving tax governance in 16 Member States: Belgium, Bulgaria, Czech Rep, Germany, Spain, France, Croatia, Hungary, Italy, Latvia, Lithuania, Malta, Poland, Portugal, Romania and Slovakia. A number of multinational companies are using tax planning strategies to reduce their global tax burden by taking advantage of mismatches between tax systems, and this is addressed for the first time in today's package.

What do the CSRs say about pensions and healthcare?

The ageing of the population is expected to have a major impact on state-funded pensions and healthcare. For instance, over 70% of the projected increase in age-related public spending is due to health and long-term care.

That is why, in 2014, the Commission points to the need to pursue pension reforms in more than half of the Member States. Although 23 Member States have legislated to increase the pensionable age in recent years, more needs to be done to close the potential financial gap in several countries, including in Austria, Belgium, Bulgaria, Croatia, the Czech Republic, Finland, Lithuania, Luxembourg, Malta, the Netherlands and Slovenia.

The Commission has made recommendations on health to 15 Member States: Austria, Bulgaria, Croatia, Czech Republic, Finland, France, Germany, Ireland, Latvia, Malta, Poland, Portugal, Romania, Slovakia and Spain. The recommendations emphasise the need to ensure the cost-effectiveness and sustainability of health systems and call for concrete, targeted reforms to optimise the hospital sector, strengthen primary care and rationalise pharmaceutical spending.

Going beyond fiscal aspects, accessibility to high-quality healthcare has become an explicit policy aim reflected in 3 recommendations: to Latvia, Romania and Spain. The Commission's communication 'On effective, accessible and resilient health systems', adopted in April 2014, offers guidance on what Member States should focus on to reform their health systems and cope with the ageing challenge ahead.

What do the CSRs say about boosting private investment and access to finance?

The stabilisation of financial markets hides divergences between Member States. Financing conditions, especially for small and medium-sized enterprises, remain tight in Italy, Greece, Spain, Lithuania, Slovenia, Croatia and Cyprus.

Over the last year, Member States have introduced policies to improve access to finance: through loan guarantee schemes or the development of corporate bond markets in Denmark, Estonia, Italy and Portugal; or through the development of venture capital markets in the Czech Republic, Germany, Spain, Estonia, the Netherlands, and Portugal.

Completing bank restructuring and further repairing banks' balance sheets will contribute to repairing the credit channel. Recommendations in this area have been addressed to (amongst others) Austria, Germany, Italy, Ireland, Portugal, Spain and Slovenia.

The steps taken at EU level to complete a Banking Union will help to improve the overall financial environment.

What structural reforms are you recommending to boost growth?

Structural reforms help to increase competition, lower prices for consumers and, ultimately, create the conditions for companies to grow, invest and create jobs.

Services – such as manufacturing, retail, business services or construction – are one of the most important sectors of the economy, accounting for more than 70% of the EU's GDP and 67% of total employment. However, sometimes national regulations restrict companies or individuals from providing their services. This year's recommendations put a particular emphasis on the reform of the retail sector (Belgium, Demark, Finland, France, Germany, Italy and Spain), regulated professions (Austria, Czech Republic, France, Poland and Slovenia) and public administration (Austria, Bulgaria, Croatia, Czech Republic, Germany, Hungary, Italy, Malta, Romania and Slovakia).

Energy and transport infrastructure, particularly inter-connections, are fundamentally important to make the EU economy run better. Some progress on reforming the functioning of railways has been made in France and Spain, but there was limited progress in Germany, Romania, Italy and Poland. Several member states - including Bulgaria Estonia, Finland, France, Germany, Latvia, Lithuania, Poland, Portugal, Romania and Slovakia - have been advised to speed up interconnection projects with neighbouring member states.

Finally, research and innovation systems need to be modernised. The Innovation Union Scoreboard shows that the innovation gap is increasing in the EU, with some countries performing particularly well while others are deteriorating. Recommendations have therefore been addressed to Belgium, the Czech Republic, Estonia, Spain, Finland, France, Luxembourg, Latvia, Poland and Slovakia.

What is the Commission doing to help Member States implement these recommendations?

The EU's Structural and Investment Funds are the principal investment tool for delivering on the Europe 2020 goals and the CSRs, and 2014 marks the start of the new programming period. There is a need to use this funding in conjunction with financial engineering techniques, loans and schemes to facilitate SME financing, to enhance the impact on the EU economy. The Commission has addressed specific recommendations on the administration of EU funds to Croatia, the Czech Republic, Italy and Romania.

Do the CSRs help Member States meet their Europe 2020 targets?

The two things are linked, though the recommendations are annual, while the Europe 2020 targets are more long-term.

In March the Commission took stock of the Europe 2020 strategy, and found that progress on the 2020 targets has so far been mixed. The EU is on course to meet or to come close to its education, climate and energy targets. But given the magnitude of the crisis, we are not on track to meet our employment, research and development or poverty reduction goals, although results and forecasts vary widely across Member States.

This year's CSRs ask Member States to make efforts on in all of the five key areas covered by the 2020 targets. For example, the CSRs show that efforts are being made by Member States to deliver on their climate and energy targets for 2020, although the Commission recommends further steps in Belgium and Luxembourg.

Why do some countries have more detailed recommendations?

The recommendations address the specific situation in each Member State. They are not one-size-fits-all.

The recommendations take into account the challenges and the need to pursue reforms in a number of Member States with excessive imbalances (Italy, Croatia and Slovenia), as well as in countries where the seriousness of imbalances can have damaging spillover effects (France, Ireland, Spain and Hungary). Romania is also facing particular challenges and is implementing a precautionary assistance programme with the support of the EU and IMF.

The detailed recommendations and deadlines for these countries will help to effectively measure progress.

Why did Greece and Cyprus not receive recommendations?

Greece and Cyprus are subject to more regular and separate monitoring under EU-IMF financial assistance programmes, which aim to restore financial stability, boost competitiveness and create the conditions for sustainable growth and job creation. Given the extensive reporting requirements under these programmes, Greece and Cyprus are exempt from the obligation to submit medium-term budgetary plans and reform programmes in April, and therefore do not receive recommendations. However, both countries have submitted plans for 2014, for which the Commission has published a staff analysis.

What do Ireland's and Portugal's recommendations mean for post-programme surveillance?

Ireland and Portugal, having exited their financial assistance programmes, are now fully integrated into the EU's normal economic governance procedures, including the European Semester.

Both countries (along with Spain) are also subject to post-programme surveillance (PPS), which involves short technical missions to the countries twice per year and the subsequent preparation of reports by the Commission, in liaison with the European Central Bank. PPS complements and does not duplicate the surveillance taking place under the European Semester, and in the context of the Stability and Growth Pact and Macroeconomic Imbalances Procedure. It does not involve the adoption of any additional policy recommendations.

MORE DETAIL ON THE EUROPEAN SEMESTER

What is the European Semester?

The European Semester is the EU's calendar for economic policy coordination. It provides for year-round economic surveillance and makes clear when and how the EU's economic governance rules apply. These rules were fundamentally strengthened during the crisis to ensure that Member States tackle problems early in the game, before they spread (LINK TO MEMO/13/979).

  • The Semester begins with the Annual Growth Survey in November, where the Commission suggests EU-wide economic priorities for the following 12-18 months. At the same time, the Commission screens Member States for potential economic imbalances in the Alert Mechanism Report, and follows up with further analysis of selected economies in March.

  • The AGS and AMR are discussed by Member States in the winter, and used as a basis for agreeing EU-wide economic priorities in March. These are taken into account in their annual budget and reform plans (submitted in April). The plans are analysed by the Commission to prepare the country-specific recommendations each spring.

  • There is also a new budgetary timetable for the euro area, where draft budgetary plans are assessed by the Commission and discussed in the Eurogroup before final budgets are adopted in December.

What is the legal basis for the country-specific recommendations?

Under the European Semester, the Commission was given a mandate by Member States to check whether they take action on reform commitments they have made at EU level.

The country-specific recommendations related to economic policy are adopted on the basis of Article 121 of the EU Treaty and those on employment policy on the basis of Article 148.

Those referring to the Stability and Growth Pact are based on Article 5(2) of Council Regulation 1466/97 and those related to the Macroeconomic Imbalance Procedure on Article 6(1) of Regulation 1176/2011.

How does the Commission monitor progress on the recommendations?

The Commission holds at least three meetings a year with Member States to discuss progress on the CSRs. A formal assessment of each Member State’s performance on this year's CSRs will take place in spring 2015, when the Commission presents next year’s country-specific recommendations.

However, economic surveillance under the European Semester is constant. In November the Commission provides an overall assessment of the EU economy, and identifies general priorities in its Annual Growth Survey. Each April, the Commission scrutinises Member States' annual budgetary and economic reform plans. The autumn, winter and spring economic forecasts also offer an opportunity to take stock of developments in the Member States.

What happens if Member States don't act on the recommendations?

It is primarily in Member States' own interests to implement the reforms that will help them recover from the crisis and create the foundations for sustainable growth. The Commission's recommendations are based on expert analysis of the main challenges in each country.

Member States are also responsible to their EU counterparts, as they make a political commitment to reform by endorsing the recommendations at EU leaders' level and formally approving them at ministerial level.

As a last resort, there is the prospect of sanctions if Member States repeatedly fail to take action on public finances or macroeconomic imbalances (under the Excessive Deficit Procedure and the Excessive Imbalance Procedure, respectively).

Does the Commission discuss the recommendations with Member States before adopting them?

The recommendations are based on the Commission's assessment of progress made on last year's recommendations, on the medium-term budget and reform plans submitted by Member States in April and on the priorities discussed and agreed on the basis of the Annual Growth Survey.

Informal discussions have been going on between the Commission and the Member States throughout the year.

Can Member States rewrite or soften the recommendations before they are formally approved?

The value of these recommendations is that they are the product of extensive and objective technical analysis, validated by thorough discussion between EU leaders and ministers.

In the past, most of the Commission's recommendations have been adopted as they were drafted. Member States are free to suggest amendments, which then have to be adopted by a qualified majority of member states. According to new rules introduced by the Six-pack reforms in 2011, the Council is expected to follow the recommendations and proposals of the Commission or explain its position publicly.

What is the role of national governments and parliaments in the process?

National governments retain the responsibility for implementing their own budgets and economic reforms, but have signed up to better coordinate these policies under the European Semester. In particular, they have agreed to adhere to common, legally binding rules on public finances and macroeconomic imbalances (which have been strengthened during the crisis – MEMO/13/979). They have also committed themselves repeatedly to work towards the targets set out in the Europe 2020 strategy.

National parliaments retain the right to debate and vote on national budgets and other economic reforms. Under the European Semester, they now have access to more and better information, allowing them to get involved in policy-making before final decisions are made. The Commission is urging national parliaments, social partners and other interest groups to get more involved in the process in future.

Does the European Parliament have a say on the recommendations?

Although the Treaty does not require a specific role for the European Parliament under Articles 121 and 148, it remains fully involved in the policy discussions under the European Semester, and presents opinions on both the Annual Growth Survey and the country-specific recommendations. These opinions are taken into account by the Commission and Member States before the AGS and recommendations are formally adopted.


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