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European Commission - Fact Sheet

European Semester 2016 Spring Package explained

Brussels, 18 May 2016

What did the Commission decide today?

The European Commission has taken the next steps in the 2016 European Semester cycle. The package includes:

  • country-specific recommendations (CSRs) for 27 Member States (excluding Greece, which is currently under a stability support programme). The recommendations call for national actions to implement reforms and pursue responsible fiscal policies with a view to re-launch investment, create jobs and stimulate growth;
  • recommendations to the Council to abrogate the Excessive Deficit Procedures (EDP) (under Article 126(12) of Treaty on the Functioning of the European Union (TFEU)) for Cyprus, Ireland and Sloveniaas these countries have brought their deficits below the 3% of GDP Treaty reference value and are forecast to remain below this level in 2016 and 2017;
  • reports on Belgium, Finland and Italy under Article 126(3) TFEU, in which it reviews their compliance with the debt criterion of the Treaty.
  • confirmation of the Commission decision from 8 March 2016 that Croatia and Portugal are to be considered to be experiencing excessive imbalances, but stepping up the Macroeconomic Imbalances Procedure (MIP) is not warranted.

Country-specific recommendations

What are the country-specific recommendations?

Country-specific recommendations (CSRs) provide tailored advice to individual Member States on how to boost jobs, growth and investment, while maintaining sound public finances. The Commission publishes them every spring, as part of the European Semester, the EU's annual cycle for economic policy coordination. They give guidance 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 EU's long-term jobs and growth plan, the Europe 2020 strategy. (For more details on the semester process and CSRs, see memo on economic governance.)

What is new in the 2016 country-specific recommendations?

In line with the Five Presidents' Report of June 2015 and the Communication on steps towards completing the Economic and Monetary Union of October 2015, the Commission has made a number of changes to the 2016 European Semester cycle and in respect to the CSRs:

-       Better integration of the euro area and national dimensions, with theadoption of the recommendations for the euro area in November, ahead of the country specific recommendations. The earlier presentation of the euro area recommendation gives Member States the possibility to focus on the euro area dimension when shaping their national policies.

-       More focused country-specific recommendations, setting the policy objectives for the next 18 months, while the Commission will continue to monitor a wide range of economic policy developments.

-       A stronger macroeconomic imbalances procedure, including the streamlining and stabilisation of the categories of macroeconomic imbalances from six to four (no imbalance, imbalances, excessive imbalances, and excessive imbalances with corrective action).

-       A stronger focus on employment and social performance, with the inclusion of three new employment variables (unemployment, youth unemployment and long-term unemployment) in the scoreboard of the Macroeconomic Imbalances Procedure, greater emphasis on the social fairness of macroeconomic adjustment programmes and a stronger role of social partners.

-       More systematic use of benchmarking to promote convergence amongst and within Member States. The aim is to promote convergence by benchmarking and pursuing best practices, which can be shared and compared across policy or thematic areas.

-       A strong focus on investment and more focused support to reforms through EU funds and technical assistance through (i) a close link between the use made of the EU budget and European Structural and Investment Funds in the Member States and the policy reforms, (ii) the roll-out of technical assistance by the Commission's Structural Reform Support Service (SRSS) and the proposed Structural Reform Support Programme (SRSP).

-       Democratic legitimacy and accountability to strengthen ownership of the European Semester: a closer dialogue with national stakeholders (governments, Parliaments, social partners, civil society) and the European Parliament at key points of the Semester process has been significantly strengthened.

What progress have Member States made since the 2015 country-specific recommendations?

The Member States have advanced reforms over the last year, but the pace of such progress needs to be accelerated to contribute, as it should, to jobs, growth and investment. The implementation of country-specific recommendations varies across policy areas. This can be due to the complexity of the reforms to be undertaken, such as reforms of labour and product markets, pensions systems and banking sector. Most significant progress is observed with regard to recommendations in the areas of financial services and active labour market policies. In contrast, more progress could have been expected in generating a business and employment friendly and regulatory environment, increasing female labour market participation and reducing barriers in the services sector. More progress in implementation is identified for Member States experiencing imbalances than for Member States without imbalances, presumably due to the larger need for reform, stronger policy dialogue and, in some cases, in response to stronger market pressure.

In countries with high external liabilities, the large current account deficits of the pre-crisis period have been considerably reduced or even turned into surpluses. In some other Member States, surpluses persist and remain very large. Cost competitiveness has generally improved and there is evidence of structural adjustment in terms of resources shifting to the tradable sector. Unemployment is declining, albeit to different degrees across the Member States. The process of balance-sheet repairs is progressing, with deleveraging ongoing in the household and corporate sectors, and bank capitalisation improving. In most countries, deleveraging is mainly linked to reduced spending, while in some countries, the relative level of debt has gone down due to robust growth. In this context, vulnerabilities associated with persisting debt overhang in some sectors remain a source of concern, while the financial sector is affected by low profitability coupled with high levels of non-performing legacy loans and the need to adjust to a more demanding regulatory environment.

Effective implementation of structural reforms requires both political will and adequate administrative capacity. At the end of the last year the Commission proposed a dedicated EU instrument – Structural Reform Support Programme (SRSP) – to provide targeted technical assistance to the Member States, at their request, to assist them with the design and implementation of institutional, structural and administrative reforms. The proposal is currently being negotiated with co-legislators.

What are the main challenges for Member States in 2015-2016?

The EU and its Member States need to make significant efforts to reinforce the recovery, boost long-term potential growth, promote upward convergence, foster job creation and reduce poverty and social exclusion. This is particularly true given the legacy of the recent crisis, weak demographic trends and long-standing structural weaknesses hampering productivity growth.

Investment is still low, from both private and public sources, and is held back by a combination of weak demand, high private debt, a difficult business environment in some Member States and overall fragile private sector confidence. Faster progress on structural reforms, including thought adequate sequencing, is also necessary to raise the growth potential of EU economies.

The international environment is changing, presenting both opportunities and challenges to the European Union. Growth in emerging economies is expected to remain subdued amid more volatility in the financial markets. More recently, growth in major advanced economies has also slowed down. These elements create uncertainty and highlight the need for the EU to strengthen its capacity to grow and stimulate demand in its large integrated economy.

What should Member States do to boost financing and investment?

In many Member States, high levels of private debt and the high ratio of non-performing loans still prevent stronger recovery in credit. Member States should facilitate the creation of the Capital Markets Union so that a large number of businesses can benefit from improved financing conditions and credit growth. In addition, the markets for other forms of capital market financing, such as venture capital, should be developed further.

Unlocking investment goes well beyond increasing financing. Member States are encouraged to ensure an environment that is conducive to investment and to remove barriers and bottlenecks to investment.

The Investment Plan for Europe is beginning to deliver results. So far, the European Investment Bank (EIB) has approved 57 projects for financing under the European Fund for Strategic Investments (EFSI), representing a financing volume of EUR 7.8 billion. The European Investment Fund (EIF) has approved 165 SME financing agreements with total financing under the EFSI of EUR 3.4 billion. Some 136,000 SMEs and Midcaps are expected to benefit. Together, these operations are expected to trigger total investment of EUR 82 billion.

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What should Member States do to improve the business environment and productivity?

Long-term growth is dependent on productivity increases. Productivity and competitiveness would benefit from structural reforms to bring about a more efficient allocation of resources, faster adoption of new technologies and innovative business models, in a more business- and employment-friendly regulatory environment with closer cooperation between business and academia.

What should Member States do to make public finances more supportive of growth?

Fiscal policy remains important in strengthening the recovery. Deficit levels have been successfully reduced in some Member States and the policy focus should mainly be on further progress with the implementation of structural reforms to lift the medium-term growth potential. At the same time, further consolidation efforts are still needed in a number of Member States to set public debt ratios firmly on a downward path, especially in those countries with high debt, where vulnerability to financial market swings may be more accentuated.

In the current context, striking an appropriate balance between the different components of public finances is crucial to preserving their growth-friendliness. On the revenue side, although some decisive steps have been taken, Member States could still step up efforts to make tax systems fairer, more transparent and effective in providing the much-needed incentives for job creation. Member States should also address the high tax wedge on labour, which weighs on labour costs and reduces the net take-home-pay of employees. On the expenditure side, Member States should target both higher efficiency and the performance of individual expenditure sources, which may allow for safeguarding the provision of adequate levels of social services and public goods also in the future. An ageing population calls for reforms in long-term care, pensions and health care to ensure that social security systems are sustainable and adequate.

What should Member States do to improve employment and skills as well as social inclusion and protection?

Reform efforts have brought initial positive results. Labour market conditions continue to improve, with employment growing and unemployment falling at a moderate pace.

Reform efforts are still needed to improve the functioning of labour markets:

- Labour markets need to strike the right balance between flexibility and security. The persistence of unemployment is likely to continue weighing on the efficiency of labour market matching, welfare dependency and low-skills traps.

- There is a need to improve the capacity to create jobs and thereby to tackle high levels of unemployment. This is crucial to boost job creation, address distortions such as high levels of long-term and youth unemployment, segmentation, skills mismatches, and to improve social cohesion. Efficient and effective vocational education and training programmes play a key role in improving the chances of employment.

- Investing in skills contributes to greater convergence. Skill gaps and mismatches put a brake on Europe's innovation capacity and competitiveness.

Social policies, including pension policies and family policies such as child care and long-term care, can support longer working lives and increase the employment of women. Promoting social dialogue and the involvement of social partners in the development of employment and social policies could facilitate the implementation and increase the effectiveness of such policies.

In the 2016 recommendations, there is a focus on the reduction of poverty and social exclusion, recommending that Member States fill gaps in their social safety nets and integrate traditional income support programmes with activation measures.

How is the refugee crisis reflected in the European Semester?

Managing the refugee crisis is a top priority for the Commission, as reflected in the various initiatives that the Commission has launched to tackle the current crisis and its consequences. Further initiatives will follow to improve the Common European Asylum system and develop an Action Plan on Integration.

A complex challenge such as this requires complex answers. It is crucial that the EU and its Member States face this challenge together. The Commission's country reports earlier this year already provided an initial assessment of the situation in Member States with the highest share of asylum seekers.

Based on this analysis, no specific recommendations on refugees were made for individual countries, as the main recipient countries have engaged in comprehensive and far-reaching policies to receive and accommodate asylum seekers and it is too early to assess the impact of current measures. However, the Commission proposes some broader recommendations regarding measures to improve the integration of people with a migrant background and disadvantaged groups, which should also benefit refugees.

The high influx of refugees and migrants over the past year leads to a number of social and economic consequences for the EU. In the short run, the inflow of refugees is set to require additional public spending and to increase domestic demand, with positive effects on GDP. The medium-term positive effect on employment and growth hinges on refugees' successful labour market and social integration, including via educational support.

To support countries that have increased their public spending significantly due to the refugee crisis, the Commission has been committed from the start to take this into account when assessing Member States' obligations under the Stability and Growth Pact. The Commission is working on the basis of the Pact’s rules regarding unforeseen circumstances and unusual events outside the control of the Member State.

Based on requests from the Member States, the assessment of the costs related to the refugee crisis is made on a case-by-case basis.

What about policy areas not targeted in this year’s recommendations?

The country-specific recommendations focus on a small number of key priority issues of macroeconomic and social relevance that require Member States' immediate attention.

However, this does not mean that those areas covered by the more extensive scope of country-specific recommendations in previous years have lost importance. The Commission will continue to monitor them in its Country Reports and will continue to encourage Member States to take a holistic approach in their National Reform Programmes.

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

The country-specific recommendations provide a policy framework for action at national level. The Commission supports dialogue with Member States, social partners and stakeholders at all levels to support exchange of experience, facilitate the follow-up, ensure close monitoring and review performance.

The Commission is also making sure that EU funding is steered towards EU and national priorities. The EU's Structural and Investment Funds are the principal investment tools for delivering on the Europe 2020 goals. 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 Investment Plan for Europe and the European Fund for Strategic Investments also serve this purpose.

The Structural Reform Support Service, established last year, is already helping with effective reform implementation, building on its experience in Cyprus and Greece. A legislative proposal to expand the service into an EU instrument for all Member States is currently under discussion with co-lawmakers to establish a Structural Reform Support Programme, which will allow the mobilisation of technical support for a broad range of key reform areas.

Why do some countries have more detailed recommendations?

The number and level of detail of the recommendations reflect the scale of the challenges each Member State faces, and the extent to which these challenges have spillover effects to other Member States.

In general terms, Member States with excessive imbalances (Bulgaria, Croatia, Cyprus, France, Italy and Portugal,) have more numerous and/or more detailed recommendations. The detailed recommendations and deadlines for these countries will help to effectively measure progress.

Why did Greece not receive recommendations?

Greece is under a stability support programme. Given the extensive reporting requirements under the programme, implementation of reforms in -Greece is monitored within the programme framework. Greece is therefore exempt from the obligation to submit medium-term budgetary plans (Stability Programme) and National Reform Programme in April, and it does not receive recommendations. That being said, Greece has submitted a National Reform Programme (NRP) in spring each year, even if this was not required under the Two-Pack.

Budgetary decisions and macroeconomic surveillance

What has the Commission decided today?

First, the Commission recommends that Cyprus, Ireland and Slovenia should now exit the excessive deficit procedure. This would leave six Member States under the corrective arm after this Semester round, down from 24 Member States in 2011.

Second, the Commission adopted reports for Belgium, Italy and Finland under Article 126(3) TFEU, in which it reviews their compliance with the debt criterion of the Treaty. While these countries appear to be at variance with the debt reference value, and the benchmark pace of reduction towards it, the reports, after analysing the relevant factors, suggest that the Stability and Growth Pact should be considered as currently complied with. For Italy, the Commission will review its assessment of the relevant factors in a new report by November as further information on the resumption of the adjustment path towards the medium-term budgetary objective for 2017 becomes available.

As regards Portugal and Spain, the Commission recommends to the Council to recommend a durable correction of the excessive deficit in 2016 and 2017 respectively, by taking the necessary structural measures and by using all windfall gains for deficit and debt reduction. In line with its duty to monitor the implementation of the excessive deficit procedure under Article 126 of the Treaty, the Commission will come back to the situation of these two Member States in early July.

Why is the Commission recommending that the Council closes the Excessive Deficit Procedures (EDPs) for Cyprus, Ireland and Slovenia?

Cyprus

Cyprus was required to correct its excessive deficit by 2016. In March 2016, Cyprus exited its three-year economic adjustment programme.

Based on general government deficit and debt data for 2015 provided by Eurostat on 21 April 2016, Cyprus' general government deficit amounted to 1.0% of GDP in 2015, well below the 3% of GDP Treaty reference value. If the Council so decides, Cyprus would leave the corrective arm one year ahead of the deadline set by the Council (end-2016). The Stability Programme, submitted by the Cypriot government on 30 April 2016, plans for the deficit to remain well below the Treaty reference value of 3% of GDP in 2016 and 2017. This is in line with the Commission's own projections for 2016 and 2017.

Ireland

Ireland was required to correct its excessive deficit by 2015. In December 2013, Ireland exited its economic adjustment programme. This year Ireland is again forecast to be Europe’s fastest growing economy.

Based on general government deficit and debt data for 2015 provided by Eurostat on 21 April 2016, Ireland's general government deficit amounted to 2.3% of GDP in 2015. This brings the deficit below the 3% of GDP Treaty reference value. The Stability Programme submitted by the Irish government on 29 April 2016 plans for the deficit to remain below the Treaty reference value of 3% of GDPin 2016 and 2017. This is in line with the Commission's own projections for 2016 and 2017.

Slovenia

Slovenia was required to correct its excessive deficit by 2015. Based on general government deficit and debt data for 2015 provided by Eurostat on 21 April 2016, Slovenia's general government deficit amounted to 2.9% of GDP in 2015. This brings the deficit below the 3% of GDP Treaty reference value. The Stability Programme submitted by the Slovenian government on 28 April 2016 plans for the deficit to remain below the Treaty reference value of 3% of GDPin 2016 and 2017. This is in line with the Commission's own projections for 2016 and 2017.

When will these countries move to the preventive arm of the SGP?

The Economic and Financial Affairs Council (ECOFIN) will discuss the Commission's recommendations. If and when the ECOFIN Council decides to abrogate the EDPs, Cyprus, Ireland and Slovenia will move from the corrective to the preventive arm of the Stability and Growth Pact (SGP).

Under the preventive arm of the SGP, these countries should progress towards their medium-term budgetary objectives at an appropriate pace, including respecting the expenditure benchmark, while complying with the deficit and debt criteria.

These three countries would have to comply with the rules of the SGP’s ‘preventive arm’ as of this year.

Reports under Article 126(3) of the Treaty assessing non-compliance with the debt criterion

In the case of Belgium, Finland and Italy, which are under the preventive arm of the SGP,the Commission has prepared reports (under Article 126(3) of the Treaty)as data for 2015 shows these countries having breached the debt criterion.

What is a report under Article 126(3) of the Treaty?

The Article 126(3) report represents the first step in assessing the case for launching a possible Excessive Deficit Procedure. It assesses the Member State's deficit and/or debt positions. A Member State is non-compliant with the deficit requirement if its general government deficit is above 3% of GDP, unless the excess over the reference value is only exceptional and temporary and the deficit ratio remains close to the reference value. As regards debt, the criterion for non-compliance is a general government debt level greater than 60% of GDP and not declining at a satisfactory pace.

The SGP defines a satisfactory pace as a reduction of the gap between a country's debt ratio and the 60% of GDP reference value of the Treaty by 1/20th annually on average over three years. If a Member State does not meet one or both of the criteria, the Commission prepares a report under Article 126(3) of the Treaty, which considers in detail a series of factors and assesses the case for opening an EDP.

What are the implications of the reports under Article 126(3) of the Treaty?

The Economic and Financial Committee has two weeks following the adoption of the Article 126(3) reports to formulate an opinion (under Article 126(4)).

What are the next steps in the implementation of the budgetary decisions?

The Council will decide on the Commission's Recommendations:

  • on closing the Excessive Deficit Procedure (EDP) for Cyprus, Ireland and Slovenia.

The Economic and Financial Committee (EFC) will provide its opinion on the Article 126(3) reports for Belgium, Finland and Italy, assessing a potential breach of the debt criterion by these countries, within two weeks.

The Commission assesses compliance with the SGP continuously throughout the year as part of the European Semester of economic policy coordination.

Are euro area programme countries covered by the EDP?

Yes, Greece, which is currently subject to a macroeconomic adjustment programme, is also subject to an on-going EDP. But to avoid duplication of monitoring and reporting, this takes place within the framework of the programme. (Since the entry into force of the "Two Pack" Regulation (EU) No 472/2013 on 30 May 2013 (MEMO/13/457), the monitoring of euro area programme countries' compliance with their recommendations under the EDP takes place within the regular monitoring of the programme provided for by Article 7(4) of the same Regulation.)

How many Member States are currently in an EDP?

If the Council follows the Commission's Recommendations for closing the EDPs for Cyprus, Ireland and Slovenia, the overall number of countries in EDP will drop to six: Croatia, France, Greece, Portugal, Spain and the United Kingdom. This is down from spring 2011, when 24 Member States were in EDP.

Which decisions related to the Macroeconomic Imbalances Procedure (MIP) did the Commission take today?

Concerning the Macroeconomic Imbalances Procedure (MIP), the Commission confirms that Croatia and Portugal are to be considered to be experiencing excessive imbalances. They should implement their reform agendas rigorously and in a timely manner. The level of ambition of the two countries' national reform programmes (NRPs) is broadly adequate and confirms their intention to correct their excessive imbalances. Both countries shall remain in the 'excessive imbalances' category, i.e; in the preventive arm of the MIP.

What is the Fiscal Compact and which Member States are bound by it?

The Fiscal Compact is Title III of the Treaty on the Stability, Coordination and Governance of the Economic and Monetary Union (TSCG). The Fiscal Compact binds twenty-two of the twenty-five Contracting Member States to the TSCG, namely the euro area Member States as well as Bulgaria, Denmark and Romania, who chose to opt in.

The Fiscal Compact introduces (Article 3 of the TSCG) a balanced budget rule to be introduced with binding and permanent provisions. The balanced budget rule is defined in reference to the medium-term objective (MTO) as referred to in the Stability and Growth Pact (SGP). It sets upper limits to the structural budget balance which depend on debt level and sustainability risks. The balanced budget rule is accompanied by a correction mechanism which should be triggered automatically in the event of significant observed deviations, except under exceptional circumstances. The rule and the correction mechanism should be monitored by a national independent monitoring institution.

What has the European Commission decided today as regards the Fiscal Compact?

The Commission has launched a formal consultation to the Member States that are contracting parties of the Fiscal Compact to enquire about their progress in implementing in national law the provisions of the Fiscal Compact. The Member States concerned have two months to submit their observations to the Commission.

For further information:

Press release

Chapeau Communication

Legal documents of fiscal Recommendations

European Semester 2016: Commission reminds Member States of fiscal obligations

Spring 2016 Economic Forecast: Staying the course amid high risks

European Semester 2016: fewer Member States have economic imbalances than a year ago

Country Reports

The EU's economic governance explained

Annual Growth Survey 2016

Alert Mechanism Report 2016

Euro Area Recommendation

Europe 2020

"Five Presidents' Report" sets out plan for strengthening Europe's Economic and Monetary Union from 1 July 2015

Completing Europe's Economic and Monetary Union: Commission takes concrete steps to strengthen EMU

MEMO/16/1727

Press contacts:

General public inquiries: Europe Direct by phone 00 800 67 89 10 11 or by email


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