title: Council Recommendation of 9 July 2019 on the 2019 National Reform Programme of Bulgaria and delivering a Council opinion on the 2019 Convergence Programme of Bulgaria

text:
               5.9.2019

               EN

               Official Journal of the European Union

               C 301/8

      COUNCIL RECOMMENDATION
      of 9 July 2019
      on the 2019 National Reform Programme of Bulgaria and delivering a Council opinion on the 2019 Convergence Programme of Bulgaria
      (2019/C 301/02)
      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 21 November 2018, the Commission adopted the Annual Growth Survey, marking the start of the 2019 European Semester for economic policy coordination. It took due account of the European Pillar of Social Rights, proclaimed by the European Parliament, the Council and the Commission on 17 November 2017. The priorities of the Annual Growth Survey were endorsed by the European Council on 21 March 2019. On 21 November 2018, on the basis of Regulation (EU) No 1176/2011, the Commission also 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 2019 country report for Bulgaria was published on 27 February 2019. It assessed Bulgaria’s progress in addressing the country-specific recommendations adopted by the Council on 13 July 2018 (3), 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 27 February 2019. The Commission’s analysis led it to conclude that Bulgaria is experiencing macroeconomic imbalances. In particular, vulnerabilities in the financial sector are coupled with high indebtedness and non-performing loans in the corporate sector. While there is progress in addressing sources of the imbalances, the full implementation and monitoring of recent reforms of supervision and governance in the bank and non-bank financial sectors will be crucial.

                  (3)

                  On 24 April 2019, Bulgaria submitted its 2019 National Reform Programme and its 2019 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 (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 the 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 2019 Convergence Programme, the government, starting from a headline surplus of 2 % of gross domestic product (GDP) in 2018, aims at a deficit of 0,3 % of GDP in 2019 and a surplus of 0,4 % of GDP in 2020, 0,2 % in 2021 and 0,1 % in 2022. Based on the recalculated structural balance (5), the medium-term budgetary objective — a structural deficit of 1 % of GDP in structural terms — continues to be overachieved throughout the programme period. According to the 2019 Convergence Programme, the general government debt-to-GDP ratio is expected to decline gradually from 22,6 % of GDP in 2018 to 16,7 % in 2022. The macroeconomic scenario underpinning those budgetary projections is plausible. Based on the Commission 2019 spring forecast, the structural balance is forecast to register a surplus of 0,7 % of GDP in 2019 and 0,6 % of GDP in 2020, above the medium-term budgetary objective. Overall, the Council is of the opinion that Bulgaria is projected to comply with the provisions of the Stability and Growth Pact in 2019 and 2020.

                  (6)

                  Tax revenues and tax compliance are improving and a number of initiatives are in place. However, tax collection does not seem to be improving everywhere at the same pace. This is particularly the case for labour-related taxes and social security contributions and in some categories of excise taxes. There is also evidence that undeclared work and illicit trade in fuels remain a challenge. Maintaining the efforts to improve tax collection and taking additional targeted measures to face the challenges in specific areas of the tax system is of paramount importance for reducing further the still large shadow economy.

                  (7)

                  The government has taken steps to improve the effectiveness of public expenditure. The World Bank completed a spending review covering a number of public institutions (ministries and municipalities) and two pilot studies, one on policing and firefighting and one on waste management, and also delivered a manual for future reviews by the government. In the 2018 medium-term fiscal strategy, the government introduced a number of performance indicators to assess the impact of spending in the different policy areas over time and to inform evaluation and planning of the budget. Following up on these initiatives is expected to raise the quality, efficiency and transparency of public spending, and consequently the quantity and quality of public goods.

                  (8)

                  State-owned enterprises suffer from weak corporate governance, which is also to a large extent reflected in their economic performance. A reform of the legal framework for the corporate governance of State-owned enterprises is under way in cooperation with the Organisation for Economic Cooperation and Development (OECD) and with the support of the Commission’s Structural Reform Support Service. The reform aims to address the current weaknesses by aligning the national legislation with the OECD’s corporate governance guidelines for state-owned enterprises. The adoption and effective implementation of the framework will ensure the continuity and will be critical for the success of the reform.

                  (9)

                  In a favourable economic environment, banks’ capital and liquidity ratios improved on average. In parallel, non-performing loans by non-financial corporations declined although they remain high. The secondary market for non-performing loans has become more dynamic. On 30 May 2019 the BNB adopted a decision to implement the EBA Guidelines for the management of non-performing and restuctured exposures. The follow-up measures resulting from the financial sector reviews have strengthened the banking sector, but some vulnerabilities remain. New regulatory initiatives in 2018 included the rules for large exposures and the identification of connected clients, an increase in the counter-cyclical capital buffer rate and the introduction of macro-prudential tools for borrower-based measures. Following up on legislative initiatives on related-party exposures, sustained supervisory efforts to limit loans to related parties and penalise infringements of collateral provisions are crucial to support sound business practices. Enhancing the bank resolution framework is another ongoing measure that will contribute to the resilience of the financial sector.

                  (10)

                  Completing the insolvency reform could help reduce the high outstanding private-sector debt and the still high share of non-performing loans. Some missing elements reduce the efficiency and effectiveness of the insolvency framework, resulting in slow and costly insolvency proceedings. At the same time, the absence of adequate monitoring tools prevents a proper analysis of current and new pre-insolvency and insolvency procedures and does not allow concrete bottlenecks or weak points to be identified. In October 2018, Bulgaria asked for assistance from the Commission’s Structural Reform Support Service to help it advance the reform of the insolvency framework. This project identifies gaps in the insolvency framework and will produce a roadmap to address them. It is important to sustain the reform momentum and implement the forthcoming roadmap.

                  (11)

                  Bulgaria has adopted legislative amendments in 2018 and subsequently in May 2019 and is working towards a fully consistent transposition of the Directive (EU) 2015/849 of the European Parliament and of the Council (6) (Fourth Anti-Money Laundering Directive). Attention should be paid to the effective implementation of these measures. The authorities have still not finalised and notified the National Risk Assessment, which is a cornerstone to devising adequate national policies to combat money laundering and terrorist financing. Moreover, recent developments in the banking sector suggest that there is need to enhance the national supervision of international financial transactions and to ensure the effective enforcement of the anti-money-laundering (AML) framework. The risk of corruption needs to be better addressed, as it is a predicate offence to money laundering. The Bulgarian authorities will need to show concrete results and build a track record evidenced by final decisions in high level corruption cases. The use of financial investigation and financial profiling is limited.

                  (12)

                  Non-bank supervision is being reformed. The Financial Supervision Commission adopted an action plan for reforming non-bank financial supervision in September 2017, in cooperation with the European Insurance and Occupational Pensions Authority. The full and timely implementation and enforcement of the action plan, still ongoing, will contribute to adequate supervision of the non-banking financial sector. Amendments to secondary legislation are in place, aiming to improve the valuation rules and their application. Their effective implementation and enforcement would address remaining valuation issues that have been identified in the past. Lastly, group-level supervision remains a challenge for ensuring an adequate risk-based insurance supervision.

                  (13)

                  The car insurance sector presents some vulnerabilities. Well-specified rules on compensation would facilitate a more harmonised approach by judges when deciding on individual cases. In the longer term, such a methodology would help to reduce costs, volatility and underwriting risk in the motor third-party liability line of business. The sustainability of the sector would also benefit from improved pricing that takes into account clients’ driving history. The Financial Supervision Commission has proposed a bonus-malus system, which is undergoing broad public debate. Lastly, the liquidity of the ‘Green Card Bureau’ has raised substantial concerns, mainly due to the non-payment of claims by one Bulgarian insurer. Strict compliance of all members with their obligations is crucial for the credibility and efficiency of the system.

                  (14)

                  Infrastructure suffers from major investment gaps. The coverage and quality of transport infrastructure have improved but remain below the Union average. The Trans-European Transport Network in Bulgaria is still incomplete. Moreover, greenhouse gas emissions from road transport have increased strongly over the last five years. There is a need for further development of rail and road sections and the respective European rail traffic management systems and intelligent transport systems. Bulgaria has low connection and treatment rates for urban waste water, high air pollution levels and landfilling rates for municipal waste and a recycling rate, considerably lower than the Union average. Investments to promote sustainable water management, resource efficiency and the transition to a circular economy are necessary. In addition, investment needs in the fields of energy and climate change mitigation and adaptation are significant. The high energy intensity of the economy and the slow progress towards meeting energy efficiency targets, in particular in the buildings sector, are holding back the productivity and competitiveness of businesses in the country. Efforts thus need to be stepped up to ensure that significant energy savings are achieved via targeted investments in the industrial, transport and buildings sectors. Increased investments in clean energy infrastructure (such as clean and low-carbon power generation, interconnections, and smart grids), in line with the priorities outlined in Bulgaria’s draft national climate and energy plan, would further help improve the economy’s overall competitiveness and people’s quality of life.

                  (15)

                  Despite an increase in the public research budget in 2018, research and development (R & D) spending remains very low in both private and public sector. Private R & D investment is dominated by large multinational companies and concentrated in the capital region. The slow pace of implementing reforms and high fragmentation in the research, development and innovation system hampers the contribution of R & D investment to productivity and growth. A large number of universities and research institutes continue to perform poorly in high-quality scientific research. Science-business links remain very weak and the availability of human capital in the R & D system is a source of significant concern. Clusters and their potential in Bulgaria are underdeveloped as they often lack a critical mass. Further reforms, combined with efficient governance and more effective public investment can maximise the impact on productivity and improve the competitiveness of the economy. In addition, increasing the digitisation of companies and introducing new business models are critical for the country’s productivity.

                  (16)

                  Public administration and e-government reforms continue to be slow and are yielding insufficient improvements while the business environment remains weak. A number of reform measures have been adopted, but their practical implementation is lagging behind. Institutional shortcomings, regulatory uncertainty, corruption, and an insufficient labour supply remain among the main obstacles to investment. Governance in the public sector could benefit from more transparency, clearer rules and a long-term perspective. Shortcomings are also apparent in the area of product testing and safety due to limited financial and human resources. Moreover, while the vast majority of measures included in the national procurement strategy have been adopted, their implementation requires continuous monitoring, control and assessment. The frequent use of direct awards and the high number of single bids represent a threat to the system’s transparency and effectiveness. The public procurement sector’s administrative capacity is an ongoing challenge, as are also the professionalisation of public buyers and aggregated purchases. The significant delay in the uptake of electronic procurement is preventing further improvement in the transparency and efficiency of public procurement processes.

                  (17)

                  The labour market has improved but challenges remain. The employment rate has reached the highest level since Bulgaria joined the Union and the unemployment rate is below the Union average. Despite these positive developments, some groups such as the low-skilled, young people, Roma and people with disabilities still face difficulties to find work. Specific measures are being implemented to support the long-term unemployed, who represented 3 % of the active population in 2018. A combination of effective and sustained outreach measures, active labour market policies and integrated employment and social services could improve disadvantaged groups’ employability and chances of finding work.

                  (18)

                  Bulgaria’s increasing skills shortages warrant significant investments. Young people might be more employable if the quality and effectiveness of traineeships and apprenticeships were improved. Moreover, the participation in upskilling and reskilling measures among the adult population is very low. Despite measures launched to encourage the development of digital skills, Bulgaria’s level of basic digital skills (29 % of individuals possess basic digital skills against a Union average of 57 %) remains among the lowest in the Union.

                  (19)

                  Despite the ratification of the International Labour Organization’s Convention concerning Minimum Wage Fixing and of several rounds of negotiations during 2018, employers and trade unions still have diverging views on the criteria to be applied when setting the minimum wage. There is scope for greater consensus about an objective and transparent wage-setting mechanism. Meanwhile, although the involvement of the social partners in the design and implementation of policies and reforms seems to have increased, continuous support for a reinforced social dialogue remains necessary.

                  (20)

                  Educational outcomes are still low and continue to be strongly influenced by parents’ socioeconomic status. This reflects challenges relating to the quality and inclusiveness of the education and training system. Bulgaria invests insufficiently in education, particularly in pre-primary and primary education, two areas that are instrumental to creating equal opportunities from an early age. Participation in quality early childhood education and care is low, in particular for Roma and children from other disadvantaged groups. The rate of early school leaving is still high, with negative consequences for future employability and labour market outcomes. The labour market relevance of vocational education and training and the availability of dual vocational education and training remain insufficient. While some measures are underway, further efforts are needed to ensure that the skill set of higher education graduates can address short- and mid-term skills shortages in a consistent way. Some measures to retrain teachers and make the profession more attractive have been put in place. However, initial and continuous education programmes for teachers require further strengthening and efforts are still needed to improve the working conditions of education staff.

                  (21)

                  Bulgaria is still facing high income inequality and risk of poverty or social exclusion. Though decreasing, the rate of poverty or social exclusion in 2018 was 32,8 %, still well above the Union average. The social security system does not cover all people in employment and the social protection system is insufficient to tackle the significant social issues. This reflects the low level of social spending, the uneven availability of social services across the territory and the limited redistributive effects of the taxation system. In 2018, the income of the richest 20 % of population was 7.7 times higher than that of the poorest 20 %, still one of the highest in the Union. Despite some measures, the adequacy and coverage of the minimum income remain limited and an objective mechanism for regularly updating it is still missing. Social services are hampered by low quality and lack of an integrated approach towards active inclusion. Disparities in access to social services, healthcare and long-term care persist. This undermines their ability to provide comprehensive support for the most vulnerable, such as the Roma, children, the elderly, persons with disabilities and people living in rural areas. Part of the population has difficulty getting access to affordable housing. More efforts are therefore needed to foster active inclusion, promote the socioeconomic integration of vulnerable groups including the Roma, enhance access to quality services and address material deprivation.

                  (22)

                  The healthcare sector is still characterised by low public spending. People in Bulgaria face limited access to healthcare caused by an uneven distribution of limited resources and low health insurance coverage. Out-of-pocket payments are considerable, as they need to compensate for the low level of public expenditure. The low availability of general practitioners is constraining the delivery of primary care. There is a significant shortage of nurses with the number per capita among the lowest in the Union. Swifter and more effective implementation of the national health strategy would help tackle these weaknesses.

                  (23)

                  Under the Cooperation and Verification Mechanism, the Commission continues to monitor the judicial reform and the fight against corruption and organised crime in Bulgaria. These areas are therefore not covered in the country-specific recommendations for Bulgaria, but are relevant for the development of a positive business environment in the country. The November 2018 Cooperation and Verification Mechanism report noted that Bulgaria had continued its efforts to reform its judiciary and address shortcomings in the fight against corruption and organised crime, but that further efforts were needed in a number of areas. The Commission expects to assess progress again in early autumn 2019.

                  (24)

                  The programming of Union funds for the period 2021-2027 could help address some of the gaps identified in the recommendations, in particular in the areas covered by Annex D to the 2019 country report. This would allow Bulgaria to make the best use of those funds in respect of the identified sectors, taking into account regional disparities. Strengthening the country’s administrative capacity for the management of these funds is an important factor for the success of this investment.

                  (25)

                  In the context of the 2019 European Semester, the Commission has carried out a comprehensive analysis of Bulgaria’s economic policy and published it in the 2019 country report. It has also assessed the 2019 Convergence Programme, the 2019 National Reform Programme and the follow-up given to the recommendations addressed to Bulgaria in previous years. The Commission has taken into account not only their relevance for sustainable fiscal and socioeconomic policy in Bulgaria, 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.

                  (26)

                  In the light of this assessment, the Council has examined the 2019 Convergence Programme and is of the opinion (7) that Bulgaria is expected to comply with the Stability and Growth Pact.

                  (27)

                  In the light of the Commission’s in-depth review and this assessment, the Council has examined the 2019 National Reform Programme and the 2019 Convergence Programme. Its recommendations made under Article 6 of Regulation (EU) No 1176/2011 are reflected in recommendation (2) below,

            HEREBY RECOMMENDS that Bulgaria take action in 2019 and 2020 to:

         1.

            Improve tax collection through targeted measures in areas such as fuel and labour taxes. Upgrade the State-owned enterprise corporate governance by adopting and putting into effect the forthcoming legislation.

         2.

            Ensure the stability of the banking sector by reinforcing supervision, promoting adequate valuation of assets, including bank collateral, and promoting a functioning secondary market for non-performing loans. Ensure effective supervision and the enforcement of the AML framework. Strengthen the non-banking financial sector by effectively enforcing risk-based supervision, the recently adopted valuation guidelines and group-level supervision. Implement the forthcoming roadmap tackling the gaps identified in the insolvency framework. Foster the stability of the car insurance sector by addressing market challenges and remaining structural weaknesses.

         3.

            Focus investment-related economic policy on research and innovation, transport, in particular on its sustainability, water, waste and energy infrastructure and energy efficiency, taking into account regional disparities, and improving the business environment.

         4.

            Strengthen employability by reinforcing skills, including digital skills. Improve the quality, labour market relevance, and inclusiveness of education and training, in particular for Roma and other disadvantaged groups. Address social inclusion through improved access to integrated employment and social services and more effective minimum income support. Improve access to health services, including by reducing out-of-pocket payments and addressing shortages of health professionals.

         Done at Brussels, 9 July 2019.

               For the Council

               The President

            M. LINTILÄ

         (1)  OJ L 209, 2.8.1997, p. 1.

         (2)  OJ L 306, 23.11.2011, p. 25.

         (3)  OJ C 320, 10.9.2018, p. 7.

         (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)  Directive (EU) 2015/849 of the European Parliament and of the Council of 20 May 2015 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing, amending Regulation (EU) No 648/2012 of the European Parliament and of the Council, and repealing Directive 2005/60/EC of the European Parliament and of the Council and Commission Directive 2006/70/EC (OJ L 141 5.6.2015, p. 73).

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


title: Council Recommendation of 9 July 2019 on the 2019 National Reform Programme of Czechia and delivering a Council opinion on the 2019 Convergence Programme of Czechia

text:
               5.9.2019

               EN

               Official Journal of the European Union

               C 301/15

      COUNCIL RECOMMENDATION
      of 9 July 2019
      on the 2019 National Reform Programme of Czechia and delivering a Council opinion on the 2019 Convergence Programme of Czechia
      (2019/C 301/03)
      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 21 November 2018, the Commission adopted the Annual Growth Survey, marking the start of the 2019 European Semester for economic policy coordination. It took due account of the European Pillar of Social Rights, proclaimed by the European Parliament, the Council and the Commission on 17 November 2017. The priorities of the Annual Growth Survey were endorsed by the European Council on 21 March 2019. On 21 November 2018, on the basis of Regulation (EU) No 1176/2011 of the European Parliament and of the Council (2), the Commission also adopted the Alert Mechanism Report, in which it did not identify Czechia as one of the Member States for which an in-depth review would be carried out.

                  (2)

                  The 2019 country report for Czechia was published on 27 February 2019. It assessed Czechia’s progress in addressing the country-specific recommendations adopted by the Council on 13 July 2018 (3), the follow-up given to the recommendations adopted in previous years and Czechia’s progress towards its national Europe 2020 targets.

                  (3)

                  On 30 April 2019, Czechia submitted its 2019 National Reform Programme and its 2019 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 (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 the effectiveness of the ESI Funds to sound economic governance.

                  (5)

                  Czechia is currently in the preventive arm of the Stability and Growth Pact. In its 2019 Convergence Programme, the government expects to move from a budgetary surplus of 0,3 % of gross domestic product (GDP) in 2019 to a deficit of 0,2 % in 2020, which is projected to gradually deteriorate to 0,5 % by 2022. Based on the recalculated structural balance (5), the medium-term budgetary objective — which has been changed from a structural deficit of 1 % in 2019 to 0,75 % of GDP as of 2020 — continues to be overachieved throughout the programme period. According to the 2019 Convergence Programme, the general government debt-to-GDP ratio is expected to gradually decline to 29,7 % in 2022. The macroeconomic scenario underpinning those budgetary projections is plausible. Risks to the achievement of budgetary targets seem broadly balanced, with expected further growth in public wages and social transfers contrasting with a small reduction in total revenues as a share of GDP. Based on the Commission 2019 spring forecast, the structural balance is forecast to deteriorate to around – 0,1 % of GDP in 2019 and – 0,4 % of GDP in 2020, remaining above the medium-term budgetary objective. Overall, the Council is of the opinion that Czechia is projected to comply with the provisions of the Stability and Growth Pact in 2019 and 2020.

                  (6)

                  Czechia faces medium risks for fiscal sustainability of public finances in the long term, mainly due to the costs of ageing. Pension expenditure is the main factor negatively affecting long-term sustainability, as it is expected to grow by around 2 percentage points of GDP by 2070. Long-term risks stem from unfavourable demographics combined with the capping of the statutory retirement age at 65 years. As a result, the old-age dependency ratio, comparing elderly people with the active population almost doubles, reaching approximately 50 % in 2070. Recent measures improve the adequacy of pensions. Alongside a more generous indexation of pension benefits, the government increased the basic pension amount and topped up pensions for older pensioners. However, these steps are not accompanied by policies that would improve sustainability. For example, the alignment between gains in life expectancy and the statutory retirement age is not automatic. Currently, any change to the retirement age (statutory and early retirement) needs to be proposed by the government and approved by the Parliament. Such measures can also be combined with labour market policies that support longer working careers and the participation of underrepresented groups. The projected increase in age-related public expenditure on healthcare amounts to 1,1 percentage points of GDP by 2070, which also reduces long-term fiscal sustainability. In this context, further consolidation of the hospital sector and investment in primary and integrated health and social care could improve the cost-effectiveness of the healthcare system.

                  (7)

                  The Czech National Bank can set recommendatory macro-prudential mortgage lending limits, but according to the current legislation, its sanctioning powers are limited since it lacks the formal authority to enforce them. While in general the Czech banks comply with the recommendations, binding legislative limits would likely increase the level of compliance among Czech banks, and other mortgage loan providers, ensuring financial stability and reduced risks for borrowers. A legislative proposal, amending the Act on the Czech National Bank, is still under discussion.

                  (8)

                  Despite slight improvements, corruption remains a concern for businesses and may hinder economic activity. On the positive side, the reforms introduced in 2017, including on public procurement, are currently being implemented and some pending measures were finally adopted by the government and sent to Parliament for further discussion. These include proposals for extending the role of the Supreme Audit Office to the regions and municipalities, and on nominations to the State-owned companies, an area open to conflict of interest and where regulation is essential. However, the proposals on protection of whistleblowers and on lobbying have not yet been adopted.

                  (9)

                  Czechia is enjoying strong labour market performance. Employment has risen steadily over the past seven years and unemployment has fallen considerably. Nonetheless, the labour market potential of women with young children, the low-skilled and people with disabilities remains underutilised. Against the background of labour shortages, there is clear scope for increasing their labour market participation. The employment gap and the gender pay gap remain high despite recent measures that have made parental leave more flexible and increased the number of childcare facilities. The employment rate among women remains well below that of men. Low availability of affordable childcare, long parental leave entitlements, low use of flexible working arrangements and the lack of long-term care facilities still have a major impact on labour market participation. In 2017, only 6,5 % of children below the age of three were in formal childcare (compared to the Union average of 34,2 %). Although the low-skilled make up a small proportion of the population, their employment rate is well below that of the medium- and high-skilled. Similarly, the employment rate of people with disabilities remains low. Due to limited capacity, public employment services currently fall short of providing jobseekers with personalised, continuous support. Increasing the outreach and activation capacities of public employment services, together with effective and well-targeted active labour market policies would help boost the participation of disadvantaged groups.

                  (10)

                  Labour and demographic constraints in a manufacturing-intensive economy warrant more investment in education and training, including for employed adults, to ensure the country meets the challenges brought about by structural changes in the economy, such as future technological changes. Qualitative skills mismatches, including those due to future automation and robotisation, could arise, notably in the digital sector. The new jobs will require new competences and significant investment, particularly in higher vocational technical skills and digital skills, expected to be needed following the automation of current mechanical jobs. Although various initiatives to introduce a comprehensive skills strategy have taken place over recent years, these have not yet grown into a genuine comprehensive system.

                  (11)

                  Education outcomes continue to be strongly affected by the socioeconomic background of students. A reform to make education more inclusive was introduced in 2016 with the support of the European Social Fund. Its success will depend on the availability of sufficient and sustainable national funding, further teacher and teaching-assistant training, and an increase in public awareness of the benefits of inclusive education. While positive overall, the impact of the inclusive education reform on the participation of Roma children in mainstream education remains limited. Low investment, the limited attractiveness of the teaching profession and socioeconomic inequalities are holding back the level of education attained. There is a shortage of teachers due to low job prestige, low salaries compared to other professions despite recent increases, and limited career development opportunities. The teaching profession remains relatively unattractive for talented young people. Given this, the shortages of qualified teachers combined with expected unfavourable demographic developments indicate that it could become more challenging to recruit and retain teachers in the future.

                  (12)

                  Despite Czechia being a transit country, the completion of the European transport networks, including TEN-T corridors, is far from being finalised. Suburban transport infrastructure also remains deficient, limiting housing affordability and people’s ability to commute to work. Weak transport links are also deterring business activity, particularly in remote regions. While the process of suburbanisation is ongoing in metropolitan areas, suburban transport networks are lagging behind, particularly for rail infrastructure. The country scores low in terms of low carbon aspects, particularly the percentage of renewable energy in transport and the take-up of electric vehicles. Furthermore, the planned growth of the recharging infrastructure for electric vehicles may not be sufficient to cater for future demand. More investment in sustainable transport could also reduce air and noise pollution, alleviating its impact on public health, especially in urban areas. Digital infrastructure is improving but the divide between urban and rural areas persists, as only 59 % of rural households are covered by fast broadband networks. Upgrading older networks based on copper infrastructure along with fixed wireless access solutions will not be sufficient for achieving the 2025 connectivity objectives. To address future connectivity needs, investment is needed in very high capacity networks (i.e. optical fibre) and appropriate demand-side measures.

                  (13)

                  The energy intensity of the Czech economy remains one of the highest in the Union as energy efficiency is improving only slowly, in particular in the buildings sector. Energy intensity is the highest in the industrial and residential sectors. Improving energy efficiency is an opportunity to increase Czechia’s competitiveness, by reducing energy costs for households and businesses, developing cleaner industries and moving up the value chain. Coal dominates the power sector and is the largest source of carbon emissions, posing a substantial threat to local air quality. Greenhouse gas emissions from road transport have increased strongly the last 5 years. On climate adaptation and risk prevention, proper action is lacking as regards suitable prevention, preparedness and disaster resilience.

                  (14)

                  Administrative and regulatory burden may be hampering investment. Many Czech firms see the administrative and regulatory burden as a major obstacle to investment. Fast-changing legislation and complex administrative procedures remain major obstacles to doing business. The cost of enforcing contracts, frequent changes to the tax and labour regulations and difficulty in obtaining construction permits are potentially discouraging investment in the country. The degree of administrative burden also varies substantially among the regions. Recent proposals aim to reduce the complexity of planning procedures, particularly for large infrastructure projects. Furthermore, the government is preparing to draft a new construction law by 2021, with the involvement of social partners. Responsibility for market surveillance of products is spread over various organisations, suffers from overlaps and poses challenges for efficient coordination and effective cooperation.

                  (15)

                  Whilst improving in terms of transparency and provided training, public procurement practices still lag behind in terms of competitiveness, due to the high proportion of procedures with only one received bid, use of quality criteria and trust in public institutions. The vast majority of public procurement decisions continue to be based on the lowest price as the adoption of a strategic approach is still pending. There has been more emphasis on centralised procurement and on using shared expertise but their rollout is rather slow, despite their proven potential.

                  (16)

                  Czechia has not yet created a fully functioning innovation ecosystem based on domestic research and development. The country remains a moderate innovator at the Union level, despite an increase in research and development intensity. This performance may be linked to public investment lacking a fully coherent strategy to increase the modest research performance and improve cooperation between the private sector and academia. Productivity gains are mostly driven by large foreign companies, while domestic firms lag behind in terms of value added generation. Moreover, total factor productivity, an indicator of how efficiently capital and labour are being used in production, has been growing at a relatively slow pace. An increased focus on domestic innovation could boost productivity across the entire business spectrum, including for small and medium-sized enterprises.

                  (17)

                  The programming of Union funds for the period 2021-2027 could help address some of the gaps identified in the recommendations, in particular in the areas covered by Annex D to the 2019 country report. This would allow Czechia to make the best use of those funds in respect of the identified sectors, taking into account regional disparities. Strengthening the country’s administrative capacity for the management of these funds is an important factor for the success of this investment.

                  (18)

                  In the context of the 2019 European Semester, the Commission has carried out a comprehensive analysis of Czechia’s economic policy and published it in the 2019 country report. It has also assessed the 2019 Convergence Programme, the 2019 National Reform Programme and the follow-up given to the recommendations addressed to Czechia in previous years. The Commission has taken into account not only their relevance for sustainable fiscal and socioeconomic policy in Czechia, 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 2019 Convergence Programme and is of the opinion (6) that Czechia is expected to comply with the Stability and Growth Pact,

            HEREBY RECOMMENDS that Czechia take action in 2019 and 2020 to:

         1.

            Improve long-term fiscal sustainability of the pension and health-care systems. Adopt pending anti-corruption measures.

         2.

            Foster the employment of women with young children, including by improving access to affordable childcare, and of disadvantaged groups. Increase the quality and inclusiveness of the education and training systems, including by fostering technical and digital skills and promoting the teaching profession.

         3.

            Focus investment-related economic policy on transport, notably on its sustainability, digital infrastructure, and low carbon and energy transition, including energy efficiency, taking into account regional disparities. Reduce the administrative burden on investment and support more quality-based competition in public procurement. Remove the barriers hampering the development of a fully functioning innovation ecosystem.

         Done at Brussels, 9 July 2019.

               For the Council

               The President

            M. LINTILÄ

         (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 320, 10.9.2018, p. 12.

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


title: Council Recommendation of 9 July 2019 on the 2019 National Reform Programme of Denmark and delivering a Council opinion on the 2019 Convergence Programme of Denmark

text:
               5.9.2019

               EN

               Official Journal of the European Union

               C 301/20

      COUNCIL RECOMMENDATION
      of 9 July 2019
      on the 2019 National Reform Programme of Denmark and delivering a Council opinion on the 2019 Convergence Programme of Denmark
      (2019/C 301/04)
      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 21 November 2018, the Commission adopted the Annual Growth Survey, marking the start of the 2019 European Semester for economic policy coordination. It took due account of the European Pillar of Social Rights, proclaimed by the European Parliament, the Council and the Commission on 17 November 2017. The priorities of the Annual Growth Survey were endorsed by the European Council on 21 March 2019. On 21 November 2018, on the basis of Regulation (EU) No 1176/2011 of the European Parliament and of the Council (2), the Commission also adopted the Alert Mechanism Report, in which it did not identify Denmark as one of the Member States for which an in-depth review would be carried out.

                  (2)

                  The 2019 country report for Denmark was published on 27 February 2019. It assessed Denmark’s progress in addressing the country-specific recommendations adopted by the Council on 13 July 2018 (3), the follow-up given to the country-specific recommendations adopted in previous years and Denmark’s progress towards its national Europe 2020 targets.

                  (3)

                  Denmark submitted its 2019 National Reform Programme on 15 March 2019, and its 2019 Convergence Programme on 10 April 2019. 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 (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 the 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 2019 Convergence Programme, the government plans a headline deficit of 0,1 % of gross domestic product (GDP) in 2019 and 2020. Based on the recalculated structural balance (5), the medium-term budgetary objective — a structural deficit of 0,5 % of GDP — continues to be overachieved throughout the programme period until 2025. According to the 2019 Convergence Programme, the general government debt-to-GDP ratio is expected to fall to 33,4 % in 2019 and to remain stable in 2020, before rising to 37,8 % of GDP by 2025. The macroeconomic scenario underpinning those budgetary projections is plausible over the programme period. Based on the Commission 2019 spring forecast, the structural balance is forecast to register a surplus of 0,9 % of GDP in 2019 and 1,0 % of GDP in 2020, above the medium-term budgetary objective. Risks relate to revenue shortfalls from volatile components, particularly the pension yield tax. Overall, the Council is of the opinion that Denmark is projected to comply with the provisions of the Stability and Growth Pact in 2019 and 2020.

                  (6)

                  Denmark’s research and innovation system is characterised by high levels of investment, a strong human resources base and scientific excellence. However, the research and innovation landscape in Denmark is concentrated in a relatively small number of players such as large firms and foundations mostly in the pharmaceutical and biotechnology sectors, which makes the research and innovation system potentially vulnerable to external shocks. Therefore, there appears to be room for improvement in investing in the scale-up of highly innovative companies.

                  (7)

                  Ensuring the supply of labour in times of demographic and technological changes and addressing labour shortages, in particular of skilled workers and ICT specialists, is key to fostering sustainable and inclusive growth in Denmark. Reforms and investments improving the attractiveness and thereby increasing the participation rates in vocational education and training is likely to have a positive impact on the supply of skilled workers. Continuous investments in adult and lifelong learning and digital skills could also help in addressing this challenge. Furthermore, it would be beneficial to focus on a better integration of marginalised and disadvantaged groups on the labour market. This relates in particular to young people with low educational attainment, people with a migrant background, people with reduced work capacity and disabilities. In addition, the educational performance of children with a migrant background remains a challenge.

                  (8)

                  Despite high quality roads, road congestion is increasing, particularly around the large cities. In addition, there is a need to decarbonise the transport sector, which points to investment opportunities in sustainable transport infrastructure in order to decarbonise the transport sector and tackle road congestion, including the rollout of alternative fuel infrastructure. The outgoing government has put forward a plan to reduce congestion around larger cities. The adoption of that plan, which allocates DKK 112 billion (almost 6 % of GDP) from 2020 to 2030, is pending.

                  (9)

                  While the productivity level in the Danish economy remains among the highest in the Union, productivity growth has been declining for decades. Exporting companies show higher productivity growth than companies shielded from competition from foreign companies. While Denmark has taken measures to support productivity growth of companies in domestically oriented services sectors, productivity growth and competition in these sectors is still lagging behind. Denmark has implemented measures to enhance competition in the financial sector and has continued to implement the utilities strategy.

                  (10)

                  Following several years of high growth, housing prices appear overvalued, particularly in the main urban areas. Housing price increases moderated, however, in 2018. Furthermore, despite a continued decline, the ratio of household debt to disposable income remains the highest in the Union. The share of mortgage loans with variable interest rates and deferred amortisation is gradually decreasing, but is still high. New macroprudential measures seem to have curbed the increase in new mortgage loans with very high debt-to-income and loan-to-value ratios. The Danish authorities have in recent years also activated the countercyclical capital buffer and implemented measures to increase the resilience of banks, and they have adopted a property tax reform (effective from 2021) to put an end to the procyclical property tax system. Nevertheless, the combination of very high loan-to-income ratios, high debt with high interest rate sensitivity and overvalued housing prices pose risks to economic and financial stability and thus continuous monitoring is warranted.

                  (11)

                  Preventing money laundering and terrorism financing has become a priority for Denmark against the background of a large money-laundering scandal involving the largest financial institution in Denmark. The Danish Parliament has reached political agreements on strengthening the supervision and on a new anti-money-laundering package, encompassing a strategy to combat money laundering and terror financing. The strategy rests on eight pillars, which include strengthening cooperation between supervisors, the financial intelligence unit and other relevant stakeholders. However, challenges remain and the financial supervisor still needs to adopt additional measures and guidelines on how to strengthen supervision in these areas. Attention should be paid to the effective implementation of these measures, once adopted.

                  (12)

                  The programming of Union funds for the period 2021-2027 could help address some of the gaps identified in the recommendations, in particular in the areas covered by Annex D to the 2019 country report. This would allow Denmark to make the best use of those funds in respect of the identified sectors, taking into account regional disparities.

                  (13)

                  In the context of the 2019 European Semester, the Commission has carried out a comprehensive analysis of Denmark’s economic policy and published it in the 2019 country report. It has also assessed the 2019 Convergence Programme, the 2019 National Reform Programme and the follow-up given to the recommendations addressed to Denmark in previous years. The Commission 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.

                  (14)

                  In the light of this assessment, the Council has examined the 2019 Convergence Programme and is of the opinion (6) that Denmark is expected to comply with the Stability and Growth Pact,

            HEREBY RECOMMENDS that Denmark take action in 2019 and 2020 to:

         1.

            Focus investment-related economic policy on education and skills, research and innovation to broaden the innovation base to include more companies, and on sustainable transport to tackle road congestion.

         2.

            Ensure effective supervision and the enforcement of the anti-money-laundering framework.

         Done at Brussels, 9 July 2019.

               For the Council

               The President

            M. LINTILÄ

         (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 320, 10.9.2018, p. 16.

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


title: Council Recommendation of 9 July 2019 on the 2019 National Reform Programme of Germany and delivering a Council opinion on the 2019 Stability Programme of Germany

text:
               5.9.2019

               EN

               Official Journal of the European Union

               C 301/24

      COUNCIL RECOMMENDATION
      of 9 July 2019
      on the 2019 National Reform Programme of Germany and delivering a Council opinion on the 2019 Stability Programme of Germany
      (2019/C 301/05)
      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 21 November 2018, the Commission adopted the Annual Growth Survey, marking the start of the 2019 European Semester for economic policy coordination. It took due account of the European Pillar of Social Rights, proclaimed by the European Parliament, the Council and the Commission on 17 November 2017. The priorities of the Annual Growth Survey were endorsed by the European Council on 21 March 2019. On 21 November 2018, on the basis of Regulation (EU) No 1176/2011, the Commission also adopted the Alert Mechanism Report, in which it identified Germany as one of the Member States for which an in-depth review would be 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 21 March 2019. On 9 April 2019, the Council adopted the Recommendation on the economic policy of the euro area (3) (‘2019 Recommendation for the euro area’), which sets out five euro-area recommendations (‘the euro-area recommendations’).

                  (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 2019 Recommendation for the euro area, as reflected in recommendations (1) and (2) below. In particular, investment measures and supporting wage growth will help address the first euro-area recommendation as regards euro-area re-balancing, and shifting taxes away from labour will help address the third euro-area recommendation as regards the functioning of the labour market.

                  (3)

                  The 2019 country report for Germany was published on 27 February 2019. It assessed Germany’s progress in addressing the country-specific recommendations adopted by the Council on 13 July 2018 (4), 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 27 February 2019. The Commission’s analysis led it to conclude that Germany is experiencing macroeconomic imbalances. In particular, the slowly declining current account surplus remains high and has cross-border relevance. The surplus slightly narrowed in 2018 in the context of a pick-up in domestic demand and is expected to continue to decline gradually in the coming years, while remaining above the threshold set in the Macroeconomic Imbalance Procedure. The surplus reflects a subdued level of domestic investment relative to savings in both the private and public sectors. Measures have been taken to boost private and public investment, which has increased substantially. This has contributed to a growth more driven by domestic demand. Nevertheless, as a share of gross domestic product (GDP), investment and consumption could have been expected to grow more given the favourable financing conditions, the public investment backlog, especially at municipal level, and the available fiscal space. Wage growth increased somewhat with the tightening labour market, yet real wage growth remains modest.

                  (4)

                  Germany submitted its 2019 National Reform Programme on 16 April 2019 and its 2019 Stability Programme on 17 April 2019. 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 (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 the effectiveness of the ESI Funds to sound economic governance.

                  (6)

                  Germany is currently in the preventive arm of the Stability and Growth Pact. In its 2019 Stability Programme, the government plans a budget surplus of between ½ and ¾ % of GDP over 2019-2023. Based on the recalculated structural balance (6), the medium-term budgetary objective — a structural deficit of 0,5 % of GDP — continues to be overachieved throughout the programme period. According to the 2019 Stability Programme, the general government debt-to-GDP ratio is expected to fall below the 60 %-of-GDP Treaty reference value in 2019 and to gradually decline to 51¼ % in 2023. The macroeconomic scenario underpinning those budgetary projections is favourable. Based on the Commission 2019 spring forecast, the structural balance is forecast to register a surplus of 1,1 % of GDP in 2019 and 0,8 % of GDP in 2020, above the medium-term budgetary objective. General government debt is forecast to remain on a firm downward path. Overall, the Council is of the opinion that Germany is projected to comply with the provisions of the Stability and Growth Pact in 2019 and 2020. At the same time, while respecting the medium-term budgetary objective, it would be important to use fiscal and structural policies to achieve a sustained upward trend in private and public investment, notably at regional and municipal levels.

                  (7)

                  Public and private investment increased robustly in 2018, but the investment ratio remains below the euro-area average. Public investment in 2018 grew by 7,7 % nominally and 3,8 % in real terms, but more efforts are still needed to clear the large investment backlog, particularly for investment in infrastructure and education. Real public investment growth has been positive for the last three years, after a period of negative growth rates. Nominal investment at municipal level has grown by almost one fifth in 2018 alone. This reflects government efforts to boost investment. However, investment at municipal level remained lower than depreciation. Referring to KfW Municipal Panel 2019, the perceived investment backlog accumulated by 2018 was at 4 % of GDP. Together with the favourable budgetary position, this indicates that there is scope to increase investment at all levels of government, in particular at regional and municipal levels. Investment in public infrastructure is still held back by capacity and planning constraints at municipal level. Measures to overcome these constraints have been introduced, but have yet to show sustained tangible results. Moreover, there is scope to improve digital public services and public procurement. Private investment has increased noticeably, but not across all asset types. Equipment investment has grown robustly in response to record-high capacity utilisation. Housing investment continues to boom. However, the construction sector now reports capacity constraints and price increases. Non-residential construction has been increasing sluggishly in real terms, suggesting that essential infrastructure may not have kept up with the economy’s needs.

                  (8)

                  Public expenditure on education, at 4,1 % of GDP in 2017, remained below the Union average of 4,6 %. Out of overall government expenditure, 9,3 % was spent on education, which is also below the Union average of 10,2 %. Spending on education and research remained at 9 % of GDP in 2017, falling short of the national target of 10 %. Even if education expenditure increased in real terms, the large investment backlog grew further due to demographic developments. Legislative changes allowing direct investment by the federal government in digital education in addition to the resources allocated by the Länder (Digitalpakt) are promising, but have yet to show results. Challenges such as growing student numbers, teacher shortages, digitalisation and further expansion of early childhood education and care will require appropriate public financing. Additional spending on education and on research and innovation is crucial for increasing Germany’s potential growth and adapting to technological change.

                  (9)

                  Germany has made progress in recent years in increasing its research and development (R & D) intensity, mainly as a result of an increase in R & D spending by large companies, especially in medium/high-tech manufacturing sectors and in particular the automotive sector. The R & D intensity of small and medium-sized enterprises (‘SMEs’) is significantly below the Union average and continues to fall behind. SMEs tend to benefit less from cooperation with public research institutes than large companies. These two factors harm business innovation, which are on a long-term downward trend. Additional investment in R & D is essential not only to increase innovation capacity across the economy and boost productivity, but also to facilitate the transition to a low-carbon and circular economy, notably in relation to sustainable transport, green energy technologies, eco-innovation and recycling, and to further increase the performance of the public research sector and its contribution to these goals.

                  (10)

                  Digitalisation of the German economy is progressing slowly and SMEs remain slow adopters of digital technologies. Germany is lagging behind in deploying very high-capacity broadband (gigabit speeds) at national level, and particularly in rural areas, where stronger investment could improve productivity growth. Only 9 % of German households (in mid-2018) is covered by high-performance fibre-based access networks, compared with the Union average of 30 %. Instead, upgrading existing copper cable networks (vectoring) continued to be the incumbent’s preferred technological solution. While many services rely on very high speed connectivity, 23 700 business parks were not connected to a fibre network in 2017 and 28 % of all companies lacked access to networks of at least 50 megabits. A lack of such connectivity holds back investment, especially by SMEs, many of which are located in rural and semi-rural areas. Public intervention in the deployment of ultrafast (≥ 100 Mbps) broadband infrastructure in rural areas remains crucial, and different options going beyond subsidies could be explored. Performance in digital public services and in e-health is far below the Union average. Only 43 % of German internet users used e-government services in 2018 (compared to a Union average of 64 %). Regarding e-health, 7 % of Germans have used health and care services provided online (compared to a Union average of 18 %). E-prescription is used by 19 % of general practitioners (compared to a Union average of 50 %).

                  (11)

                  More investment in transport infrastructure and clean mobility solutions is needed in Germany to tackle mobility and air quality challenges, as well as to support climate change mitigation and adaptation. Greenhouse gas emissions from road transport have increased over the last five years. Air quality in Germany gives serious cause for concern, especially in urban areas where traffic accounts for about 60 % of harmful NOx emissions. Freight transport could benefit from more developed inter-modality solutions. Cars remain by far the most commonly used means of transport for daily commuting and the average time spent in traffic jams is about 30 hours per year. Congestion and looking for parking spaces has been estimated to cost EUR 110 billion per year, or about 4 % of Germany’s GDP. Although vehicles running on alternative fuels have seen the steepest increase in new registrations, the numbers remain low. Car sharing and ridesharing are still heavily underexploited. Considerable public and private investment will also be needed in view of new supply chains for batteries and critical raw materials.

                  (12)

                  Germany’s electricity networks are slowly adapting to renewable production and significant investment in transmission and distribution grids remains necessary. Substantial delays in carrying out many projects have entailed considerable costs to German and European electricity networks and electricity markets. Of the 1 800 km of the grid projects identified in the 2009 Energy Network Expansion Act, only around 800 km had been implemented by the second quarter of 2018, in part because of public opposition. Delays in extending the grid will lead to higher congestion costs and result in more distortions in market functioning, both inside Germany and across borders. Investments in energy networks that promote sector coupling, diversification and an appropriate grid infrastructure are crucial for the flexibility of the energy system and for better integration across different sectors of the economy in view of the achievement of energy and climate targets.

                  (13)

                  Housing in Germany has become less affordable. Since 2015, both rents and house prices have grown faster than their long-term averages, in particular in large cities. In 2017, 20 % of the people aged 65 and over in Germany faced an excessive housing cost burden (i.e., the total housing cost represented more than 40 % of their disposable income), compared to 10 % of Europeans aged 65 and over. For the population with the lowest income, the housing cost overburden rate was 10 percentage points above the Union average of 35,3 %. The government reacted with certain measures, including a ‘price brake’ restricting rent increases (Mietpreisbremse), a support scheme to buy new property (Baukindergeld), as well as a change of basic law to enable the federal level to financially support the construction of social housing. Nevertheless, the completion of new dwellings remains considerably below demand and well below the government target of 375 000 per year. Further measures may be necessary, such as accelerating the construction of social housing, improving transport options, as well as reforming land-use and building regulation.

                  (14)

                  Germany has particularly benefited from integration in the internal market and plays an important role in its further development. However, barriers to competition in the business services sector in Germany remain high in comparison to other Member States. This concerns various areas, including regulated professions such as architecture, engineering, and legal services, where regulatory restrictions, such as reserve of activities and regulation on prices and fees, stifle competition. However, also unregulated business services face more restrictions to the general business environment compared to other Member States. Changes in the regulation of business services to increase competition would boost the efficiency and effectiveness of investment and economic activity.

                  (15)

                  After some improvements in previous years, there has been little progress over the past year to reform Germany’s tax system to foster domestic private investment and growth. The tax system remains complex, distorts decision-making, e.g. on labour market participation, investment and financing, and could provide more effective incentives for investment and consumption. Most progress was recorded with labour taxation, but this is not yet visible in the data. There is still potential to reduce distortive taxation on labour through a tax shift away from labour to sources of revenue more supportive to inclusive and sustainable growth. The taxation of earnings from labour in 2018 (the tax wedge) remained among the highest in the Union, both for average and low-wage earners. Social security contributions of employees are particularly high compared to other countries, and social security contributions overall account for about two thirds of the tax wedge, while income tax accounts for one third. In turn, revenues from environmental taxes as a share of GDP are among the lowest in the Union. The cost of capital and the effective average corporate tax rate, which differ across regions, are among the highest in the Union. The effective average tax rate amounted to 28,8 % (national aggregate) as compared with a Union average of 20 %. Due to the interplay of the corporate income tax, the local trade tax and the solidarity surcharge, the corporate tax system is complex, involves high tax administration costs and distorts the level and location of investments. In addition, the corporate income tax distorts financing decisions, with a bias towards debt financing, estimated to be the third highest in the Union, according to 2017 data. Lowering the capital costs on equity could increase private investment and strengthen the relatively under-developed venture capital market.

                  (16)

                  The labour market remains strong, while the labour market potential of certain groups is underused. The employment rate for ages 20-64 reached 79,9 % in the fourth quarter in 2018, one of the highest in the Union. Unemployment sank to a record low of 3,2 % by the beginning of 2019. High job vacancy rate and labour shortages are becoming increasingly apparent and are restraining production significantly in some regions and sectors. Still, the labour market potential of certain groups, like women and people with a migrant background, is underused. At 46,7 %, Germany’s percentage of female part-time work is very high. Taxes on labour in Germany remain relatively high, including for lower wage earners. The particular rules governing joint income taxation for married couples (Ehegattensplitting) mute the incentives for second earners to work, notably longer hours. People with a migrant background have a considerably lower employment rate than people with a native background, with a particularly high gap for women. Measures have been taken to support the integration of refugees in the labour market, but challenges remain, including their lack of proficiency in the German language, missing or non-transferable qualifications, caring responsibilities towards children and relatives, and lack of experience with informal rules on the German labour market.

                  (17)

                  The retirement of the baby boomer generation is affecting Germany more than other Member States. In the long-run, this demographic change will strain German public finances, could challenge the adequacy of pensions, and could degrade the currently limited share of the older population (aged 65 and above) at risk poverty or social inclusion. By 2040, the country is expected to be facing one of the largest increases in spending in relation to GDP on public pensions in the Union (up by 1,9 percentage points of GDP), while the public pension benefit ratio is expected to fall by 4,4 percentage points, to 37,6 %, according to the 2018 Ageing Report (European Commission, 2018d). Recent pension reforms increased benefit levels for certain groups, yet it is not clear that the achieved social benefits are commensurate to their considerable fiscal cost. The government also set two ‘stop lines’ (doppelte Haltelinie): a maximum pension contribution rate of 20 % and minimum income replacement rates of 48 % up to 2025. Retaining these limits is expected to require significant fiscal transfers, increasing further the burden on younger generations. In addition, the adequacy of the retirement income of low-income workers remains an issue.

                  (18)

                  Despite increasing labour shortages, real wage growth remains modest, while nominal earnings rose by 3,1 % in 2018. In addition, a concentration of employment growth in better paid full-time jobs and a reduction of the share of marginal part-time work in total employment contributed to overall wage growth in 2018, also slightly ahead of productivity growth. Collective bargaining coverage continued to decline (by 2 percentage points from 2016 to 2017), to 49 % in the west and 34 % in the east. There are significant differences in terms of coverage across sectors, with better coverage in the public sector and industry, while services have a much lower coverage. Low-paid workers have generally benefited from the minimum wage that has been introduced since 2015. Hourly wages at the very bottom of the wage distribution, notably the two lowest wage deciles, increased substantially. However, the share of low-paid workers, at 22,5 % in 2017, remains considerably above the Union average. The number of people employed only in mini-jobs fell by 6,8 % over 2010-2018 and employment subject to social insurance rose by around 18,1 % in the same period. Strengthening the conditions to promote wage growth would support domestic demand and contribute to euro-area rebalancing.

                  (19)

                  Upward social mobility in education is low in Germany. National sources confirm little progress in reducing the influence of socioeconomic background on educational outcomes. Germany has a good track record of integrating recently arrived migrants and refugees into education and training. However, people with a migrant background typically face bigger challenges than students with a native background (e.g., early school leaving rates and difficulty in finding apprenticeship places). Increasingly heterogeneous classrooms calls for strong efforts to reinforce the teaching profession, at a time of already considerable teacher shortage. The participation of employees in adult learning is a concern for future labour market performance of workers, in particular for the 6,2 million people who lack basic reading and writing skills.

                  (20)

                  Though the number of people at risk of poverty or social exclusion has fallen since its peak in 2014, challenges in equality of opportunities remain. In particular, the risk of poverty or social exclusion was, in 2017, 67 percentage points greater for the children of low-skilled parents than for the children of highly skilled parents. This gap is substantially higher than the average gap (53,9 percentage points) in the Union.

                  (21)

                  The programming of Union funds for the period 2021-2027 could help address some of the gaps identified in the recommendations, in particular in the areas covered by Annex D to the 2019 country report. This would allow Germany to make the best use of those funds in respect of the identified sectors, taking into account regional disparities.

                  (22)

                  In the context of the 2019 European Semester, the Commission has carried out a comprehensive analysis of Germany’s economic policy and published it in the 2019 country report. It has also assessed the 2019 Stability Programme, the 2019 National Reform Programme and the follow-up given to the recommendations addressed to Germany in previous years. The Commission 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.

                  (23)

                  In the light of this assessment, the Council has examined the 2019 Stability Programme and is of the opinion (7) that Germany is expected to comply with the Stability and Growth Pact.

                  (24)

                  In the light of the Commission’s in-depth review and this assessment, the Council has examined the 2019 National Reform Programme and the 2019 Stability Programme. Its recommendations made under Article 6 of Regulation (EU) No 1176/2011 are reflected in recommendations (1) and (2) below. Those recommendations also contribute to the implementation of the 2019 Recommendation for the euro area, in particular the first euro-area recommendation. The fiscal policies referred to in recommendation (1) below contribute, inter alia, to addressing imbalances linked to the current account surplus,

            HEREBY RECOMMENDS that Germany take action in 2019 and 2020 to:

         1.

            While respecting the medium-term budgetary objective, use fiscal and structural policies to achieve a sustained upward trend in private and public investment, in particular at regional and municipal level. Focus investment-related economic policy on education; research and innovation; digitalisation and very-high capacity broadband; sustainable transport as well as energy networks and affordable housing, taking into account regional disparities. Shift taxes away from labour to sources less detrimental to inclusive and sustainable growth. Strengthen competition in business services and regulated professions.

         2.

            Reduce disincentives to work more hours, including the high tax wedge, in particular for low-wage and second earners. Take measures to safeguard the long-term sustainability of the pension system, while preserving adequacy. Strengthen the conditions that support higher wage growth, while respecting the role of the social partners. Improve educational outcomes and skills levels of disadvantaged groups.

         Done at Brussels, 9 July 2019.

               For the Council

               The President

            M. LINTILÄ

         (1)  OJ L 209, 2.8.1997, p. 1.

         (2)  OJ L 306, 23.11.2011, p. 25.

         (3)  OJ C 136, 12.4.2019, p. 1.

         (4)  OJ C 320, 10.9.2018, p. 19.

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