               EUROPEAN COMMISSION
            Brussels, 20.5.2020
            COM(2020) 523 final
            Recommendation for a
            COUNCIL RECOMMENDATION
            on the 2020 National Reform Programme of  Romania and delivering a Council opinion on the 2020 Convergence Programme of Romania

               Recommendation for a

               COUNCIL RECOMMENDATION

               on the 2020 National Reform Programme of Romania and delivering a Council opinion on the 2020 Convergence Programme of Romania

               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 17 December 2019, the Commission adopted the Annual Sustainable Growth Strategy, marking the start of the 2020 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. On 17 December 2019, on the basis of Regulation (EU) No 1176/2011, the Commission also adopted the Alert Mechanism Report, in which it identified Romania as one of the Member States for which an in-depth review would be carried out.

               (2)The 2020 country report for Romania
                  3
                was published on 26 February 2020. It assessed Romania’s progress in addressing the country-specific recommendations adopted by the Council on 9 July 2019
                  4
               , the follow-up given to the recommendations adopted in previous years and Romania’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 26 February 2020. The Commission’s analysis led it to conclude that Romania is experiencing macroeconomic imbalances. In particular, vulnerabilities are linked to cost-competitiveness and a widening current account deficit in a context of an expansionary fiscal policy and an unpredictable business environment.

               (3)On 11 March 2020, the World Health Organization officially declared the COVID-19 outbreak a global pandemic. It is a severe public health emergency for citizens, societies and economies. It is putting national health systems under severe strain, disrupting global supply chains, causing volatility in financial markets, triggering consumer demand shocks and having negative effects across various sectors. It is threatening people’s jobs, their incomes and companies’ business. It has delivered a major economic shock that is already having serious repercussions in the European Union. On 13 March 2020, the Commission adopted a Communication
                  5
                calling for a coordinated economic response to the crisis, involving all actors at national and Union level.

               (4)Several Member States have declared a state of emergency or introduced emergency measures. Any emergency measures should be strictly proportionate, necessary, limited in time, and in line with European and international standards. They should be subject to democratic oversight and independent judicial review.

               (5)On 20 March 2020, the Commission adopted a Communication on the activation of the general escape clause of the Stability and Growth Pact
                  6
               . The clause, as set out in Articles 5(1), 6(3), 9(1) and 10(3) of Regulation (EC) 1466/97 and Articles 3(5) and 5(2) of Regulation (EC) 1467/97, facilitates the coordination of budgetary policies in times of severe economic downturn. In its Communication, the Commission shared with the Council its view that, given the expected severe economic downturn resulting from the COVID-19 outbreak, the current conditions permit activation of the clause. On 23 March 2020, the Ministers of Finance of the Member States agreed with the assessment of the Commission. The activation of the general escape clause allows for a temporary departure from the adjustment path towards the medium-term budgetary objective, provided that this does not endanger fiscal sustainability in the medium term. For the corrective arm, the Council may also decide, on a recommendation from the Commission, to adopt a revised fiscal trajectory. The general escape clause does not suspend the procedures of the Stability and Growth Pact. It allows Member States to depart from the budgetary requirements that would normally apply while enabling the Commission and the Council to undertake the necessary policy coordination measures within the framework of the Pact.

               (6)Continued action is required to limit and control the spread of the pandemic, strengthen the resilience of the national health systems, mitigate the socio-economic consequences through supportive measures for business and households and to ensure adequate health and safety conditions at the workplace with a view to resuming economic activity. The Union should fully use the various tools at its disposal to support Member States’ efforts in those areas. In parallel, Member States and the Union should work together to prepare the measures necessary to get back to a normal functioning of our societies and economies and to sustainable growth, integrating inter alia the green transition and the digital transformation, and drawing all lessons from the crisis.

               (7)The COVID-19 crisis has highlighted the flexibility that the single market offers to adapt to extraordinary situations. However, in order to ensure a swift and smooth transition to the recovery phase and the free movement of goods, services and workers, exceptional measures that prevent the single market from functioning normally must be removed as soon as they are no longer indispensable. The current crisis has shown the need for crisis preparedness plans in the health sector, which include in particular improved purchasing strategies, diversified supply chains and strategic reserves of essential supplies. They are key elements for developing broader crisis preparedness plans.

               (8)The Union legislator has already amended the relevant legislative frameworks
                  7
                to allow Member States to mobilise all unused resources from the European Structural and Investment Funds so they can address the exceptional effects of the COVID-19 pandemic. Those amendments will provide additional flexibility, as well as simplified and streamlined procedures. To alleviate cash flow pressures, Member States can also benefit from a 100% co-financing rate from the Union budget in the 2020-2021 accounting year. Romania is encouraged to make full use of those possibilities to help the individuals and sectors most affected by the challenges.

               (9)The socio-economic consequences of the pandemic are likely to be unevenly distributed across Romanian regions due to significant investment and labour productivity gaps and different specialisation patterns. This entails a substantial risk of widening regional disparities within Romania reversing the already observed trend of slightly reducing disparities between the capital city and the rest of the regions or between urban and rural areas. Combined with the risk of a temporary unravelling of the convergence process between Member States, the current situation calls for targeted policy responses.

               (10)On 8 May 2020, Romania submitted its 2020 National Reform Programme and, on 14 May 2020, its 2020 Convergence Programme. In order to take account of their interlinkages, the two programmes have been assessed at the same time.

               (11)Romania is currently in the corrective arm of the Stability and Growth Pact.

               (12)On 3 April 2020, the Council decided that an excessive deficit existed in Romania due to non-compliance with the deficit criterion in 2019. The decision was based on the updated fiscal targets by the government, which reflected the budget execution data for the year to date. The 2019 general government deficit outturn of 4,3% of GDP confirmed the breach. The breach was the result of a continuous build-up of fiscal imbalances due to an expansionary fiscal policy since 2016, in a period of strong economic growth. Systematic and repeated derogations from national fiscal rules during that period rendered those rules largely ineffective. Moreover, Romania had repeatedly failed to take effective action in response to the Council’s recommendations made to it in the context of the significant deviation procedure. On 3 April 2020, the Council also issued a recommendation with a view to bringing an end to the situation of an excessive government deficit in Romania by 2022 at the latest.

               (13)The long-term sustainability of Romania’s public finances was already at risk prior to the COVID-19 outbreak, as a result of high budget deficits and the projected significant rise in ageing costs, in particular pensions. Old-age pensions were increased by 15% in September 2019 and, based on a pension law adopted in summer 2019, are due to increase by 40% in September 2020 and be additionally recalculated upward in September 2021. Pension spending would thus increase substantially over the period 2020 to 2022. Fiscal sustainability risks are further heightened by the impact of the COVID-19 pandemic on economic activity and the fiscal effort required to cushion it. Prior fiscal policy decisions have left Romania with small fiscal buffers to deal with the outcome of the COVID-19 outbreak.

               (14)In its 2020 Convergence Programme, the government headline balance is planned to deteriorate from a deficit of 4,3% of GDP in 2019 to a deficit of 6,7% of GDP in 2020, while the general government debt-to-GDP ratio is expected to increase from 35,2% in 2019 to 40,9% in 2020. The macroeconomic and fiscal outlook is affected by high uncertainty due to the COVID-19 pandemic. In addition, there are country-specific risks underlying the budgetary projections, namely some revenue items do not seem to be estimated in line with the underlying macroeconomic projections, while the moderation of some current expenditure items seem to be based on fiscal consolidation measures that are not specified in the Programme.

               (15)In response to the COVID-19 pandemic, and as part of a coordinated Union approach, Romania has adopted budgetary measures to increase the capacity of its health system, contain the pandemic, and provide relief to those individuals and sectors that have been particularly affected. According to the 2020 Convergence Programme, those budgetary measures amount to 1,2% of GDP. The measures include a technical unemployment benefit to employees and similar benefits to other categories of workers, medical equipment and other expenditures to help fight COVID-19 and bonuses for employees in the health sector working with patients infected with COVID-19. In addition, the government has announced measures that, while not having a direct budgetary impact, will contribute to support liquidity to businesses. Those measures include tax deferrals, speeding up of VAT reimbursements, loan guarantees for small and medium-sized enterprises (SMEs) a temporary moratorium of payment of bank loan instalments for households and SMEs and a deferral of rent and utility bills for SMEs. Overall, the measures taken by the government of Romania are in line with the guidelines set out in the Commission Communication on a coordinated economic response to the COVID-19 outbreak.

               (16)Based on the Commission 2020 spring forecast under unchanged policies, Romania’s general government balance is forecast to be -9,2% of GDP in 2020 and -11,4% of GDP in 2021. The general government debt-to-GDP ratio is projected by the Commission to reach 46,2% in 2020.

               (17)Romania declared a state of emergency on 16 March 2020. As of 25 March 2020 all schools and shops, except for those selling primary necessity products, were ordered to close and border-crossing restrictions came into force. Movement in public areas was allowed only in limited cases, with stricter measures for people above 65. Romania also introduced a ban on international travel to certain countries and put several cities into strict quarantine. This situation has taken a toll on the production sector of the economy, as the lockdown measures have had a severely negative impact on economic activity. In the industrial sector, several manufacturers shut-down production in March, with strong spill-over effects in key sectors, such as the automotive industry. Similar developments are observed in the retail and hospitality sectors. The aggregated effect will push the economy into a recession in 2020. The state of emergency ended on 14 May 2020 and Romania announced that it would gradually implement de-confinement measures. Starting on 15 May 2020, measures were introduced concerning the easing of movement inside cities, the partial reopening of commercial retailing and the mandatory use of protection masks in closed public and commercial spaces, public transport and workplaces. Some manufacturers from the automotive industry  gradually resumed activity in early May 2020. The government is preparing further measures aimed at relaunching the economy.

               (18)The pandemic has put the health system under unprecedented pressure. The crisis hit a system characterised by structural weaknesses, such as low spending and unequal access to healthcare. In this context, improving the resilience of the health system and its capacity to respond to shocks represents a key challenge. As part of the immediate response, Romania purchased critical medical products and included COVID-19 related medical costs in the minimum benefit package for the uninsured. Considerable health workforce shortages, including of family physicians, as well as outdated medical facilities, lack of medical products, insufficient training for health workers and limited continuity and integration between different levels of care weaken the resilience of the health system. Reported unmet medical needs were on the rise already before the COVID-19 crisis and access to healthcare is likely to have deteriorated. The pandemic further exposed regional disparities and the gap in healthcare coverage for low-income groups and the elderly. In the longer run, population ageing and migration are challenges that put increasing pressure on the sustainability of the health system. In light of COVID-19, it is equally important to address structural issues, including the development of preventive, outpatient and community based care with well-targeted public policy measures. Long-term investment will be needed to reinforce the Romanian health system by securing health workers and equipment, enhancing technological and applied research and improving the coverage and accessibility of health services to all citizens, also in non-urban areas, including through the use of e-health services.

               (19)Fast economic growth in recent years triggered an improvement in social conditions. Gross disposable household income increased by 5,7% in 2019. The risk of poverty and social exclusion, at 31,2% in 2019, was among the highest in the EU, though on a steadily declining path. However, the pandemic’s impact on the economy may lead to the deterioration of social conditions. Poverty and social exclusion, including child-poverty, in-work poverty and income inequalities are expected to increase, with vulnerable groups such as non-standard workers, undeclared workers, the self-employed, Roma, people with disabilities, the elderly and the homeless among the most exposed. Coverage and adequacy of social protection measures and the effectiveness of the tax and benefit system in redistributing income remain limited. Children in rural areas and informal settlements have limited access to good quality early childhood education and care, adequate nutrition, health care and housing. Social transfers have a very limited impact on reducing poverty and the social reference index used as a basis for most social benefits has not been updated since 2008. Adequacy of the minimum income support remains one of the lowest in the EU. Though adopted in 2016, the minimum inclusion income reform has been further postponed to 2021. Social and essential services remain largely insufficient, including in areas such as water and sanitation, energy and housing. Moreover, territorial distribution is uneven and characterised by significant rural-urban and regional disparities. This may limit the capacity to counteract the impact of the pandemic. The potential of the social economy to improve social conditions is still untapped.

               (20)Over 2019, labour market developments remained positive, but disparities between regions, rural and urban areas and socio-economic groups persist. High levels of inactivity are registered, in particular for women, young people, the low-skilled, people with disabilities and older people. In the context of the COVID-19 outbreak, existing challenges are likely to deepen, together with rapidly increasing unemployment and inactivity. According to the Commission forecast, unemployment is expected to rise to 6,5% in 2020 and recover to 5,4% in 2021. Undeclared work remains a challenge and its negative impact might be exacerbated in the current context, underlining the need to support the transition into declared work. Therefore, timely tailor-made services addressing the needs of vulnerable groups and workers affected by the crisis are essential. In addition to the recently initiated technical unemployment scheme, developing the access to short-time work schemes, promoting income support measures and flexible working arrangements and teleworking for the affected workers, with the involvement of social partners, are crucial to strengthening the resilience of the labour market in the short and long term.

               (21)Persisting skills mismatches and skills shortages, underpinned by demographic developments and the limited labour market relevance of education and training, limited Romania’s economic growth potential even before the pandemic. The share of adults participating in learning activities, at 1,3% in 2019, is one of the lowest in the EU. Low participation in early childhood education and care widens inequality of opportunities between pupils. The equity, inclusiveness and quality of education remain important challenges and strategic reforms in this area are needed. Romania has a high share of early leavers from education and training (15,3% in 2019) and young people neither in education, employment or training (14,7%, a slight increase on 2018). There is still no integrated, nation-wide mechanism targeting early school leaving. Educational outcomes, especially in rural and economically deprived areas, are not improving. Participation in higher education is low and remains insufficiently aligned to labour market needs. The number of graduates in science, technology, engineering and mathematics (STEM) remains particularly low. Romania scores poorly on many components of the Digital Economy and Social Index, including digital public services, digital skills of the overall population and digitalisation of businesses. Basic digital skills and basic software skills are among the lowest in the EU. Due to inadequate digital infrastructure, teaching materials and insufficient digital skills, the shift to distance learning caused by the COVID-19 outbreak poses challenges for education and training institutions, educators and students, in particular for disadvantaged students and Roma.

               (22)Due to the pandemic and the resulting lockdown measures, supply chains have been interrupted throughout the country and businesses have had to reduce activities or even close, and people have been unable to work. Businesses of all sizes – particularly SMEs – are strongly affected by the disruption of trade and the lockdown and are facing liquidity constraints and bankruptcy risks. The government adopted a set of measures combining tailored assistance to businesses and income protection for all workers affected. To recover from the crisis, additional resources will be needed to keep supporting businesses and households. The services sector will need particular attention as it is hardest hit and some sub-sectors are expected to contract for longer than manufacturing. Government response measures include the creation of a public guarantee scheme (‘IMM Invest’) with an envelope of RON 15 billion to offer state guarantees to SMEs contracting interest-free loans to finance investment and provide working capital. These guarantees will also be beneficial for banks, which need to remain well capitalised and liquid in order to ensure the necessary flow of credit to households and companies. Also, due to the so far rather limited role of banks in providing credit to businesses – in particular to innovative SMEs – loan guarantees alone might not be enough.

               (23)To foster the economic recovery, it will be important to front-load mature public investment projects and promote private investment, including through relevant reforms. The crisis showed even more clearly that Romania has a critical need to relaunch public infrastructure works in fields such as sustainable transport, clean energy, environmental and digital service infrastructure. Urban transport suffers from poor sector organisation and the weak administrative capacity of local providers. The waste management system continues to be characterised by very low recycling of municipal waste and very high landfill rates. Implementing the National Energy and Climate Plan will require investment to clean production and use of energy, as well as the reconversion of mono-industrial and carbon intensive regions. Efforts need to be stepped up for the extension and modernisation of drinking water and wastewater infrastructure. Investments in the air monitoring network is also indispensable due to serious structural shortcomings. There is also a need to modernise and ensure interoperability of all the digital public services that generate information sharing, including in the social, education and health areas. Large regional disparities and the low productivity of some sectors are detrimental to long-term sustainable growth. Equally important are investments to promote the economy’s competitiveness by supporting research and development (R&D) activities, innovative SMEs, and integration into the Union’s strategic value chains. R&D investment by firms remains subdued and limited to a small number of sub-sectors which are highly dependent on foreign direct investments. Declining public R&D funding has resulted in poor scientific and technological quality and weak academia-business links. The programming of the Just Transition Fund for the period 2021-2027 could help Romania to address some of the challenges posed by the transition to a climate neutral economy, in particular in the territories covered by Annex D to the country report
                  8
               . This would allow Romania to make the best use of that fund.

               (24)Reform of the public administration is stalling. There is no effective framework in place for strategic and budgetary planning, which has a knock-on effect on the strategic vision for long-term development of the country, the prioritisation of actions and policy coordination at the central and local level. The sectoral strategic framework is fragmented and sometimes overlapping while actions to be taken within sectors are not prioritised. The strategic management role of the General Secretariat of the Government is still not consolidated. High fragmentation of competencies and resources continues to affect the delivery of public services, especially at local level and in poor communities. Red tape and insufficient capacity to deliver quality services, including digital, are negatively impacting on citizens and businesses, especially during thes crisis. Cumbersome administrative procedures for setting up businesses as well as regulatory requirements imposed on services providers, including regulated professions, further impede market development. Reinforced cooperation between Romanian market surveillance authorities and customs authorises can help reducing the volume of non-compliant products imported from outside the Union. Frequent reorganisations and overuse of temporary management hamper the independence of the administration. The implementation of corporate governance for state-owned enterprises remains a challenge.

               (25)Predictability of decision-making remains a major issue. Before the crisis, only around a third of the annual government plan was respected. The number of emergency ordinances passed remained very high, creating uncertainty and likely hampering investment. For instance, GEO 114/2018 had major socio-economic effects on several sectors, including the financial sector. While the provisions with adverse impact on the banking sector were reversed, some of the measures potentially affecting the long-term viability of second-pillar pension funds still remain in place. The predictability and stability of public procurement legislation remain important challenges. The efficiency of public procurement continues to be an issue, as does the irreversibility of certain measures, notably the streamlining of ex ante control. There is little progress in improving the governance, quality and effective use of regulatory impact assessments. There is no institutional framework for quality control at government level and options for setting up a regulatory impact assessement board are still being assessed. The functioning of social dialogue remains limited, in particular at sector level, while a meaningful and continuous involvement of social partners is key for the success of any exit and recovery strategy in the light of the current crisis. The established institutional framework for consultation is not adequately used to feed into the decision-making process and does not engage social partners sufficiently in the design and implementation of reforms. Discussions on changes to the social dialogue law and the revision of economic sectors have stalled. The follow-up to the International Labour Organisation’s recommendations issued in April 2018 is still uncertain. The lack of a permanent objective mechanism to determine the minimum wage may weigh on the business environment.

               (26)While the present recommendations focus on tackling the socio-economic impacts of the pandemic and facilitating the economic recovery, the 2019 country-specific recommendations adopted by the Council on 9 July 2019 also covered reforms that are essential to address medium- to long-term structural challenges. Those recommendations remain pertinent and will continue to be monitored throughout next year’s European Semester annual cycle. That also applies to recommendations regarding investment-related economic policies. The latter recommendations should be taken into account for the strategic programming of cohesion policy funding post-2020, including for mitigating measures and exit strategies with regard to the current crisis.

               (27)Following several headwinds in recent years, pressures on the banking sector have subsided, as several measures which caused concern in the past, including the bank tax, were reverted at the beginning of 2020. The banking sector has entered the current COVID-19 crisis well capitalised and liquid, while the non-performing loans ratio declined below 5%. The measures adopted by the government to support households and corporates, in particular SMEs, are also important for maintaining banking sector resilience and the capacity of banks to absorb shocks. Commercial banks have also taken steps to support clients, such as the postponement of principal and interest payments, the extension of credit repayment, ensuring ATM liquidity and reducing the fees for online services. On 20 March 2020, the National Bank of Romania lowered the monetary policy rate and announced it would start purchasing RON-denominated government securities in the secondary market to ensure the smooth financing of the real economy and the public sector. In spite of the adopted measures including the prudential flexibility granted by supervisors, asset quality is likely to deteriorate in the coming months. In this respect, maintaining prudent lending standards and prioritising support to viable borrowers will contribute to safeguarding asset quality in the banking sector. Furthermore, ensuring a stable and predictable regulatory environment for banks is an important pre-condition for preserving their active role in the provision of credit to the economy and in supporting economic recovery.

               (28)Significant legal modifications and political pressure on the judiciary in 2017, 2018 and in the largest part of 2019 have affected the efficiency, quality and independence of the justice system and its capacity to investigate and sanction high-level corruption. While the government currently supports actions to prevent and sanction corruption, and has shown willingness to reverse some of the most controversial measures, Romania has not yet made the necessary legislative changes. These issues are the subject of monitoring under the cooperation and verification mechanism. Under this mechanism, the Commission continues to monitor judicial reform and the fight against corruption in Romania. These areas are therefore not covered in the country-specific recommendations for Romania, but are relevant for developing a positive socio-economic environment in the country.

               (29)The European Semester provides the framework for continuous economic and employment policy coordination in the Union, which can contribute to a sustainable economy. Member States have taken stock of progress regarding United Nations’ Sustainable Development Goals (SDGs) implementation in their 2020 National Reform Programmes. By ensuring the full implementation of the recommendations below, Romania will contribute to the progress towards the SDGs and to the common effort of ensuring competitive sustainability in the Union.

               (30)In the context of the 2020 European Semester, the Commission has carried out a comprehensive analysis of Romania’s economic policy and published it in the 2020 country report. It has also assessed the 2020 Convergence Programme and the 2020 National Reform Programme and the follow-up given to the recommendations addressed to Romania in previous years. It has taken into account not only their relevance for sustainable fiscal and socioeconomic policy in Romania, but also their compliance with Union rules and guidance, given the need to strengthen the Union’s overall economic governance by providing Union-level input into future national decisions.

               (31)In the light of that assessment, the Council has examined the 2020 Convergence Programme and its opinion
                  9
                is reflected in particular in recommendation (1) below.

               (32)In the light of the Commission’s in-depth review and this assessment, the Council has examined the 2020 National Reform Programme and the 2020 Convergence Programme. The present recommendations take into account the need to tackle the pandemic and facilitate the economic recovery as a first necessary step to permit an adjustment of imbalances. Recommendations directly addressing the macroeconomic imbalances identified by the Commission under Article 6 of Regulation (EU) No 1176/2011 are reflected in recommendation (4),

               HEREBY RECOMMENDS that Romania take action in 2020 and 2021 to:

               1.Pursue fiscal policies in line with the Council’s recommendation of 3 April 2020
                  10
               , while taking all necessary measures to effectively address the pandemic, sustain the economy and support the ensuing recovery. Avoid the implementation of permanent measures that would endanger fiscal sustainability. Strengthen the resilience of the health system, including in the areas of health workers and medical products, and improve access to health services.

               2.Provide adequate income replacement and extend social protection measures and access to essential services for all. Mitigate the employment impact of the crisis by developing flexible working arrangements and activation measures. Strengthen skills and digital learning and ensure equal access to education.

               3.Ensure liquidity support to the economy benefitting businesses and households, particularly small and medium-sized enterprises and the self-employed. Front-load mature public investment projects and promote private investment to foster the economic recovery. Focus investment on the green and digital transition, in particular on sustainable transport, digital service infrastructure, clean and efficient production and use of energy and environmental infrastructure, including in the coal regions.

               4.Improve the quality and effectiveness of public administration and the predictability of decision-making, including through an adequate involvement of social partners.

               Done at Brussels,

                     For the Council

                     The President

                     (1)

                        OJ L 209, 2.8.1997, p. 1.

                     (2)

                        OJ L 306, 23.11.2011, p. 25.

                     (3)

                        SWD(2020) 522 final.

                     (4)

                        OJ C 301, 5.9.2019, p. 117.

                     (5)

                        COM(2020) 112 final.

                     (6)

                        COM(2020) 123 final.

                     (7)

                        Regulation (EU) 2020/460 of the European Parliament and of the Council of 30 March 2020 amending Regulations (EU) No 1301/2013, (EU) No 1303/2013 and (EU) No 508/2014 as regards specific measures to mobilise investments in the healthcare systems of Member States and in other sectors of their economies in response to the COVID-19 outbreak (Coronavirus Response Investment Initiative) (OJ L 99, 31.3.2020, p. 5) and Regulation (EU) 2020/558 of the European Parliament and of the Council of 23 April 2020 amending Regulations (EU) No 1301/2013 and (EU) No 1303/2013 as regards specific measures to provide exceptional flexibility for the use of the European Structural and Investments Funds in response to the COVID-19 outbreak (OJ L 130, 24.4.2020, p. 1).

                     (8)

                        SWD(2020) 522 final.

                     (9)

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

                     (10)

                        OJ C 116, 8.4.2020, p. 1–3.


               EUROPEAN COMMISSION
            Brussels, 20.5.2020
            COM(2020) 526 final
            Recommendation for a
            COUNCIL RECOMMENDATION
            on the 2020 National Reform Programme of Finland and delivering a Council opinion on the 2020 Stability Programme of Finland

               Recommendation for a

               COUNCIL RECOMMENDATION

               on the 2020 National Reform Programme of Finland and delivering a Council opinion on the 2020 Stability Programme of Finland

               THE COUNCIL OF THE EUROPEAN UNION,

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

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

               Having regard to the recommendation of the European Commission,

               Having regard to the resolutions of the European Parliament,

               Having regard to the conclusions of the European Council,

               Having regard to the opinion of the Employment Committee,

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

               Having regard to the opinion of the Social Protection Committee,

               Having regard to the opinion of the Economic Policy Committee,

               Whereas:

               (1)On 17 December 2019, the Commission adopted the Annual Sustainable Growth Strategy, marking the start of the 2020 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. On 17 December 2019, on the basis of Regulation (EU) No 1176/2011, the Commission also adopted the Alert Mechanism Report, in which it did not identify Finland as one of the Member States for which an in-depth review would be carried out. On the same date, the Commission also adopted a recommendation for a Council recommendation on the economic policy of the euro area.

               (2)The 2020 country report for Finland
                  2
                was published on 26 February 2020. It assessed Finland’s progress in addressing the country-specific recommendations adopted by the Council on 9 July 2019
                  3
               , the follow-up given to the recommendations adopted in previous years and Finland's progress towards its national Europe 2020 targets.

               (3)On 11 March 2020, the World Health Organization officially declared the COVID-19 outbreak a global pandemic. It is a severe public health emergency for citizens, societies and economies. It is putting national health systems under severe strain, disrupting global supply chains, causing volatility in financial markets, triggering consumer demand shocks and having negative effects across various sectors. It is threatening people’s jobs, their incomes and companies’ business. It has delivered a major economic shock that is already having serious repercussions in the European Union. On 13 March 2020, the Commission adopted a Communication
                  4
                calling for a coordinated economic response to the crisis, involving all actors at national and Union level.

               (4)Several Member States have declared a state of emergency or introduced emergency measures. Any emergency measures should be strictly proportionate, necessary, limited in time, and in line with European and international standards. They should be subject to democratic oversight and independent judicial review.

               (5)On 20 March 2020, the Commission adopted a Communication on the activation of the general escape clause of the Stability and Growth Pact
                  5
               . The clause, as set out in Articles 5(1), 6(3), 9(1) and 10(3) of Regulation (EC) 1466/97 and Articles 3(5) and 5(2) of Regulation (EC) 1467/97, facilitates the coordination of budgetary policies in times of severe economic downturn. In its Communication, the Commission shared with the Council its view that, given the expected severe economic downturn resulting from the COVID-19 outbreak, the current conditions permit activation of the clause. On 23 March 2020, the Ministers of Finance of the Member States agreed with the assessment of the Commission. The activation of the general escape clause allows for a temporary departure from the adjustment path towards the medium-term budgetary objective, provided that this does not endanger fiscal sustainability in the medium term. For the corrective arm, the Council may also decide, on a recommendation from the Commission, to adopt a revised fiscal trajectory. The general escape clause does not suspend the procedures of the Stability and Growth Pact. It allows Member States to depart from the budgetary requirements that would normally apply while enabling the Commission and the Council to undertake the necessary policy coordination measures within the framework of the Pact.

               (6)Continued action is required to limit and control the spread of the pandemic, strengthen the resilience of the national health systems, mitigate the socio-economic consequences through supportive measures for business and households and to ensure adequate health and safety conditions at the workplace with a view to resuming economic activity. The Union should fully use the various tools at its disposal to support Member States’ efforts in those areas. In parallel, Member States and the Union should work together to prepare the measures necessary to get back to a normal functioning of our societies and economies and to sustainable growth, integrating inter alia the green transition and the digital transformation, and drawing all lessons from the crisis.

               (7)The COVID-19 crisis has highlighted the flexibility that the single market offers to adapt to extraordinary situations. However, in order to ensure a swift and smooth transition to the recovery phase and the free movement of goods, services and workers, exceptional measures that prevent the single market from functioning normally must be removed as soon as they are no longer indispensable. The current crisis has shown the need crisis preparedness plans in the health sector, which include in particular improved purchasing strategies, diversified supply chains and strategic reserves of essential supplies. They are key elements for developing broader crisis preparedness plans.

               (8)The Union legislator has already amended the relevant legislative frameworks
                  6
                to allow Member States to mobilise all unused resources from the European Structural and Investment Funds so they can address the exceptional effects of the COVID-19 pandemic. Those amendments will provide additional flexibility, as well as simplified and streamlined procedures. To alleviate cash flow pressures, Member States can also benefit from a 100% co-financing rate from the Union budget in the 2020-2021 accounting year. Finland is encouraged to make full use of those possibilities to help the individuals and sectors most affected by the challenges.

               (9)The socio-economic consequences of the pandemic are likely to be unevenly distributed across sectors and regions due to different specialisation patterns. This entails a risk of widening disparities within Finland. Combined with the risk of a temporary unravelling of the convergence process between Member States, the current situation calls for targeted policy responses.

               (10)On 30 April 2020, Finland submitted its 2020 National Reform Programme and its 2020 Stability Programme. In order to take account of their interlinkages, the two programmes have been assessed at the same time.

               (11)Finland is currently in the preventive arm of the Stability and Growth Pact and subject to the debt rule.

               (12)In its 2020 Stability Programme, the government plans the headline balance to deteriorate from a deficit of 1,1% of GDP in 2019 to a deficit of 7,2% of GDP in 2020. The deficit is projected to decline to 4,0% of GDP in 2021. After increasing to 59,4% of GDP in 2019, the general government debt-to-GDP ratio is expected to increase to 69,1% in 2020 according to the 2020 Stability Programme. The macroeconomic and fiscal outlook is affected by high uncertainty due to the COVID-19 pandemic.

               (13)In response to the COVID-19 pandemic, and as part of a coordinated Union approach, Finland has adopted budgetary measures to increase the capacity of its health system, contain the pandemic, and provide relief to those individuals and sectors that have been particularly affected. According to the 2020 Stability Programme, those budgetary measures amounted to 1,7% of GDP. The measures include both emergency spending for protection of health and public order and support measures for businesses and employees. In addition, Finland has announced measures that, while not having a direct budgetary impact, will contribute to support liquidity to businesses, which the 2020 Stability Programmes estimates at 5% of GDP. Those measures include loan guarantees for companies, mainly targeting SMEs, as well as specific guarantee schemes for Finnair and shipping companies ensuring security of supply. In addition, other liquidity-enhancing measures, not reported in the Stability Programme, have been adopted in Finland, including tax deferrals for corporate income taxes. Those additional measures are estimated at 15% of GDP. Overall, the measures taken by Finland are in line with the guidelines set out in the Commission Communication on a coordinated economic response to the COVID-19 outbreak. The full implementation of those measures, followed by a refocusing of fiscal policies towards achieving prudent medium-term fiscal positions when economic conditions allow, will contribute to preserving fiscal sustainability in the medium term.

               (14)Based on the Commission 2020 spring forecast under unchanged policies, Finland’s general government balance is forecast at -7,4% of GDP in 2020 and -3,4% in 2021. The general government debt ratio is projected to reach 69,4% of GDP in 2020 and 69,6% in 2021.

               (15)On 20 May 2020, the Commission issued a report prepared in accordance with Article 126(3) of the Treaty due to Finland’s projected breach of the 3% of GDP deficit threshold in 2020. Overall, the analysis suggests that the deficit criterion as defined in the Treaty and in Regulation (EC) No 1467/1997 is not fulfilled.

               (16)In response to the crisis, Finland has taken comprehensive action to support its health system and its economy. For example, the Finnish government adopted several supplementary budgets and decided to improve job security for employees, while conditions for receiving unemployment benefits have been relaxed. Access to unemployment benefits has been made easier for freelancers and entrepreneurs. Social security measures amount to EUR 1,6 billion. Direct business grants amounting to EUR 1 billion have been made available in addition to EUR 10 billion in state-guaranteed loans. The government has temporarily reduced the employer's pension contribution by 2,6 percentage points and has allocated at least EUR 1 billion to a municipal support package. The Finnish Financial Supervisory Authority lowered Finnish credit institutions’ capital requirements by removing the systemic risk buffer and by adjusting credit institution-specific requirements. The government nominated a working group led by the Ministry of Finance and the Ministry of Social Affairs and Health to prepare Finland's COVID-19 crisis exit strategy. The government adopted a staged exit plan in early May, based on the first report of the working group. The working group will further propose relevant measures to address the health, social and economic impact of the crisis. It has consulted social partners, municipalities, civil society and environmental organisations.

               (17)While Finland has shown a general readiness to deal with the COVID-19 crisis, its health system could benefit from being made more resilient. Hospital districts have had to reallocate medical staff to treat coronavirus patients and deviate from the previously established legal time limits for non-urgent healthcare. The current system of health services delivered by various providers has led to an uneven density of health workers across the country. The fragmentation of service provision and the unequal access to social and primary healthcare services is expected to remain an issue after the crisis, particularly for unemployed and retired people, including persons with disabilities. With the rise in unemployment due to the COVID-19 crisis, both short- and medium-term policy action should be focused on improving equal access to primary healthcare. In the medium term, it remains important to pursue the social and health reform plans considered by successive Finnish governments, especially as they prepare Finland for far-reaching demographic changes and would help the country maintain the quality of its health system in the future while improving its accessibility. The long-term sustainability of Finland’s public finances continues to be at risk due to the projected rise in ageing costs, in particular social and health care.

               (18)According to the Commission forecast, unemployment is expected to rise to 8,3% in 2020 and recover to 7,7% in 2021. Effective short- and medium-term policy actions, designed in close cooperation with the social partners, are needed to curb increases in the unemployment rate and to re-integrate into the labour market those who have lost their jobs due to the COVID-19 crisis. These efforts should also support groups at risk of poverty and social exclusion, such as the low-skilled, persons with disabilities, people with partial work ability and people with a migrant background. Finland has short-time work schemes in place that have put many employees on furlough. Active labour market policies, including upskilling and reskilling measures could ensure quick and sustainable re-entry into the labour market. Subsidised salaries could be targeted and coupled with training and follow-up by public employment services. Reskilling and upskilling are key to maintaining the employability of the labour force in an increasingly digital and green economy. The continuous learning reform could help address the need for skills enhancement of adults, including those with low skills, in labour market-relevant sectors such as the Information and Communication Technology (ICT) sector. In order to provide the market with the skills it needs in times of demographic and technological changes, it will be important to maintain the labour market relevance of education, also by ensuring sufficient university places in line with employment foresight for each sector and region. To avoid aggravating the socio-economic situation of the most vulnerable groups in the wake of the COVID-19 crisis, addressing the digital divide will be key, particularly in ensuring that disadvantaged learners have access to quality education. The complex benefit system creates barriers to taking up work. To encourage the take-up of short-time and part-time work, the income register containing real-time information on salaries and benefits should be efficiently deployed together with accelerating the handling times of social security benefits. In the medium term, it will be important for Finland to reform the social benefits system to boost employment and to prepare the country’s welfare system for the future.

               (19)Helping businesses, especially small and medium-sized enterprisess (SMEs), to stay afloat during the crisis is essential to stimulating the economy following the lifting of the lockdown measures currently in place. Temporary liquidity support through loans, grants and guarantees could help tide businesses over this period of high uncertainty and substantially lower revenues. In the process of designing and implementing these measures the resilience of the banking sector needs to be taken into account.

               (20)To foster the economic recovery, it will be important to front-load mature public investment projects and promote private investment, including through relevant reforms. Investment in Finland remains below the EU average for categories that most support productivity growth, notably investment in equipment and in intellectual property. This can limit the country’s long-term growth potential and weigh on its competitiveness and recovery. More investment in research and development is a key factor enabling structural change to favour knowledge-intensive sectors of the economy and strengthen long-term growth potential. The planned move towards climate neutrality by 2035 also reflected in Finland’s National Energy and Climate Plan will require substantial investment, particularly in electricity networks and in sustainable transport. A new national transport system for 2021 is being developed under the lead of a parliamentary steering group. Amid health, environmental, regional and productivity concerns, continued efforts are needed to roll out high-speed broadband and to improve other digital infrastructure, with a view to rationalise logistics and maintain economic activity in remote areas. The programming of the Just Transition Fund for the period 2021-2027 could help Finland to address some of the challenges posed by the transition to a climate neutral economy, in particular in the territories covered by Annex D to the country report
                  7
               . This would allow Finland to make the best use of that fund.

               (21)Finland’s national risk assessment on anti-money laundering is currently outdated and will be updated in 2020. The Finnish financial supervisory authority has recently improved its supervisory capacity. However, staffing is still inadequate, and the ‘risk-based’ approach to supervision is not yet correctly applied. While several cases of suspected violations have been investigated, the establishment of a dissuasive sanctioning policy remains another priority area. Reporting of suspicious transactions has sharply increased in recent months and tools within the Financial Intelligence Unit appear insufficient to analyse this information. Exchange of information between the Financial Intelligence Unit and the financial supervisory authority remains insufficient.

               (22)While the present recommendations focus on tackling the socio-economic impacts of the pandemic and facilitating the economic recovery, the 2019 country-specific recommendations adopted by the Council on 9 July 2019 also covered reforms that are essential to address medium- to long-term structural challenges. Those recommendations remain pertinent and will continue to be monitored throughout next year’s European Semester annual cycle. That also applies to recommendations regarding investment-related economic policies. The latter recommendations should be taken into account for the strategic programming of cohesion policy funding post-2020, including for mitigating measures and exit strategies with regard to the current crisis.

               (23)The European Semester provides the framework for continuous economic and employment policy coordination in the Union, which can contribute to a sustainable economy. Member States have taken stock of progress regarding United Nations’ Sustainable Development Goals (SDGs) implementation in their 2020 National Reform Programmes. By ensuring the full implementation of the recommendations below, Finland will contribute to the progress towards the SDGs and to the common effort of ensuring competitive sustainability in the Union.

               (24)Close coordination between economies in the economic and monetary union is key to achieve a swift recovery from the economic impact of the COVID-19. Finland should, as a Member State whose currency is the euro – and taking into account political guidance by the Eurogroup – ensure its policies remain consistent with the euro area recommendations and coordinated with those of the other euro area Member States.

               (25)In the context of the 2020 European Semester, the Commission has carried out a comprehensive analysis of Finland’s economic policy and published it in the 2020 country report. It has also assessed the 2020 Stability Programme and the 2020 National Reform Programme and the follow-up given to the recommendations addressed to Finland in previous years. It has taken into account not only their relevance for sustainable fiscal and socioeconomic policy in Finland, but also their compliance with Union rules and guidance, given the need to strengthen the Union’s overall economic governance by providing Union-level input into future national decisions.

               (26)In the light of that assessment, the Council has examined the 2020 Stability Programme and its opinion
                  8
                is reflected in particular in recommendation (1) below,

               HEREBY RECOMMENDS that Finland take action in 2020 and 2021 to:

               1.In line with the general escape clause, take all necessary measures to effectively address the pandemic, sustain the economy and support the ensuing recovery. When economic conditions allow, pursue fiscal policies aimed at achieving prudent medium-term fiscal positions and ensuring debt sustainability, while enhancing investment. Address shortages of health workers to strengthen the resilience of the health system and improve access to social and health services.

               2.Strengthen measures to support employment and bolster active labour market policies.

               3.Take measures to provide liquidity to the real economy, in particular to small and medium-sized enterprises. Front-load mature public investment projects and promote private investment to foster the economic recovery. Focus investment on the green and digital transition, in particular on clean and efficient production and use of energy, sustainable and efficient infrastructure as well as research and innovation.

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

               Done at Brussels,

                     For the Council

                     The President

                     (1)

                        OJ L 209, 2.8.1997, p. 1.

                     (2)

                        SWD(2020) 525 final.

                     (3)

                        OJ C 301, 5.9.2019, p. 117.

                     (4)

                        COM(2020) 112 final.

                     (5)

                        COM(2020) 123 final.

                     (6)

                        Regulation (EU) 2020/460 of the European Parliament and of the Council of 30 March 2020 amending Regulations (EU) No 1301/2013, (EU) No 1303/2013 and (EU) No 508/2014 as regards specific measures to mobilise investments in the healthcare systems of Member States and in other sectors of their economies in response to the COVID-19 outbreak (Coronavirus Response Investment Initiative) (OJ L 99, 31.3.2020, p. 5) and Regulation (EU) 2020/558 of the European Parliament and of the Council of 23 April 2020 amending Regulations (EU) No 1301/2013 and (EU) No 1303/2013 as regards specific measures to provide exceptional flexibility for the use of the European Structural and Investments Funds in response to the COVID-19 outbreak (OJ L 130, 24.4.2020, p. 1).

                     (7)

                        SWD(2020) 525 final.

                     (8)

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


               EUROPEAN COMMISSION
            Brussels, 20.5.2020
            COM(2020) 513 final
            Recommendation for a
            COUNCIL RECOMMENDATION
            on the 2020 National Reform Programme of Cyprus and delivering a Council opinion on the 2020 Stability Programme of Cyprus

               Recommendation for a

               COUNCIL RECOMMENDATION

               on the 2020 National Reform Programme of Cyprus and delivering a Council opinion on the 2020 Stability Programme of Cyprus

               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 17 December 2019, the Commission adopted the Annual Sustainable Growth Strategy, marking the start of the 2020 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. On 17 December 2019, on the basis of Regulation (EU) No 1176/2011, the Commission also adopted the Alert Mechanism Report, in which it identified Cyprus as one of the Member States for which an in-depth review would be carried out. On the same date, the Commission also adopted a recommendation for a Council recommendation on the economic policy of the euro area.

               (2)The 2020 country report for Cyprus
                  3
                was published on 26 February 2020. It assessed Cyprus’s progress in addressing the country-specific recommendations adopted by the Council on 9 July 2019
                  4
               , the follow-up given to the recommendations adopted in previous years and Cyprus's progress towards its national Europe 2020 targets. It also included an in-depth review under Article 5 of Regulation (EU) No 1176/2011, the results of which were also published on 26 February 2020. The Commission’s analysis led it to conclude that Cyprus is experiencing excessive macroeconomic imbalances. In particular, a very high share of non-performing loans burdens the financial sector and high stocks of private, public, and external debt hang on the economy, in a context of moderate potential growth.

               (3)On 11 March 2020, the World Health Organization officially declared the COVID-19 outbreak a global pandemic. It is a severe public health emergency for citizens, societies and economies. It is putting national health systems under severe strain, disrupting global supply chains, causing volatility in financial markets, triggering consumer demand shocks and having negative effects across various sectors. It is threatening people’s jobs, their incomes and companies’ business. It has delivered a major economic shock that is already having serious repercussions in the European Union. On 13 March 2020, the Commission adopted a Communication
                  5
                calling for a coordinated economic response to the crisis, involving all actors at national and Union level.

               (4)Several Member States have declared a state of emergency or introduced emergency measures. Any emergency measures should be strictly proportionate, necessary, limited in time, and in line with European and international standards. They should be subject to democratic oversight and independent judicial review.

               (5)On 20 March 2020, the Commission adopted a Communication on the activation of the general escape clause of the Stability and Growth Pact
                  6
               . The clause, as set out in Articles 5(1), 6(3), 9(1) and 10(3) of Regulation (EC) 1466/97 and Articles 3(5) and 5(2) of Regulation (EC) 1467/97, facilitates the coordination of budgetary policies in times of severe economic downturn. In its Communication, the Commission shared with the Council its view that, given the expected severe economic downturn resulting from the COVID-19 outbreak, the current conditions permit activation of the clause. On 23 March 2020, the Ministers of Finance of the Member States agreed with the assessment of the Commission. The activation of the general escape clause allows for a temporary departure from the adjustment path towards the medium-term budgetary objective, provided that this does not endanger fiscal sustainability in the medium term. For the corrective arm, the Council may also decide, on a recommendation from the Commission, to adopt a revised fiscal trajectory. The general escape clause does not suspend the procedures of the Stability and Growth Pact. It allows Member States to depart from the budgetary requirements that would normally apply while enabling the Commission and the Council to undertake the necessary policy coordination measures within the framework of the Pact.

               (6)Continued action is required to limit and control the spread of the pandemic, strengthen the resilience of the national health systems, mitigate the socio-economic consequences through supportive measures for business and households and to ensure adequate health and safety conditions at the workplace with a view to resuming economic activity. The Union should fully use the various tools at its disposal to support Member States’ efforts in those areas. In parallel, Member States and the Union should work together to prepare the measures necessary to get back to a normal functioning of our societies and economies and to sustainable growth, integrating inter alia the green transition and the digital transformation, and drawing all lessons from the crisis.

               (7)The COVID-19 crisis has highlighted the flexibility that the single market offers to adapt to extraordinary situations. However, in order to ensure a swift and smooth transition to the recovery phase and the free movement of goods, services and workers, exceptional measures that prevent the single market from functioning normally must be removed as soon as they are no longer indispensable. The current crisis has shown the need for crisis preparedness plans in the health sector, which include in particular improved purchasing strategies, diversified supply chains and strategic reserves of essential supplies. They are key elements for developing broader crisis preparedness plans.

               (8)The Union legislator has already amended the relevant legislative frameworks
                  7
                to allow Member States to mobilise all unused resources from the European Structural and Investment Funds so they can address the exceptional effects of the COVID-19 pandemic. Those amendments will provide additional flexibility, as well as simplified and streamlined procedures. To alleviate cash flow pressures, Member States can also benefit from a 100% co-financing rate from the Union budget in the 2020-2021 accounting year. Cyprus is encouraged to make full use of those possibilities to help the individuals and sectors most affected by the challenges.

               (9)The socio-economic consequences of the pandemic are likely to be unevenly distributed across the country due to different specialisation patterns, in particular in areas markedly relying on tourism and more generally on face-to-face business to consumers. This entails a risk of widening territorial disparities within Cyprus. Combined with the risk of a temporary unravelling of the convergence process between Member States, the current situation calls for targeted policy responses.

               (10)On 7 May 2020, Cyprus submitted its 2020 National Reform Programme and its 2020 Stability Programme. In order to take account of their interlinkages, the two programmes have been assessed at the same time.

               (11)Cyprus is currently in the preventive arm of the Stability and Growth Pact and subject to the debt rule.

               (12)In its 2020 Stability Programme, the government plans the headline balance to deteriorate from a surplus of 1,7% of GDP in 2019 to a deficit of 4,3% of GDP in 2020. The deficit is projected to decline to 0.4% of GDP in 2021. After decreasing to 95,5% of GDP in 2019, the general government debt-to-GDP ratio is expected to increase to 116,8% in 2020 according to the 2020 Stability Programme. The macroeconomic and fiscal outlook is affected by high uncertainty due to the COVID-19 pandemic. In addition, there are country-specific risks underlying the budgetary projections, namely explicit contingent liabilities and potential financing needs of public hospitals during the first years of the implementation of the National Health Insurance System.

               (13)In response to the COVID-19 pandemic, and as part of a coordinated Union approach, Cyprus has adopted budgetary measures to increase the capacity of its health system, contain the pandemic, and provide relief to those individuals and sectors that have been particularly affected. According to the 2020 Stability Programme, those budgetary measures amount to 4,4% of GDP. The measures include strengthening health care services with an extra budget of up to 0,5% of GDP, subsidised wages to keep employees on the payroll in case of suspended business operations (2,7% of GDP) and income support for the small businesses and the self-employed (0,3% of GDP). In addition, Cyprus has announced measures that, while not having a direct budgetary impact, will contribute to support liquidity to businesses, including for example the deferral of VAT payment for a period of two months. Overall, the measures taken by Cyprus are in line with the guidelines set out in the Commission Communication on a coordinated economic response to the COVID-19 outbreak. The full implementation of those measures, followed by a refocusing of fiscal policies towards achieving prudent medium-term fiscal positions when economic conditions allow, will contribute to preserving fiscal sustainability in the medium term.

               (14)Based on the Commission 2020 spring forecast under unchanged policies, Cyprus’ general government balance is forecast at -7% of GDP in 2020 and -1,8% in 2021. The general government debt ratio is projected to reach 115,7% of GDP in 2020 and 105% in 2021.

               (15)On 20 May 2020, the Commission issued a report prepared in accordance with Article 126(3) of the Treaty due to Cyprus’ non-compliance with the debt rule in 2019 and the planned breach of the 3% of GDP deficit threshold in 2020. Overall, the analysis suggests that the debt criterion as defined in the Treaty and in Regulation (EC) No 1467/1997 is complied with, while the deficit criterion is not fulfilled.

               (16)Cyprus reacted to the COVID-19 outbreak with a range of measures to mitigate the economic impacts of the crisis. On 15 March 2020 the government put forward a financial support programme to safeguard public health and ensure the economic survival of businesses and employers. The programme earmarks EUR 100 million for financial support to the health sector to combat the pandemic, including for the recruitment of additional medical, nursing and support staff, and for equipment and infrastructure. It sets out a series of measures to support enterprises by enhancing liquidity, e.g. support schemes for businesses and the self-employed, and temporary suspension of VAT payments for companies. The package also includes dedicated support of EUR 11 million to help the tourism sector recover.

               (17)The COVID-19 crisis demonstrates the need to channel investments to improve and modernise public health care, restore capacity and implement the healthcare reform. The new healthcare system offers better access to primary care services, appropriate guidance and treatments based on clinical protocols. It also provides for universal entitlement to affordable health services in the context of the COVID-19 outbreak. Cyprus has an established emergency pandemic plan and allocated additional resources to prevent and manage the impact of infection and contagion. In the medium-term, Cyprus needs to steer investments towards increasing the health system’s effectiveness, accessibility and overall resilience. Additional resources for the health system shall prevent future shortages of medical staff, critical medical supplies and infrastructure. The smooth implementation of the healthcare reform, as planned, is central to ensuring access to healthcare and universal coverage. Digital health solutions and new applications would contribute to stepping-up the deployment of e-health services and improving teleconsultations and alert mechanisms. Policies that improve the hospital capacity, health workers’ working conditions and ensure the use of personal protective equipment, testing, medicines and medical devices are vital. Integration with the long-term care and primary and community care is crucial in light of demographic change, and to support the most vulnerable, including people with disabilities.

               (18)After consistent positive labour market developments in recent years, Cyprus will now be facing challenges in terms of employment levels due to the health crisis. Further efforts are needed to minimise the socio-economic impact of the crisis. Cyprus has already adopted emergency measures including short-time work schemes and the extension of unemployment benefits to the self-employed. It will be important to retain employment and ensure the implementation of announced measures, in close consultation with the social partners. Strengthening the capacity of the public employment services with permanent staff will be key, notably by safeguarding the continuation of services of the employment counsellors under temporary contracts expiring in the second half of 2020. This will avoid putting the services under further strain and to provide efficient support to the newly unemployed and other vulnerable groups, such as young people not in education, employment or training, long-term unemployed and persons with disabilities. Support for school-to-work transition and outreach to young people in particular require further attention, as recent graduates might face additional difficulties in finding a job.

               (19)The outbreak of COVID-19 requires appropriate measures to mitigate social impacts and to support households’ income and sustain a prompt recovery of the economy. According to the Commission forecast, unemployment is expected to rise to 8,6% in 2020 and recover to 7,5% in 2021. External demand for services is set to dip significantly, as the tourism sector is expected to be particularly hard hit by the crisis. Adequate income replacement should be ensured for all affected workers and self-employed people, including those facing gaps in terms of access to social protection. Social protection schemes need to protect those in employment, self-employment and unemployment. There is scope for strengthening the overall social protection system in order to prevent increases in poverty and inequality levels, notably by reaching out to the most vulnerable, including children, inactive people, undeclared workers, and people with a migrant background.

               (20)The promotion of flexible working arrangements with the involvement of social partners, particularly in the form of teleworking, is of high importance. In the short term these will support workers with unforeseen caring responsibilities for children and other dependants, while in the long term they will facilitate labour market re-entry of the high share of inactive women due to caring responsibilities. Since the elderly and people with chronic diseases have increased risks of severe illness due to the virus, investing in quality long-term care services is of high importance to ensure their continued provision and efficiency in the short and medium term.

               (21)Improving the quality, efficiency and labour market relevance of education and training is crucial in this crisis context and to ensure a fast labour market recovery. Equipping people with the right skills is even more important in times where increased numbers might lose their jobs and need to be ready for job transitions thereafter. The mobility restrictions highlighted the challenges related to the low digital skills levels in Cyprus. This negatively affects online activities, such as teleworking, distance learning, and the use of e-health services. Equal access to IT infrastructure and internet, including for disadvantaged learners, along with well-trained teachers, are key for quality digital education and distance learning. To address low overall educational and training outcomes and improve skills more broadly, it is essential to continue with the education reform, while investing in solutions for digital learning, work-based learning and apprenticeship training, and in developing teachers’ and trainers’ competences to use IT tools effectively. There is scope to address underachievement in basic skills, as well as raise participation in adult learning. To accelerate application, retraining programmes could, to the extent possible, be designed for online use and then, once the pandemic is contained, integrate physical presence, as appropriate.

               (22)For the duration of the crisis and its aftermath, significant funds are and will be needed to support businesses. Securing adequate access to finance and liquidity is essential, especially for small- and medium-sized enterprises (SMEs), in order to keep companies in business and people at work. In the process of designing and implementing these measures the resilience of the banking sector needs to be taken into account. Cyprus has implemented a specific Small Business Support Scheme that subsidises the salary payments of businesses with up to five employees. In addition, the suspension of the increased contributions to the national health system and the postponement of tax payments (e.g. VAT) will ease the immediate pressure. Swift administrative coordination, practical support and effective communication on the backing available to SMEs, in co-operation with the SME support structures and business organisations, are essential. Speeding up of contractual payments by public authorities can also help improve the cash flow of SMEs. Newly founded start-ups and scale-ups may need specific support, e.g. in the form of equity stakes by public institutions and incentives for venture capital funds to increase their investments in these firms. It remains important to implement the equity support measures prepared before the crisis (Cyprus Energy Fund, co-investment equity fund).

               (23)To foster the economic recovery, it will be important to front-load mature public investment projects and promote private investment, including through relevant reforms. Protecting and using the country’s natural resources efficiently is of paramount importance to ensure a sustainable economic recovery and future growth. To maintain the country’s appeal to tourists, it is necessary to address challenges related to the green energy transition, effective waste and water management and the protection of nature and biodiversity. While significant investments have already started, more investments in these areas need to be frontloaded. Cyprus faces important challenges in reaching its 2030 target for greenhouse gas emissions not covered by the EU emissions trading system. These challenges need to be addressed by planning and adopting additional measures in a timely manner in accordance with the country’s National Energy and Climate Plan. Such measures will require investments, in particular in areas like renewable energy, energy efficiency and sustainable transport, which can also help to provide a robust green stimulus. Cyprus also needs to improve its waste management system and the circular economy. Waste generation remains significantly higher than the EU average, while recycling rates remain significantly lower than the EU average. Landfilling rate is also very high. Water and waste water management, notably in urban areas, is characterised by inefficiencies. Droughts and water scarcity are major concerns and an insufficient policy response might affect the country’s rural economy and tourism. The programming of the Just Transition Fund for the period 2021-2027 could help Cyprus to address some of the challenges posed by the transition to a climate neutral economy, in particular in the territories covered by Annex D to the country report. This would allow Cyprus to make the best use of that fund.

               (24)The importance of a modern digital infrastructure, universal internet access and availability of digital services were highlighted by the COVID-19 mobility restrictions. Investing in the digital economy is essential for bolstering productivity and boosting the economic recovery after the crisis. Cyprus ranks in the low end in the Commission’s Digital Economy and Society Index (DESI) 2020. Only 45% of Cypriots between 16 and 74 years have at least basic digital skills and ICT specialists still represent a lower proportion of the workforce compared to the EU average (2,7% vs 3,9%), hampering the potential of the digital economy. There is a low level of online interaction between public authorities and citizens, with only 51% of Cypriots interacting online. The level of e-commerce (i.e. SMEs selling online, e-commerce turnover and online cross-border sales) is improving (31,8 in 2019 against 29,4 in 2018) but it is still below the EU average of 40,1 (out of 100).

               (25)Cyprus can further improve its research and innovation system to support productivity growth and the required digital and environmental transition in a postpandemia scenario. Firms’ low research and innovation absorption capacity hamper Cyprus’s competitiveness. Improved academia-business cooperation and commercialisation of research results remain a key bottleneck and require urgent action. However, recent measures such as the creation of a new department for research and innovation, the appointment of a new Deputy Ministry for Research, Innovation and Digital Policy as well as the new National Strategy for Research and Innovation 2019-2023, which sets a higher research and innovation intensity target of 1,5% of GDP by 2023 (up from the current 0,56%) are promising steps.

               (26)Tackling aggressive tax planning is key to improving the efficiency and fairness of tax systems, as acknowledged in the 2020 euro area recommendation. Spill-over effects of taxpayers' aggressive tax planning strategies call for coordinated national action to complement Union legislation. The economic evidence suggests that Cyprus' tax rules are used for aggressive tax planning purposes. Cyprus has taken steps to address this by implementing international and European initiatives and taking some additional national measures. However, features of the system such as the absence of withholding taxes on outbound dividend, interest and royalty payments by Cyprus-based companies to third country residents, and the corporate tax residency rules, may continue to facilitate aggressive tax planning. The Notional Interest Deduction scheme needs to be closely monitored. Finally, the ‘Scheme for Naturalisation of Investors in Cyprus by Exception’ and the ‘Residence by Investment Scheme’ have been listed by the OECD as having a potentially high risk for being misused.

               (27)An effective justice system remains a key factor for an attractive, investment- and business-friendly economy and will be crucial in the recovery process. Serious inefficiencies in the justice system continue to undermine contract enforcement and prevent the swift resolution of civil and commercial cases. A series of reforms have been announced to address the most critical problems in the justice system in Cyprus, in particular the outdated civil procedures rules and digitalisation of the courts, the clearance of the large backlog of cases and the lack of lifelong training for judges, but progress remains slow.

               (28)Strengthening the resilience and efficiency of the public administration is key to ensuring the swift and effective implementation of the COVID-19 recovery measures in Cyprus. Improving the coordination between central and local government and tackling the fragmentation and inefficiencies at local level are necessary to remove the bottlenecks for coherent implementation, investments and service delivery in the country. Pushing forward the digitalisation of public administration is key to ensuring its own business continuity, as well as the continued and effective access to public services for citizens and the businesses.

               (29)While the present recommendations focus on tackling the socio-economic impacts of the pandemic and facilitating the economic recovery, the 2019 country-specific recommendations adopted by the Council on 9 July 2019 also covered reforms that are essential to address medium- to long-term structural challenges. Those recommendations remain pertinent and will continue to be monitored throughout next year’s European Semester annual cycle. That also applies to recommendations regarding investment-related economic policies. The latter recommendations should be taken into account for the strategic programming of cohesion policy funding post-2020, including for mitigating measures and exit strategies with regard to the current crisis.

               (30)Safeguarding the overall soundness of the banking system and managing financial stability risks are essential for weathering the COVID-19 crisis and supporting the economy. While the stability of the banking sector improved significantly in recent years, the pandemic is posing strains on banks, through an increase in credit risk and pressures on profitability and capitalisation.  Vulnerabilities and challenges stem from an over-indebted private sector and a high stock of non-performing loans (NPLs), which limit the scope of credit support. The Cypriot banking sector has the second highest NPL ratio in the euro area. Therefore, efforts to reduce NPLs remains a priority, in particular addressing ‘legacy NPLs’ that are long overdue before the onset of the COVID-19 crisis. For achieving this aim, progress on the state-owned asset management company (KEDIPES), including on its organisational model and strategy, is essential. The ESTIA scheme importantly seeks to support and protect vulnerable borrowers, but it is remains essential to balance this aim with improving payment culture. In this respect, strengthening the enforcement of claims and promoting the use of insolvency framework would help underpin a sustainable workout of bad loans. Moreover, reducing the backlog in the issuance of title deeds by implementing a structural solution to address the inadequacies of the property transaction system (i.e. the issuance and transfer of title deeds) remains an important task.

               (31)Continuing efforts to strengthen the framework to prevent and sanction corruption is key to ensuring recovery in the aftermath of the COVID-19 crisis and achieving an efficient, accountable and transparent allocation and distribution of funds and resources. While an action plan against corruption is being implemented, key measures and legislation are still pending adoption, notably the draft Acts for the enhancement of transparency in public decision making, the establishment of the independent authority against corruption, reporting corruption and the protection of whistle-blowers. The provisions related to the law Office’s budgetary independence, separation of functions and recruitment procedures are still pending completion.

               (32)The European Semester provides the framework for continuous economic and employment policy coordination in the Union, which can contribute to a sustainable economy. Member States have taken stock of progress regarding United Nations’ Sustainable Development Goals (SDGs) implementation in their 2020 National Reform Programmes. By ensuring the full implementation of the recommendations below, Cyprus will contribute to the progress towards the SDGs and to the common effort of ensuring competitive sustainability in the Union.

               (33)Close coordination between economies in the economic and monetary union is key to achieve a swift recovery from the economic impact of the COVID-19. Cyprus should, as a Member State whose currency is the euro – and taking into account political guidance by the Eurogroup – ensure its policies remain consistent with the euro area recommendations and coordinated with those of the other euro area Member States.

               (34)In the context of the 2020 European Semester, the Commission has carried out a comprehensive analysis of Cyprus’s economic policy and published it in the 2020 country report. It has also assessed the 2020 Stability Programme and the 2020 National Reform Programme and the follow-up given to the recommendations addressed to Cyprus in previous years. It has taken into account not only their relevance for sustainable fiscal and socioeconomic policy in Cyprus, but also their compliance with Union rules and guidance, given the need to strengthen the Union’s overall economic governance by providing Union-level input into future national decisions.

               (35)In the light of that assessment, the Council has examined the 2020 Stability Programme and its opinion
                  8
                is reflected in particular in recommendation (1) below.

               (36)In the light of the Commission’s in-depth review and this assessment, the Council has examined the 2020 National Reform Programme and the 2020 Stability Programme. The present recommendations take into account the need to tackle the pandemic and facilitate the economic recovery as a first necessary step to permit an adjustment of imbalances. Recommendations directly addressing the macroeconomic imbalances identified by the Commission under Article 6 of Regulation (EU) No 1176/2011 are reflected in recommendations (1), (3) and (4),

               HEREBY RECOMMENDS that Cyprus take action in 2020 and 2021 to:

               1.In line with the general escape clause, take all necessary measures to effectively address the pandemic, sustain the economy and support the ensuing recovery. When economic conditions allow, pursue fiscal policies aimed at achieving prudent medium-term fiscal positions and ensuring debt sustainability, while enhancing investment. Strengthen the resilience and capacity of the health system to ensure quality and affordable services, including by improving health workers’ working conditions.

               2.Provide adequate income replacement and access to social protection for all. Strengthen public employment services, promote flexible working arrangements and improve labour market relevance of education and training.

               3.Secure adequate access to finance and liquidity, especially for small and medium-sized enterprises. Front-load mature public investment projects and promote private investment to foster the economic recovery. Focus investment on the green and digital transition, in particular on clean and efficient production and use of  energy, waste and water management, sustainable transport, digitalisation, research and innovation.

               4.Step up action to address features of the tax system that facilitate aggressive tax planning by individuals and multinationals. Improve the efficiency and digitalisation of the judicial system and the public sector.

               Done at Brussels,

                     For the Council

                     The President

                     (1)

                        OJ L 209, 2.8.1997, p. 1.

                     (2)

                        OJ L 306, 23.11.2011, p. 25.

                     (3)

                        SWD(2020) 512 final.

                     (4)

                        OJ C 301, 5.9.2019, p. 117.

                     (5)

                        COM(2020) 112 final.

                     (6)

                        COM(2020) 123 final.

                     (7)

                        Regulation (EU) 2020/460 of the European Parliament and of the Council of 30 March 2020 amending Regulations (EU) No 1301/2013, (EU) No 1303/2013 and (EU) No 508/2014 as regards specific measures to mobilise investments in the healthcare systems of Member States and in other sectors of their economies in response to the COVID-19 outbreak (Coronavirus Response Investment Initiative) (OJ L 99, 31.3.2020, p. 5) and Regulation (EU) 2020/558 of the European Parliament and of the Council of 23 April 2020 amending Regulations (EU) No 1301/2013 and (EU) No 1303/2013 as regards specific measures to provide exceptional flexibility for the use of the European Structural and Investments Funds in response to the COVID-19 outbreak (OJ L 130, 24.4.2020, p. 1).

                     (8)

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