Important legal notice

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52006SC0281

Recommendation for a Council opinion in accordance with the third paragraph of Art. 9 of Council Regulation (EC) No 1466/97 of 7 July 1997 on the updated convergence programme of Poland, 2005-2008  /* SEC/2006/0281 final */

	[pic] | COMMISSION OF THE EUROPEAN COMMUNITIES |Brussels, 1.3.2006SEC(2006) 281 finalRecommendation for aCOUNCIL OPINIONin accordance with the third paragraph of Art. 9 of Council Regulation (EC) No 1466/97 of 7 July 1997 On the updated convergence programme of Poland, 2005-2008(presented by the Commission)EXPLANATORY MEMORANDUMBackgroundThe Stability and Growth Pact, which entered into force on 1 July 1998, is based on the objective of sound government finances as a means of strengthening the conditions for price stability and for strong sustainable growth conducive to employment creation. In 2005, the Pact was amended for the first time. The reform acknowledged the Pact’s usefulness in anchoring fiscal discipline but sought to strengthen its effectiveness and economic underpinnings as well as to safeguard the sustainability of the public finances in the long run.Council Regulation (EC) No 1466/97 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies[1], which is part of the Pact, stipulates that Member States have to submit, to the Council and the Commission, stability or convergence programmes and annual updates thereof (Member States that have already adopted the single currency submit (updated) stability programmes and Member States that have not yet adopted it submit (updated) convergence programmes). The first convergence programme of Poland was submitted in May 2004. In accordance with the Regulation, the Council delivered an opinion on it on 5 July 2004 on the basis of a recommendation from the Commission and after having consulted the European Economic and Financial Committee. In accordance with the same procedure, updated stability and convergence programmes are assessed by the Commission and examined by the Committee mentioned above, while the Council may examine them.In these programmes, Member States need to specify their medium-term objective for the budgetary position and set out the policy measures to achieve and maintain it, including the accompanying economic assumptions. Following the reform of the Pact, the medium-term objective should be differentiated for individual Member States in the light of the economic and budgetary heterogeneity in the Union, including as regards the fiscal risk to sustainability. Other elements of the reform are that a more symmetrical approach to fiscal policy over the cycle through enhanced budgetary discipline in economic good times should be achieved, while “major structural reforms” with a verifiable impact on long-term sustainability should be taken into account for a temporary deviation from the medium-term objective or the adjustment path towards it.Taking into account the Commission services’ autumn 2005 forecast, the code of conduct[2], the commonly agreed methodology for the estimation of potential output and cyclically-adjusted balances and the broad economic policy guidelines included in the integrated guidelines for the period 2005-2008, the Commission has examined the recently submitted update of the convergence programme of Poland and, based on its assessment below, has adopted a recommendation for a Council opinion on it.Assessment1.  Poland submitted its convergence programme on 19 January 2006, more than one month and a half after the date specified in the code of conduct. The delay was caused by a change of government in November 2005 following parliamentary elections and a change of the minister of finance in early January 2006. The programme covers the period 2005 to 2008. The document was adopted by the government on 18 January 2006. It incorporates the government 2006 budget, as amended in December 2005 by the new government. The programme broadly follows the model structure and data provision requirements for stability and convergence programmes specified in the new code of conduct[3].2.  On 5 July 2004 the Council decided that Poland was in excessive deficit. According to the Council recommendation under Article 104(7) of the same date, the excessive deficit has to be corrected by 2007. In its opinion of 17 February 2005 on the previous update of the convergence programme, covering the period 2004-2007, the Council invited Poland to “(i) strengthen the fiscal adjustment beyond 2005 and lower the deficit target for 2007; (ii) to ensure a full implementation of the structural measures contained in the Hausner plan and make further efforts to introduce alternative measures if implementation risks were to materialize”.3.  Polish real GDP growth averaged 4.5% per year between 1994 and 2004 more than 2 percentage points above the EU25 average of 2.4%. After a period of strong economic expansion, real GDP growth fell to 1.0% in 2001, reflecting both domestic and external cyclical factors. It has since rebounded reaching 5.3% in 2004. Per capita income in purchasing power standards reached 46.5% of the EU25 average in 2004. HICP inflation has remained high, at 7.0% on average, over the last ten years, but it dropped significantly in 2005, to about 2%. The labour market situation remains Poland’s major problem. As a consequence of economic restructuring, the unemployment rate increased from 13.2% in 1994 to 18.8% in 2004, while total employment decreased by more than 7 percentage points over the same period. Structural problems in the labour market, in particular low geographical mobility of workers and skills mismatches, remain an important impediment to economic growth. For the last ten years, the general government balance has been negative in Poland. It fluctuated between -1.4% and -4.8%[4] of GDP until 2003, when it started to improve, reaching -3.8% of GDP in 2004.4.  Following an increase in real GDP of 3.3% in 2005, the programme’s macroeconomic scenario expects economic growth to gradually strengthen to 4.3% in 2006 up to 5.0% in 2008, which is broadly in line with the Commission services’ autumn 2005 forecasts for the years 2005-2007. For the year 2008, the programme’s growth projection is above the Commission services’ estimate of potential growth. The growth assumptions underlying the programme can thus be considered as plausible, tilted to favourable in the outer year.5.  Poland pursued a successful policy of disinflation in the recent years with only two short periods of temporary inflation hikes (in 2000 and 2004). The harmonised index of consumer prices (HICP) decreased from 15% in 1997 to ca. 2% in 2005. The exchange rate has fluctuated widely over the past years, along a broad appreciation trend apparent since March 2004, interrupted temporarily in spring 2005. The appreciation resumed in May 2005 and, despite increased volatility, lasted for the rest of the year. The progressive decrease of the spread vis-à-vis the euro area on long-term government bond yields observed since August 2004 was interrupted by uncertainty surrounding the September 2005 elections and the new government’s economic agenda. Polish monetary policy continues to be based on direct inflation targeting combined with a free float of the zloty. Since 2004, the inflation target has been defined as a continuous year-on-year CPI inflation of 2.5%. Poland intends to pursue the current monetary policy system until a possible ERM II entry, the date of which has not been announced yet.6.  As regards budgetary implementation in 2005, the general government deficit is estimated at 2.9% of GDP in the January 2006 update of the convergence programme (against 3.6% of GDP in the Commission services’ autumn 2005 forecast and a deficit target of 3.9% of GDP set in the previous update of the convergence programme). However, comparison with previous convergence programmes is not straightforward because of significant data revisions due to methodological changes. The better-than-expected outcome was mainly determined by the budgetary performance of the central government, in particular the state budget, which recorded (on a cash basis) higher-than-planned direct tax revenues and an under-execution of expenditures, reducing the deficit by about 0.7 percentage points compared to the budget plan for 2005.7.  The current update of the convergence programme aims at a gradual reduction of the general government deficit to meet the convergence criteria by the end of the legislature, hence implicitly by the end of 2009. The deficit target for 2009 is not quantified. The deficit target for 2007 is unchanged at 2.2% of GDP, with the open pension funds included in the general government sector. Excluding the open pension funds from the government sector, the deficit target was revised upwards, compared to the previous update, from 3.9% of GDP to 4.1% of GDP because the estimated cost of the pension reform increased from 1.7% to 1.9% of GDP. The primary balance (open pension funds in the general government sector) is expected to improve from -0.3% of GDP in 2005 to 0.6% in 2008. This slow adjustment is driven by favourable revenue developments in 2006 and some expenditure cuts in 2007 and 2008. Compared with the previous update, the current update sets a more ambitious deficit target in 2006, but afterwards the adjustment effort is lower and expenditure reforms are postponed until 2007 and 2008.8.  Based on Commission services’ calculations on the basis of the programme according to the commonly agreed methodology, the structural balance is planned to improve on average by merely 0.25% of GDP per year, evenly spread over the programme period. The update identifies a medium-term objective (MTO) for the budgetary position as meant in the Stability and Growth Pact of around -1% of GDP, which it expects to achieve after 2010, well beyond the programme horizon.9.  As the programme’s MTO is more demanding than the minimum benchmark (estimated at a deficit of around -1½% of GDP), its achievement should fulfil the aim of providing a safety margin against the occurrence of an excessive deficit. The programme’s MTO reflects the debt ratio and average potential output growth in the long term.10.  The balance of risks to the budgetary projections is negative. On the one hand the record of overachievement of the budgetary targets set in the previous programmes makes the budgetary projections cautious. On the other hand, assumptions about tax elasticities are rather optimistic, in particular in 2006. Furthermore, the growth assumptions in the outer year of the programme period (i.e. 2008) seem favourable. In the current political climate, miners have been granted special pension rights, inducing other social groups to claim a special treatment, undermining the pension reform. There is also a political source of risk attached to the budgetary projections. Already in the past it was difficult to implement a large part of the so called Hausner plan of public finance restructuring because the government lacked support of the parliament. The current political situation (a minority government) is not favourable to introducing measures aiming at the reduction of the general government deficit and achieving long-term public finance sustainability. The nominal anchor of PLN 30bn for the state budget, introduced in the convergence programme, does not appear sufficient to eliminate the causes of high deficits in Poland, i.e. too fast growth of public expenditure.11.  The programme does not follow the deficit reduction path specified by the Council in its recommendation under Article 104(7). Even at face value, the fiscal stance in the update seems inconsistent with a correction of the excessive deficit by the deadline set by the Council. The conclusion is reinforced taking into account the balance of risks. The deficit targets for 2005 and 2006 are lower than in the previous update and meet the nominal deficit targets set in the Council recommendation of 5 July 2004, thanks to better than planned execution of the 2005 budget with carry-over effects to 2006. A comparison of targets is, however, complicated by changes in national accounts methodology and data revisions. For the critical year 2007, the programme foresees a deficit reduction to 2.2% of GDP. However, when excluding the second-pillar funded pension schemes from the general government sector in line with the Eurostat decision of 2 March 2004, the planned deficit in 2007 is at 4.1% of GDP. Substantial additional adjustment effort would be needed to correct the excessive deficit by the set deadline.12.  Between 2005 and 2008, government debt is expected to increase by 3¼ percentage point of GDP and reach 45½% of GDP in 2008, well below the 60% of GDP reference value but, if the open pension funds are excluded from the general government sector, the debt ratio will reach 52.6%. A significant debt increasing stock-flow adjustment is expected to offset the effect of a primary surplus and a favourable snowball effect (i.e. the negative contribution of the implicit interest is more than offset by sustained high nominal GDP growth).13.  With regard to the sustainability of public finances, Poland appears to be at low risk on grounds of the projected budgetary costs of ageing populations. The level of debt is currently under the 60% reference value and should remain so under the assumption that savings related to the full implementation of the 1999 pension reform will materialise. However, measures recently adopted by the government to exclude particular employment groups from the reformed pension scheme could weaken the reform’s long-term outcome, particularly if further exemptions from the pension schemes were granted. The realization of contingent liabilities as well as the currently high structural deficit may increase the debt/GDP ratio faster than planned over the medium term. Implementing rigorously the planned consolidation of public finances over the medium-term would reduce risks to long-term sustainability.14.  The envisaged measures in the area of public finances are broadly consistent with the broad economic policy guidelines included in the integrated guidelines for the period 2005-2008.However, the planned adjustment is not sufficient to correct promptly the excessive deficit.15.  The National Reform Programme of Poland, submitted on 5 January 2006 in the context of the renewed Lisbon strategy for growth and jobs, identifies the following challenges with significant implications for public finances: budgetary consolidation in view of high deficits, upgrading the underdeveloped transport and environment protection infrastructure, reinforcing public sector R&D and innovation, promoting a more robust approach to raising employment rates through reducing charges imposed on labour for the low paid. The budgetary implications of the actions outlined in the National Reform Programme are not presented in the budgetary projections of the convergence programme. Among the public finance measures included in the National Reform Programme, convergence programme mentions the deficit anchor and the multi-annual budgetary planning.In view of the above assessment, the Commission notes that the convergence programme does not envisage the correction of the excessive deficit in 2007, as required by the Council recommendation of 5 July 2004. Accordingly, the Commission intends to recommend further steps under the excessive deficit procedure as required by the Stability and Growth Pact. In the meantime, Poland should:-  strengthen the adjustment in 2006 in particular, by allocating any higher-than-budgeted revenues or lower-than-budgeted expenditure to deficit reduction;-  improve the long-term sustainability of the reformed pension system;-  enhance the institutional framework of public finances by introducing a medium-term expenditure rule.Recommendation for aCOUNCIL OPINIONin accordance with the third paragraph of Art. 9 of Council Regulation (EC) No 1466/97 of 7 July 1997 On the updated convergence programme of Poland, 2005-2008THE COUNCIL OF THE EUROPEAN UNION,Having regard to the Treaty establishing the European Community,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[5], and in particular Article 9(3) thereof,Having regard to the recommendation of the Commission,After consulting the Economic and Financial Committee,HAS DELIVERED THIS OPINION:16.  On [14 March 2006] the Council examined the updated convergence programme of Poland, which covers the period 2005 to 2008.17.  Polish real GDP growth averaged 4.5% per year between 1994 and 2004 more than 2 percentage points above the EU25 average of 2.4%. After a period of strong economic expansion, real GDP growth slowed to 1.0% in 2001, reflecting both domestic and external cyclical factors. It has since rebounded reaching 5.3% in 2004. Per capita income in purchasing power standards reached 46.5% of the EU25 average in 2004. HICP inflation has remained high, at 7.0% on average, over the last ten years, but dropped significantly in 2005, to around 2%. The labour market situation remains Poland’s major problem, with unemployment rate of 18.8% in 2004 and the lowest rate of employment in the EU (51.7% in 2004). For the last ten years, the general government balance has always been negative in Poland. It fluctuated between -1.4% and -4.8%[6] of GDP until 2003, since when it started to improve, reaching -3.8% of GDP in 2004.18.  On 5 July 2004 the Council decided that Poland was in excessive deficit. According to the Council recommendation under Article 104(7) of the same date, the excessive deficit has to be corrected by 2007. In its opinion of 17 February 2005 on the previous update of the convergence programme, covering the period 2004-2007, the Council invited Poland to “(i) strengthen the fiscal adjustment beyond 2005 and lower the deficit target for 2007; (ii) to ensure a full implementation of the structural measures contained in the Hausner plan and make further efforts to introduce alternative measures if implementation risks were to materialize”.19.  As regards budgetary implementation in 2005, the general government deficit for 2005 is estimated at 3.6% of GDP in the Commission services’ autumn 2005 forecast, against a deficit target of 3.9% of GDP set in the previous update of the convergence programme. The comparison with previous convergence programmes is complicated by significant data revisions linked to methodological changes. The better-than-expected outcome was mainly determined by the budgetary performance of the central government, in particular the state budget, which recorded (on a cash basis) higher-than-planned direct tax revenues and an under-execution of expenditures, reducing the deficit by about 0.7 percentage points compared to the budget plan for 2005.20.  The programme broadly follows the model structure and data provision requirements for stability and convergence programmes specified in the new code of conduct[7]. Poland submitted its convergence programme update on 19 January 2006, 7 weeks beyond the 1 December deadline set in the code of conduct. The delay was caused by the formation of a new government in November 2005 following parliamentary elections and the replacement of the minister of finance in early January 2006.21.  The programme’s macroeconomic scenario expects annual real GDP growth to increase from 3.3% in 2005 to 4.3% in 2006 and to reach 5.0% in 2008. The growth assumptions underlying the programme can be considered as plausible, tilted to favourable in the outer year. The programme’s projections for inflation also appear realistic, except for 2006 when they seem to be on the low side.22.  The current update of the convergence programme aims at a gradual reduction of the general government deficit to meet the convergence criteria by the end of the legislature, hence implicitly by the end of 2009. The target for 2009 is not quantified. The deficit target for 2007 is unchanged at 2.2% of GDP, with the second-pillar funded pension schemes included in the general government sector. If the pension schemes are excluded from the government sector, the deficit target increases compared to the previous update, from 3.9% of GDP to 4.1% of GDP because the estimated cost of the pension reform now reaches 1.9% of GDP. The primary balance (second-pillar funded pension schemes in the general government sector) is expected to improve from -0.3% of GDP in 2005 to 0.6% in 2008. This slow adjustment is driven primarily by favourable revenue developments in 2006 and some expenditure cuts in 2007 and 2008. Compared with the previous update, the current update sets more ambitious deficit targets in 2006, thanks to carry-over effect from favourable revenue developments in 2005, but afterwards the adjustment effort is lower and expenditure reforms are postponed until 2007 and 2008.23.  Over the programme period, the structural balance (i.e. the cyclically-adjusted balance net of one-off and other temporary measures) calculated by the Commission services on the basis of the information provided in the programme according to the commonly agreed methodology is planned to improve on average by 0.25% of GDP per year. The programme sets the medium-term objective (MTO) for the budgetary position at a structural deficit of -1.0% of GDP, which it does not aim to achieve within the programme period. As the programme’s MTO is more demanding than the minimum benchmark (estimated at a deficit of around -1½% of GDP), its achievement should fulfil the aim of providing a safety margin against the occurrence of an excessive deficit. The programme’s MTO reflects the debt ratio and average potential output growth in the long term.24.  The budgetary outcome could be worse than projected in the programme. Although the record of overachievement of the budgetary targets set in the previous programmes may make the budgetary projections look cautious, several factors weigh on the planned adjustment. Assumptions about the tax elasticity are rather optimistic, in particular in 2006. Furthermore, the growth assumptions in the outer year of the programme period (2008) seem favourable. In the current political climate, miners have been granted special pension rights, inducing other social groups to also make demands for special schemes, undermining the pension reform implemented in 1999. A broader political risk weighs on the budgetary projections in view of the situation that emerged from the autumn 2005 elections. The four-year nominal anchor of PLN 30bn for the state budget, introduced in the convergence programme, does not appear sufficient to eliminate the causes of high deficits in Poland, i.e. too fast growth of public expenditure. Therefore, some alternative or additional fiscal rule aiming at controlling increase in government expenditure would be beneficial.25.  The programme does not follow the deficit reduction path specified by the Council in its recommendation under Article 104(7).Even taken at face value, the fiscal stance in the update seems inconsistent with a correction of the excessive deficit by the deadline set by the Council. The conclusion is reinforced taking into account the balance of risks. The deficit targets for 2005 and 2006 are lower than in the previous update and meet the nominal targets set in the Council recommendation of 5 July 2004, thanks to better than planned execution of the 2005 budget with carry-over effects to 2006. A comparison of targets is, however, complicated by changes in national accounts methodology and data revisions. For the critical year 2007, the programme foresees a deficit reduction to 2.2% of GDP. However, when excluding the second-pillar funded pension schemes from the general government sector in line with Eurostat decision of 2 March 2004, the planned deficit in 2007 is at 4.1% of GDP. Substantial additional adjustment effort would be needed to correct the excessive deficit by the set deadline.26.  Between 2005 and 2008, government debt is expected to increase by 3¼ percentage point of GDP and reach 45½% of GDP in 2008, well below the 60% of GDP reference value. Significant debt-increasing stock-flow adjustments are expected to offset the effect of primary surpluses and a favourable snowball effect (i.e. the negative contribution of the implicit interest is outweighed by sustained high nominal GDP growth).27.  The envisaged measures in the area of public finances are broadly consistent with the broad economic policy guidelines included in the integrated guidelines for the period 2005-2008.However, the measures proposed are not sufficient to correct promptly the excessive deficit.28.  The National Reform Programme of Poland, submitted on 5 January 2006 in the context of the renewed Lisbon strategy for growth and jobs, identifies the following challenges with significant implications for public finances: budgetary consolidation in view of high deficits, upgrading the underdeveloped infrastructure and reducing charges imposed on labour to decrease the high unemployment in Poland. However, the budgetary implications of the actions outlined in the National Reform Programme are not presented in the budgetary projections of the convergence programme. Among the public finance measures introduced in the National Reform Programme, convergence programme mentions the deficit anchor and the multi-annual budgetary planning.29.  With regard to the sustainability of public finances, Poland appears to be at low risk on grounds of the projected budgetary costs of ageing populations. The level of debt is currently under the 60% reference value and should remain so under the assumption that savings related to the full implementation of the 1999 pension reform will materialise. However, measures recently adopted by the government to exclude particular employment groups from the reformed pension scheme could weaken the reform’s long-term outcome, particularly if further exemptions from the pension schemes were granted. The realization of contingent liabilities as well as the currently high structural deficit may increase the debt/GDP ratio faster than planned over the medium term. Implementing rigorously the planned consolidation of public finances over the medium-term would reduce risks to long-term sustainability[8].In view of the above assessment, the Council notes that the convergence programme does not envisage the correction of the excessive deficit in 2007, as required by the Council recommendation of 5 July 2004, and that the Commission intends to recommend further steps under the excessive deficit procedure as required by the Stability and Growth Pact. In the meantime, Poland should:-  strengthen the adjustment in 2006 in particular, by allocating any higher-than-budgeted revenues or lower-than-budgeted expenditure to deficit reduction;-  improve the long-term sustainability of the reformed pension system;-  enhance the institutional framework of public finances by introducing a medium-term expenditure rule.Comparison of key macroeconomic and budgetary projections 12004 | 2005 | 2006 | 2007 | 2008 |Real GDP (% change) | CP Jan 2006 | 5.3 | 3.3 | 4.3 | 4.6 | 5.0 |COM Nov 2005 | 5.3 | 3.4 | 4.3 | 4.5 | n.a. |CP Dec 2004 | 5.7 | 5.0 | 4.8 | 5.6 | n.a. |HICP inflation (%) | CP Jan 2006 | 3.6 | 2.2 | 1.5 | 2.2 | 2.5 |COM Nov 2005 | 3.6 | 2.2 | 2.3 | 2.5 | n.a. |CP Dec 2004 | 3.5 | 3 | 2.7 | 2.5 | n.a. |Output gap (% of potential GDP) | CP Jan 20062 | 0.4 | 0.1 | 0.3 | 0.3 | 0.6 |COM Nov 20055 | 0.4 | 0.2 | 0.4 | 0.6 | n.a. |CP Dec 20042 | n.a. | n.a. | n.a. | n.a. | n.a. |General government balance (% of GDP) | CP Jan 2006 | -3.8 | -2.9 | -2.6 | -2.2 | -1.9 |COM Nov 2005 | -3.9 | -3.6 | -3.6 | -3.4 | n.a. |CP Dec 2004 | -5.4 | -3.9 | -3.2 | -2.2 | n.a. |Primary balance (% of GDP) | CP Jan 2006 | -1.2 | -0.3 | -0.2 | 0.3 | 0.6 |COM Nov 2005 | -1.2 | -1.0 | -1.1 | -1.0 | n.a. |CP Dec 2004 | -2.6 | -1.3 | -0.5 | 0.4 | n.a. |Cyclically-adjusted and Structural balance3 (% of GDP) | CP Jan 2006 | -4.1 | -2.9 | -2.7 | -2.3 | -2.1 |COM Nov 20054 | -4.1 | -3.7 | -3.7 | -3.6 | n.a. |CP Dec 2004 | n.a. | n.a. | n.a. | n.a. | n.a. |Government gross debt (% of GDP) | CP Jan 2006 | 41.9 | 42.5 | 45.0 | 45.3 | 45.4 |COM Nov 2005 | 43.6 | 46.3 | 47.0 | 47.3 | n.a. |CP Dec 2004 | 45.9 | 47.6 | 48.0 | 47.3 | n.a. |Notes: 1 The budgetary projections exclude the impact of the Eurostat decision of 2 March 2004 on the classification of funded pension schemes, which needs to be implemented by the time of the spring 2007 notification. Including this impact, the general government balance according to the updated programme would be -5.6% of GDP in 2004, -4.7% in 2005, -4.6% in 2006, -4.1% in 2007 and -3.7% in 2008, while government gross debt would be 45.9% of GDP in 2004, 47.9% in 2005, 51.2% in 2006, 52.1% in 2007 and 52.6% in 2008. 2 Commission services calculations on the basis of the information in the programme. 3 Cyclically-adjusted balance and structural balance are the same since one-off and other temporary measures taken from the programme are insignificant (0.04% of GDP in 2005, deficit-reducing). 4 There are no one-off and other temporary measures in the Commission services’ forecast. 5 Based on estimated potential growth of 3.3%, 3.6%, 4.2% and 4.5% respectively in the period 2004-2007. Source: Convergence programme (CP); Commission services’ autumn 2005 economic forecasts (COM); Commission services’ calculations. | [1] OJ L 209, 2.8.1997, p. 1. Regulation as amended by Regulation (EC) No 1055/2005 (OJ L 174, 7.7.2005, p. 1). All the documents referred to in this text can be found at the following website:http://europa.eu.int/comm/economy_finance/about/activities/sgp/main_en.htm[2] “Specifications on the implementation of the Stability and Growth Pact and guidelines on the format and content of stability and convergence programmes”, endorsed by the ECOFIN Council of 11 October 2005.[3] The programme provides all compulsory and most optional data prescribed by the new code of conduct. The data on employment in hours worked and labour productivity measured as GDP per hours worked have not been provided. There are no data for general government expenditure by function for 2008. Differences between cash and accruals, net accumulation of financial assets are also missing. Total revenues and expenditures in Table 7 (long-term sustainability) are missing.[4] EDP definition, all pension funds classified within the general government sector, revised data.[5] OJ L 209, 2.8.1997, p. 1. Regulation as amended by Regulation (EC) No 1055/2005 (OJ L 174, 7.7.2005, p. 1). The documents referred to in this text can be found at the following website:http://europa.eu.int/comm/economy_finance/about/activities/sgp/main_en.htm[6] EDP definition, all pension funds classified within the general government sector, revised data.[7] The programme provides all compulsory and most optional data prescribed by the new code of conduct. The data on employment in hours worked and labour productivity measured as GDP per hours worked have not been provided. There are no data for general government expenditure by function for 2008. Differences between cash and accruals, net accumulation of financial assets are also missing. Total revenues and expenditures in Table 7 (long-term sustainability) are missing.[8] Details on long-term sustainability are provided in the technical assessment of the programme by the Commission services (http://europa.eu.int/comm/economy_finance/about/activities/sgp/main_en.htm).


Avis juridique important

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52004SC0832

Recommendation for a Council recommendation to the Czech Republic with a view to bringing an end to the situation of an excessive government deficit  /* SEC/2004/0832 final */

Recommendation for a COUNCIL RECOMMENDATION TO THE CZECH REPUBLIC with a view to bringing an end to the situation of an excessive government deficit(presented by the Commission)EXPLANATORY MEMORANDUMOn 7 April 2004, the Commission published its Spring 2004 forecasts [1]. According to these forecasts, which took into consideration data reported by the Czech Republic in March 2004, the general government deficit in the Czech Republic increased from 6.4% of GDP in 2002 to 12.9% of GDP in 2003 (5.9% of GDP excluding a major one-off operation related to imputed state guarantees), thus exceeding the 3% of GDP Treaty reference value.[1]  The Commission Spring 2004 forecast is available at the following website: http://europa.eu.int/comm/economy_finance/ publications/european_economy/2004/ee204en.pdf.Based on this prima facie evidence, the Commission initiated the excessive deficit procedure for the Czech Republic on 12 May 2004, with the adoption of the report foreseen in Article 104(3) of the Treaty [2]. On 13 May 2004, the Commission received the convergence programme of the Czech Republic, which confirmed a deficit figure of 12.9% of GDP for 2003.[2]  The full text of this report is available at the following website: http://europa.eu.int/comm/economy_finance/ about/activities/sgp/procedures_en.htm.The application of the excessive deficit procedure (EDP) is governed by Article 104 of the Treaty and by Council Regulation (EC) No 1467/97 "on speeding up and clarifying the implementation of the excessive deficit procedure", which is part of the Stability and Growth Pact [3]. Countries that joined the EU on 1 May 2004 are Member States with a derogation and are to avoid excessive deficits, but sanctions according to Article 104 (9) and (11) cannot be imposed on them."[3]  OJ L 209, 2.8.1997.The Commission report according to Article 104(3) of the Treaty concluded that the excess of the Czech Republic's deficit in 2003 over the 3% of GDP Treaty reference value did not result from an unusual event outside the control of the Czech authorities, nor was it the result of a severe economic downturn in the sense of the Stability and Growth Pact, as real GDP growth reached 2.9% in 2003. Concerning developments in 2004, the report concluded that the general government deficit is likely to decrease but remain above 3% of GDP. In particular, the Commission Spring 2004 forecasts are for a general government deficit of 5.9% of GDP in 2004, which is above the 5.3% of GDP projected by the Czech authorities in the convergence programme.Based on the Commission Spring 2004 forecasts, the Commission report also concluded that the debt-to-GDP ratio, which had reached 37.6% of GDP in 2003, will remain below the 60% reference value of the Treaty in 2004. In particular, the Commission Spring 2004 forecasts projects the debt ratio to reach 40.6% of GDP in 2004, which is above the 38.4% of GDP projected by the Czech authorities in the convergence programme.Article 104(4) of the Treaty states that "the Committee provided for in Article 114 (i.e. the Economic and Financial Committee) has to formulate an opinion on the report of the Commission". The Committee issued its opinion on 24 May 2004, subscribing to the assessment made by the Commission in its report. In particular, the Committee concluded that the budgetary situation in the Czech Republic indicated the existence of an excessive deficit under the first of the two criteria foreseen by Article 104(2) for the identification of such deficits. Consideration of other relevant factors, in particular the medium-term budgetary position and the public investment ratio, did not change the assessment based on the criteria themselves. The Committee also considered as likely that the general government deficit would continue to exceed the Treaty reference value in 2004, and that general government gross debt would remain below the Treaty reference value of 60% of GDP but increase further to 40.6% of GDP in 2004.The Commission, having examined the relevant factors taken into account in its report and having regard to the opinion of the Committee, is of the opinion that an excessive deficit exists in the Czech Republic. This opinion, adopted by the Commission on 24 June 2004, has been addressed to the Council, according to Article 104(5) of the Treaty. The Commission has recommended that the Council shall decide accordingly, in conformity with Article 104(6). In addition, the Commission is herewith submitting to the Council a recommendation for a Council recommendation to be addressed to the Czech Republic with a view to bringing the situation of an excessive deficit to an end, according to Article 104(7) of the Treaty. The monitoring of the implementation of action taken by the Czech Republic may demand that the Council makes further recommendations according to Article 104(7), given the non-applicability of Article 104(9) to Member States with a derogation.Recommendation for a COUNCIL RECOMMENDATION TO THE CZECH REPUBLIC with a view to bringing an end to the situation of an excessive government deficitTHE COUNCIL OF THE EUROPEAN UNION,Having regard to the Treaty establishing the European Community, and in particular Article 104(7) thereof;Having regard to the recommendation from the Commission;Whereas:(1) According to Article 104 of the Treaty, Member States are to avoid excessive government deficits;(2) The Stability and Growth Pact is based on the objective of sound government finances as a means of strengthening the conditions for price stability and for strong sustainable growth conducive to employment creation;(3) The Council has decided on [5 July] 2004, in accordance with Article 104(6), that an excessive deficit exists in the Czech Republic;(4) Having decided on the existence of an excessive deficit in the Czech Republic, the Council, in accordance with Article 104(7) of the Treaty and Article 3 of Council Regulation (EC) No 1467/97, is required to make at the same time recommendations to the Member State concerned with a view to bringing that situation to an end within a given period;(5) According to Article 3(4) of Council Regulation (EC) No 1467/97, this recommendation should specify that effective action is to be taken by the Member State concerned within four months at most and that the correction of the excessive deficit should be completed in the year following its identification unless there are special circumstances. Such special circumstances are present in the case of the Czech Republic, namely because the general government deficit upon EU accession was significantly above the reference value and because of the ongoing structural shift in the economy;(6) The existence of special circumstances authorises the Council to allow the correction of the excessive deficit in a medium-term framework. It is appropriate to consider the convergence programme submitted by the Czech Republic in May 2004, and its subsequent updates, and the Council Opinions thereof as providing the adjustment path for the correction of the excessive deficit. The convergence programme of May 2004 plans to decrease the general government deficit to 3.3% in 2007 and further mentions that the proposed path of deficit reduction indicates that the elimination of the excessive deficit would be completed by 2008, with the following intermediate annual targets for the deficit: 5.3% of GDP in 2004, 4.7% of GDP in 2005, and 3.8% of GDP in 2006. The adjustment path is based on a macro-economic scenario which, according to the Council Opinion of [5 July] 2004 on the convergence programme, is cautious;(7) In the view of the Council, budgetary consolidation measures should secure a lasting improvement in the general government balance, while being geared towards enhancing the quality of the public finances and reinforcing the growth potential of the economy.HEREBY RECOMMENDS:- the Czech authorities to put an end to the present excessive deficit situation as rapidly as possible;- the Czech authorities to take action in a medium-term framework in order to bring the deficit below 3% of GDP by 2008 in a credible and sustainable manner, in accordance with the path for deficit reduction specified in the Council Opinion [of 5 July 2004] on the convergence programme submitted in May 2004;- the Czech authorities to implement with vigour the measures envisaged in the May 2004 convergence programme, in particular a cut in the wage bill of central government and a reduction in spending of individual ministries;- the Czech authorities to take effective action by 5 November 2004 regarding the measures envisaged to achieve the 2005 deficit target.In addition, the Council invites the Czech authorities to:- allocate higher-than-budgeted revenues to deficit reduction;- introduce fiscal targeting based on medium-term expenditure ceilings and to design effective rules to reduce the risk of increasing indebtedness of regions and municipalities;- undertake the reform of the pension and healthcare systems to improve the long-term sustainability of the public finances;- minimise the negative budgetary impact of the operations of the Czech Consolidation Agency.This recommendation is addressed to the Czech Republic.Done at Brussels, [5 July] 2004.For the CouncilThe President[...]


title: Council Recommendation of 8 July 2014 on the National Reform Programme 2014 of Croatia and delivering a Council opinion on the Convergence Programme of Croatia, 2014

text:
               29.7.2014

               EN

               Official Journal of the European Union

               C 247/50

         COUNCIL RECOMMENDATION
   of 8 July 2014
   on the National Reform Programme 2014 of Croatia and delivering a Council opinion on the Convergence Programme of Croatia, 2014
   2014/C 247/10
   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 26 March 2010, the European Council agreed to the Commission's proposal to launch a new strategy for growth and jobs, Europe 2020, based on enhanced coordination of economic policies, which focuses on the key areas where action is needed to boost Europe's potential for sustainable growth and competitiveness.

               (2)

               On 13 July 2010, the Council, on the basis of the Commission's proposals, adopted a Recommendation on the broad guidelines for the economic policies of the Member States and the Union (2010 to 2014) and, on 21 October 2010, it adopted a decision on guidelines for the employment policies of the Member States (3), which together form the ‘integrated guidelines’. Member States were invited to take the integrated guidelines into account in their national economic and employment policies.

               (3)

               On 29 June 2012, the Member States' Heads of State or Government decided on a Compact for Growth and Jobs, providing a coherent framework for action at national, EU and euro area levels using all possible levers, instruments and policies. They decided on action to be taken at the level of the Member States, in particular expressing full commitment to achieving the objectives of the Europe 2020 Strategy and to implementing the country‐specific recommendations.

               (4)

               Croatia participated in the 2013 European Semester on a voluntary and informal basis by submitting an economic programme; there were no country‐specific recommendations. On 21 June 2013, the Council adopted conclusions welcoming Croatia's economic programme, emphasising that Croatia is expected to progress towards meeting the requirements of the Stability and Growth Pact and that it needs to embark on a credible consolidation path, whilst safeguarding growth‐enhancing expenditure and ensuring room for co‐financing the inflow of EU funds.

               (5)

               On 13 November 2013, the Commission adopted the Annual Growth Survey, marking the start of the 2014 European Semester for economic policy coordination. Also, on 13 November 2013, the Commission, on the basis of Regulation (EU) No 1176/2011, adopted the Alert Mechanism Report, in which it identified Croatia as one of the Member States for which an in‐depth review would be carried out.

               (6)

               On 20 December 2013, the European Council endorsed the priorities for ensuring financial stability, fiscal consolidation and action to foster growth. It underscored the need to pursue differentiated, growth‐friendly fiscal consolidation, to restore normal lending conditions to the economy, to promote growth and competitiveness, to tackle unemployment and the social consequences of the crisis, and to modernise public administration.

               (7)

               On 5 March 2014, the Commission published the results of its in‐depth review for Croatia, under Article 5 of Regulation (EU) No 1176/2011. The Commission's analysis leads it to conclude that Croatia is experiencing excessive macroeconomic imbalances, which require specific monitoring and strong policy action. In particular, policy action is required in view of the vulnerabilities arising from sizeable external liabilities, declining export performance, highly leveraged firms and fast‐increasing general government debt, all within a context of low growth and poor adjustment capacity.

               (8)

               On 24 April 2014, Croatia submitted its 2014 National Reform Programme and its 2014 Convergence Programme. In order to take account of their interlinkages, the two programmes have been assessed at the same time.

               (9)

               The objective of the budgetary strategy outlined in the 2014 Convergence Programme is to correct the excessive deficit by 2016, whilst at the same time moving back to a path of sustainable economic growth. This is projected to be achieved by a continuous reduction in the deficit from 4,9 % of GDP in 2013 to below 3 % of GDP by 2016, the deadline for the correction of the excessive deficit. The Convergence Programme projects that government debt will peak at around 72 % of GDP in 2014, slightly drop in the following year and level off thereafter. The macroeconomic scenario underpinning the budgetary projections in the Convergence Programme is optimistic over the entire programme period. According to the Convergence Programme scenario, GDP would stagnate in 2014, whilst moderate growth of 1,2 % is projected in 2015; against a decline of 0,6 % and growth of 0,7 %, respectively, in the Commission services 2014 Spring Forecast. The Convergence Programme's budgetary forecast figures deviate from the standards of the European System of National and Regional Accounts (ESA), giving rise to inconsistency with past data and the macroeconomic scenario and hindering an appropriate comparison with the Commission services 2014 Spring forecast. Moreover, the Convergence Programme does not provide a sufficient level of detail on the consolidation measures for 2015 and 2016, in particular on the expenditure side. According to the Commission services 2014 Spring forecast, the headline balance is expected to reach 3,8 % and 3,1 % of GDP in 2014 and 2015 respectively. After the necessary adjustment to make these projections comparable to the targets set in the context of the Excessive Deficit Procedure (i.e. excluding the impact of the transfer of second pillar pension assets), the Commission projection for the deficit in 2014 would be 4,6 % of GDP and 3,8 % in 2015.
               As the Convergence Programme constitutes the first report on the action taken by the authorities following the opening of the Excessive Deficit Procedure on 28 January 2014, the Commission assessed the action taken by Croatia in a Communication published on 2 June 2014. In particular, the headline target is projected to be met in 2014, while the deficit is expected to be somewhat above target in 2015. The improvement in the structural government balance falls marginally short of what is required both in 2014 and 2015. Finally, while the change in the adjusted structural balance is below the recommended effort, the effort measured by the underlying amount of discretionary measures is estimated to be delivered both in 2014 and 2015. In order to reduce the negative impact on growth and enhance the sustainability of the consolidation, greater attention to the quality of the measures and a transition to expenditure‐based measures are warranted. Based on its assessment of the Convergence Programme and the Commission forecast, pursuant to Regulation (EC) No 1466/97, the Council is of the opinion that, while Croatia took effective action by 30 April 2014 to correct its excessive deficit as recommended, additional efforts are needed in order to comply with the recommendation under the Excessive Deficit Procedure to correct the excessive deficit by 2016 and ensure the credibility of the correction.

               (10)

               Budgetary consolidation measures should be geared towards enhancing the quality of public finances, with a view to achieving efficiencies, in particular in wage, social security and subsidy outlays, and to providing sufficient fiscal space for prioritising growth‐enhancing expenditure and investments, including in projects funded by the Union. Croatia has implemented significant reforms in its fiscal framework in recent years. However, weaknesses remain in relation to budgetary planning, effective control over expenditure and consistent application of budgetary constraints, which negatively impact on fiscal policy‐making. Although recently changed, the design of the fiscal rules should be further improved. In particular, the effectiveness of the fiscal framework is undermined by the absence of preventive mechanisms and weak compliance with the debt rule, and an ambiguous formulation of the structural balanced‐budget rule. While the establishment of the Fiscal Policy Commission is welcome, additional measures are deemed necessary to strengthen its position in the budget planning and monitoring, most notably its independence from all budgetary authorities.

               (11)

               Croatia faces the challenge of pursuing fiscal consolidation without harming competitiveness and prospects of economic recovery. Against such background, the revenue side of public finances is constrained by a narrow definition of the bases for taxes that offer a stable tax yield and have little distortionary impact on growth. In this context, the National Reform Programme announces a plan to introduce a recurrent property tax in 2016 but its operational design, including that of the tax base, is yet to be specified. Croatia is also determined to take measures to improve tax compliance by reducing the grey economy. Steps have been taken on this front. The gradual introduction of fiscal cash registries has increased tax receipts by enhanced oversight of transactions. The reorganisation of the tax administration is expected to improve the efficiency and effectiveness of tax collection while lowering compliance burdens for taxpayers. However, in light of fiscal consolidation needs, and also taking into account data pointing to significant amounts of uncollected taxes, there seems to be scope to increase further the efficiency of tax collection and continued efforts are needed to improve tax compliance by providing more e‐services to taxpayers.

               (12)

               Croatia has taken measures with a view to improving the sustainability and adequacy of pensions: since November 2010, the statutory retirement age, the early retirement age and the qualifying period for women have been gradually increased and are set to be fully harmonised by 2030. The amendments to the Pension Insurance Act adopted in December 2013 raise the statutory retirement age from 65 to 67 and the early retirement age from 60 to 62. However, this increase will become effective only as of 2031, which is insufficiently ambitious taking account of demographic trends. Despite reforms implemented over recent years, various possibilities for early retirement still exist. Considering the extent of exemptions, the penalties for early retirement and the late retirement bonus create little incentive to work until the statutory retirement age, impacting negatively on the labour supply and the sustainability of the pension system. The Act on the Single Forensic Expertise Body was adopted in 2013 to help limit the inflow of disability pensioners and reduce fraud by unifying disability assessments. Together with increased inspections, this addresses a definite need but the effect on expenditure will depend on how measures are implemented and the extent to which decisions are enforced. Pensions under special schemes that were above a certain threshold were cut by 10 %, albeit on a temporary basis, while their indexation has been tied to a GDP trigger. Despite recent attempts to curb expenditure and increase transparency, the pace and extent of convergence of pensions under special schemes towards general rules are slow and overall progress is still limited.

               (13)

               The health sector achieves reasonably good health outcomes and, with some regional variation, services are accessible, but the system contributes significantly to pressure on the public finances. The authorities identified remediable inefficiencies in the hospital network. The master plan presented in March 2014 for the reorganisation of hospital care provides for measures that would improve cost‐effectiveness, such as rationalisation of the hospital network, reduced average lengths of hospital stays, a better allocation of hospital beds, including for long‐term care, and further changes in hospital financing. Strong monitoring and implementation capacities in both hospitals and central government should be ensured to put the plan into practice. Long‐term care is characterised by dispersed services between the health and the social welfare systems, low coverage rates and formal care, high costs of provision and long waiting lists.

               (14)

               Employment and activity rates are amongst the lowest in the Union, and are particularly low for young people and older people. Beyond cyclical developments, these labour market outcomes are partly related to institutional and policy settings. Croatia has embarked on labour market reforms to increase flexibility on the labour market. A first phase of the reform, completed in 2013, focused on regulation of fixed‐term employment contracts. The Government adopted a second legislative proposal in January 2014 which provides for reducing dismissal costs by shortening and simplifying procedures and increasing working‐time flexibility. In addition, more flexible forms of employment such as part‐time contracts would be introduced. These changes would put Croatia broadly on a par with its peers, as far as the employment protection index is concerned. Although these reforms are expected to have a positive effect on overall employment, they also entail an increased risk of labour market segmentation, including the development of fixed‐term contracts. Meanwhile, no changes are foreseen to the wage‐setting institutions despite Croatia's particular combination of relatively high average wages and very low employment. Despite further rising unemployment, spending and coverage of active labour market policy measures to enable improved access to, and longer stay in, the labour market are still below average, especially as regards young people, the long‐term unemployed and older workers. The administrative capacity of the Croatian public employment service is under severe pressure, including at regional level. An overall system to monitor and evaluate developments on the labour market and labour market needs including skills forecasting does not exist nor is there a regular evaluation of active labour market policy measures. There is a high proportion of undeclared paid activity.

               (15)

               The situation on the labour market is of particular concern for young people as youth unemployment increased drastically and reached almost 50 % in 2013, while the proportion of young people not in education, employment or training continues to increase. Important challenges include outreach to non‐registered youth and mobilisation of the private sector to offer more apprenticeships, in line with the objectives of a youth guarantee. Croatia also faces serious challenges in education as regards labour‐market relevance and quality of provision across all educational sectors. Work‐based learning and career guidance across secondary and tertiary education are lacking while employers' engagement with vocational education and training, and secondary and tertiary education is low. Employment rates among recent graduates are significantly lower than in the rest of the Union. The outdated vocational education and training system is undergoing reform in the form of piloting new school curricula. The implementation of the Croatian Qualifications Framework and the Strategy on Education, Science and Technology is pending but should improve educational outcomes and align them with labour market needs.

               (16)

               High unemployment and low labour market participation have led to a deterioration of the social situation in Croatia. The proportion of persons at risk of poverty and social exclusion has increased in recent years and is significantly above the EU average. The design of the social benefit system makes it possible for recipients to accumulate overlapping cash transfers. When recipients move into work, they lose the benefit of some of these social transfers, thereby creating disincentives for them to enter the labour market. There is scope to make the social protection system more efficient and transparent: currently, the allocation of income support schemes and benefits is scattered across many institutions and levels of government, with inconsistent application of criteria and overlaps. The 2013 Social Welfare Act introduced stricter means testing and merged four of more than 70 benefits at national level, including some targeting specific groups, into the General Minimum Income. A national ‘one‐stop shop’, through which all national level cash benefits will be administered, is being implemented gradually until 2016. However, systematic monitoring and evaluation will be difficult as the income support schemes and programmes at local and regional levels and the various non‐means tested cash benefits targeting specific categories of the population, have not been integrated. Despite several legislative reforms since 2011, the design of the social benefit systems failed to effectively target, people most in need.

               (17)

               The current regulatory framework for doing business in Croatia imposes a high burden on businesses, including lack of legal certainty, non‐transparent decision‐making in particular at local level, and numerous para‐fiscal charges. Moreover, high fragmentation of public administration responsibilities at regional and local levels and a complex split of competencies between ministries and agencies at central level complicate business decisions and lengthen administrative procedures. A structured approach has been put in place at central government level to identify obstacles for business; however, a consistent methodology for measuring administrative burden is not applied, which decreases the effectiveness of measures already taken. The existing one‐stop shop for businesses covers limited functionalities only. There is a need to rationalise and improve control over public subsidies and guarantees; a central register of supported companies and individuals would represent a first step in this area. Croatia has initiated reforms of the public administration to strengthen its administrative capacities and to improve the client‐orientation of public services for citizens and businesses. However, the quality of public governance remains low, with weak coordination across different levels of government and little or overformalistic use of evidence‐based policy‐making and assessment. The adoption of the public administration reform strategy is a step in the right direction; the strategy should be thoroughly implemented at all levels of government. The experience of the implementation of the pre‐accession funds points to deficiencies in terms of strategic planning and institutional capacity and weaknesses in project elaboration and follow‐up.

               (18)

               State‐owned or state‐controlled companies are negatively affected by weak governance while the implementation of the new strategy for the management of public assets and enterprises has encountered delays. Currently, there is no competitive selection procedure for supervisory board members and management, and appointments are not published. While measures have been taken to improve the anti‐corruption framework, more efforts are required in the prevention of corruption, at all layers of government. The key elements currently missing in the anti‐corruption framework include effective verification mechanisms for conflict of interest and asset disclosure of public officials, as well as specific safeguards for state‐owned and state‐controlled enterprises. The verification powers of the Commission for the Resolution of Conflict of Interest rely on the competences and pro‐activeness of other authorities. Despite the progress made to increase transparency of public procurement procedures, risk assessment tools are not being systematically used and vulnerable sectors appear to be insufficiently prioritised. The oversight over the effective implementation of public procurement rules needs to be reinforced, also in view of the allocation of EU funds in the coming years.

               (19)

               The wide‐spread application of the pre‐bankruptcy procedure in 2013 met with some success in addressing debt‐servicing problems faced by companies in the context of complex, expensive and lengthy bankruptcy procedures. However, there is scope to considerably strengthen the instrument by addressing various shortcomings, such as insufficient clarification of the role of the State in the process, strengthening the role of commercial courts in validating claims and sound restructuring plans, extending the scope of the procedure to allow for effective restructuring before the debtor becomes insolvent, and addressing deficiencies in implementation of the law. Despite a number of reforms to improve the effectiveness of the justice system, judicial proceedings in litigious civil, commercial and administrative cases are unduly long, particularly in first instance. The backlog of cases increased in 2013 and is very high, particularly as regards civil and commercial proceedings. Continued effort to create and enforce the right incentives to resolve proceedings in a timely manner and to promote out‐of‐court settlements, especially in the case of small claims, is needed to address these issues, as they hamper business activity and reduce Croatia's attractiveness for foreign direct investment.

               (20)

               The conservative approach adopted by the Croatian National Bank to macro‐prudential regulation, in particular in relation to capital levels, has meant that banks have built up a degree of resilience that has proven to be useful given the challenges they now face from the weak economy. However, with the economy entering its sixth year of recession and increasing non‐performing loans, there are risks to banks' asset quality. It is welcome that certain portfolios of the four largest Croatian banks, which are foreign‐owned, will be covered by the euro area asset quality review/stress test of the new Single Supervisory Mechanism. Nevertheless, the exercise excludes some materially important portfolios from a Croatian perspective, as portfolios are selected based on their relevance at a banking group level. Furthermore, the exercise does not cover mid‐size and smaller banks, which may have lower capital levels and less robust asset quality, and which are potentially important for financial stability. Complementing the Single Supervisory Mechanism exercise by an additional supervisory diagnostic exercise designed specifically for the Croatian financial system (and which would cover significant portfolios of Croatian subsidiaries that are not part of the Single Supervisory Mechanism exercise, as well as key mid‐size and smaller banks) would improve the overall understanding of banks' loan classification and the adequacy of their loan loss provisions.

               (21)

               In the context of the European Semester, the Commission has carried out a comprehensive analysis of Croatia's economic policy. It has assessed the National Reform Programme and the Convergence Programme. It has taken into account not only their relevance for sustainable fiscal and socio‐economic policy in Croatia but also their compliance with EU rules and guidance, given the need to reinforce the overall economic governance of the Union by providing EU‐level input into future national decisions. Its recommendations under the European Semester are reflected in recommendations (1) to (8) below.

               (22)

               In the light of this assessment, the Council has examined the Convergence Programme, and its opinion (4) is reflected in particular in recommendation (1) below.

               (23)

               In the light of the Commission's in‐depth review and this assessment, the Council has examined the National Reform Programme and the Convergence Programme. Its recommendations under Article 6 of Regulation (EU) No 1176/2011 are reflected in recommendations (1) to (8) below.

         HEREBY RECOMMENDS that Croatia take action within the period 2014‐2015 to:

               1.

               Fully implement the budgetary measures adopted for 2014. Reinforce the budgetary strategy, further specifying announced measures for 2015 and 2016, and considering additional permanent, growth‐friendly measures in order to ensure a sustainable correction of the excessive deficit by 2016. At the same time, ensure that the structural adjustment effort as specified in the Council recommendation under the Excessive Deficit Procedure is delivered. Align programme projections with ESA standards and Stability and Growth Pact requirements. Take measures to reinforce control over expenditure. By March 2015, carry out a thorough expenditure review. Reinforce the budgetary planning process, in particular by improving the accuracy of macroeconomic and budgetary forecasts and strengthening the binding nature of the annual and medium‐term expenditure ceilings and improve the design of fiscal rules. By October 2014, ground in law the newly established Fiscal Policy Commission, strengthen its independence from all budgetary authorities, broaden its mandate, in particular with respect to the monitoring of all fiscal rules and the ex ante and ex post assessment of forecasts, and ensure adequate resourcing. Building on plans outlined in the National Reform Programme, present a concrete strategy to reform recurrent property taxation. Initiate a process of reporting and reviewing of tax expenditures. Improve tax compliance, in particular by further enhancing the efficiency of the tax administration; present an action plan to this end by the end of 2014.

               2.

               Reduce access to early retirement. Adopt legislation by March 2015 to accelerate the planned harmonisation of statutory retirement ages of women and men and to advance the planned increase of the statutory retirement age to 67 years. Ensure enforcement of tighter disability pensions assessments and controls and accelerate the integration of pensions under special schemes into the general pension system. Strengthen the cost‐effectiveness of the healthcare sector, including hospitals.

               3.

               Implement the second phase of the labour law reform, following consultation with the social partners, in particular as regards conditions for dismissals and working time, and with a view to preventing further labour market segmentation including for young people, by March 2015. Review the wage‐setting system with a view to better aligning productivity developments and wage conditions. Present the conclusions of this review by the end of 2014. Strengthen the effectiveness and reach of active labour market policies by reinforcing the administrative capacities of the public employment services, including at regional level, and by increasing the coverage of the young, long‐term unemployed and older workers. Prioritise outreach to non‐registered youth and mobilise the private sector to offer more apprenticeships, in line with the objectives of a youth guarantee. Outline plans, by the end of 2014, to address undeclared work. Implement measures to improve the labour market relevance and quality of education outcomes by modernising the qualification systems, by putting in place quality assurance mechanisms and by improving school‐to‐work transitions, in particular through strengthening vocational education and work‐based learning.

               4.

               Review tax and benefits systems by the end of 2014, and present an action plan to improve the reactivation of inactive and unemployed persons. Strengthen the effectiveness and transparency of the social protection system by further consolidating benefits, unifying eligibility criteria and linking data from all relevant levels and government entities in the ‘one‐stop shop’. Improve the effectiveness and adequacy of social assistance benefits through their better targeting.

               5.

               Take further measures to improve the business environment. In particular, by March 2015 set a target for considerably lowering administrative requirements, including para‐fiscal charges. Address the high level of fragmentation and overlapping responsibilities by streamlining administrative processes and by clarifying the decision‐making and accountability framework across various levels of government and at central government level between ministries and agencies. Improve administrative capacity and strategic planning of units entrusted with the management of European Structural and Investment Funds and provide them with adequate and stable staffing levels.

               6.

               Present, by October 2014, a detailed plan for public property management for 2015. Ensure that companies under state control are governed in a transparent and accountable manner, in particular, strengthen the competency requirements for members of management and supervisory boards nominated by the State and introduce a public register for appointments. Reinforce prevention of corruption in public administration and state‐owned and state‐controlled enterprises, including by increasing the verification powers of the Conflict of Interest Commission. Strengthen transparency and efficiency of public procurement at both central and local levels, and the capacity to monitor implementation and to detect irregularities.

               7.

               By the end of 2014, reinforce the role of commercial courts in the monitoring of transparency and legality in the application of the corporate pre‐bankruptcy procedure. Review the compulsory test of insolvency/illiquidity to access pre‐bankruptcy settlement proceedings and streamline the insolvency/liquidation process to reduce its length. Improve the quality and efficiency of the judicial system, in particular by providing incentives to resolve proceedings in litigious civil and commercial cases and in administrative cases in a timely manner and to resort to out‐of‐court settlement especially for smaller claims.

               8.

               Complement the 2014 European Central Bank's asset quality reviews and stress test exercises, undertake a comprehensive portfolio screening exercise designed specifically for the Croatian financial sector, with a focus on important portfolios that are not covered by the European Central Bank exercise and including key mid‐size and smaller banks.

      Done at Brussels, 8 July 2014.

            For the Council

            The President

         P. C. PADOAN

      (1)  OJ L 209, 2.8.1997, p. 1.

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

      (3)  Maintained for 2014 by Council Decision 2014/322/EU of 6 May 2014 on guidelines for the employment policies of the Member States for 2014 (OJ L 165, 4.6.2014, p. 49).

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