               EUROPEAN COMMISSION
            Brussels, 1.6.2021
            COM(2021) 269 final
            Recommendation for a
            COUNCIL DECISION
            authorising the opening of negotiations to amend the Agreement between the European Union and Japan on mutual legal assistance in criminal matters

               EXPLANATORY MEMORANDUM

               1.CONTEXT OF THE PROPOSAL

               •Reasons for and objectives of the proposal

               The Agreement between the European Union and Japan on mutual legal assistance in criminal matters
                  1
                aims to establish more effective cooperation between the European Union and Japan in that area. Under the Agreement, the requested state shall, upon the request by the requesting state, provide legal assistance in connection with investigations, prosecutions and other proceedings (including judicial proceedings) in criminal matters. The scope of the Agreement includes modern cooperation tools such as videoconferencing and the exchange of bank information. It is the EU’s first such ‘self‑standing’ agreement with another country. No individual Member State had previously concluded a separate similar agreement with Japan.

               The Data Protection Law Enforcement Directive (LED)
                  2
                entered into force on 6 May 2016 and Member States were to transpose it into national law by 6 May 2018 (Article 63(1) LED). Compared with the Framework Decision that it repealed and replaced
                  3
               , the LED is a much more comprehensive and complete horizontal data protection instrument. It applies to the domestic and cross-border processing of personal data by competent authorities for the purposes of preventing, investigating, detecting or prosecuting criminal offences and executing criminal penalties, including safeguarding against and preventing threats to public security (Article 1(1) LED).

               Article 62(6) LED requires the Commission, by 6 May 2019, to review other EU legal acts that regulate the processing of personal data for law enforcement purposes, in order to assess the need for alignment with the LED and, where appropriate, propose amendments so as to ensure a consistent approach to the protection of personal data.

               On 24 June 2020, the Commission fulfilled that obligation by adopting a Communication, Way forward on aligning the former third pillar acquis with data protection rules
                  4
               . It listed 10 legal acts that should be aligned with the LED and set out a timetable for doing so. It identified the Agreement with Japan as one of the acts that require targeted amendment to ensure full alignment with the LED and indicated that it would make a recommendation to the Council in the first quarter of 2021. This is the recommendation.

               •Consistency with existing policy provisions in the policy area

               The purpose of this initiative is to align the data protection rules in the Agreement with the principles and rules laid down in the LED, in order to provide a strong and coherent data protection framework for the purposes of the Agreement.

               •Consistency with other Union policies

                  n/a

               2.LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY

               •Legal basis

               This proposal is based on Article 218(3) and (4) of the Treaty on the Functioning of the European Union (TFEU).

               Article 218(3) TFEU requires the Commission to submit recommendations to the Council, which then adopts a decision authorising the opening of negotiations and, depending on the subject of the envisaged agreement, nominating the Union negotiator or the head of the Union’s negotiating team. Article 218(4) TFEU provides that the Council may set out negotiating directives and designate a special committee in consultation with which the negotiations must be conducted.

               •Subsidiarity (for non-exclusive competence)

                  Only the Union can conduct negotiations to amend the Agreement.

               •Proportionality

                  This proposal is limited to what is necessary to ensure that the Agreement is compatible with existing Union legislation on the protection of personal data, in particular the LED, without changing the cooperation mechanisms under the Agreement. The recommendation does not go beyond what is necessary for achieving the objectives pursued, in accordance with Article 5(4) of the Treaty on European Union.

               •Choice of the instrument

                  n/a

               3.RESULTS OF EX POST EVALUATIONS, STAKEHOLDER CONSULTATIONS AND IMPACT ASSESSMENTS

               •Ex post evaluations/fitness checks of existing legislation

               This recommendation follows the results of the Commission’s review under Article 62(6) LED, as presented in its Communication, Way forward on aligning the former third pillar acquis with data protection rules. The Communication lists points on which alignment is necessary. In particular, it identifies the need to improve the data protection safeguards in the Agreement.

               Under the current provisions, in particular Articles 8 (requests for assistance) and 13 (confidentiality and use limitations):

               requests must contain a description of the purpose of the assistance requested, together with the facts pertaining to the subject of the investigation, prosecution or other proceeding (including judicial proceeding); and

               the requesting state must not process personal data for purposes other than that described in the request without prior consent from the requested state.

               The review identified several areas in which provisions are needed. These areas include:

               ·provisions on data quality and security;

               ·rules on data retention and record keeping;

               ·safeguards applicable to the processing of special categories of personal data;

               ·restrictions on onward transfers; and

               ·rules on oversight and legal remedies available to individuals.

               This recommendation seeks the authorisation of the Council to open negotiations on amending the Agreement with a view to agreeing new provisions that will allow the Union to ensure compliance with its obligations under the LED.

               •Stakeholder consultations

                  In line with its ‘better regulation’ guidelines, the Commission published a roadmap outlining an initiative for a recommendation for a Council Decision on ‘EU-Japan Agreement on mutual legal assistance in criminal matters — proposed alignment with EU data protection rules’
                     5
                  . Stakeholders were invited to provide feedback between 14 January and 11 February 2021. No submissions were received in that period.

               •Collection and use of expertise

                  When conducting the review, the Commission took account of a study carried out as part of the European Parliament pilot project on ‘a fundamental rights review of EU data collection instruments and programmes’
                     6
                  . The study included a mapping of Union acts covered by Article 62(6) LED and identified provisions potentially requiring alignment on data protection issues.

               •Impact assessment

               The impact of the present proposal is essentially limited to the processing of personal data by competent authorities in the context of Council Framework Decision 2002/465/JHA
                  7
               . The impact of new obligations arising from the LED was assessed in the context of the preparatory works for the Directive. This renders a specific impact assessment for this proposal unnecessary.

               •Regulatory fitness and simplification

                  n/a

               •Fundamental rights

               The right to the protection of personal data is enshrined in Article 8 of the Charter of Fundamental Rights of the European Union, Article 16 TFEU and Article 8 of the European Convention on Human Rights. Data protection is also closely linked to respect for private and family life, as protected by Article 7 of the Charter. EU data protection legislation aims to ensure a high level of protection of personal data.

               The present recommendation seeks authorisation for the opening of negotiations with a view to amending the Agreement with Japan so as to provide for appropriate safeguards to ensure compliance with Member States’ obligations under the LED. This would positively impact the fundamental rights to privacy and data protection.

               4.BUDGETARY IMPLICATIONS

                  n/a

               Recommendation for a

               COUNCIL DECISION

               authorising the opening of negotiations to amend the Agreement between the European Union and Japan on mutual legal assistance in criminal matters

               THE COUNCIL OF THE EUROPEAN UNION,

               Having regard to the Treaty on the Functioning of the European Union, and in particular Article 218(3) and (4) thereof,

               Having regard to the recommendation from the European Commission,

               Whereas:

               (1)Negotiations should be opened with a view to amending the Agreement between the European Union and Japan on mutual legal assistance in criminal matters
                  8
               .

               (2)The processing of personal data under the Agreement should comply with the applicable data protection rules. The data protection provisions of the Agreement should be reviewed and new provisions agreed that allow the Union to ensure that such processing complies with Directive (EU) 2016/680
                  9
                of the European Parliament and of the Council.

               (3)The European Data Protection Supervisor was consulted in accordance with Article 42(1) of Regulation (EU) 2018/1725 of the European Parliament and of the Council
                  10
                and delivered an opinion on …
                  11
               ,

               HAS ADOPTED THIS DECISION:

               Article 1

               1.The Commission is hereby authorised to open negotiations to amend the Agreement between the European Union and Japan on mutual legal assistance in criminal matters.

               Article 2

               The negotiating directives are set out in the Annex.

               Article 3

               The negotiations shall be conducted in consultation with [a special committee to be designated by the Council].

               Article 4

               This Decision is addressed to the Commission.

               Done at Brussels,

                     For the Council

                     The President

                     (1)

                        Agreement between the European Union and Japan on mutual legal assistance in criminal matters (OJ L 39, 12.2.2010, p. 20), signed in Brussels on 30 November 2009 and in Tokyo on 15 December 2009. It entered into force on 2 January 2011.

                     (2)

                        Directive (EU) 2016/680 of the European Parliament and of the Council of 27 April 2016 on the protection of natural persons with regard to the processing of personal data by competent authorities for the purposes of the prevention, investigation, detection or prosecution of criminal offences or the execution of criminal penalties, and on the free movement of such data, and repealing Council Framework Decision 2008/977/JHA (OJ L 119, 4.5.2016, p. 89).

                     (3)

                        Council Framework Decision 2008/977/JHA of 27 November 2008 on the protection of personal data processed in the framework of police and judicial cooperation in criminal matters (OJ L 350, 30.12.2008, p. 60).

                     (4)

                        COM(2020) 262 final.

                     (5)

                  https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/12804-EU-Japan-mutual-legal-assistance-on-criminal-matters

                     (6)

                        The project was requested by the Parliament, managed by the Commission and carried out by a contractor (group of independent experts) selected by the Commission on the basis of criteria set out by the Parliament. The project deliverables reflect the views and opinions of the contractor only and the Commission cannot be held responsible for any use which may be made of the information contained therein;

                        http://www.fondazionebrodolini.it/en/projects/pilot-project-fundamental-rights-review-eu-data-collection-instruments-and-programmes

                     (7)

                        Council Framework Decision of 13 June 2002 on joint investigation teams (OJ L 162, 20.6.2002, p. 1).

                     (8)

                        Agreement between the European Union and Japan on mutual legal assistance in criminal matters, OJ L 39, 12.2.2010, p. 20.

                     (9)

                        Directive (EU) 2016/680 of the European Parliament and of the Council of 27 April 2016 on the protection of natural persons with regard to the processing of personal data by competent authorities for the purposes of the prevention, investigation, detection or prosecution of criminal offences or the execution of criminal penalties, and on the free movement of such data, and repealing Council Framework Decision 2008/977/JHA (OJ L 119, 4.5.2016, p. 89).

                     (10)

                        Regulation (EU) 2018/1725 of the European Parliament and of the Council of 23 October 2018 on the protection of natural persons with regard to the processing of personal data by the Union institutions, bodies, offices and agencies and on the free movement of such data, and repealing Regulation (EC) No 45/2001 and Decision No 1247/2002/EC (OJ L 295, 21.11.2018, p. 39).

                     (11)

                        OJ C ….

    ---documentbreak---

               EUROPEAN COMMISSION
            Brussels, 1.6.2021
            COM(2021) 269 final
            ANNEX
            to the
            Recommendation for a
            COUNCIL DECISIONauthorising the opening of negotiations to amend the Agreement between the European Union and Japan on mutual legal assistance in criminal matters

               ANNEX

               Directives for the negotiations to amend the Agreement between the European Union and Japan on mutual legal assistance in criminal matters

               The Commission should, in the course of the negotiations, aim to achieve the objectives set out in detail below:

               (1)The general objective of the amendments is to support and strengthen the cooperation between the Member States and Japan in the area of mutual legal assistance in criminal matters by strengthening safeguards with respect to the protection of personal data. The amendments should not change the purpose and forms of cooperation under the Agreement.

               (2)The Agreement, in particular Articles 8 (requests for assistance) and 13 (confidentiality and use limitations), already requires that:

               –requests contain a description of the purpose of the assistance requested, together with the facts pertaining to the subject of the investigation, prosecution or other proceeding (including judicial proceeding); and

               –the requesting state must not process personal data for purposes other than that described in the request without prior consent from the requested state.

               This upholds the principles of purpose specification and purpose limitation.

               (3)The amendments should ensure that the Agreement provides for appropriate data protection safeguards within the meaning of Directive (EU) 2016/680
                  1
                for the transfer of personal data pursuant to the Agreement, irrespective of the nationality or place of residence of the individuals concerned.

               (4)In particular, the amendments should comprise the following additional safeguards, to be applied to all authorities that participate in the investigation, prosecution or other proceeding (including judicial proceeding) that is described in the request:

               (a)a requirement to ensure that any personal data to be transferred between the parties is necessary to achieve the purpose of the request in line with the objectives and scope of the agreement and that is adequate, relevant and not excessive in relation to that purpose;

               (b)a requirement to ensure that personal data is accurate and, where necessary, kept up to date; that personal data which does not fulfil this requirement is erased or rectified; and the other party is informed where there are indications that personal data is or has become inaccurate or outdated;

               (c)a requirement to ensure that personal data is not retained for longer than is necessary for the purpose(s) for which it has been transferred;

               (d)a requirement that the transfer and further processing of personal data revealing racial or ethnic origin, political opinions, religious or philosophical beliefs, or trade union membership, of genetic data, biometric data for the purpose of uniquely identifying a natural person, data concerning health or data concerning a natural person’s sex life or sexual orientation, is allowed only if such transfer and further processing is subject to appropriate safeguards addressing the specific risks entailed by the processing;

               (e)a requirement to implement appropriate technical and organisational measures so as to be able to demonstrate compliance;

               (f)a requirement to ensure the security of personal data through appropriate technical and organisational measures, including access restrictions, and to provide notification in the event of a personal data breach;

               (g)a mechanism to ensure that the individual(s) concerned are notified of any data transfer and that basic information on the processing is made available to them, subject to any necessary and proportionate restrictions;

               (h)a requirement to ensure that the individual(s) concerned have enforceable rights of access (including basic information on the processing), rectification and erasure, subject to any necessary and proportionate restrictions, and to provide for appropriate safeguards with respect to decisions based solely on the automated processing of transferred personal data that negatively affects them.

               (i)where prior consent is required pursuant to Article 13(1) of the Agreement, a requirement of the requested state to assess all relevant factors, in particular:

               –the initial purpose of processing;

               –the purpose of further processing; and

               –whether the receiving authority ensures a level of data protection for the personal data that is shared equivalent to that guaranteed by the Agreement;

               (j)a requirement to ensure that compliance with the safeguards agreed between the parties is supervised by one or more independent oversight authorities with effective powers of investigation and enforcement, in particular the power to address individuals’ complaints about the use of their personal data, taking into account the specific context of data processing by courts acting in their judicial capacity; and

               (k)a requirement to ensure that individuals are granted effective judicial redress in the event of violations of the above safeguards.

               (5)The amended Agreement should contain definitions of key terms, including a definition of ‘personal data’ that is in line with Article 3(1) of Directive (EU) 2016/680.

                     (1)

                        Directive (EU) 2016/680 of the European Parliament and of the Council of 27 April 2016 on the protection of natural persons with regard to the processing of personal data by competent authorities for the purposes of the prevention, investigation, detection or prosecution of criminal offences or the execution of criminal penalties, and on the free movement of such data, and repealing Council Framework Decision 2008/977/JHA (OJ L 119, 4.5.2016, p. 89).


               EUROPEAN COMMISSION
            Brussels, 2.6.2021
            COM(2021) 513 final
            Recommendation for a
            COUNCIL RECOMMENDATION
            delivering a Council opinion on the 2021 Stability Programme of Cyprus
            {SWD(2021) 501 final}

               Recommendation for a

               COUNCIL RECOMMENDATION

               delivering a Council opinion on the 2021 Stability Programme of Cyprus

               THE COUNCIL OF THE EUROPEAN UNION,

               Having regard to the Treaty on the Functioning of the European Union,

               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,

               After consulting the Economic and Financial Committee,

               Whereas:

               (1)On 20 March 2020, the Commission adopted a Communication on the activation of the general escape clause
                  2
                of the Stability and Growth Pact.
                  3
                In its Communication, the Commission set out its view that, given the expected severe economic downturn resulting from the COVID-19 outbreak, the conditions to activate the general escape clause were met. On 23 March 2020, the Ministers of Finance of the Member States agreed with the assessment of the Commission. The general escape clause has granted Member States budgetary flexibility to deal with the crisis. It has facilitated the coordination of budgetary policies in times of severe economic downturn. Its activation allows for a temporary departure from the adjustment path towards the medium-term budgetary objective of each Member State, provided this does not endanger fiscal sustainability in the medium term. On 17 September 2020, in its Annual Sustainable Growth Strategy, the Commission announced that the general escape clause would remain active in 2021.
                  4

               (2)On 20 July 2020, the Council recommended Cyprus
                  5
                to take all necessary measures, in line with the general escape clause, to effectively address the pandemic, sustain the economy and support the ensuing recovery. It also recommended Cyprus to pursue, when economic conditions allow, fiscal policies aimed at achieving prudent medium-term fiscal positions and ensuring debt sustainability, while enhancing investment.

               (3)The Council Recommendation on the economic policy of the euro area indicates that fiscal policies remain supportive in all euro area Member States throughout 2021 and that policy measures should be tailored to country-specific circumstances and be timely, temporary and targeted.
                  6
                 When the epidemiological and economic conditions allow, emergency measures should be phased out, while combatting the social and labour-market impact of the crisis. Fiscal policies should be pursued that are aimed at achieving prudent medium-term fiscal positions and ensuring debt sustainability, while enhancing investment. Member States should pursue reforms that strengthen the coverage, adequacy, and sustainability of health and social protection systems for all.

               (4)On 18 November 2020, the Commission adopted its Opinions on the 2021 Draft Budgetary Plans of the euro area Member States, which were based on a qualitative assessment of the fiscal measures. The Commission was of the opinion that the Draft Budgetary Plan of Cyprus was overall in line with the fiscal policy recommendations adopted by the Council on 20 July 2020, and that most of the measures included in the plan supported economic activity against the background of considerable uncertainty.

               (5)Next Generation EU, including the Recovery and Resilience Facility, will ensure a sustainable, inclusive and fair recovery. Regulation (EU) 2021/241 establishing the Recovery and Resilience Facility
                  7
                came into force on 19 February 2021.This Facility will provide financial support for the implementation of reforms and investment, entailing a fiscal impulse financed by the EU. It will contribute to the economic recovery, to the implementation of sustainable and growth-enhancing reforms and investment, notably to promote the green and digital transitions, and it will strengthen the economies’ resilience and potential growth. In turn, it will also help public finances to return to more favourable positions in the near term and will contribute to strengthening sustainable public finances, growth and job creation in the medium and long term.

               (6)On 3 March 2021, the Commission adopted a Communication providing further policy orientations to facilitate the coordination of fiscal policies and the preparation of Member States’ Stability and Convergence Programmes.
                  8
                The overall fiscal stance, taking into account national budgets and the Recovery and Resilience Facility, should remain supportive in 2021 and 2022. At the same time, given the expectation of economic activity gradually normalising in the second half of 2021, Member States’ fiscal policies should become more differentiated in 2022. Member States’ fiscal policies should take into account the state of the recovery, fiscal sustainability and the need to reduce economic, social and territorial divergences. In view of the need to support a sustainable recovery for the EU, Member States with low sustainability risks should gear their budgets towards maintaining a supportive fiscal policy in 2022, taking into account the impact of the Recovery and Resilience Facility. Member States with high debt levels should pursue prudent fiscal policies, while preserving nationally financed investment and making use of grants under the Recovery and Resilience Facility to fund additional high-quality investment projects and structural reforms. For the period beyond 2022, fiscal policies should continue to take into account the strength of the recovery, the degree of economic uncertainty and fiscal sustainability considerations. A refocusing of fiscal policies towards achieving prudent medium-term fiscal positions, including by phasing out support measures in due course, will contribute to ensuring fiscal sustainability in the medium term.

               (7)The Communication of 3 March 2021 also announced the Commission’s view that the decision on the deactivation or continued application of the general escape clause should be taken as an overall assessment of the state of the economy, with the level of economic activity in the EU or euro area compared to pre-crisis levels (end-2019) as key quantitative criterion. On the basis of the Commission’s 2021 spring forecast, on 2 June the Commission considered that the conditions to continue to apply the general escape clause in 2022 and to deactivate it as of 2023 were met. Country-specific situations will continue to be taken into account after the deactivation of the general escape clause.
                  9

               (8)On 29 April 2021, Cyprus submitted its 2021 Stability Programme, in line with Article 4 of Regulation (EC) No 1466/97.

               (9)In 2020, based on data validated by Eurostat, Cyprus’s general government deficit was 5.7% of GDP, while general government debt increased to 118.2% of GDP. The annual change in the primary budget balance amounted to -7.6% of GDP, including discretionary budgetary measures of 3.6% in support of the economy and the operation of automatic stabilisers. Cyprus also provided liquidity support to companies and households (such as guarantees and tax deferrals, which do not have a direct and immediate budgetary impact)estimated at 1.9% of GDP.

               On 2 June 2020, the Commission issued a report under Article 126(3) TFEU. This report discusses the budgetary situation of Cyprus, as its general government deficit in 2020 exceeded the 3% of GDP Treaty reference value, while its general government debt exceeded the 60% of GDP Treaty reference value and did not diminish at a satisfactory pace. The report concluded that the deficit criterion was not fulfilled and the debt criterion was not complied with.

               (10)The macroeconomic scenario underpinning the budgetary projections is favourable in 2021 and 2022. According to the Commission 2021 spring forecast, Cypriot real GDP is expected to grow by 3.1% in 2021 and 3.8% in 2022. According to the Stability Programme, the Cypriot economy is expected to grow by 3.6% in 2021 and 3.8% in 2022. The Programme’s comparatively higher growth rate in 2021 is driven by stronger private consumption.

               (11)In its 2021 Stability Programme, the government plans an increase in the general government deficit from 5.7% of GDP in 2020 to 4.7% of GDP in 2021, while the debt ratio is planned to decrease to 111.9% of GDP in 2021. According to the programme, the change in the primary budget balance in 2021 compared with the pre-crisis level (2019) is set to amount to -6.5% of GDP, reflecting the discretionary budgetary measures of 3.4% of GDP in support of the economy and the operation of automatic stabilisers. These projections are in line with the Commission’s 2021 spring forecast.

               (12)In response to the COVID-19 pandemic and related economic downturn, Cyprus has adopted budgetary measures to strengthen the capacity of its health system, contain the pandemic and provide relief to those individuals and sectors that have been particularly affected. This forceful policy response has cushioned the contraction in GDP, which, in turn, curtailed the increase in government deficit and public debt. Fiscal measures should maximise support to the recovery without pre-empting future fiscal trajectories. Therefore, measures should avoid creating a permanent burden on public finances. When Member States introduce permanent measures, they should properly fund them to ensure budgetary neutrality in the medium term. The measures taken by Cyprus in 2020 and 2021 have been in line with the Council Recommendation of 20 July 2020. The discretionary budgetary measures adopted by the government in 2020 and 2021 are mostly temporary or matched by offsetting measures.

               (13)The 2021 Stability Programme assumes investment and reforms financed by grants under the Recovery and Resilience Facility amounting to 0.6% in 2021, 0.4% in 2022, 0.4% in 2023, and 0.4% in 2024. Instead, the Commission forecast assumes that the total budgetary impact of reforms and investments entailed in the Plan amounts to 0.3% of GDP in 2021 and 0.5% of GDP in 2022.

               (14)The established indicators of fiscal adjustment set out in Regulation (EC) No 1466/97 need to be considered in the context of the current circumstances. First, there is significant uncertainty surrounding output gap estimates. Second, there is a need for fiscal policy to stand ready to rapidly adapt to the evolution of the pandemic, shifting from emergency relief to more targeted measures once health risks diminish. Third, the current context is characterised by a significant policy response to support economic activity. In the presence of sizeable transfers from the EU budget (such as those from the Recovery and Resilience Facility), the established indicators do not capture the full impulse provided by fiscal policies to the economy. Against this background, the structural balance does not appear adequate in the current circumstances. The expenditure benchmark, in turn, needs to be adapted
                  10
                and complemented with additional information in order to fully gauge the fiscal policy orientation.

               First, similarly to the approach pursed in the assessment of the 2021 Draft Budgetary Plans, temporary emergency measures have been excluded from the expenditure aggregate. These crisis-related temporary emergency measures support health systems and compensate workers and firms for the losses in income due to lockdowns and supply chain disruptions; their reversal by the public authorities is contingent on the return of the public health and economic situation to normality.

               Second, to assess the overall fiscal stance at the current juncture, the sizeable transfers from the EU budget (such as those from the Recovery and Resilience Facility) should be included in the relevant expenditure aggregate.

               Therefore, the fiscal stance is then measured by the change in primary expenditure (net of discretionary revenue measures and excluding crisis-related temporary emergency measures) including expenditure financed by grants under the Recovery and Resilience Facility and other EU funds.

               Going beyond the overall fiscal stance, the analysis also aims at assessing whether national fiscal policy is prudent and its composition is conducive to a sustainable recovery consistent with the green and digital transitions. For that reason, particular attention is paid to the evolution of nationally financed primary current expenditure and investment.

               (15)In its 2021 Stability Programme, Cyprus’s general government deficit is planned to decrease to 0.9% of GDP in 2022, mainly due to  a discontinuation of the temporary support measures adopted in 2020 and 2021. The general government debt ratio is planned to decrease to 103.9% of GDP in 2022. These projections are below the Commission’s 2021 spring forecast. The Commission forecasts a deficit of 2% of GDP, mainly due to higher expected expenditure and lower revenue, and a general government debt ratio of 106.6% of GDP in 2022.

               Based on the Commission’s forecast, the overall fiscal stance as defined above – also including the impact on aggregate demand in 2022 from investment financed by both the national and the EU budgets, notably the Recovery and Resilience Facility – is estimated at -0.3% of GDP.
                  11
                The positive contribution of expenditure financed by Recovery and Resilience Facility grants and other EU funds is projected to increase 0.4 percentage points of GDP. Nationally financed investment is projected to provide a contractionary contribution of 0.1 percentage point of GDP.
                  12
                Nationally financed primary current expenditure (net of discretionary revenue measures) is projected to provide a contractionary contribution of 0.1 percentage points of GDP.

               (16)The quality of Member States’ budgetary measures appears particularly important. Fiscal structural reforms aimed at improving the composition of national budgets can support potential growth, create much-needed fiscal space and help ensuring fiscal sustainability over the longer term, including in view of climate change and health challenges. On the revenue side, the COVID-19 crisis has reinforced the importance of reforms for more efficient and fairer public revenue systems. On the expenditure side, it has made even more crucial to increase the level and quality of sustainable and growth-enhancing investments, consistent with serving the objectives of enhancing growth potential, economic and social resilience and the green and digital twin transition. The Recovery and Resilience Plans will allow to improve the composition of national budgets.

               (17)According to the programme’s medium-term budgetary plans, the general government surplus is planned to increase from 0.1% in 2023, to 1.6% of GDP in 2024.

               Based on the programme, the overall fiscal stance – also including the impact on aggregate demand from investment financed by both the national and the EU budgets, notably the Recovery and Resilience Facility – is estimated at 2.8% of GDP in 2023 and 2024 on average. The positive contribution of expenditure financed by Recovery and Resilience Facility grants and other EU funds is projected to increase by 0.1 percentage point of GDP. Nationally financed investment is projected to provide a contractionary contribution of 0.1 percentage point of GDP.
                  13
                Nationally financed primary current expenditure (net of discretionary revenue measures) is projected to provide a contractionary contribution of 2.8 percentage points of GDP.

               The current estimate of the 10-year average nominal potential growth is 3½%.
                  14
                 However, this estimate does not include the impact of thereforms that are part of the Recovery and Resilience Plan and can boost Cyprus’ potential growth.

               (18)The general government debt ratio is planned to decrease from 99.5% of GDP in 2023 to 92.9% of GDP in 2024. Cyprus is considered to face medium fiscal sustainability risks over the medium term, as per the latest debt sustainability analysis.
                  15

               (19)In view of the currently still exceptionally high degree of uncertainty, the fiscal policy guidance should remain predominantly qualitative. More precise quantified guidance for the later years should be provided in 2022, if the degree of uncertainty has sufficiently declined by then.

               The Council has assessed the 2021 Stability Programme and the follow-up by the Cyprus to the Council Recommendation of 20 July 2020.

               HEREBY RECOMMENDS CYPRUS TO:

               1.In 2022, maintain a supportive fiscal stance, including the impulse provided by the Recovery and Resilience Facility, and preserve nationally financed investment.

               2.When economic conditions allow, pursue a fiscal policy aimed at achieving prudent medium-term fiscal positions and ensuring fiscal sustainability in the medium term. At the same time, enhance investment to boost growth potential.

               3.Pay particular attention to the composition of public finances, both on the revenue and expenditure sides of the budget, and to the quality of budgetary measures, to ensure a sustainable and inclusive recovery. Prioritise sustainable and growth-enhancing investment, notably supporting the green and digital transition. Give priority to fiscal structural reforms that will help provide financing for public policy priorities and contribute to the long-term sustainability of public finances, including by strengthening the coverage, adequacy, and sustainability of health and social protection systems for all.

               Done at Brussels,

                     For the Council

                     The President

                     (1)

                        OJ L 209, 2.8.1997, p. 1.

                     (2)

                        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.

                     (3)

                        Communication from the Commission to the Council on the activation of the general escape clause of   the Stability and Growth Pact, Brussels, 20.3.2020, COM(2020) 123 final.

                     (4)

                        Communication from the Commission on Annual Sustainable Growth Strategy 2021, Brussels, 17.9.2020, COM(2020) 575 final.

                     (5)

                        Council Recommendation of 20 July 2020 on the National Reform Programme of Cyprus and delivering a Council opinion on the 2020 Stability Programme of Cyprus, OJ C 282, 26.8.2020, p. 82.

                     (6)

                        Pending final adoption by the Council, after endorsement by the European Council. The text agreed by the Eurogroup on 16 December 2020 is available at:
                  https://data.consilium.europa.eu/doc/document/ST-14356-2020-INIT/en/pdf

                     (7)

                  OJ
                   L57, 18.2.2021, p.17.

                     (8)

                        Communication from the Commission to the Council on one year since the outbreak of COVID-19: fiscal policy response, Brussels, 3.3.2021, COM(2021) 105 final.

                     (9)

                        Communication from the Commission on Economic policy coordination in 2021: overcoming COVID-19, supporting the recovery and modernising our economy, Brussels, 2.6.2021, COM(2021)500 final.

                     (10)

                        In particular, the 4-year smoothing of investment used in the expenditure benchmark does not allow assessing properly the fiscal support to the recovery provided by nationally financed investments.

                     (11)

                        A negative sign of the indicator corresponds to an excess of the primary expenditure growth compared with medium-term economic growth, which indicates an expansionary fiscal policy.

                     (12)

                        Other nationally financed capital expenditure is projected to provide an expansionary contribution of 0.1 percentage points of GDP.

                     (13)

                        Other nationally financed capital expenditure is projected to provide a neutral contribution.

                     (14)

                        Estimated by the Commission, following the commonly agreed methodology.

                     (15)

                        See Commission Staff Working Document – Statistical Annex providing background data relevant for the assessment of the 2021 Stability and Convergence Programmes


               EUROPEAN COMMISSION
            Brussels, 2.6.2021
            COM(2021) 511 final
            Recommendation for a
            COUNCIL RECOMMENDATION
            delivering a Council opinion on the 2021 Convergence Programme of Croatia
            {SWD(2021) 501 final}

               Recommendation for a

               COUNCIL RECOMMENDATION

               delivering a Council opinion on the 2021 Convergence Programme of Croatia

               THE COUNCIL OF THE EUROPEAN UNION,

               Having regard to the Treaty on the Functioning of the European Union,

               Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies
                  1
               , and in particular Article 9(2) thereof,

               Having regard to the Recommendation of the European Commission,

               Having regard to the resolutions of the European Parliament,

               After consulting the Economic and Financial Committee,

               Whereas:

               (1)On 20 March 2020, the Commission adopted a Communication on the activation of the general escape clause
                  2
                of the Stability and Growth Pact.
                  3
                In its Communication, the Commission set out its view that, given the expected severe economic downturn resulting from the COVID-19 outbreak, the conditions to activate the general escape clause were met. On 23 March 2020, the Ministers of Finance of the Member States agreed with the assessment of the Commission. The general escape clause has granted Member States budgetary flexibility to deal with the crisis. It has facilitated the coordination of budgetary policies in times of severe economic downturn. Its activation allows for a temporary departure from the adjustment path towards the medium-term budgetary objective of each Member State, provided this does not endanger fiscal sustainability in the medium term. On 17 September 2020, in its Annual Sustainable Growth Strategy, the Commission announced that the general escape clause would remain active in 2021.
                  4

               (2)On 20 July 2020, the Council recommended Croatia to take all necessary measures, in line with the general escape clause, to effectively address the pandemic, sustain the economy and support the ensuing recovery.
                  5
                It also recommended Croatia to pursue, when economic conditions allow, fiscal policies aimed at achieving prudent medium-term fiscal positions and ensuring debt sustainability, while enhancing investment.

               (3)Next Generation EU, including the Recovery and Resilience Facility, will ensure a sustainable, inclusive and fair recovery. Regulation (EU) 2021/241 establishing the Recovery and Resilience Facility
                  6
                came into force on 19 February 2021. This Facility will provide financial support for the implementation of reforms and investment, entailing a fiscal impulse financed by the EU. It will contribute to the economic recovery, to the implementation of sustainable and growth-enhancing reforms and investment, notably to promote the green and digital transitions, and it will strengthen the economies’ resilience and potential growth. In turn, it will also help public finances to return to more favourable positions in the near term and will contribute to strengthening sustainable public finances, growth and job creation in the medium and long term.

               (4)On 3 March 2021, the Commission adopted a Communication providing further policy orientations to facilitate the coordination of fiscal policies and the preparation of Member States’ Stability and Convergence Programmes.
                  7
                The overall fiscal stance, taking into account national budgets and the Recovery and Resilience Facility, should remain supportive in 2021 and 2022. At the same time, given the expectation of economic activity gradually normalising in the second half of 2021, Member States’ fiscal policies should become more differentiated in 2022. Member States’ fiscal policies should take into account the state of the recovery, fiscal sustainability and the need to reduce economic, social and territorial divergences. In view of the need to support a sustainable recovery for the EU, Member States with low sustainability risks should gear their budgets towards maintaining a supportive fiscal policy in 2022, taking into account the impact of the Recovery and Resilience Facility. Member States with high debt levels should pursue prudent fiscal policies, while preserving nationally financed investment and making use of grants under the Recovery and Resilience Facility to fund additional high-quality investment projects and structural reforms. For the period beyond 2022, fiscal policies should continue to take into account the strength of the recovery, the degree of economic uncertainty and fiscal sustainability considerations. A refocusing of fiscal policies towards achieving prudent medium-term fiscal positions, including by phasing out support measures in due course, will contribute to ensuring fiscal sustainability in the medium term.

               (5)The Communication of 3 March 2021 also announced the Commission’s view that the decision on the deactivation or continued application of the general escape clause should be taken as an overall assessment of the state of the economy, with the level of economic activity in the EU or euro area compared to pre-crisis levels (end-2019) as key quantitative criterion. On the basis of the Commission’s 2021 spring forecast, on 2 June the Commission considered that the conditions to continue to apply the general escape clause in 2022 and to deactivate it as of 2023 were met. Country-specific situations will continue to be taken into account after the deactivation of the general escape clause.
                  8

               (6)On 29 April 2021, Croatia submitted its 2021 Convergence Programme, in line with Article 8 of Regulation (EC) No 1466/97.

               (7)In 2020, based on data validated by Eurostat, Croatia’s general government deficit was 7.4% of GDP, while general government debt increased to 88.7% of GDP. The annual change in the primary budget balance amounted to -8.1% of GDP, including discretionary budgetary measures of 3.8% of GDP in support of the economy and the operation of automatic stabilisers. Croatia also provided liquidity support to companies and households (such as guarantees and tax deferrals, which do not have a direct and immediate budgetary impact),  estimated at 4.6% of GDP.

               On 2 June 2021, the Commission issued a report under Article 126(3) TFEU. This report discusses the budgetary situation of Croatia, as its general government deficit in 2020 exceeded the 3% of GDP Treaty reference value, while its general government debt exceeded the 60% of GDP Treaty reference value and did not diminish at a satisfactory pace. The report concluded that the deficit criterion was not fulfilled and the debt criterion was not complied with.

               (8)The macroeconomic scenario underpinning the Convergence Programme’s budgetary projections is realistic in 2021 and favourable in 2022. Most notably, it projects somewhat stronger growth than the Commission’s spring forecast in 2021 (5.2% compared to 5%) and in particular in 2022 (6.6% compared to 6.1%). This is most notably due to the more positive projections of household consumption and investment, while the Commission’s forecast is slightly more optimistic on the contribution of exports.

               (9)In its 2021 Convergence Programme, the government plans a decrease in the general government deficit from 7.4% of GDP in 2020 to 3.8% of GDP in 2021, while the debt ratio is planned to decrease to 86.6% of GDP in 2021. According to the programme, the change in the primary budget balance in 2021 compared with the pre-crisis level (2019) is set to amount to -4.6% of GDP, reflecting the discretionary budgetary measures in support of the economy and the operation of automatic stabilisers. In comparison, the Commission’s 2021 spring forecast does not project the deficit to narrow as much in 2021 (4.6% of GDP). The differences are most pronounced on the revenue side, which the Convergence Programme projects to rebound well in excess of the nominal GDP growth rate. Meanwhile, reconstruction following the 2020 earthquakes in Zagreb and Petrinja is expected to have an impact, although exceptional, on expenditure.

               (10)In response to the COVID-19 pandemic and related economic downturn, Croatia has adopted budgetary measures to strengthen the capacity of its health system, contain the pandemic and provide relief to those individuals and sectors that have been particularly affected. This forceful policy response has cushioned the contraction in GDP, which, in turn, curtailed the increase in government deficit and public debt. Fiscal measures should maximise support to the recovery without pre-empting future fiscal trajectories. Therefore, measures should avoid creating a permanent burden on public finances. When Member States introduce permanent measures, they should properly fund them to ensure budgetary neutrality in the medium term. The measures taken by Croatia in 2020 and 2021 have been in line with the Council Recommendation of 20 July 2020. The discretionary measures adopted by the government in 2020 and 2021 are mostly temporary or matched by offsetting measures. Beyond the horizon of the Commission’s forecast, in 2023, the remaining impact of those non-temporary measures is preliminarily estimated at around 0.3% of GDP, mainly consisting of income tax cuts.

               (11)The 2021 Convergence Programme assumes investment and reforms financed by grants under the Recovery and Resilience Facility amounting to 0.4% of GDP in 2021, 1.9% in 2022, 2.4% in 2023, 2.3% in 2024, 1.7% in 2025 and 1% in 2026. The Commission’s spring forecast includes these grants in its budgetary projections at a broadly similar pace in 2021 and 2022.

               (12)The established indicators of fiscal adjustment set out in Regulation (EC) No 1466/97 need to be considered in the context of the current circumstances. First, there is significant uncertainty surrounding output gap estimates. Second, there is a need for fiscal policy to stand ready to rapidly adapt to the evolution of the pandemic, shifting from emergency relief to more targeted measures once health risks diminish. Third, the current context is characterised by a significant policy response to support economic activity. In the presence of sizeable transfers from the EU budget (such as those from the Recovery and Resilience Facility), the established indicators do not capture the full impulse provided by fiscal policies to the economy. Against this background, the structural balance does not appear adequate in the current circumstances. The expenditure benchmark, in turn, needs to be adapted
                  9
                and complemented with additional information in order to fully gauge the fiscal policy orientation.

               First, similarly to the approach pursed in the assessment of the 2021 Draft Budgetary Plans, temporary emergency measures have been excluded from the expenditure aggregate. These crisis-related temporary emergency measures support health systems and compensate workers and firms for the losses in income due to lockdowns and supply chain disruptions; their reversal by the public authorities is contingent on the return of the public health and economic situation to normality.

               Second, to assess the overall fiscal stance at the current juncture, the sizeable transfers from the EU budget (such as those from the Recovery and Resilience Facility) should be included in the relevant expenditure aggregate.

               Therefore, the fiscal stance is then measured by the change in primary expenditure (net of discretionary revenue measures and excluding crisis-related temporary emergency measures) including expenditure financed by grants under the Recovery and Resilience Facility and other EU funds.

               Going beyond the overall fiscal stance, the analysis also aims at assessing whether national fiscal policy is prudent and its composition is conducive to a sustainable recovery consistent with the green and digital transitions. For that reason, particular attention is paid to the evolution of nationally financed primary current expenditure and investment.

               (13)In its 2021 Convergence Programme, Croatia’s general government deficit is planned to decrease to 2.6% of GDP in 2022, mainly due to strong revenue growth and a discontinuation of the temporary support measures adopted in 2020 and 2021. The general government debt ratio is planned to decrease to 82.5% of GDP in 2022. The Commission’s 2021 spring forecast projects a higher deficit and debt ratio in 2022, at 3.2% of GDP and 82.9% of GDP, respectively, the difference being largely due to the base effect from 2021.

               Based on the Commission’s forecast, overall fiscal stance as defined above – also including the impact on aggregate demand in 2022 from investment financed by both the national and the EU budgets, notably the Recovery and Resilience Facility – is estimated at - 2.4 of GDP
                  10
               . The positive contribution of expenditure financed by Recovery and Resilience Facility grants and other EU funds is projected to increase by 1.5 percentage points of GDP. Nationally financed investment is projected to provide an expansionary contribution of 0.1 percentage points of GDP.
                  11
                Nationally financed primary current expenditure (net of discretionary revenue measures) is projected to provide an expansionary contribution of 0.8 percentage points of GDP.

               (14)The quality of Member States’ budgetary measures appear particularly important. Fiscal structural reforms aimed at improving the composition of national budgets can support potential growth, create much-needed fiscal space and help ensuring fiscal sustainability over the longer term, including in view of climate change and health challenges. On the revenue side, the COVID-19 crisis has reinforced the importance of reforms for more efficient and fairer public revenue systems. On the expenditure side, it has made even more crucial to increase the level and quality of sustainable and growth-enhancing investments, consistent with serving the objectives of enhancing growth potential, economic and social resilience and the green and digital twin transition. The Recovery and Resilience Plans will allow to improve the composition of national budgets.

               (15)According to the programme’s medium-term budgetary plans, the general government deficit is planned to decrease from 1.9% of GDP in 2023, to 1.5% of GDP in 2024.

               Based on the programme, the overall fiscal stance – also including the impact on aggregate demand from investment financed by both the national and the EU budgets, notably the Recovery and Resilience Facility – is estimated at -0.1% of GDP in 2023 and 2024 on average. Expenditure financed by Recovery and Resilience Facility grants and other EU funds is projected to provide a contractionary contribution of 0.6 percentage points of GDP. Nationally financed investment is projected to provide a contractionary contribution of 0.1 percentage points of GDP.
                  12
                Nationally financed primary current expenditure (net of discretionary revenue measures) is projected to provide an expansionary contribution of 0.6 percentage points of GDP.

               The current estimate of the 10-year average nominal potential growth is 3 1/4 %
                  13
               . However, this estimate does not include the impact of the reforms that are part of the Recovery and Resilience Plan and can boost Croatia’s potential growth.

               (16)The general government debt ratio is planned to decrease from 79.5% of GDP in 2023 to 76.8% of GDP in 2024. Croatia is considered to face medium fiscal sustainability risks over the medium term, as per the latest debt sustainability analysis
                  14
               .

               (17)In view of the currently still exceptionally high degree of uncertainty, the fiscal policy guidance should remain predominantly qualitative. More precise quantified guidance for the later years should be provided in 2022, if the degree of uncertainty has sufficiently declined by then.

               The Council has assessed the 2021 Convergence Programme and the follow-up by Croatia to the Council Recommendation of 20 July 2020.

               HEREBY RECOMMENDS CROATIA TO:

               1.In 2022, maintain a supportive fiscal stance, including the impulse provided by the Recovery and Resilience Facility, and preserve nationally financed investment. Keep the growth of nationally financed current expenditure under control.

               2.When economic conditions allow, pursue a fiscal policy aimed at achieving prudent medium-term fiscal positions and ensuring fiscal sustainability in the medium term. At the same time, enhance investment to boost growth potential

               3.Pay particular attention to the composition of public finances, both on the revenue and expenditure sides of the budget, and to the quality of budgetary measures, to ensure a sustainable and inclusive recovery. Prioritise sustainable and growth-enhancing investment, notably supporting the green and digital transition. Give priority to fiscal structural reforms that will help provide financing for public policy priorities and contribute to the long-term sustainability of public finances, including by strengthening the coverage, adequacy, and sustainability of health and social protection systems for all.

               Done at Brussels, 2.6.2021

                     For the Council

                     The President

                     (1)

                        OJ L 209, 2.8.1997, p. 1.

                     (2)

                        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.

                     (3)

                        Communication from the Commission to the Council on the activation of the general escape clause of   the Stability and Growth Pact, Brussels, 20.3.2020, COM(2020) 123 final.

                     (4)

                        Communication from the Commission on Annual Sustainable Growth Strategy 2021, Brussels, 17.9.2020, COM(2020) 575 final.

                     (5)

                        Council Recommendation of 20 July 2020 on the National Reform Programme of Croatia and delivering a Council opinion on the 2020 Convergence Programme of Croatia, OJ C 282, 26.8.2020, p. 68

                     (6)

                  OJ
                   L57, 18.2.2021, p.17.

                     (7)

                        Communication from the Commission to the Council on one year since the outbreak of COVID-19: fiscal policy response, Brussels, 3.3.2021, COM(2021) 105 final.

                     (8)

                        Communication from the Commission on Economic policy coordination in 2021: overcoming COVID-19, supporting the recovery and modernising our economy, Brussels, 2.6.2021, COM(2021)500 final.

                     (9)

                        In particular, the 4-year smoothing of investment used in the expenditure benchmark does not allow assessing properly the fiscal support to the recovery provided by nationally financed investments.

                     (10)

                        A negative sign of the indicator corresponds to an excess of the primary expenditure growth compared with medium-term economic growth, which indicates an expansionary fiscal policy.

                     (11)

                        Other nationally financed capital expenditure is projected to provide a neutral contribution.

                     (12)

                        Other nationally financed capital expenditure is projected to provide an expansionary contribution of 0.2 percentage points of GDP.

                     (13)

                        Estimated by the Commission, following the commonly agreed methodology.

                     (14)

                  See C
                  ommission Staff Working Document – Statistical Annex providing background data relevant for the assessment of the 2021 Stability and Convergence Programmes


               EUROPEAN COMMISSION
            Brussels, 2.6.2021
            COM(2021) 530 final
            Recommendation for a
            COUNCIL RECOMMENDATION
            with a view to bringing an end to the situation of an excessive government deficit in Romania
            {SWD(2021) 530 final}

               Recommendation for a

               COUNCIL RECOMMENDATION

               with a view to bringing an end to the situation of an excessive government deficit in Romania

               THE COUNCIL OF THE EUROPEAN UNION,

               Having regard to the Treaty on the Functioning of the European Union, and in particular Article 126(7) thereof,

               Having regard to the recommendation from the Commission;

               Whereas:

               (1)According to Article 126 of the Treaty on the Functioning of the European Union (Treaty) Member States are to avoid excessive government deficits.

               (2)The Stability and Growth Pact (SGP) 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)Following a recommendation from the Commission of 4 March 2020
                  1
                on the basis of an excessive deficit planned in 2019, the Council decided on 3 April 2020, in accordance with Article 126(6) of the Treaty that an excessive deficit existed in Romania
                  2
                and issued a recommendation to correct the excessive deficit by 2022 at the latest
                  3
               , in accordance with Article 126(7) of the Treaty and Article 3 of Council Regulation (EC) No 1467/97
                  4
               .

               (4)On 20 March 2020, the Commission adopted a Communication on the activation of the general escape clause of the Stability and Growth Pact (SGP)
                  5
               . That clause, as set out in Articles 5(1), 6(3), 9(1) and 10(3) of Regulation (EC) 1466/97
                  6
                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 set out its view that, given the severe economic downturn resulting from the COVID-19 outbreak, the conditions to activate the general escape clause were met. On 23 March 2020, the Ministers of Finance of the Member States agreed with the assessment of the Commission.

               (5)On 15 September 2020, Romania submitted its report on action taken in response to the Council recommendation of 3 April 2020. That report pointed to a major deterioration of the public finances during 2020, mainly due to the COVID‑19 pandemic.

               (6)On 18 November 2020, the Commission adopted a Communication on Romania’s fiscal situation
                  7
               . In light of the continued exceptional uncertainty created by the COVID 19 pandemic and its extraordinary macroeconomic and fiscal impact, the Commission considered that no decision on further steps in the excessive deficit procedure (EDP) initiated for Romania could be taken at that juncture. In particular, the exceptional uncertainty, including for designing a credible path for fiscal policy, did not allow the Commission to put forward a recommendation for a Council recommendation under Article 126(7) of the Treaty at that stage. The Commission stated that it would reassess Romania’s budgetary situation in spring 2021, based on the 2020 outturn data, 2021 budget and the Commission 2021 spring forecast and that, if appropriate, it would propose new steps under the EDP, taking into account the continued application of the general escape clause of the SGP in 2021.

               (7)On 3 March 2021, the Commission adopted a Communication providing further policy orientations to facilitate the coordination of fiscal policies and the preparation of Member States’ Stability and Convergence Programmes
                  8
               . The Communication of 3 March 2021 announced the Commission’s view that the decision on the deactivation or continued application of the general escape clause should be taken as an overall assessment of the state of the economy, with the level of economic activity in the EU or euro area compared to pre-crisis levels (end-2019) as key quantitative criterion. On 2 June 2021 the Commission adopted a Communication on Economic policy coordination in 2021
                  9
               . According to that Communication, the general escape clause of the Stability and Growth Pact will continue to be applied in 2022 and is expected to be deactivated as of 2023.

               (8)According to an update of the Commission’s Debt Sustainability Monitor 2020 to reflect the latest Commission 2021 spring forecast, Romania’s medium and long-term fiscal sustainability risks remain high. Those risks need to be addressed by an adequate medium-term fiscal plan backed by structural measures.

               (9)In light of the deep contraction in economic activity linked to the COVID-19 pandemic and of the related need for fiscal policies to support the recovery in 2021 and 2022, the Council recommendation of 3 April 2020 does no longer provide a relevant basis for fiscal policy guidance for Romania.

               (10)Pursuant to the last sentence of Article 3(5) of Regulation (EC) No 1467/97, the Council may decide, on a recommendation from the Commission, to adopt a revised recommendation under Article 126(7) of the Treaty in the event of a severe economic downturn in the euro area or in the Union as a whole, provided that this does not endanger fiscal sustainability in the medium term.

               (11)In accordance with Article 126(7) of the Treaty and Article 3 of Regulation (EC) No 1467/97, the Council is required to make a recommendation to the Member State concerned which also establishes a deadline to bring the situation of an excessive deficit to an end. The recommendation is to establish a maximum deadline of six months for effective action to be taken by the Member State concerned to correct the excessive deficit, which can be reduced to three months when warranted by the seriousness of the situation. Furthermore, in a recommendation to correct an excessive deficit the Council is to request the achievement of annual budgetary targets which, on the basis of the forecast underpinning the recommendation, are consistent with a minimum annual improvement in the structural balance, i.e. the cyclically-adjusted balance excluding one-off and other temporary measures, of at least 0.5% of GDP as a benchmark.

               (12)Real GDP in Romania contracted by 3.9% in 2020. According to the Commission 2021 spring forecast, real GDP growth is forecast to rebound to 5.1% in 2021 and 4.9% in 2022. Private consumption is expected to recover as the vaccination roll-out progresses and social distancing measures are gradually lifted, while wage growth is also expected to remain robust. The phasing in of projects under the Recovery and Resilience Plan (RRP) is set to lend new impetus to investment growth. The contribution of net exports, that is export minus imports, is expected to remain negative over the forecast horizon. This is because imports are expected to be spurred by the recovery of private consumption as well as by growing investments. Exports are expected to be supported by a recovery in external demand but remain less dynamic than imports. The growth outlook is subject to balanced risks. On the one hand, a credible medium-term fiscal strategy can help dispel concerns about fiscal sustainability, in particular when combined with ambitious reforms (including those contained in the RRP). This would help address Romania’s macroeconomic imbalances, mitigate financial stability risks and contribute to sustainable growth, including by improving the investment climate. On the other hand, uncertainty with regard to public policy-making and delays or inefficiencies in the implementation of the RRP could result in negative confidence effects.

               (13)On 2 March 2021, the Romanian Parliament adopted Romania’s 2021 budget and medium-term fiscal strategy. That fiscal strategy, together with information on the profile of non-repayable financial support and loans under the Recovery and Resilience Facility (Facility), has been taken into account in the 2021 Convergence Programme, which was submitted to the Commission on 5 May 2021. Starting with a general government deficit of 9.2% of GDP in 2020, the Convergence Programme targets a general government deficit of below 3% of GDP by 2024 in the following steps: 8.0% of GDP in 2021, 6.2% of GDP in 2022, 4.4% of GDP in 2023 and 2.9% of GDP in 2024. The fiscal adjustment set out in the Convergence Programme is mostly expenditure-based. Expenditure control (reduction as a percentage of GDP) is envisaged in particular for public sector wages (down by 1.4 pps between 2022 and 2024) and social transfers (down by 0.9 pps between 2022 and 2024).

               (14)The Commission 2021 spring forecast, extended up to 2024, projects a general government deficit of 8.0% of GDP in 2021, 7.1% of GDP in 2022 and 6.8% of GDP in 2023 and 2024. That forecast takes into account expenditures expected to be financed by non-repayable financial support and loans from the Facility, as presented in the Romanian Convergence Programme and in additional information provided by Romania. The decrease of the general headline government deficit projected by the Commission is mostly driven by the gradual expiry of emergency measures adopted in response to the COVID-19 pandemic, by higher revenues driven by the projected economic recovery, and by the additional positive impact of investments and reforms expected to be financed by the Facility. Moreover, the Romanian government has decided to freeze public sector wages in 2021 and 2022, to postpone pension increases in 2021 and to increase pensions moderately in 2022, which contribute to an improved outlook as compared to the one in the Commission 2020 autumn forecast. These changes have already been legislated. In addition, the government intends to adopt a new pension legislation that would keep pension expenditure as percentage of GDP broadly stable. The higher deficit projection in the Commission 2021 spring forecast, compared to Romania’s Convergence Programme, stems from the fact that the planned consolidation is not fully supported by enacted, or as yet credibly announced, measures and could therefore not be taken into account in the Commission forecast. The structural deficit is projected by the Commission to improve by 0.7 pps of GDP in 2021, by 0.5 pps of GDP in 2022 and to deteriorate by 0.1 pps of GDP in 2023 and 0.4 pps of GDP in 2024.

               (15)General government debt stood at 34.7% of GDP at end-2018, 35.3% of GDP at end-2019 and 47.3% of GDP at end-2020. According to the Commission 2021 spring forecast, it is projected to increase to 49.7% of GDP at end-2021, 52.7% of GDP at end-2022 and 59.5% of GDP at end-2024, thus approaching for the first time the 60% of GDP Treaty reference value in the absence of additional corrective measures than those already enacted or credibly announced.

               (16)The analysis of medium to long-term debt sustainability, updated after the Commission 2021 spring forecast, confirms that risks to sustainability are high in the medium term. According to a baseline 10-year projection, the general government debt-to-GDP ratio would continue increasing over the projection period and reach a level close to 90% of GDP. Risks to debt sustainability are driven by large fiscal deficits, costs of ageing, and vulnerability of the debt path to macro-fiscal shocks. Pension increases, legislated in summer 2019, and for the time being postponed until the end of 2022, are the predominant source of the debt sustainability risks. The debt structure, with a high share of foreign denominated debt and a significant share of debt held by non-residents, further adds to the debt sustainability risks, although interventions by the National Bank of Romania on the secondary market have helped keep government borrowing costs at favourable levels in 2020. Moreover, there are risks linked to contingent liabilities stemming from state guarantees (of 1.4% of GDP) granted to firms and the self-employed during the COVID-19 crisis. Gross financing needs are projected to increase. Conversely, reforms and investments under Next Generation EU, if effectively implemented, are expected to have a positive impact on GDP growth in the coming years, thereby contributing to debt sustainability.

               (17)Under Article 3(4) of Regulation (EC) No 1467/97, the correction of the excessive deficit is to be completed in the year following its identification unless there are special circumstances. The adjustment path should be determined in line with Regulation (EC) No 1467/97, taking into account the economic and fiscal position of the Member State.

               (18)In the present situation, such special circumstances exist in Romania. Granting Romania one additional year, which would be in line with the rule established in Article 3(4) of Regulation (EC) No 1467/97, would require a very sharp fiscal adjustment and result in significant output losses, thus risking compromising the economic recovery after the COVID-19 pandemic. An adjustment path with a deadline for correcting the excessive deficit by 2024, while still requiring substantial annual adjustments, would imply a more gradual effort and strike a good balance between fiscal consolidation and supporting the economic recovery. The new adjustement path also takes into account the changed fiscal situation, including budgetary developments in 2020 and the new budgetary strategy put in place by the Romanian government. Reforms, including those that improve the management of public finances, would be instrumental in ensuring a durable correction of the excessive deficit. In light of these considerations, and consistent with the fiscal policy orientations set out in the Commision Communication of 3 March 2021, setting a deadline to correct the excessive deficit by 2024 is justified.

               (19)A credible and sustainable adjustment path under this deadline would require Romania to achieve a headline general government deficit target of 8.0% of GDP in 2021, 6.2% of GDP in 2022, 4.4% of GDP in 2023, and 2.9% of GDP in 2024, in line with the government’s own targets. This, based on the Commission forecast, is consistent with a nominal growth rate of net primary government expenditure of 3.4% in 2021, 1.3% in 2022, 0.9% in 2023 and 0.0% in 2024.
                  10
                Such growth rates of net primary government expenditure will be the primary indicator used to assess the fiscal effort if a careful analysis is needed. The corresponding annual fiscal adjustment in the structural balance is 0.7% of GDP in 2021, 1.8% of GDP in 2022, 1.7% of GDP in 2023 and 1.5% of GDP in 2024.

               (20)To assess the potential impact of overall fiscal policy on output, at the current juncture, the sizeable payments from the European Union budget (under the Facility and other Union funds) should be included in the relevant expenditure aggregate, as a measure of fiscal stance.
                  11
                On this basis, Union funds are expected to have a significant positive impact on the Romanian economy in the coming years. Specifically, investments and reforms supported by the Facility provide an opportunity for Romania to improve its underlying fiscal position in the medium term while still supporting growth and job creation.

               (21)Budgetary consolidation measures should secure a lasting correction on the excessive deficit, while being geared towards enhancing the quality of the public finances and reinforcing the growth potential of the economy. Reforms of a fiscal and broader economic nature, including reforms of the pension system, tax administration, public sector wages and state-owned enterprises governance, should support the fiscal consolidation effort and make it sustainable.

               (22)Since 2016, Romania has systematically and repeatedly derogated from its national fiscal rules and the timeline for the adoption of the medium-term fiscal strategy, enshrined in the national fiscal framework. Going forward, Romania’s budgetary adjustment would be supported by the full application of the national fiscal framework.

               HAS ADOPTED THIS RECOMMENDATION:

               (1)Romania should put an end to the excessive deficit situation by 2024 at the latest.

               (2)Romania should reach a headline general government deficit target of 8.0% of GDP in 2021, 6.2% of GDP in 2022, 4.4% of GDP in 2023, and 2.9% of GDP in 2024, which is consistent with a nominal growth rate of net primary government expenditure of 3.4% in 2021, 1.3% in 2022, 0.9% in 2023 and 0.0% in 2024. This corresponds to an annual structural adjustment of 0.7% of GDP in 2021, 1.8% of GDP in 2022, 1.7% of GDP in 2023 and 1.5% of GDP in 2024.

               (3)Romania should fully implement the measures already adopted for 2021. It should specify and implement the additional measures that are necessary to achieve the correction of its excessive deficit by 2024. Budgetary consolidation measures should secure a sustainable correction in a growth-friendly manner. Any windfall gains should be used to reduce the general government deficit.

               (4)The Council establishes the deadline of 15 October 2021 for Romania to take effective action and, in accordance with Article 3(4a) of Regulation (EC) No 1467/97, to report the consolidation strategy that is envisaged to achieve the targets. Thereafter, Romania should report on progress made in the implementation of this recommendation at least every six months until the excessive deficit has been corrected.

               Furthermore, Romania should ensure the full and effective application of the national fiscal framework. To ensure the success of the medium-term fiscal strategy, it will also be important to support the fiscal consolidation with comprehensive reforms.

               This Recommendation is addressed to Romania.

               Done at Brussels,

                     For the Council

                     The President

                     (1)

                        COM/2020/91 final.

                     (2)

                        OJ L 110, 8.4.2020, p. 58.

                     (3)

                        OJ C 116, 8.4.2020, p. 1.

                     (4)

                        Council Regulation (EC) No 1467/97 of 7 July 1997 on speeding up and clarifying the implementation of the excessive deficit procedure (OJ L 209, 2.8.1997 p.6).

                     (5)

                        COM/2020/123 final.

                     (6)

                        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 (OJ L 209 2.8.1997, p. 1).

                     (7)

                        COM/2020/752 final.

                     (8)

                        COM/2021/105 final.

                     (9)

                        Communication from the Commission on Economic policy coordination in 2021: overcoming COVID-19, supporting the recovery and modernising our economy, Brussels, 2.6.2021, COM(2021)500 final.

                     (10)

                        Net primary government expenditure comprises total government expenditure excluding interest expenditure, expenditure on Union programmes fully matched by Union funds revenue and non-discretionary changes in unemployment benefit expenditure. Nationally financed gross fixed capital formation is smoothed over a 4-year period. Discretionary revenue measures or revenue increases mandated by law are factored in. One-off measures on both the revenue and expenditure sides are netted out.

                     (11)

                        The overall fiscal stance is measured by comparing the change in primary expenditure (net of discretionary revenue measures but including changes in expenditure financed by the Facility and other non-repayable financial support by the European Union) to the 10-year average potential growth rate. However, this estimate does not include the impact of the reforms that are part of the Recovery and Resilience Plan and can boost Romania’s economic potential growth. A negative sign of the indicator corresponds to an excess of the primary expenditure growth compared with medium-term economic growth, which indicates an expansionary fiscal policy.