               EUROPEAN COMMISSION
            Brussels, 20.5.2020
            COM(2020) 518 final
            Recommendation for a
            COUNCIL RECOMMENDATION
            on the 2020 National Reform Programme of Malta and delivering a Council opinion on the 2020 Stability Programme of Malta

               Recommendation for a

               COUNCIL RECOMMENDATION

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

               THE COUNCIL OF THE EUROPEAN UNION,

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

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

               Having regard to the recommendation of the European Commission,

               Having regard to the resolutions of the European Parliament,

               Having regard to the conclusions of the European Council,

               Having regard to the opinion of the Employment Committee,

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

               Having regard to the opinion of the Social Protection Committee,

               Having regard to the opinion of the Economic Policy Committee,

               Whereas:

               (1)On 17 December 2019, the Commission adopted the Annual Sustainable Growth Strategy, marking the start of the 2020 European Semester for economic policy coordination. It took due account of the European Pillar of Social Rights, proclaimed by the European Parliament, the Council and the Commission on 17 November 2017. On 17 December 2019, on the basis of Regulation (EU) No 1176/2011, the Commission also adopted the Alert Mechanism Report, in which it did not identify Malta as one of the Member States for which an in-depth review would be carried out. On the same date, the Commission also adopted a recommendation for a Council recommendation on the economic policy of the euro area.

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

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

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

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

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

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

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

               (9)On 30 April 2020, Malta submitted its 2020 National Reform Programme and, on 2 May 2020, its 2020 Stability Programme. In order to take account of their interlinkages, the two programmes have been assessed at the same time.

               (10)Malta is currently in the preventive arm of the Stability and Growth Pact.

               (11)In its 2020 Stability Programme, the government plans the headline balance to deteriorate from a surplus of 0,5% of GDP in 2019 to a deficit of 7,5 % of GDP in 2020. The deficit is projected to decline to 3,6% of GDP in 2021. After decreasing to 43,1% of GDP in 2019, the general government debt-to-GDP ratio is expected to increase to 54,5% in 2020 according to the 2020 Stability Programme. The macroeconomic and fiscal outlook is affected by high uncertainty due to the COVID-19 pandemic.

               (12)In response to the COVID-19 pandemic, and as part of a coordinated Union approach, Malta has adopted budgetary measures to increase the capacity of its health system, contain the pandemic, and provide relief to those individuals and sectors that have been particularly affected. According to the 2020 Stability Programme, those budgetary measures amounted to 4,1% of GDP. The measures include wage supplements for distressed sectors, increasing healthcare capacity, and COVID-19 related social measures. In addition, Malta has announced measures that, while not having a direct budgetary impact, will contribute to support liquidity to businesses. The 2020 Stability Programme estimates that government guarantees will allow banks to leverage the portfolio of new company loans by up to 6,1% of GDP. Those measures include loan guarantees. The 2020 Stability Programme also confirms earlier announcements of tax deferrals for personal and corporate income taxes, value added tax and social contributions. Overall, the measures taken by Malta are in line with the guidelines set out in the Commission Communication on a coordinated economic response to the COVID-19 outbreak. The full implementation of those measures, followed by a refocusing of fiscal policies towards achieving prudent medium-term fiscal positions when economic conditions allow, will contribute to preserving fiscal sustainability in the medium term.

               (13)Based on the Commission 2020 spring forecast under unchanged policies, Malta’s general government balance is forecast at -6,7% of GDP in 2020 and -2,5% in 2021. The general government debt ratio is projected to remain below 60 % of GDP in 2020 and 2021.

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

               (15)In response to the COVID-19 pandemic, Malta took containment measures through an effective health communication campaign, putting in place physical isolation and quarantine measures, monitoring and a high level of testing and contact tracing. The Maltese authorities have also been working to increase the capacity of hospitals, including the ones dedicated to Intensive Therapy Units. Direct acquisition of Personal Protective Equipment (PPEs) is being undertaken at the national level. Malta has also joined the Union joint procurement process for PPEs, laboratory reagents and tests and ventilators. With respect to medicines and active ingredients, Malta is actively monitoring the situation in order to identify and anticipate any possible shortages and take immediate remedial action, especially in the case of border closures by countries that usually supply the medicines or active ingredients. On 12 May 2020, the Commission approved an EUR 11,5 million scheme to support investments in the production of COVID-19-relevant products including medicinal products such as vaccines, hospital and medical equipment, including ventilators, and protective clothing and equipment. There has also been effective redeployment and re-training of medical staff. Public Health Specialists who used to occupy various positions within regulatory bodies and ministries have been fully repurposed and redeployed to assist in response to this pandemic.

               (16)The Maltese government has supported businesses through financial support for teleworking and subsidies for workers on mandatory quarantine. The government also provided guarantees and tax deferral for businesses, including self-employed persons. Full time employees of enterprises operating in sectors such as retail, wholesale, tourism and hospitality that suffered drastically due to the COVID-19 pandemic or sectors that had to temporarily suspend operations on the order of the Superintendent of Public Health will be entitled to up to five days’ salary per week, based on a salary of EUR 800 per month.. Employees in less harshly affected sectors are entitled to one-two days per week, based on a salary of EUR 800 per month. The government has also announced support for people with disabilities, families with children where both parents are employed and neither are able to telework, workers who lost their job due to the current crisis and the jobless living in rented accommodation.  Finally, the government will be financing up to 2,5 percentage points of the interest rates on bank loans taken out by businesses hit by the COVID19 pandemic.

               (17)The Maltese health system delivers good health outcomes. However, the outbreak of the COVID-19 pandemic put the Maltese public health system under unprecedented levels of pressure. Efforts that focus on building the capacity of the healthcare system to respond effectively to pandemic crises, such as COVID-19, would improve its resilience. The following areas require particular monitoring: (i) the increasing reliance on migrant nurses in acute and long-term care, and an ageing private general practitioner workforce may pose challenges; (ii) the difficulties in making new and innovative medicines available; (iii) the high out of pocket expenditure on primary and outpatient care and on some medicines; (iv) waiting lists for outpatient care specialties are consistently long and have been increasing recently. Reorienting service delivery away from hospitals to primary care remains also a key priority.

               (18)According to the Commission forecast, unemployment is expected to rise to 5,9% in 2020 and to recover to 4,4% in 2021. In order to mitigate the serious impacts of the crisis on employment, Malta took emergency measures, in consultation with social partners, to prevent lay-offs by favouring short time work instead. The adoption of short-time work arrangements on a more permanent basis would also protect jobs in the transition towards economic recovery. Ensuring adequate support and access to social protection for all workers, including the self-employed, and accounting for a possibly extended duration of unemployment are crucial. Malta’s social protection system also needs to ensure that adequate support is provided to foreign workers in finding alternative employment; in retaining work permits when possible and accessing other social services. The share of low-skilled adults is comparatively high, aggravated by a high share of early-school-leavers. The current crisis may exacerbate skills shortages in some sectors and redefine skill needs in others. This makes the mapping of skills and the reskilling of workers even more important, in particular for digital and green skills. Malta has made recent progress on education and training but significant challenges remain, including a high share of pupils with insufficient levels of basic skills.

               (19)The COVID-19 crisis has made swift deployment of liquidity support to businesses an urgent priority for Malta. Ensuring a continuous flow of credit, and access to finance, is of the essence, especially to small and medium-sized enterprises in the most impacted sectors. The banking system has an important role to play in the effective implementation of liquidity measures by providing loans and channeling public guarantees, thus overcoming the conservative  approach to lending practices shown before the crisis. In the process of designing and implementing these measures the resilience of the banking sector needs to be taken into account.

               (20)To foster the economic recovery, it will be important to front-load mature public investment projects and promote private investment, including through relevant reforms. Investments in support of the recovery represents an opportunity to set the Maltese economy on a more sustainable track. Malta’s transformation to a climate neutral economy will require sizeable private and public investment over a sustained period of time. Investment to reduce greenhouse gas emissions, described in its National Energy and Climate Plan, and to address other negative environmental externalities, in particular in sectors like construction and transport, can help achieve the dual objectives of economic recovery and sustainability. Supporting the renovation of the existing building stock and targeted training schemes will help to improve the energy performance of buildings. Further investment on sustainable transport can ensure viable alternatives to the use of private cars. The programming of the Just Transition Fund for the period 2021-2027 could help Malta to address some of the challenges posed by the transition to a climate neutral economy as presented in Annex D to the country report
                  7
               . This would allow Malta to make the best use of that fund.

               (21)Placing higher importance on research and innovation and better embedding it in the business environment will support the sustainability of Malta’s knowledge based economic model. Malta has developed e-government services for citizens and businesses, including a number of mobile apps. However, their uptake by the public remains low. In order to facilitate the economy’s digital transition, it is essential to encourage the use of digital public services by citizens and businesses.

               (22)Malta’s shift towards an internationally oriented service sector and its specialisation in remote gaming, virtual assets and its citizenship and residence schemes, while contributing to economic growth, makes it susceptible to money laundering risks, which are yet to be mitigated. To prevent and combat these risks, steps have been taken to strengthen the role of the anti-money laundering supervisor. Cooperation with other competent authorities has also been enhanced. However, the Malta Financial Services Authority’s practice of insourcing a private consultancy for supervisory tasks is of concern. Shortcomings in the investigation and prosecution of money laundering remain a challenge. Enhancing the national supervision of internationally oriented financial businesses licensed in Malta would strengthen the overall governance framework. In the insurance sector the cooperation between domestic and external supervisors is essential. There is also margin for improvement in third country bank branches’ supervision as well as enhancements in the risk-oriented approach and valuation of adequacy of risk management for banking institutions.

               (23)Tackling aggressive tax planning remains key to improve the efficiency and fairness of tax systems. Spillover effects of taxpayers’ aggressive tax planning strategies between Member States call for a coordinated action of national policies to complement EU legislation. Malta has taken steps to address aggressive tax planning practices by implementing previously agreed international and European agreed initiatives, but the treatment of resident non-domiciled companies as well as the investor-citizenship and investor-residence schemes, which do not even require an individual to be resident for tax purposes in Malta, pose a risk of double non-taxation for both, companies and individuals.

               (24)Malta also faces challenges to strengthen its institutional capacity to fight corruption. Malta has announced reforms to strengthen the investigation and prosecution of corruption and it is consulting relevant stakeholders, notably the Venice Commission, on the reforms of the judiciary. Concrete measures have to be adopted to complete all these reforms and make them operational.

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

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

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

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

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

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

               1.In line with the general escape clause, take all necessary measures to effectively address the pandemic, sustain the economy and support the ensuing recovery. When economic conditions allow, pursue fiscal policies aimed at achieving prudent medium-term fiscal positions and ensuring debt sustainability, while enhancing investment. Strengthen the resilience of the health system with regard to the health workforce, critical medical products and primary care.

               2.Consolidate short-time work arrangements and ensure the adequacy of unemployment protection for all workers. Strengthen the quality and inclusiveness of education and skills development.

               3.Ensure effective implementation of liquidity support to affected businesses, including the self-employed. Front-load mature public investment projects and promote private investment to foster the economic recovery.  Focus investment on the green and digital transition, in particular on clean and efficient production and use of energy, sustainable transport, waste management, research and innovation.

               4.Complete reforms addressing current shortcomings in institutional capacity and governance to enhance judicial independence. Continue efforts to adequately assess and mitigate money laundering risks and to ensure effective enforcement of the anti-money laundering framework. Step up action to address features of the tax system that facilitate aggressive tax planning by individuals and multinationals.

               Done at Brussels,

                     For the Council

                     The President

                     (1)

                        OJ L 209, 2.8.1997, p. 1.

                     (2)

                        SWD(2020) 517 final.

                     (3)

                        OJ C 301, 5.9.2019, p. 117.

                     (4)

                        COM(2020) 112 final.

                     (5)

                        COM(2020) 123 final.

                     (6)

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

                     (7)

                        SWD(2020) 517 final.

                     (8)

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


               EUROPEAN COMMISSION
            Brussels, 20.5.2020
            COM(2020) 514 final
            Recommendation for a
            COUNCIL RECOMMENDATION
            on the 2020 National Reform Programme of Latvia and delivering a Council opinion on the 2020 Stability Programme of Latvia

               Recommendation for a

               COUNCIL RECOMMENDATION

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

               THE COUNCIL OF THE EUROPEAN UNION,

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

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

               Having regard to the recommendation of the European Commission,

               Having regard to the resolutions of the European Parliament,

               Having regard to the conclusions of the European Council,

               Having regard to the opinion of the Employment Committee,

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

               Having regard to the opinion of the Social Protection Committee,

               Having regard to the opinion of the Economic Policy Committee,

               Whereas:

               (1)On 17 December 2019, the Commission adopted the Annual Sustainable Growth Strategy, marking the start of the 2020 European Semester for economic policy coordination. It took due account of the European Pillar of Social Rights, proclaimed by the European Parliament, the Council and the Commission on 17 November 2017. On 17 December 2019, on the basis of Regulation (EU) No 1176/2011, the Commission also adopted the Alert Mechanism Report, in which it did not identify Latvia as one of the Member States for which an in-depth review would be carried out. On the same date, the Commission also adopted a recommendation for a Council recommendation on the economic policy of the euro area.

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

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

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

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

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

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

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

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

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

               (11)Latvia is currently in the preventive arm of the Stability and Growth Pact.

               (12)In its 2020 Stability Programme, the government plans the headline balance to deteriorate from a deficit of 0,2% of GDP in 2019 to 9,4% of GDP in 2020. The government deficit is projected to decline to 5,0% in 2021 and to 2,7% of GDP by 2023, under unchanged policies. After decreasing to 36,9% of GDP in 2019, the general government debt-to-GDP ratio is expected to peak at around 53% in 2022, based on the 2020 Stability Programme. The macroeconomic and fiscal outlook is affected by high uncertainty due to the COVID-19 pandemic.

               (13)In response to the COVID-19 pandemic, and as part of a coordinated Union approach, Latvia has adopted budgetary measures to increase the capacity of its health system, contain the pandemic, and provide relief to those individuals and sectors that have been particularly affected. According to the 2020 Stability Programme, those budgetary measures amounted to 3,0% of GDP. The measures include tax deferral options for up to 3 years, expanded coverage of State-paid sick leave, support for specific sectors and additional health spending. In addition, Latvia has adopted liquidity support to businesses through guarantees and loans amounting to 3,2% of GDP. Overall, the measures taken by Latvia are in line with the guidelines set out in the Commission Communication on a coordinated economic response to the COVID-19 outbreak. The full implementation of those measures, followed by a refocusing of fiscal policies towards achieving prudent medium-term fiscal positions when economic conditions allow, will contribute to preserving fiscal sustainability in the medium term.

               (14)Based on the Commission 2020 spring forecast under unchanged policies, Latvia’s general government balance is forecast at -7,3% of GDP in 2020 and  -4,5% in 2021. This reflects a broadly similar effect of the stimulus measures as in the Stability Programme, but the drop in employment is projected to be lower and automatic stabilisers on the expenditure side are also assumed to be lower. The general government debt ratio is projected to remain below 60% of GDP in 2020 and 2021.

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

               (16)Latvia declared the state of emergency on 13 March 2020 and extended it until 9 June 2020. The government limited the movement of persons across Latvia’s borders by air, rail and sea, closed schools and universities, prohibited all public events, enforced social distancing measures, restricted sales on weekends and promoted digital public services. Considering the improved epidemiological situation, the authorities loosened national restrictions as of 12 May 2020 and agreed to reopen borders with Lithuania and Estonia as of 15 May 2020. According to the Commission forecast, unemployment is expected to rise to 8,6% in 2020 and slightly recover to 8,3% in 2021. The economy is projected to decline by 7% in 2020 with investments and export taking the largest hit amid declining foreign demand and growing uncertainty. Employment is expected to decrease by 2,5%, taking into account the fact that the negative impact on employment will be considerably cushioned by the government-subsidised employee furlough scheme and salary subsidies in export-oriented sectors. In response to the crisis, Latvia developed a comprehensive fiscal and economic policy response to the crisis. The authorities have targeted the response in three directions: (1) support to workers; (2) support to businesses; and (3) support to the hardest-hit economic sectors. Labour policy measures, aimed at maintaining employment and strengthening the social safety net include inter alia salary subsidies of up to 75% of a person’s gross wage, coverage of sick leave if a worker is diagnosed with COVID-19 or in quarantine, and extension of unemployment benefits. Support to  businesses, facing temporary difficulties has aimed to extend liquidity to viable firms and to quickly boost supply of vital goods and services.

               (17)The COVID-19 outbreak required unprecedented measures to contain the spread and impact of the disease. COVID-19 amplified the structural weaknesses in Latvia’s health system, which are directly related to the limited financial and human resources available to it and to reforms that are only slowly progressing. Access to quality and affordable healthcare and the effectiveness of the health system are affected by low public financing. This leads to high self-reported unmet needs for healthcare, significant out-of-pocket payments, especially for vulnerable groups, as well as inequality of access. Unhealthy lifestyles are another important reason for the poor health outcomes. In addition, health workforce shortages constitute a complex challenge and hamper the delivery of health services. To boost efficiency and quality in healthcare, it is crucial to accelerate the ongoing reforms which remain in an early stage including effective prevention measures, stronger primary care, a rationalised hospital sector and targeted quality management. The extent of the impact of these reforms and the opportunities to improve health outcomes also depend significantly on the amount of public financing for health. In order to be able to manage similar crises in the future, it is important to ensure investments into effective and well-resourced public health measures to prevent, contain and mitigate the spread of infectious diseases and to manage their impact on the health system’s performance. Investments could aim at providing the necessary equipment, robust e-health services, facilities and human resources for healthcare and at ensuring the capacity to deliver all expected regular health services alongside care for COVID-19 patients.

               (18)Latvia has taken measures to extend income support for workers and to avoid dismissals during the emergency situation. However, the support is limited in coverage and adequacy, mainly because it is dependent on social contribution payments and restrictive eligibility criteria. The scheme also does not allow for partial idle time. A more gradual transition from income support to work income would allow for a greater labour market flexibility during the downtime period and the economic recovery. Continuous efforts are needed to improve the adequacy, duration and coverage of the social safety net for all. However, these efforts are constrained by the low tax revenue as a share of GDP. Despite some slight improvement, the adequacy of the guaranteed minimum income, of minimum pensions and of income support for persons with disabilities remains low. Latvia has introduced the unemployment aid benefit for the most vulnerable, yet the unemployed are at a high risk of poverty, particularly when the duration of unemployment increases. Coverage gaps in access to social protection, including unemployment insurance, for self-employed and non-standard workers exist and could be tackled. While its share is decreasing, undeclared work and envelope wages remain widespread, weakening affected workers’ social protection and increasing occupational risks. Vulnerable groups are likely to face the most difficulties in finding a job again. The integration of employment, education, health and social services and the provision of social services remains low. The share of people facing severe housing deprivation and that of people facing overcrowding are among the highest in the Union, while social housing is scarce.

               (19)Providing support to small and medium-sized enterprises to help them quickly develop flexible work and teleworking capacities may significantly help mitigate the impact of the crisis. Low registration with public employment services and the low level of involvement of the unemployed in active labour market measures are of particular concern. The delivery and composition of active labour market measures have to be reinforced and adapted to reduce the duration of the unemployment spells and facilitate transitions back to work. Equipping people with the right skills is even more important to improve the resilience of the labour force in times of an economic downturn. Effective and easily accessible adult learning, reskilling and upskilling measures, together with the provision of social services and mobility support, could provide more people with the skills necessary for the labour market. Digital skills also need to be improved as only 43% of Latvians have basic or above basic digital skills. The COVID-19 emergency also highlighted the need to develop quality digital education and training and to ensure equal access to all learners. Strengthening the capacity of social partners is also important to ensure their meaningful and timely involvement in the COVID-19 crisis response and recovery.

               (20)A sizable liquidity support scheme was quickly set up and deployed through the national development institution, Altum. It has helped restructure loan repayment schedules for businesses and provided liquidity support through new loans. At the same time, most restructurings of bank loans take place without involvement of state guarantees. However, the eligibility conditions for state guarantees are relatively strict. As a result, there is a risk that smaller companies with weaker financial position or overdue tax payments will not receive support.  Restaurants and hotels, which are among the hardest hit industries in this crisis, experience difficulties accessing liquidity because of their weak collateral and financial position. At the same time, it is important to sustain the resilience of the banking sector.

               (21)To foster the economic recovery, it will be important to front-load mature public investment projects and promote private investment, including through relevant reforms. Policies to support the country’s digital transformation and green transition should take into account the significant regional disparities. Most urban areas in Latvia have excellent digital infrastructure, but fixed broadband coverage in rural areas, especially last-mile connections, is low. Continued and strengthened efforts to deploy very high-speed broadband will help further improve the digital infrastructure. In order to tackle the challenges posed by the transition to a climate neutral economy, investments are needed to diversify the economy and make it more modern and competitive, including by strengthening investment in research and innovation and human capital and to alleviate the socio-economic costs of the transition. Latvia’s environmental sustainability rests on making progress towards improved energy efficiency, implementing its National Energy and Climate Plan, including in particular in transport and buildings, and mainstreaming environmental sustainability considerations in other economic sectors, notably in agriculture and forestry. Improving intermodal transport infrastructure within and around Riga would both facilitate labour mobility and help curb growing energy consumption from passenger cars. Furthermore, the Rail Baltica project and the energy interconnection projects are Latvia’s key investment priorities aimed at improving its safety and integration into the single market. Making further investments in renewable energy, in particular wind power, and promoting the transition to a circular economy with significantly higher recycling rates can also improve both environmental and economic outcomes and help achieve climate change mitigation targets. The programming of the Just Transition Fund for 2021-2027 could help Latvia address some of the challenges posed by the transition to a climate neutral economy, in particular in the territories covered by Annex D to the country report. This would allow Latvia to make the best use of that fund.

               (22)Latvia has significantly reduced the flow of risky money through its banks and overhauled its anti-money laundering system. In particular, Latvia banned the servicing of non-resident shell companies and amended a number of laws. The capacity and capability of key supervisory, financial intelligence and law enforcement institutions has been strengthened. While supervision of financial institutions has been tightened considerably, it could be better targeted and become more efficient with improved risk assessment. Moreover, while the capacity and cooperation between law enforcement bodies has been improved, their capacity to investigate and prosecute money laundering cases could be further strengthened.

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

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

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

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

               (27)In the light of that assessment, the Council has examined the 2020 Stability Programme and its opinion
                  7
                is reflected in particular in recommendation (1) below,

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

               1.In line with the general escape clause, take all necessary measures to effectively address the pandemic, sustain the economy and support the ensuing recovery. When economic conditions allow, pursue fiscal policies aimed at achieving prudent medium-term fiscal positions and ensuring debt sustainability, while enhancing investment. Strengthen the resilience and accessibility of the health system including by providing additional human and financial resources.

               2.Provide adequate income support to the groups most affected by the crisis and strengthen the social safety net. Mitigate the employment impact of the crisis, including through flexible working arrangements, active labour market measures and skills.

               3.Ensure access to liquidity support by firms and in particular small and medium-sized enterprises. Front-load mature public investment projects and promote private investment to foster the economic recovery. Focus investment on the green and digital transition, in particular on research and innovation, clean and efficient production and use of energy, sustainable transport and digital infrastructures.

               4.Continue progress on the anti-money laundering framework.

               Done at Brussels,

                     For the Council

                     The President

                     (1)

                        OJ L 209, 2.8.1997, p. 1.

                     (2)

                        SWD(2020) 513 final.

                     (3)

                        OJ C 301, 5.9.2019, p. 117.

                     (4)

                        COM(2020) 112 final.

                     (5)

                        COM(2020) 123 final.

                     (6)

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

                     (7)

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


               EUROPEAN COMMISSION
            Brussels, 20.5.2020
            COM(2020) 512 final
            Recommendation for a
            COUNCIL RECOMMENDATION
            on the 2020 National Reform Programme of Italy and delivering a Council opinion on the 2020 Stability Programme of Italy

               Recommendation for a

               COUNCIL RECOMMENDATION

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

               THE COUNCIL OF THE EUROPEAN UNION,

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

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

               Having regard to Regulation (EU) No 1176/2011 of the European Parliament and of the Council of 16 November 2011 on the prevention and correction of macroeconomic imbalances
                  2
               , and in particular Article 6(1) thereof,

               Having regard to the recommendation of the European Commission,

               Having regard to the resolutions of the European Parliament,

               Having regard to the conclusions of the European Council,

               Having regard to the opinion of the Employment Committee,

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

               Having regard to the opinion of the Social Protection Committee,

               Having regard to the opinion of the Economic Policy Committee,

               Whereas:

               (1)On 17 December 2019, the Commission adopted the Annual Sustainable Growth Strategy, marking the start of the 2020 European Semester for economic policy coordination. It took due account of the European Pillar of Social Rights, proclaimed by the European Parliament, the Council and the Commission on 17 November 2017. On 17 December 2019, on the basis of Regulation (EU) No 1176/2011, the Commission also adopted the Alert Mechanism Report, in which it identified Italy as one of the Member States for which an in-depth review would be carried out. On the same date, the Commission also adopted a recommendation for a Council recommendation on the economic policy of the euro area.

               (2)The 2020 country report for Italy
                  3
                was published on 26 February 2020. It assessed Italy’s progress in addressing the country-specific recommendations adopted by the Council on 9 July 2019
                  4
               , the follow-up given to the recommendations adopted in previous years and Italy’s progress towards its national Europe 2020 targets. It also included an in-depth review under Article 5 of Regulation (EU) No 1176/2011, the results of which were also published on 26 February 2020. The Commission’s analysis led it to conclude that Italy is experiencing excessive macroeconomic imbalances. In particular, high government debt and protracted weak productivity dynamics imply risks with cross-border relevance, in a context of high unemployment and a still high level of non-performing loans.

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

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

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

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

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

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

               (9)The socio-economic consequences of the pandemic are likely to be unevenly distributed across Italian regions and territories due to longstanding economic and social disparities, diverging competitiveness potential and the degree of reliance on tourism. This entails a risk of widening regional and territorial disparities within Italy, aggravating diverging trends between less developed regions and more developed ones, between social peripheries and the rest of urban areas as well as between some urban areas and rural areas. Combined with the risk of a temporary unravelling of the convergence process between Member States, the current situation calls for targeted policy responses.

               (10)On 30 April 2020, Italy submitted its 2020 Stability Programme.

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

               (12)In its 2020 Stability Programme, the government plans the headline balance to deteriorate from a deficit of 1,6 % of GDP) in 2019 to a deficit of 10,4 % of GDP in 2020. The deficit is projected to decline to 5,7% of GDP in 2021. After having stabilised at 134,8 % in 2019, the general government debt-to-GDP ratio is expected to increase to 155,7 % in 2020 according to the 2020 Stability Programme. The macroeconomic and fiscal outlook is affected by high uncertainty due to the COVID-19 pandemic. There are country-specific risks underlying the budgetary projections, namely the considerable size of public guarantees and the volatility of sovereign yields.

               (13)In response to the COVID-19 pandemic, and as part of a coordinated Union approach, Italy has adopted budgetary measures to increase the capacity of its health system, contain the pandemic, and provide relief to those individuals and sectors that have been particularly affected. According to the 2020 Stability Programme, those budgetary measures amount to 4,5 % of GDP in 2020. The measures include strengthened healthcare and civil protection, extended wage supplementation schemes and financial support to self-employed persons and firms. In addition, Italy has introduced measures that, while not having a direct budgetary impact, will contribute to support liquidity to businesses, including tax deferrals and loan guarantees. Overall, the measures taken by Italy are in line with the guidelines set out in the Commission Communication on a coordinated economic response to the COVID-19 outbreak. The full implementation of those measures, followed by a refocusing of fiscal policies towards achieving prudent medium-term fiscal positions when economic conditions allow, will contribute to preserving fiscal sustainability in the medium-term.

               (14)Based on the Commission 2020 spring forecast under unchanged policies, Italy’s general government balance is forecast at -11,1 % of GDP in 2020 and -5,6 % in 2021. The general government debt ratio is projected to reach 158,9 % of GDP in 2020 and 153,6 % in 2021.

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

               (16)The COVID-19 pandemic has put the national health system under unprecedented strain, evidencing structural weaknesses and the need to increase preparedness in response to crisis events. Despite below EU average spending on health, Italy’s health system is characterised by highly specialised as well as good quality universal services and it has generally succeeded in providing accessible care. Nevertheless, especially at the onset of the pandemic, the health system governance fragmentation, and coordination between central and regional authorities slowed down the implementation of some containment measures. The response of regional health systems to the crisis was based primarily on an extraordinary mobilisation, in particular of the health workforce and local social services. This compensated the limits of the physical infrastructure, numbers of health workers and investment in the past years aimed at improving structures and services. The Italian government made great efforts to mitigate the spread of the virus, relieve pressure on hospitals and generate additional care capacity. A longer-term containment strategy is now being developed to ensure a safe return to productive activity. In addition to improving governance processes and crisis preparedness plans, post-COVID-19 policies should aim at alleviating the public investment gap in health care. In the medium-to-long term, developing a strategic investment plan will be key to improve the resilience of the Italian health system, and to guarantee the continued provision of accessible care. In the face of current health workforce projections, priority should be given to developing policies to resolve bottlenecks in the training, recruitment and retention of the health workforce.

               (17)The lockdown measures adopted in response to the health crisis are having a strong negative impact on the labour market and social conditions. Prior to the crisis, the social situation was slowly improving, even if the risk of poverty or social exclusion, in-work poverty and income inequality remained high and with major regional differences. Given the impact of the COVID-19 outbreak and its aftermath, social safety nets should be strengthened to ensure adequate income replacement, irrespective of their employment status, including those facing gaps in access to social protection. Strengthening income replacement and support is particularly relevant for atypical workers and people in vulnerable situations. Provision of services aimed at social and labour market inclusion is also key. The new minimum income scheme, which provided over the past year benefits to more than one million households (EUR 513, on average), may mitigate the effects of the crisis. However, its reach out to vulnerable groups could be improved. On a temporary basis, the government introduced an additional “emergency income” to support households not eligible for the minimum income so far. People employed in the shadow economy, notably in sectors such as agriculture, food industry and housing, also risk facing gaps in access to social protection and income support. To respond to this challenge, the government recently eased the rules for legalising the employment status of undeclared workers and for obtaining or extending residence permits for working migrants. Negative demographic trends and brain drain also risk hindering growth prospects. In addition to more difficult labour market conditions, lack of quality services is a driver of depopulation in Southern regions and rural areas. Enhancing access to e-services is key, especially in a context of limited mobility.

               (18)Since the outbreak of the crisis, Italy is taking steps to mitigate the employment impact. Short-time work schemes (Cassa integrazione), have played a major role and are expected to do so in the future. Eligibility has been extended to include small and micro enterprises and all economic sectors and employees. In addition, a separate (temporary) scheme has been created for the self-employed. Prior to the crisis labour market conditions had continued to improve. In 2019, the employment rate reached 64%, the highest rate ever recorded. However, this was still significantly below the Union average. The unemployment rate was persistently high, as were other indicators of labour market slack, and is expected to rise further to 11,8% in 2020 and recover to 10,7% in 2021, according to the Commission forecast. The share of temporary contracts was also high, even if since mid-2018 job creation had been driven by permanent jobs. For the future, in order to promote a sustainable and inclusive recovery, the labour market integration of inactive young people and women is key. Some steps were taken to strengthen public employment services and better integrate them with social services, adult learning and vocational training. However, their placement capacity remains weak and varies widely across regions. The involvement of employers also remains marginal. As lockdown measures are progressively lifted, flexible working arrangements and teleworking can support firms and workers. In response to the crisis, the government adopted temporary measures aiming at conciliating private and working life, such as fostering smart working and special leaves and providing vouchers for baby-sitting. Despite recent efforts, measures to promote equal opportunities and work-life balance policies, as well as the supply of affordable early childhood education and care and long-term care services, remain weak and poorly integrated.

               (19)The current emergency also shows the need to improve digital learning and skills, including for working age adults and distance learning. Investing in education and skills is key to promoting a smart and inclusive recovery and to staying on track to pursue the green and digital transition. In that regard, education and training outcomes continue to represent a major challenge for Italy. There are large regional gaps in basic skills attainment and the rate of early school leaving is well above the Union average (13,5% vs 10,3% in 2019), in particular for non-Union born pupils (33%). In a context of limitations to mobility, regional and territorial disparities risk being exacerbated. In that light, investing in distance learning, as well as in the digital infrastructure and skills of educators and learners, is particularly important. Italy also has a lower share of graduates in science and engineering compared to the Union average, and tertiary attainment remains very low (27,6% in 2019). Moreover, Italian enterprises invest less in training regarding information and communication technologies for their employees, compared to peer countries. The low participation rate of low-qualified adults in training is also a matter of concern, given the declining number of jobs requiring low qualifications. Upskilling and reskilling remain as crucial as ever to equip workers with labour market relevant skills and to promote a fair transition towards a more digital and sustainable economy.

               (20)The crisis has reinforced the need to support the access to finance for firms. Italy has adopted several schemes to support the flow of liquidity to firms, including under the Temporary Framework for State aid measures to support the economy in the current COVID-19 outbreak
                  8
               . Effective implementation of such schemes, including through guarantees channelled by the banking system, is key to ensure that all firms, and in particular small and medium-sized enterprises (SMEs) and those in the most affected sectors and geographic areas as well as innovative firms, benefit from them. In the process of designing and implementing those measures the resilience of the banking sector needs to be taken into account. Direct grants and incentives to market-based finance can also support the liquidity of SMEs and innovative firms. Innovative firms (often without collateral) have more difficulties to access credit, and the current crisis could worsen the situation. Deferral of tax and social contributions to the State has helped improve the cash flows of firms. However, delays in approved payments, whether by administrations-to-businesses or by business-to-business, should be prevented, as they are a drag on the liquidity of all firms, particularly of smaller ones.

               (21)To foster the economic recovery, it will be important to front-load mature public investment projects and promote private investment, including through relevant reforms. Investment in support of the green transition will be particularly important to support recovery and increase future resilience. Italy is highly vulnerable to extreme weather and hydrogeological disasters, including droughts and forest fires. Italy’s transformation to a climate neutral economy will require sizeable private and public investment, over a sustained period of time, in particular on new renewable energy production, electricity infrastructure, energy efficiency, among others. Green deal investments to tackle climate change are laid out in in Italy’s National Energy and Climate Plan. They are essential to address the threat represented by climate change, while playing a fundamental role in Italy’s recovery and to strengthen its resilience. Green deal investments are also key for reducing the impact on human health from air pollution in Italian cities, especially in the Po Basin. For instance, implementing sustainable mobility initiatives, such as renewal of local public buses, represents an example to address both congestion and air pollution. Infrastructure deficits for water and waste management, notably in southern regions, lead to environmental and health impacts with considerable costs and lost revenues for the Italian economy. More generally, resilience to climate change is relevant for all infrastructure, including health infrastructure. This requires adaptation strategies. Addressing environmental and climate change challenges, such as hydrological risks, sustainable urban mobility, energy efficiency, circular economy and industrial transformation, represent an opportunity to improve productivity while avoiding unsustainable practices. At the same time, investing into such projects can contribute to creating jobs and sustaining the post-crisis recovery. The programming of the Just Transition Fund for the period 2021-2027 could help Italy to address some of the challenges posed by the transition to a climate neutral economy, in particular in the territories covered by Annex D to the 2020 country report
                  9
               . This would allow Italy to make the best use of that fund.

               (22)The COVID-19 outbreak lockdown has underlined the importance of investing in the economy’s digitalisation and shown the relevance of digital infrastructures. Low levels of digital intensity and digital knowledge of firms in Italy, especially SMEs and micro-enterprises, have prevented them from offering e-commerce and teleworking arrangements and providing and using digital tools during confinement. Investing in digitisation and skills through a continued and timely implementation of targeted national policies is essential to enhance e-business models and help firms adapt, as well as to boost productivity and competitiveness. Access to fast and reliable digital infrastructure has shown to be key to ensuring essential services are provided in government, education, health and medicine, and key to monitoring and controlling the epidemic. Italy is still lagging behind in fiber-to-the-premises coverage in rural areas. Specific measures should be adopted to address that gap, as well as to further encourage take-up.

               (23)A well-performing research and innovation system is the result of continuous, coherent and evidence-based policy support, together with investments and adequate human capital. The current crisis has clearly shown that the rapid exchange of data between researchers, including access to results and evidence at no charge to the user and Open Science, need further strengthening. The latter, together with science/business cooperation are clearly instrumental to bring research results, including those needed on vaccines and therapies, on the market, building on the strength of Italy in the medical industrial and research sector.

               (24)An effective public administration is crucial to ensure that measures adopted to address the emergency and support the economic recovery are not slowed down in their implementation. The disbursement of social benefits, liquidity measures, and the front-loading of investments, etc. may not be effective if hampered by public sector bottlenecks. Weaknesses include lengthy procedures, including civil justice ones, the low level of digitalisation and weak administrative capacity. Procedures and checks need to be dealt with swiftly, in a context where public resources are being significantly increased to support economic activity. Digitalisation across public administrations was uneven prior to the crisis. Online interaction between authorities and the general public was low. The share of administrative procedures managed by regions and municipalities that can be started and completed entirely digitally remains low. The crisis has also exposed the lack of interoperability of public digital services. To facilitate the business responsiveness of the public administration, sectoral regulations need to be improved and simplified, while remaining barriers to competition need to be removed. Finally, an effective justice system is key for an attractive investment and business-friendly economy and will be crucial in the recovery process, also by enabling effective rescue and recovery frameworks.

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

               (26)The measures adopted by the Italian government to support households and corporates are also beneficial for preserving banking sector capitalisation and resilience in the current difficult operating environment. Despite the adopted mitigating measures, including the prudential flexibility granted by banking supervisors, the COVID-19 outbreak is also straining bank asset quality across the Union, and is expected to continue to do so in the coming weeks and months, including in Italy. As a result, non-performing loan (NPL) reduction efforts are being impacted, also due to the slowdown in the court and impaired asset workout activities. In that regard, fostering sustainable solutions for the viable borrowers affected by the crisis, including by avoiding legal automaticities, is an important pre-requisite for safeguarding asset quality. Meanwhile, ensuring accurate reporting of asset quality deterioration and prudent credit standards can also help support the functioning of the secondary market for NPLs and contain adverse effects on existing NPLs disposal initiatives.

               (27)Effective prevention and sanctioning of corruption can play an important role in ensuring Italy’s recovery after the crisis. Transparency in the public sector and reinforced checks against corruption, in particular, can avoid attempts by organised crime to infiltrate economic and financial life, distort public procurement procedures and, more broadly, divert public resources needed for investment. At the same time, public procurement procedures should remain efficient, balancing the need for scrupulous monitoring with the need for timeliness. Disposition time at criminal appeal courts still raises concerns but comprehensive reforms to streamline criminal procedures are being discussed in Parliament. Italy’s anti-corruption framework has recently been reinforced but needs to be completed, also by sanctioning elected public officials in case of conflicts of interest.

               (28)The European Semester provides the framework for continuous economic and employment policy coordination in the Union, which can contribute to a sustainable economy. . By ensuring the full implementation of the recommendations below, Italy will contribute to the progress towards the SDGs and to the common effort of ensuring competitive sustainability in the Union.

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

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

               (31)In the light of that assessment, the Council has examined the 2020 Stability Programme and its opinion
                  10
                is reflected in particular in recommendation (1) below.

               (32)In the light of the Commission’s in-depth review and this assessment, the Council has examined the [2020 National Reform Programme and] the 2020 Stability Programme. The present recommendations take into account the need to tackle the pandemic and facilitate the economic recovery as a first necessary step to permit an adjustment of imbalances. Recommendations directly addressing the macroeconomic imbalances identified by the Commission under Article 6 of Regulation (EU) No 1176/2011 are reflected in recommendations (1), (2), (3) and (4),

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

               1.In line with the general escape clause, take all necessary measures to effectively address the pandemic, sustain the economy and support the ensuing recovery. When economic conditions allow, pursue fiscal policies aimed at achieving prudent medium-term fiscal positions and ensuring debt sustainability, while enhancing investment. Strengthen the resilience and capacity of the health system, in the areas of health workers, critical medical products and infrastructure. Enhance coordination between national and regional authorities.

               2.Provide adequate income replacement and access to social protection, notably for atypical workers. Mitigate the employment impact of the crisis, including through flexible working arrangements and active support to employment. Strengthen distance learning and skills, including digital ones.

               3.Ensure effective implementation of measures to provide liquidity to the real economy, including to small and medium-sized enterprises, innovative firms and the self-employed, and avoid late payments. Front-load mature public investment projects and promote private investment to foster the economic recovery. Focus investment on the green and digital transition, in particular on clean and efficient production and use of energy, research and innovation, sustainable public transport, waste and water management as well as reinforced digital infrastructure to ensure the provision of essential services.

               4.Improve the efficiency of the judicial system and the effectiveness of public administration.

               Done at Brussels,

                     For the Council

                     The President

                     (1)

                        OJ L 209, 2.8.1997, p. 1.

                     (2)

                        OJ L 306, 23.11.2011, p. 25.

                     (3)

                        SWD(2020) 511 final.

                     (4)

                        OJ C 301, 5.9.2019, p. 117.

                     (5)

                        COM(2020) 112 final.

                     (6)

                        COM(2020) 123 final.

                     (7)

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

                     (8)

                        OJ C 91I , 20.3.2020, p. 1–9.

                     (9)

                        SWD(2020) 511 final.

                     (10)

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