               EUROPEAN COMMISSION
            Brussels, 20.11.2019
            COM(2019) 921 final
            Recommendation for a
            COUNCIL DECISION
            establishing that no effective action has been taken by Hungary in response to the Council Recommendation of 14 June 2019
            {SWD(2019) 941 final}

               Recommendation for a

               COUNCIL DECISION

               establishing that no effective action has been taken by Hungary in response to the Council Recommendation of 14 June 2019

               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 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies
                  1
               , and in particular the fourth subparagraph of Article 10(2) thereof,

               Having regard to the Recommendation from the European Commission,

               Whereas:

               (1)In June 2018, the Council found in accordance with Article 121(4) of the Treaty that in 2017, there had been a significant observed deviation from Hungary’s medium-term budgetary objective. In view of that established significant deviation, the Council issued a Recommendation on 22 June 2018
                  2
               , recommending that Hungary take the policy measures necessary to address that deviation. The Council subsequently found that Hungary had not taken effective action in response to that Recommendation and issued a revised Recommendation on 4 December 2018
                  3
               . The Council subsequently found that Hungary had not taken effective action in response to that Recommendation either.

               (2)On 14 June 2019, the Council found that in 2018 a significant observed deviation from the adjustment path toward the medium-term budgetary objective had again occurred in Hungary and issued a Recommendation for Hungary to take the necessary measures to ensure that the nominal growth rate of net primary government expenditure
                  4
                does not exceed 3.3% in 2019 and 4.7% in 2020, corresponding to an annual structural adjustment of 1.0% of gross domestic product (GDP) in 2019 and 0.75% of GDP in 2020.
                  5
                The recommended effort for 2020 was deemed appropriate, contingent on compliance with the requested adjustment in 2019. It also recommended that Hungary uses any windfall gains for deficit reduction, while budgetary consolidation measures should secure a lasting improvement in the general government structural balance in a growth-friendly manner. The Council established a deadline of 15 October 2019 for Hungary to report on the action taken in response to that Recommendation.

               (3)On 26 September 2019, the Commission undertook an enhanced surveillance mission in Hungary for the purpose of on-site monitoring under Article -11(2) of Regulation (EC) No 1466/97. After having transmitted its provisional findings to the Hungarian authorities for comments, the Commission reported its findings to the Council on 20 November 2019. Those findings were made public. The Commission report finds that the Hungarian authorities intend to maintain the 2019 headline deficit target of 1.8% of GDP as set in the 2019 Convergence Programme. For 2020, the authorities revised the deficit target to 1% of GDP, making it more ambitious than the 1.5% of GDP target indicated in the 2019 Convergence Programme. Thus, the Hungarian authorities plan to act upon the Recommendation of 14 June 2019 only with respect to the year 2020.

               (4)On 15 October 2019, the Hungarian authorities submitted a report on action taken in response to the Council Recommendation of 14 June 2019.
                  6
                In the report, despite the more favourable macroeconomic and fiscal developments so far in 2019, the authorities maintain the general government deficit target from the 2019 Convergence programme of 1.8% of GDP in 2019. For 2020, the authorities confirm the target of a headline deficit of 1.0% of GDP, in line with the 2020 budget, and 0.5% of GDP better than the target included in the 2019 Convergence Programme. The report recalls the high reserve (1% of GDP) included in the 2020 deficit target, which is aimed at managing external risks and which could be spent only if the deficit target is expected to be met. The report lists the deficit-increasing measures contained in the “Economic Protection Action Plan” that the government adopted on 30 May 2019, which aim to sustain growth in the years to come at a rate of 2 percenage points higher than the EU average. The broad range of economic programmes listed in the report remain largely unquantified; nor does the report include any budgetary projection for 2019 and 2020. Thereby, the report does not comply with the reporting requirement recommended by the Council.

               (5)In 2019, based on the Commission 2019 autumn forecast, the growth of net primary government expenditure is projected at 6.8%, well above the recommended rate of 3.3% (deviation of 1.3% of GDP). The structural balance is set to improve by 0.5% of GDP, against the recommended improvement of 1.0% of GDP (deviation of 0.5% of GDP). Therefore, both pillars point to a deviation from the recommended adjustment. The reading of the expenditure benchmark is negatively impacted by the use of a lower GDP deflator underlying that indicator compared to current estimates. Also the smoothing of nationally-financed investment impacts marginally and negatively the reading of the expenditure benchmark. The structural balance, in turn, is positively impacted by the higher potential growth estimate underlying that indicator but negatively impacted by revenue shortfalls. Taking into account these factors, the overall assessment confirms a deviation from the recommended adjustment in 2019.

               (6)In 2020, based on the Commission 2019 autumn forecast, the growth of net primary government expenditure is projected to be 7.5%, well above the recommended rate of 4.7% (deviation of 1.0% of GDP). The structural balance is set to improve by 1.2% of GDP, 0.4 percentage points above the effort of 0.75% of GDP recommended by the Council. Therefore, the expenditure benchmark points to a risk of a deviation from the required adjustment while the structural balance points to compliance, with a relatively large discrepancy. Public investment has been steadily increasing in recent years to reach a level of 6.4% of GDP in 2019, by far the highest in the EU. In this context, the planned reduction in 2020 is seen as a longer lasting normalization of the public investment rate. While the reduction in investment is fully reflected in the change of the structural balance, the smoothened profile of investment in the expenditure benchmark results in an overly negative indication of the fiscal effort given by the expenditure benchmark. The expenditure benchmark is also negatively impacted by the use of a lower GDP deflator compared to current estimates. When taking into account these factors, the expenditure benchmark would point to compliance with the requirement. At the same time, the structural balance is positively influenced by a higher point estimate of potential GDP growth underlying its calculation compared to the medium-term average underlying the expenditure benchmark. Taking into account these considerations, the overall assessment concludes that Hungary would deliver the recommended adjustment in 2020.

               (7)The above findings lead to the conclusion that Hungary's response to the Council Recommendation of 14 June 2019 has been insufficient. The fiscal effort falls short of ensuring that the nominal growth rate of net primary government expenditure does not exceed 3.3% in 2019, corresponding to an annual structural adjustment of 1.0% of GDP, whereas in 2020 the planned fiscal effort is overall consistent with the recommended adjustment,

               HAS ADOPTED THIS DECISION:

               Article 1

               Hungary has not taken effective action in response to the Council Recommendation of 14 June 2019.

               Article 2

               This Decision is addressed to Hungary.

               Done at Brussels,

                     For the Council

                     The President

                     (1)

                        OJ L 209, 2.8.1997, p. 1.

                     (2)

                        OJ C 223, 27.6.2018, p. 1.

                     (3)

                        OJ C 460, 21.12.2018, p. 4.

                     (4)

                        Net primary government expenditure is comprised of 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 four-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.

                     (5)

                        OJ C 210, 21.6.2019, p. 4.

                     (6)

                        https://ec.europa.eu/info/files/hungary-report-council-recommendations-under-significant-deviation-procedure_en


               EUROPEAN COMMISSION
            Brussels, 5.6.2019
            COM(2019) 513 final
            Recommendation for a
            COUNCIL RECOMMENDATION
            on the 2019 National Reform Programme of Cyprus and delivering a Council opinion on the 2019 Stability Programme of Cyprus

               Recommendation for a

               COUNCIL RECOMMENDATION

               on the 2019 National Reform Programme of Cyprus and delivering a Council opinion on the 2019 Stability Programme of Cyprus

               THE COUNCIL OF THE EUROPEAN UNION,

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

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

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

               Having regard to the recommendation of the European Commission,

               Having regard to the resolutions of the European Parliament,

               Having regard to the conclusions of the European Council,

               Having regard to the opinion of the Employment Committee,

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

               Having regard to the opinion of the Social Protection Committee,

               Having regard to the opinion of the Economic Policy Committee,

               Whereas:

               (1)On 21 November 2018, the Commission adopted the Annual Growth Survey, marking the start of the 2019 European Semester for economic policy coordination. It took due account of the European Pillar of Social Rights, proclaimed by the European Parliament, the Council and the Commission on 17 November 2017. The priorities of the Annual Growth Survey were endorsed by the European Council on 21 March 2019. On 21 November 2018, on the basis of Regulation (EU) No 1176/2011, the Commission also adopted the Alert Mechanism Report, in which it identified Cyprus as one of the Member States for which an in-depth review would be carried out. On the same date, the Commission also adopted a recommendation for a Council recommendation on the economic policy of the euro area, which was endorsed by the European Council on 21 March 2019. On 9 April 2019, the Council adopted the recommendation on the economic policy of the euro area (‘Recommendation for the euro area’).

               (2)As a Member State whose currency is the euro and in view of the close interlinkages between the economies in the economic and monetary union, Cyprus should ensure the full and timely implementation of the Recommendation for the euro area, as reflected in recommendations (1) to (5) below. In particular, measures to decrease the administrative burden will help address the first euro area recommendation as regards the business environment and productivity improvements for euro area rebalancing, focusing economic policy related to investment in the specified areas will help address the second euro area recommendation as regards supporting investment, tax measures and measures to improve skills will help address the third euro area recommendation as regards fight against Aggressive Tax Planning and functioning of the labour market, and measures to improve the functioning of the asset management company will help address the fourth euro area recommendation as regards the reduction of non-performing loans.

               (3)The 2019 country report for Cyprus
                  3
                was published on 27 February 2019. It assessed Cyprus’s progress in addressing the country-specific recommendations adopted by the Council on 13 July 2018, the follow-up given to the recommendations adopted in previous years and Cyprus's progress towards its national Europe 2020 targets. It also included an in-depth review under Article 5 of Regulation (EU) No 1176/2011, the results of which were also published on 27 February 2019
                  4
               . The Commission’s analysis led it to conclude that Cyprus is experiencing excessive macroeconomic imbalances. In particular, it is essential that the Member State tackles the high stocks of private, public and external debt and non-performing loans.

               (4)On 15 April 2019, Cyprus submitted its 2019 National Reform Programme and, on 30 April 2019, its 2019 Stability Programme. In order to take account of their interlinkages, the two programmes have been assessed at the same time.

               (5)Relevant country-specific recommendations have been addressed in the programming of the European Structural and Investment Funds ('ESI Funds') for the 2014-2020 period. As provided for in Article 23 of Regulation (EU) No 1303/2013 of the European Parliament and of the Council
                  5
               , where it is necessary to support the implementation of relevant Council recommendations, the Commission may request a Member State to review and propose amendments to its Partnership Agreement and relevant programmes. The Commission has provided further details on how it would make use of that provision in guidelines on the application of the measures linking the effectiveness of the ESI Funds to sound economic governance
                  6
               .

               (6)Cyprus is currently in the preventive arm of the Stability and Growth Pact. In its 2019 Stability Programme, the general government balance, which turned into a deficit of 4.8% of GDP in 2018 and thereby exceeded the Treaty reference value of 3% of GDP, is projected to reach a surplus in nominal terms of 3.0% of GDP in 2019 and above 2.0% of GDP over the programme period. Based on the recalculated structural balance
                  7
               , the medium-term budgetary objective, set at a balanced budgetary position in structural terms, is planned to be reached over 2019-2022. After having increased to around 102.5% of GDP in 2018, the general government debt-to-GDP ratio is expected to decrease to 95.7% in 2019 and to continue to steadily decline thereafter, reaching 77.5% by 2022, according to the 2019 Stability Programme. The macroeconomic scenario underpinning those budgetary projections is plausible. The risks associated with the macroeconomic and budgetary assumptions presented in the Stability Programme are tilted to the downside, mainly linked to external developments, as well as the potential fiscal impact of Court rulings on past fiscal reforms and the financing needs of public hospitals during the first years of the national health system. The Commission 2019 spring forecast projects the general government balance to register a surplus of 3.0% of GDP in 2019 and 2.8% of GDP in 2020. Based on the Commission 2019 spring forecast the structural balance is forecast to stand at 1.1% of GDP in 2019 and at 0.7% of GDP in 2020, remaining above the medium-term budgetary objective. Cyprus is forecast to comply with the debt rule in 2019 and 2020. Overall, the Council is of the opinion that Cyprus is projected to comply with the provisions of the Stability and Growth Pact in 2019 and 2020.

               (7)On 5 June 2019, the Commission issued a report prepared in accordance with Article 126(3) of the TFEU as based on notified data the headline deficit was in breach of the 3% of GDP Treaty reference value in 2018. The report concluded that further steps leading to a decision on the existence of an excessive deficit should not be taken. Inefficiencies in the public administration and local governments remain a challenge despite some progress with e-government services. This has an impact on the business environment. Key legislative proposals to address the issue remain pending. These include draft laws on the reform of the public administration and of local governments. Shortcomings in the governance framework for state-owned entities might facilitate the build-up of public contingent liabilities and hinder investment capacity in key utilities, such as telecoms and energy. The containment of the public-sector wage bill, which has been a significant factor in fiscal consolidation in Cyprus, warrants continuation.

               (8)The fight against aggressive tax planning is essential to make tax systems more efficient and fair as acknowledged in the 2019 euro area recommendation. Spillover effects of taxpayers' aggressive tax planning strategies between Member States call for a coordinated action of national policies to complement EU legislation. Cyprus has taken measures against aggressive tax planning, but the high levels of dividend and interest payments (relative to GDP) suggests that Cyprus' tax rules are used by companies that engage in aggressive tax planning. The absence of withholding taxes on outbound (i.e. from EU residents to third country residents) dividend, interest and, in many cases, royalty payments by Cyprus-based companies to third country residents may lead to those payments escaping tax altogether, if they are also not subject to tax in the recipient jurisdiction. The absence of such taxes, together with the corporate tax residency rules, may continue to facilitate aggressive tax planning. The Notional Interest Deduction scheme needs to be closely monitored to prevent any misuse for aggressive tax planning. Finally, the Scheme for Naturalisation of Investors in Cyprus by Exception and Residence by Investment Scheme give access to a low personal tax rate on income from foreign financial assets and do not require an individual to spend a significant amount of time in the jurisdiction offering the scheme. They have been listed by the OECD as having a potentially high risk for being misused to circumvent the automatic exchange of financial accounts.

               (9)Important measures were implemented in the context of a comprehensive non-performing loans strategy. This led to a marked reduction in non-performing loans in the banking sector, mainly due to the sale and wind-down of the Cyprus Cooperative Bank and the transfer of its non-performing loans portfolio to a state-owned asset management company. Furthermore, the law on the sale of loans was improved and a law on the securitisation of loans was adopted. In order to maximise the proceeds from the sale of assets and ultimately help reduce private debt, it is essential for the State-owned asset management company to have an effective governance structure, a highly specialised management, operational independence from the Cypriot State, and well-defined targets in line with the commitments made by the government in the context of the State aid decision on the sale of the Cyprus Cooperative Bank, which was approved by the European Commission. Furthermore, it is important to set up an adequate supervisory framework for the credit-acquiring companies as the number of credit-acquiring companies has increased, including the State-owned asset management company, and more non-performing loans portfolio sales are planned in the future. The governance and administrative capacity of insurance and pension fund supervisors remains weak. The integration of these supervisors should be swiftly finalised. More generally, the supervisory framework for the capital markets has to be strengthened, given the relatively sizeable cross-border activities of the non-bank financial services companies and the exponential growth of licensed firms in recent years.

               (10)Employment is rising, unemployment is falling and the public employment services short-term capacity to facilitate active support to employment has been improved. However, the long-term sustainability of public employment services capacity is still an issue, as the additional staff was recruited for only 2 years. In 2018 the proportion of young people not in education, employment or training was among the highest in the EU. The low efficiency of the public employment services and their limited rollout and participation in activation for helping people find work remain a challenge. Therefore, there is scope for reinforcing the outreach and activation support for access to employment, in particular for young people and the long-term unemployed. This includes promoting self-employment and the social economy as well as modernising labour market institutions and services to help people gain skills that better match labour market needs.

               (11)Skills shortages and mismatches are among the main obstacles to business investment, highlighting the need to invest more in training of unused and under-used labour potential, better aligning education curricula to labour market needs, and investing in matching vocational education infrastructure. Progress on crucial education and training reforms, such as improving the appointments and evaluation of teachers, is uneven. Educational achievements remain low as does participation in early childhood education and care which has become less affordable for households as their income during the crisis fell at a faster rate than childcare costs. Continuing efforts to modernise the education and training system at all levels will help to improve educational outcomes and increase the potential for sustainable growth in Cyprus. Revising the vocational and training curricula is a promising step in reducing the skills mismatches in the labour market. However, prevalent skills mismatches for tertiary graduates and low participation in adult learning, especially of the low qualified, indicate the need for enhanced upskilling and reskilling measures.

               (12)Cyprus has made progress on healthcare by adopting legislation to establish the new National Health System. The new system seeks to improve access, introduce universal health coverage, reduce the high level of out-of-pocket payments and increase the efficiency of care delivery in the public sector. Before the system becomes fully functional in 2020, there are major implementation challenges and investment needs. Preserving long-term sustainability of the system, including ensuring the financial and operational autonomy of public hospitals, as planned, remains crucial. Measures aimed at modernising and improving the efficiency of healthcare providers, including primary healthcare, introducing e-Health and setting up a National Medicines Organisation would further strengthen the healthcare system. The level of long-term care is low and remains a challenge given the ageing population.

               (13)Cyprus's weak environmental performance is a major concern and it remains vulnerable to climate change. Cyprus needs to significantly improve its waste management system and the circular economy. Waste generation remains significantly higher than the Union average and has increased since 2014. The current facilities for waste treatment do not achieve high recycling rates and the lack of economic instruments such as landfill taxes makes recycling economically unattractive. Water management, notably in urban areas, is characterised by inefficiencies. Water scarcity, in combination with over-abstraction of groundwater, is the main challenge for Cyprus. On urban wastewater, there is a considerable amount of wastewater that is still discharged without collection or treatment – only around half of the total waste water undergoes secondary treatment. Droughts and water scarcity are major concerns and an insufficient policy response might affect the Member State’s rural economy and tourism. Therefore, sustainable management and an efficient use of its natural resources, along with stricter enforcement of environment and climate legislation, are essential for Cyprus to mitigate adverse climate change effects, preserve and restore its natural environment and ensure sustainable economic growth in the long term.

               (14)Cyprus can make much better use of its renewable energy sources – particularly solar – and address current energy inefficiencies. The renewable energy share in Cyprus was 8.9% in 2017, with the 2020 target being 13%. Residential and commercial buildings constructed with no or low levels of thermal protection, particularly in urban settings, are a substantial source of energy inefficiency. Framework conditions for investing in the renewable energy sector have improved, and several measures have been introduced, including installations of photovoltaic systems and grant schemes for small and medium-sized enterprises and households. However, Cyprus has not yet taken full advantage of its considerable potential in renewable energy generation notably from solar sources. The reliance on roads for inland transport creates a number of policy challenges, most notably the struggle to reduce air pollution and greenhouse gas emissions, and also leads to severe congestion in urban areas during peak hours and on roads to and from ports. With a 2.7% share in 2016, Cyprus is also lagging behind in the use of renewable energy sources in transport and may have difficulties reaching the binding 10% target by 2020.

               (15)Investing in the digital economy and in improving workers’ digital skills is essential for bolstering productivity. Cyprus ranks in the low end in the European Commission’s Digital Economy and Society Index (DESI) 2019. Only 50% of Cypriots between 16 and 74 years have basic digital skills and ICT specialists still represent a lower proportion of the workforce compared to the EU (2.3% vs 3.7%), hampering the potential of the digital economy. There is a low level of online interaction between public authorities and citizens, with only 50% of Cypriots interacting online. E-commerce is improving but it is still below the Union average.

               (16)Cyprus remains a moderate innovator, with innovation performance having declined since 2010. Public and private research and development expenditure levels are among the lowest in the Union, thus hindering the capacity of the research centres and the business sector to innovate. The interaction between academia and businesses is also very limited. Increasing the capacity of the business sector to innovate and boosting access to finance and investments that focus on well-defined areas of smart specialisation are crucial to improve Cyprus’s competitiveness and that of its small and medium-sized enterprises in particular.

               (17)The administrative burden is high, especially for initiating strategic investments. There is scope to significantly simplify the procedures for obtaining permits for strategic investments, and the relevant legislation is still pending.

               (18)Implementation of the action plan for growth has led to some progress in entrepreneurship and access to finance for small and medium-sized enterprises. However, financial support measures for small and medium-sized enterprises are still based mainly on grants. Alternative sources of finance such as venture capital, equity funding and crowdfunding remain marginal for Cypriot businesses. Better co-ordination of business support could improve uptake. Privatisation efforts to attract productivity-enhancing foreign investments are in many cases on hold, and only a few privatisation projects are gradually advancing.

               (19)Persisting inefficiencies in the justice system continue to affect contract enforcement and prevent the swift resolution of civil and commercial cases and the investigation of serious crimes. Cumbersome and outdated civil procedure rules and weak enforcement of court decisions weigh on banks’ incentives to use the insolvency and foreclosure frameworks to reduce their stock of non-performing loans. A series of reforms have started to address the most critical problems in the justice system, in particular the outdated civil procedures rules, the low specialisation and digitalisation of courts, the clearance of the large backlog of cases and the lack of lifelong training for judges, but progress remains slow. The reform should be in line with the commitments undertaken by the government in the context of the State aid decision on the sale of the Cyprus Cooperative Bank, which was approved by the European Commission. Improved insolvency and foreclosure frameworks were adopted in 2018. Decisive implementation of the new laws together with ensuring an efficient judicial system and stricter enforcement of judgements should help improve the debt repayment discipline. A national anti-corruption strategy is in place since December 2017 and has been reinforced by the approval of a national horizontal action plan against corruption by the Council of Ministers in May 2019. Draft laws for the establishment of a new independent anti-corruption agency and whistle-blower protection have been submitted to the parliament but are yet to be adopted. These laws would help to strengthen the national anti-corruption framework. The anti-corruption reforms should be accelerated through the swift implementation of the anti-corruption Action Plan. The independence of the prosecution has to be safeguarded and the capacity of law enforcement should be strengthened.

               (20)Despite some efforts to reduce the backlog in the issuance of title deeds, the backlog remains high. A structural solution to address the inadequacies of the property transaction system (i.e. the issuance and transfer of title deeds) is still lacking. This is essential to facilitate foreclosure procedures and enable liquidation of collaterals.

               (21)The programming of EU Funds for the period 2021-2027 could help address some of the gaps identified in the recommendations, in particular in the areas covered by Annex D to the country report
                  8
               . This would allow Cyprus to make the best use of those funds in respect of the identified sectors, taking into account territorial disparities. Strengthening the country’s administrative capacity for the management of these funds is an important factor for the success of this investment.

               (22)In the context of the 2019 European Semester, the Commission has carried out a comprehensive analysis of Cyprus’s economic policy and published it in the 2019 country report. It has also assessed the 2019 Stability Programme and the 2019 National Reform Programme and the follow-up given to the recommendations addressed to Cyprus in previous years. It has taken into account not only their relevance for sustainable fiscal and socioeconomic policy in Cyprus, but also their compliance with Union rules and guidance, given the need to strengthen the Union’s overall economic governance by providing Union-level input into future national decisions.

               (23)In the light of this assessment, the Council has examined the 2019 Stability Programme and is of the opinion
                  9
                that […].

               (24)In the light of the Commission’s in-depth review and this assessment, the Council has examined the 2019 National Reform Programme and the 2019 Stability Programme. Its recommendations under Article 6 of Regulation (EU) No 1176/2011 are reflected in recommendations (1) to (5) below. Those recommendations also contribute to the implementation of the Recommendation for the euro area, in particular the first, third and the fourth euro area recommendations. Fiscal policies referred to in recommendation (1) contribute inter-alia to address imbalances linked to high government debt.

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

               1.Adopt key legislative reforms to improve efficiency in the public sector, in particular as regards the functioning of the public administration and the governance of state-owned entities and local governments. Address features of the tax system that may facilitate aggressive tax planning by individuals and multinationals, in particular by means of outbound payments.

               2.Facilitate the reduction of non-performing loans including by setting up an effective governance structure of the State-owned asset management company, taking steps to improve payment discipline and strengthening the supervision of the credit acquiring companies. Strengthen the supervision capacities in the non-bank financial sector, including by fully integrating the insurance and pension funds supervisors.

               3.Complete reforms aimed at increasing the effectiveness of the public employment services and reinforce outreach and activation support for young people. Deliver on the reform of the education and training system, including teacher evaluation, and increase employers' engagement and learners' participation in vocational education and training, and affordable childhood education and care. Take measures to ensure that the National Health System becomes operational in 2020, as planned, while preserving its long-term sustainability.

               4.Focus investment-related economic policy on sustainable transport, environment, in particular waste and water management, energy efficiency and renewable energy, digitalisation, including digital skills, and research and innovation, taking into account territorial disparities within the Member State. Adopt legislation to simplify the procedures for strategic investors to obtain necessary permits and licences. Improve access to finance for small and medium-sized enterprises, and resume the implementation of privatisation projects.

               5.Step up efforts to improve the efficiency of the judicial system, including the functioning of administrative justice and revising civil procedures, increasing the specialisation of courts and setting up an operational e-justice system. Take measures to strengthen the legal enforcement of claims and ensure reliable and swift systems for the issuance and transfer of title deeds and immovable property rights. Accelerate anti-corruption reforms, safeguard the independence of the prosecution and strengthen the capacity of the law enforcement.

               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(2019) 1012 final.

                     (4)

                        COM(2019) 150 final.

                     (5)

                        Regulation (EU) No 1303/2013 of the European Parliament and of the Council of 17 December 2013 laying down common provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund, the European Agricultural Fund for Rural Development and the European Maritime and Fisheries Fund and laying down general provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund and the European Maritime and Fisheries Fund and repealing Council Regulation (EC) No 1083/2006 (OJ L 347, 20.12.2013, p. 320).

                     (6)

                        COM(2014) 494 final.

                     (7)

                        Cyclically-adjusted balance net of one-off and temporary measures, recalculated by the Commission using the commonly agreed methodology.

                     (8)

                        SWD(2019) 1012 final.

                     (9)

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


               EUROPEAN COMMISSION
            Brussels, 5.6.2019
            COM(2019) 512 final
            Recommendation for a
            COUNCIL RECOMMENDATION
            on the 2019 National Reform Programme of Italy and delivering a Council opinion on the 2019 Stability Programme of Italy

               Recommendation for a

               COUNCIL RECOMMENDATION

               on the 2019 National Reform Programme of Italy and delivering a Council opinion on the 2019 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 21 November 2018, the Commission adopted the Annual Growth Survey, marking the start of the 2019 European Semester for economic policy coordination. It took due account of the European Pillar of Social Rights, proclaimed by the European Parliament, the Council and the Commission on 17 November 2017. The priorities of the Annual Growth Survey were endorsed by the European Council on 21 March 2019. On 21 November 2018, on the basis of Regulation (EU) No 1176/2011, the Commission also adopted the Alert Mechanism Report, in which it identified 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, which was endorsed by the European Council on 21 March 2019. On 9 April 2019, the Council adopted the recommendation on the economic policy of the euro area (‘Recommendation for the euro area’).

               (2)As a Member State whose currency is the euro and in view of the close interlinkages between the economies in the economic and monetary union, Italy should ensure the full and timely implementation of the Recommendation for the euro area, as reflected in recommendations (1) to (5) below. In particular, measures in the area of public administration, justice and competition will help address the first euro area recommendation in what concerns resilient product markets and the quality of institutions; focusing economic policy related to investment in the specified areas and using windfall gains to reduce public debt will help address the second euro area recommendation as regards supporting investment and rebuilding buffers; measures to improve employability and shift the tax burden away from productive factors will help address the third euro area recommendation as regards the functioning of the labour market, and measures to improve banks’ balance sheets will help address the fourth euro area recommendation as regards the reduction of non-performing loans.

               (3)The 2019 country report for Italy
                  3
                was published on 27 February 2019. It assessed Italy’s progress in addressing the country-specific recommendations adopted by the Council on 13 July 2018, 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 27 February 2019
                  4
               . 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. The need for action to reduce the risk of adverse effects on the Italian economy and on the economic and monetary union, given the size and cross-border relevance of Italy’s economy, is particularly significant.

               (4)On 19 April 2019, Italy submitted its 2019 National Reform Programme and its 2019 Stability Programme. In order to take account of their interlinkages, the two programmes have been assessed at the same time. Italy’s 2019 National Reform Programme only partly addresses the structural issues raised by the 2018 country-specific recommendations, and details on the few new commitments it contains, as well as on the timeline for their implementation, are often missing. However, its reform strategy builds on major reforms already in the pipeline in different areas, showing broad continuity compared to past National Reform Programmes.

               (5)Relevant country-specific recommendations have been addressed in the programming of the European Structural and Investment Funds ('ESI Funds') for the 2014-2020 period. As provided for in Article 23 of Regulation (EU) No 1303/2013 of the European Parliament and of the Council
                  5
               , where it is necessary to support the implementation of relevant Council recommendations, the Commission may request a Member State to review and propose amendments to its Partnership Agreement and relevant programmes. The Commission has provided further details on how it would make use of that provision in guidelines on the application of the measures linking the effectiveness of the ESI Funds to sound economic governance
                  6
               .

               (6)Italy is currently in the preventive arm of the Stability and Growth Pact and subject to the debt rule. In its 2019 Stability Programme the government expects the headline deficit to increase from 2.1% of GDP in 2018 to 2.4% in 2019, and to gradually decline thereafter to 2.1% in 2020 and 1.5% by 2022. These projections assume a VAT hike (1.3% of GDP in 2020 and 1.5% of GDP from 2021) legislated as a ‘safeguard clause’ to achieve the budgetary targets from 2020. Based on the recalculated structural balance
                  7
               , the medium-term budgetary objective – which has been changed from a balanced budgetary position in structural terms in 2019 to a surplus of 0.5% of GDP in structural terms as of 2020 – is not planned to be reached within the programme period. After having increased in 2018 (to 132.2% of GDP, from 131.4% in 2017), the general government debt-to-GDP ratio is projected in the 2019 Stability Programme to increase by 0.4 percentage point of GDP to 132.6% in 2019, and to decline to 128.9% by 2022. These projections assume privatisation proceeds of 1% of GDP in 2019 and 0.3% in 2020. The macroeconomic scenario underpinning those budgetary projections is plausible. However, in recent years the VAT hikes legislated as ‘safeguard clauses’ have been systematically repealed without adequate alternative financing measures, and privatisation targets have been underachieved. Based on a no-policy change assumption, the Commission 2019 spring forecast expects lower nominal GDP growth and a higher government deficit for 2020 than the 2019 Stability Programme. The Commission forecast does not incorporate the VAT hike legislated as a ‘safeguard clause’ in 2020.

               (7)On 5 June 2019, the Commission issued a report prepared in accordance with Article 126(3) of the TFEU due to Italy's non-compliance with the debt rule in 2018. The report concluded, following an assessment of all the relevant factors, that the debt criterion as defined in the Treaty and in Regulation (EC) No 1467/1997 should be considered as not complied with, and that a debt-based EDP is thus warranted.

               (8)Following the request in the revised 2019 Draft Budgetary Plan, the 2019 Stability Programme confirms that the budgetary impact of the collapse of the Morandi bridge in Genoa and of exceptionally adverse weather conditions that occurred in 2018 was significant and provides adequate evidence of the scope and nature of these additional budgetary costs. In particular, the 2019 Stability Programme indicates that the 2019 budget comprises exceptional expenditure amounting to about 0.2% of GDP in relation to an extraordinary maintenance programme for the road network and a preventive plan to limit hydrogeological risks. Due to the direct link with the collapse of the Morandi bridge in Genoa and the adverse weather conditions of 2018, the specific treatment of expenditure for extraordinary road-maintenance and hydrogeological risk prevention could be considered in application of the ‘unusual event clause’. According to the Commission, the eligible additional expenditure in 2019 amounts to 0.18% of GDP for these measures. The provisions set out in Articles 5(1) and 6(3) of Regulation (EC) No 1466/97 cater for this additional expenditure, in that the collapse of the Morandi bridge in Genoa and the exceptionally adverse weather conditions are considered unusual events, their impact on Italy’s public finances is significant and sustainability would not be compromised by allowing for a temporary deviation from the adjustment path towards the medium-term budgetary objective. A final assessment, including on eligible amounts, will be made in spring 2020 on the basis of observed data for 2019 as provided by the Italian authorities.

               (9)On 13 July 2018, the Council recommended Italy to ensure that the nominal growth rate of net primary government expenditure
                  8
                does not exceed 0.1% in 2019, corresponding to an annual structural adjustment of 0.6% of GDP. Based on the Commission 2019 spring forecast, there is a risk of a significant deviation from the recommended adjustment path towards the medium-term budgetary objective in 2019. That conclusion would not change even if the budgetary impact of the extraordinary maintenance programme for the road network following the collapse of the Morandi bridge in Genoa and of a preventive plan to limit hydrogeological risks following exceptionally adverse weather conditions were subtracted from the requirement of the preventive arm of the Stability and Growth Pact in 2019.

               (10)In 2020, in view of Italy's general government debt ratio above 60% of GDP and projected output gap of -0.1%, the net primary government expenditure should decline by 0.1% in nominal terms, in line with the structural adjustment of 0.6% of GDP stemming from the matrix of requirements under the Stability and Growth Pact. Based on the Commission 2019 spring forecast under unchanged policies, there is a risk of a significant deviation from the requirement in 2020. Italy is prima facie not forecast to comply with the debt rule in 2019 and 2020. Moreover, at around 132% of GDP, Italy's high public debt ratio implies that large resources are earmarked to cover debt servicing costs, to the detriment of more growth-enhancing items including education, innovation and infrastructure. Overall, the Council is of the opinion that the necessary measures should be taken as of 2019 to comply with the provisions of the Stability and Growth Pact. The use of any windfall gains to further reduce the general government debt ratio would be important.

               (11)Italy's tax system continues to weigh heavily on the factors of production, to the detriment of economic growth. The high tax burden on labour and capital discourages employment and investment. While the 2019 budget has slightly lowered taxation on self-employed workers, it has also temporarily raised the tax burden on firms on balance. Tax bases less detrimental to growth, such as property and consumption, are underused, leaving room to shift the tax burden away from labour and capital in a budgetary neutral way. The recurrent property tax on first residences was repealed in 2015, including for wealthier households. In addition, land and property values (or ‘cadastral’ values), which serve as the basis for calculating property tax, are largely outdated, and a reform to align them with current market values is still pending. The number and size of tax expenditures, in particular in the case of the reduced rates for value added tax, are high, and their streamlining has been systematically postponed in recent years. There is also scope to alleviate the burden on compliant firms and households by reducing the complexity of the tax code and increasing the overall level of tax compliance. In particular, the VAT gap (the difference between theoretical VAT revenues and those actually collected) is among the highest in the EU. One of the reasons for this is the high level of tax evasion, which is especially related to omitted billing and invoicing. The mandatory electronic transmission of receipts for all commercial transactions with final consumers is a positive step in remedying the gap. However, legal thresholds for cash payments have been increased in recent years, which could discourage the use of electronic payments. Encouraging electronic payments instead could raise incentives to issue bills and invoices and thus improve tax compliance.

               (12)Italy's expenditure on old-age pensions, at around 15% of GDP in 2017, is among the highest in the Union, and is expected to increase in the medium term due to the worsening old-age dependency ratio. The 2019 budget and the decree law implementing the new early retirement scheme in January 2019 backtrack on elements of past pension reforms, worsening the sustainability of public finances in the medium term. These new provisions will further increase pension expenditure in the medium term. Between 2019 and 2021, the new early retirement scheme (‘quota 100’) will allow people to retire at age 62 if they have paid 38 years of contributions. In addition, the scope of the existing provisions for early retirement has been extended, including by suspending until 2026 the indexation to life expectancy of the required minimum contribution, which past pension reforms had introduced. For those provisions, the 2019 budget earmarked funds worth 0.2% of GDP in 2019 and 0.5% of GDP in 2020 and 2021, but additional costs are also expected in the following years. The high public spending for old-age pensions restrains other social and growth-enhancing spending items like education and investment, and limits margins to reduce the overall high tax burden and the high public debt. Furthermore, broadening the possibility for early retirement might negatively affect labour supply, in a context where Italy is already lagging behind the EU average for the participation of its older workers (55-64) in employment, thereby hampering potential growth and worsening the sustainability of public debt. To limit the increase in spending on pensions, previously legislated pension reforms to curb implicit liabilities arising from population ageing should be fully implemented. Furthermore, savings could be achieved by intervening on the high pension entitlements not matched by contributions, while respecting the principles of fairness and proportionality.

               (13)Despite the economic slowdown, employment continued to increase in 2018, albeit at a slightly slower pace than in the previous year. The number of persons in employment reached 23.2 million at the end of the year, exceeding pre-crisis levels. The employment rate (20-64 years) rose to 63% last year, but is still far below the EU average (73.2%). Moreover, regional gaps are substantial and the labour market remains segmented, with the share of temporary contracts having further increased in 2018. The unemployment rate declined to 10.6%. Long-term and youth unemployment remain high, weighing on potential growth and social cohesion. Inactivity is prevalent among women, the low-skilled and young people. Moreover, the share of young people (15-24) neither in employment nor in education or training, at 19.2% in 2018, is the highest in the EU. Involuntary part-time is also widespread, pointing to persisting slack in the labour market.

               (14)Income inequality and risk of poverty are high, with wide regional and territorial disparities. In 2017, 28.9% of the population was at risk of poverty or social exclusion, above both the pre-crisis levels and well above the 2017 EU average (22.4%). Children, especially those with a migrant background, are particularly affected. In-work poverty is high and rising, in particular among temporary workers and people with a migrant background. The self-employed, who represent 20.8% of the workforce (against the EU average of 13.7%), are generally less protected against social risks than employees. Access to affordable and adequate housing is also a challenge and the provision of social services remains underdeveloped and fragmented. The impact of social transfers on reducing poverty and inequality reduction is one of the lowest in the EU. The anti-poverty scheme introduced in 2018 has been replaced by a new major scheme (citizenship income), which keeps an active inclusion approach, subject to certain conditions. However, the reform may prove difficult to implement, putting a considerable burden on the public administration, namely on employment and social services. Its actual impact will depend on how effective policies are in getting people into work or training, the extent to which personalised social services are provided and on controls. In particular, the actual capacity to reach out those most in need will influence the impact on the reduction of poverty and social exclusion. The outcome of the health system is overall good, despite below-EU average spending. Nevertheless, the provision of healthcare largely varies across regions, affecting access, equity and efficiency, and could be improved through better administration and by monitoring the delivery of standard levels of services. More home and community-based care and long-term care is key to provide support to people with disabilities and other disadvantaged groups.

               (15)Undeclared work is widespread in Italy, especially in the southern regions. According to the estimates of the National Institute of Statistics, the unobserved economy was worth about EUR 210 billion (12.4% of GDP) in 2016. Around 37.2% of it is attributable to undeclared work. This affects in particular vulnerable groups, such as migrants, women and minors. The new Labour Inspectorate Agency, operational since 2017, devoted particular attention to the phenomenon of "caporalato" in the agriculture sector, characterised by a high incidence of irregularity and by a risk of labour exploitation, especially for irregular migrants. A close monitoring of the measures recently adopted as well as additional steps are needed to tackle and prevent undeclared work and labour exploitation and to ensure fair and safe working conditions. Finally, it is important to ensure that the operationalisation of the citizenship income maximises the incentives to regular work and the transformation of undeclared work into regular employment, both through close monitoring and positive incentives.

               (16)Improving public employment services, by providing more resources and better quality services, is crucial for implementing the reform on the new citizenship income scheme. In this context of the new citizenship income scheme for low-income earners and unemployed persons, effective active labour market policies are an important tool for reducing labour market frictions and incentivising people to look for a job. In this respect, it is critical that employment services be equipped with sufficient and qualified staff. Effective job search assistance aiming to enhance training and upskilling is crucial to improve labour mobility and provide workers with the right skills for future labour market challenges and an increasingly challenging and competitive working environment. Some steps to make active labour market policies more effective have been recently taken, such as the definition of monitoring indicators and minimum standards, the adoption of a strategy for the long-term unemployed and the development of a qualitative profiling tool. Nonetheless, the overall efficiency of public employment services and their capacity to find jobs for people remain weak, performance varies widely between regions and integration with social and educational policies is limited. Cooperation with employers is also weak.

               (17)The gender employment gap in Italy remains one of the highest in the EU and the employment rate of women, albeit slightly increasing, is substantially lower than the EU average (53.1% against 67.4% in 2018). Investment in care services and women's participation in the job market remains insufficient, as well as measures to promote equal opportunities and adequate work-life balance policies. However, a comprehensive strategy to promote women's participation in the labour market is still missing. While the compulsory paternity leave was marginally extended from 4 to 5 days, the parental leave system remains inadequate. This, together with underdeveloped childcare and long-term care services, tends to prevent women with children or other family members in need of care from working. In 2017, only 28.6% of children under three years of age were in formal early childhood education, well below the EU average. Investment in childcare, health and long-term care should take into account the wide geographical disparities in the availability of services. Furthermore, a high tax wedge for second earners reduces the financial incentive for women to take up work. Higher labour-force participation of women, as much as higher participation rates in general, could foster economic growth by lifting labour supply, alleviate poverty and mitigate the social and financial risks rising from population aging.

               (18)The initially envisaged reform of the collective bargaining framework aimed to bring wages and salaries more in line with economic conditions at the regional and firm level. In March 2018 Confindustria signed a framework agreement with the three major Italian trade unions (Cgil, Cisl and Uil) in order to expand second-level bargaining. Moreover, the agreement increases legal certainty by setting clearer rules for the representation of social partners at negotiations and establishes an improved algorithm for setting wage minima. The first implementation agreement on representativeness, health and work safety was signed at end of 2018 by the employers’ association and the three major trade unions.

               (19)Investment in education and skills is crucial to promote smart, inclusive and sustainable growth. Italy's sluggish productivity trend is affected by the weaknesses of the education and training system and the weak demand for high skills. Improving the quality of the education and training system is a major challenge. The school drop-out rate (early school leaving) remains well above the EU average (14.5% vs 10.6% in 2018) and there are wide regional and territorial disparities in educational outcomes. While the share of funding allocated to primary and secondary education is broadly in line with the EU average, further efforts to attract, effectively recruit and motivate teachers could contribute to improve learning outcomes. The recruitment system is too knowledge-based rather than skills-based, while the training component is limited. Moreover, Italian teachers’ salaries remain low compared to international standards and relative to workers with tertiary education. Salary increases are slower than among international peers and career prospects are more limited, based on a single career pathway. Furthermore, promotions are based exclusively on seniority rather than merit. This results in a very low attractiveness of the teaching profession for highly qualified persons and discouragement of the teaching staff, which in turn has a negative impact on the learning outcomes of students. The apprenticeship system was gaining momentum in recent years, but adopted measures have scaled it down. Italian students and adults are amongst the worst performers in the EU in key competences and basic skills. Adult participation in learning is very limited and decreasing, in a context where the employment gap between the high- and low-skilled is among the highest in the EU. Upskilling is particularly needed for digital skills. There has been limited progress in digital skills and infrastructure. Investment in human capital is a pre-requisite for boosting public and private investment and current measures to boost digital skills and adult learning lack a comprehensive approach. Basic and advanced digital skill levels are below the EU average – only 44% of individuals between 16 and 74 years have basic digital skills (57% in the EU).

               (20)Weak investment in skills is slowing down Italy’s transition to a knowledge-based economy, holding back productivity growth and limiting the potential to improve non-price competitiveness and GDP growth. Education gaps also help to explain the lower productivity of Italy’s micro and small firms compared to peer countries. Tertiary education is underfinanced and understaffed, and the scope of vocational-oriented higher education is limited despite high employability rates. The proportion of university graduates remains low (27.9% of the population aged 30 to 34 in 2018) and is coupled with a relatively low availability of tertiary graduates, especially in scientific and technical fields, targeted investments in skills are a pre-requisite to boost both public and private investment, particularly in intangibles. There is a need to boost studies in fields relevant to knowledge-intensive sectors and to strengthen specific skills, such as digital and financial ones.

               (21)The adoption by smaller firms of strategies to increase productivity, such as product, process and organisational innovation, remains limited, particularly in southern Italy. Investment in intangibles has been considerably below the Union average since the early 2000s. Business expenditure on research and development is almost half the average level of the euro area. Public support for business expenditure on research and development remains low, although it is improving thanks to the increased role of tax incentives. Public expenditure on research and development is also below the euro area average. Low innovation could also slow down the transition to a green economy. Improving Italy’s innovation performance requires further investment in intangibles, as well as a stronger focus on technology transfer, taking into account regional weaknesses and the size of the firms. Public support for business expenditure on research and development can be improved through a balanced mix of direct and indirect measures and an in-depth assessment of the existing temporary tax incentives, to make the most efficient ones permanent. Measures to support knowledge (such as technological clusters) and cooperation among firms help smaller firms in particular to tackle these difficulties and increase their low productivity.

               (22)Investment is needed to raise the quality and sustainability of the country’s infrastructure. In the transport sector, Italy has not delivered on its infrastructure investment strategy (Connettere l’Italia). Very limited progress has been made in implementing the planned investments in rail, road and sustainable urban mobility. This is due to administrative delays, spending inefficiencies, incomplete implementation of the Code on procurement and concessions and litigation. The EU transport scoreboard shows that the quality of Italy’s infrastructure is below the EU average. The state of repair is a clear source of concern, as shown by the collapse of the Morandi bridge in Genoa. The government has prioritised maintenance and safety with a plan to monitor the maintenance status of all infrastructure and the creation of a new agency in charge of safety of rail and road infrastructure. In this respect, for 2019 Italy was granted an allowance of EUR 1 billion under EU fiscal rules for an investment plan to secure road infrastructure similar to the Morandi bridge. Investing in sustainable transport and infrastructure is also a way of tackling environmental challenges. Sustained green investment is needed to achieve of the ambitious 2030 EU energy and climate targets. The Integrated National Energy and Climate Plan is a key source of guidance to establish investment needs in the area of decarbonisation and energy. Investments are needed to improve the energy infrastructure, which would contribute to a more resilient, clean, secure and flexible energy system, while enhancing market integration and reducing price gaps. The Italian electricity grid is not yet sufficiently equipped to cope with increased exchanges across borders and to cope with the magnitude of variable renewables as projected for 2030. Investment in prevention for hydrogeological and seismic risks is needed to reduce emergency expenditure, including for infrastructure. For 2019, Italy was granted an allowance of EUR 2.1 billion with respect to EU fiscal rules to ensure prevention against major hydrogeological risks. Lastly, insufficient effective investment is being made in waste management and water infrastructure in southern Italy, while scarcity and drought risks continue. The fragmentation of the sector, together with the weak credit profile of smaller operators, remains a barrier to investment. Investment, including in climate change response, environmental sustainability and risk prevention as well as rural connectivity would also contribute to address regional disparities. In rural areas, the broadband network is also less advanced. On ultrafast (100 Mbps and above) broadband coverage, Italy still lags behind (only 24% compared to the EU average of 60%) and ranks near the bottom (27th) with a still very moderate growth rate. Both ultrafast broadband coverage and take-up show results much below the EU averages.

               (23)The weak capacity of the public sector, especially at the local level, to administer funding represents an investment barrier across sectors, due to complex procedures, the overlapping of responsibilities and poor management of public employment. Inadequate skills in the public sector constrain the capacity to assess, select and manage investment projects. This also undermines the implementation of EU funds, where Italy lags behind compared to the Union average. The lower quality of governance in southern Italy seriously limits its spending and policy-making capacity. Improving the administrative capacity is a pre-condition for the effective delivery of public investment and the use of EU funds, with positive spillovers on private investment and GDP growth. Such improvements could give more impact to investments in broadband, transport, water management and the circular economy, especially in southern Italy. The latter lags behind mainly in terms of intangible investment. The improvement of administrative capacity of central and local bodies would have positive impact on the planning, evaluation and monitoring of investment projects, as well as on identifying and addressing possible bottlenecks.

               (24)Increasing the efficiency of Italy’s public administration and its responsiveness to business would have a positive impact on the business environment, investment and the ability of firms to exploit innovation opportunities. In 2015, a comprehensive enabling law reforming the public administration was adopted. The reform tackled most sources of inefficiency such as the length and complexity of procedures, the lack of transparency, the ineffective management of public employment, the inefficient management of public-owned enterprises, and low digitalisation. By the end of 2017, most of the reform was implemented and enforcement is ongoing, supported by the new “Concretezza” law. However, inconsistent planning, scarce financial resources and insufficient coordination are delaying the implementation of digital public services in key areas like online payment systems, which would help reducing complexity and increasing transparency. The high average age and low average digital skills of public employees is further slowing down the process. Nevertheless, when clear goals and effective enforcement are combined, results are evident as was the case for the rapid development of the electronic market for public administrations and e-invoicing. The 2015 public administration reform also envisaged a new framework reforming the management of local public services. However, in November 2016 Italy’s Constitutional Court declared the procedure followed to adopt a number of legislative decrees, including the one on local public services, unconstitutional. A new legislative initiative is thus needed to promote the efficiency and quality of local public services, including by prioritising competitive bids over in-house solutions or direct grants.

               (25)The Economic and Financial Document 2018 (DEF 2018) identified project preparation and quality improvement of the project cycle as critical factors for relaunching effective investment spending in Italy. In the same document, the constitution of a specific grant fund for project preparation and project review of key infrastructure projects was reported. Another grant fund was foreseen for preparation of smaller projects implemented by local bodies. However, implementing decrees on both funds have not been issued yet, and the allocation assigned to these funds may be lower than the one initially presented in the DEF 2018. In the budget law for 2019, the creation of a "Centrale per la progettazione" is mentioned but this body is not operational yet and its creation seems to require a longer-term effort. In terms of functionality, it is not clear how the Centrale per la progettazione will interact with municipalities and other local bodies.

               (26)Improvements to the business environment would facilitate entrepreneurship, and better framework conditions for competition would favour a more efficient allocation of resources and productivity gains. The 2015 annual competition law, adopted in August 2017, needs to be properly implemented. Moreover, significant barriers to competition persist in certain sectors, such as business services and retail. Improving the quality of the regulatory framework would ensure a level playing field for both innovative platforms and traditional operators, unleashing the full potential of the collaborative economy and fairer competition in all sectors. Increasing competitive processes to award public service contracts and concessions for access to public goods would positively affect the quality of services. Lack of regulatory stability in the public procurement system could jeopardise some key benefits of previous reforms and contribute to defer investment. Market surveillance of products is spread over various organisations, has many overlaps and lacks systems for efficient coordination. This reduces the effectiveness of controls in preventing unfair competition from non-compliant business.

               (27)The low efficiency of Italy's civil justice system remains a source of concern. In 2017, the time needed to resolve civil and commercial litigious cases in Italy was still the highest in the EU at all instances. While the length of proceedings showed an increase in first instance compared to 2016, past reforms are starting to positively affect trial length at higher instances, but there is still room to limit abuses of the trial and ensure a more efficient functioning of courts. At the Supreme Court of Cassation, a high number of incoming cases coupled with lower clearance rates of its tax section negatively affects the Court’s efficiency and raises concerns about the tax justice system at first and second instance. Overall, adequate enforcement of simpler procedural rules could help to decisively speed up civil trials. In this regard, a reform to streamline the civil procedure has been announced, but has not yet been presented to the Parliament. Other challenges are the still limited and inconsistent use of the inadmissibility filter for appeals in second instance, the numerous vacancies for administrative staff, and the remaining differences across courts in the effectiveness of case management.

               (28)Italy has recently made some progress in improving its anti-corruption framework, including through better protection for whistle-blowers, a stronger role of the National Anti-corruption Authority in implementing it, and a new anti-corruption law of January 2019. The latter aims to boost the detection and repression of corruption through stricter penalties, better investigation techniques and a leniency scheme for those who denounce corruption. The law also suppresses prescription terms after a first-instance conviction, but only as of 2020. The latter is a long-awaited positive step in line with international standards. However, the repression of corruption remains ineffective in Italy, mainly because the length of criminal proceedings remains excessive in the absence of a much-needed reform of the criminal trial, including the appeal system to avoid abuse of litigation. Moreover, gaps persist in the prosecution framework for specific offences, such as embezzlement of public money.

               (29)Italian banks have continued to make good progress in repairing their balance sheet despite renewed market pressure. However, due to their high exposure to the sovereign, market volatility has adversely affected their capital positions, putting pressure on funding costs and making their access to unsecured wholesale funding more difficult. Continued reduction of the legacy stock of non-performing loans and unlikely-to-pay loans remains warranted especially for small and second-tier banks, in order to further safeguard financial stability and strengthen credit extension to the economy. Having banks, especially smaller ones, advance on meeting regulatory funding requirements would also boost the system's resilience to external shocks. Addressing banks’ structurally low profitability by increasing efficiency and business model optimisation is also important. A timely implementation of the insolvency reform decrees would help accelerate the still slow foreclosure and collateral enforcement procedures and further boost the resilience of the banking sector. Any compensation granted by the State to shareholders and retail holders of subordinated debt of banks subject to past administrative liquidation procedures should be strictly targeted at addressing the social effects of past mis-selling. Governance in the banking system should be further improved, by promptly completing the 2015 reform of the large cooperative banks after legal clarity has been established.

               (30)Bank credit remains the dominant source of corporate financing. However, smaller and innovative firms still struggle to access credit, especially in southern Italy. The capital market is underdeveloped in comparison to other Member States, also due to factors constraining demand, such as low financial education, fear of losing control over the business and burdensome administrative requirements. Several measures were introduced in the last few years to improve access to finance, mostly focusing on the bank credit channel, although market-based measures such as mini-bonds, the alternative investment market, venture capital and direct public support also helped smaller and innovative firms to gain access to finance. The abolition of the allowance for corporate equity by the 2019 budget may reduce incentives for firms to use equity financing. Effectively boosting non-bank access to finance requires taking into account the needs of smaller and innovative firms as well as the capacity of investors to evaluate investment projects. Diversifying financing sources would better protect firms’ investment from shocks in the banking sector, while supporting innovation and growth.

               (31)The programming of EU funds for the period 2021-2027 could help address some of the gaps identified in the recommendations, in particular in the areas covered by Annex D to the country report
                  9
               . This would allow Italy to make the best use of those funds in respect of the identified sectors, taking into account regional disparities. Strengthening the country’s administrative capacity for the management of these funds is an important factor for the success of this investment.

               (32)In the context of the 2019 European Semester, the Commission has carried out a comprehensive analysis of Italy’s economic policy and published it in the 2019 country report. It has also assessed the 2019 Stability Programme and the 2019 National Reform 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. This reflects the need to strengthen the Union’s overall economic governance by providing Union-level input into future national decisions.

               (33)In the light of this assessment, the Council has examined the 2019 Stability Programme and its opinion
                  10
                is reflected in particular in recommendation (1).

               (34)In the light of the Commission’s in-depth review and this assessment, the Council has examined the 2019 National Reform Programme and the 2019 Stability Programme. Its recommendations under Article 6 of Regulation (EU) No 1176/2011 are reflected in recommendations (1) to (5) below. Those recommendations also contribute to the implementation to the first four of the Recommendations on the economic policy of the euro area. Fiscal policies referred to in recommendation (1) contribute inter-alia to address imbalances linked to high government debt.

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

               1.Ensure a nominal reduction of net primary government expenditure of 0.1% in 2020, corresponding to an annual structural adjustment of 0.6% of GDP. Use windfall gains to accelerate the reduction of the general government debt ratio. Shift taxation away from labour, including by reducing tax expenditure and reforming the outdated cadastral values. Fight tax evasion, especially in the form of omitted invoicing, including by strengthening the compulsory use of e-payments including through lower legal thresholds for cash payments. Implement fully past pension reforms to reduce the share of old-age pensions in public spending and create space for other social and growth-enhancing spending.

               2.Step up efforts to tackle undeclared work. Ensure that active labour market and social policies are effectively integrated and reach out notably to young people and vulnerable groups. Support women’s participation in the labour market through a comprehensive strategy, including through access to quality childcare and long-term care. Improve educational outcomes, also through adequate and targeted investment, and foster upskilling, including by strengthening digital skills.

               3.Focus investment-related economic policy on research and innovation, and the quality of infrastructure, taking into account regional disparities. Improve the effectiveness of public administration, including by investing in the skills of public employees, by accelerating digitalisation, and by increasing the efficiency and quality of local public services. Address restrictions to competition, particularly in the retail sector and in business services, also through a new annual competition law.

               4.Reduce the length of civil trials at all instances by enforcing and streamlining procedural rules, including those under consideration by the legislator. Improve the effectiveness of the fight against corruption by reforming procedural rules to reduce the length of criminal trials.

               5.Foster bank balance sheet restructuring, in particular for small and medium-sized banks, by improving efficiency and asset quality, continuing the reduction of non-performing loans, and diversifying funding. Improve non-bank financing for smaller and innovative firms.

               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(2019) 1011 final.

                     (4)

                        COM(2019) 150 final.

                     (5)

                        Regulation (EU) No 1303/2013 of the European Parliament and of the Council of 17 December 2013 laying down common provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund, the European Agricultural Fund for Rural Development and the European Maritime and Fisheries Fund and laying down general provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund and the European Maritime and Fisheries Fund and repealing Council Regulation (EC) No 1083/2006 (OJ L 347, 20.12.2013, p. 320).

                     (6)

                        COM(2014) 494 final.

                     (7)

                        Cyclically-adjusted balance net of one-off and temporary measures, recalculated by the Commission using the commonly agreed methodology.

                     (8)

                        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

                     (9)

                        SWD(2019) 1011 final.

                     (10)

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


               EUROPEAN COMMISSION
            Brussels, 5.6.2019
            COM(2019) 504 final
            Recommendation for a
            COUNCIL RECOMMENDATION
            on the 2019 National Reform Programme of Denmark and delivering a Council opinion on the 2019 Convergence Programme of Denmark

               Recommendation for a

               COUNCIL RECOMMENDATION

               on the 2019 National Reform Programme of Denmark and delivering a Council opinion on the 2019 Convergence Programme of Denmark

               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
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               , and in particular Article 9(2) thereof,

               Having regard to the recommendation of the European Commission,

               Having regard to the resolutions of the European Parliament,

               Having regard to the conclusions of the European Council,

               Having regard to the opinion of the Employment Committee,

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

               Having regard to the opinion of the Social Protection Committee,

               Having regard to the opinion of the Economic Policy Committee,

               Whereas:

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

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

               (3)On 15 March 2019, Denmark submitted its 2019 National Reform Programme and, on 10 April 2019, its 2019 Convergence Programme. In order to take account of their interlinkages, the two programmes have been assessed at the same time.

               (4)Relevant country-specific recommendations have been addressed in the programming of the European Structural and Investment Funds ('ESI Funds') for the 2014-2020 period. As provided for in Article 23 of Regulation (EU) No 1303/2013 of the European Parliament and of the Council
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               , where it is necessary to support the implementation of relevant Council recommendations, the Commission may request a Member State to review and propose amendments to its Partnership Agreement and relevant programmes. The Commission has provided further details on how it would make use of that provision in guidelines on the application of the measures linking the effectiveness of the ESI Funds to sound economic governance
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               .

               (5)Denmark is currently in the preventive arm of the Stability and Growth Pact. In its 2019 Convergence Programme, the government plans a headline deficit of 0.1% of GDP in 2019 and 2020. Based on the recalculated structural balance
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               , the medium-term budgetary objective — a structural deficit of 0.5% of GDP — continues to be overachieved throughout the programme period until 2025. According to the 2019 Convergence Programme, the general government debt-to-GDP ratio is expected to fall to 33.4% in 2019 and to remain stable in 2020, before rising to 37.8% of GDP by 2025. The macroeconomic scenario underpinning those budgetary projections is plausible over the programme period. Based on the Commission 2019 spring forecast, the structural balance is forecast to register a surplus of 0.9% of GDP in 2019 and 1.0% of GDP in 2020, above the medium-term budgetary objective. Risks relate to revenue shortfalls from volatile components, particularly the pension yield tax. Overall, the Council is of the opinion that Denmark is projected to comply with the provisions of the Stability and Growth Pact in 2019 and 2020.

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

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

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

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

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

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

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

               (13)In the context of the 2019 European Semester, the Commission has carried out a comprehensive analysis of Denmark’s economic policy and published it in the 2019 country report. It has also assessed the 2019 Convergence Programme and the 2019 National Reform Programme and the follow-up given to the recommendations addressed to Denmark in previous years. It has taken into account not only their relevance for sustainable fiscal and socioeconomic policy in Denmark, but also their compliance with Union rules and guidance, given the need to strengthen the Union’s overall economic governance by providing Union-level input into future national decisions.

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

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

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

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

               Done at Brussels,

                     For the Council

                     The President

                     (1)

                        OJ L 209, 2.8.1997, p. 1.

                     (2)

                        SWD(2019) 1003 final.

                     (3)

                        Regulation (EU) No 1303/2013 of the European Parliament and of the Council of 17 December 2013 laying down common provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund, the European Agricultural Fund for Rural Development and the European Maritime and Fisheries Fund and laying down general provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund and the European Maritime and Fisheries Fund and repealing Council Regulation (EC) No 1083/2006 (OJ L 347, 20.12.2013, p. 320).

                     (4)

                        COM(2014) 494 final.

                     (5)

                        Cyclically-adjusted balance net of one-off and temporary measures, recalculated by the Commission using the commonly agreed methodology.

                     (6)

                        SWD(2019) 1003 final.

                     (7)

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