title: Council Recommendation of 18 June 2021 delivering a Council opinion on the 2021 Convergence Programme of Bulgaria

text:
               29.7.2021

               EN

               Official Journal of the European Union

               C 304/6

      COUNCIL RECOMMENDATION
      of 18 June 2021
      delivering a Council opinion on the 2021 Convergence Programme of Bulgaria
      (2021/C 304/02)
      THE COUNCIL OF THE EUROPEAN UNION,
      Having regard to the Treaty on the Functioning of the European Union,
      Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies (1), and in particular 9(2) thereof,
      Having regard to the recommendation of the European Commission,
      Having regard to the resolutions of the European Parliament,
      After consulting the Economic and Financial Committee,
      Whereas:

                  (1)

                  On 20 March 2020, the Commission adopted a communication on the activation of the general escape clause of the Stability and Growth Pact. The general escape clause, as set out in Articles 5(1), 6(3), 9(1) and 10(3) of Regulation (EC) No 1466/97 and Articles 3(5) and 5(2) of Council Regulation (EC) No 1467/97 (2), facilitates the coordination of budgetary policies in times of severe economic downturn. In that communication, the Commission set out its view that, given the expected severe economic downturn resulting from the COVID-19 pandemic, the conditions for activating the general escape clause were met. On 23 March 2020, the ministers of finance of the Member States agreed with the assessment of the Commission. The general escape clause has granted Member States budgetary flexibility to deal with the COVID-19 crisis. It has facilitated the coordination of budgetary policies in times of severe economic downturn. Its activation allows for a temporary departure from the adjustment path towards the medium-term budgetary objective of each Member State, provided that this does not endanger fiscal sustainability in the medium term. On 17 September 2020, in its communication on the 2021 Annual Sustainable Growth Strategy, the Commission announced that the general escape clause would remain active in 2021.

                  (2)

                  On 20 July 2020, the Council adopted a Recommendation (3) (‘the Council Recommendation of 20 July 2020’). It recommended Bulgaria to take all necessary measures, in line with the general escape clause, to effectively address the COVID-19 pandemic, sustain the economy and support the ensuing recovery. It also recommended Bulgaria to pursue, when economic conditions allow, fiscal policies aimed at achieving prudent medium-term fiscal positions and ensuring debt sustainability, while enhancing investment.

                  (3)

                  Next Generation EU, including the Recovery and Resilience Facility, will ensure a sustainable, inclusive and fair recovery. Regulation (EU) 2021/241 of the European Parliament and of the Council (4), which established the Recovery and Resilience Facility, entered into force on 19 February 2021. The Recovery and Resilience Facility will provide financial support for the implementation of reforms and investment, entailing a fiscal impulse financed by the Union. It will contribute to the economic recovery and to the implementation of sustainable and growth-enhancing reforms and investment, in particular to promote the green and digital transitions, and will strengthen the resilience and potential growth of the Member States’ economies. It will also help public finances to return to more favourable positions in the near term and will contribute to strengthening sustainable public finances and to growth and job creation in the medium and long term.

                  (4)

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

                  (5)

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

                  (6)

                  On 5 May 2021, Bulgaria submitted its 2021 Convergence Programme, beyond the deadline established in Article 8 of Regulation (EC) No 1466/97.

                  (7)

                  In 2020, based on data validated by Eurostat, Bulgaria’s general government deficit was 3,4 % of gross domestic product (GDP), while general government debt increased to 25 % of GDP. The annual change in the primary budget balance amounted to -5,5 % of GDP, including discretionary budgetary measures of 3,2 % of GDP in support of the economy and the operation of automatic stabilisers.

                  (8)

                  On 2 June 2021, the Commission issued a report under Article 126(3) of the Treaty. That report discusses the budgetary situation of Bulgaria, as its general government deficit in 2020 exceeded the 3 %-of-GDP Treaty reference value. The report concluded that the deficit criterion was fulfilled.

                  (9)

                  The macroeconomic scenario underpinning the budgetary projections is cautious in 2021 and 2022, since it does not take into account funding under the Recovery and Resilience Facility. Consequently, the presented baseline is not directly comparable with the Commission’s 2021 spring forecast. Moreover, the Commission’s 2021 spring forecast expects a stronger growth rate in exports, based on more favourable assumptions for foreign demand.

                  (10)

                  In its 2021 Convergence Programme, the government plans an increase in the general government deficit from 3,4 % of GDP in 2020 to 5,6 % of GDP in 2021, while the debt ratio is planned to increase to 27,4 % of GDP in 2021. According to the 2021 Convergence Programme, the change in the primary budget balance in 2021 compared with the pre-crisis level (2019) is set to amount to -7,8 % of GDP. The drivers of the projected increases in the nominal and primary general government deficit and consequently debt are not explained in detail in the 2021 Convergence Programme and occur despite the expiration of some of the discretionary budgetary measures. These projections are above the Commission’s 2021 spring forecast. According to the Commission’s 2021 spring forecast, the deficit is expected to decrease to 3,2 % of GDP in 2021 and the debt ratio is expected to decrease to 24,5 % of GDP in 2021. The main source of difference is the projection of other revenue, which according to the 2021 Convergence Programme is expected to decrease by 2,5 percentage points of GDP in 2021, well below historical levels. The drivers of this reduction are not explained in the 2021 Convergence Programme.

                  (11)

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

                  (12)

                  The 2021 Convergence Programme assumes investment and reforms financed by grants under the Recovery and Resilience Facility amounting to 0,02 % of GDP in 2020, 0,3 % in 2021, 0,8 % in 2022, 1,4 % in 2023, 1,7 % in 2024, 2,6 % in 2025 and 1,8 % in 2026. The Commission’s 2021 spring forecast includes these grants in its budgetary projections.

                  (13)

                  The established indicators of fiscal adjustment set out in Regulation (EC) No 1466/97 need to be considered in the context of the current circumstances. First, there is significant uncertainty surrounding output gap estimates. Second, there is a need for fiscal policy to stand ready to rapidly adapt to the evolution of the COVID-19 pandemic, shifting from emergency relief to more targeted measures once health risks diminish. Third, the current context is characterised by a significant policy response to support economic activity. In the presence of sizeable transfers from the Union budget (such as those from the Recovery and Resilience Facility), the established indicators do not capture the full impulse provided to the economy by fiscal policies. Against this background, the structural balance does not appear adequate in the current circumstances. The expenditure benchmark also needs to be adapted (5) and complemented with additional information in order to fully gauge the fiscal policy orientation.

                  (14)

                  As in the approach pursued in the assessment of the 2021 draft budgetary plans, temporary emergency measures have been excluded from the expenditure aggregate. These crisis-related temporary emergency measures support health systems and compensate workers and firms for the losses in income due to lockdowns and supply chain disruptions; their reversal by the public authorities is contingent on the return of the public health and economic situation to normality. To assess the overall fiscal stance at the current juncture, the sizeable transfers from the Union budget (such as those from the Recovery and Resilience Facility) should be included in the relevant expenditure aggregate. The overall fiscal stance is therefore measured by the change in primary expenditure (net of discretionary revenue measures and excluding crisis-related temporary emergency measures), including expenditure financed by grants under the Recovery and Resilience Facility and other Union funds. Going beyond the overall fiscal stance, the analysis also aims to assess whether national fiscal policy is prudent and its composition is conducive to a sustainable recovery consistent with the green and digital transitions. For that reason, particular attention is paid to the evolution of nationally financed primary current expenditure and investment.

                  (15)

                  In its 2021 Convergence Programme, Bulgaria’s general government deficit is planned to decrease to 2,7 % of GDP in 2022, mainly due to the discontinuation of the temporary support measures adopted in 2020 and 2021. The general government debt ratio is planned to increase to 28,6 % of GDP in 2022. These projections are above the Commission’s 2021 spring forecast. Based on the Commission’s 2021 spring forecast, and on the basis of the specific methodology that reflects the above-mentioned challenges, the overall fiscal stance — including the impact on aggregate demand in 2022 from investment financed by both the national and Union budgets, in particular the Recovery and Resilience Facility — is estimated at -1,4 % of GDP (6). The positive contribution of expenditure financed by Recovery and Resilience Facility grants and other Union funds is projected to increase by 0,8 percentage point of GDP. Nationally financed investment is projected to provide a contractionary contribution of 0,4 percentage point of GDP. (7) Nationally financed primary current expenditure (net of discretionary revenue measures) is projected to provide an expansionary contribution of 1 percentage point of GDP.

                  (16)

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

                  (17)

                  According to the 2021 Convergence Programme’s medium-term budgetary plans, the general government deficit is planned to increase to 3,1 % of GDP in 2023. No information on 2024 is provided in the 2021 Convergence Programme. Based on the 2021 Convergence Programme, the overall fiscal stance — including the impact on aggregate demand from investment financed by both the national and Union budgets, in particular the Recovery and Resilience Facility — is estimated at -0,6 % of GDP in 2023. The positive contribution of expenditure financed by Recovery and Resilience Facility grants and other Union funds is projected to increase by 0,6 percentage point of GDP in 2023. Nationally financed investment is projected to provide an expansionary contribution of 0,4 percentage point of GDP in 2023. (8) Nationally financed primary current expenditure (net of discretionary revenue measures) is projected to provide a contractionary contribution of 0,4 percentage point of GDP. The current estimate of the 10-year average nominal potential growth is 5 %. (9) However, this estimate does not include the impact of the reforms that are part of the recovery and resilience plan and could therefore boost Bulgaria’s potential growth.

                  (18)

                  The general government debt ratio is planned to increase to 29,3 % of GDP in 2023. There is no information on 2024 in the 2021 Convergence Programme. Bulgaria is considered to face low fiscal sustainability risks over the medium term, as per the latest debt sustainability analysis.

                  (19)

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

                  (20)

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

            HEREBY RECOMMENDS BULGARIA TO:

         1.

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

         2.

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

         3.

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

         Done at Luxembourg, 18 June 2021.

               For the Council

               The President

            J. LEÃO

         (1)  OJ L 209, 2.8.1997, p. 1.

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

         (3)  Council Recommendation of 20 July 2020 on the 2020 National Reform Programme of Bulgaria and delivering a Council opinion on the 2020 Convergence Programme of Bulgaria (OJ C 282, 26.8.2020, p. 8).

         (4)  Regulation (EU) 2021/241 of the European Parliament and of the Council of 12 February 2021 establishing the Recovery and Resilience Facility (OJ L 57, 18.2.2021, p. 17).

         (5)  In particular, the four-year smoothing of investment used in the expenditure benchmark does not allow for a proper assessment of the fiscal support for the recovery provided by nationally financed investments.

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

         (7)  Other nationally financed capital expenditure is projected to provide a contractionary contribution of 0,1 percentage point of GDP.

         (8)  Other nationally financed capital expenditure is projected to provide an expansionary contribution of 0,1 percentage point of GDP.

         (9)  Estimated by the Commission in accordance with the commonly agreed methodology.


title: Council Recommendation of 18 June 2021 delivering a Council opinion on the 2021 Convergence Programme of Czechia

text:
               29.7.2021

               EN

               Official Journal of the European Union

               C 304/10

      COUNCIL RECOMMENDATION
      of 18 June 2021
      delivering a Council opinion on the 2021 Convergence Programme of Czechia
      (2021/C 304/03)
      THE COUNCIL OF THE EUROPEAN UNION,
      Having regard to the Treaty on the Functioning of the European Union,
      Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies (1), and in particular Article 9(2) thereof,
      Having regard to the recommendation of the European Commission,
      Having regard to the resolutions of the European Parliament,
      After consulting the Economic and Financial Committee,
      Whereas:

                  (1)

                  On 20 March 2020, the Commission adopted a communication on the activation of the general escape clause of the Stability and Growth Pact. The general escape clause, as set out in Articles 5(1), 6(3), 9(1) and 10(3) of Regulation (EC) No 1466/97 and Articles 3(5) and 5(2) of Council Regulation (EC) No 1467/97 (2), facilitates the coordination of budgetary policies in times of severe economic downturn. In that communication, the Commission set out its view that, given the expected severe economic downturn resulting from the COVID-19 pandemic, the conditions for activating the general escape clause were met. On 23 March 2020, the ministers of finance of the Member States agreed with the assessment of the Commission. The general escape clause has granted Member States budgetary flexibility to deal with the COVID-19 crisis. It has facilitated the coordination of budgetary policies in times of severe economic downturn. Its activation allows for a temporary departure from the adjustment path towards the medium-term budgetary objective of each Member State, provided that this does not endanger fiscal sustainability in the medium term. On 17 September 2020, in its communication on the 2021 Annual Sustainable Growth Strategy, the Commission announced that the general escape clause would remain active in 2021.

                  (2)

                  On 20 July 2020, the Council adopted a Recommendation (3) (‘the Council Recommendation of 20 July 2020’). It recommended Czechia to take all necessary measures, in line with the general escape clause, to effectively address the COVID-19 pandemic, sustain the economy and support the ensuing recovery. It also recommended Czechia to pursue, when economic conditions allow, fiscal policies aimed at achieving prudent medium-term fiscal positions and ensuring debt sustainability, while enhancing investment.

                  (3)

                  Next Generation EU, including the Recovery and Resilience Facility, will ensure a sustainable, inclusive and fair recovery. Regulation (EU) 2021/241 of the European Parliament and of the Council (4), which established the Recovery and Resilience Facility, entered into force on 19 February 2021. The Recovery and Resilience Facility will provide financial support for the implementation of reforms and investment, entailing a fiscal impulse financed by the Union. It will contribute to the economic recovery and to the implementation of sustainable and growth-enhancing reforms and investment, in particular to promote the green and digital transitions, and will strengthen the resilience and potential growth of Member States’ economies. It will also help public finances to return to more favourable positions in the near term and will contribute to strengthening sustainable public finances and to growth and job creation in the medium and long term.

                  (4)

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

                  (5)

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

                  (6)

                  On 30 April 2021, Czechia submitted its 2021 Convergence Programme, in line with Article 8 of Regulation (EC) No 1466/97.

                  (7)

                  In 2020, based on data validated by Eurostat, Czechia’s general government deficit was 6,2 % of gross domestic product (GDP), while general government debt increased to 38,1 % of GDP. The annual change in the primary budget balance amounted to -6,4 % of GDP, including discretionary budgetary measures of 4,6 % in support of the economy and the operation of automatic stabilisers. Czechia also provided liquidity support to companies and households (such as guarantees and tax deferrals, which do not have a direct and immediate budgetary impact), estimated at 6,2 % of GDP; the actual take-up of the public guarantees in 2020 is estimated by the Commission to be roughly equivalent to 1½ % of GDP.

                  (8)

                  On 2 June 2021, the Commission issued a report under Article 126(3) of the Treaty. That report discusses the budgetary situation of Czechia, as its general government deficit in 2020 exceeded the 3 %-of-GDP Treaty reference value. The report concluded that the deficit criterion was not fulfilled.

                  (9)

                  The macroeconomic scenario underpinning the budgetary projections is realistic in 2021 and cautious in 2022. The Commission’s projection is slightly more optimistic in terms of real GDP growth for 2021 (3,4 % compared to 3,1 % in the 2021 Convergence Programme) and it is even more optimistic for 2022 (4,4 % compared to 3,7 % in the 2021 Convergence Programme), as the Commission expects higher private consumption growth in 2021 and higher gross fixed capital formation in 2022.

                  (10)

                  In its 2021 Convergence Programme, the government plans an increase in the general government deficit from 6,2 % of GDP in 2020 to 8,8 % of GDP in 2021, while the debt ratio is planned to increase to 44,8 % of GDP in 2021. According to the 2021 Convergence Programme, the change in the primary budget balance in 2021 compared with the pre-crisis level (2019) is set to amount to -9,0 % of GDP, reflecting the discretionary budgetary measures of 6,5 % of GDP in support of the economy and the operation of automatic stabilisers. These projections are in line with the Commission’s 2021 spring forecast.

                  (11)

                  In response to the COVID-19 pandemic and related economic downturn, Czechia has adopted budgetary measures to strengthen the capacity of its health system, contain the COVID-19 pandemic and provide relief to those individuals and sectors that have been particularly affected. This forceful policy response has cushioned the contraction in GDP, which, in turn, has curtailed the increase in government deficit and public debt. Fiscal measures should maximise support to the recovery without pre-empting future fiscal trajectories. Therefore, measures should avoid creating a permanent burden on public finances. When Member States introduce permanent measures, they should properly fund them to ensure budgetary neutrality in the medium term. The measures taken by Czechia in 2020 and 2021 have been in line with the Council Recommendation of 20 July 2020. Some of the discretionary measures adopted by the government over the period 2020 and 2021 do not appear to be temporary or matched by offsetting measures. Beyond the horizon of the Commission’s 2021 spring forecast, in 2023, the cumulative remaining impact of those non-temporary measures is preliminarily estimated at around 2 % of GDP, mainly consisting of reductions in the revenues from personal income tax with an impact of 1,9 % of GDP.

                  (12)

                  The 2021 Convergence Programme assumes investment and reforms financed by grants under the Recovery and Resilience Facility amounting to 0,3 % of GDP in 2021, 0,7 % of GDP in 2022 and 0,7 % of GDP in 2023. The Commission’s 2021 spring forecast includes these grants in its budgetary projections.

                  (13)

                  The established indicators of fiscal adjustment set out in Regulation (EC) No 1466/97 need to be considered in the context of the current circumstances. First, there is significant uncertainty surrounding output gap estimates. Second, there is a need for fiscal policy to stand ready to rapidly adapt to the evolution of the COVID-19 pandemic, shifting from emergency relief to more targeted measures once health risks diminish. Third, the current context is characterised by a significant policy response to support economic activity. In the presence of sizeable transfers from the Union budget (such as those from the Recovery and Resilience Facility), the established indicators do not capture the full impulse provided to the economy by fiscal policies. Against this background, the structural balance does not appear adequate in the current circumstances. The expenditure benchmark also needs to be adapted (5) and complemented with additional information in order to fully gauge the fiscal policy orientation.

                  (14)

                  As in the approach pursued in the assessment of the 2021 draft budgetary plans, temporary emergency measures have been excluded from the expenditure aggregate. These crisis-related temporary emergency measures support health systems and compensate workers and firms for the losses in income due to lockdowns and supply chain disruptions; their reversal by the public authorities is contingent on the return of the public health and economic situation to normality. To assess the overall fiscal stance at the current juncture, the sizeable transfers from the Union budget (such as those from the Recovery and Resilience Facility) should be included in the relevant expenditure aggregate. The overall fiscal stance is therefore measured by the change in primary expenditure (net of discretionary revenue measures and excluding crisis-related temporary emergency measures), including expenditure financed by grants under the Recovery and Resilience Facility and other Union funds. Going beyond the overall fiscal stance, the analysis also aims to assess whether national fiscal policy is prudent and its composition is conducive to a sustainable recovery consistent with the green and digital transitions. For that reason, particular attention is paid to the evolution of nationally financed primary current expenditure and investment.

                  (15)

                  In its 2021 Convergence Programme, Czechia’s general government deficit is planned to decrease to 5,9 % of GDP in 2022, mainly due to a discontinuation of the temporary support measures adopted in 2020 and 2021 and due to the economic recovery. The general government debt ratio is planned to increase to 48,2 % of GDP in 2022. These projections are in line with the Commission’s 2021 spring forecast. Based on the Commission’s 2021 spring forecast, and on the basis of the specific methodology that reflects the above mentioned challenges, the overall fiscal stance –including the impact on aggregate demand in 2022 from investment financed by both the national and Union budgets, in particular the Recovery and Resilience Facility — is estimated at - 0,2 % of GDP (6). The positive contribution of expenditure financed by Recovery and Resilience Facility grants and other Union funds is projected to increase by 0,5 percentage point of GDP. Nationally financed investment is projected to provide a contractionary contribution of 0,3 percentage point of GDP. (7) Nationally financed primary current expenditure (net of discretionary revenue measures) is projected to provide a neutral contribution.

                  (16)

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

                  (17)

                  According to the 2021 Convergence Programme’s medium-term budgetary plans, the general government deficit is planned to decrease from 5,4 % in 2023, to 5,2 % of GDP in 2024. The general government deficit is not planned to return below the 3 %-of-GDP Treaty reference value over the programme’s horizon. Based on the 2021 Convergence Programme, the overall fiscal stance –including the impact on aggregate demand from investment financed by both the national and Union budgets, in particular the Recovery and Resilience Facility — is estimated at +1,2 % of GDP in 2023 and 2024 on average. The positive contribution of expenditure financed by Recovery and Resilience Facility grants and other Union funds is projected to decrease by 0,3 percentage point of GDP. Nationally financed investment is projected to provide a contractionary contribution of 0,1 percentage point of GDP. (8) Nationally financed primary current expenditure (net of discretionary revenue measures) is projected to provide a contractionary contribution of 0,8 percentage point of GDP. The current estimate of the 10-year average nominal potential growth is 4¼ % (9). However, this estimate does not include the impact of the reforms that are part of the recovery and resilience plan and could therefore boost Czechia’s potential growth.

                  (18)

                  According to the 2021 Convergence Programme, the general government debt ratio is planned to increase from 51,5 % of GDP in 2023 to 54,6 % of GDP in 2024. Czechia is considered to face medium fiscal sustainability risks over the medium term, as per the latest debt sustainability analysis.

                  (19)

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

                  (20)

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

            HEREBY RECOMMENDS CZECHIA TO:

         1.

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

         2.

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

         3.

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

         Done at Luxembourg, 18 June 2021.

               For the Council

               The President

            J. LEÃO

         (1)  OJ L 209, 2.8.1997, p. 1.

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

         (3)  Council Recommendation of 20 July 2020 on the 2020 National Reform Programme of Czechia and delivering a Council opinion on the 2020 Convergence Programme of Czechia (OJ C 282, 26.8.2020, p. 15).

         (4)  Regulation (EU) 2021/241 of the European Parliament and of the Council of 12 February 2021 establishing the Recovery and Resilience Facility (OJ L 57, 18.2.2021, p. 17).

         (5)  In particular, the four-year smoothing of investment used in the expenditure benchmark does not allow for a proper assessment of the fiscal support for the recovery provided by nationally financed investments.

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

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

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

         (9)  Estimated by the Commission in accordance with the commonly agreed methodology.


title: Council Recommendation of 18 June 2021 delivering a Council opinion on the 2021 Convergence Programme of Denmark

text:
               29.7.2021

               EN

               Official Journal of the European Union

               C 304/14

      COUNCIL RECOMMENDATION
      of 18 June 2021
      delivering a Council opinion on the 2021 Convergence Programme of Denmark
      (2021/C 304/04)
      THE COUNCIL OF THE EUROPEAN UNION,
      Having regard to the Treaty on the Functioning of the European Union,
      Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies (1), and in particular Article 9(2) thereof,
      Having regard to the recommendation of the European Commission,
      Having regard to the resolutions of the European Parliament,
      After consulting the Economic and Financial Committee,
      Whereas:

                  (1)

                  On 20 March 2020, the Commission adopted a communication on the activation of the general escape clause of the Stability and Growth Pact. The general escape clause, as set out in Articles 5(1), 6(3), 9(1) and 10(3) of Regulation (EC) No 1466/97 and Articles 3(5) and 5(2) of Council Regulation (EC) No 1467/97 (2), facilitates the coordination of budgetary policies in times of severe economic downturn. In that communication, the Commission set out its view that, given the expected severe economic downturn resulting from the COVID-19 pandemic, the conditions for activating the general escape clause were met. On 23 March 2020, the ministers of finance of the Member States agreed with the assessment of the Commission. The general escape clause has granted Member States budgetary flexibility to deal with the COVID-19 crisis. It has facilitated the coordination of budgetary policies in times of severe economic downturn. Its activation allows for a temporary departure from the adjustment path towards the medium-term budgetary objective of each Member State, provided that this does not endanger fiscal sustainability in the medium term. On 17 September 2020, in its communication on the 2021 Annual Sustainable Growth Strategy, the Commission announced that the general escape clause would remain active in 2021.

                  (2)

                  On 20 July 2020, the Council adopted a Recommendation (3) (‘the Council Recommendation of 20 July 2020’). It recommended Denmark to take all necessary measures, in line with the general escape clause, to effectively address the COVID-19 pandemic, sustain the economy and support the ensuing recovery. It also recommended Denmark to pursue, when economic conditions allow, fiscal policies aimed at achieving prudent medium-term fiscal positions and ensuring debt sustainability, while enhancing investment.

                  (3)

                  Next Generation EU, including the Recovery and Resilience Facility, will ensure a sustainable, inclusive and fair recovery. Regulation (EU) 2021/241 of the European Parliament and of the Council (4), which established the Recovery and Resilience Facility, entered into force on 19 February 2021. The Recovery and Resilience Facility will provide financial support for the implementation of reforms and investment, entailing a fiscal impulse financed by the Union. It will contribute to the economic recovery and to the implementation of sustainable and growth-enhancing reforms and investment, in particular to promote the green and digital transitions, and will strengthen the resilience and potential growth of the Member States’ economies. It will also help public finances to return to more favourable positions in the near term and will contribute to strengthening sustainable public finances and to growth and job creation in the medium and long term.

                  (4)

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

                  (5)

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

                  (6)

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

                  (7)

                  In 2020, based on data validated by Eurostat, Denmark’s general government deficit was 1,1 % of gross domestic product (GDP), while general government debt increased to 42,2 % of GDP. The annual change in the primary budget balance amounted to 5,1 % of GDP, including discretionary budgetary measures of 2,8 % of GDP in support of the economy and the operation of automatic stabilisers. Denmark also provided liquidity support to companies and households (such as guarantees and tax deferrals, which do not have a direct and immediate budgetary impact), estimated at 28,4 % of GDP; the actual take-up of the public guarantees in 2020 is estimated by the Commission at below ½ % of GDP.

                  (8)

                  On 2 June 2021, the Commission issued a report under Article 126(3) of the Treaty. That report discusses the budgetary situation of Denmark, as its general government deficit is planned to exceed the 3 %-of-GDP Treaty reference value in 2021. The report concluded that the deficit criterion was fulfilled.

                  (9)

                  The macroeconomic scenario underpinning the budgetary projections is cautious in 2021 and realistic in 2022. The 2021 Convergence Programme projects real GDP to grow by 2,1 % in 2021 and 3,8 % in 2022. By comparison, the Commission’s 2021 spring forecast projects real GDP growth of 2,9 % in 2021 and 3, 5 % in 2022. The main differences are linked to assumptions about the development of the COVID-19 pandemic and related restrictions in 2021.

                  (10)

                  In its 2021 Convergence Programme, the government plans an increase of the general government deficit from -1,1 % of GDP in 2020 to -3,3 % of GDP in 2021, while the debt ratio is planned to decrease to 40,7 % of GDP in 2021. According to the 2021 Convergence Programme, the change in the primary budget balance in 2021 compared with the pre-crisis level (2019) is set to amount to — 7 % of GDP, reflecting the discretionary budgetary measures of 1,2 % of GDP in support of the economy and the operation of automatic stabilisers. The Commission’s 2021 spring forecast projects a lower deficit in 2021 reflecting a stronger macroeconomic scenario and a more optimistic revenue forecast from pension yield tax.

                  (11)

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

                  (12)

                  The 2021 Convergence Programme assumes investment and reforms financed by grants under the Recovery and Resilience Facility amounting to 0,2 % of GDP in 2021, 0,2 % in 2022, 0,1 % in 2023, 0,1 % in 2024 and 0,03 % in 2025. The Commission’s 2021 spring forecast includes these grants in its budgetary projections.

                  (13)

                  The established indicators of fiscal adjustment set out in Regulation (EC) No 1466/97 need to be considered in the context of the current circumstances. First, there is significant uncertainty surrounding output gap estimates. Second, there is a need for fiscal policy to stand ready to rapidly adapt to the evolution of the COVID-19 pandemic shifting from emergency relief to more targeted measures once health risks diminish. Third, the current context is characterised by a significant policy response to support economic activity. In the presence of sizeable transfers from the Union budget (such as those from the Recovery and Resilience Facility), the established indicators do not capture the full impulse provided to the economy by fiscal policies. Against this background, the structural balance does not appear adequate in the current circumstances. The expenditure benchmark also needs to be adapted (5) and complemented with additional information in order to fully gauge the fiscal policy orientation.

                  (14)

                  As in the approach pursued in the assessment of the 2021 draft budgetary plans, temporary emergency measures have been excluded from the expenditure aggregate. These crisis-related temporary emergency measures support health systems and compensate workers and firms for the losses in income due to lockdowns and supply chain disruptions; their reversal by the public authorities is contingent on the return of the public health and economic situation to normality. To assess the overall fiscal stance at the current juncture, the sizeable transfers from the Union budget (such as those from the Recovery and Resilience Facility) should be included in the relevant expenditure aggregate. The overall fiscal stance is therefore measured by the change in primary expenditure (net of discretionary revenue measures and excluding crisis-related temporary emergency measures), including expenditure financed by grants under the Recovery and Resilience Facility and other Union funds.
                  Going beyond the overall fiscal stance, the analysis also aims to assess whether national fiscal policy is prudent and its composition is conducive to a sustainable recovery consistent with the green and digital transitions. For that reason, particular attention is paid to the evolution of nationally financed primary current expenditure and investment.

                  (15)

                  In its 2021 Convergence Programme, Denmark’s general government deficit is planned to decrease to 0,9 % of GDP in 2022, mainly due to a discontinuation of the temporary support measures adopted in 2020 and 2021. The general government debt ratio is planned to increase to 41,3 % of GDP in 2022. These projections are in line with the Commission’s 2021 spring forecast. Based on the Commission’s 2021 spring forecast, and on the basis of the specific methodology that reflects the above-mentioned challenges, the overall fiscal stance — including the impact on aggregate demand in 2022 from investment financed by both the national and Union budgets, in particular the Recovery and Resilience Facility — is estimated at +1,6 % of GDP (6). The positive contribution of expenditure financed by Recovery and Resilience Facility grants and other Union funds is projected to remain unchanged. Nationally financed investment is projected to provide a neutral contribution (7). Nationally financed primary current expenditure (net of discretionary revenue measures) is projected to provide a contractionary contribution of 1,0 percentage point of GDP.

                  (16)

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

                  (17)

                  According to the 2021 Convergence Programme’s medium-term budgetary plans, the general government deficit is planned to decrease from 0,7 % of GDP in 2023 to 0,6 % of GDP in 2024 and to reach a balance in 2025. Based on the 2021 Convergence Programme, the overall fiscal stance — including the impact on aggregate demand from investment financed by both the national and Union budgets, in particular the Recovery and Resilience Facility — is estimated at 0,2 % of GDP in 2023 and 2024 on average. The positive contribution of expenditure financed by Recovery and Resilience Facility grants and other Union funds is projected to decrease by 0,1 percentage point of GDP. Nationally financed investment is projected to provide a contractionary contribution of 0,1 percentage point of GDP (8). Nationally financed primary current expenditure (net of discretionary revenue measures) is projected to provide a neutral contribution. The current estimate of the 10-year average nominal potential growth is 3 ½ % (9). However, this estimate does not include the impact of the reforms that are part of the recovery and resilience plan and could therefore boost Denmark’s potential growth.

                  (18)

                  The general government debt ratio is planned in the 2021 Convergence programme to decrease from 41,6 % of GDP in 2023 to 41,3 % of GDP in 2024. Denmark is considered to face low fiscal sustainability risks over the medium term, as per the latest debt sustainability analysis.

                  (19)

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

                  (20)

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

            HEREBY RECOMMENDS DENMARK TO:

         1.

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

         2.

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

         3.

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

         Done at Luxembourg, 18 June 2021.

               For the Council

               The President

            J. LEÃO

         (1)  OJ L 209, 2.8.1997, p. 1.

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

         (3)  Council Recommendation of 20 July 2020 on the 2020 National Reform Programme of Denmark and delivering a Council opinion on the 2020 Convergence Programme of Denmark (OJ C 282, 26.8.2020, p. 22).

         (4)  Regulation (EU) 2021/241 of the European Parliament and of the Council of 12 February 2021 establishing the Recovery and Resilience Facility (OJ L 57, 18.2.2021, p. 17).

         (5)  In particular, the four-year smoothing of investment used in the expenditure benchmark does not allow for a proper assessment of the fiscal support for the recovery provided by nationally financed investments.

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

         (7)  Other nationally financed capital expenditure is projected to provide a contractionary contribution of 0,6 percentage point of GDP.

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

         (9)  Estimated by the Commission, in accordance with the commonly agreed methodology.


title: Council Recommendation of 18 June 2021 delivering a Council opinion on the 2021 Stability Programme of Germany

text:
               29.7.2021

               EN

               Official Journal of the European Union

               C 304/18

      COUNCIL RECOMMENDATION
      of 18 June 2021
      delivering a Council opinion on the 2021 Stability Programme of Germany
      (2021/C 304/05)
      THE COUNCIL OF THE EUROPEAN UNION,
      Having regard to the Treaty on the Functioning of the European Union,
      Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies (1), and in particular Article 5(2) thereof,
      Having regard to the recommendation of the European Commission,
      Having regard to the resolutions of the European Parliament,
      After consulting the Economic and Financial Committee,
      Whereas:

                  (1)

                  On 20 March 2020, the Commission adopted a communication on the activation of the general escape clause of the Stability and Growth Pact. The general escape clause, as set out in Articles 5(1), 6(3), 9(1) and 10(3) of Regulation (EC) No 1466/97 and Articles 3(5) and 5(2) of Council Regulation (EC) No 1467/97 (2), facilitates the coordination of budgetary policies in times of severe economic downturn. In that communication, the Commission set out its view that, given the expected severe economic downturn resulting from the COVID-19 pandemic, the conditions for activating the general escape clause were met. On 23 March 2020, the ministers of finance of the Member States agreed with the assessment of the Commission. The general escape clause has granted Member States budgetary flexibility to deal with the COVID-19 crisis. It has facilitated the coordination of budgetary policies in times of severe economic downturn. Its activation allows for a temporary departure from the adjustment path towards the medium-term budgetary objective of each Member State, provided that this does not endanger fiscal sustainability in the medium term. On 17 September 2020, in its communication on the 2021 Annual Sustainable Growth Strategy, the Commission announced that the general escape clause would remain active in 2021.

                  (2)

                  On 20 July 2020, the Council adopted a Recommendation (3) (‘the Council Recommendation of 20 July 2020’). It recommended Germany to take all necessary measures, in line with the general escape clause, to effectively address the COVID-19 pandemic, sustain the economy and support the ensuing recovery. It also recommended Germany to pursue, when economic conditions allow, fiscal policies aimed at achieving prudent medium-term fiscal positions and ensuring debt sustainability, while enhancing investment.

                  (3)

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

                  (4)

                  On 18 November 2020, the Commission adopted its opinions on the 2021 draft budgetary plans of the euro-area Member States, which were based on a qualitative assessment of the fiscal measures. The Commission was of the opinion that the draft budgetary plan of Germany was overall in line with the fiscal policy recommendations set out in the Council Recommendation of 20 July 2020, and that most of the measures included in the draft budgetary plan supported economic activity against the background of considerable uncertainty.

                  (5)

                  Next Generation EU, including the Recovery and Resilience Facility, will ensure a sustainable, inclusive and fair recovery. Regulation (EU) 2021/241 of the European Parliament and of the Council (4), which established the Recovery and Resilience Facility, entered into force on 19 February 2021. The Recovery and Resilience Facility will provide financial support for the implementation of reforms and investment, entailing a fiscal impulse financed by the Union. It will contribute to the economic recovery and to the implementation of sustainable and growth-enhancing reforms and investment, in particular to promote the green and digital transitions, and will strengthen the resilience and potential growth of the Member States’ economies. It will also help public finances to return to more favourable positions in the near term and will contribute to strengthening sustainable public finances and to growth and job creation in the medium and long term.

                  (6)

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

                  (7)

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

                  (8)

                  On 27 April 2021, Germany submitted its 2021 Stability Programme, in line with Article 4 of Regulation (EC) No 1466/97.

                  (9)

                  In 2020, based on data validated by Eurostat, Germany’s general government deficit was 4,2 % of gross domestic product (GDP), while general government debt increased to 69,8 % of GDP. The annual change in the primary budget balance amounted to -5,9 % of GDP, including discretionary budgetary measures of - 3½ % of GDP in support of the economy and the operation of automatic stabilisers. Germany also provided liquidity support to companies and households (such as guarantees and tax deferrals, which do not have a direct and immediate budgetary impact) estimated at 25 % of GDP; the actual take-up of the public guarantees in 2020 is estimated by the Commission to be roughly equivalent to 1½ % of GDP.

                  (10)

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

                  (11)

                  The macroeconomic scenario underpinning the budgetary projections is realistic in 2021 and cautious in 2022. The 2021 Stability Programme projects real GDP growth of 3,0 % in 2021 and 2,6 % in 2022, compared to the Commission's 2021 spring forecast projections of 3,4 % and 4,1 % respectively. The difference stems from the expectation by the authorities of a faster-than-anticipated recovery in private consumption, but less vigorous export growth in 2021. For 2022, the Commission's 2021 spring forecast is driven by a delayed but strong rebound in consumption. Projections in the 2021 Stability Programme assume a return to the pre-crisis level of output in the course of 2022, while employment and private consumption are expected to take somewhat longer to recover.

                  (12)

                  In its 2021 Stability Programme, the government plans an increase in the general government deficit from 4,2 % of GDP in 2020 to 9 % of GDP in 2021, while the debt ratio is planned to further increase to 74½ % of GDP in 2021. According to the 2021 Stability Programme, the change in the primary budget balance in 2021 compared with the pre-crisis level (2019) is set to amount to -10,6 % of GDP, reflecting the discretionary budgetary measures of 6¼ % of GDP in support of the economy and the operation of automatic stabilisers. In its 2021 spring forecast, the Commission expects a lower budgetary impact of the measures to fight the COVID-19 pandemic and support the economy, projecting a lower deficit than in the 2021 Stability Programme, at 7,5 % of GDP in 2021, with a debt ratio of 73,1 % of GDP.

                  (13)

                  In response to the COVID-19 pandemic and related economic downturn, Germany has adopted budgetary measures to strengthen the capacity of its health system, contain the COVID-19 pandemic and provide relief to those individuals and sectors that have been particularly affected. This forceful policy response has cushioned the contraction in GDP, which, in turn, has curtailed the increase in government deficit and public debt. Fiscal measures should maximise support to the recovery without pre-empting future fiscal trajectories. Therefore, measures should avoid creating a permanent burden on public finances. When Member States introduce permanent measures, they should properly fund them to ensure budgetary neutrality in the medium term. The measures taken by Germany in 2020 and 2021 have been in line with the Council Recommendation of 20 July 2020. Some of the discretionary measures adopted by the government over the period 2020 to 2021 do not appear to be temporary or matched by offsetting measures. Beyond the horizon of the Commission’s 2021 spring forecast, in 2023, the cumulative remaining impact of those non-temporary measures is preliminarily estimated at around 1 % of GDP. Those non-temporary measures also include investment of approximately 1/10 % of GDP, which is expected to support medium-term potential growth and thus sustainability.

                  (14)

                  The 2021 Stability Programme assumes investment and reforms financed by grants under the Recovery and Resilience Facility amounting to 0,03 % of GDP in 2020, 0,3 % in 2021, 0,1 % in 2022, 0,1 % in 2023, 0,1 % in 2024, 0,1 % in 2025 and 0,04 % in 2026. The Commission’s 2021 spring forecast includes these grants in its budgetary projections.

                  (15)

                  The established indicators of fiscal adjustment set out in Regulation (EC) No 1466/97 need to be considered in the context of the current circumstances. First, there is significant uncertainty surrounding output gap estimates. Second, there is a need for fiscal policy to stand ready to rapidly adapt to the evolution of the COVID-19 pandemic, shifting from emergency relief to more targeted measures once health risks diminish. Third, the current context is characterised by a significant policy response to support economic activity. In the presence of sizeable transfers from the Union budget (such as those from the Recovery and Resilience Facility), the established indicators do not capture the full impulse provided to the economy by fiscal policies. Against this background, the structural balance does not appear adequate in the current circumstances. The expenditure benchmark also needs to be adapted (5) and complemented with additional information in order to fully gauge the fiscal policy orientation.

                  (16)

                  As in the approach pursued in the assessment of the 2021 draft budgetary plans, temporary emergency measures have been excluded from the expenditure aggregate. These crisis-related temporary emergency measures support health systems and compensate workers and firms for the losses in income due to lockdowns and supply chain disruptions; their reversal by the public authorities is contingent on the return of the public health and economic situation to normality. To assess the overall fiscal stance at the current juncture, the sizeable transfers from the Union budget (such as those from the Recovery and Resilience Facility) should be included in the relevant expenditure aggregate. The overall fiscal stance is therefore measured by the change in primary expenditure (net of discretionary revenue measures and excluding crisis-related temporary emergency measures), including expenditure financed by grants under the Recovery and Resilience Facility and other Union funds. Going beyond the overall fiscal stance, the analysis also aims to assess whether national fiscal policy is prudent and its composition is conducive to a sustainable recovery consistent with the green and digital transitions. For that reason, particular attention is paid to the evolution of nationally financed primary current expenditure and investment.

                  (17)

                  In its 2021 Stability Programme, Germany’s general government deficit is planned to decrease to 3 % of GDP in 2022, mainly due to the discontinuation of the temporary support measures adopted in 2020 and 2021. The general government debt ratio is planned to decrease to 74 % of GDP in 2022. These projections are in line with the Commission’s 2021 spring forecast. Based on the Commission’s 2021 spring forecast, and on the basis of the specific methodology that reflects the above-mentioned challenges, the overall fiscal stance — including the impact on aggregate demand in 2022 from investment financed by both the national and Union budgets, in particular the Recovery and Resilience Facility — is estimated at +0,5 % of GDP (6). The positive contribution of expenditure financed by Recovery and Resilience Facility grants and other Union funds is projected to decrease by 0,1 percentage point of GDP. Nationally financed investment is projected to provide an expansionary contribution of 0,2 percentage point of GDP. (7) Nationally financed primary current expenditure (net of discretionary revenue measures) is projected to provide a contractionary contribution of 0,3 percentage point of GDP.

                  (18)

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

                  (19)

                  According to the 2021 Stability Programme’s medium-term budgetary plans, the general government deficit is planned to decrease from 1½ % in 2023 to ½ % of GDP in 2024, reaching a balanced budget of 0 % of GDP in 2025. Based on the 2021 Stability Programme, the overall fiscal stance — including the impact on aggregate demand from investment financed by both the national and Union budgets, in particular the Recovery and Resilience Facility — is estimated at +0,9 % of GDP in 2023 and 2024 on average. The positive contribution of expenditure financed by Recovery and Resilience Facility grants and other Union funds is projected to remain unchanged. Nationally financed investment is projected to provide a neutral contribution (8). Nationally financed primary current expenditure (net of discretionary revenue measures) is projected to provide a contractionary contribution of 0,7 percentage point of GDP. The current estimate of the 10-year average nominal potential growth is 2¾ % (9). However, this estimate does not include the impact of the reforms that are part of the recovery and resilience plan and could therefore boost Germany’s potential growth.

                  (20)

                  The general government debt ratio is planned to decrease from 73¼ % of GDP in 2023 to 72 % of GDP in 2024. Germany is considered to face low fiscal sustainability risks over the medium term, as per the latest debt sustainability analysis.

                  (21)

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

                  (22)

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

            HEREBY RECOMMENDS GERMANY TO:

         1.

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

         2.

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

         3.

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

         Done at Luxembourg, 18 June 2021.

               For the Council

               The President

            J. LEÃO

         (1)  OJ L 209, 2.8.1997, p. 1.

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

         (3)  Council Recommendation of 20 July 2020 on the 2020 National Reform Programme of Germany and delivering a Council opinion on the 2020 Stability Programme of Germany (OJ C 282, 26.8.2020, p. 27).

         (4)  Regulation (EU) 2021/241 of the European Parliament and of the Council of 12 February 2021 establishing the Recovery and Resilience Facility (OJ L 57, 18.2.2021, p. 17).

         (5)  In particular, the four-year smoothing of investment used in the expenditure benchmark does not allow for a proper assessment of the fiscal support for the recovery provided by nationally financed investments.

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

         (7)  Other nationally financed capital expenditure is projected to provide a contractionary contribution of 0,2 percentage point of GDP.

         (8)  Other nationally financed capital expenditure is projected to provide a contractionary contribution of 0,1 percentage point of GDP.

         (9)  Estimated by the Commission in accordance with the commonly agreed methodology.