               EUROPEAN COMMISSION
            Brussels, 22.5.2017
            COM(2017) 521 final
            Recommendation for a
            COUNCIL RECOMMENDATION
            on the 2017 National Reform Programme of Portugaland delivering a Council opinion on the 2017 Stability Programme of Portugal

               Recommendation for a

               COUNCIL RECOMMENDATION

               on the 2017 National Reform Programme of Portugal

                  and delivering a Council opinion on the 2017 Stability Programme of Portugal

               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,
                  3

               Having regard to the resolutions of the European Parliament,
                  4

               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 16 November 2016, the Commission adopted the Annual Growth Survey,
                  5
                marking the start of the 2017 European Semester of economic policy coordination. The priorities of the Annual Growth Survey were endorsed by the European Council on 9-10 March 2017. On 16 November 2016, on the basis of Regulation (EU) No 1176/2011, the Commission adopted the Alert Mechanism Report,
                  6
                in which it identified Portugal as one of the Member States for which an in-depth review would be carried out. On the same day, the Commission also adopted a recommendation for a Council Recommendation on the economic policy of the euro area. That Recommendation was endorsed by the European Council on 9-10 March 2017 and adopted by the Council on 21 March
                  7
               .

               (2)As a country whose currency is the euro and in view of the close interlinkages between the economies in the economic and monetary union, Portugal should ensure the full and timely implementation of the Recommendation for the euro area which is reflected in recommendations 1 to 4 below.

               (3)The 2017 country report for Portugal
                  8
                was published on 22 February 2017. It assessed Portugal’s progress in addressing the country-specific recommendations adopted by the Council on 12 July 2016, the follow-up given to the recommendations adopted in previous years and Portugal’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 22 February 2017.
                  9
                The Commission’s analysis leads it to conclude that Portugal is experiencing excessive macroeconomic imbalances. In particular, the large stocks of net external liabilities, private and public debt and a high share of non-performing loans constitute vulnerabilities in a context of high but decreasing unemployment and slow productivity growth. Potential growth lags behind its pre-crisis level, affected by persistent bottlenecks and rigidities in the product and labour markets, together with external imbalances. The current account balance shows some improvements, though additional effort is required for a more significant adjustment of net external liabilities. Following a significant adjustment in recent years, unit labour costs started increasing due to sluggish productivity growth and rising wages. Private debt is falling, and government debt has stabilised, in a context of remaining deleveraging needs. The stock of non-performing loans remains high and, together with low profitability and relatively thin capital buffers, they pose risks to banks’ balance sheets. Labour market conditions have improved but youth and long-term unemployment, as well as the share of temporary employees, are still high.

               (4)On 28 April 2017, Portugal submitted its 2017 National Reform Programme and its 2017 Stability Programme. To take account of their interlinkages, the two programmes have been assessed at the same time. Portugal’s National Reform Programme includes commitments both for the short and medium term. In particular, it includes measures to improve the management of public finances and the business environment and to tackle corporate debt. It commits with ambitious reforms to modernise the public administration, increase social protection, upgrade the skill level of the labour force and improve governance in State-owned enterprises. It also covers the challenges identified in the 2017 country report and the Recommendation for the Euro Area, including the need to re-launch investment and ensure the sustainability of public finances. If fully implemented within the indicated timelines, these measures would help address Portugal’s macroeconomic imbalances and country-specific recommendations. Based on the assessment of Portugal’s policy commitments, the Commission confirms its previous assessment that at this stage no further steps are warranted in the framework of the Macroeconomic Imbalances Procedure. The implementation of the policy reform agenda will be followed closely by means of specific monitoring.

               (5)The relevant country-specific recommendations have been taken into account in the Member States' programmes for the European Structural and Investment Funds (ESI Funds) covering the 2014-2020 period. As foreseen in the legislation governing the ESI Funds,
                  10
                where it is necessary to support the implementation of relevant country-specific recommendations, the Commission may request a Member State to review and amend its relevant ESI Funds programmes. The Commission has provided further guidelines on the application of those rules.
                  11

               (6)Following the abrogation of the excessive deficit procedure, Portugal is in the preventive arm of the Stability and Growth Pact and subject to the transitional debt rule. In its 2017 Stability Programme, Portugal plans to attain a headline deficit of 1.5% of GDP and 1.0% of GDP in 2017 and 2018, respectively, and a further improvement to a surplus of 0.4% of GDP in 2020. Those plans do not include the potential deficit-increasing impact of bank support measures.
                  12
                The medium-term budgetary objective – a structural surplus of 0.25 % of GDP – is planned to be achieved by 2021. The Stability Programme projects the government debt-to-GDP ratio to reach 127.9% in 2017 and 124.2% in 2018, which would then be at 117.6% in 2020. The macroeconomic scenario underpinning these budgetary projections is plausible for 2017 but favourable for the following years. At the same time, the measures needed to support the planned deficit targets from 2017 onwards have not been sufficiently specified.

               (7)On 12 July 2016, the Council recommended Portugal to achieve an annual fiscal adjustment of at least 0.6% of GDP towards the medium-term budgetary objective in 2017. Based on the Commission 2017 spring forecast, there is a risk of a significant deviation from that requirement in 2017.

               (8)In 2018, in light of its fiscal situation and notably of its debt level, Portugal is expected to further adjust towards its medium-term budgetary objective of a structural surplus of 0.25 % of GDP. According to the commonly agreed adjustment matrix under the Stability and Growth Pact, that adjustment translates into a requirement of a nominal growth rate of net primary government expenditure
                  13
                 which does not exceed 0.1%. It would correspond to a structural adjustment of at least 0.6% of GDP. Under unchanged policies, there is a risk of a significant deviation from that requirement in 2018. Portugal is prima facie not forecast to comply with the transitional debt rule in 2017 and 2018. Overall, the Council is of the opinion that further measures will be needed as of 2017 to comply with the provisions of the Stability and Growth Pact. However, as foreseen in Regulation (EC) No 1466/97, the assessment of the budgetary plans and outcomes should take account of the Member State's budgetary balance in light of the cyclical conditions. As recalled in the Commission Communication accompanying these country-specific recommendations, the assessment of the 2018 Draft Budgetary Plan and subsequent assessment of 2018 budget outcomes will need to take due account of the goal to achieve a fiscal stance that contributes to both strengthening  the ongoing recovery and ensuring the sustainability of Portugal’s public finances. In that context, the Commission intends to make use of the applicable margin of appreciation in light of the cyclical situation of Portugal.

               (9)A solid budgetary consolidation relies on the timely and strict implementation of the new budget framework law, reviewing and rationalising public spending and further improving revenue collection. Portugal has started a spending review exercise, mainly based on efficiency measures that involve the health and education ministries, state-owned enterprises and (centralised) public procurement and real estate management. However, this spending review falls short of a comprehensive approach since it only covers the central government and focuses on efficiency savings stemming from streamlining services. In the health sector, the government has adopted measures aimed at promoting disease prevention and public health policies. Moreover, several steps have been taken to make the health care sector more efficient and sustainable, for example via centralised procurement or greater use of generics. At the same time, while the hospital reform continues, budgetary planning and implementation in hospitals remains an important issue. Late payments (arrears) continue to increase, denoting weaknesses in accounting control mechanisms and managerial practices. Accurate and balanced budgeting, improved controls and effective enforcement of the commitment control law could help reduce arrears and improve efficiency and quality in this sector. High and rising ageing costs still pose a risk to fiscal sustainability. In the medium term, higher fiscal risks are expected to be related largely to the costs of financing pensions. Long-term fiscal risks in the country are assessed as low, largely thanks to pension reforms and assuming a no-policy change scenario and that there is a further reduction in the reliance of the pension system on budgetary transfers. The restructuring of state-owned enterprises to make them fiscally sustainable has not still been fully addressed. State-owned enterprises supervised by the Ministry of Finance’s monitoring unit (UTAM) had a total indebtedness of EUR 32 billion in the second quarter of 2016. A framework with established targets to guarantee the financial sustainability of state-owned enterprises could help to decrease their dependence on State budget transfers and tackle the large debt stock.

               (10)The Portuguese labour market continued to recover in 2016, with a steady improvement in labour market indicators and notably a decrease in the unemployment rate. A significant share of new jobs created are on open-ended contracts. However, the stock of temporary contracts remains stable at high levels. High labour market segmentation adversely affects workers’ career prospects and incomes, in particular among the young. In January 2017, Portugal redesigned its employment support programme to promote hiring on open-ended contracts. However, its expected impact on reducing segmentation appears limited, as relatively few people are expected to be covered by the programme. Although recent labour market reforms improved incentives for job creation, some aspects of the legal framework may still discourage firms from hiring workers on open-ended contracts. In particular, employers face high and uncertain firing costs in case of individual dismissal of permanent workers. This is due in part to the possibility of a worker being reinstated if the dismissal is deemed unfair, and to inefficiencies in legal proceedings.

               (11)With the drop in unemployment since 2014, the absolute number of the long-term unemployed is also decreasing. However, more than half of unemployed people have been jobless for a year or more, and this share is not decreasing with the recovery. High levels of long-term and youth unemployment increase the risk that jobless people will disengage from the labour market, gradually losing their skills and employability, thus also weighing negatively on potential growth. Youth unemployment, while still sizeable, is declining owing to a range of measures taken in previous years, including through outreach measures in the context of the Youth Guarantee. This may partly explain why the share of young people neither in employment nor in education or training (NEET) is lower than the EU average. Portugal is also taking action to streamline active labour market policies and to address the issue of the youth unemployment. This includes the introduction of employment incentives (through social security rebates) in April 2017, targeted to the hiring of young and long-term unemployed on open-ended contracts. However, to ensure effective activation of the long-term unemployed, it is crucial that public employment services cooperate effectively with social services to better identify and address the needs of this group. An important step in this direction would be to create the announced one-stop shops for employment.

               (12)By following the announced schedule, the government has increased the minimum wage for the third consecutive year in 2017. The last increase, above expected inflation and average productivity increases, is expected to make the minimum wage increasingly binding, as the share of employees covered already amounted to a fifth of the total in 2016. Minimum wage increases contribute to reducing high in-work poverty and may positively impact on aggregate demand. However, they may entail employment risks, notably for the low-skilled. These risks did not materialise in the current context of recovery, but remain a challenge. The government is monitoring the impact of minimum wage developments through quarterly reports, which are published and discussed with social partners.

               (13)Portugal has made significant improvements in its school education outcomes, as shown by the most recent PISA results. However, the country remains among the OECD countries with the highest rates of grade repetition, which is proven to increase the risk of early school leaving and weighs significantly on education costs. The overall skills level of the labour force remains among the lowest in Europe and hampers the country’s innovation potential and competitiveness. Moreover, digital skills remain a barrier for upgrading the labour force skills. About 22 % of people in the Portuguese labour force have no digital skills (mostly because they do not use the internet regularly), about double the EU average. The government has taken action to promote adult education, namely by establishing the ‘Qualifica’ centres and ‘passport’. To ensure they are effective, it will be crucial that they provide quality opportunities for up-skilling and re-skilling workers, in line with labour market needs. The government has also taken a number of measures to support cooperation between higher education and the business sector, namely regarding their research outcomes and activities. However, the university structures would need to adapt in order to favour this cooperation.

               (14)The large stock of corporate non-performing loans, low profitability, exposure to sovereign debt risks and weak capital buffers are putting pressure on the banking sector. The deterioration in the quality of assets, in particular in the corporate sector, weighs on the banking sector’s profitability. It is one of the factors, along with low capital buffers, that impede the productive allocation of credit and investment. The non-performing loan ratio remains high (20.1 % against 19.6 % at the end of 2015) and is still rising for some sectors of the economy, in particular firms active in the construction and real estate sectors. Some steps have been taken recently to address the large stock of non-performing loans. However, a comprehensive strategy is still needed to ensure a significant reduction of the impaired debt stock, including fostering the development of secondary markets in order to enable banks to sell parts of their distressed portfolios.

               (15)Credit conditions have been gradually improving on the demand and the supply side but access to finance remains a major concern for SMEs. The percentage of Portuguese SMEs which did not manage to obtain the full amount of loans requested rose from 34 % to 42 %, against a falling EU average that reached 30 % in 2016. Innovative and competitive firms with strong growth potential would benefit from better access to capital. This would reduce their dependence on debt financing and improve their access to finance, thereby helping firms to scale-up and internationalise. The difference in the cost of capital between investments financed by debt and the ones financed through equity in 2016 was the fifth highest in the EU and well above the EU average. Although the changes to the tax regime have reduced incentives to debt financing, it is too early to see any impact on the relatively high debt bias in corporate taxation. In July 2016, the authorities launched the Capitalizar programme designed mainly to encourage private investment. The programme establishes new credit lines for SMEs, creates specialised funds that would participate in private investments and introduces changes to the tax regime to support investment. In parallel, the government has put in place another programme (Programa Semente) to provide finance to start-ups and small enterprises in their early stages (seed capital). The programme will help them to raise equity finance by offering tax reliefs, for at least 2 years, to individual investors who purchase new shares in such companies. Both programmes are expected to improve the financing of companies in Portugal, provided that they are swiftly and fully implemented.

               (16)In January 2017, as part of a package of measures to tackle barriers in services markets,
                  14
                the Commission provided guidance to all Member States on national reform needs for regulating professional services with high growth and jobs potential. The reform recommendations address a broad range of requirements based on a comparative analysis following the spirit and the work carried out in the mutual evaluation exercise with Member States in the last 3 years. Portugal has participated actively in this exercise. Portugal explains in its national action plan that, as major reforms and review of the regulated professions have been carried out since 2011, it does not expect major modifications in the coming years. The guidance offered by the Commission complements the European Semester evaluations by specifically addressing the requirements applicable to these professions. There are significant regulatory and administrative barriers in accessing service provision in several sectors. Reforms targeting construction and the most restrictive business services, including regulated professions, were agreed during the financial assistance programme, but have been either halted or reversed. The by-laws regulating certain professions are less ambitious than the framework law in terms of opening up these professions to competition. They also raise concerns as regards the direct or indirect effect of restricting competition in the market for professional services.

               (17)Low levels of efficiency and transparency persist in the Portuguese public administration. Competition in public procurement remains limited. Despite progress, there are still shortcomings as regards the transparency and reliability of public procurement data and procedures. Transparency in concession contracts and public-private partnerships is still hindered by contracting authorities lacking the expertise needed to manage complex contracts. The use of direct awards in public procurement remains high. Administrative burden and the lack of homogeneous implementing practices across the country are delaying the reform of procedures. Despite some progress, there have been delays in simplifying local and central administrative procedures with little coordination between the various layers of the public administration. The Portuguese authorities have approved a new simplification programme, called SIMPLEX+. This contains a fairly ambitious package of measures for citizens and businesses. These measures are promising abd an early implementation of the SIMPLEX+ package needs to be ensured so that the programme can start having an effective impact. Most of the measures included in the package relevant to businesses are now starting to be implemented. The performance of the Portuguese justice system is still below the EU average. In Portugal, efficiency indicators for civil, commercial and tax litigation cases remain poor. This has a negative impact on business dynamics and attracting foreign direct investment. The efficiency of the tax and administrative courts remains challenging in terms of resolution rate, and proceedings are still too long. It still takes up to 40 months to conclude insolvency court proceedings, raising doubts about the efficiency of SIREVE frameworks.

               (18)Portugal is making progress with increasing transparency and combating corruption in public administration, but there is no overarching strategy. Anti-corruption appears to have become a real priority for the national prosecution services and more efficient processes for case and resource management have been put in place. Yet, it remains to be seen whether these will be reflected by improvements in final conviction rates for high-level corruption and the application of penalties that provide stronger deterrents. On the preventive side, the corruption prevention plans set up in each public institution have so far been largely formalistic. They are not fully adapted to each organisation nor are they complemented by adequate monitoring.

               (19)In the context of the European Semester, the Commission has carried out a comprehensive analysis of Portugal’s economic policy and published it in the 2017 country report. It has also assessed the Stability Programme and the National Reform Programme and the follow-up given to the recommendations addressed to Portugal in previous years. It has taken into account not only their relevance for sustainable fiscal and socioeconomic policy in Portugal, but also their compliance with EU rules and guidance, given the need to strengthen the EU’s overall economic governance by providing EU-level input into future national decisions.

               (20)In the light of this assessment, the Council has examined the Stability Programme and its opinion
                  15
                is reflected in particular in recommendation 1 below.

               (21)In the light of the Commission’s in-depth review and this assessment, the Council has examined the National Reform Programme and the Stability Programme. Its recommendations made under Article 6 of Regulation (EU) No 1176/2011 are reflected in recommendations 1 to 4 below,

               HEREBY RECOMMENDS that Portugal take action in 2017 and 2018 to:

               1.Ensure the durability of the correction of the excessive deficit. Pursue its fiscal policy in line with the requirements of the preventive arm of the Stability and Growth Pact, which translates into a substantial fiscal effort for 2018. When taking policy action, consideration should be given to achieving a fiscal stance that contributes to both strengthening the ongoing recovery and ensuring the sustainability of Portugal’s public finances. Step up efforts to finalise a comprehensive expenditure review at all levels of public administration. Strengthen expenditure control, cost effectiveness and adequate budgeting, in particular in the health sector with a focus on the reduction of arrears in hospitals and ensure the sustainability of the pension system. To increase the financial sustainability of state-owned enterprises set sector-specific efficiency targets in time for the 2018 budget, improving state-owned enterprises’ overall net income and decreasing the burden on the State budget.

               2.Promote hiring on open-ended contracts, including by reviewing the legal framework. Ensure the effective activation of the long-term unemployed. Together with social partners, ensure that minimum wage developments do not harm employment of the low-skilled.

               3.Step up efforts to clean up the balance sheets of credit institutions by implementing a comprehensive strategy addressing non-performing loans, including by enhancing the secondary market for bad assets. Improve the access to capital, in particular for start-ups and small and medium sized enterprises.

               4.Implement a roadmap to further reduce the administrative burden and tackle regulatory barriers in construction and business services by end 2017. Increase the efficiency of insolvency and tax proceedings.

               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)
                  COM(2017) 521 final.

                     (4)
                  P8_ TA(2017)0038, P8_ TA(2017)0039, and P8_ TA(2017)0040.

                     (5)
                  COM(2016) 725 final.

                     (6)
                  COM(2016) 728 final.

                     (7)
                  2017/C92/01.

                     (8)
                  SWD(2017) 87 final.

                     (9)
                  COM(2017) 90 final.

                     (10)
                  Article 23 of 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.

                     (11)

                        COM(2014) 494 final.

                     (12)
                  Commission Decision of 10 March 2017 – SA.47178 – Portugal – Recapitalisation of Caixa Geral de Depósitos, S.A.

                     (13)
                  Net 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 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.

                     (14)
                  COM(2016) 820 final, COM(2016) 821 final, COM(2016) 822 final, COM(2016) 823 final, COM(2016) 824 final.

                     (15)
                  Under Article 5(2) of Council Regulation (EC) No 1466/97.


               EUROPEAN COMMISSION
            Brussels, 22.5.2017
            COM(2017) 505 final
            Recommendation for a
            COUNCIL RECOMMENDATION
            on the 2017 National Reform Programme of Germanyand delivering a Council opinion on the 2017 Stability Programme of Germany

               Recommendation for a

               COUNCIL RECOMMENDATION

               on the 2017 National Reform Programme of Germany

                  and delivering a Council opinion on the 2017 Stability Programme of Germany

               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,
                  3

               Having regard to the resolutions of the European Parliament,
                  4

               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 16 November 2016, the Commission adopted the Annual Growth Survey,
                  5
                marking the start of the 2017 European Semester of economic policy coordination. The priorities of the Annual Growth Survey were endorsed by the European Council on 9-10 March 2017. On 16 November 2016, on the basis of Regulation (EU) No 1176/2011, the Commission adopted the Alert Mechanism Report,
                  6
                in which it identified Germany as one of the Member States for which an in-depth review would be carried out. On the same day, the Commission also adopted a recommendation for a Council Recommendation on the economic policy of the euro area. That Recommendation was endorsed by the European Council on 9-10 March 2017 and adopted by the Council on 21 March 2017.
                  7

               (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, Germany should ensure the full and timely implementation of the Recommendation for the euro area which is reflected in recommendations 1 and 2 below.

               (3)The 2017 country report for Germany
                  8
                was published on 22 February 2017. It assessed Germany’s progress in addressing the country-specific recommendations adopted by the Council on 12 July 2016, the follow-up given to the recommendations adopted in previous years and Germany’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 22 February 2017.
                  9
                The Commission’s analysis leads it to conclude that Germany is experiencing macroeconomic imbalances. In particular, the persistently high current account surplus has cross-border relevance and reflects — besides a strong integration and performance of its highly competitive industry in the international division of labour — excess savings and subdued investment in both the private and the public sector. The current account surplus increased further in 2015, stayed largely unchanged in 2016 and is expected to remain at a high level. Addressing the surplus can have implications on the rebalancing prospects of the rest of the euro area and the EU because more dynamic domestic demand in Germany can ease deleveraging needs in highly-indebted Member States. Despite low interest rates that create favourable financing conditions, business investment as a share of GDP is still subdued. While the recovery in private consumption has continued, household savings have reached record high levels in the EU. The need for action to reduce the risk of adverse effects on the German economy and, given its size and cross-border relevance, on the economic and monetary union, is particularly important.

               (4)On 13 April 2017 Germany submitted its 2017 Stability Programme and on 28 April 2017 Germany submitted its 2017 National Reform Programme. To take account of their interlinkages, the two programmes have been assessed at the same time.

               (5)The relevant country-specific recommendations have been taken into account in the Member States’ programmes for the European Structural and Investment Funds (ESI Funds) covering the 2014-2020 period. As foreseen in the legislation governing the ESI Funds,
                  10
                where it is necessary to support the implementation of relevant country-specific recommendations, the Commission may request a Member State to review and amend its relevant ESI Funds programmes. The Commission has provided further guidelines on the application of those rules.
                  11

               (6)Germany is currently in the preventive arm of the Stability and Growth Pact and subject to the debt rule. In its 2017 Stability Programme, the government plans a budget surplus of between ¼ and ½% of GDP over 2017-2021. The medium-term budgetary objective — a structural deficit of 0.5% of GDP — continues to be met with a margin throughout the programme period. According to the Stability Programme, the general government debt-to-GDP ratio is expected to gradually decline to 57% in 2021. The macroeconomic scenario underpinning these budgetary projections, which has not been endorsed by an independent body, is plausible.

               (7)Based on the Commission 2017 spring forecast, the structural balance is forecast to register a surplus of 0.6% of GDP in 2017 and 0.3% of GDP in 2018, above the medium-term budgetary objective. General government debt is forecast to remain on a firm downward path beyond the requirements of the debt rule. Overall, the Council is of the opinion that Germany is projected to comply with the provisions of the Stability and Growth Pact in 2017 and 2018. At the same time, there remains scope to support domestic demand by using fiscal policy notably to achieve a sustained upward trend in investment, and by creating conditions for higher real wage growth.

               (8)Public investment as a proportion of GDP has remained largely constant and is below the euro area average. A public investment backlog persists in particular at municipal level, where net investment remained negative in 2016. This is despite the measures taken over the last few years and significant increases in public investment at general government level in 2015 and 2016. Additional measures were taken in 2016 which should increase the scope for public investment, including at federal State and municipal level. These include a reform of federal fiscal relations that, once adopted, will take effect in 2020. Moreover, extending consulting services on infrastructure investment planning to include municipalities should improve the planning and implementation of infrastructure investment at municipal level. This appears particularly relevant given that infrastructure investment projects in the federal States and municipalities are only executed to a limited extent and are influenced by capacity and planning constraints. The favourable budgetary position generally indicates available fiscal space, for example to provide additional funds to increase public investment at all levels of government.

               (9)Overall public and private education and research expenditure has been rather stable relative to GDP in recent years, but it remains below the EU average. At 9.1 % in 2015 it fell short of the national target of 10 % of GDP. Additional investment in education, research and innovation is crucial for Germany’s future economic success and in particular to effectively integrate recently arrived immigrants. To achieve the latter, Germany has undertaken considerable efforts, especially in the area of vocational education and training. In the coming years, comparable efforts will be necessary in other educational sectors.

               (10)The German tax system remains complex, tax administration costs are high and several corporate taxation provisions may be hampering private investment. Despite significant reductions, corporate capital costs in Germany are still among the highest in the EU-28. When accounting for the local trade tax (Gewerbesteuer) and the solidarity surcharge, the top statutory tax rate on corporate income reached 30.2 % in 2016. This was substantially above the non-weighted EU average of 22.8 %. The effective average tax rate is 28.2 % compared with a non-weighted average of 21.1 % for the EU. The bias towards debt in corporate taxation was the seventh highest in the EU in 2016. At shareholder level, the extent of the debt bias is similar. This matters in particular for SMEs, which tend to have domestic shareholders. Lowering the capital costs on equity could strengthen private investment and the underdeveloped German venture capital market. Other features of the tax system that might distort financing and investment decisions are the inclusion of non-profit elements in the tax base of the local trade tax, limitations on loss carry-forwards, and tax-induced distortions with respect to the choice of legal form. Further provisions that might reduce the investment-friendliness of the tax system include the depreciation regime, the interest rate used to calculate deductible pension provisions, the taxation of capital gains, and cash accounting for the purpose of value-added taxation. If implemented effectively, the additional general and IT-specific functional authority of the federal tax administration in relation to the States’ tax administrations that was agreed as part of the reform of federal fiscal relations could help in accelerating the modernisation of the tax administration.

               (11)Venture capital investment has increased in Germany, but the market still remains underdeveloped by international standards. In 2015, venture capital investment accounted for about 0.03 % of GDP, which is slightly above the EU average but still below Member States such as Finland, the United Kingdom, Sweden, Ireland or France, and far below non-EU Member States such as Israel and the United States. In particular, the venture capital market in Germany appears to be failing to provide bigger later-stage investments. The federal government has taken a number of measures to support venture capital investment. For example, it simplified the taxation of investment funds, improved loss carry-forwards under the corporate income taxation system and expanded the INVEST programme for business angels.

               (12)The shift towards renewable energy necessitates significant investment in electricity distribution networks. However, planned investment in domestic electricity infrastructure has been significantly delayed. Only around 35 % of the highest voltage grid projects identified in the 2009 Energy Network Expansion Act had been implemented by mid-2016, mainly owing to public opposition. Of a current total of 6 100 km of power lines planned in the Federal Requirement Plan Act, only around 6 % have been approved and only 1 % have been constructed.

               (13)There are still barriers to reaping the full benefits of digitisation. For example, Germany is not performing well in the availability of high-speed and ultra-fast broadband connections, in particular in semi-urban and rural regions. Computer usage by young Germans is comparatively low and many schools lack broadband access. Performance in digital public services is also below the EU average. In particular SMEs need to catch up in terms of digitisation. Only one fifth of SMEs have a digitisation strategy. A network of SME centres of excellence has been set up to strengthen and accelerate the digitisation of SMEs and the ‘Industrie 4.0’ platform brings together all relevant stakeholders. While business R&D investment is growing and Germany is close to achieving its Europe 2020 R&D intensity target, investment is increasingly concentrated in large companies, while the contribution of SMEs is declining. Moreover, an ageing population may also have an impact on entrepreneurial activity in the coming years.

               (14)High regulatory barriers remain in the business services sector and regulated professions. The level of restrictions is higher than the EU average in particular for architects, engineers, lawyers and accountants/tax advisers. In addition, the business churn rate for these professions is significantly lower than the EU average, which seems to indicate relatively low dynamism and competition in professional services in Germany. These barriers include shareholding and company form restrictions for architects and engineers, and multidisciplinary restrictions for architects, engineers and lawyers. Reducing these barriers could generate more intensive competition, resulting in more firms entering the market, and leading to benefits for consumers in terms of lower prices and broader choice. In January 2017 the Commission presented reform recommendations for regulation in professional services, as part of a package of measures to tackle barriers in services markets.
                  12

               (15)Employment has continued to rise and unemployment has fallen to historically low levels. However, the increase in employment has been partly due to an increase in part-time work, in particular among women, and has been only partially reflected in aggregate real wage growth, which decelerated in 2016. Disincentives to work for second earners and widespread part-time work are hampering the full use of the labour market potential. Better provision of quality and affordable full-time childcare, all-day schools and long-term care is a crucial lever for increasing female participation in the workforce. Joint taxation of income for married couples and free health care insurance coverage for non-working spouses discourage second earners, in many cases women, from taking up a job or increasing the number of hours worked. Moreover, lower labour market attachment is combined with a high gender pay gap of 22 % compared to an EU average of 16.3 % in 2015.

               (16)Despite a slight reduction, mini-jobs remain widespread, with about 4.8 million people having a mini-job as their only job in September 2016. The number of temporary agency workers has quadrupled since 2005, reaching around 1 million (close to 3 % of total employment) in June 2016. Protection from potential abuses in temporary agency work and work contracts is expected to improve, yet developments deserve monitoring. In addition, fixed-term contracts appear to have a comparatively high wage gap of 27 % compared to permanent contracts.

               (17)The tax wedge for low-wage earners is high in comparison with other Member States, thus reducing work incentives, take-home pay and consumption opportunities. Germany increased the minimum personal income tax allowance and child allowances and adjusted the income tax brackets. These measures tend to benefit low and middle income groups, but the overall impact on the tax wedge will be limited. In spite of recent substantial rises in real disposable income, wages and productivity evolutions have been diverging over a long period, leading to a considerable accumulated gap. Higher real wage growth would also contribute to reducing the high external imbalances.

               (18)Germany has done considerable efforts in receiving asylum seekers and in integrating refugees and other immigrants. Further improvements appear possible, as in 2016 the number of job-seeking refugees increased to 10% of all unemployed. Labour market integration of people with a migrant background, in particular women, remains a major challenge which, including through the education system, also applies to children born in Germany with parents born outside the EU.

               (19)Not all members of society have benefited equally from the overall positive economic and labour market developments of the last few years. After a period of increases, income inequality moderated only recently, while wealth inequality remains among the highest in the euro area. Moreover, the good labour market performance has not led to a decline in the risk of poverty. The at-risk-of-poverty rate in old age is above the EU average and the number of people at risk of old-age poverty is expected to increase in the coming years. The replacement rate of the statutory pension scheme is forecasted to further decline. At the same time, the rates of enrolment in second or third-pillar pension schemes are too low to fully compensate for the decrease in the replacement rate of the first pillar. If not offset, pension adequacy is thus expected to deteriorate. It remains to be seen how effective the recent proposals to improve incentives for later retirement (Flexi-Rente) can be in counteracting the incentives for early retirement introduced in 2014.

               (20)In the context of the European Semester, the Commission has carried out a comprehensive analysis of Germany’s economic policy and published it in the 2017 country report. It has also assessed the Stability Programme and the National Reform Programme and the follow-up given to the recommendations addressed to Germany in previous years. It has taken into account not only their relevance for sustainable fiscal and socioeconomic policy in Germany, but also their compliance with EU rules and guidance, given the need to strengthen the EU’s overall economic governance by providing EU-level input into future national decisions.

               (21)In the light of this assessment, the Council has examined the Stability Programme and is of the opinion
                  13
                that Germany is expected to comply with the Stability and Growth Pact.

               (22)In the light of the Commission’s in-depth review and this assessment, the Council has examined the National Reform Programme and the Stability Programme. Its recommendations made under Article 6 of Regulation (EU) No 1176/2011 are reflected in recommendations 1 and 2 below,

               HEREBY RECOMMENDS that Germany take action in 2017 and 2018 to:

               1.Use fiscal policy to support domestic demand and achieve a sustained upward trend in investment. Accelerate public investment at all levels of government, especially in education, research and innovation, and address capacity and planning constraints for infrastructure investments. Further improve the efficiency and investment-friendliness of the tax system. Stimulate competition in business services and regulated professions.

               2.Reduce disincentives to work for second earners and facilitate transitions to standard employment. Reduce the high tax wedge for low-wage earners. Create conditions to promote higher real wage growth, respecting the role of the social partners.

               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)
                  COM(2017) 505 final.

                     (4)
                  P8_ TA(2017)0038, P8_ TA(2017)0039, and P8_ TA(2017)0040.

                     (5)
                  COM(2016) 725 final.

                     (6)
                  COM(2016) 728 final.

                     (7)
                  OJ C92/01, 24.3.2017, p. 1.

                     (8)
                  SWD(2017) 71 final.

                     (9)
                  COM(2017) 90 final.

                     (10)
                  Article 23 of 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.

                     (11)
                  COM(2014) 494 final.

                     (12)
                  COM(2016) 820 final, COM(2016) 821 final, COM(2016) 822 final, COM(2016) 823 final, COM(2016) 824 final.

                     (13)
                  Under Article 5(2) of Council Regulation (EC) No 1466/97.


Recommendation for a COUNCIL RECOMMENDATION on the 2017 National Reform Programme of Denmark and delivering a Council opinion on the 2017 Convergence Programme of Denmark


               EUROPEAN COMMISSION
            Brussels, 13.5.2015
            COM(2015) 277 final
            Recommendation for a
            COUNCIL RECOMMENDATION
            on the 2015 National Reform Programme of the United Kingdomand delivering a Council opinion on the 2015 Convergence Programme of the United Kingdom

               Recommendation for a

               COUNCIL RECOMMENDATION

               on the 2015 National Reform Programme of the United Kingdom

                  and delivering a Council opinion on the 2015 Convergence Programme
                  of the United Kingdom

               THE COUNCIL OF THE EUROPEAN UNION,

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

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

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

               Having regard to the recommendation of the European Commission
                  3
               ,

               Having regard to the resolutions of the European Parliament
                  4
               ,

               Having regard to the conclusions of the European Council,

               Having regard to the opinion of the Employment Committee,

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

               Having regard to the opinion of the Social Protection Committee,

               Having regard to the opinion of the Economic Policy Committee,

               Whereas:

               (1)On 26 March 2010, the European Council agreed to the Commission’s proposal to launch a new strategy for growth and jobs, Europe 2020, based on enhanced coordination of economic policies. The strategy focuses on the key areas where action is needed to boost Europe’s potential for sustainable growth and competitiveness.

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

               (3)On 8 July 2014, the Council adopted a Recommendation on the United Kingdom’s National Reform Programme for 2014 and delivered its opinion on the United Kingdom’s updated Convergence Programme for 2014.

               (4)On 28 November 2014, the Commission adopted the Annual Growth Survey
                  5
               , marking the start of the 2015 European Semester of economic policy coordination. On the same day, on the basis of Regulation (EU) No 1176/2011, the Commission adopted the Alert Mechanism Report
                  6
               , in which it identified the United Kingdom as one of the Member States for which an in-depth review would be carried out.

               (5)On 18 December 2014, the European Council endorsed the priorities for boosting investment, accelerating structural reforms and pursuing responsible growth-friendly fiscal consolidation.

               (6)On 26 February 2015, the Commission published its 2015 country report for the United Kingdom
                  7
               . This assessed the United Kingdom’s progress in addressing the country-specific recommendations adopted on 8 July 2014. The country report also includes the results of the in-depth review under Article 5 of Regulation (EU) No 1176/2011. The Commission’s analysis leads it to conclude that the United Kingdom is experiencing macroeconomic imbalances which require policy action and monitoring. In particular, risks related to the high level of household indebtedness, also linked to structural characteristics of the housing market, continue to require attention. The resilience of the economy and the financial sector has increased. However, a shortage of housing will persist and is likely to underpin high house prices in the medium term and continue to leave the sector less resilient in the face of risks.

               (7)On 26 March 2015, the United Kingdom submitted its 2015 National Reform Programme and its 2015 Convergence Programme. To take account of their interlinkages, the two programmes have been assessed at the same time.

               (8)The United Kingdom is currently in the corrective arm of the Stability and Growth Pact. In its 2014-15 Convergence Programme, the government plans an improvement in the headline deficit from 4.3% of GDP in 2015-16 to 2.2% of GDP in 2016-17 so that a surplus of 0.1% of GDP is reached in 2019-20. The Convergence Programme does not include a medium-term objective. The government debt-to-GDP ratio is expected to peak in 2015-16 at 88.8% and to gradually decline to 81.4% in 2019-20. Based on the Commission's 2015 spring forecast the United Kingdom is not expected to have corrected its excessive deficit by the 2014-15 deadline set by the Council. Furthermore, the fiscal effort was below what was recommended by the Council. For this reason, on XX June, the Council decided in accordance with Article 126(8) TFEU that the United Kingdom had not taken effective action in response to the Council recommendation under the excessive deficit recommendation of 2 December 2009 and issued a new recommendation asking the United Kingdom to correct the excessive deficit by 2016-17. The Convergence Programme is compatible with the new 2016-17 deadline under the excessive deficit procedure. The macroeconomic scenario underpinning these budgetary projections is plausible. Based on the Commission's 2015 spring forecast, the United Kingdom is forecast to correct its excessive deficit by the 2016-17 deadline and to deliver the recommended fiscal effort. Measures to support the planned deficit rates from 2015-16 onwards are already specified but greater detail is required on ear-marked departmental expenditure limits. Based on its assessment of the Convergence Programme and taking into account the Commission's 2015 spring forecast, the Council is of the opinion that the United Kingdom is expected to comply with the provisions of the Stability and Growth Pact.

               (9)A high, and possibly excessive, level of household indebtedness has been identified as potentially constituting a macroeconomic imbalance that poses risks to the United Kingdom economy. While household sector indebtedness continues to fall modestly, it remains high and leaves the United Kingdom vulnerable to risks that could affect economic growth and financial stability. In mid-2014, the Financial Policy Committee of the Bank of England announced two measures to mitigate risks associated with high household indebtedness. They recommended that mortgage lenders apply an ‘interest rate stress test’ to assess borrowers’ ability to meet their mortgage obligations if interest rates rise. They also recommended that mortgage lenders limit the proportion of mortgages at loan-to-income ratios of 4.5 and above to 15 % of new mortgages. The impact of these measures should be monitored carefully.

               A number of reforms of the national planning policy framework have been undertaken but these are unlikely to have a short-term impact. The response of the local authorities to the reform in raising housing supply needs to be closely monitored.

               (10)The United Kingdom labour market has performed well in recent years and is set to remain strong. The employment rate reached 76.5 % in 2014 while the unemployment rate continued to fall, to 6 %, and is projected to decline further in 2015. Despite the positive trends in relation to labour market outcomes, social challenges persist. The rate of people living in households with very low work intensity increased slightly, from 13 % in 2012 to 13.2 % in 2013, compared with the EU average of 10.7 %. The difference in the share of part-time work between women (42.6 % in 2013) and men (13.2 % in 2013) is one of the highest in the EU. The percentage of women who are inactive or work part-time due to personal and family responsibilities (12.5 %) was almost twice as high as the EU average (6.3 %) in 2013. Youth employment and employer engagement in the area of apprenticeships are further challenges. Another area to focus on, linked to youth employment, is education and skills. A large proportion of young people have comparatively low levels of basic skills. The implementation of measures to address welfare reform and childcare has been limited. The proportion of children living in jobless households in the United Kingdom is still one of the highest in the EU. In addition, even if supply in the childcare system has increased recently, the availability of affordable, high-quality, full-time childcare remains a key issue.

               (11)Boosting public and private investment would help improve productivity and competitiveness which are key challenges for the United Kingdom. The need to ensure high-quality infrastructure investment is reflected in the December 2014 national infrastructure plan which has been updated and widened in scope. The private sector is expected to finance a major share of the plan but questions remain over how much it will commit. This poses risks to the plan’s success, even if there has been substantial progress in providing timely information on its implementation. The United Kingdom should ensure that business tax systems are pro-investment, in particular through the forthcoming review of business rates.

               (12)In the context of the European Semester, the Commission has carried out a comprehensive analysis of the United Kingdom’s economic policy and published it in the 2015 country report. It has also assessed the Convergence Programme and the National Reform Programme and the follow-up given to the recommendations addressed to the United Kingdom in previous years. It has taken into account not only their relevance for sustainable fiscal and socioeconomic policy in the United Kingdom but also their compliance with EU rules and guidance, given the need to strengthen the overall economic governance of the European Union by providing EU-level input into future national decisions. The recommendations under the European Semester are reflected in recommendations 1 to 3 below.

               (13)In the light of this assessment, the Council has examined the United Kingdom’s convergence programme, and its opinion
                  8
                is reflected in particular in recommendation 1 below.

               (14)In the light of the Commission’s in-depth review and this assessment, the Council has examined the national reform programme and the convergence programme. Its recommendations under Article 6 of Regulation (EU) No 1176/2011 are reflected in recommendations 2 to 3 below,

               HEREBY RECOMMENDS that the United Kingdom take action in 2015 and 2016 to:

               1.Ensure effective action under the excessive deficit procedure and endeavour to correct the excessive deficit in a durable manner by 2016-17, in particular by prioritising capital expenditure.

               2.Take further steps to boost supply in the housing sector, including by implementing the reforms of the national planning policy framework.

               3.Address skills mismatches by increasing employers’ engagement in the delivery of apprenticeships. Take action to further reduce the number of young people with low basic skills. Further improve the availability of affordable, high-quality, full-time childcare.

               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)
                  COM(2015) 277.

                     (4)
                  P8_TA(2015)0067, P8_TA(2015)0068, P8_TA(2015)0069.

                     (5)
                  COM(2014) 902.

                     (6)
                  COM(2014) 904.

                     (7)
                  SWD (2015) 47.

                     (8)
                  Under Article 9(2) of Council Regulation (EC) No 1466/97.


               EUROPEAN COMMISSION
            Brussels, 22.5.2017
            COM(2017) 506 final
            Recommendation for a
            COUNCIL RECOMMENDATION
            on the 2017 National Reform Programme of Estoniaand delivering a Council opinion on the 2017 Stability Programme of Estonia

               Recommendation for a

               COUNCIL RECOMMENDATION

               on the 2017 National Reform Programme of Estonia

                  and delivering a Council opinion on the 2017 Stability Programme of Estonia

               THE COUNCIL OF THE EUROPEAN UNION,

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

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

               Having regard to the recommendation of the European Commission,
                  2

               Having regard to the resolutions of the European Parliament,
                  3

               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 16 November 2016, the Commission adopted the Annual Growth Survey,
                  4
                marking the start of the 2017 European Semester of economic policy coordination. The priorities of the Annual Growth Survey were endorsed by the European Council on 9-10 March 2017. On 16 November 2016, on the basis of Regulation (EU) No 1176/2011, the Commission adopted the Alert Mechanism Report,
                  5
                in which it did not identify Estonia as one of the Member States for which an in-depth review would be carried out. On the same day, the Commission also adopted a recommendation for a Council Recommendation on the economic policy of the euro area. That Recommendation was endorsed by the European Council on 9-10 March 2017 and adopted by the Council on 21 March 2017.
                  6

               (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, Estonia should ensure the full and timely implementation of the Recommendation for the euro area that is reflected in recommendation 1 below.

               (3)The 2017 country report for Estonia
                  7
                was published on 22 February 2017. It assessed Estonia’s progress in addressing the country-specific recommendations adopted by the Council on 12 July 2016, the follow-up given to the recommendations adopted in previous years and Estonia’s progress towards its national Europe 2020 targets.

               (4)On 28 April 2017, Estonia submitted its 2017 Stability Programme and on 4 May 2017 Estonia submitted its 2017 National Reform Programme. To take account of their interlinkages, the two programmes have been assessed at the same time.

               (5)The relevant country-specific recommendations have been taken into account in the Member States’ programmes for the European Structural and Investment Funds (ESI Funds) covering the 2014-2020 period. As foreseen in the legislation governing the ESI Funds,
                  8
                where it is necessary to support the implementation of relevant country-specific recommendations, the Commission may request a Member State to review and amend its relevant ESI Funds programmes. The Commission has provided further guidelines on the application of those rules.
                  9

               (6)Estonia is currently in the preventive arm of the Stability and Growth Pact. In its 2017 Stability Programme, the government lowered its medium-term budgetary objective from a structural balance to a deficit of 0.5% of GDP. The government plans to move from a general government surplus of 0.3% of GDP in 2016 to a deficit of 0.5% of GDP in 2017 and 0.8% of GDP in 2018. According to the estimates of the Stability Programme, this corresponds to a structural surplus of 0.2% of GDP in 2017 and a deficit of 0.5% of GDP in 2018, respecting the medium-term budgetary objective. However, based on the recalculated
                  10
                structural balance, the deficit is projected to amount to 0.1% of GDP in 2017 and 0.9% of GDP in 2018, below the new medium-term budgetary objective. According to the Stability Programme, gross government debt is projected to remain below 10% of GDP in 2017 and 2018. The macroeconomic scenario underpinning these budgetary projections is plausible for 2017 and 2018, but it is favourable for the later years of the programme. At the same time, there are risks linked to the revenue yield assumptions related to the various new tax measures taking effect in 2018.

               (7)Based on the Commission 2017 spring forecast, the structural balance is projected to register a deficit of 0.3% of GDP in 2017, remaining above the medium-term budgetary objective. In 2018, Estonia is recommended to remain at the medium-term budgetary objective. Under unchanged policies, there is a risk of some deviation from that requirement. Overall, the Council is of the opinion that Estonia needs to stand ready to take further measures to ensure compliance in 2018.

               (8)Estonia has taken action to ensure the provision and accessibility of high-quality services, including social services at local level as part of its local government reform. In particular, Estonia has adopted the Administrative Reform Act with a view to making it easier to create viable local municipalities that can finance their own activities, to plan development and growth, and to offer quality services. It successfully completed the voluntary phase of the merger of local municipalities and it is implementing the Social Welfare Act. Some key steps to complete the local government reform have not yet been taken. The revision of the financing scheme for municipalities is still pending. Further legislative acts on the responsibilities and division of tasks between municipalities and central government are still in preparation. Adopting these proposals is critical to ensuring the provision of quality public services in areas such as education, youth work, health promotion and transport.

               (9)The gender pay gap in Estonia fell from 28.3 % in 2014 to 26.9 % in 2015 but is still the highest in the Union. The government is taking steps to further narrow the gender pay gap. In particular, the 2016-2023 Welfare Plan has been adopted and is being implemented to tackle gender segregation in the labour market and to fight stereotypes. The modification of the Gender Equality Act to give the labour inspectorates the task of more closely monitoring gender equality in the private sector has still to be adopted. The revision of the parental leave system to allow a more flexible take-up of parental leave is also being considered. The legislative change has not yet been adopted.

               (10)Income inequality in Estonia is high. The ratio of incomes of the richest 20 % of households to that of the poorest 20 % rose from 5.4 in 2012 to 6.2 in 2015, and is now the seventh highest in the EU. The key driver appears to be the high wage dispersion as a result of strong income growth among the higher skilled. In absolute terms, the incomes of the poorest 10 % of households have lagged behind growth in median incomes, leading to problems with the adequacy of the social safety net. A contributing factor is that benefits (particularly pensions, social assistance and unemployment benefits) are not keeping pace with the growth in market incomes. This has also resulted in a gradual increase in the at-risk-of-poverty rate from 15.8 % in 2010 to 21.6 % in 2015. Substantial efforts have been undertaken to make the tax system more progressive as of 2018, in particular for low-income earners, by raising the basic allowance of the personal income tax system.

               (11)Business enterprise expenditure in research, technology and innovation increased in 2015 to 0.69 %, but its overall level remains below EU average of 1.3 %. The share of high-technology and knowledge-intensive companies remains limited and the number of new doctoral graduates is low. Wage growth has consistently exceeded productivity growth in recent years, affecting profits and thereby pulling investment growth downwards. Subdued investment in technological development may cause the value-added of exports, especially goods, to increase less than expected, and poses a risk to output growth. The volume of contract research between academia and businesses increased in 2015. However, cooperation between the two sectors remained limited despite the measures taken by the government. Estonia has further improved its business environment, but the lengthy insolvency proceedings and recovery rate for secured creditors remain barriers to investment. A project to improve the insolvency framework was launched in 2016 to make the process faster and more efficient and to improve the rate of successful demands. However, amendments to the legislative framework have not yet been adopted.

               (12)In the context of the European Semester, the Commission has carried out a comprehensive analysis of Estonia’s economic policy and published it in the 2017 country report. It has also assessed the Stability Programme and the National Reform Programme and the follow-up given to the recommendations addressed to Estonia in previous years. It has taken into account not only their relevance for sustainable fiscal and socioeconomic policy in Estonia, but also their compliance with EU rules and guidance, given the need to strengthen the EU’s overall economic governance by providing EU-level input into future national decisions.

               (13)In the light of this assessment, the Council has examined the Stability Programme and its opinion
                  11
                is reflected in particular in recommendation 1 below,

               HEREBY RECOMMENDS that Estonia take action in 2017 and 2018 to:

               1.Pursue its fiscal policy in line with the requirements of the preventive arm of the Stability and Growth Pact, which implies to remain at its medium-term budgetary objective in 2018. Ensure better adequacy of the social safety net. Take measures to reduce the gender pay gap, in particular by improving wage transparency and reviewing the parental leave system.

               2.Promote private investment in research, technology and innovation, including by implementing measures for strengthening the cooperation between academia and businesses.

               Done at Brussels,

                     For the Council

                     The President

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

                     (2)
                  COM(2017) 506 final.

                     (3)
                  P8_ TA(2017)0038, P8_ TA(2017)0039, and P8_ TA(2017)0040.

                     (4)
                  COM(2016) 725 final.

                     (5)
                  COM(2016) 728 final.

                     (6)
                  OJ C92/01, 24.3.2017, p. 1.

                     (7)
                  SWD(2017) 72 final.

                     (8)
                  Article 23 of 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.

                     (9)
                  COM(2014) 494 final.

                     (10)
                  Cyclically-adjusted balance net of one-off and temporary measures, recalculated by the Commission using the commonly agreed methodology.

                     (11)
                  Under Article 5(2) of Council Regulation (EC) No 1466/97.


               EUROPEAN COMMISSION
            Brussels, 22.5.2017
            COM(2017) 518 final
            Recommendation for a
            COUNCIL RECOMMENDATION
            on the 2017 National Reform Programme of the Netherlandsand delivering a Council opinion on the 2017 Stability Programme of the Netherlands

               Recommendation for a

               COUNCIL RECOMMENDATION

               on the 2017 National Reform Programme of the Netherlands

                  and delivering a Council opinion on the 2017 Stability Programme of the Netherlands

               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,
                  3

               Having regard to the resolutions of the European Parliament,
                  4

               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 16 November 2016, the Commission adopted the Annual Growth Survey,
                  5
                marking the start of the 2017 European Semester of economic policy coordination. The priorities of the Annual Growth Survey were endorsed by the European Council on 9-10 March 2017. On 16 November 2016, on the basis of Regulation (EU) No 1176/2011, the Commission adopted the Alert Mechanism Report,
                  6
                in which it identified the Netherlands as one of the Member States for which an in-depth review would be carried out. On the same day, the Commission also adopted a recommendation for a Council Recommendation on the economic policy of the euro area. That Recommendation was endorsed by the European Council on 9-10 March 2017 and adopted by the Council on 21 March
                  7
               .

               (2)As a country whose currency is the euro and in view of the close interlinkages between the economies in the economic and monetary union, the Netherlands should ensure the full and timely implementation of the Recommendations for the euro area which is reflected in recommendations 1 to 3 below.

               (3)The 2017 country report for the Netherlands
                  8
                was published on 22 February 2017. It assessed the Netherlands’ progress in addressing the country-specific recommendations adopted by the Council on 12 July 2016, the follow-up given to the recommendations adopted in previous years and the Netherlands’ 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 22 February 2017.
                  9
                The Commission’s analysis leads it to conclude that the Netherlands is experiencing macroeconomic imbalances. The Netherlands shows the largest three-year average current account surplus in terms of GDP among euro area countries. The surplus implies a suboptimal allocation of resources, leaving opportunities for increased growth and welfare. The disposable income of households is hampered by a high compulsory payment wedge. Private debt is high, specifically the stock of household mortgage debt. The long household balance sheets increase the vulnerability to financial shocks. The need for action to reduce the risk of adverse effects on the Dutch economy and, given its size and cross-border relevance, on the economic and monetary union, is particularly important.

               (4)On 26 April 2017, the Netherlands submitted its 2017 National Reform Programme and its 2017 Stability Programme. To take account of their interlinkages, the two programmes have been assessed at the same time.

               (5)The relevant country-specific recommendations have been taken into account in the Member States' programmes for the European Structural and Investment Funds (ESI Funds) covering the 2014-2020 period. As foreseen in the legislation governing the ESI Funds,
                  10
                where it is necessary to support the implementation of relevant country-specific recommendations, the Commission may request a Member State to review and amend its relevant ESI Funds programmes. The Commission has provided further guidelines on the application of those rules.
                  11

               (6)The Netherlands is currently in the preventive arm of the Stability and Growth Pact and subject to the debt rule. In its 2017 stability programme, the government plans an increase in the general government surplus from 0.5% of GDP in 2017 to 1.3% of GDP in 2020. The medium-term budgetary objective — a structural deficit of 0.5% of GDP — continues to be met with a margin throughout the programme period. According to the stability programme, the government debt-to-GDP ratio is projected to fall to 58.5% in 2017, below the Treaty reference value of 60% of GDP. The government plans a further decline in the government debt ratio to 49.3% of GDP in 2020. The macroeconomic scenario underpinning these budgetary projections is plausible. Based on the Commission 2017 spring forecast, the structural balance is projected to increase from a surplus of 0.2% of GDP in 2017 to 0.4% of GDP in 2018, above the medium-term budgetary objective. General government debt is forecast to remain on a firm downward path beyond the requirements of the debt rule. Overall, the Council is of the opinion that the Netherlands is projected to comply with the provisions of the Stability and Growth Pact in 2017 and 2018. At the same time, there remains scope to support domestic demand by using fiscal policy, notably to foster investment in research and development, and by creating conditions for higher real wage growth, in view of persistent external imbalances.

               (7)The recent growth in employment can be largely attributed to an increase in the number of people employed on temporary contracts and of the self-employed. The high and increasing percentage of temporary contracts as well as the rapid increase in self-employment without employees is observed in the context of great differences in applicable labour regulations, labour protection, as well as differences in tax and social security legislation. Although some measures have been taken, some of these factors still create a financial incentive for employees to start working as self-employed or favours hiring them under a temporary contract. This may have particularly distortive effects at the margin of the labour market and may have contributed to the observed moderation in aggregate real wage growth. Self-employed are more often under-insured against disability, unemployment and old age. This could affect the sustainability of the social security system in the long run. The enforcement of measures to tackle bogus self-employment is suspended until 2018. The employment situation of people with a migrant background remains an important challenge. The employment rate for non-EU born migrants is 20 percentage points lower than for people born in the Netherlands, only a small part of which is explained by differences in age and educational achievement.

               (8)The rise in recent years in the household saving rate was partly due to higher saving in the second pillar of the pension system (mandatory supplementary private schemes), to which the regulatory environment contributed. An appropriate intra- and inter-generational distribution of costs and risks beyond the adopted rules on indexation and financial buffers (financial assessment framework) would help households to allocate their financial means in more growth-friendly ways. The government announced its intention to substantially reform the second pension pillar in order to improve the coverage, create a more transparent, more flexible and actuarially fairer system.

               (9)Rigidities and distortive incentives that have built up over decades shape house financing and sectoral savings patterns. Households’ tendency to leverage up gross mortgage debt against housing wealth largely reflects long-standing fiscal incentives, in particular the full tax deductibility of mortgage interest. Despite the strengthening of the economic recovery, no further measures have been taken to address this since 2012.

               (10)Investment declined strongly during the crisis and has recovered only partially since. The weakness in economy-wide investment appears to have a strong cyclical character, and was driven by a downturn in the housing market as well as fiscal consolidation choices. While barriers to investment seem to be minor, procedures to obtain building permits are relatively lengthy. Low investment in renewable energy appears linked to past market dynamics, market uncertainty and regulatory factors. Public and private expenditure on R&D is low given the educational attainment, academic achievement and the level of economic development compared to the top performing Member States. Government expenditure in this area has stagnated since 2014, while private R&D spending remains low. No progress has been made on the related recommendation.

               (11)In the context of the European Semester the Commission has carried out a comprehensive analysis of the Netherlands’ economic policy and published it in the 2017 country report. It has also assessed the Stability Programme and the National Reform Programme and the follow-up given to the recommendations addressed to the Netherlands in previous years. It has taken into account not only their relevance for sustainable fiscal and socioeconomic policy in the Netherlands, but also their compliance with EU rules and guidance, given the need to strengthen the EU’s overall economic governance by providing EU-level input into future national decisions.

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

               (13)In the light of the Commission’s in-depth review and this assessment, the Council has examined the National Reform Programme and the Stability Programme. Its recommendations made under Article 6 of Regulation (EU) No 1176/2011 are reflected in recommendation 1 and 3 to the Netherlands below,

               HEREBY RECOMMENDS that the Netherlands take action in 2017 and 2018 to:

               1. Use fiscal policy to support domestic demand, including investment in research and development. Take measures to reduce the remaining distortions in the housing market and the debt bias for households, in particular by decreasing mortgage interest tax deductibility.

               2.Tackle remaining barriers to hiring staff on permanent contracts. Address the high increase in the self-employed without employees, including by reducing tax distortions favouring self-employment, without compromising entrepreneurship, and by promoting access of the self-employed to affordable social protection. Based on the broad preparatory process already launched, make the second pillar of the pension system more transparent, inter-generationally fairer and more resilient to shocks. Create conditions to promote higher real wage growth, respecting the role of the social partners.

               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)
                  COM(2017) 518 final.

                     (4)
                  P8_ TA(2017)0038, P8_ TA(2017)0039, and P8_ TA(2017)0040.

                     (5)
                  COM(2016) 725 final.

                     (6)
                  COM(2016) 728 final.

                     (7)
                  2017/C92/01

                     (8)
                  SWD(2017) 84 final.

                     (9)
                  COM(2017) 90 final.

                     (10)
                  Article 23 of 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.

                     (11)

                        COM(2014) 494 final.

                     (12)
                  Under Article 5(2) of Council Regulation (EC) No 1466/97.