title: Council Recommendation of 9 July 2019 on the 2019 National Reform Programme of Ireland and delivering a Council opinion on the 2019 Stability Programme of Ireland

text:
               5.9.2019

               EN

               Official Journal of the European Union

               C 301/35

      COUNCIL RECOMMENDATION
      of 9 July 2019
      on the 2019 National Reform Programme of Ireland and delivering a Council opinion on the 2019 Stability Programme of Ireland
      (2019/C 301/07)
      THE COUNCIL OF THE EUROPEAN UNION,
      Having regard to the Treaty on the Functioning of the European Union, and in particular Articles 121(2) and 148(4) thereof,
      Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies (1), and in particular Article 5(2) thereof,
      Having regard to Regulation (EU) No 1176/2011 of the European Parliament and of the Council of 16 November 2011 on the prevention and correction of macroeconomic imbalances (2), and in particular Article 6(1) thereof,
      Having regard to the recommendation of the European Commission,
      Having regard to the resolutions of the European Parliament,
      Having regard to the conclusions of the European Council,
      Having regard to the opinion of the Employment Committee,
      Having regard to the opinion of the Economic and Financial Committee,
      Having regard to the opinion of the Social Protection Committee,
      Having regard to the opinion of the Economic Policy Committee,
      Whereas:

                  (1)

                  On 21 November 2018, the Commission adopted the Annual Growth Survey, marking the start of the 2019 European Semester for economic policy coordination. It took due account of the European Pillar of Social Rights, proclaimed by the European Parliament, the Council and the Commission on 17 November 2017. The priorities of the Annual Growth Survey were endorsed by the European Council on 21 March 2019. On 21 November 2018, on the basis of Regulation (EU) No 1176/2011, the Commission also adopted the Alert Mechanism Report, in which it identified Ireland as one of the Member States for which an in-depth review would be carried out. On the same date, the Commission also adopted a recommendation for a Council recommendation on the economic policy of the euro area, which was endorsed by the European Council on 21 March 2019. On 9 April 2019, the Council adopted the Recommendation on the economic policy of the euro area (3) (‘2019 Recommendation for the euro area’), which sets out five euro-area recommendations (‘the euro-area recommendations’).

                  (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, Ireland should ensure the full and timely implementation of the 2019 Recommendation for the euro area, as reflected in recommendations (1) and (3) below. In particular, focusing economic policy related to investment on the specified areas and introducing tax measures will help address the second euro-area recommendation as regards supporting investment, improving public finances and combating aggressive tax planning.

                  (3)

                  The 2019 country report for Ireland was published on 27 February 2019. It assessed Ireland’s progress in addressing the country-specific recommendations adopted by the Council on 13 July 2018 (4), the follow-up given to the country-specific recommendations adopted in previous years and Ireland’s progress towards its national Europe 2020 targets. It also included an in-depth review under Article 5 of Regulation (EU) No 1176/2011, the results of which were also published on 27 February 2019. The Commission’s analysis led it to conclude that Ireland is experiencing macroeconomic imbalances. In particular, large stocks of public and private debt and net external liabilities make Ireland vulnerable to adverse shocks, but the flow variables have continued to improve. The stock of private debt remains high, but economic growth is continuing to help reduce it. The activities of multinationals continue to influence corporate debt. Household debt appears to be broadly in line with the fundamentals, although it is high compared with disposable income. Government debt is projected to remain on a downward trajectory, while the deficit is moving closer to a balanced position. House prices have been growing at a rapid pace for a number of years but have slowed down recently. House prices are largely driven by supply constraints, and there is no clear evidence of overvaluation. The stock of non-performing loans, although still high, has decreased further even if long-term arrears are falling at a slower pace.

                  (4)

                  Ireland submitted its 2019 National Reform Programme on 17 April 2019 and its 2019 Stability Programme on 29 April 2019. In order to take account of their interlinkages, the two programmes have been assessed at the same time.

                  (5)

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

                  (6)

                  Ireland is currently in the preventive arm of the Stability and Growth Pact and subject to the debt rule. In its 2019 Stability Programme, the government expects the headline balance to improve to 0,2 % of gross domestic product (GDP) in 2019 and to continue to gradually improve thereafter to 1,3 % of GDP in 2023. Based on the recalculated structural balance (6), the medium-term budgetary objective, set at a structural deficit of 0,5 % of GDP, is planned to be reached by 2020. According to the Stability Programme, the general government debt-to-GDP ratio is expected to fall to 61,1 % in 2019 and to continue declining to 51,6 % in 2023. The macroeconomic scenario underpinning those budgetary projections is plausible. At the same time, the measures needed to support the planned deficit targets from 2020 onwards have not been sufficiently specified.

                  (7)

                  On 13 July 2018, the Council recommended Ireland to achieve the medium-term budgetary objective in 2019. This is consistent with a maximum nominal growth rate of net primary government expenditure (7) of 7,0 % in 2019, corresponding to an allowed deterioration in the structural balance of 0,3 % of GDP. Based on the Commission 2019 spring forecast, Ireland is expected to comply with the recommended fiscal adjustment in 2019.

                  (8)

                  In 2020, Ireland should achieve its medium-term budgetary objective. Based on the Commission 2019 spring forecast, this is consistent with a maximum nominal growth rate of net primary government expenditure of 3,7 % (8), corresponding to an annual structural adjustment of 0,7 % of GDP. Ireland is forecast to reach 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 Ireland is projected to comply with the provisions of the Stability and Growth Pact in 2019 and 2020. In view of the difference between measurements of GDP and domestic output in Ireland and the associated impact on the debt-to-GDP ratio, Ireland’s current cyclical conditions and the heightened external risks, the use of any windfall gains to further reduce the general government debt ratio would be important.

                  (9)

                  Public finances have further improved on the back of robust output growth, but the risks of revenue volatility remain, and there is scope for making revenue more resilient to economic fluctuations and adverse shocks. Limiting the scope and number of tax expenditures and broadening the tax base would improve revenue stability in the face of economic volatility. While Ireland has increased the lower value added tax rate on tourism activities, some recent tax measures have focused on cuts and reliefs. Moreover, Ireland has further potential to improve the way its tax system can support environmental objectives. Such efforts could include reducing fossil fuel subsidies and providing a stronger price signal to investors by committing to a schedule of increases in the carbon tax over the next decade.

                  (10)

                  The fight against aggressive tax planning is essential in making tax systems more efficient and fairer, as acknowledged in the 2019 Recommendation for the euro area. Spillover effects of taxpayers’ aggressive tax-planning strategies between Member States call for a coordinated action of national policies to complement Union legislation. Ireland has taken measures against aggressive tax planning, but the high level of royalty and dividend payments as a percentage of GDP suggests that Ireland’s tax rules are used by companies that engage in aggressive tax planning. Limited application of withholding taxes on outbound (i.e. from Union residents to third-country residents) royalty and dividend payments made by companies based in Ireland may lead to those payments escaping tax altogether, if they are also not subject to tax in the recipient jurisdiction.

                  (11)

                  Long-term fiscal sustainability risks related to the cost of ageing remain. Spending on healthcare is projected to rise from 4,1 % of GDP in 2016 to 5,1 % in 2070, with a peak of 5,2 % in 2063. Though there are aspects of the healthcare system in Ireland that work well or have improved, the system is inefficient, struggles to meet demand and does not deliver coordinated, integrated care. In order to mitigate against the escalating pressures of demand, the Irish government approved the Sláintecare Implementation Strategy and set up the Sláintecare Programme Implementation Office to comprehensively reform and modernise Ireland’s health and social care services over the next 10 years. The planned reform represents a credible vision for making the health system universally accessible and sustainable, meeting the demands of an ageing population and shifting care into the community, with a stronger focus on prevention. This is likely to have a positive impact in reducing the reliance on acute care, thereby making healthcare more cost-effective. However, implementation is endangered by the health system’s difficulties in addressing the duplicate health insurance market and effectively managing its own budget, performance and workforce in the short term. Short-term costs will also need to be contained to fulfil the Sláintecare vision in the long run.

                  (12)

                  Despite past government efforts to contain spending on public pensions, the overall deficit of the pension system is expected to grow significantly in the long term as a result of pension expenditure rising from 5 % of GDP in 2016 to 6,6 % in 2070, with a peak of 7,5 % in 2053. A full and timely implementation of the presented roadmap for pension reform is key to making the Irish pension system more fiscally sustainable.

                  (13)

                  Increased investment in skills, education and training as well as in social inclusion are essential for improving Ireland’s productivity and long-term inclusive growth. The tightening labour market and the emerging skills shortages and mismatches in certain sectors call for efforts to reach out to inactive groups of potential workers and to invest in under-tapped human capital. There is scope for promoting upskilling and better aligning education curricula and vocational training to labour market needs. The low percentage of the workforce with basic digital skills calls for further investment in workplace-based training and upskilling of the adult workforce. Investing in access to quality and affordable childcare and rolling out the National Childcare Scheme will help increase the rather low employment rate for women. The participation rate of people with disabilities in the labour market is among the lowest in Europe. The number of people living in households with low work intensity remains one of the highest in the Union, highlighting the scope for more integrated and targeted activation strategies to support this particular group.

                  (14)

                  Years of low investment after the economic bust are taking their toll on the availability of affordable and social housing and of appropriate infrastructure in the areas of clean transport and energy, water and ultrafast broadband, which in turn pose barriers to business investment. Moreover, greenhouse gas emissions from road transport have increased strongly in 5 years. Improved infrastructure, combined with spatial planning, could be a critical enabler for improving the housing supply, increasing private investment, boosting productivity growth, and ensuring balanced regional economic development. Future-proof connectivity and sufficient digital skills remain crucial for domestic companies to effectively utilise digital technology and for a thriving domestic information and communications technology sector. Significant challenges remain in relation to access to ultrafast broadband, in particular in rural areas. More infrastructure investment in clean energy, clean and public transport and water services as well as intensified efforts in the field of decarbonisation, energy efficiency, renewable energy and the circular economy would help Ireland in its transition towards a low-carbon and environmentally resilient economy.

                  (15)

                  While the launch of the National Development Plan could eventually lead to the provision of additional basic infrastructure, the weak capacity of the construction sector could become an obstacle to its timely delivery. Furthermore, diversifying maritime transport and energy connections with continental Europe could increase the resilience of the economy to external shocks. Ireland has so far failed to decouple its economic growth from the emissions of greenhouse gases and air pollutants. Greenhouse gas emissions have steadily risen, in particular in transport, agriculture, energy and the built environment. Lack of progress in this area will make it more difficult for Ireland to meet its Union obligations, while also increasing the cost of future action.

                  (16)

                  Persistent supply shortages, coupled with increasing demand, continue to fuel rises in property prices. Although prices did not seem overvalued in 2017, affordability is becoming a concern. Housing supply shortages are also affecting social housing due to insufficient investment and builds over the last decade. While demand for social housing is estimated at about 72 000 units, just 10 000 are planned for delivery in 2019. 17 000 households are to be assisted through Ireland’s Housing Assistance Payment or Rental Accommodation Scheme, but this risks exacerbating rent increases in the private rental market where supply is already constrained. A large number of social homes are under-occupied, notably in the Dublin area, in part due to outdated succession practices. The inadequate mix in the types of social houses provided together with the very limited amount of affordable and cost-rental accommodation are factors further aggravating the situation. This is a major reason for a steady rise in the number of people and families living in emergency accommodation, with homelessness figures reaching new highs in February 2019.

                  (17)

                  Fostering the innovation-driven productivity of domestic firms is crucial to support more robust and resilient productivity growth in the country. Business research and development (R & D) expenditure continues to increase but it remains below the Union average and highly concentrated in the foreign-owned firms. There is scope to gear innovation policies to better support Irish small and medium-sized enterprises (SMEs). Indirect support (i.e. tax credits) remains the main instrument of public support for R & D in Ireland (accounting for 80 % of total public support). Stronger linkages between multinationals and domestic firms could help to improve the diffusion of innovation throughout the economy. In addition, closer cooperation between firms and public research centres would also increase the innovation potential.

                  (18)

                  Although the low levels of public R & D continue to cause concern (1,05 % of GDP compared to a Union average of 2 %), the recently adopted Future Jobs Ireland 2019 programme provides a promising framework to stimulate innovation and technological change and improve the productivity of SMEs. However, its full implementation will depend on a significant increase in public expenditure on research and innovation and the translation of the recently adopted programme into concrete policy measures. As it stands, this ambitious list of measures still lacks important details and precise implementation dates. For instance, for actions to be taken in 2019, no measures have been identified to increase the availability of long-term equity investment to support indigenous companies in scaling their business; the policy mix to incentivise SMEs to invest in new technologies combines tax credit and non-tax incentives to encourage SMEs to invest in innovation, but the relative magnitude of these measures remains unknown. Future Jobs Ireland 2019 does not include specific actions and deliverables to address the gap between Ireland and other Member States when it comes to rolling out future-proof broadband networks in line with Union 2025 Gigabit Society targets. The National Broadband Plan is expected to help address this gap.

                  (19)

                  Regional disparities in Ireland are significant and have been increasing over the last decade. Ireland has rather high regional economic disparities compared to other Member States in terms of GDP per capita. Between 2000 and 2016, GDP per capita in the Southern and Eastern region increased by 74 %, 63 percentage points more than in the Border, Midland and Western region, and the increase accelerated after 2012. By 2016, GDP per capita in the Southern and Eastern region was 2,6 times higher than in the Border, Midland and Western region. The Dublin area, with 40 % of Ireland’s population, contributed by 62 percentage points to GDP growth between 2000 and 2016.

                  (20)

                  Regulatory barriers to entrepreneurship (in particular certain regulations related to commercial property and legal services) negatively affect firm entry and exit and thereby the productivity of indigenous Irish firms. Barriers to entry into retail markets represent a challenge. Ireland scores among the top five countries with the greatest number of procedural requirements as regards the establishment of retail outlets. Retailers face procedural obstacles which delay and increase the costs of opening new shops and may have a negative impact on market structure and dynamics.

                  (21)

                  The new Legal Services Regulation Act remains to be implemented, as the introduction of regulations continues to experience significant delays, even if preparatory consultations are ongoing. Allowing for direct professional access to barristers on contentious matters as well as allowing for legal persons to become partners in all types of legal practice remain uncertain possibilities. However, overly complex operation and management rules for multi-disciplinary practices are to be avoided. An ambitious implementation of open-ended reforms is a matter of top priority. ‘Ambition 2.3’ in the Future Jobs Ireland 2019 programme is supposed to tackle problems with the cost of legal services, but the only deliverable in 2019 is tentative and the timing is ambiguous. Delays in implementing this reform contribute to the high cost of legal services in Ireland, to the detriment of business, SMEs in particular, and individuals. Since legal services are an important input for other business services, restrictions in that sector contribute to the high cost of other services (e.g. insurance).

                  (22)

                  Non-performing loan ratios have continued to fall and were down by 4,4 percentage points to 5,5 % in the year up to the fourth quarter of 2018. Banks are well on track to meet their reduction targets, supported by portfolio sales, restructuring efforts and rising property prices. Long-term mortgage arrears (over two years past due) remain relatively high, helping to keep the non-performing loan ratio above the euro-area average. A number of initiatives and draft bills, such as the ‘no consent, no sale’ bill have been proposed to address the social and economic impact of non-performing loan resolution, including for vulnerable households. The credit register became fully functional for consumer loans in 2018 and will be crucial for assessing whether borrowers are capable of servicing their debts. Insolvency procedures and the use of in- and out-of-court options for arrears resolution remain limited. Further reducing long-term mortgage arrears while building on initiatives for vulnerable households, without creating undue obstacles for non-performing loans resolution, remains a challenge and requires continued monitoring.

                  (23)

                  The programming of Union funds for the period 2021-2027 could help address some of the gaps identified in the recommendations, in particular in the areas covered by Annex D to the 2019 country report. This would allow Ireland to make the best use of those funds in respect of the identified sectors, taking into account regional disparities.

                  (24)

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

                  (25)

                  In the light of this assessment, the Council has examined the 2019 Stability Programme and is of the opinion (9) that Ireland is expected to comply with the Stability and Growth Pact.

                  (26)

                  In the light of the Commission’s in-depth review and this assessment, the Council has examined the 2019 National Reform Programme and the 2019 Stability Programme. Its recommendations under Article 6 of Regulation (EU) No 1176/2011 are reflected in recommendations (1) and (3) below. Those recommendations also contribute to the implementation of the 2019 Recommendation for the euro area, in particular the second euro-area recommendation. The fiscal policies referred to in recommendation (1) below contribute, inter alia, to addressing imbalances linked to high government debt,

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

         1.

            Achieve the medium-term budgetary objective in 2020. Use windfall gains to accelerate the reduction of the general government debt ratio. Limit the scope and number of tax expenditures, and broaden the tax base. Continue to address features of the tax system that may facilitate aggressive tax planning, and focus in particular on outbound payments. Address the expected increase in age-related expenditure by making the healthcare system more cost-effective and by fully implementing pension reform plans.

         2.

            Provide personalised active integration support and facilitate upskilling, in particular for vulnerable groups and people living in households with low work intensity. Increase access to affordable and quality childcare.

         3.

            Focus investment-related economic policy on low carbon and energy transition, the reduction of greenhouse gas emissions, sustainable transport, water, digital infrastructure and affordable and social housing, taking into account regional disparities. Implement measures, including those in the Future Jobs strategy, to diversify the economy and improve the productivity of Irish firms — SMEs in particular — by using more direct funding instruments to stimulate research and innovation and by reducing regulatory barriers to entrepreneurship.

         Done at Brussels, 9 July 2019.

               For the Council

               The President

            M. LINTILÄ

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

         (2)  OJ L 306, 23.11.2011, p. 25.

         (3)  OJ C 136, 12.4.2019, p. 1.

         (4)  OJ C 320, 10.9.2018, p. 27.

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

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

         (7)  Net primary government expenditure comprises total government expenditure excluding interest expenditure, expenditure on Union programmes fully matched by Union funds revenue and nondiscretionary changes in unemployment benefit expenditure. Nationally financed gross fixed capital formation is smoothed over a four-year period. Discretionary revenue measures or revenue increases mandated by law are factored in. One-off measures on both the revenue and expenditure sides are netted out. The expenditure benchmark for Ireland reflects an adjustment to correct for a distortion to the 10-year reference rate of potential growth caused by the exceptionally high surge in real GDP growth in 2015. Following the approach taken by the Irish authorities in their Budget 2017 calculations, the Commission has taken the average of potential growth rates in 2014 and 2016.

         (8)  As in 2019, the expenditure benchmark reflects an adjustment to correct for a distortion to the 10-year reference rate of potential growth caused by the exceptionally high surge in real GDP growth in 2015.

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


title: Council Recommendation of 9 July 2019 on the 2019 National Reform Programme of Greece and delivering a Council opinion on the 2019 Stability Programme of Greece

text:
               5.9.2019

               EN

               Official Journal of the European Union

               C 301/42

      COUNCIL RECOMMENDATION
      of 9 July 2019
      on the 2019 National Reform Programme of Greece and delivering a Council opinion on the 2019 Stability Programme of Greece
      (2019/C 301/08)
      THE COUNCIL OF THE EUROPEAN UNION,
      Having regard to the Treaty on the Functioning of the European Union, and in particular Articles 121(2) and 148(4) thereof,
      Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies (1), and in particular Article 5(2) thereof,
      Having regard to Regulation (EU) No 1176/2011 of the European Parliament and of the Council of 16 November 2011 on the prevention and correction of macroeconomic imbalances (2), and in particular Article 6(1) thereof,
      Having regard to the recommendation of the European Commission,
      Having regard to the resolutions of the European Parliament,
      Having regard to the conclusions of the European Council,
      Having regard to the opinion of the Employment Committee,
      Having regard to the opinion of the Economic and Financial Committee,
      Having regard to the opinion of the Social Protection Committee,
      Having regard to the opinion of the Economic Policy Committee,
      Whereas:

                  (1)

                  On 21 November 2018, the Commission adopted the Annual Growth Survey, marking the start of the 2019 European Semester for economic policy coordination. It took due account of the European Pillar of Social Rights, proclaimed by the European Parliament, the Council and the Commission on 17 November 2017. The priorities of the Annual Growth Survey were endorsed by the European Council on 21 March 2019. On 21 November 2018, on the basis of Regulation (EU) No 1176/2011, the Commission also adopted the Alert Mechanism Report, in which it identified Greece as one of the Member States for which an in-depth review would be carried out. On the same date, the Commission also adopted a recommendation for a Council recommendation on the economic policy of the euro area, which was endorsed by the European Council on 21 March 2019. On 9 April 2019, the Council adopted the Recommendation on the economic policy of the euro area (3) (‘2019 Recommendation for the euro area’), which sets out five euro-area recommendations (‘the euro-area recommendations’).

                  (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, Greece should ensure the full and timely implementation of the 2019 Recommendation for the euro area, as reflected in recommendations (1) and (2) below. In particular, reforms in line with the post-programme commitments and focusing economic policy related to investment in the specified areas will help address the euro-area recommendation.

                  (3)

                  The 2019 country report for Greece was published on 27 February 2019. It assessed Greece’s progress towards its national Europe 2020 targets. It also included an in-depth review under Article 5 of Regulation (EU) No 1176/2011, the results of which were also published on 27 February 2019. The Commission’s analysis led it to conclude that Greece is experiencing excessive macroeconomic imbalances. The imbalances identified related in particular to the high public debt, the negative net international investment position, the high non-performing loans on banks’ balance sheets and the still high unemployment rate. In addition, deep institutional and structural reforms initiated in recent years to modernise the economy and the State will require many years of sustained implementation for their impact to be fully felt.

                  (4)

                  Greece submitted its 2019 National Reform Programme on 26 April 2019 and its 2019 Stability Programme on 30 April 2019. In order to take account of their interlinkages, the two programmes have been assessed at the same time.

                  (5)

                  As provided for in Article 23 of Regulation (EU) No 1303/2013 of the European Parliament and of the Council (4), where it is necessary to support the implementation of relevant Council recommendations, the Commission may request a Member State to review and propose amendments to its Partnership Agreement and relevant programmes. The Commission has provided further details on how it would make use of that provision in guidelines on the application of the measures linking the effectiveness of the European Structural and Investment Funds to sound economic governance (5).

                  (6)

                  Greece is currently in the preventive arm of the Stability and Growth Pact and subject to the transitional debt rule. It should also preserve a sound fiscal position which ensures compliance with the primary surplus target set by Council Implementing Decision (EU) 2017/1226 (6) of 3,5 % of gross domestic product (GDP) for 2018 and over the medium term. In spring 2018, the Council issued no country-specific recommendation to Greece in the context of the European Semester because pursuant to Article 12 of Regulation (EU) No 472/2013 of the European Parliament and of the Council (7) Greece was exempt from the monitoring and assessment under the European Semester at that time since it was subject to a macroeconomic adjustment programme. The post-programme framework for Greece entails the activation of enhanced surveillance together with Greece’s integration to the European Semester framework of economic and social policy coordination, while maximising the synergies between the enhanced surveillance and European Semester processes.

                  (7)

                  In its 2019 Stability Programme, the government plans a headline surplus of between 1,1 % and 1,7 % of GDP over 2019-2022. The government set its medium-term budgetary objective — a budget surplus of 0,25 % of GDP in structural terms as of 2020. Based on the recalculated structural balance (8), this medium-term budgetary objective is planned to be overachieved throughout the programme period and the general government debt-to-GDP ratio is expected to gradually decline to 153,3 % in 2022. The macroeconomic scenario underpinning those budgetary projections has been endorsed by an independent body and is favourable. Based on the Commission 2019 spring forecast, the structural balance is forecast to register a surplus of 1,9 % of GDP in 2019 and 0,8 % of GDP in 2020, above the medium-term budgetary objective. General government debt is forecast to remain on a downward path and to comply with the transitional debt rule in 2019 and with the debt rule in 2020. Overall, based on the Commission 2019 spring forecast and thus excluding the new measures adopted after its cut-off date, Greece was projected to comply with the provisions of the Stability and Growth Pact in 2019 and 2020. On the same basis, Greece was also considered to comply with the 3,5 % of GDP primary surplus target monitored under the enhanced surveillance framework.

                  (8)

                  The Stability Programme and Commission 2019 spring forecast do not incorporate new permanent measures announced and adopted shortly after their respective submission and cut-off dates. The Commission estimates the fiscal impact of these measures to exceed 1,0 % of GDP in 2019 and subsequent years. It is also assessed that the adoption of these new measures poses a risk for the agreed primary surplus target, as monitored under the enhanced surveillance framework and set by Implementing Decision (EU) 2017/1226. Moreover, the new measures are expected to reduce the structural balance, raising concerns on the achievement the medium-term budgetary objective in 2020. But, a reassessment will be carried out in autumn 2019, and will include a revision of the applicable benchmark for the net expenditure growth rate in 2020. While general government debt is forecast to remain on a downward path, some risks could be posed to compliance with the debt reduction benchmark. This will have to be reassessed in autumn as a result of these newly adopted measures.

                  (9)

                  Following its successful completion of the financial assistance programme under the European Stability Mechanism, Greece is subject to a post-programme surveillance framework integrated into the European Semester and is subject to enhanced surveillance in accordance with Regulation (EU) No 472/2013. The activation of enhanced surveillance for Greece under Commission Implementing Decisions (EU) 2018/1192 (9) and (EU) 2019/338 (10) acknowledges the fact that over the medium term, Greece needs to continue adopting measures to address the sources or potential sources of macroeconomic imbalances, while implementing structural reforms to support a robust and sustainable economic growth. Greece made a commitment in the Eurogroup of 22 June 2018 to continue all key reforms adopted under the programme until they are fully completed. Greece also committed to implementing specific actions related to fiscal and fiscal-structural policies, social welfare, financial stability, labour and product markets, privatisation and public administration. Greece is subject to quarterly reporting on progress with implementing its commitments under enhanced surveillance, where a favourable report can, on a six monthly basis, pave the way for the release of debt-relief measures worth 0,7 % of GDP per annum. The release of the first tranche of policy-contingent debt measures worth EUR 970 million was agreed by the Eurogroup in April 2019. The third Enhanced Surveillance report assessing Greece’s progress with the implementation of its commitments was published on 5 June 2019.

                  (10)

                  Reforms that improve the business environment and the quality of institutions, in particular the efficiency of the justice system, would foster economic resilience in Greece, improve payment discipline and should have a significant impact on investment decisions and attracting businesses. Despite recent improvements, the Greek judicial system still faces challenges and displays inefficiencies, as the time to reach a decision is often too long and backlogs weigh on the productivity of courts. Further targeted action in this area is therefore critical, also to facilitate the smooth functioning of the financial system as well as help unlocking investment potential.

                  (11)

                  Several years of underinvestment have led to major investment gaps in Greece. Increasing growth-enhancing investment will be instrumental in underpinning longer-term growth and reducing regional disparities. Reforms in the financial sector favouring the expansion of the supply of credit will play a key role in supporting investment. The 2019 country report identified priority areas for public and private sector investment.

                  (12)

                  Higher investment in education and training is crucial to improve Greece’s productivity and long-term inclusive growth and address barriers to growth in innovative sectors. The Greek education system faces several challenges with inadequate resources, low autonomy, underachievement in basic (including digital) skills and persisting skills mismatches. At all levels, accountability and monitoring, which are necessary for quality improvement of the education system, are largely missing. Promoting quality and inclusive education and training, establishing closer links between education and labour market needs, improving the attractiveness of vocational education and training, and increasing participation in lifelong learning are important for underpinning sustainable growth.

                  (13)

                  Despite recent improvements, the share of long-term unemployed, which represented 70 % of the unemployed in Greece in 2018, is very high, and high youth unemployment and low labour market participation of women are also a matter of concern. Interventions should focus on improving employment prospects, promoting labour market participation, and fostering conditions for job creation. Effective social dialogue and responsible social partnership in Greece can support the environment for the implementation and ownership of sustained reforms, resulting in a better functioning of the labour market.

                  (14)

                  Whilst reforms have been initiated, Greece is characterised by high income inequality and has one of the lowest impact of social transfers on reducing the risk of poverty in the Union (15,83 % in 2017 versus an Union average of 33,98 %). Investments should focus on enhancing access to inclusive, affordable and high quality social services, as well as on developing day-care centres. Supporting the most deprived and promoting the social integration of children at risk of poverty, of persons with disabilities, of migrants and refugees, while paying attention to geographic disparities would improve social inclusion in Greece.

                  (15)

                  Greece initiated a far-reaching reform of the primary healthcare system in 2017, which is crucial to ensure access and requires continued investment through the deployment of local healthcare units (the ‘TOMYs’).

                  (16)

                  The Greek transport system faces significant challenges. It is largely road-based and heavily dependent on oil, with all main connections rotating around the Athens– Thessaloniki route. Transport costs are still high while the quality of service, safety standards and penetration of intelligent transport systems remains low. New investment is needed to increase multimodal transport and promote regional integration and urban development.

                  (17)

                  Treatment of solid waste and urban and industrial wastewater is the main area needing additional investment in order to align the country’s environmental protection standards with the rest of the Union. The management of solid waste continues to be a major structural challenge, with Greece still relying heavily on landfilling and mechanical-biological treatment instead of more modern techniques. In addition, the proportion of municipal waste that is recycled is only about a third of the Union average. Investments are also needed to improve water treatment, combat ground water salinisation, and support measures to prevent flooding and restore the natural flow of rivers.

                  (18)

                  Underdeveloped infrastructures increase energy costs for businesses and households and form a barrier to the uptake of renewable energy. Greece faces a particular challenge here with the electricity connectivity of islands and the connection with neighbouring countries. Further development of commercial gas infrastructure would help grow the market. The reform of both the gas and electricity markets should strive to take advantage of these new infrastructure opportunities.

                  (19)

                  The digital transformation of the economy and society remains challenging, with low access to high-speed broadband networks and digital skills well below the Union average. Greece particularly needs to invest in information and communication technology, also to make up for the investment slump during the crisis. Insufficient higher speed broadband connectivity creates major bottlenecks for dynamic export oriented businesses. The investment in innovation and people’s skills is insufficient to promote productivity growth, and the lack of digital skills among the population at large is impeding them from finding employment and hindering the development of innovative businesses.

                  (20)

                  Renewed ‘smart specialisation’ strategies at national and regional level, and additional measures to address the most pressing weaknesses of the research and innovation system, are needed to stimulate market-oriented investment in research and development (R & D), which remains low and weighs on Greece’s growth potential. Advances in scientific excellence are hindered by the low intensity of public R & D, a lack of a performance-based funding system and weak science-business links. Higher investment is also needed to boost the low levels of technological development, reflected in the very low number of patents compared with other Member States, and to fully tap into the potential of start-ups and scale-ups.

                  (21)

                  As a crosscutting theme, investment in the regeneration of deprived urban areas, islands and highlands is needed to counter the loss and deteriorated quality of the country’s physical and human capital during the economic crisis. Sustainable redevelopment of disadvantaged and/or deindustrialised areas in the Athens-Piraeus and Thessaloniki conurbations and in some principal peripheral urban centres is a specific short to medium-term priority. Longer-term priorities include developing sustainable productive activities, upgrading mobility and security systems, energy efficiency and renewable energy, environmental protection and improving resilience to natural risks and socio-economic crises. Interventions should also target the social inclusion, the integration of migrants, the acquisition of skills to reduce unemployment, and cultural activities to increase the attractiveness of deprived areas. Addressing these challenges through integrated urban renewal strategies would maximise the chances of achieving the best economic, social and environmental outcomes.

                  (22)

                  The programming of Union funds for the period 2021-2027 could help address some of the gaps identified in the recommendations, in particular in the areas covered by Annex D to the 2019 country report. This would allow Greece to make the best use of those funds in respect of the identified sectors, taking into account regional disparities. Strengthening the administrative capacity for the management of the Funds is an important factor for the success of investment.

                  (23)

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

                  (24)

                  In the light of this assessment, the Council has examined the 2019 Stability Programme and is of the opinion (11) that Greece is expected to comply with the Stability and Growth Pact.

                  (25)

                  In the light of the Commission’s in-depth review and this assessment, the Council has examined the 2019 National Reform Programme and the 2019 Stability Programme. Its recommendations made under Article 6 of Regulation (EU) No 1176/2011 are reflected in recommendations (1) and (2) below. Those recommendations also contribute to the implementation of the first four of the euro-area recommendations,

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

         1.

            Achieve a sustainable economic recovery and tackle the excessive macroeconomic imbalances by continuing and completing reforms in line with the post-programme commitments given at the Eurogroup of 22 June 2018.

         2.

            Focus investment-related economic policy on sustainable transport and logistics, environmental protection, energy efficiency, renewable energy and interconnection projects, digital technologies, R & D, education, skills, employability, health, and the renewal of urban areas, taking into account regional disparities and the need to ensure social inclusion.

         Done at Brussels, 9 July 2019.

               For the Council

               The President

            M. LINTILÄ

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

         (2)  OJ L 306, 23.11.2011, p. 25.

         (3)  OJ C 136, 12.4.2019, p. 1.

         (4)  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).

         (5)  COM(2014) 494 final.

         (6)  Council Implementing Decision (EU) 2017/1226 of 30 June 2017 amending Implementing Decision (EU) 2016/544 approving the macroeconomic adjustment programme of Greece (2015/1411) (OJ L 174, 7.7.2017, p. 22.).

         (7)  Regulation (EU) No 472/2013 of the European Parliament and of the Council of 21 May 2013 on the strengthening of economic and budgetary surveillance of Member States in the euro area experiencing or threatened with serious difficulties with respect to their financial stability (OJ L 140, 27.5.2013, p. 1).

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

         (9)  Commission Implementing Decision (EU) 2018/1192 of 11 July 2018 on the activation of enhanced surveillance for Greece (OJ L 211, 22.8.2018, p. 1).

         (10)  Commission Implementing Decision (EU) 2019/338 of 20 February 2019 on the prolongation of enhanced surveillance for Greece (OJ L 60, 28.2.2019, p. 17.).

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


title: Council Recommendation of 9 July 2019 on the 2019 National Reform Programme of Spain and delivering a Council opinion on the 2019 Stability Programme of Spain

text:
               5.9.2019

               EN

               Official Journal of the European Union

               C 301/48

      COUNCIL RECOMMENDATION
      of 9 July 2019
      on the 2019 National Reform Programme of Spain and delivering a Council opinion on the 2019 Stability Programme of Spain
      (2019/C 301/09)
      THE COUNCIL OF THE EUROPEAN UNION,
      Having regard to the Treaty on the Functioning of the European Union, and in particular Articles 121(2) and 148(4) thereof,
      Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies (1), and in particular Article 5(2) thereof,
      Having regard to Regulation (EU) No 1176/2011 of the European Parliament and of the Council of 16 November 2011 on the prevention and correction of macroeconomic imbalances (2), and in particular Article 6(1) thereof,
      Having regard to the recommendation of the European Commission,
      Having regard to the resolutions of the European Parliament,
      Having regard to the conclusions of the European Council,
      Having regard to the opinion of the Employment Committee,
      Having regard to the opinion of the Economic and Financial Committee,
      Having regard to the opinion of the Social Protection Committee,
      Having regard to the opinion of the Economic Policy Committee,
      Whereas:

                  (1)

                  On 21 November 2018, the Commission adopted the Annual Growth Survey, marking the start of the 2019 European Semester for economic policy coordination. It took due account of the European Pillar of Social Rights, proclaimed by the European Parliament, the Council and the Commission on 17 November 2017. The priorities of the Annual Growth Survey were endorsed by the European Council on 21 March 2019. On 21 November 2018, on the basis of Regulation (EU) No 1176/2011, the Commission also adopted the Alert Mechanism Report, in which it identified Spain as one of the Member States for which an in-depth review would be carried out. On the same date, the Commission also adopted a recommendation for a Council recommendation on the economic policy of the euro area, which was endorsed by the European Council on 21 March 2019. On 9 April 2019, the Council adopted the Recommendation on the economic policy of the euro area (3) (‘2019 Recommendation for the euro area’) which sets out five euro-area recommendations (‘the euro-area recommendations’).

                  (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, Spain should ensure the full and timely implementation of the 2019 Recommendation for the euro area, as reflected in recommendations (1) to (4) below. In particular, measures to improve productivity will help address the first euro-area recommendation as regards productivity improvements for euro area rebalancing, using windfall gains to reduce public debt and focusing economic policy related to investment in the specified areas will help address the second euro-area recommendation as regards rebuilding buffers and supporting investment, and measures to improve skills and employability will help address the third euro-area recommendation as regards the functioning of the labour market.

                  (3)

                  The 2019 country report for Spain was published on 27 February 2019. It assessed Spain’s progress in addressing the country-specific recommendations adopted by the Council on 13 July 2018 (4), the follow-up given to the country-specific recommendations adopted in previous years and Spain’s progress towards its national Europe 2020 targets. It also included an in-depth review under Article 5 of Regulation (EU) No 1176/2011, the results of which were also published on 27 February 2019. The Commission’s analysis led it to conclude that Spain is experiencing macroeconomic imbalances. A large stock of internal and external debt, both public and private, and high unemployment, in the context of weak productivity growth, are still vulnerabilities with a cross-border relevance. The reduction of private-sector debt is progressing, but deleveraging needs remain sizeable. Despite continued robust gross domestic product (GDP) growth, the government debt as a share of GDP remains high. The unemployment rate has continued its rapid decline, but remains very high and the high degree of labour market segmentation between temporary and open-ended contracts impedes faster labour productivity growth. After a strong reform momentum between 2012 and 2015, an evolving political context over the past year has contributed to another year of limited progress in implementing country-specific recommendations of previous years. The present favourable economic situation provides a window of opportunity to address pending reform needs with a view to making the Spanish economy more resilient and raising its productivity growth.

                  (4)

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

                  (5)

                  The 2019 Stability Programme reports on actions taken to implement the preventive and corrective tools set out in Spain’s Stability Law. However, it does not set out plans to make the enforcement of these tools automatic and to review the Stability Law’s expenditure rule, with a view to strengthening its contribution to fiscal consolidation, especially during economic upturns. In the area of public procurement, to improve the efficiency of public spending as well as to help prevent irregularities, the ambitious implementation of the Law on public-sector contracts adopted in 2017 will be instrumental. In particular, it is important that the new governing structure, in particular the Independent Office for Regulation and Supervision, can effectively perform the tasks allocated to it, and that the comprehensive National Public Procurement Strategy be swiftly adopted — with the active involvement of contracting authorities and entities at national, regional and local levels. Finally, a number of spending reviews are due in 2019 and the implementation of the recommendations stemming from them should help increase the efficiency of public spending.

                  (6)

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

                  (7)

                  Following the timely and durable correction of the excessive deficit and Council Decision (EU) 2019/1001 (6) to abrogate the excessive deficit procedure, Spain is in the preventive arm of the Stability and Growth Pact and subject to the transitional debt rule. It projects the general government balance to increase from – 2,5 % of GDP in 2018 to – 2,0 % of GDP in 2019 and to reach a balanced budget in 2022. Based on the recalculated structural balance (7), the medium-term budgetary objective of a balanced budgetary position in structural terms is not planned to be achieved over the time horizon of the 2019 Stability Programme. According to the 2019 Stability Programme, the general government debt-to-GDP ratio is expected to decrease from 97,1 % in 2018 to 95,8 % in 2019, before reaching 88,7 % in 2022. The macroeconomic scenario underpinning those budgetary projections is plausible. Risks to the achievement of the fiscal targets set in the 2019 Stability Programme mostly pertain to the revenue side, where there is large uncertainty about the yield or chances of adoption of many of the revenue measures.

                  (8)

                  On 13 July 2018, the Council recommended Spain to ensure that the nominal growth rate of net primary government expenditure (8) does not exceed 0,6 % in 2019, corresponding to an annual structural adjustment of 0,65 % of GDP. Based on the Commission 2019 spring forecast, there is a risk of a significant deviation from the recommended adjustment path towards the medium-term budgetary objective in 2019.

                  (9)

                  In 2020, in view of Spain’s general government debt-to-GDP ratio, which is above the 60 %-of-GDP Treaty reference value, and projected positive output gap of 2,0 % of GDP, nominal net primary government expenditure should not grow in 2020, in line with the structural adjustment of 1,0 % of GDP stemming from the commonly agreed adjustment matrix of requirements under the Stability and Growth Pact. At the same time, there are signs that idle capacity in the economy is underestimated, with inflation projected to stay below 2 % in 2019 and 2020 and remaining slack in the labour market (high unemployment rate and a very high share of involuntary part-time work, temporary employees as well as in-work poverty). In addition, the plausibility tool also indicates that there is a high degree of uncertainty surrounding the output gap estimates based on the common methodology. On that basis, an annual structural adjustment of 0,65 % of GDP, corresponding to a maximum growth rate of net primary government expenditure of 0,9 %, appears appropriate. According to the Commission 2019 spring forecast, under unchanged policies, there is a risk of a significant deviation from the required fiscal adjustment in 2020. In addition, Spain is not projected to comply with the requirements of the transitional debt rule in 2019 and 2020. Overall, the Council is of the opinion that the necessary measures should be taken as of 2019 to comply with the provisions of the Stability and Growth Pact. It would be important to use any windfall gains to further reduce the general government debt ratio.

                  (10)

                  Employment growth remains robust in Spain. Unemployment continues to fall but it remains well above the Union average, especially for young people and for the low-skilled people. Gender gaps in employment and in the length of working careers remain wide. These represent untapped potential not least given the rapidly ageing population.

                  (11)

                  While progressively reduced, the still widespread use of temporary contracts, including in sectors less prone to seasonal or cyclical activity, ranks amongst the highest in Europe and may hinder Spain’s growth potential and social cohesion. Young people, the low-skilled and third-country nationals are those most affected, often suffering from lower entitlements to social benefits and higher poverty risks. Temporary contracts are often very short and provide weak incentives for both workers and employers to invest in training, which in turn hinders productivity growth. Moving from a temporary contract to a permanent one remains difficult and, barriers to mobility of labour reduce opportunities for jobseekers and hamper its efficient allocation across the country.

                  (12)

                  Spain has strengthened the support to the long-term unemployed, who still represented 6,4 % of the active population in 2018. Recent initiatives seek to make young people employable through counselling and career guidance, but public employment services still handle a low share of job vacancies and further efforts are needed to improve their use in job search and placement. In particular, in some regions, engagement with employers is weak and profiling tools to better match jobseekers with employers’ needs are still in an initial phase. Partnerships between public employment services and social services are progressing, but cooperation is still limited in some regions. Increased investment in modern public employment services together with support to labour mobility could contribute to improve the employability and adaptability of workers and smoothens labour market transitions, thus improving Spain’s productivity and long-term inclusive growth.

                  (13)

                  Efforts to reinforce labour inspectorates in order to fight against the abuse of temporary contracts are bearing some fruit and the share of open-ended contracts in net employment growth is increasing. However, employers continue to make an extensive use of short-term contracts. Past evidence shows that the numerous incentives to support job creation are having limited effects in promoting quality employment. Spain launched a new evaluation with the view to simplifying the system, but results are not available yet. Recruitment competitions to reduce the share of fixed-term employment in the public sector at all levels of government need to be speed up to reach the target of 8 % by the end of the 2020 recruitment competitions. While the setting-up of tripartite round tables is a good step towards greater involvement by the social partners in policy design, there is room for deeper and more timely consultations.

                  (14)

                  Though decreasing, the proportion of people at risk of poverty and social exclusion as well as income inequality remains above the Union average. In-work poverty rates are high amongst temporary or low-skilled workers, or non-EU-born. The child poverty rate, although declining, remains very high. The capacity of social transfers other than pensions to reduce poverty remains among the lowest in the Union, especially for children. Social spending as a share of GDP in Spain for households with children in Spain is one of the lowest in the Union and is poorly targeted, despite a recent small increase in the means-tested child allowance. Despite a positive trend, there are still significant gaps in the coverage of people with severe and moderate dependency. National unemployment assistance remains fragmented, with multiple schemes that target different groups of jobseekers. Recent measures improving the coverage and protection of income assistance for older long-term unemployed (aged 52 or above) may, at the same time, weaken incentives to work within this particular group. Meanwhile, regional minimum income schemes present wide disparities in access conditions, coverage and adequacy across regions and their limited portability between regions reduces incentives for labour mobility. As a result, a number of people in need do not receive support. The launch of the Universal Social Card system will make the social benefits system more transparent and thus allow for a better targeting. While the economic recovery continues to curb poverty, the situation calls for investment in social inclusion policies and social infrastructure (e.g. social housing) in order to attain inclusive growth. In addition, Spain faces specific territorial cohesion challenges, such as acute depopulation and ageing in certain rural areas. Actions promoting entrepreneurship, digitalisation and the social economy can help respond to those challenges, as part of integrated territorial development strategies.

                  (15)

                  During the crisis, the Spanish pension system played an important role in maintaining the living standards of the elderly, who face a lower risk of poverty. Projections in the 2018 Ageing Report and Pension Adequacy Report indicate that the 2011 and 2013 reforms helped to ensure the sustainability and relative adequacy of pensions in the long term. However, a continuation of the relinking of pension increases to inflation (as decided in 2018 and 2019) and the postponement of the sustainability factor would require compensatory measures to ensure the sustainability of the pension system in the medium to long term. Moreover, action would be needed to address both the main challenge of the adequacy of future retirees’ incomes and the length and completeness of their working careers in a context of high unemployment and widespread use of temporary contracts and part-time employment.

                  (16)

                  Spain’s innovation performance and productivity growth are hampered by subdued levels of investment in research and development and by skills mismatches. Research and development expenditure in the business sector in Spain is only half the level of the Union average, particularly for large firms, with significant regional disparities. That divergence is reinforced by the low and falling execution rate of the public budget for research and development, particularly of loans. Skills shortages and mismatches are another important barrier to the development and use of advanced technologies, in particular by small and medium-sized firms. Employment in high technology sectors and knowledge intensive services is well below the Union average in many Spanish regions. While regional innovation strategies for smart specialisation are being developed and the governance of national research and innovation policy is being streamlined, national-regional coordination in the design, implementation and evaluation of policy remains weak. Improving Spain’s innovation performance requires significant investments to foster entrepreneurship and start-ups and help them grow and to promote the competitiveness of all firms and their adaptation – including through digitalisation – to higher added-value activities with the aim of expanding their presence in international markets. It also requires a stronger focus on public-private partnerships, cooperation between academia and business and technology transfer, particularly in favour of small and medium-sized companies, a strengthened governance of research and innovation policy across government levels, and a closer alignment of research and development infrastructure and projects to regional and national innovation strategies.

                  (17)

                  Although improving, the early school leaving rate remains very high in Spain, with significant regional disparities. There is scope to improve educational outcomes which vary greatly across regions. Both factors negatively affect the long-term potential for productivity growth. Efforts to reform the education system have stalled. Firms report difficulty in finding the skills needed to embrace innovation, in particular as regards specialists in information and communication technologies. Spain approved measures to upgrade the dual vocational education and training system, which could play a key role in providing the skills and qualifications required to absorb innovation, but enrolment in those systems remains moderate. Spain’s rate of tertiary education attainment is above the Union average but tertiary graduates face difficulties in finding adequate jobs. Developing human capital through all levels of education and training, including higher education and vocational training, and greater cooperation between education and business with a view to mitigating existing skills mismatches, could boost labour market access of young graduates. It could also provide firms with the skills and qualifications required to enhance their innovation capacity and to take full advantage of the growth potential offered by digitalisation. Retraining workers in digital skills would also allow Spanish companies to remain competitive in an increasingly digitised economy. All those actions would contribute to the reduction of regional disparities.

                  (18)

                  The restrictiveness and fragmentation of regulation within Spain are preventing firms from benefiting from economies of scale and is holding back productivity. The Law on Market Unity remains an important tool to address these issues. Implementing that Law more decisively and removing identified restrictions on services in particular for certain professional services, such as civil engineers, architects and legal services, would improve growth opportunities and competition. As in other fields where regions are key actors for the successful implementation of reforms, a stronger and sustained coordination between national and regional authorities could make policies in this area more effective.

                  (19)

                  Incomplete connections for freight transport by rail and limited integration with the Union’s electricity and gas markets prevent Spain from fully benefitting from the Union Single Market. For this reason, Spain also needs to invest further in electricity interconnections with the rest of the Union to achieve the target of at least 10 % of its installed electricity production capacity by 2020. Investment is also needed to allow for greater use of rail for freight transport, including cross-border connections with France and Portugal and connections to ports and logistic hubs.

                  (20)

                  Significant investment gaps also remain in the area of natural resources management to ensure a more sustainable development model. Reducing energy consumption in buildings, and developing smart grids and renewable electricity storage would help to better manage the demand. Additional efforts should promote sustainable transport and the circular economy. Certain areas of Spain are amongst the most exposed in Europe to climate change, with the existing water resources under pressure and requiring further infrastructure investments to improve water management, such as wastewater treatment, addressing leaks in the networks and water supply. In spite of a steady progress in recent years, Spain still needs to fulfil certain requirements of the Union’s water law. Progress in meeting all these objectives would bring environmental, economic and social benefits to Spain.

                  (21)

                  For all identified investment gaps, account should be taken of specific regional disparities in investment needs. Territorial disparities in GDP per head are moderate but they remain wider than before the crisis, mostly due to the asymmetric impact of labour shedding across regions. The widest regional disparities are currently identified in labour and social outcome indicators, where most Spanish regions underperform relative to the Union average. Other socioeconomic indicators present wide territorial disparities, such as innovation, entrepreneurship, and competitiveness. Economic policy related to investment should take due account of regional disparities in investment needs.

                  (22)

                  The programming of Union funds for the period 2021-2027 could help address some of the gaps identified in the recommendations, in particular in the areas covered by Annex D to the 2019 country report. This would allow Spain to make the best use of those funds in respect of the identified sectors, taking into account regional disparities and the special situation of the outermost region of the Canary Islands. Strengthening the country’s administrative capacity for the management of these funds is an important factor for the success of this investment.

                  (23)

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

                  (24)

                  In the light of this assessment, the Council has examined the 2019 Stability Programme and its opinion (9) is reflected in particular in recommendation (1) below.

                  (25)

                  In the light of the Commission’s in-depth review and this assessment, the Council has examined the 2019 National Reform Programme and the 2019 Stability Programme. Its recommendations made under Article 6 of Regulation (EU) No 1176/2011 are reflected in recommendations (1) to (4) below. Those recommendations also contribute to the implementation of the 2019 Recommendation for the euro area, in particular the first, second and third euro-area recommendations. Fiscal policies referred to in recommendation (1) contribute inter-alia to address imbalances linked to high government debt,

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

         1.

            Ensure that the nominal growth rate of net primary government expenditure does not exceed 0,9 % in 2020, corresponding to an annual structural adjustment of 0,65 % of GDP. Take measures to strengthen the fiscal and public procurement frameworks at all levels of government. Preserve the sustainability of the pension system. Use windfall gains to accelerate the reduction of the general government debt ratio.

         2.

            Ensure that employment and social services have the capacity to provide effective support. Foster transitions towards open-ended contracts, including by simplifying the system of hiring incentives. Improve support for families, reduce fragmentation of national unemployment assistance and address coverage gaps in regional minimum income schemes. Reduce early school leaving and improve educational outcomes, taking into account regional disparities. Increase cooperation between education and businesses with a view to improving the provision of labour market relevant skills and qualifications, in particular for information and communication technologies.

         3.

            Focus investment-related economic policy on fostering innovation, resource and energy efficiency, upgrading rail freight infrastructure and extending electricity interconnections with the rest of the Union, taking into account regional disparities. Enhance the effectiveness of policies supporting research and innovation.

         4.

            Further the implementation of the Law on Market Unity by ensuring that, at all levels of government, rules governing access to and exercise of economic activities, in particular for services, are in line with the principles of that Law and by improving cooperation between administrations.

         Done at Brussels, 9 July 2019.

               For the Council

               The President

            M. LINTILÄ

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

         (2)  OJ L 306, 23.11.2011, p. 25.

         (3)  OJ C 136, 12.4.2019, p. 1.

         (4)  OJ C 320, 10.9.2018, p. 33.

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

         (6)  Council Decision (EU) 2019/1001 of 14 June 2019 abrogating Decision 2009/417/EC on the existence of an excessive deficit in Spain (OJ L 163, 20.6.2019, p. 59).

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

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

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