               EUROPEAN COMMISSION
            Brussels, 23.5.2018
            COM(2018) 416 final
            Recommendation for a
            COUNCIL RECOMMENDATION
            on the 2018 National Reform Programme of Hungaryand delivering a Council opinion on the 2018 Convergence Programme of Hungary

               Recommendation for a

               COUNCIL RECOMMENDATION

               on the 2018 National Reform Programme of Hungary

                  and delivering a Council opinion on the 2018 Convergence Programme of Hungary

               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 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 22 November 2017, the Commission adopted the Annual Growth Survey, marking the start of the 2018 European Semester of 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 22 March 2018. On 22 November 2017, on the basis of Regulation (EU) No 1176/2011, the Commission also adopted the Alert Mechanism Report, in which it did not identify Hungary as one of the Member States for which an in-depth review would be carried out.

               (2)The 2018 country report for Hungary
                  4
                was published on 7 March 2018. It assessed Hungary’s progress in addressing the country-specific recommendations adopted by the Council on 11 July 2017, the follow-up given to the recommendations adopted in previous years and Hungary's progress towards its national Europe 2020 targets.

               (3)On 30 April 2018, Hungary submitted its 2018 National Reform Programme and its 2018 Convergence Programme. To take account of their interlinkages, the two programmes have been assessed at the same time.

               (4)Relevant country-specific recommendations have been addressed in the programming of the European Structural and Investment Funds for the 2014-2020 period. As foreseen 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 European Structural and Investment Funds to sound economic governance
                  6
               .

               (5)Hungary is currently in the preventive arm of the Stability and Growth Pact and subject to the debt rule. In its 2018 Convergence Programme, the Government plans a deterioration of the headline deficit from 2.0 % in 2017 to 2.4 % in 2018 and a gradual improvement thereafter to 0.5 % of GDP by 2022. The medium-term budgetary objective — a structural deficit of 1.5 % of GDP — is planned to be met by 2020. Based on the recalculated structural balance
                  7
                , the medium-term budgetary objective would be reached by 2022. According to the Convergence Programme, the general government debt-to-GDP ratio is expected to decline gradually to slightly below 60 % by the end of 2022. The macroeconomic scenario underpinning those budgetary projections is favourable, which poses notable risks to the implementation of the deficit targets.

               (6)The 2018 Convergence Programme indicates that the budgetary impact of the security-related measures in 2017 is significant, and provides adequate evidence of the scope and nature of these additional budgetary costs. According to the Commission, the eligible additional expenditure in 2017 amounted to 0.17 % of GDP for security-related measures. The provisions set out in Articles 5(1) and 6(3) of Regulation (EC) No 1466/97 cater for this additional expenditure, in that the severity of the terrorist threat are unusual events, their impact on Hungary's public finances is significant and sustainability would not be compromised by allowing for a temporary deviation from the adjustment path towards the medium-term budgetary objective. Therefore, the required adjustment towards the medium-term budgetary objective for 2017 has been reduced to take into account these additional costs.

               (7)On 12 July 2016, the Council recommended Hungary to achieve an annual fiscal adjustment of 0.6 % of GDP towards the medium-term budgetary objective in 2017 unless the medium-term budgetary objective was respected with a lower effort. Based on 2017 outturn data Hungary was found to be in significant deviation from the adjustment path toward the medium-term budgetary objective. In line with Article 121(4) TFEU and Article 10(2) of Council Regulation (EC) No 1466/97, the Commission issued a warning to Hungary on 23 May 2018 that a significant deviation from the adjustment path toward the medium-term budgetary objective was observed in 2017. On XX June, the Council adopted a subsequent recommendation confirming the need for Hungary to take the necessary measures to ensure that the nominal growth rate of net primary government expenditure
                  8
                does not exceed 2.8 % in 2018, corresponding to an annual structural adjustment of 1 % of GDP. Based on the Commission 2018 spring forecast, there is a risk of a deviation from the recommended effort.

               (8)In 2019, in view of Hungary's general government debt ratio above 60 % of GDP and projected output gap of 2.3 %, the nominal growth rate of net primary government expenditure should not exceed 3.9 %, in line with the structural adjustment of 0.75 % of GDP stemming from the matrix of requirements under the Stability and Growth Pact. Based on the Commission 2018 spring forecast, there is a risk of a significant deviation from that requirement in 2019. Overall, the Council is of the opinion that significant further measures will be needed as of 2018 to comply with the provisions of the Stability and Growth Pact, in light of a strongly deteriorating fiscal outlook, in line with the recommendation addressed to Hungary on XX June 2018 with a view to correcting the significant observed deviation from the adjustment path toward the medium-term budgetary objective.

               (9)The overall employment rate has improved significantly and the favourable economic trend provides an opportunity to reintegrate notably unemployed people into the labour market. The gender employment gap is wide, especially in the 25-39 age group, which can in part be explained by a limited supply of good quality childcare. The level of participation in childcare for children under the age of 3 is well under the Barcelona target and the EU average. Although the public work scheme remains the main active labour market policy, the number of participants in it having decreased significantly represents a positive development. Nonetheless, the scheme remains insufficiently focused and its effectiveness in reintegrating participants into the open labour market continues to be limited considering the labour market situation. Active labour market policies which focus more on up- and reskilling are under-developed.

               (10)The proportion of people at risk of poverty and social exclusion has decreased to 26.3 % in 2016 but remains above the EU average. Children in general are more exposed to poverty than other age groups. The level of minimum income benefits is below 50 % of the poverty threshold for a single household, making it among the lowest in the EU. The adequacy of unemployment benefits is very low: the maximum duration of 3 months ranks as the shortest in the EU, and represents only around a quarter of the average time required by job seekers to find employment. In addition, the levels of payment are among the lowest in the EU.

               (11)The Hungarian social dialogue structures and processes remain underdeveloped and do not allow for a meaningful involvement of social partners in policy design and implementation. The deficiencies in stakeholders' engagement and the limited transparency have an impact on the evidence base for and quality of policy making, creating uncertainty for investors and slowing down convergence.

               (12)Measures have been implemented to improve the tax system, but some problems remain. Although decreasing, the tax wedge on labour, especially for certain low-income groups, is still high in EU comparison. The overall complexity of the tax system, coupled with the continued presence of sector-specific taxes, remains a weakness. Measures against taxpayer's aggressive planning strategies are essential to impede distortions of competition between firms, provide fair treatment of taxpayers and safeguard public finances. Spill-over effects of taxpayer's aggressive planning strategies between Member States call for a coordinated action of national policies to complement EU legislation. Hungary records relatively high capital inflows and outflows through special purpose entities, which are disconnected from the real economy. The absence of withholding taxes on outbound (i.e. from EU residents to third country residents) dividend, interest and royalty payments made by companies based in Hungary may lead to those payments escaping tax altogether, if they are also not subject to tax in the recipient jurisdiction. The Commission takes note that Hungary acknowledges that outbound payment may lead to aggressive tax planning if misused. Based on recent exchanges, the Commission will continue its constructive dialogue to fight against taxpayers aggressive planning strategies.

               (13)Regulatory barriers in services, and retail trade in particular, impact on the sector's performance and hamper the efficient reallocation of resources, productivity and innovation. There is a continuous trend to entrust certain services to state-owned firms specifically created for these purpose, to the detriment of open competition. Unpredictability of the legal framework is a further problem, especially in the retail sector, which in recent years has been faced with frequent changes to regulations. As the proposed regulations are often tailored to turnover or floor size, they mainly affect foreign retail chains. This increases uncertainty among business operators and can deter investment. A stable regulatory environment favourable to competition is needed. Restrictive regulation of professions remains high in Hungary, in particular with respect to key professions like accounting and legal services.

               (14)Concerns remain regarding preventing and prosecuting corruption. According to several indicators, Hungary's exposure to corruption appears to have increased over the past years and the risks of corruption could negatively affect the country's growth potential. The functioning of the prosecution service is of crucial importance to fight corruption and money laundering and while measures to fight low-level corruption appear to have been applied with some success, there is not enough focus on starting investigations into high-level cases. Limited transparency and restrictions on access to information further hinder measures to prevent corruption. Significant steps have been taken regarding public procurement, but there is scope to further improve transparency and competition in tendering processes.

               (15)Education outcomes for basic skills are significantly below the EU average, especially for children from disadvantaged socioeconomic background. Pupils are streamed early into different types of schools, with wide gaps in education outcomes and employment paths. Disadvantaged children, including Roma children, tend to be concentrated in vocational secondary schools which are characterised by poorer levels of basic skills and higher dropout rates, and people who leave these schools receive lower wages on average. The early school leaving rate increased to 12.4 % on average, and is particularly high among Roma children. These challenges are especially pressing in the context of quality and inclusive education. The shrinking pool of applicants and high drop-out rates in tertiary education will further limit attainment rates at a time when the demand for highly-skilled workforce is growing.

               (16)Poor health outcomes, aggravated by unhealthy lifestyles, persist, having a negative impact on human capital. Low levels of healthcare spending, coupled with an inefficient allocation of resources, limit the effectiveness of the Hungarian healthcare system. This, together with a high reliance on out-of-pocket payments, has negative equity implications for the timely access to affordable, preventive and curative health care of good quality. Shortage of health care workers also hampers access to care, although recent salary increases have mitigated this challenge. Ongoing reform efforts are focused on tackling excessive use of hospital care services, a key cause of which is that primary care providers are not appropriately equipped to act as effective gatekeepers. Further rationalisation of hospital resources use, together with targeted investments to strengthen primary care services, would enable the reduction of disparities in access to care, drive efficiency gains and effectively improve health outcomes.

               (17)In the context of the 2018 European Semester, the Commission has carried out a comprehensive analysis of Hungary’s economic policy and published it in the 2018 country report. It has also assessed the 2018 Convergence Programme and the 2018 National Reform Programme and the follow-up given to the recommendations addressed to Hungary in previous years. The Commission has taken into account not only their relevance for sustainable fiscal and socioeconomic policy in Hungary 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 for future national decisions.

               (18)In the light of this assessment, the Council has examined the 2018 Convergence Programme and its opinion
                  9
                is reflected in particular in recommendation 1 below.

               HEREBY RECOMMENDS that Hungary take action in 2018 and 2019 to:

               1.In 2018, ensure compliance with the Council recommendation of XX June 2018 with a view to correcting the significant deviation from the adjustment path toward the medium-term budgetary objective. In 2019, ensure that the nominal growth rate of net primary government expenditure does not exceed 3.9 %, corresponding to an annual structural adjustment of 0.75 % of GDP.

               2.Continue simplifying the tax system, in particular by reducing sector specific taxes. Improve the quality and transparency of the decision-making process through effective social dialogue and engagement with other stakeholders and by regular, adequate impact assessments. Reinforce the anti-corruption framework, strengthen prosecutorial efforts and improve transparency and competition in public procurement inter alia through making data gained from the e-procurement system accessible to the public. Strengthen competition, regulatory stability and transparency in the services sector, notably in retail.

               3.Unlock labour reserves through improving the quality of active labour market policies. Improve education outcomes and increase the participation of disadvantaged groups, in particular Roma, in quality and inclusive mainstream education. Improve the adequacy and coverage of social assistance and unemployment benefits.

               Done at Brussels,

                     For the Council

                     The President

                     (1)

                        OJ L 209, 2.8.1997, p. 1.

                     (2)

                        COM(2018) 416 final.

                     (3)

                        P8_TA(2018)0077 and P8_TA(2018)0078.

                     (4)

                        SWD(2018) 215 final.

                     (5)

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

                     (6)

                        COM(2014) 494 final.

                     (7)

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

                     (8)

                        Net primary government expenditure comprises total government expenditure excluding interest expenditure, expenditure on Union programmes fully matched by Union funds revenue and non-discretionary changes in unemployment benefit expenditure. Nationally financed gross fixed capital formation is smoothed over a 4-year period. Discretionary revenue measures or revenue increases mandated by law are factored in. One-off measures on both the revenue and expenditure sides are netted out.

                     (9)

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


               EUROPEAN COMMISSION
            Brussels, 23.5.2018
            COM(2018) 418 final
            Recommendation for a
            COUNCIL RECOMMENDATION
            on the 2018 National Reform Programme of the Netherlandsand delivering a Council opinion on the 2018 Stability Programme of the Netherlands

               Recommendation for a

               COUNCIL RECOMMENDATION

               on the 2018 National Reform Programme of the Netherlands

                  and delivering a Council opinion on the 2018 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 22 November 2017, the Commission adopted the Annual Growth Survey, marking the start of the 2018 European Semester of 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 22 March 2018. On 22 November 2017, on the basis of Regulation (EU) No 1176/2011, the Commission also adopted the Alert Mechanism Report, 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, which was endorsed by the European Council on 22 March 2018. On 14 May 2018 the Council adopted the recommendation on the economic policy of the euro area (‘recommendation for the euro area’).

               (2)As a Member State whose currency is the euro and in view of the close interlinkages between the economies in the economic and monetary union, the Netherlands should ensure the full and timely implementation of the recommendation on the economic policy for the euro area, as reflected in recommendations (1) to (2) below.

               (3)The 2018 country report for the Netherlands
                  5
                was published on 7 March 2018. It assessed some progress in addressing the country-specific recommendations adopted by the Council on 11 July 2017, 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 7 March 2018
                  6
               . The Commission’s analysis leads it to conclude that the Netherlands is experiencing macroeconomic imbalances. In particular, the Netherlands shows the largest three-year average current account surplus in terms of GDP among euro area Member States. The surplus suggests a suboptimal allocation of resources, leaving opportunities for increased growth and welfare. Private debt is high, specifically the stock of household mortgages and multinational enterprises' debt. The long household balance sheets increase the vulnerability to financial shocks.

               (4)On 30 April 2018, the Netherlands submitted its 2018 National Reform Programme and on 26 April 2018 its 2018 Stability Programme. 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 for the 2014-2020 period. As foreseen in Article 23 of Regulation (EU) No 1303/2013 of the European Parliament and of the Council
                  7
               , 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
                  8
               .

               (6)The Netherlands is currently in the preventive arm of the Stability and Growth Pact. In its 2018 Stability Programme, the government plans a decrease in the general government surplus from 1.1 % of GDP in 2017 to 0.3 % of GDP in 2021. The medium-term budgetary objective — a structural deficit of 0.5 % of GDP — continues to be met throughout the programme period. According to the 2018 Stability Programme, the government debt-to-GDP ratio is projected to fall to 44.0 % of GDP in 2021. The macroeconomic scenario underpinning those budgetary projections is plausible. Based on the Commission 2018 spring forecast, the structural balance is projected to decline from a surplus of 0.5 % of GDP in 2017 to a deficit of 0.1 % of GDP in 2018 and 0.3 % of GDP in 2019, above the medium-term budgetary objective. General government debt is forecast to remain on a firm downward path and below the Treaty reference value. Overall, the Council is of the opinion that the Netherlands is projected to comply with the provisions of the Stability and Growth Pact in 2018 and 2019. At the same time, while respecting the medium-term objective, there remains scope to use fiscal and structural policies to raise public and private investment in research, development and innovation.

               (7)The Netherlands has an efficient research and development sector and the country’s high-performing education system and scientific base provide a sound basis for boosting innovation and growth capacity through education and research and development activities. Substantial additional investment has been announced which could help to stabilise public and private research and development intensity. Whether the Netherlands will reach its Europe 2020, targets notably on investment in research and development and renewable energy, remains uncertain.

               (8)A key challenge in addressing high household indebtedness lies in the housing market, where the rigidities and distortive incentives that have built up over decades shape the patterns of housing financing and sectoral savings. Since 2012, a series of measures has been implemented that partly address this. In 2017, the government announced plans to accelerate the reduction in mortgage interest tax deductibility starting in 2020. Yet, the lack of a well-functioning middle segment on the rental market encourages households to buy rather than rent, leading to high debt-to-income ratios and financial vulnerability at a young age. The social housing sector is one of the largest in the Union, but housing is not always occupied by those really in need. High-income households stay in social housing, given that social housing corporations do not increase rents as fast as they legally could. While the government has announced its intention to support the supply of affordable housing on the private rental market, concrete plans for such support have not been communicated yet.

               (9)As indicated in the 2018 euro area recommendation, the fight against aggressive tax planning strategies is essential to impede distortions of competition between firms, provide fair treatment of taxpayers and safeguard public finances. Spill-over effects of taxpayer's aggressive planning strategies between Member States call for a coordinated action of national policies to complement EU legislation. The high level of dividend, royalty and interest payments made via the Netherlands continue to suggest that the country’s tax rules are used by companies that engage in aggressive tax planning. A large proportion of the foreign direct investment stock is held by ‘special purpose entities’. The absence of withholding taxes on outbound (i.e. from EU residents to third country residents) royalties and interest payments may lead to those payments escaping tax altogether, if they are also not subject to tax in the recipient jurisdiction. The lack of some anti-abuse rules, especially in the case of hybrid entities, may also facilitate aggressive tax planning. The Commission acknowledges the Netherland's commitment to fight aggressive tax planning as set out in the reform agenda on taxation, including withholding taxes on royalty, interest and dividend payments in case of abuse or payments to low-tax jurisdictions, is a positive step to decrease aggressive tax planning and should be implemented swiftly and monitored closely. Based on recent exchanges, the Commission will continue its constructive dialogue to fight against taxpayers aggressive planning strategies.

               (10)Despite low unemployment and high job vacancy rates, nominal wage growth was moderate at 1.5 % in 2017. This is below the level that could be expected based on inflation, productivity and unemployment. Moderate wage growth can be partly linked to slow increases in productivity, remaining labour market slack and increased labour market segmentation. In 2017, the government adopted several fiscal measures, which reduce the tax burden on labour and aim at increasing the net disposable household income of those who work. Further boosting net disposable household income by creating the conditions to promote wage growth and reforming the second pillar of the pension system to make it more transparent, inter-generationally fairer and more resilient to shocks would support domestic demand and contribute to euro area rebalancing.

               (11)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 and additional ones have recently been announced, some of these factors still create financial incentives for employees to start working as self-employed or favour hiring them under a temporary contract. In addition, the enforcement of measures to tackle bogus self-employment has been suspended until 2020. 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.

               (12)Despite a labour market that performs well overall, there is still untapped labour potential. In particular the high number of part-time working women and the employment situation of people with a migrant background remain an important challenge. The employment rate for non-EU-born migrants is 20.6 percentage points lower than for people born in the Netherlands with an even larger gap for non-EU-born women.

               (13)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 has confirmed its intention to substantially reform the second pension pillar in order to improve the coverage and to create a more transparent, more flexible and actuarially fairer system. With respect to fiscal sustainability, the 2018 Ageing Report points to a medium risk to fiscal sustainability in the long term, as long-term care expenditures are projected to increase from 3.5 % to 6.0 % of GDP by 2070.

               (14)In the context of the 2018 European Semester, the Commission has carried out a comprehensive analysis of the Netherlands’ economic policy and published it in the 2018 country report
                  9
               . It has also assessed the 2018 Stability Programme and the 2018 National Reform Programme and the follow-up given to the recommendations addressed to the Netherlands in previous years. The Commission has taken into account not only their relevance for sustainable fiscal and socioeconomic policy in the Netherlands but also the extent to which they comply 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.

               (15)In the light of this assessment, the Council has examined the 2018 Stability Programme and its opinion
                  10
                that the Netherlands is expected to comply with the Stability and Growth Pact.

               (16)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 under Article 6 of Regulation (EU) No 1176/2011 are reflected in recommendations 1 and 2 below.

               HEREBY RECOMMENDS that the Netherlands take action in 2018 and 2019 to:

               1.While respecting the medium-term objective, use fiscal and structural policies to raise public and private investment in research, development and innovation. Take measures to reduce the debt bias for households and the remaining distortions in the housing market, in particular by supporting the development of the private rental sector.

               2.Reduce the incentives to use temporary contracts and self-employed without employees, while promoting adequate social protection for the self-employed, and tackle bogus self-employment. Create conditions to promote higher wage growth, respecting the role of the social partners. Ensure that the second pillar of the pension system is more transparent, inter-generationally fairer and more resilient to shocks.

               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(2018) 418 final.

                     (4)

                        P8_TA(2018)0077 and P8_TA(2018)0078.

                     (5)

                        SWD(2018) 217 final.

                     (6)

                        COM(2018) 120 final.

                     (7)

                        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).

                     (8)

                        COM(2014) 494 final.

                     (9)

                        https://ec.europa.eu/info/sites/info/files/2018-european-semester-country-report-netherland-en.pdf

                     (10)

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


               EUROPEAN COMMISSION
            Brussels, 23.5.2018
            COM(2018) 411 final
            Recommendation for a
            COUNCIL RECOMMENDATION
            on the 2018 National Reform Programme of Italyand delivering a Council opinion on the 2018 Stability Programme of Italy

               Recommendation for a

               COUNCIL RECOMMENDATION

               on the 2018 National Reform Programme of Italy

                  and delivering a Council opinion on the 2018 Stability Programme of Italy

               THE COUNCIL OF THE EUROPEAN UNION,

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

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

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

               Having regard to the recommendation of the European Commission
                  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 22 November 2017, the Commission adopted the Annual Growth Survey, marking the start of the 2018 European Semester of 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 22 March 2018. On 22 November 2017, on the basis of Regulation (EU) No 1176/2011, the Commission also adopted the Alert Mechanism Report, in which it identified Italy as one of the Member States for which an in-depth review would be carried out. On the same day, 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 22 March 2018. On 14 May 2018, the Council adopted the recommendation on the economic policy of the euro area (‘recommendation for the euro area’).

               (2)As a Member State whose currency is the euro and in view of the close interlinkages between the economies in the Economic and Monetary Union, Italy should ensure the full and timely implementation of the recommendation on the economic policy for the euro area, as reflected in recommendations (1) to (4) below.

               (3)The 2018 country report for Italy
                  5
                was published on 7 March 2018. It assessed Italy’s progress in addressing the country-specific recommendations adopted by the Council on 11 July 2017, the follow-up given to the recommendations adopted in previous years and Italy’s progress towards its national Europe 2020 targets. It also included an in-depth review under Article 5 of Regulation (EU) No 1176/2011, the results of which were also published on 7 March 2018
                  6
               . The Commission’s analysis leads it to conclude that Italy is experiencing excessive macroeconomic imbalances. In particular, high government debt and protracted weak productivity dynamics imply risks with cross-border relevance, in a context of a high but decreasing stock of non-performing loans and very high but improving unemployment. The need for action to reduce the risk of adverse effects on the Italian economy and on the economic and monetary union, given the size and cross-border relevance of Italy’s economy, is particularly important.

               (4)On 16 May 2018, Italy submitted its 2018 National Reform Programme and its 2018 Stability Programme. 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 for the 2014-2020 period. As foreseen in Article 23 of Regulation (EU) No 1303/2013 of the European Parliament and of the Council
                  7
               , 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
                  8
               .

               (6)Italy is currently in the preventive arm of the Stability and Growth Pact and subject to the debt rule. The 2018 Stability Programme submitted by the outgoing government is based on a trend scenario assuming unchanged legislation. The headline deficit is projected by the authorities to improve from 2.3 % of GDP in 2017 to 1.6 % in 2018, 0.8 % in 2019, and a broadly balanced budgetary position by 2020. The medium-term budgetary objective, set at a balanced budgetary position in structural terms, is planned to be reached by 2020 and maintained in 2021, whereas the recalculated
                  9
                structural balance points to a small structural deficit (0.2 % of GDP) in both years. After having slightly decreased in 2017 (to 131.8 % of GDP, from 132.0 % in 2016), the general government debt-to-GDP ratio is projected in the 2018 Stability Programme to continue declining as of 2018, reaching 122.0 % in 2021 also thanks to projected privatisation proceeds of 0.3% per year over 2018-20. However, privatisation targets have been underachieved in recent years. Based on a no-policy change assumption, the Commission 2018 spring forecast expects lower real GDP growth and a higher deficit for 2019 than the 2018 Stability Programme. In fact, the Commission forecast does not incorporate a VAT hike (0.7 % of GDP) legislated as a ‘safeguard clause’ to achieve the budgetary targets in 2019.

               (7)On 23 May 2018 the Commission issued a report under Article 126(3) of the TFEU due to Italy’s prima facie non-compliance with the debt rule in 2016 and 2017. The report concluded, following an assessment of all the relevant factors, that the debt criterion as defined in the Treaty and in Regulation (EC) No 1467/1997 should be considered as currently complied with, and that opening of an excessive deficit procedure is thus not warranted, having regard in particular to Italy's ex-post compliance with the preventive arm in 2017. The Commission will reassess compliance on the basis of the ex-post data for 2018 to be notified in Spring 2019.

               (8)The Stability Programme indicates that the budgetary impact of the exceptional inflow of refugees and the protection against seismic risks is significant and provides adequate evidence of the scope and nature of these additional budgetary costs. According to the Commission, the eligible additional expenditure in 2017 amounted to 0.16 % of GDP for the exceptional inflow of refugees and 0.19 % of GDP concerning protection against seismic risks. The provisions set out in Articles 5(1) and 6(3) of Regulation (EC) No 1466/97 cater for this additional expenditure, in that the inflow of refugees and the seismic risks are unusual events, their impact on Italy’s public finances is significant and sustainability would not be compromised by allowing for a temporary deviation from the adjustment path towards the medium-term budgetary objective. Therefore, the required adjustment towards the medium-term budgetary objective for 2017 has been reduced to take into account these additional costs.

               (9)On 11 July 2017, the Council recommended Italy to ensure a nominal rate of reduction of net primary government expenditure
                  10
                by at least 0.2 % in 2018, corresponding to an annual structural adjustment of 0.6 % of GDP. At the same time, it was stated that the assessment of the 2018 Draft Budgetary Plan and subsequent assessment of 2018 budget outcomes will need to take due account of the goal of achieving a fiscal stance that contributes to both strengthening the ongoing recovery and ensuring the sustainability of public finances. Following the Commission’s assessment of the strength of the recovery in Italy while giving due consideration to its sustainability challenges, carried out in the context of its opinion on Italy’s Draft Budgetary Plan, a fiscal structural effort of at least 0.3 % of GDP is required for 2018, without any additional margin of deviation over one year. This corresponds to a nominal rate of growth of net primary government expenditure not exceeding 0.5 %. Taking that into account in the overall assessment, based on the Commission 2018 spring forecast, there is a risk of a significant deviation from the recommended adjustment path towards the medium-term budgetary objective in 2018.

               (10)In 2019, in view of Italy’s general government debt ratio above 60 % of GDP and projected output gap of 0.5 %, the nominal growth rate of net primary government expenditure should not exceed 0.1 %, in line with the structural adjustment of 0.6 % of GDP stemming from the matrix of requirements under the Stability and Growth Pact. Under unchanged policies, there is a risk of a significant deviation from the requirement in 2019 and for 2018 and 2019 taken together. Italy is prima facie not forecast to comply with the debt rule in 2018 and 2019. Moreover, at around 130 % of GDP, Italy’s high public debt ratio implies that large resources are earmarked to cover debt servicing costs, to the detriment of more growth-enhancing items including education, innovation and infrastructure. Overall, the Council is of the opinion that the necessary measures should be taken as of 2018 to comply with the provisions of the Stability and Growth Pact. The use of any windfall gains to further reduce the general government debt ratio would be prudent.

               (11)Italy's old-age pension expenditure, at around 15 % of potential GDP, is now among the highest in the EU. Implicit liabilities arising from population ageing were curbed by past pension reforms, improving Italy's long-term sustainability also by gradually adjusting retirement age to life expectancy. However, both the 2017 and the 2018 budgets contained provisions that partially reversed those reforms. Italy has a larger share of population above 65 than the EU average. This is projected to further increase over time, worsening Italy's old-age dependency ratio. Hence, pension expenditure is projected to increase over the medium term. The high share of old-age pensions in public spending also restraints other social spending, including to fight poverty, and growth-enhancing spending items like education, whose share in expenditure has been declining  since the early 2000s. While respecting the principles of fairness and proportionality, sizeable savings could be achieved by intervening on the high pension entitlements not matched by contributions.

               (12)Italy’s tax system weighs heavily on capital and labour, which has adverse effects on economic growth. Despite the recent extension of targeted tax incentives, the tax burden on the production factors is still among the highest in the EU, discouraging investment and employment. There is room to reduce it in a budgetary neutral way, by shifting towards tax bases less detrimental to growth, such as property and consumption. The recurrent property tax on first residences was repealed in 2015, including for wealthier households. In addition, property cadastral values are largely outdated, and a reform to align them with current market values is still pending. The number and size of tax expenditures, in particular in the case of the reduced value added tax rates, are particularly high and their streamlining has been further postponed despite being required by national legislation. There is also scope to reduce the burden on compliant firms and households by reducing the complexity of the tax code and increasing the overall level of tax compliance. The extension of mandatory electronic invoicing to all private sector transactions from 2019 is a positive step in this direction. However, legal thresholds for cash payments have been increased, which could discourage the use of electronic payments whose compulsory nature may improve tax compliance. Italy’s National Institute of Statistics estimates that the shadow economy amounts to about 12.9 % of GDP, but no strategic action has been planned to tackle this challenge. About 15.9 % of total employment is partially or completely undeclared, with peaks nearing 50 % in some sectors.

               (13)Investment declined sharply during the crisis and has not yet returned to its 2007 level. Despite increasing in 2017 the level of investment is still low compared to other EU countries. Private investment has been particularly low, held back by structural factors. These include a less favourable business environment, financial constraints related to underdeveloped capital markets, impaired bank-lending and a lack of high-skilled people due to, among other reasons, brain drain and limited lifelong learning. Intangible assets, such as research and development, innovation and training of workers, are vital for productivity and economic growth and can help explain differences in productivity across countries. However, investment in such assets remains below the EU average. This is due to the large number of micro-firms, Italy’s lack of specialisation in knowledge-intensive sectors, limited digitisation and digital skills. At the same time, overall public spending in research and development has been reduced. Financing of small and medium-sized companies continues to be highly dependent on the banking sector, and lending remains subdued despite financing costs at historically low levels. There are also major regional differences in investment in research and development, in the take-up of recent policy incentives for innovative firms and in the quality of education. Based on the current evaluation of the results of the different industrial measures put in place under "Finance for Growth" and "Industry/Enterprise 4.0" initiatives, it would seem appropriate to set-up a long-term policy framework to sustain investment that is capable of strengthening the different factors (credit availability, strong research basis, high education and suitable skills) that support innovation. It would also seem appropriate to consider existing differences in regional industrial and education systems.

               (14)The efficiency of Italy’s justice system has improved only slightly in the past years, and the length of proceedings remains a source of concern, especially at higher instances. Namely, in 2016, the time needed to resolve civil and commercial litigious cases was still one of the highest in the EU at all instances. The backlog continued to increase at the Supreme Court of Cassation, where it remains among the largest in the EU per capita. An important enabling law streamlining civil procedural rules and introducing stronger deterrence against vexatious litigation has been pending in Italy's Parliament for two years. In addition, among the measures adopted to contain litigation and strengthen procedural discipline, the simplified proceeding (‘rito sommario’) has not become the default in appeal courts, and use of the inadmissibility filter for appeals remains inconsistent and limited in second instance, thereby failing to bring the expected reduction in incoming cases. Rather, in 2016 the number of incoming civil cases increased both in first and second instance also due to steadily increasing appeal rates. An increasing share of Cassation appeals was declared inadmissible in 2016, confirming a recent upward trend. The Supreme Court’s ability to deal with its case inflow also decreased in the context of a marked rise in its non-criminal incoming cases (including tax cases), which could undermine its role. Adequate enforcement of procedural rules, including against the misuse of litigation, could also contribute to the sound and efficient administration of justice.

               (15)Corruption remains a major challenge for Italy’s business environment and public procurement. Italy improved its anti-corruption framework by revising its statute of limitations, extending the protection of whistle-blowers to private sector workers and better aligning the offence of corruption among private parties with international standards. While the adopted reform of the statute of limitations does not stop prescription terms after a first-instance conviction, as recommended by the Council of Europe’s Group of Countries against Corruption, it may reduce the scope for abusive criminal litigation as a delaying tactic by lawyers at higher instances. As such, it may alleviate a long-standing concern that corruption cases get time-barred after first-instance conviction. Repression of corruption could be improved by increasing the efficiency of criminal justice. In 2014, Italy had the largest number of incoming and pending criminal cases in the EU at second and third instance, also due to one of the highest rates of Cassation appeals. This resulted in one of the longest criminal trial lengths. Incentivising expedited procedures and discouraging abuses of the trial could help make criminal justice and the fight against corruption more effective. Moreover, the National Anti-Corruption Authority has a key role in the implementation of the new anti-corruption framework.

               (16)Increasing the quality of the Italian public administration would have a positive impact on the business environment and investment and firms’ ability to exploit innovation opportunities. The great regional variation in administrations’ responsiveness towards firms suggests that entrepreneurs in specific areas face bigger obstacles when doing business. In 2015, a comprehensive enabling law reforming the public administration was adopted, with the potential to improve efficiency for the benefit of the economy. By the end of 2017, the implementation of the reform was completed and now requires enforcement, in particular in regions with the lowest performances. On publicly-owned enterprises, the reform aims to ensure that publicly-owned enterprises operate under the same rules as privately-owned entities. The declared objectives are to: rationalise publicly-owned enterprises via mergers, consolidations of non-profitable ones and privatisations; increase the efficiency of the remaining enterprises; and avoid future proliferation of non-essential publicly-owned enterprises. The enforcement of the new framework is key to achieve these objectives. In addition, local public services are sheltered from competition (in and for the market), impacting on efficiency, quality of services and leading to consumers’ dissatisfaction. The 2015 public administration reform also envisaged a new framework reforming the management of local public services. However, in November 2016, the Constitutional Court declared the procedure followed to adopt some legislative decrees unconstitutional, including the one on local public services. As the deadline of the decree expired in November 2016, a new legislative initiative is needed.

               (17)Improvements to business environment would facilitate entrepreneurship, while better framework conditions for competition would favour a more efficient allocation of resources and productivity gains. The 2015 annual competition law was adopted in August 2017 and needs to be properly implemented. However, significant barriers to competition persist in certain sectors, such as professional services, local public transport, rail and retail sectors. Increasing competitive processes to award public service contracts and concessions for access to public goods would positively impact the quality of services. In the area of public procurement, the benefits of the recent reform will depend on the reform’s timely completion, a consistent application of the plans for e-procurement and aggregation and the actual activation of the central aggregation body for policy coordination (Cabina di regia per gli appalti pubblici).

               (18)Market confidence in Italian banks has increased following measures taken in 2017 to deal with several weaker banks. On the back of the improved economic conditions and supervisory pressure, progress has been made with reducing non-performing loans, but the legacy stock still remains high. This constrains banks’ profitability and their ability to internally generate capital. The pace at which non-performing loans are being disposed of, which includes deepening the secondary market for non-performing loans, needs to be maintained in order to further strengthen financial stability and credit extension to the real economy. Further balance sheet restructuring and consolidation, including for small and second-tier banks, should also be supported. This includes addressing banks’ structurally low profitability through comprehensive cost-cutting and business model optimisation.

               (19)Whereas the various corporate governance reforms are ongoing, full implementation of the reforms of the large cooperative and small mutual banks reforms would underpin the overall health of the banking sector. The insolvency and foreclosure frameworks remain insufficiently supportive of swiftly working out and restructuring non-performing loans. Promptly adopting and implementing the necessary legislative measures for the insolvency reform would help address structural weaknesses. Measures adopted in 2016 to accelerate collateral enforcement by banks are not yet being used. The framework for collateral enforcement is still not fully applicable to companies and households.

               (20)Despite progress due to several policy measures adopted over the last years, access to finance remains an important barrier to investment and finance for growth, particularly for small and medium-sized companies. Firms’ financing remains predominantly bank-based, while the capital market is underdeveloped as compared to other EU countries. The share of small and medium-sized companies financed by equity is particularly low, compared to the EU average. The recent reduction in the ’allowance for corporate equity’ has further increased preference for bank credit. Boosting market-based access to finance for firms would be an essential ingredient in diversifying firms’ financing sources in order to support investment and growth

               (21)Labour market institutions have been substantially reformed in recent years. Labour market conditions continue to improve, as headcount employment increased by 1.0 % in 2017 to over 23 million people, back to pre-crisis levels. The employment rate (age 20-64) rose to over 62 % last year, albeit largely driven by temporary jobs. However, this is still considerably below the EU average. The unemployment rate fell to 10.9 % but the total hours worked is still considerably lower than before the recession. Despite improvements, long-term and youth unemployment remain high, posing risks to social cohesion and growth. At 20.1 % in 2017, the proportion of young people not in employment, education or training was still among the highest in the EU, with wide and persistent regional differences.

               (22)Bargaining at firm or territorial level remains limited, also due to the prevalence of small firms in Italy. This may prevent wages from adapting swiftly to local economic conditions. At the end of February 2018, Confindustria and the three major Italian trade unions (Cgil, Cisl and Uil) signed a framework agreement, stressing the role of second-level bargaining, by increasing legal certainty through setting clearer rules for the representation of social partners at negotiations. The tax rebates on productivity-related wage increases set by second-level agreements were strengthened in 2017, but their effectiveness is difficult to evaluate. While the total number of collective agreements is on the rise, only a small share of them is signed by the main trade unions and employers’ associations.

               (23)The reform of active labour market policies outlined by the Jobs Act made little progress in 2017. Training and re-qualification are particularly important in the light of the increased flexibility in the Italian labour market and the growing share of temporary contracts. Generally binding service standards have not yet been implemented, and employment services lack staff and adequate monitoring. Increasing the number of staff and ensuring that they are sufficiently qualified for employment services and social services, is also critical for the correct implementation of the anti-poverty scheme introduced in 2018 and for the Youth Guarantee, which aims to provide young people in need with an adequate job or training offer in a timely manner.

               (24)The proportion of women participating in the labour market, although on the rise, remains one of the lowest in the EU. The impact of the recent measures, centred on non-means tested cash payment per child birth, has not been assessed by the Italian authorities. Evidence suggests that these cash transfers may not be effective to increase women’s participation in the labour market. In addition, they are unlikely to increase the birth rate, which has been stagnating at very low levels over the last 20 years. A comprehensive strategy to reconcile family life and work is missing. These shortcomings are reflected by the lack of gender balanced design of parental leave, flexible working arrangements and the insufficient supply of adequate, affordable and quality childcare and care services.

               (25)Introducing measures to raise human capital and skills would help improve employability and meet future labour market needs. The overall quality of schooling in Italy is improving, but wide regional differences persist. The proportion of students leaving school without a diploma remains above the EU average (30 % compared with the EU average of 19.7 %), particularly among foreign-born students. Implementation of the school reform is broadly on track, and vocational education and training is improving. Tertiary education, severely underfunded with public spending accounting for less than 0.4 % of GDP, is characterised by high drop-out rates and prolonged study periods. As a consequence, educational attainment is one of the lowest in the EU (26.9 % of the population aged 30 to 34). The participation rate in adult learning programmes is increasing but it still remains among the lowest in the EU, especially for low-skilled adults. Upskilling and reskilling should be fostered, while employers should be encouraged to provide more learning opportunities for the workforce. The implementation of the comprehensive national ‘skills strategy’ launched in October 2017 will be crucial.

               (26)Unlike the EU trend, the rate of people at risk of poverty or social exclusion has continued to increase and at 30 % in 2016 it was well above the EU average. This especially affects children, temporary workers and migrants. Income inequality is high and rising. In 2016, the income of the top 20 % of households was 6.3 times higher than that of the poorest 20 %. This ratio is even higher for people of working-age, as the redistributive impact of pensions is excluded. The introduction of a new permanent scheme to tackle poverty (Reddito di Inclusione) represents a major step forward in social policies. Designed as a universal transfer for people meeting certain conditions of poverty, the scheme is expected to increase the currently low impact of social benefits on poverty reduction. The scheme is based on solid governance mechanisms and will be subject to systematic evaluation. Importantly, it also envisages a substantial reinforcement of the country’s understaffed social services. Closer co-operation between social services and public employment services, as well as the allocation of sufficient resources, will be crucial for the smooth implementation of the reform. The scheme incorporates the former unemployment assistance scheme (ASDI), as a first step towards rationalising social spending. Italy’s health care system provides universal coverage and the health of the population is good overall; nevertheless, self-reported unmet needs for medical care are high, and differences between regions in the organisation and quality of care delivery persist. Italy has made some efforts to ensure appropriate access to health care, including by revising and expanding the minimum statutory benefit package of care services.

               (27)In the context of the 2018 European Semester, the Commission has carried out a comprehensive analysis of Italy’s economic policy and published it in the 2018 country report. It has also assessed the 2018 Stability Programme and the 2018 National Reform Programme and the follow-up given to the recommendations addressed to Italy in previous years. The Commission has taken into account not only their relevance for sustainable fiscal and socioeconomic policy in Italy but also the extent to which they comply with Union rules and guidance, given the need to strengthen the Union’s overall economic governance by providing Union-level input for future national decisions.

               (28)In the light of this assessment, the Council has examined the 2018 Stability Programme and its opinion
                  11
                is reflected in particular in recommendation 1 below.

               (29)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 under Article 6 of Regulation (EU) No 1176/2011 are reflected in recommendations 1 to 4 below.

               HEREBY RECOMMENDS that Italy take action in 2018 and 2019 to:

               1.Ensure that the nominal growth rate of net primary government expenditure does not exceed 0.1 % in 2019, corresponding to an annual structural adjustment of 0.6 % of GDP. Use windfall gains to accelerate the reduction of the general government debt ratio. Shift taxation away from labour, including by reducing tax expenditure and reforming the outdated cadastral values. Step up efforts to tackle the shadow economy, including by strengthening the compulsory use of e-payments through lower legal thresholds for cash payments. Reduce the share of old-age pensions in public spending to create space for other social spending.

               2.Reduce the length of civil trials at all instances by enforcing and streamlining procedural rules, including those under consideration by the legislator. Achieve more effective prevention and repression of corruption by reducing the length of criminal trials and implementing the new anti-corruption framework. Ensure enforcement of the new framework for publicly-owned enterprises and increase the efficiency and quality of local public services. Address restrictions to competition, including in services, also through a new annual competition law.

               3.Maintain the pace of reducing the high stock of non-performing loans and support further bank balance sheet restructuring and consolidation, including for small and medium-sized banks, and promptly implement the insolvency reform. Improve market-based access to finance for firms.

               4.Step up implementation of the reform of active labour market policies to ensure equal access to effective job-search assistance and training. Encourage labour market participation of women through a comprehensive strategy, rationalising family-support policies and increasing the coverage of childcare facilities. Foster research, innovation, digital skills and infrastructure through better-targeted investment and increase participation in vocational-oriented tertiary education.

               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(2018) 411 final.

                     (4)

                        P8_TA(2018)0077 and P8_TA(2018)0078.

                     (5)

                        SWD(2018) 210 final.

                     (6)

                        COM(2018) 120 final.

                     (7)

                        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).

                     (8)

                        COM(2014) 494 final.

                     (9)

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

                     (10)

                        Net primary government expenditure comprises total government expenditure excluding interest expenditure, expenditure on Union programmes fully matched by Union funds revenue and non-discretionary changes in unemployment benefit expenditure. Nationally financed gross fixed capital formation is smoothed over a 4-year period. Discretionary revenue measures or revenue increases mandated by law are factored in. One-off measures on both the revenue and expenditure sides are netted out.

                     (11)

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


               EUROPEAN COMMISSION
            Brussels, 21.11.2018
            COM(2018) 802 final
            Recommendation for a
            COUNCIL RECOMMENDATION
            with a view to correcting the significant observed deviation from the adjustment path toward the medium-term budgetary objective in Romania
            {SWD(2018) 503 final}

               Recommendation for a

               COUNCIL RECOMMENDATION

               with a view to correcting the significant observed deviation from the adjustment path toward the medium-term budgetary objective

                  in Romania

               THE COUNCIL OF THE EUROPEAN UNION,

               Having regard to the Treaty on the Functioning of the European Union, and in particular Article 121(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 the second sub-paragraph of Article 10(2) thereof,

               Having regard to the recommendation from the European Commission,

               Whereas:

               (1)On 16 June 2017, the Council decided in accordance with Article 121(4) of the Treaty on the Functioning of the European Union ("TFEU") that a significant observed deviation from the medium-term budgetary objective of -1% of GDP occurred in Romania in 2016. In view of the established significant deviation, on 16 June 2017 it issued a recommendation for Romania to take the necessary measures to ensure that the nominal growth rate of net primary government expenditure did not exceed 3.3% in 2017, corresponding to an annual structural adjustment of 0.5% of GDP. On 5 December 2017 the Council found that Romania had not taken effective action in response to the Recommendation of 16 June 2017 and issued a new recommendation. In the new recommendation the Council asked Romania to take the necessary measures to ensure that the nominal growth rate of net primary government expenditure does not exceed 3.3% in 2018, corresponding to an annual structural adjustment of 0.8% of GDP. On 22 June 2018 the Council found that Romania had not taken effective action in response to the revised recommendation of 5 December 2017.

               (2)On 22 June 2018, the Council decided in accordance with Article 121(4) TFEU that a significant observed deviation from the adjustment path toward the medium-term budgetary objective had also occurred in Romania in 2017. In view of the established significant deviation, on 22 June 2018 the Council issued a recommendation
                  2
                for Romania to take the necessary measures to ensure that the nominal growth rate of net primary government expenditure
                  3
                does not exceed 3.3% in 2018 and 5.1% in 2019, corresponding to an annual structural adjustment of 0.8% of GDP in each year. It also recommended that Romania use any windfall gains for deficit reduction, while budgetary consolidation measures should ensure a lasting improvement in the general government structural balance in a growth-friendly manner. The Council established a deadline of 15 October 2018 for Romania to report on the action taken in response to this recommendation.

               (3)On 13 July 2018, the Council recommended that Romania ensure that, in 2018 and in 2019, it comply with the Council Recommendation of 22 June 2018 with a view to correct the significant deviation from the adjustment path toward the medium-term bdgetary objective.
                  4

               (4)On 27 and 28 September 2018, the Commission undertook an enhanced surveillance mission in Romania for the purpose of on-site monitoring under Article -11(2) of Regulation (EC) No 1466/97. After having transmitted its provisional findings to the Romanian authorities for comments, the Commission reported its findings to the Council on 21 November 2018. Those findings were subsequently made public.

               (5)On 16 October 2018, the Romanian authorities submitted the report on effective action in response to the Council Recommendation of 22 June 2018
                  5
               . Given the information provided by the authorities in their report and the overall assessment based on the Commission autumn 2018 forecast, on 21 November 2018 the Council concluded that Romania has not taken effective action in response to the Council Recommendation of 22 June 2018.

               (6)In light of the absence of effective action by Romania and the cumulated high deviation from the appropriate adjustment path toward the medium-term budgetary objective, it is appropriate to address to the Member State a revised recommendation on the appropriate measures to be taken.under Article 121(4) TFEU.

               (7)Romania's structural deficit has increased by 2.1% of GDP in 2016 and by 1.2% of GDP in 2017. It reached 3.4% of GDP in 2017 and is projected in the Commission 2018 autumn forecast to broadly stabilize as of 2018. In order to correct for the cumulated deviation and to bring Romania back on an appropriate adjustment path following the past slippages, an additional effort should complement the structural effort of 0.8% of GDP recommended by the Council on 22 June 2018. An additional effort of 0.2% of GDP seems appropriate given the magnitude of the observed significant deviation from the recommended adjustment path towards the medium-term budgetary objective. It will accelerate the adjustment back towards the medium-term budgetary objective without putting economic growth at risk.

               (8)The required improvement of the structural balance by 1.0% of GDP in 2019 is consistent with a nominal growth rate of net primary government expenditure not exceeding 4.5% in 2019.

               (9)The Commission 2018 autumn forecast projects a deterioration of the structural balance by 0.1% of GDP in 2019. Therefore, a structural improvement of 1.0% of GDP translates into the need to adopt measures of a total structural yield of 1.1% of GDP in 2019 compared to the current baseline in the Commission 2018 autumn forecast.

               (10)The Commission 2018 autumn forecast projects a general government deficit of 3.4% in 2019, which is above the 3% of GDP Treaty reference value. The required structural adjustment seems also appropriate to ensure that Romania respects the 3% of GDP Treaty reference value in 2019 with a margin.

               (11)The failure to act upon earlier recommendations to correct the observed significant deviation and the risk of exceeding the Treaty reference value call for urgent action to put Romania’s fiscal policy back on a prudent path.

               (12)In order to achieve the recommended budgetary targets, it is crucial that Romania adopts and strictly implements the necessary measures and monitors the development of current expenditure closely.

               (13)The requirements issued in this recommendation supersede the corresponding elements set out in the fiscal recommendation contained in the Council Recommendation addressed to Romania on 13 July 2018.

               (14)Romania should report to the Council on action taken in response to this Recommendation by 15 April 2019, possibly as part of its Covergence Programme submitted pursuant to Article 7 of Regulation (EC) No 1466/97.

               (15)It is appropriate that this recommendation should be made public,

               HEREBY RECOMMENDS THAT ROMANIA:

               (1)take the necessary measures to ensure that the nominal growth rate of net primary government expenditure does not exceed 4.5% in 2019, corresponding to an annual structural adjustment of 1.0% of GDP, thereby putting the Member State on an appropriate adjustment path toward the medium-term budgetary objective.

               (2)use any windfall gains for deficit reduction, budgetary consolidation measures should secure a lasting improvement in the general government structural balance in a growth-friendly manner.

               (3)report to the Council by 15 April 2019 on action taken in response to this Recommendation; the report should provide sufficiently specified and credibly announced measures, including budgetary impact of each of them, as well as updated and detailed budgetary projections for 2019.

               This recommendation is addressed to Romania.

               Done at Brussels,

                     For the Council

                     The President

                     (1)

                        OJ L 209, 2.8.1997, p. 1.

                     (2)

                        OJ C 223, 27.6.2018, p. 3.

                     (3)

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

                     (4)

                        Council Recommendation of 13 July 2018 on the 2018 National Reform Programme of Romania and delivering a Council opinion on the 2018 Convergence Programme of Romania (OJ C 320, 10.9.2018, p. 98).

                     (5)

                        Available at http://data.consilium.europa.eu/doc/document/ST-13279-2018-INIT/en/pdf


               EUROPEAN COMMISSION
            Brussels, 20.11.2019
            COM(2019) 922 final
            Recommendation for a
            COUNCIL RECOMMENDATION
            with a view to correcting the significant observed deviation from the adjustment path toward the medium-term budgetary objective in Hungary
            {SWD(2019) 941 final}

               Recommendation for a

               COUNCIL RECOMMENDATION

               with a view to correcting the significant observed deviation from the adjustment path toward the medium-term budgetary objective

                  in Hungary

               THE COUNCIL OF THE EUROPEAN UNION,

               Having regard to the Treaty on the Functioning of the European Union, and in particular Article 121(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 the second subparagraph of Article 10(2) thereof,

               Having regard to the Recommendation from the European Commission,

               Whereas:

               (1)In accordance with Article 121 of the Treaty, Member States shall promote sound public finances over the medium term through the coordination of economic policies and multilateral surveillance in order to avoid the occurrence of excessive government deficits.

               (2)The Stability and Growth Pact is based on the objective of sound government finances as a means of strengthening the conditions for price stability and for strong sustainable growth conducive to employment creation.

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

               (4)On 14 June 2019, the Council decided that in 2018 a significant observed deviation from the adjustment path toward the medium-term budgetary objective had again occurred in Hungary and issued a Recommendation for Hungary to take the necessary measures to ensure that the nominal growth rate of net primary government expenditure
                  4
                does not exceed 3.3% in 2019 and 4.7% in 2020, corresponding to an annual structural adjustment of 1% of gross domestic product (GDP) in 2019 and 0.75% of GDP in 2020.
                  5
                It also recommended that Hungary uses any windfall gains for deficit reduction, while budgetary consolidation measures should secure a lasting improvement in the general government structural balance in a growth-friendly manner. The Council established a deadline of 15 October 2019 for Hungary to report on the action taken in response to that Recommendation.

               (5)On 9 July 2019, the Council recommended Hungary to ensure that, in 2019 and in 2020, it complies with the Council Recommendation of 14 June 2019 with a view to correcting the significant deviation from the adjustment path toward the medium-term budgetary objective.
                  6

               (6)On 26 September 2019, the Commission undertook an enhanced surveillance mission in Hungary for the purpose of on-site monitoring under Article -11(2) of Regulation (EC) No 1466/97. After having transmitted its provisional findings to the Hungarian authorities for comments, the Commission reported its findings to the Council on 20 November 2019. Those findings were made public.

               (7)On 15 October 2019, the Hungarian authorities submitted the report on effective action in response to the Council Recommendation of 14 June 2019.
                  7
                Given the information provided by the authorities in their report and the overall assessment based on the Commission autumn 2019 forecast, the Council on 20 November 2019 concluded that Hungary has not taken effective action in response to the Council Recommendation of 14 June 2019.

               (8)In light of the absence of effective action by Hungary and the cumulated deviation from the recommended adjustment path toward its medium-term budgetary objective, it is appropriate to address to Hungary a revised Recommendation on the appropriate measures to be taken under Article 121(4) of the Treaty.

               (9)Based on the Commission 2019 autumn forecast, Hungary's structural balance is projected to improve by 0.5% of GDP in 2019 and by a further 1.2% of GDP in 2020. As a result, the structural deficit is estimated to be 1.8% of GDP and 1.1% of GDP away from the medium-term budgetary objective of 1.5% in 2019 and 1.0% in 2020.

               (10)In order to bring Hungary back on an appropriate adjustment path following past slippages, the annual structural adjustment of 0.75% of GDP for 2020 recommended by the Council on 14 June 2019 seems appropriate in light of the overall macro-fiscal developments against the backdrop of the expected deceleration of economic activity in the next years as cyclical factors, which have been supporting growth in recent years, are expected to gradually wear off.

               (11)Based on the Commission 2019 autumn forecast, the required improvement of the structural balance by 0.75% of GDP in 2020 is consistent with the nominal growth rate of net primary government expenditure not exceeding 4.7%.

               (12)The Commission 2019 autumn forecast expects Hungary’s structural deficit to improve by 1.2% of GDP in 2020, while the expenditure benchmark points to a deviation from the requirement. Taking into account the factors influencing both the structural balance and the expenditure benchmark, based on current projections, the budget for 2020 adopted by the Hungarian government is expected to deliver the required effort.

               (13)The failure to act upon earlier Recommendations to correct the observed significant deviation call for action to put Hungary’s fiscal policy back on a prudent path.

               (14)In order to achieve the recommended budgetary targets, it is crucial that Hungary strictly implements the necessary measures and monitors the development of current expenditure closely and contains spending sprees at the end of the year.

               (15)The requirements issued in this Recommendation supersede the corresponding elements set out in the Council Recommendation of 14 June 2019.

               (16)Hungary should report to the Council on action taken in response to this Recommendation by 15 April 2020, possibly as part of its Convergence Programme submitted pursuant to Article 7 of Regulation (EC) No 1466/97.

               (17)It is appropriate that this Recommendation should be made public,

               HEREBY RECOMMENDS THAT HUNGARY:

               (1)take the necessary measures to ensure that the nominal growth rate of net primary government expenditure does not exceed 4.7% in 2020, corresponding to an annual structural adjustment of 0.75% of GDP, thereby putting the Member State on an appropriate adjustment path toward the medium-term budgetary objective.

               (2)use any windfall gains for deficit reduction; compensate unexpected revenue shortfalls with high-quality permanent fiscal measures. Budgetary consolidation measures should secure a lasting improvement in the general government structural balance in a growth-friendly manner;

               (3)report to the Council by 15 April 2020 on action taken in response to this Recommendation. The report should provide sufficiently specified and credibly announced measures, including the budgetary impact of each of them, with a view to complying with the required adjustment path, as well as updated and detailed budgetary projections for 2020.

               This Recommendation is addressed to Hungary.

               Done at Brussels,

                     For the Council

                     The President

                     (1)

                        OJ L 209, 2.8.1997, p. 1.

                     (2)

                        OJ C 223, 27.6.2018, p. 1.

                     (3)

                        OJ C 460, 21.12.2018, p. 4.

                     (4)

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

                     (5)

                        OJ C 210, 21.6.2019, p. 4.

                     (6)

                        Council Recommendation of 9 July 2019 on the 2019 National Reform Programme of Hungary and delivering a Council opinion on the 2019 Convergence Programme of Hungary (OJ C 301, 5.9.2019, p. 101).

                     (7)

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


               EUROPEAN COMMISSION
            Brussels, 20.11.2019
            COM(2019) 913 final
            Recommendation for a
            COUNCIL DECISION
            establishing that no effective action has been taken by Romania in response to the Council Recommendation of 14 June 2019
            {SWD(2019) 932 final}

               Recommendation for a

               COUNCIL DECISION

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

               THE COUNCIL OF THE EUROPEAN UNION,

               Having regard to the Treaty on the Functioning of the European Union,

               Having regard to Council Regulation (EC) No 1466/97 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies
                  1
               , and in particular the fourth subparagraph of Article 10(2) thereof,

               Having regard to the Recommendation from the European Commission,

               Whereas:

               (1)In June 2017 and June 2018, the Council found in accordance with Article 121(4) of the Treaty that in 2016 and 2017, respectively, there had been a significant observed deviation from Romania’s medium-term budgetary objective or from the adjustment path towards it. In view of those established significant deviations, the Council issued Recommendations on 16 June 2017
                  2
                and 22 June 2018
                  3
               , recommending that Romania take the policy measures necessary to address those deviations. The Council subsequently found that Romania had not taken effective action in response to those Recommendations and issued revised Recommendations on 5 December 2017
                  4
                and 4 December 2018
                  5
                respectively. The Council subsequently found that Romania had not taken effective action in response to those Recommendations either.

               (2)On 14 June 2019, the Council found that in 2018 a significant observed deviation from the adjustment path toward the medium-term budgetary objective had again occurred in Romania and issued a Recommendation for Romania to take the necessary measures to ensure that the nominal growth rate of net primary government expenditure
                  6
                does not exceed 4.5% in 2019 and 5.1% in 2020, corresponding to an annual structural adjustment of 1.0% of gross domestic product (GDP) in 2019 and 0.75% of GDP in 2020.
                  7
                It also recommended that Romania uses any windfall gains for deficit reduction, while budgetary consolidation measures should secure a lasting improvement in the general government structural balance in a growth-friendly manner. The Council established a deadline of 15 October 2019 for Romania to report on the action taken in response to that Recommendation.

               (3)On 25 September 2019 the Commission undertook an enhanced surveillance mission in Romania for the purpose of on-site monitoring under Article -11(2) of Regulation (EC) No 1466/97. After having transmitted its provisional findings to the Romanian authorities for comments, the Commission reported its findings to the Council on 20 November 2019. Those findings were made public. The Commission report finds that the Romanian authorities only plan to undertake structural adjustment from 2022 and thus do not intend to act upon the Council Recommendation of 14 June 2019.

               (4)On 15 October 2019, the Romanian authorities submitted a report on action taken in response to the Council Recommendation of 14 June 2019. The report does not contain a comprehensive projection of individual budgetary categories nor does it include the budgetary impact of each mentioned measure. Thereby, the report does not comply with the reporting requirements recommended by the Council. In the report, the authorities reiterated that their target for 2019 remains a headline deficit of 2.8% of GDP, the same target as in the 2019 Convergence Programme. If this target headline deficit were to be achieved, it would represent only a marginal reduction in the general government deficit compared to 2018, despite Romania experiencing high economic growth. For 2020, the authorities target a headline deficit of 2.9% of GDP, which is higher than the target of 2.7% of GDP in the 2019 Convergence Programme. Overall, the fiscal impact of the reported measures falls short of the requirement stated in the Council Recommendation of 14 June 2019.

               (5)In 2019, based on the Commission 2019 autumn forecast, the growth of net primary government expenditure is projected to be 12.8%, well above the recommended rate of 4.5% (deviation of 2.5% of GDP). The structural balance is set to deteriorate by 0.8% of GDP against the recommended improvement of 1.0% of GDP (deviation of 1.8% of GDP). Therefore, both pillars point to a deviation from the recommended adjustment. The overall assessment confirms a deviation from the recommended adjustment in 2019.

               (6)In 2020, based on the Commission 2019 autumn forecast, the growth of net primary government expenditure is projected to be 11.1%, well above the recommended rate of 5.1% (deviation of 1.8% of GDP). The structural balance is set to deteriorate by 0.8% of GDP against the recommended improvement of 0.75% of GDP (deviation of 1.6% of GDP). Therefore, both pillars point to a risk of a deviation from the required adjustment of similar magnitude. The overall assessment confirms a deviation from the recommended adjustment in 2020.

               (7)Moreover, the Commission 2019 autumn forecast projects a general government deficit of 3.6% in 2019 and 4.4% in 2020, which is above the 3% of GDP Treaty reference value.

               (8)The above findings lead to the conclusion that Romania's response to the Council Recommendation of 14 June 2019 has been insufficient,

               HAS ADOPTED THIS DECISION:

               Article 1

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

               Article 2

               This Decision is addressed to Romania.

               Done at Brussels,

                     For the Council

                     The President

                     (1)

                        OJ L 209, 2.8.1997, p. 1.

                     (2)

                        OJ C 216, 6.7.2017, p. 1.

                     (3)

                        OJ C 223, 27.6.2018, p. 3.

                     (4)

                        OJ C 439, 20.12.2017, p. 1.

                     (5)

                        OJ C 460, 21.12.2018, p. 1.

                     (6)

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

                     (7)

                        OJ C 210, 21.6.2019, p. 1.


Recommendation for a COUNCIL RECOMMENDATION on the 2019 National Reform Programme of Lithuania and delivering a Council opinion on the 2019 Stability Programme of Lithuania