title: Council Recommendation of 20 July 2020 on the 2020 National Reform Programme of Cyprus and delivering a Council opinion on the 2020 Stability Programme of Cyprus 2020/C 282/13

text:
               26.8.2020

               EN

               Official Journal of the European Union

               C 282/82

      COUNCIL RECOMMENDATION
      of 20 July 2020
      on the 2020 National Reform Programme of Cyprus and delivering a Council opinion on the 2020 Stability Programme of Cyprus
      (2020/C 282/13)
      THE COUNCIL OF THE EUROPEAN UNION,
      Having regard to the Treaty on the Functioning of the European Union, and in particular Articles 121(2) and 148(4) thereof,
      Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies (1), and in particular Article 5(2) thereof,
      Having regard to Regulation (EU) No 1176/2011 of the European Parliament and of the Council of 16 November 2011 on the prevention and correction of macroeconomic imbalances (2), and in particular Article 6(1) thereof,
      Having regard to the recommendation of the European Commission,
      Having regard to the resolutions of the European Parliament,
      Having regard to the conclusions of the European Council,
      Having regard to the opinion of the Employment Committee,
      Having regard to the opinion of the Economic and Financial Committee,
      Having regard to the opinion of the Social Protection Committee,
      Having regard to the opinion of the Economic Policy Committee,
      Whereas:

                  (1)

                  On 17 December 2019, the Commission adopted the Annual Sustainable Growth Strategy, marking the start of the 2020 European Semester for economic policy coordination. It took due account of the European Pillar of Social Rights, proclaimed by the European Parliament, the Council and the Commission on 17 November 2017. On 17 December 2019, on the basis of Regulation (EU) No 1176/2011, the Commission also adopted the Alert Mechanism Report, in which it identified Cyprus as one of the Member States for which an in-depth review would be carried out. On the same date, the Commission also adopted a recommendation for a Council recommendation on the economic policy of the euro area.

                  (2)

                  The 2020 country report for Cyprus was published on 26 February 2020. It assessed Cyprus’s progress in addressing the country-specific recommendations adopted by the Council on 9 July 2019 (3) (‘the 2019 country-specific recommendations’), the follow-up given to the country-specific recommendations adopted in previous years and Cyprus’s progress towards its national Europe 2020 targets. It also included an in-depth review under Article 5 of Regulation (EU) No 1176/2011, the results of which were also published on 26 February 2020. The Commission’s analysis led it to conclude that Cyprus is experiencing excessive macroeconomic imbalances. In particular, the financial sector is burdened by a very high share of non-performing loans and high stocks of private, public and external debt weigh on the economy, in a context of moderate potential growth.

                  (3)

                  On 11 March 2020, the World Health Organization officially declared the COVID-19 outbreak a global pandemic. It is a severe public health emergency for citizens, societies and economies. It is putting national health systems under severe strain, disrupting global supply chains, causing volatility in financial markets, triggering consumer demand shocks and having negative effects across various sectors. It is threatening people’s jobs and incomes as well as companies’ business. It has delivered a major economic shock that is already having serious repercussions in the Union. On 13 March 2020, the Commission adopted a communication calling for a coordinated economic response to the crisis, involving all actors at national and Union level.

                  (4)

                  Several Member States have declared a state of emergency or introduced emergency measures. Any emergency measures should be strictly proportionate, necessary, limited in time, and in line with European and international standards. They should be subject to democratic oversight and independent judicial review.

                  (5)

                  On 20 March 2020, the Commission adopted a communication on the activation of the general escape clause of the Stability and Growth Pact. The general escape clause, as set out in Articles 5(1), 6(3), 9(1) and 10(3) of Regulation (EC) No 1466/97 and Articles 3(5) and 5(2) of Council Regulation (EC) No 1467/97 (4), facilitates the coordination of budgetary policies in times of severe economic downturn. In its communication of 20 March 2020, the Commission considered that, given the expected severe economic downturn resulting from the COVID-19 pandemic, the conditions for the activation of the general escape clause had been met and asked the Council to endorse this conclusion. On 23 March 2020, the ministers of finance of the Member States agreed with the assessment of the Commission. They agreed that the severe economic downturn requires a resolute, ambitious and coordinated response. The activation of the general escape clause allows for a temporary departure from the adjustment path towards the medium-term budgetary objective, provided that this does not endanger fiscal sustainability in the medium term. For the corrective arm, the Council may also decide, on a recommendation from the Commission, to adopt a revised fiscal trajectory. The general escape clause does not suspend the procedures of the Stability and Growth Pact. It allows Member States to depart from the budgetary requirements that would normally apply while enabling the Commission and the Council to undertake the necessary policy coordination measures within the framework of the Pact.

                  (6)

                  Continued action is required to limit and control the spread of the COVID-19 pandemic, strengthen the resilience of the national health systems, mitigate the socioeconomic consequences of the pandemic through supportive measures for business and households, and ensure adequate health and safety conditions at the workplace with a view to resuming economic activity. The Union should fully use the various tools at its disposal to support Member States’ efforts in those areas. In parallel, Member States and the Union should work together to prepare the measures necessary to bring about a return to the normal functioning of our societies and economies and to sustainable growth, integrating, inter alia, the green transition and the digital transformation, and drawing lessons from the crisis.

                  (7)

                  The COVID-19 crisis has highlighted the flexibility that the internal market offers to adapt to extraordinary situations. However, in order to ensure a swift and smooth transition to the recovery phase and the free movement of goods, services and workers, exceptional measures that prevent the internal market from functioning normally should be removed as soon as they are no longer indispensable. The current crisis has shown the need for crisis preparedness plans in the health sector. Improved purchasing strategies, diversified supply chains and strategic reserves of essential supplies are among the key elements for developing broader crisis preparedness plans.

                  (8)

                  The Union legislator has already amended the relevant legislative frameworks by means of Regulations (EU) 2020/460 (5) and (EU) 2020/558 (6) of the European Parliament and of the Council to allow Member States to mobilise all unused resources from the European Structural and Investment Funds so they can address the exceptional effects of the COVID-19 pandemic. Those amendments will provide additional flexibility, as well as simplified and streamlined procedures. To alleviate cash-flow pressures, Member States can also benefit from a 100 % co-financing rate from the Union budget in the 2020-2021 accounting year. Cyprus is encouraged to make full use of those possibilities to help the individuals and sectors most affected.

                  (9)

                  The socioeconomic consequences of the COVID-19 pandemic are likely to be unevenly distributed across the country because of different specialisation patterns, in particular in areas markedly relying on tourism and more generally on face-to-face business with consumers. This entails a risk of widening territorial disparities within Cyprus. Combined with the risk of a temporary unravelling of the convergence process between Member States, the current situation calls for targeted policy responses.

                  (10)

                  On 7 May 2020, Cyprus submitted its 2020 National Reform Programme and its 2020 Stability Programme. In order to take account of their interlinkages, the two programmes have been assessed at the same time.

                  (11)

                  Cyprus is currently in the preventive arm of the Stability and Growth Pact and subject to the debt rule.

                  (12)

                  In its 2020 Stability Programme, the government plans the headline balance to deteriorate from a surplus of 1,7 % of gross domestic product (GDP) in 2019 to a deficit of 4,3 % of GDP in 2020. The deficit is projected to decline to 0,4 % of GDP in 2021. After decreasing to 95,5 % of GDP in 2019, the general government debt-to-GDP ratio is expected to increase to 116,8 % in 2020 according to the 2020 Stability Programme. The macroeconomic and fiscal outlook is affected by high uncertainty because of the COVID-19 pandemic. In addition, there are risks underlying the budgetary projections, namely explicit contingent liabilities and potential financing needs of public hospitals during the first years of the implementation of the National Health Insurance System.

                  (13)

                  In response to the COVID-19 pandemic, and as part of a coordinated Union approach, Cyprus has adopted timely budgetary measures to increase the capacity of its health system, contain the pandemic, and provide relief to those individuals and sectors that have been particularly affected. According to the 2020 Stability Programme, those budgetary measures amounted to 4,4 % of GDP. The measures include strengthening health care services with an extra budget of up to 0,5 % of GDP, subsidised wages to keep employees on the payroll in case of suspended business operations (2,7 % of GDP) and income support for the small businesses and the self-employed (0,3 % of GDP). In addition, Cyprus has announced measures that, while not having a direct budgetary impact, will contribute to providing liquidity support to businesses, including for example the deferral of VAT payment for a period of two months. Overall, the measures taken by Cyprus are in line with the guidelines set out in the Commission communication of 13 March 2020. The full implementation of the emergency measures and of supportive fiscal measures, followed by a refocusing of fiscal policies towards achieving prudent medium-term fiscal positions when economic conditions allow, will contribute to preserving fiscal sustainability in the medium term.

                  (14)

                  Based on the Commission 2020 spring forecast under unchanged policies, Cyprus’s general government balance is forecast at -7 % of GDP in 2020 and -1,8 % of GDP in 2021. The general government debt ratio is projected to reach 115,7 % of GDP in 2020 and 105 % of GDP in 2021.

                  (15)

                  On 20 May 2020, the Commission issued a report prepared in accordance with Article 126(3) of the Treaty because of Cyprus’s non-compliance with the debt rule in 2019 and the planned breach of the 3 %-of-GDP deficit threshold in 2020. Overall, the Commission’s analysis suggests that the debt criterion as defined in the Treaty and in Regulation (EC) No 1467/97 has been complied with, while the deficit criterion has not been fulfilled.

                  (16)

                  Cyprus reacted to the COVID-19 outbreak with a range of measures to mitigate the economic impacts of the crisis. On 15 March 2020 the government put forward a financial support programme to safeguard public health and ensure the economic survival of businesses and employers. The programme earmarks EUR 100 million for financial support to the health sector to combat the pandemic, including for the recruitment of additional medical, nursing and support staff, and for equipment and infrastructure. It sets out a series of measures to support enterprises by enhancing liquidity, e.g. support schemes for businesses and the self-employed, and temporary suspension of VAT payments for companies. The package also includes dedicated support of EUR 11 million to help the tourism sector recover.

                  (17)

                  The COVID-19 crisis demonstrates the need to channel investments to improve and modernise public healthcare, restore capacity and implement the healthcare reform. The new healthcare system offers better access to primary care services, appropriate guidance and treatments based on clinical protocols. It also provides for universal entitlement to affordable health services in the context of the COVID-19 outbreak. Cyprus has an established emergency pandemic plan and allocated additional resources to prevent and manage the impact of infection and contagion. In the medium term, Cyprus needs to steer investments towards increasing the health system’s effectiveness, accessibility and overall resilience. Additional resources for the health system should prevent future shortages of medical staff, critical medical supplies and infrastructure. The smooth implementation of the healthcare reform, as planned, is central to ensuring access to healthcare and universal coverage. Digital health solutions and new applications would contribute to stepping up the deployment of e-health services and improving teleconsultations and alert mechanisms. Policies that improve hospital capacity, address health workers’ working conditions and ensure the deployment of personal protective equipment, testing, medicines and medical devices are vital. Integration with long-term care as well as primary and community care is crucial in light of demographic change and the need to support the most vulnerable, including people with disabilities.

                  (18)

                  After consistent positive labour market developments in recent years, Cyprus will now be facing challenges in terms of employment levels due to the health crisis. Further efforts are needed to minimise the socioeconomic impact of the crisis. Cyprus has already adopted emergency measures including short-time work schemes and the extension of unemployment benefits to the self-employed. It will be important to retain employment and ensure the implementation of announced measures, in close consultation with the social partners. Strengthening the capacity of the public employment services with permanent staff will be key, in particular by safeguarding the continuation of services of employment counsellors under temporary contracts expiring in the second half of 2020. This will avoid putting the services under further strain and provide efficient support to the newly unemployed and other vulnerable groups, such as young people not in education, employment or training, the long-term unemployed and persons with disabilities. Support for school-to-work transition and outreach to young people in particular require further attention, as recent graduates might face additional difficulties in finding a job.

                  (19)

                  The outbreak of COVID-19 requires appropriate measures to mitigate social impacts and to support households’ income and sustain a prompt recovery of the economy. According to the Commission 2020 spring forecast, unemployment is expected to rise to 8,6 % in 2020 and decrease to 7,5 % in 2021. External demand for services is set to dip significantly, as the tourism sector is expected to be particularly hard hit by the crisis. Adequate income replacement should be ensured for all affected workers and self-employed people, including those facing gaps in terms of access to social protection. Social protection schemes need to protect those in employment, self-employment and unemployment. There is scope for strengthening the overall social protection system in order to prevent increases in poverty and inequality levels, in particular by reaching out to the most vulnerable, including children, inactive people, undeclared workers, and people with a migrant background.

                  (20)

                  The promotion of flexible working arrangements with the involvement of social partners, particularly in the form of teleworking, is of high importance. In the short term, these will support workers with unforeseen caring responsibilities for children and other dependants, while in the long term they will facilitate labour market re-entry of the high share of inactive women due to caring responsibilities. Since the elderly and people with chronic diseases have increased risks of severe illness due to the virus, investing in quality long-term care services is of high importance to ensure their continued provision and efficiency in the short and medium term.

                  (21)

                  Improving the quality, efficiency and labour market relevance of education and training is crucial in this crisis context and to ensure a fast labour-market recovery. Equipping people with the right skills is even more important in times where increased numbers might lose their jobs and need to be ready for job transitions thereafter. The mobility restrictions highlighted the challenges related to the low digital skills levels in Cyprus. This negatively affects online activities, such as teleworking, distance learning and the use of e-health services. Equal access to IT infrastructure and internet, including for disadvantaged learners, along with well-trained teachers, are key for quality digital education and distance learning. To address low overall educational and training outcomes and improve skills more broadly, it is essential to continue with the education reform, while investing in solutions for digital learning, work-based learning and apprenticeship training, and in developing teachers’ and trainers’ competences to use IT tools effectively. There is scope to address underachievement in basic skills, as well as raise participation in adult learning. To accelerate application, retraining programmes could, to the extent possible, be designed for online use and then, once the pandemic is contained, integrate physical presence, as appropriate.

                  (22)

                  For the duration of the crisis and its aftermath, significant funds are and will be needed to support businesses. Securing adequate access to finance and liquidity is essential, especially for small and medium-sized enterprises (SMEs), in order to keep companies in business and people at work. In the process of designing and implementing these measures the resilience of the banking sector needs to be taken into account. Cyprus has implemented a specific small-business support scheme that subsidises the salary payments of businesses with up to five employees. In addition, the suspension of the increased contributions to the national health system and the postponement of tax payments (e.g. VAT) will ease the immediate pressure. Swift administrative coordination, practical support and effective communication on the backing available to SMEs, in cooperation with the SME support structures and business organisations, are essential. The speeding-up of contractual payments by public authorities can also help improve the cash flow of SMEs. Newly founded start-ups and scale-ups may need specific support, e.g. in the form of equity stakes by public institutions and incentives for venture capital funds to increase their investments in these firms. It remains important to implement financial instruments prepared before the crisis (Cyprus Energy Fund of Funds).

                  (23)

                  To foster the economic recovery, it will be important to front-load mature public investment projects and promote private investment, including through relevant reforms. Protecting and using the country’s natural resources efficiently is of paramount importance to ensure a sustainable economic recovery and future growth. To maintain the country’s appeal to tourists, it is necessary to address challenges related to the green energy transition, effective waste and water management and the protection of nature and biodiversity. While significant investments have already started, more investments in these areas need to be front-loaded. Cyprus faces important challenges in reaching its 2030 target for greenhouse gas emissions not covered by the EU emissions trading system. These challenges need to be addressed by planning and adopting additional measures in a timely manner in accordance with the country’s National Energy and Climate Plan. Such measures will require investments, in particular in areas like renewable energy, energy efficiency and sustainable transport, which can also help to provide a robust green stimulus. Cyprus also needs to improve its waste management system and the circular economy. Waste generation remains significantly higher than the Union average, while recycling rates remain significantly lower than the Union average. The landfilling rate is also very high. Water and waste water management, especially in urban areas, is characterised by inefficiencies. Droughts and water scarcity are major concerns and an insufficient policy response might affect the country’s rural economy and tourism. The programming of the Just Transition Fund, which is the subject of a Commission proposal, for the period 2021-2027 could help Cyprus to address some of the challenges posed by the transition to a climate-neutral economy, in particular in the territories covered by Annex D to the 2020 country report. This would allow Cyprus to make the best use of that Fund.

                  (24)

                  The importance of a modern digital infrastructure, universal internet access and the availability of digital services was highlighted by the COVID-19 mobility restrictions. Investing in the digital economy is essential for bolstering productivity and boosting the economic recovery after the crisis. Cyprus ranks at the low end of the Commission’s Digital Economy and Society Index (DESI) 2020. Only 45 % of Cypriots between 16 and 74 years of age have at least basic digital skills and ICT specialists still represent a lower proportion of the workforce compared to the Union average (2,7 % vs 3,9 %), hampering the potential of the digital economy. There is a low level of online interaction between public authorities and citizens, with only 51 % of Cypriots interacting online. The level of e-commerce (i.e. SMEs selling online, e-commerce turnover and online cross-border sales) is improving (31,8 % in 2019 against 29,4 % in 2018) but it is still below the Union average of 40,1 %.

                  (25)

                  Cyprus can further improve its research and innovation system to support productivity growth and the required digital and environmental transition in a post-pandemic scenario. Firms’ low research and innovation absorption capacity hamper Cyprus’s competitiveness. Improved cooperation between academia and business and the commercialisation of research results remain key bottlenecks and require urgent action. However, recent measures such as the creation establishment of a new Deputy Ministry of Research, Innovation and Digital Policy, the appointment of a new Deputy Minister for Research, Innovation and Digital Policy as well as the new Cyprus Research and Innovation Strategy Framework 2019-2023 (‘Innovate Cyprus’), which sets a higher research and development target of 1,5 % of GDP by 2023 (up from the current 0,56 %) are promising steps.

                  (26)

                  Tackling aggressive tax planning is key to improving the efficiency and fairness of tax systems, as acknowledged in the 2020 Recommendation on the economic policy of the euro area. Spillover effects of taxpayers’ aggressive tax-planning strategies call for coordinated national action to complement Union legislation. The economic evidence suggests that Cyprus’s tax rules are used for aggressive tax-planning purposes. Cyprus has taken steps to address this by implementing international and European initiatives and taking some additional national measures. However, features of the system such as the absence of withholding taxes on outbound dividend, interest and royalty payments by Cyprus-based companies to third country residents, and the corporate tax residency rules, may continue to facilitate aggressive tax planning. The notional interest deduction scheme needs to be closely monitored. Finally, the scheme for the naturalisation of investors in Cyprus by exception and the residence-by-investment scheme have been listed by the OECD as having a potentially high risk for being misused. Cyprus has prepared and submitted for legal vetting draft laws introducing withholding taxes on dividend, interest and royalty payments to countries included in Annex I to the EU list of non-cooperative jurisdictions for tax purposes. Cyprus has also prepared and submitted for legal vetting the introduction of a corporate tax residency test based on incorporation, in addition to the existing management and control. The effectiveness of these measures in tackling aggressive tax planning will need to be assessed.

                  (27)

                  An effective justice system remains a key factor for an attractive investment- and business-friendly economy and will be crucial in the recovery process. Serious inefficiencies in the justice system continue to undermine contract enforcement and prevent the swift resolution of civil and commercial cases. A series of reforms have been announced to address the most critical problems in the justice system in Cyprus, in particular the outdated civil procedures rules and digitalisation of the courts, the clearance of the large backlog of cases and the lack of lifelong training for judges, but progress remains slow.

                  (28)

                  Strengthening the resilience and efficiency of the public administration is key to ensuring the swift and effective implementation of the COVID-19 recovery measures in Cyprus. Improving the coordination between central and local government and tackling the fragmentation and inefficiencies at local level are necessary to remove the bottlenecks for coherent implementation, investments and service delivery in the country. Pushing forward the digitalisation of public administration is key to ensuring its own business continuity, as well as the continued and effective access to public services for citizens and the businesses.

                  (29)

                  While the country-specific recommendations set out in this Recommendation (‘the 2020 country-specific recommendations’) focus on tackling the socioeconomic impacts of the pandemic and facilitating the economic recovery, the 2019 country-specific recommendations also covered reforms that are essential to address medium- to long-term structural challenges. The 2019 country-specific recommendations remain pertinent and will continue to be monitored throughout next year’s European Semester. That includes the 2019 country-specific recommendations regarding investment-related economic policies. All of the 2019 country-specific recommendations should be taken into account for the strategic programming of post-2020 cohesion policy funding, including for mitigating measures and exit strategies with regard to the current crisis.

                  (30)

                  Safeguarding the overall soundness of the banking system and managing financial stability risks are essential for weathering the COVID-19 crisis and supporting the economy. While the stability of the banking sector improved significantly in recent years, the pandemic is posing strains on banks, through an increase in credit risk and pressures on profitability and capitalisation. Vulnerabilities and challenges stem from an over-indebted private sector and a high stock of non-performing loans (NPLs), which limit the scope of credit support. The Cypriot banking sector has the second highest NPL ratio in the euro area. Therefore, efforts to reduce NPLs remains a priority, in particular addressing legacy NPLs that are long overdue before the onset of the COVID-19 crisis. To achieve this aim, progress on the State-owned asset management company (KEDIPES), including on its organisational model and strategy, is essential. The ESTIA scheme appropriately seeks to support and protect vulnerable borrowers, but it is remains essential to balance this aim with improving payment culture. In this respect, strengthening the enforcement of claims and promoting the use of insolvency framework would help underpin a sustainable workout of bad loans. Moreover, reducing the backlog in the issuance of title deeds by implementing a structural solution to address the inadequacies of the property transaction system (i.e. the issuance and transfer of title deeds) remains an important task.

                  (31)

                  Continuing efforts to strengthen the framework to prevent and penalise corruption is key to ensuring recovery in the aftermath of the COVID-19 crisis and achieving an efficient, accountable and transparent allocation and distribution of funds and resources. While an action plan against corruption is being implemented, key measures and legislation are still pending adoption, notably the draft Acts for the enhancement of transparency in public decision making, the establishment of the independent authority against corruption, reporting corruption and the protection of whistle-blowers. The provisions related to the Law Office’s separation of functions and recruitment procedures are still pending completion.

                  (32)

                  The European Semester provides the framework for continuous economic and employment policy coordination in the Union, which can contribute to a sustainable economy. In their 2020 National Reform Programmes, Member States have taken stock of progress made in the implementation of the United Nations Sustainable Development Goals (SDGs). By ensuring the full implementation of the 2020 country-specific recommendations, Cyprus will contribute to the progress towards the SDGs and to the common effort of ensuring competitive sustainability in the Union.

                  (33)

                  Close coordination between economies in the economic and monetary union is key in achieving a swift recovery from the economic impact of the COVID-19 pandemic. As a Member State whose currency is the euro, Cyprus should ensure that its policies remain consistent with the 2020 euro-area recommendations and coordinated with those of the other Member States whose currency is the euro, taking into account political guidance from the Eurogroup.

                  (34)

                  In the context of the 2020 European Semester, the Commission has carried out a comprehensive analysis of Cyprus’s economic policy and published it in the 2020 country report. It has also assessed the 2020 Stability Programme, the 2020 National Reform Programme and the follow-up given to the country-specific recommendations addressed to Cyprus in previous years. The Commission has taken into account not only their relevance for sustainable fiscal and socioeconomic policy in Cyprus, but also their compliance with Union rules and guidance, given the need to strengthen the Union’s overall economic governance by providing Union-level input into future national decisions.

                  (35)

                  In the light of this assessment, the Council has examined the 2020 Stability Programme and its opinion (7) is reflected in particular in recommendation (1) below.

                  (36)

                  In the light of the Commission’s in-depth review and this assessment, the Council has examined the 2020 National Reform Programme and the 2020 Stability Programme. The 2020 country-specific recommendations take into account the need to tackle the COVID-19 pandemic and facilitate the economic recovery as a necessary first step to allow for an adjustment of imbalances. The 2020 country-specific recommendations directly addressing the macroeconomic imbalances identified by the Commission under Article 6 of Regulation (EU) No 1176/2011 are reflected in recommendations (1), (3) and (4),

            HEREBY RECOMMENDS that Cyprus take action in 2020 and 2021 to:

                  1.

                  Take all necessary measures, in line with the general escape clause of the Stability and Growth Pact, to effectively address the COVID-19 pandemic, sustain the economy and support the ensuing recovery. When economic conditions allow, pursue fiscal policies aimed at achieving prudent medium-term fiscal positions and ensuring debt sustainability, while enhancing investment. Strengthen the resilience and capacity of the health system to ensure quality and affordable services, including by addressing health workers’ working conditions.

                  2.

                  Provide adequate income replacement and access to social protection for all. Strengthen public employment services, promote flexible working arrangements and improve the labour-market relevance of education and training.

                  3.

                  Secure adequate access to finance and liquidity, especially for SMEs. Front-load mature public investment projects and promote private investment to foster the economic recovery. Focus investment on the green and digital transition, in particular on clean and efficient production and use of energy, waste and water management, sustainable transport, digitalisation, research and innovation.

                  4.

                  Step up action to address features of the tax system that facilitate aggressive tax planning by individuals and multinationals. Improve the efficiency and digitalisation of the judicial system and the public sector.

         Done at Brussels, 20 July 2020.

               For the Council

               The President

            J. KLOECKNER

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

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

         (3)  OJ C 301, 5.9.2019, p. 80.

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

         (5)  Regulation (EU) 2020/460 of the European Parliament and of the Council of 30 March 2020 amending Regulations (EU) No 1301/2013, (EU) No 1303/2013 and (EU) No 508/2014 as regards specific measures to mobilise investments in the healthcare systems of Member States and in other sectors of their economies in response to the COVID-19 outbreak (Coronavirus Response Investment Initiative) (OJ L 99, 31.3.2020, p. 5).

         (6)  Regulation (EU) 2020/558 of the European Parliament and of the Council of 23 April 2020 amending Regulations (EU) No 1301/2013 and (EU) No 1303/2013 as regards specific measures to provide exceptional flexibility for the use of the European Structural and Investments Funds in response to the COVID-19 outbreak (OJ L 130, 24.4.2020, p. 1).

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


title: Council Recommendation of 20 July 2020 on the 2020 National Reform Programme of Latvia and delivering a Council opinion on the 2020 Stability Programme of Latvia 2020/C 282/14

text:
               26.8.2020

               EN

               Official Journal of the European Union

               C 282/89

      COUNCIL RECOMMENDATION
      of 20 July 2020
      on the 2020 National Reform Programme of Latvia and delivering a Council opinion on the 2020 Stability Programme of Latvia
      (2020/C 282/14)
      THE COUNCIL OF THE EUROPEAN UNION,
      Having regard to the Treaty on the Functioning of the European Union, and in particular Articles 121(2) and 148(4) thereof,
      Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies (1), and in particular Article 5(2) thereof,
      Having regard to the recommendation of the European Commission,
      Having regard to the resolutions of the European Parliament,
      Having regard to the conclusions of the European Council,
      Having regard to the opinion of the Employment Committee,
      Having regard to the opinion of the Economic and Financial Committee,
      Having regard to the opinion of the Social Protection Committee,
      Having regard to the opinion of the Economic Policy Committee,
      Whereas:

                  (1)

                  On 17 December 2019, the Commission adopted the Annual Sustainable Growth Strategy, marking the start of the 2020 European Semester for economic policy coordination. It took due account of the European Pillar of Social Rights, proclaimed by the European Parliament, the Council and the Commission on 17 November 2017. On 17 December 2019, on the basis of Regulation (EU) No 1176/2011 of the European Parliament and of the Council (2), the Commission also adopted the Alert Mechanism Report, in which it did not identify Latvia as one of the Member States for which an in-depth review would be carried out. On the same date, the Commission also adopted a recommendation for a Council recommendation on the economic policy of the euro area.

                  (2)

                  The 2020 country report for Latvia was published on 26 February 2020. It assessed Latvia’s progress in addressing the country-specific recommendations adopted by the Council on 9 July 2019 (3) (‘the 2019 country-specific recommendations’), the follow-up given to the country-specific recommendations adopted in previous years and Latvia’s progress towards its national Europe 2020 targets.

                  (3)

                  On 11 March 2020, the World Health Organization officially declared the COVID-19 outbreak a global pandemic. It is a severe public health emergency for citizens, societies and economies. It is putting national health systems under severe strain, disrupting global supply chains, causing volatility in financial markets, triggering consumer demand shocks and having negative effects across various sectors. It is threatening people’s jobs and incomes as well as companies’ business. It has delivered a major economic shock that is already having serious repercussions in the Union. On 13 March 2020, the Commission adopted a communication calling for a coordinated economic response to the crisis, involving all actors at national and Union level.

                  (4)

                  Several Member States have declared a state of emergency or introduced emergency measures. Any emergency measures should be strictly proportionate, necessary, limited in time, and in line with European and international standards. They should be subject to democratic oversight and independent judicial review.

                  (5)

                  On 20 March 2020, the Commission adopted a communication on the activation of the general escape clause of the Stability and Growth Pact. The general escape clause, as set out in Articles 5(1), 6(3), 9(1) and 10(3) of Regulation (EC) No 1466/97 and Articles 3(5) and 5(2) of Council Regulation (EC) No 1467/97 (4), facilitates the coordination of budgetary policies in times of severe economic downturn. In its communication of 20 March 2020, the Commission considered that, given the expected severe economic downturn resulting from the COVID-19 pandemic, the conditions for the activation of the general escape clause had been met and asked the Council to endorse this conclusion. On 23 March 2020, the ministers of finance of the Member States agreed with the assessment of the Commission. They agreed that the severe economic downturn requires a resolute, ambitious and coordinated response. The activation of the general escape clause allows for a temporary departure from the adjustment path towards the medium-term budgetary objective, provided that this does not endanger fiscal sustainability in the medium term. For the corrective arm, the Council may also decide, on a recommendation from the Commission, to adopt a revised fiscal trajectory. The general escape clause does not suspend the procedures of the Stability and Growth Pact. It allows Member States to depart from the budgetary requirements that would normally apply while enabling the Commission and the Council to undertake the necessary policy coordination measures within the framework of the Pact.

                  (6)

                  Continued action is required to limit and control the spread of the COVID-19 pandemic, strengthen the resilience of the national health systems, mitigate the socioeconomic consequences of the pandemic through supportive measures for business and households, and ensure adequate health and safety conditions at the workplace with a view to resuming economic activity. The Union should fully use the various tools at its disposal to support Member States’ efforts in those areas. In parallel, Member States and the Union should work together to prepare the measures necessary to bring about a return to the normal functioning of our societies and economies and to sustainable growth, integrating, inter alia, the green transition and the digital transformation, and drawing lessons from the crisis.

                  (7)

                  The COVID-19 crisis has highlighted the flexibility that the internal market offers to adapt to extraordinary situations. However, in order to ensure a swift and smooth transition to the recovery phase and the free movement of goods, services and workers, exceptional measures that prevent the internal market from functioning normally should be removed as soon as they are no longer indispensable. The current crisis has shown the need for crisis preparedness plans in the health sector. Improved purchasing strategies, diversified supply chains and strategic reserves of essential supplies are among the key elements for developing broader crisis preparedness plans.

                  (8)

                  The Union legislator has already amended the relevant legislative frameworks by means of Regulations (EU) 2020/460 (5) and (EU) 2020/558 (6) of the European Parliament and of the Council to allow Member States to mobilise all unused resources from the European Structural and Investment Funds so they can address the exceptional effects of the COVID-19 pandemic. Those amendments will provide additional flexibility, as well as simplified and streamlined procedures. To alleviate cash-flow pressures, Member States can also benefit from a 100 % co-financing rate from the Union budget in the 2020-2021 accounting year. Latvia is encouraged to make full use of those possibilities to help the individuals and sectors most affected.

                  (9)

                  The socioeconomic consequences of the COVID-19 pandemic are likely to be unevenly distributed across sectors and regions due to different specialisation patterns. This entails a risk of widening disparities within Latvia. Combined with the risk of a temporary unravelling of the convergence process between Member States, the current situation calls for targeted policy responses.

                  (10)

                  On 30 April 2020, Latvia submitted its 2020 National Reform Programme and its 2020 Stability Programme. In order to take account of their interlinkages, the two programmes have been assessed at the same time.

                  (11)

                  Latvia is currently in the preventive arm of the Stability and Growth Pact.

                  (12)

                  In its 2020 Stability Programme, the government plans the headline balance to deteriorate from a deficit of 0,2 % of gross domestic product (GDP) in 2019 to 9,4 % of GDP in 2020. The deficit is projected to decline to 5,0 % of GDP in 2021 and to 2,7 % of GDP by 2023, under unchanged policies. After decreasing to 36,9 % of GDP in 2019, the general government debt-to-GDP ratio is expected to peak at around 53 % in 2022, based on the 2020 Stability Programme. The macroeconomic and fiscal outlook is affected by high uncertainty because of the COVID-19 pandemic.

                  (13)

                  In response to the COVID-19 pandemic, and as part of a coordinated Union approach, Latvia has adopted timely budgetary measures to increase the capacity of its health system, contain the pandemic, and provide relief to those individuals and sectors that have been particularly affected. According to the 2020 Stability Programme, those budgetary measures amounted to 3,0 % of GDP. The measures include tax deferral options for up to three years, expanded coverage of State-paid sick leave, support for specific sectors and additional health spending. In addition, Latvia has adopted liquidity support to businesses through guarantees and loans amounting to 3,2 % of GDP. Overall, the measures taken by Latvia are in line with the guidelines set out in the Commission communication of 13 March 2020. The full implementation of the emergency measures and of supportive fiscal measures, followed by a refocusing of fiscal policies towards achieving prudent medium-term fiscal positions when economic conditions allow, will contribute to preserving fiscal sustainability in the medium term.

                  (14)

                  Based on the Commission 2020 spring forecast under unchanged policies, Latvia’s general government balance is forecast at -7,3 % of GDP in 2020 and -4,5 % of GDP in 2021. This reflects a broadly similar effect of the stimulus measures as in the 2020 Stability Programme, but the drop in employment is projected to be lower and automatic stabilisers on the expenditure side are also assumed to be lower. The general government debt ratio is projected to remain below 60 % of GDP in 2020 and 2021.

                  (15)

                  On 20 May 2020, the Commission issued a report prepared in accordance with Article 126(3) of the Treaty because of Latvia’s projected breach of the 3 %-of-GDP deficit threshold in 2020. Overall, the Commission’s analysis suggests that the deficit criterion as defined in the Treaty and in Regulation (EC) No 1467/97 has not been fulfilled.

                  (16)

                  Latvia declared a state of emergency on 13 March 2020 and extended it until 9 June 2020. The government limited the movement of persons across Latvia’s borders by air, rail and sea, closed schools and universities while ensuring distance learning, prohibited all public events, enforced social distancing measures, restricted sales on weekends and promoted digital public services. Considering the improved epidemiological situation, the authorities loosened national restrictions as of 12 May 2020 and agreed to reopen borders with Lithuania and Estonia as of 15 May 2020. According to the Commission 2020 spring forecast, unemployment is expected to rise to 8,6 % in 2020 and slightly recover to 8,3 % in 2021. The economy is projected to decline by 7 % in 2020 with investments and export taking the largest hit amid declining foreign demand and growing uncertainty. Employment is expected to decrease by 2,5 %, taking into account the fact that the negative impact on employment will be considerably cushioned by the government-subsidised employee furlough scheme and salary subsidies in export-oriented sectors. In response to the COVID-19 crisis, Latvia has developed a comprehensive fiscal and economic policy response. The authorities have targeted the response in three directions: (1) support to workers; (2) support to businesses; and (3) support to the hardest-hit economic sectors. Labour policy measures, aimed at maintaining employment and strengthening the social safety net include, inter alia, salary subsidies of up to 75 % of a person’s gross wage, coverage of sick leave if a worker is diagnosed with COVID-19 or is in quarantine, and extension of unemployment benefits. Support to businesses, facing temporary difficulties has aimed to extend liquidity to viable firms and to quickly boost supply of vital goods and services.

                  (17)

                  The COVID-19 pandemic has required unprecedented measures to contain the spread and impact of the disease. It has amplified the structural weaknesses in Latvia’s health system, which are directly related to the limited financial and human resources available to it and to reforms that are only slowly progressing. Access to quality and affordable healthcare and the effectiveness of the health system are affected by low public financing. This leads to high self-reported unmet needs for healthcare, significant out-of-pocket payments, especially for vulnerable groups, as well as inequality of access. Unhealthy lifestyles are another important reason for the poor health outcomes. In addition, health workforce shortages constitute a complex challenge and hamper the delivery of health services. To boost efficiency and quality in healthcare, it is crucial to accelerate the ongoing reforms which remain in an early stage including effective prevention measures, stronger primary care, a rationalised hospital sector and targeted quality management. The extent of the impact of these reforms and the opportunities to improve health outcomes also depend significantly on the amount of public financing for health. In order to be able to manage similar crises in the future, it is important to ensure investments into effective and well-resourced public health measures to prevent, contain and mitigate the spread of infectious diseases and to manage their impact on the health system’s performance. Investments could aim at providing the necessary equipment, robust e-health services, facilities and human resources for healthcare and at ensuring the capacity to deliver all expected regular health services alongside care for COVID-19 patients.

                  (18)

                  Latvia has taken measures to extend income support for workers and to avoid dismissals during the state of emergency. However, the support is limited in coverage and adequacy, mainly because it is dependent on social contribution payments and restrictive eligibility criteria. The scheme also does not allow for partial idle time. A more gradual transition from income support to work income would allow for a greater labour market flexibility during the downtime period and the economic recovery. Continuous efforts are needed to improve the adequacy, duration and coverage of the social safety net for all. However, these efforts are constrained by the low tax revenue as a share of GDP. Despite some slight improvement, the adequacy of the guaranteed minimum income, of minimum pensions and of income support for persons with disabilities remains low. Latvia has introduced the unemployment assistance benefit for the most vulnerable, yet the unemployed are at a high risk of poverty, particularly when the duration of unemployment increases. Coverage gaps in access to social protection, including unemployment insurance, for self-employed and non-standard workers exist and could be tackled. While its share is decreasing, undeclared work and envelope wages remain widespread, weakening affected workers’ social protection and increasing occupational risks. Vulnerable groups are likely to face the most difficulties in finding a job again. The integration of employment, education, health and social services and the provision of social services remains low. The share of people facing severe housing deprivation and that of people facing overcrowding are among the highest in the Union, while social housing is scarce.

                  (19)

                  Providing support to small and medium-sized enterprises to help them quickly develop flexible work and teleworking capacities may significantly help mitigate the impact of the crisis. Low registration with public employment services and the low level of involvement of the unemployed in active labour market measures are of particular concern. The delivery and composition of active labour market measures have to be reinforced and adapted to reduce the duration of the unemployment spells and facilitate transitions back to work. Equipping people with the right skills is even more important to improve the resilience of the labour force in times of an economic downturn. Effective and easily accessible adult learning, reskilling and upskilling measures, together with the provision of social services and mobility support, could provide more people with the skills necessary for the labour market. Digital skills also need to be improved as only 43 % of Latvians have basic or above basic digital skills. The COVID-19 pandemic has also highlighted the need to enhance quality digital education and training and to ensure equal access to all learners. Strengthening the capacity of social partners is also important to ensure their meaningful and timely involvement in the COVID-19 crisis response and recovery.

                  (20)

                  A sizable liquidity support scheme was quickly set up and deployed through the national development institution, Altum. It has helped restructure loan repayment schedules for businesses and provided liquidity support through new loans. At the same time, most restructurings of bank loans take place without involvement of State guarantees. However, the eligibility conditions for State guarantees are relatively strict. As a result, there is a risk that smaller companies with weaker financial position or overdue tax payments will not receive support. Restaurants and hotels, which are among the hardest hit industries in this crisis, experience difficulties accessing liquidity because of their weak collateral and financial position. At the same time, it is important to sustain the resilience of the banking sector.

                  (21)

                  To foster the economic recovery, it will be important to front-load mature public investment projects and promote private investment, including through relevant reforms. Policies to support the country’s digital transformation and green transition should take into account the significant regional disparities. Most urban areas in Latvia have excellent digital infrastructure, but fixed broadband coverage in rural areas, especially last-mile connections, is low. Continued and strengthened efforts to deploy very high-speed broadband will help further improve the digital infrastructure. In order to tackle the challenges posed by the transition to a climate neutral economy, investments are needed to diversify the economy and make it more modern and competitive, including by strengthening investment in research and innovation and human capital and to alleviate the socioeconomic costs of the transition. Latvia’s environmental sustainability rests on making progress towards improved energy efficiency, implementing its National Energy and Climate Plan, including in particular in transport and buildings, and mainstreaming environmental sustainability considerations in other economic sectors, in particular in agriculture and forestry. Improving intermodal transport infrastructure within and around Riga would both facilitate labour mobility and help curb growing energy consumption from passenger cars. Furthermore, the Rail Baltica project and the energy interconnection projects are Latvia’s key investment priorities aimed at improving its safety and integration into the internal market. Making further investments in renewable energy, in particular wind power, and promoting the transition to a circular economy with significantly higher recycling rates can also improve both environmental and economic outcomes and help achieve climate change mitigation targets. The programming of the Just Transition Fund, which is the subject of a Commission proposal, for 2021-2027 could help Latvia address some of the challenges posed by the transition to a climate-neutral economy, in particular in the territories covered by Annex D to the 2020 country report. This would allow Latvia to make the best use of that Fund.

                  (22)

                  Latvia has significantly reduced the flow of risky money through its banks and overhauled its anti-money-laundering system. In particular, Latvia banned the servicing of non-resident shell companies and amended a number of laws. The capacity and capability of key supervisory, financial intelligence and law enforcement institutions has been strengthened. While supervision of financial institutions has been tightened considerably, it could be better targeted and become more efficient with improved risk assessment. Moreover, while the capacity and cooperation between law enforcement bodies has been improved, their capacity to investigate and prosecute money laundering cases could be further strengthened.

                  (23)

                  While the country-specific recommendations set out in this Recommendation (‘the 2020 country-specific recommendations’) focus on tackling the socioeconomic impacts of the COVID-19 pandemic and facilitating the economic recovery, the 2019 country-specific recommendations also covered reforms that are essential to address medium- to long-term structural challenges. The 2019 country-specific recommendations remain pertinent and will continue to be monitored throughout next year’s European Semester. That includes the 2019 country-specific recommendations regarding investment-related economic policies. All of the 2019 country-specific recommendations should be taken into account for the strategic programming of post-2020 cohesion policy funding, including for mitigating measures and exit strategies with regard to the current crisis.

                  (24)

                  The European Semester provides the framework for continuous economic and employment policy coordination in the Union, which can contribute to a sustainable economy. In their 2020 National Reform Programmes, Member States have taken stock of progress made in the implementation of the United Nations Sustainable Development Goals (SDGs). By ensuring the full implementation of the 2020 country-specific recommendations, Latvia will contribute to the progress towards the SDGs and to the common effort of ensuring competitive sustainability in the Union.

                  (25)

                  Close coordination between economies in the economic and monetary union is key in achieving a swift recovery from the economic impact of the COVID-19 pandemic. As a Member State whose currency is the euro, Latvia should ensure that its policies remain consistent with the 2020 euro-area recommendations and coordinated with those of the other Member States whose currency is the euro, while taking into account political guidance from the Eurogroup.

                  (26)

                  In the context of the 2020 European Semester, the Commission has carried out a comprehensive analysis of Latvia’s economic policy and published it in the 2020 country report. It has also assessed the 2020 Stability Programme, the 2020 National Reform Programme and the follow-up given to the country-specific recommendations addressed to Latvia in previous years. The Commission has taken into account not only their relevance for sustainable fiscal and socioeconomic policy in Latvia, but also their compliance with Union rules and guidance, given the need to strengthen the Union’s overall economic governance by providing Union-level input into future national decisions.

                  (27)

                  In the light of this assessment, the Council has examined the 2020 Stability Programme and its opinion (7) is reflected in particular in recommendation (1) below,

            HEREBY RECOMMENDS that Latvia take action in 2020 and 2021 to:

                  1.

                  Take all necessary measures, in line with the general escape clause of the Stability and Growth Pact, to effectively address the COVID-19 pandemic, sustain the economy and support the ensuing recovery. When economic conditions allow, pursue fiscal policies aimed at achieving prudent medium-term fiscal positions and ensuring debt sustainability, while enhancing investment. Strengthen the resilience and accessibility of the health system including by providing additional human and financial resources.

                  2.

                  Provide adequate income support to the groups most affected by the crisis and strengthen the social safety net. Mitigate the employment impact of the crisis, including through flexible working arrangements, active labour market measures and skills.

                  3.

                  Ensure access to liquidity support by firms and in particular small and medium-sized enterprises. Front-load mature public investment projects and promote private investment to foster the economic recovery. Focus investment on the green and digital transition, in particular on research and innovation, clean and efficient production and use of energy, sustainable transport and digital infrastructures.

                  4.

                  Continue progress on the anti-money-laundering framework.

         Done at Brussels, 20 July 2020.

               For the Council

               The President

            J. KLOECKNER

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

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

         (3)  OJ C 301, 5.9.2019, p. 86.

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

         (5)  Regulation (EU) 2020/460 of the European Parliament and of the Council of 30 March 2020 amending Regulations (EU) No 1301/2013, (EU) No 1303/2013 and (EU) No 508/2014 as regards specific measures to mobilise investments in the healthcare systems of Member States and in other sectors of their economies in response to the COVID-19 outbreak (Coronavirus Response Investment Initiative) (OJ L 99, 31.3.2020, p. 5).

         (6)  Regulation (EU) 2020/558 of the European Parliament and of the Council of 23 April 2020 amending Regulations (EU) No 1301/2013 and (EU) No 1303/2013 as regards specific measures to provide exceptional flexibility for the use of the European Structural and Investments Funds in response to the COVID-19 outbreak (OJ L 130, 24.4.2020, p. 1).

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


title: Council Recommendation of 20 July 2020 on the 2020 National Reform Programme of Lithuania and delivering a Council opinion on the 2020 Stability Programme of Lithuania 2020/C 282/15

text:
               26.8.2020

               EN

               Official Journal of the European Union

               C 282/95

      COUNCIL RECOMMENDATION
      of 20 July 2020
      on the 2020 National Reform Programme of Lithuania and delivering a Council opinion on the 2020 Stability Programme of Lithuania
      (2020/C 282/15)
      THE COUNCIL OF THE EUROPEAN UNION,
      Having regard to the Treaty on the Functioning of the European Union, and in particular Articles 121(2) and 148(4) thereof,
      Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies (1), and in particular Article 5(2) thereof,
      Having regard to Regulation (EU) No 1176/2011 of the European Parliament and of the Council of 16 November 2011 on the prevention and correction of macroeconomic imbalances (2), and in particular Article 6(1) thereof,
      Having regard to the recommendation of the European Commission,
      Having regard to the resolutions of the European Parliament,
      Having regard to the conclusions of the European Council,
      Having regard to the opinion of the Employment Committee,
      Having regard to the opinion of the Economic and Financial Committee,
      Having regard to the opinion of the Social Protection Committee,
      Having regard to the opinion of the Economic Policy Committee,
      Whereas:

                  (1)

                  On 17 December 2019, the Commission adopted the Annual Sustainable Growth Strategy, marking the start of the 2020 European Semester for economic policy coordination. It took due account of the European Pillar of Social Rights, proclaimed by the European Parliament, the Council and the Commission on 17 November 2017. On 17 December 2019, on the basis of Regulation (EU) No 1176/2011, the Commission also adopted the Alert Mechanism Report, in which it did not identify Lithuania as one of the Member States for which an in-depth review would be carried out. On the same date, the Commission also adopted a recommendation for a Council recommendation on the economic policy of the euro area.

                  (2)

                  The 2020 country report for Lithuania was published on 26 February 2020. It assessed Lithuania’s progress in addressing the country-specific recommendations adopted by the Council on 9 July 2019 (3) (‘the 2019 country-specific recommendations’), the follow-up given to the country-specific recommendations adopted in previous years and Lithuania’s progress towards its national Europe 2020 targets.

                  (3)

                  On 11 March 2020, the World Health Organization officially declared the COVID-19 outbreak a global pandemic. It is a severe public health emergency for citizens, societies and economies. It is putting national health systems under severe strain, disrupting global supply chains, causing volatility in financial markets, triggering consumer demand shocks and having negative effects across various sectors. It is threatening people’s jobs and incomes as well as companies’ business. It has delivered a major economic shock that is already having serious repercussions in the Union. On 13 March 2020, the Commission adopted a communication calling for a coordinated economic response to the crisis, involving all actors at national and Union level.

                  (4)

                  Several Member States have declared a state of emergency or introduced emergency measures. Any emergency measures should be strictly proportionate, necessary, limited in time, and in line with European and international standards. They should be subject to democratic oversight and independent judicial review.

                  (5)

                  On 20 March 2020, the Commission adopted a communication on the activation of the general escape clause of the Stability and Growth Pact. The general escape clause, as set out in Articles 5(1), 6(3), 9(1) and 10(3) of Regulation (EC) No 1466/97 and Articles 3(5) and 5(2) of Council Regulation (EC) No 1467/97 (4), facilitates the coordination of budgetary policies in times of severe economic downturn. In its communication of 20 March 2020, the Commission considered that, given the expected severe economic downturn resulting from the COVID-19 pandemic, the conditions for the activation of the general escape clause had been met and asked the Council to endorse this conclusion. On 23 March 2020, the ministers of finance of the Member States agreed with the assessment of the Commission. They agreed that the severe economic downturn requires a resolute, ambitious and coordinated response. The activation of the general escape clause allows for a temporary departure from the adjustment path towards the medium-term budgetary objective, provided that this does not endanger fiscal sustainability in the medium term. For the corrective arm, the Council may also decide, on a recommendation from the Commission, to adopt a revised fiscal trajectory. The general escape clause does not suspend the procedures of the Stability and Growth Pact. It allows Member States to depart from the budgetary requirements that would normally apply while enabling the Commission and the Council to undertake the necessary policy coordination measures within the framework of the Pact.

                  (6)

                  Continued action is required to limit and control the spread of the COVID-19 pandemic, strengthen the resilience of the national health systems, mitigate the socioeconomic consequences of the pandemic through supportive measures for business and households, and ensure adequate health and safety conditions at the workplace with a view to resuming economic activity. The Union should fully use the various tools at its disposal to support Member States’ efforts in those areas. In parallel, Member States and the Union should work together to prepare the measures necessary to bring about a return to the normal functioning of our societies and economies and to sustainable growth, integrating, inter alia, the green transition and the digital transformation, and drawing lessons from the crisis.

                  (7)

                  The COVID-19 crisis has highlighted the flexibility that the internal market offers to adapt to extraordinary situations. However, in order to ensure a swift and smooth transition to the recovery phase and the free movement of goods, services and workers, exceptional measures that prevent the internal market from functioning normally should be removed as soon as they are no longer indispensable. The current crisis has shown the need for crisis preparedness plans in the health sector. Improved purchasing strategies, diversified supply chains and strategic reserves of essential supplies are among the key elements for developing broader crisis preparedness plans.

                  (8)

                  The Union legislator has already amended the relevant legislative frameworks by means of Regulations (EU) 2020/460 (5) and (EU) 2020/558 (6) of the European Parliament and of the Council to allow Member States to mobilise all unused resources from the European Structural and Investment Funds so they can address the exceptional effects of the COVID-19 pandemic. Those amendments will provide additional flexibility, as well as simplified and streamlined procedures. To alleviate cash-flow pressures, Member States can also benefit from a 100 % co-financing rate from the Union budget in the 2020-2021 accounting year. Lithuania is encouraged to make full use of those possibilities to help the individuals and sectors most affected.

                  (9)

                  The socioeconomic consequences of the COVID-19 pandemic are likely to be unevenly distributed across Lithuanian sectors and regions because of different specialisation patterns. This entails a risk of widening disparities within Lithuania. Combined with the risk of a temporary unravelling of the convergence process between Member States, the current situation calls for targeted policy responses.

                  (10)

                  Lithuania submitted its 2020 National Reform Programme on 15 May 2020 and its 2020 Stability Programme on 30 April 2020. In order to take account of their interlinkages, the two programmes have been assessed at the same time.

                  (11)

                  Lithuania is currently in the preventive arm of the Stability and Growth Pact.

                  (12)

                  In its 2020 Stability Programme, the government plans the headline balance to deteriorate from a surplus of 0,3 % of gross domestic product (GDP) in 2019 to a deficit of 11,4 % of GDP in 2020. The deficit is projected to decline to 3,9 % of GDP in 2021. After increasing to 36,3 % of GDP in 2019, the general government debt-to-GDP ratio is expected to increase to 50,6 % in 2020 according to the 2020 Stability Programme. The macroeconomic and fiscal outlook is affected by high uncertainty because of the COVID-19 pandemic.

                  (13)

                  In response to the COVID-19 pandemic, and as part of a coordinated Union approach, Lithuania has adopted timely budgetary measures to increase the capacity of its health system, contain the pandemic, and provide relief to those individuals and sectors that have been particularly affected. According to the 2020 Stability Programme, those budgetary measures amounted to 6,8 % of GDP. The measures include tax deferrals, additional funding to buy medical supplies, subsidies to sustain jobs and benefits to the self-employed and employees affected by the COVID-19 pandemic. As the Commission analysis of the design and implementation of some measures point to a relatively low potential take-up, the Commission assumed a smaller impact of the government measures on the public finances. In addition, Lithuania has announced discretionary measures that, while not having a direct budgetary impact, will contribute to the crisis response, including providing liquidity support to businesses, which the 2020 Stability Programme estimates at 3,8 % of GDP. Those measures include loan guarantees (2,9 % of GDP). Overall, the measures taken by Lithuania are in line with the guidelines set out in the Commission communication of 13 March 2020. The full implementation of the emergency measures and of supportive fiscal measures, followed by a refocusing of fiscal policies towards achieving prudent medium-term fiscal positions when economic conditions allow, will contribute to preserving fiscal sustainability in the medium term.

                  (14)

                  Based on the Commission 2020 spring forecast under unchanged policies, Lithuania’s general government balance is forecast at -6,9 % of GDP in 2020 and -2,7 % of GDP in 2021. The general government debt ratio is projected to remain below 60 % of GDP in 2020 and 2021.

                  (15)

                  On 20 May 2020, the Commission issued a report prepared in accordance with Article 126(3) of the Treaty because of Lithuania’s planned breach of the 3 %-of-GDP deficit threshold in 2020. Overall, the Commission’s analysis suggests that the deficit criterion as defined in the Treaty and in Regulation (EC) No 1467/97 has not been fulfilled.

                  (16)

                  According to the Commission 2020 spring forecast, Lithuania’s GDP is set to contract by 8 % which is projected to be followed by a rapid recovery of 7,5 % in 2021. In order to respond to the COVID-19 outbreak and to cushion the economic fallout, Lithuania put forward the ‘Plan for Economic Stimulus and Mitigation of Consequences of COVID-19 Transmission’ on 16 March. The plan’s size amounts to EUR 2,5 billion or 6,3 % of the country’s GDP, and includes up to EUR 500 million or 1,3 % of GDP to ensure necessary resources for the health system. A further EUR 500 million was allocated to protect jobs and income. The capacity of the State guarantee funds was increased by EUR 500 million, and additional State guarantees amounting up to EUR 500 million were approved to stimulate the economy. In April, the Commission approved several Lithuanian aid schemes to support the Lithuanian economy in the context of the COVID-19 outbreak. These schemes are designed to help businesses cover immediate working capital needs and continue their activities during and after the pandemic. Additionally, the Bank of Lithuania relaxed some capital requirements for commercial banks to increase lending to the real economy.

                  (17)

                  Health outcomes in Lithuania persistently lag behind those in other Member States, due in part to suboptimal efficiency of the health system, which suffers from low funding. The current pandemic has subjected the system to additional pressure and highlighted further structural challenges which include slow progress in improving quality of services, underinvestment in primary healthcare and no progress in adapting the hospital network to render it more efficient and responsive to needs. The COVID-19 crisis is also exposing health inequalities related to workforce shortages and geographical mismatches between services and needs. Lithuania needs to mobilise the resources needed to tackle the current crisis and to improve the resilience of its health systems in future. While immediate action is focusing on strengthening capacities in terms of health workers, critical medical supplies and equipment in order to save lives during the pandemic, longer term investments should be scaled up to improve the resilience of the health system so that it can sustain operations, resume its optimal performance and prepare itself for new shocks. This will require allocating sufficient resources to improve the accessibility, efficiency, and quality of the health system, so it can better respond to the challenges of growing chronical conditions, aging and persisting heath inequalities. Primary care and the development of e-health have a central role to play in this regard. Lithuania should also ensure that recent improvements to the affordability of healthcare are not undermined. Finally, future resilience will also require enhancing the system’s ability to reduce unhealthy lifestyles (one of the other important factors behind poor health outcomes in Lithuania) and greater efforts to prepare the long-term care sector to deal with the ageing population.

                  (18)

                  Before the COVID-19 pandemic, labour market participation was high and unemployment was low, but this crisis has posed new challenges.With the help of Union funding, Lithuania has implemented a short-time work scheme to mitigate the effects of the pandemic on employment and introduced a number of other measures to mitigate the negative effects on businesses and the self-employed. Before the crisis, the coverage of Active Labour Market Policy (ALMP) measures was decreasing, and participation in adult learning remained low. However, higher coverage and sufficient funding for ALMP measures and other measures to reskill and upskill the workforce will be needed to help the unemployed to return to the labour market as early as possible and provide effective support in a sustainable manner beyond the recovery phase. Strengthening social partners’ capacity is important to ensure their meaningful and timely involvement in the design of the exit and recovery process.

                  (19)

                  While steps were taken before the crisis to address the risk of poverty and social exclusion, for example by increasing universal child benefits and pensions, poverty and income inequality are still among the highest in the Union. Lithuania has comparatively low public expenditure on social protection, and the impact of social transfers on poverty reduction is low, and assessed as critical on the Social Scoreboard of indicators supporting the European Pillar of Social Rights. The low progressivity and ability to redistribute of the tax and benefit system limits the country’s ability to finance public goods and services, and to reduce poverty and income inequality. The negative effect of the COVID-19 pandemic on employment and household income is likely to aggravate those problems in the medium term. Temporary measures such as revising the eligibility rules, the amounts and duration of some benefits, may be needed to ensure that the situation of those most affected by the pandemic does not deteriorate. The social safety net should be extended to support all groups, including the self-employed, atypical workers and the most vulnerable people. The provision of the main social services and social housing needs to be strengthened to support those in need.

                  (20)

                  Liquidity support to businesses through public sector loans and guarantees, with a focus on small and medium-sized enterprises (‘SMEs’), has been of utmost importance, but the distribution of liquidity support to firms must be effectively and swiftly implemented by intermediaries and loan conditions must take account of the crisis situation. In the process of designing and implementing those measures the resilience of the banking sector needs to be taken into account. Allowing deferred payments of taxes and social contributions and speeding up contractual payments by public authorities can also help improve the cash flow of SMEs. Newly-founded start-ups and scale-ups may need specific support, e.g. in the form of equity stakes by public institutions and incentives for venture capital funds to increase their investments in those firms. Efforts should be maintained to reduce unnecessary regulatory and administrative burdens and to offer efficient digital public services for citizens and businesses.

                  (21)

                  Lithuania should ensure that its measures to promote economic recovery are forward-looking and facilitate the digital and green transitions, where there are a number of challenges to be tackled. For the former, digital skills are below the Union average, with SMEs reporting considerable difficulties in recruiting for ICT vacancies. While fibre deployment is above the Union average, both for urban and rural areas, fixed broadband coverage and related take-up is very low and wide gaps remain between the cities and rural areas.

                  (22)

                  To foster the economic recovery, it will be important to front-load mature public investment projects and promote private investment, including through relevant reforms. As regards the green transition, total greenhouse gas emissions in Lithuania remain largely unchanged since 2010. Lithuania’s resource productivity is one of the lowest in the Union and circular (secondary) material use is well below the Union average. In line with Lithuania’s National Energy and Climate Plan, improving the energy performance of buildings thanks to energy efficiency and renewable energy solutions, modernising heating systems and improving the sustainability of the transport sector, would significantly contribute to decarbonising the economy. Targeted public and private investments aimed at tackling those issues, and others with a significant environmental and health impact, can promote growth and resilience, and help ensure a sustainable recovery from the crisis. Investments which have already been planned allow for the swift identification of projects which could be front-loaded and contribute to economic recovery, for example in building renovation and renewable energy. Preparatory work for medium-term recovery measures can draw on Member States’ National Energy and Climate Plans, list of Projects of Common Interest, and infrastructure development plans. Furthermore, the Rail Baltica project and the energy interconnection projects are Lithuania’s key investment priorities aimed at improving its safety and integration into the Union’s internal market. The programming of the Just Transition Fund, which is the subject of a Commission proposal, for the period 2021-2027 could help Lithuania to address some of the challenges posed by the transition to a climate-neutral economy, in particular in the territories covered by Annex D to the 2020 country report. This would allow Lithuania to make the best use of that Fund.

                  (23)

                  While the country-specific recommendations set out in this Recommendation (‘the 2020 country-specific recommendations’) focus on tackling the socioeconomic impacts of the COVID-19 pandemic and facilitating the economic recovery, the 2019 country-specific recommendations also covered reforms that are essential to address medium- to long-term structural challenges. The 2019 country-specific recommendations remain pertinent and will continue to be monitored throughout next year’s European Semester. That includes the 2019 country-specific recommendations regarding investment-related economic policies. All of the 2019 country-specific recommendations should be taken into account for the strategic programming of post-2020 cohesion policy funding, including for mitigating measures and exit strategies with regard to the current crisis.

                  (24)

                  The European Semester provides the framework for continuous economic and employment policy coordination in the Union, which can contribute to a sustainable economy. In their 2020 National Reform Programmes, Member States have taken stock of progress made in the implementation of the United Nations’ Sustainable Development Goals (SDGs). By ensuring the full implementation of the 2020 country-specific recommendations, Lithuania will contribute to the progress towards the SDGs and to the common effort of ensuring competitive sustainability in the Union.

                  (25)

                  Close coordination between economies in the economic and monetary union is key in achieving a swift recovery from the economic impact of the COVID-19 pandemic. As a Member State whose currency is the euro, Lithuania should ensure that its policies remain consistent with the 2020 euro-area recommendations and coordinated with those of the other Member States whose currency is the euro, while taking into account political guidance from the Eurogroup.

                  (26)

                  In the context of the 2020 European Semester, the Commission has carried out a comprehensive analysis of Lithuania’s economic policy and published it in the 2020 country report. It has also assessed the 2020 Stability Programme, the 2020 National Reform Programme and the follow-up given to the country-specific recommendations addressed to Lithuania in previous years. The Commission has taken into account not only their relevance for sustainable fiscal and socioeconomic policy in Lithuania, but also their compliance with Union rules and guidance, given the need to strengthen the Union’s overall economic governance by providing Union-level input into future national decisions.

                  (27)

                  In the light of this assessment, the Council has examined the 2020 Stability Programme and its opinion (7) is reflected in particular in recommendation (1) below.

            HEREBY RECOMMENDS that Lithuania takes action in 2020 and 2021 to:

                  1.

                  Take all necessary measures, in line with the general escape clause of the Stability and Growth Pact, to effectively address the COVID-19 pandemic, sustain the economy and support the ensuing recovery. When economic conditions allow, pursue fiscal policies aimed at achieving prudent medium-term fiscal positions and ensuring debt sustainability, while enhancing investment. Strengthen the resilience of the health system, including by mobilising adequate funding and addressing shortages in the health workforce and of critical medical products. Improve the accessibility and quality of health services.

                  2.

                  Mitigate the impact of the COVID-19 crisis on employment. Increase the funding and coverage of ALMP measures and promote skills. Ensure the coverage and adequacy of the social safety net and improve the effectiveness of the tax and benefit system to protect against poverty.

                  3.

                  Support liquidity for businesses, especially for SMEs and export-oriented sectors. Front-load mature public investment projects and promote private investment to foster the economic recovery. Focus investment on the green and digital transition, in particular on the coverage and take-up of very-high-capacity broadband, on clean and efficient production and use of energy, and sustainable transport. Promote technological innovation in SMEs.

         Done at Brussels, 20 July 2020.

               For the Council

               The President

            J. KLOECKNER

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

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

         (3)  OJ C 301, 5.9.2019, p. 91.

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

         (5)  Regulation (EU) 2020/460 of the European Parliament and of the Council of 30 March 2020 amending Regulations (EU) No 1301/2013, (EU) No 1303/2013 and (EU) No 508/2014 as regards specific measures to mobilise investments in the healthcare systems of Member States and in other sectors of their economies in response to the COVID-19 outbreak (Coronavirus Response Investment Initiative) (OJ L 99, 31.3.2020, p. 5).

         (6)  Regulation (EU) 2020/558 of the European Parliament and of the Council of 23 April 2020 amending Regulations (EU) No 1301/2013 and (EU) No 1303/2013 as regards specific measures to provide exceptional flexibility for the use of the European Structural and Investments Funds in response to the COVID-19 outbreak (OJ L 130, 24.4.2020, p. 1).

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