               EUROPEAN COMMISSION
            Brussels, 23.5.2018
            COM(2018) 409 final
            Recommendation for a
            COUNCIL RECOMMENDATION
            on the 2018 National Reform Programme of Franceand delivering a Council opinion on the 2018 Stability Programme of France

               Recommendation for a

               COUNCIL RECOMMENDATION

               on the 2018 National Reform Programme of France

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

               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 France 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, France should ensure the full and timely implementation of the recommendation on the economic policy for the euro area, as reflected in the recommendations below, in particular (1) and (2).

               (3)The 2018 country report for France
                  5
                was published on 7 March 2018. It assessed France’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 France'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 France is experiencing macroeconomic imbalances. In particular, vulnerabilities stem from high public debt and weak competitiveness dynamics in a context of low productivity growth. The risk of an adverse effect on the French economy and, given its size, of negative spillovers to the economic and monetary union, is particularly important.

               (4)On 25 April 2018, France 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)[Following the timely and durable correction of the excessive deficit and the decision by the Council of [XX] June 2018 to abrogate the excessive deficit procedure, France is in the preventive arm of the Stability and Growth Pact and subject to the transitional debt rule. In its 2018 Stability Programme, the government plans a gradual improvement of the general government balance from -2.6 % of GDP in 2017 to +0.3 % of GDP in 2022. The medium-term budgetary objective — a structural deficit of 0.4 % of GDP — is not planned to be achieved over the horizon covered by the Stability Programme. According to the 2018 Stability Programme, the general government debt-to-GDP ratio is expected to decrease from 97.0 % in 2017 to 89.2 % in 2022. The macroeconomic scenario underpinning those budgetary projections is plausible. At the same time, the measures needed to support the planned deficit targets from 2019 onwards have not been sufficiently specified.

               (7)On 11 July 2017, the Council recommended France to ensure that the nominal growth rate of net primary
                  9
                government expenditure does not exceed 1.2 % 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 France while giving due consideration to its sustainability challenges, carried out in the context of its opinion on France's Draft Budgetary Plan, no additional elements in that regard need to be taken into account. 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.

               (8)In 2019, in view of France's general government debt ratio above 60 % of GDP and projected output gap of 0.6 %, the nominal growth rate of net primary government expenditure should not exceed 1.4 %, in line with the structural adjustment of 0.6 % of GDP stemming from the matrix of requirements under the Stability and Growth Pact. According to the Commission 2018 spring forecast at unchanged policies, there is a risk of a significant deviation from that requirement in 2019 and over 2018 and 2019 taken together. France is prima facie not forecast to comply with the transitional debt rule in 2018 and 2019. 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.

               (9)The level of public expenditure in France is the highest in the EU. The expenditure ratio is projected to reach 56.0 % of GDP in 2018, 10.6 percentage points higher than the EU average. While the consolidation strategy in recent years has mainly benefited from declining interest rates and cuts in public investment, the low interest rate environment is unlikely to prevail in the medium term and the cut in productive investment could harm future economic potential. The spending reviews since 2014 did not render significant savings and efficiency gains were limited due to a lack of appropriate follow-up and a low level of political ownership. The most recent spending review strategy has been abandoned and will be replaced by Action Publique 2022, the principles of which are set out in the 2018-2022 multiannual public finances programming law. The Comité Action Publique 2022 is due to produce a roadmap before Summer 2018 and to analyse what measures need to be taken. However, clearly specified measures have not been proposed yet and new savings within this framework will only be delivered from 2020 onwards. Efforts to address the current fiscal consolidation needs over the short-to-medium term would benefit from the swift implementation of expenditure-saving measures.

               (10)At present, 37 different pension schemes co-exist in France. These concern different groups of workers and function according to different sets of rules. Progressively unifying the rules would improve the transparency of the system, increase intergenerational fairness, and facilitate labour mobility. Harmonising the calculation rules would also contribute to better control public expenditure. While the pension reforms already adopted are expected to bring down the level of public pension expenditure ratio in the long run, a simpler and more efficient pension system would generate further savings and help mitigate public finance sustainability risks in the medium term. According to a recent study, the alignment of different pension schemes in the public and private sectors would bring more than EUR 5 billion of public expenditure savings at the horizon 2022.

               (11)The unemployment rate declined from 10.4 % in 2015 to 9.4 % in 2017 and is forecast to decrease further in the coming years, while the employment rate rose to 70.6 % in 2017. However, labour market conditions for young people, low-skilled workers and people with a migrant background (both first and second generations) remain relatively more difficult. In 2016, only 54.5 % of non-EU born people (aged 20-64) were in employment, which is 17.5 percentage points lower than the figure for those born in France. Inhabitants of most deprived areas (Quartiers de la politique de la ville), including people with a migrant background, continue to face difficulties on the labour market. Notwithstanding policy action, the impact of socioeconomic and migrant background on educational performance is comparatively high and hampers labour market integration. There is also evidence of discriminatory practices in the labour market. Effective active employment support, including language training, intensive job counselling and recruitment support, and firmer action on discriminatory practices, are key to fostering equal opportunities on the labour market.

               (12)The 2016 law on labour, modernising social dialogue and securing professional pathways aims to improve firms’ capacity to adjust to economic cycles and reduce the share of workers on temporary contracts. While more people are being recruited on open-ended contracts, labour market segmentation remains a challenge and the transition to more open-ended forms of employment should be fostered. In this context, it is important to finalise the implementation of the ongoing ambitious reform programme, which includes the recently adopted reform of the labour law, the planned overhaul of the unemployment benefit system and the reform of the vocational education and training system, including apprenticeships.

               (13)The gradual implementation of measures to reduce the labour tax wedge have improved France's cost competitiveness since 2013, but accumulated past losses have not yet been fully recovered. At the average wage, in 2016, France still had one of the highest employers' social contribution rates as a proportion of total labour costs in the EU. Existing policy measures to reduce labour costs are expected to be further consolidated and strengthened as of 2019, with the announced conversion of the tax credit for competitiveness and employment (CICE) into a generalised reduction of social contributions for employers and the introduction of further rebates for lower wages to foster employment of the low-qualified.

               (14)Since 2013, the French minimum wage has followed its indexation rule, without any ad hoc hikes. As a result, it has grown more slowly than reference wages (1.23 % in 2017, compared to 1.31 % for average wage), in a context of weak inflation and subdued wage growth. While the minimum wage, as compared with the average wage, is high in international terms, the cost of labour at the minimum wage has been significantly curtailed by reductions of social contributions. Such reductions will be intensified and made permanent as of 2019. While the indexation of the minimum wage is important to preserve workers' purchasing power, the current mechanism (unique in the EU) might limit wage adjustments to changing conditions, with potential negative consequences for competitiveness. A group of independent experts assesses the minimum wage annually and provides non-binding opinions on its development. In 2017, the group recommended revising the indexation rule, for example by limiting it to inflation indexation only.

               (15)The current initial vocational education and training system does not sufficiently support labour market integration in particular because a significant proportion of students is driven towards pathways with limited employment prospects. Moreover, French students in vocational education and training achieve much lower educational outcomes than the EU average, while those in general education perform much better. In this context, measures to foster apprenticeships, which are associated with better employment prospects, along with measures to improve school-based results, are essential to support youth employment and promote equality of opportunity. At the same time, improving access to continuous training for the low qualified workers and jobseekers and promoting the achievement of higher qualifications, backed by appropriate training guidance, are also important. Reflecting these challenges and in particular the need to improve the governance of the system, ensure labour market relevance, quality and access to training and secure labour market transitions, the government has presented on 27 April 2018 a draft law reforming the apprenticeship and continuous vocational education and training system. Moreover, the 2018 National Reform Programme confirms the intention to implement a EUR 14 billion investment plan for skills and opens the way for a complementary reform of the school-based initial vocational education.

               (16)Overall, the social protection system delivers good results. Income inequalities after transfers are below the EU average and, despite a recent increase, the number of people at risk of poverty and social exclusion remains relatively low. However, some groups, in particular single-parent families, people not born in the EU and people living in deprived urban areas, face a higher risk of poverty. Access to adequate housing for people living in poverty remains a matter of concern. Despite recent improvements, social housing shortages remain in some areas.

               (17)Despite ongoing reforms to reduce the tax burden on companies and support productive investment, the French tax system continues to be characterised by a high level of complexity, with tax expenditures, inefficient taxes and taxes on production forming barriers to a well-functioning business environment. The high number of tax expenditures (tax credit, exemptions, tax reductions) puts an additional burden on businesses, and SMEs in particular, in the form of increased compliance costs and uncertainty. It also creates additional control costs for the tax administration. Tax expenditures will increase further in number and in value under the 2018 Budget Law and are set to reach EUR 99.8 billion in 2018 (4.5 % of GDP) in 2018, as compared with EUR 93 billion in 2017. In addition, around 192 taxes yielding low revenue (less than EUR 150 million a year) have been identified, but only a very limited number have been eliminated since 2014
                  10
               . Finally, France has  very high taxes on production in the EU
                  11
                (3.1 % of GDP in 2016) which consist mainly of capital and labour taxes for which companies are liable as a result of engaging in production and regardless of their economic performance.

               (18)Market services accounted for more than 50 % of value added, 40 % of employment and 20 % of the manufacturing industry's value added in exports in 2016. However, while competition in market services has an impact across the whole economy, it is still hampered by regulatory requirements and administrative burden, which also impede firms' ability to grow. If sufficiently ambitious and fully implemented, reforms in the area of services could have a significant positive economic impact. In prioritising reform efforts, it is important to take into account the economic importance and performance of the services subsectors. An indicator-based approach used to identify priority reforms in the services sectors highlights a number of business services (architectural and engineering activities, legal and accounting activities, administrative and support services), retail trade, accommodation and food services, and health. In the specific area of professional services, the Growth, Activity and Equal Economic Opportunities Act (the ‘Macron law’) of 6 August 2015 eased restrictions in a limited number of professions, mostly legal professions. Moreover, subsequent acts have diluted its spirit, which also limited its expected impact. Further reforms could target specific entry and exercise restrictions (e.g. reserves of activity, voting rights restrictions, shareholding restrictions, multidisciplinary restrictions and numerus clausus restrictions), which are considered excessive. Reforms to address key impediments to firms' growth could include removing threshold effects linked to size-related criteria in regulations and reducing the administrative burden on businesses. Finally, improving France's coverage with fast broadband would enhance its ability to benefit from the digital economy.

               (19)According to the European Innovation Scoreboard, France's innovation performance remains below that of EU innovation leaders, despite the relatively high level of public support.  In particular, improving the efficiency of public support schemes (including the Crédit d'Impôt Recherche, tax credit for research and development) would stimulate better innovation output. In this respect, the results of ongoing evaluations need to be fed into improvements to the design of public support for innovation. Knowledge transfer between public research and businesses remains a challenge and this limits the commercial exploitation of research results. Compared with other EU countries, France's performance is low in public-private co-publications and public R&D financed by businesses. There is some potential to strengthen transfer mechanisms between academia and industry by simplifying partnership research and incentivising researchers' mobility.

               (20) In the context of the 2018 European Semester, the Commission has carried out a comprehensive analysis of France’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 France in previous years. The Commission has taken into account not only their relevance for sustainable fiscal and socioeconomic policy in France, 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.

               (21)In the light of this assessment, the Council has examined the 2018 Stability Programme and its opinion
                  12
                is reflected in particular in recommendation 1 below.

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

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

               1.Ensure that the nominal growth rate of net primary government expenditure does not exceed 1.4 % 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. Implement expenditure savings in 2018 and fully specify the objectives and new measures needed in the context of Public Action 2022, for them to translate into concrete expenditure savings and efficiency gains measures in the 2019 budget. Progressively unify the rules of the different pension regimes to enhance their fairness and sustainability.

               2.Pursue the reforms of the vocational education and training system, to strengthen its labour market relevance and improve access to training, in particular for low qualified workers and jobseekers. Foster equal opportunities and access to the labour market, including for people with a migrant background and people living in deprived areas. Ensure that minimum wage developments are consistent with job creation and competitiveness.

               3.Simplify the tax system, by limiting the use of tax expenditures, removing inefficient taxes and reducing taxes on production levied on companies. Reduce the regulatory and administrative burden to increase competition in the services sector and to foster firms' growth. Step up efforts to increase the performance of the innovation system notably by improving the efficiency of public support schemes and strengthening knowledge transfer between public research institutions and firms.

               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) 409 final.

                     (4)

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

                     (5)

                        SWD(2018) 208 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)

                        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.

                     (10)

                        Inspection Générale des Finances (2014), Les taxes à faible rendement.

                     (11)

                        Taxes on production are to be understood as "other taxes on production" according to EUROSTAT (D29 category).

                     (12)

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


               EUROPEAN COMMISSION
            Brussels, 23.5.2018
            COM(2018) 410 final
            Recommendation for a
            COUNCIL RECOMMENDATION
            on the 2018 National Reform Programme of Croatiaand delivering a Council opinion on the 2018 Convergence Programme of Croatia

               Recommendation for a

               COUNCIL RECOMMENDATION

               on the 2018 National Reform Programme of Croatia

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

               THE COUNCIL OF THE EUROPEAN UNION,

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

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

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

               Having regard to the recommendation of the European Commission
                  3
               ,

               Having regard to the resolutions of the European Parliament
                  4
               ,

               Having regard to the conclusions of the European Council,

               Having regard to the opinion of the Employment Committee,

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

               Having regard to the opinion of the Social Protection Committee,

               Having regard to the opinion of the Economic Policy Committee,

               Whereas:

               (1)On 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 Croatia as one of the Member States for which an in-depth review would be carried out.

               (2)The 2018 country report for Croatia
                  5
                was published on 7 March 2018. It assessed Croatia’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 Croatia'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 Croatia is still experiencing excessive macroeconomic imbalances, although they are being reduced. Vulnerabilities are linked to still high levels of public, private and external debt, all largely denominated in foreign currency. The level of non-performing loans remains high, in particular for non-financial corporations. Croatia's potential growth remains insufficient to enable a durable adjustment and overall there has been little progress in implementing policy measures to address the chronically low labour utilisation and slow productivity growth. Competitiveness and investment remain hindered by a restrictive business environment and the fragmentation of the public administration weighs on efficiency in public services.

               (3)On 26 April 2018, Croatia 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
                  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

               (5)Croatia is currently in the preventive arm of the Stability and Growth Pact and subject to the debt rule. Starting from a general government surplus of 0.8 % of GDP in 2017, the 2018 Convergence Programme plans the headline balance to fall into a deficit of 0.5 % of GDP in 2018 and then to gradually improve to a surplus of 0.5 % of GDP in 2021. The medium-term budgetary objective — a structural deficit of 1.75 % of GDP — is planned to continue to be overachieved throughout the programme period. According to the 2018 Convergence Programme, the general government debt-to-GDP ratio is expected to fall from 78.0 % of GDP in 2017 to 75.1 % in 2018 and to continue declining to 65.9 % in 2021. The macroeconomic scenario underpinning those budgetary projections is plausible. However, the planned budgetary targets appear cautious. The Commission 2018 spring forecast projects the general government balance at 0.7 % and 0.8 % of GDP in 2018 and 2019, respectively.

               (6)On 11 July 2017, the Council recommended Croatia to remain at its medium-term budgetary objective in 2018. Based on the Commission 2018 spring forecast the structural balance is forecast to stand at -0.3 % of GDP in 2018 and at -0.6 % of GDP in 2019, remaining above the medium-term budgetary objective. Croatia is forecast to comply with the debt rule in 2018 and 2019. Overall, the Council is of the opinion that Croatia is projected to comply with the provisions of the Stability and Growth Pact in 2018 and 2019.

               (7)The planned adoption of key legislation to improve Croatia's fiscal framework is long overdue. Flaws in the design of the numerical fiscal rule make it ineffective for fiscal policy planning and the role of the Fiscal Policy Commission as an independent body is still weak. Croatia's still high level of public debt and its exposure to currency risks mean that sound debt management practices remain essential. In 2017, the debt management function was strengthened and a debt managemet strategy was produced, which requires regular updates. The introduction of a property tax already legislated was postponed with no indication of whether and when it would be implemented. This leaves Croatia with a low proportion of revenue from recurrent taxation of immovable property. A recurrent property tax would create scope for improving the overall growth-friendliness of revenue collection, while ensuring a stable and predictable source of revenue for local government units.

               (8)The Croatian labour market continued to recover in 2017. Still, employment and  activity rates remain substantially below the EU average, hampering potential growth. To date, the statutory pensionable age is 62 years for women and 65 years for men. The convergence and increase of the statutory retirement age is slow, with both sexes stipulated to reach a pensionable age of 67 only in 2038. In addition, older workers can benefit from many pathways to early retirement and the pension system includes a number of special pension schemes providing more favourable conditions for retirement. The care responsibilities of women contribute further to their low labour market participation. The resulting low average duration of working lives  implies low current and future pension adequacy and risks of old-age poverty. The announced measures to encourage longer working lives have not yet been implemented.

               (9)Even though the social dialogue structure in Croatia is in place, the actual interaction between the authorities and stakeholders in the policy preparation process is limited and mostly confined to the provision of written feedback on the government proposed measures. In addition, the fragmentation of trade unions limits their overall capacity to engage in social dialogue.

               (10)Despite recent improvements, the share of the population at risk of poverty or social exclusion remains high, with marked territorial disparities across counties. The elderly, the low skilled and people with disabilities are particularly affected. The social protection system displays shortcomings in effectiveness and fairness. Social benefits have a limited poverty reduction capacity. Lack of coordination across institutions and lower fiscal capacity of poorer local government units leads to an uneven provision of social benefits.

               (11)Croatia performs below EU average in education investment, early childhood education and care, basic skills, tertiary educational attainment and labour market relevance of vocational education and training in education. Croatia has launched the implementation of several reforms outlined in the strategy on education, science and technology. The reform of school curricula is likely to have a positive impact on the quality of Croatia's education, if it is implemented in full and consistently with the other actions in the strategy. The labour market relevance of vocational education and training programmes appears limited, as suggested by the fact that more than half of registered unemployed are vocational education and training graduates. Better coordination between public authorities and employers is needed to improve the identification of skills needs. The adult education system aiming to help inclusion in the labour market is characterized by a large and unevenly distributed number of providers across the country, and learning programmes that are not properly assessed. Participation in adult education and educational programmes offered as part of active labour market policy measures are critically low.

               (12)The territorial fragmentation of Croatia's public administration and the wide distribution of competences across levels of government weigh on the effeciency of public service provision and public expenditure. Many small local units lack adequate financial and administrative capacity to carry out decentralised functions. Indicators of public administration efficiency show performance below the EU average, which hinders the design and implementation of public policies and a more efficient use of European Structural and Investment Funds. The planned reduction of the number of local branch offices of the central administration and the streamlining of the system of state agencies have been further postponed. Lack of coherence in the wage-setting frameworks in the public administration and public services impede equality of treatment and government's control over the public wage bill. The planned legislation for their harmonisation has been further postponed to mid-2018. The authorities have taken  the first steps to integrate some functions among hospitals in order to improve efficiency in service provision and access to health care. However, an ineffective model of the health system's financing results in accumulation of debts, especially related to in-patient care.

               (13)State-owned enterprises maintain their large presence in the economy. Measures to improve their governance have advanced slowly, and they continue to operate at low levels of productivity and profitability. Adoption of new legislation governing the management and disposal of state assets has been further delayed, which weighs on the advancement of key policy measures aimed at opening up stateowned enterprises to private capital and activation of other assets.

               (14)November 2017 saw the finalisation of an independent asset quality review of the Croatian Bank for Reconstruction and Development. Given the bank's importance for implementing the EU financial instruments and the Investment Plan for Europe as well as its increasing engagement in direct lending, the review's findings should be used to strengthen the bank's supervisory and regulatory framework and governance.

               (15)Administrative burden and parafiscal charges continue to weigh on the business environment. Reduction of the administrative burden has been progressing steadily, but at a modest pace. Cuts in parafiscal charges have been limited and transparency is low, as neither regular updates of the registry nor impact assessments of the planned cuts have been conducted.

               (16)The anti-corruption action plan 2017–2018 needs to be fully implemented in order to deliver on the objectives of the anti-corruption strategy 2015–2020. Several key elements still require improvement, particularly asset and conflict-of-interest disclosures, raising awareness of whistle-blowing reporting channels, and an effective control of risks in public procurement, which remains vulnerable to corruption due to a large share of in-house contracting by state-owned entities.

               (17)Restrictive regulation in goods and services markets, in particular a high number of exceedingly regulated professions hampers competition. Easing regulation has been slow against the background of strong resistance from interest groups.

               (18)Lengthy court proceedings and sizeable backlogs continue to weigh on the quality and efficiency of the justice system and consequently the business environment. The observed decrease in backlogs was mainly driven by a lower inflow of new cases rather than faster resolution of cases. Despite improvements, electronic communication in litigation and insolvency proceedings remains underused.

               (19)Some targeted efforts to reform the national science and innovation system are in the making via Croatia's smart specialisation strategy. Policy responsibilities in support of science and innovation appear uncoordinated, which weakens the implementation of the policy strategy. Similarly, major universities have highly fragmented governance structures and rigid administrative rules. Cooperation between research institutions and the business sector is weak. There is no systematic monitoring and evaluation of the impact of research and innovation policies in place, preventing proper priority setting. The tertiary education system could benefit from incentives to encourage quality and labour market relevance.

               (20)In the context of the 2018 European Semester, the Commission has carried out a comprehensive analysis of Croatia’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 Croatia in previous years. It has taken into account not only their relevance for a sustainable fiscal and socioeconomic policy in Croatia 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.

               (21)In the light of this assessment, the Council has examined the 2018 Convergence Programme and is of the opinion that Croatia is expected to comply with the Stability and Growth Pact.

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

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

               1.Strengthen the fiscal framework, including by strengthening the mandate and independence of the Fiscal Policy Commission. Introduce a recurrent property tax.

               2.Discourage early retirement, accelerate the transition to a higher statutory retirement age and align pension provisions for specific categories with the rules of the general scheme. Deliver on the reform of the education and training system to improve its quality and labour market relevance for both young people and adults. Consolidate social benefits and improve their poverty reduction capacity.

               3.Reduce the territorial fragmentation of the public administration, streamline the functional distribution of competencies and enhance the capacity to design and implement public policies. In consultation with social partners, introduce harmonised wage-setting frameworks across the public administration and public services.

               4.Improve corporate governance in state-owned enterprises and intensify the sale of state-owned enterprises and non-productive assets. Significantly reduce the burden on businesses arising from parafiscal charges and from cumbersome administrative and legislative requirements. Enhance competition in business services and regulated professions. Reduce the duration of court proceedings and improve electronic communication in courts.

               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) 410 final.

                     (4)

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

                     (5)

                        SWD(2018) 209 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.


               EUROPEAN COMMISSION
            Brussels, 23.5.2018
            COM(2018) 424 final
            Recommendation for a
            COUNCIL RECOMMENDATION
            on the 2018 National Reform Programme of Slovakiaand delivering a Council opinion on the 2018 Stability Programme of Slovakia

               Recommendation for a

               COUNCIL RECOMMENDATION

               on the 2018 National Reform Programme of Slovakia

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

               THE COUNCIL OF THE EUROPEAN UNION,

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

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

               Having regard to the recommendation of the European Commission
                  2
               ,

               Having regard to the resolutions of the European Parliament
                  3
               ,

               Having regard to the conclusions of the European Council,

               Having regard to the opinion of the Employment Committee,

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

               Having regard to the opinion of the Social Protection Committee,

               Having regard to the opinion of the Economic Policy Committee,

               Whereas:

               (1)On 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 Slovakia 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, Slovakia should ensure the full and timely implementation of the recommendation on the economic policy for the euro area, as reflected in the recommendations below, in particular (1).

               (3)The 2018 country report for Slovakia
                  4
                was published on 7 March 2018. It assessed Slovakia’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 Slovakia's progress towards its national Europe 2020 targets.

               (4)On 25 April 2018, Slovakia 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
                  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
               .

               (6)Slovakia is currently in the preventive arm of the Stability and Growth Pact. In its 2018 Stability Programme, the government plans to improve the headline deficit to 0.8 % of GDP in 2018, and gradually further to 0.0 % of GDP in 2021. The medium-term budgetary objective — a structural deficit of 0.5 % of GDP — is expected to be reached in 2020. According to the 2018 Stability Programme, the general government debt-to-GDP ratio is expected to gradually decline from 49.3 % in 2018 to 43.3 % by 2021. The macroeconomic scenario underpinning those budgetary projections is plausible. At the same time, the measures needed to support the planned deficit targets from 2019 onwards have not been fully specified. The budget includes a non-specified category of expenditure called budgetary reserves which represents a non-negligible share (0.7 % of GDP) and can be used for ad hoc operations, thus reducing predictability in budget implementation.

               (7)On 11 July 2017, the Council recommended Slovakia to ensure that the nominal growth rate of net primary government expenditure
                  7
                does not exceed 2.9 % in 2018, corresponding to an annual structural adjustment of 0.5 % 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 Slovakia while giving due consideration to its sustainability challenges no additional elements in that regard need to be taken into account. Based on the Commission spring 2018 forecast, there is a risk of a significant deviation from that recommendation in 2018.

               (8)In 2019, in view of Slovakia's projected output gap of 1.2 %, the nominal growth rate of net primary government expenditure should not exceed 4.1 %, in line with the structural adjustment of 0.5 % of GDP stemming from the matrix of requirements under the Stability and Growth Pact. Under unchanged policies, Slovakia would be at risk of significant deviation from the requirement in 2019, due to the deviation over 2018 and 2019 taken together. Overall, the Council is of the opinion that the necessary measures should be taken as of 2018 to ensure compliance with the provisions of the Stability and Growth Pact.

               (9)Slovakia's public finances still face risks in the long term. Healthcare expenditure continues to pose a risk to the long-term sustainability of public finances as increasing the cost effectiveness of healthcare in Slovakia remains a challenge. In the long term, public expenditure on healthcare is projected to increase by 1.2 pps. of GDP, above the average estimated increase of 0.9 pps. for the EU. The pension system has seen a gradual improvement in its long-term sustainability due to the automatic increase in the retirement age, which has reduced the projected age-related spending increases in the long term.

               (10)Although some steps have been taken to improve the cost effectiveness of the healthcare system, notably through the implementation of the Value for Money spending review, the potential to rationalise the use of resources remains significant. Plans for a far-reaching healthcare reform allowing the streamlining of services, better hospital resource management and more efficient care system are showing no signs of progress. The consumption of hospital services continues to be high, with high rates of hospitalisation for chronic diseases and discharge rates above the EU average, coupled with relatively low bed occupancy rates. While strengthening the primary care sector can ease the high burden put on hospitals, the system suffers from a shortage of general practitioners, which is exacerbated by their uneven geographical distribution. The age composition of general practitioners also raises concerns for their future supply. Lastly, several provisions aimed at enhancing the cost effectiveness of the health system such as the full introduction of a diagnosis-related group payment system and the effective operationalisation of the e-health system are still in their development phase. They are likely to face further delays and implementation challenges in the future.

               (11)Fiscal revenues are increasing on the back of swift economic growth and efforts are ongoing to improve tax compliance and close Slovakia's high value added tax gap. While fiscal incentives promoting research and development were increased, property taxation remains a weak revenue source. A rolling programme of spending reviews for all key areas of public spending is proving to be an effective and rigorous tool for improving cost effectiveness in government spending.

               (12)Positive developments in the labour market continue, marked by increasing employment and historically low levels of unemployment. Nevertheless, the long-term unemployment rate continues to be one of the highest in the EU, affecting particularly disadvantaged groups such as low-skilled workers, young people and marginalised Roma. As a result of the improving labour market conditions, reports of skilled labour shortages in some sectors of the economy have started to appear. Regional disparities in the labour market are pronounced, with higher unemployment concentrated in eastern Slovakia and labour shortages concentrated in the western part of the country. Slovakia has started to implement its action plan on the integration of the long-term unemployed, supported by the European Social Fund. The plan introduces personalised services, social counselling, and a new basic profiling system. However, implementation has not yet yielded any structural changes. Gaps persist in cooperation with private partners and non-governmental organisations to alleviate caseloads in public employment services, while individualised counselling is at an early stage. In addition, the rough segmentation of the long-term unemployed does not fully serve as a tool for subsequent referral to activation measures. Training and requalification programmes have been strengthened but are still insufficient and their targeting of the long-term unemployed and disadvantaged groups remains limited. In addition, adult participation in learning is still very low and second-chance education for disadvantaged groups is underdeveloped. The eligibility criteria for unemployment benefits are strict and the duration of benefits is short. This results in low coverage of the short-term unemployed receiving unemployment benefits.

               (13)The gender employment gap and gender pay gap are well above the EU average. The low employment rate of women of childbearing age reflects the long parental leave rarely taken up by men, accompanied by low take up of flexible working arrangements and limited affordability and access to childcare facilities. Particularly for children under the age of three, the enrolment rates in childcare are extremely low.

               (14)The education system does not sufficiently contribute to the socioeconomic development of Slovakia, and is underfunded at all levels. The quality of educational outcomes, the participation of Roma in inclusive mainstream education and the effective integration of students from socioeconomically disadvantaged backgrounds in education and training are pressing challenges. Educational outcomes and the level of basic skills remain weak by international standards and are profoundly impacted by students' socioeconomic background. Early school leaving is low but increasing and regional disparities in dropout rates are pronounced. Despite plans to annually increase teacher salaries by 6% until 2020, the teaching profession is still unattractive, in part due to limited initial training and professional development opportunities. The implementation of measures to increase the participation of Roma pupils in inclusive mainstream education is extremely weak due to inadequate financial support and monitoring as well as insufficient training of teachers on intercultural issues.

               (15)Public administration is still burdened by inefficiency and bottlenecks caused by poor inter-ministerial cooperation and weak political neutrality of the civil service. Implementation of the Civil Service Act has been slowly taking off, but its impact on improving human resource management remains to be seen. On the management of EU funds, administration capacity and efficiency is still limited and staff turnover remains high, in part linked to the political cycle. This is nevertheless being addressed by strengthening the coordinating role of the Office of the Deputy Prime Minister which acts as a stabilising factor on continuity and institutional expertise in implementing organisations.

               (16)European Structural and Investment Funds are pivotal in addressing key challenges to improve competitiveness, growth and jobs in Slovakia. Slovakia suffered from a loss of EUR 26 million of funding for research and innovation in 2017 mostly due to problems in applying selection criteria and selecting evaluators, as confirmed by the verifications carried out. If appropriate measures are not taken to accelerate implementation, there is a high risk that another part of the funding allocation will be lost. While the project selection rate has now exceeded half of the total allocation for the current programming period, implementation on the ground resulted in payments to beneficiaries amounting only to 11 % of the allocation.

               (17)The low effectivity of public administration also translates to other sectors, including energy and the environment. Recycling rates are very low and air quality remains relatively poor. Sustainable forest management is an increasing challenge. The energy sector suffers from overregulation and energy policies are not fully in line with the climate and energy objectives of the EU.

               (18)Slovakia has taken important steps towards achieving a well-functioning system of public procurement. Efforts have been made to introduce quality award criteria. Mandatory electronic tools for conducting public procurement procedures should be in place in October 2018. While not optimally efficient, comprehensive prior verifications have been carried out on all projects funded through the European Social and Investment Funds. Nevertheless, a satisfactory performance has not yet been achieved in the areas of internal controls, transparency, digitisation, professionalisation and strategic public procurement. This is reflected in Slovakia's scores related to anti-competitive practices, which remain somewhat above the EU average, despite some improvement. Moreover, there are still only limited signs of commitment to fighting corruption. More than half of businesses perceive corruption as widespread in public procurement managed by national authorities.

               (19)Corruption, complex administrative procedures, excessive and fast-changing business regulations and the poor quality of regulatory bodies heavily affect the quality of Slovakia's business environment. While Slovakia lost some ground in some international comparisons, it has identified a number of measures to improve the quality of the business environment and boost investment. Slovakia has also strengthened its framework for regulatory impact assessment, extending its use in recent years. Finally, a new strategy for better regulation has been recently adopted. High regulatory barriers remain in the business services sector with levels of restrictiveness higher than the EU average for architects, engineers, tax advisers, lawyers, patent agents, real estate agents and tourist guides. Recommendations to address the regulatory barriers were made in the Communication from the Commission of January 2017
                  8
               . However, Slovakia has reported no progress in tackling those restrictions.

               (20)Overall, no progress has been achieved in stepping up the fight against corruption. Corruption perceptions remain high and prosecutions for such offences have fallen further. The perception of corruption has further deteriorated in the wake of the murder of an investigative journalist and his findings on a wide range of high-level corruption cases. The proportion of high-level cases prosecuted is extremely low. The lack of accountability for police and public prosecutors has not been resolved and hinder the fight against corruption and investigations of sensitive corruption cases.

               (21)Improving the effectiveness of the justice system, including the independence, remains a challenge for Slovakia, despite some improvements in efficiency. Concerns about the independence of the judiciary persist, including the appointment processes for judges at all levels of the judiciary.

               (22)Although boosting innovation can trigger competitiveness and facilitate the transition to a knowledge-based economy, Slovakia's capacity to innovate remains moderate, with a business research and development intensity which is very low (0.40 % of GDP in 2016). While the country has a large medium/high-tech manufacturing sector, the dominant multinational companies have so far shown only limited interest in carrying out research and development activities and the percentage of small and medium-sized enterprises innovating in-house was much lower in Slovakia (13.9 %) than in the EU as a whole (28.8 %) in 2016.

               (23)Public investments in research and innovation increased strongly between 2009 and 2015 due to the use of the European Structural and Investment Funds. The full potential of these investments has not been realised due to inefficiencies in Slovakia's research environment. Despite the strengthened role of the Office of Deputy Prime Minister for coordination of research, development and innovation, the overall governance of policy in this area is weak. The fragmented nature of the system and the weak governance framework, with responsibilities split among several ministries and implementing agencies, which are often poorly coordinated, leads to a regular postponement of reforms. Measures to stimulate knowledge transfer, strengthen research capacities in industry and improve the cooperation between businesses and academia are advancing only slowly.

               (24)In the context of the 2018 European Semester, the Commission has carried out a comprehensive analysis of Slovakia’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 Slovakia in previous years. It has taken into account not only their relevance for sustainable fiscal and socioeconomic policy in Slovakia but also their compliance with Union rules and guidance, given the need to strengthen the Union’s overall economic governance by providing Union-level input into future national decisions.

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

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

               1.Ensure that the nominal growth rate of net primary government expenditure does not exceed 4.1 % in 2019, corresponding to an annual structural adjustment of 0.5 % of GDP. Implement measures to increase the cost effectiveness of the healthcare system and develop a more effective healthcare workforce strategy.

               2.Reinforce activation and upskilling measures, including quality targeted training and individualised services for disadvantaged groups, in particular by delivering on the action plan for the long-term unemployed. Foster women's employment, especially by extending affordable, quality childcare. Improve the quality and inclusiveness of education, including by increasing the participation of Roma children in mainstream education from early childhood onwards.

               3.Increase the use of quality-related and lifecycle cost criteria in public procurement operations. Tackle corruption, including by ensuring enforcement of existing legislation and by increasing accountability at the level of police and prosecution. Improve the effectiveness of the justice system, in particular by safeguarding independence in judicial appointment procedures. Reduce the fragmentation of the public research system and stimulate business innovation, including for small and medium-sized enterprises.

               Done at Brussels,

                     For the Council

                     The President

                     (1)

                        OJ L 209, 2.8.1997, p. 1.

                     (2)

                        COM(2018) 424 final.

                     (3)

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

                     (4)

                        SWD(2018) 223 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)

                        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.

                     (8)

                        COM(2016) 820 final

                     (9)

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


               EUROPEAN COMMISSION
            Brussels, 23.5.2018
            COM(2018) 405 final
            Recommendation for a
            COUNCIL RECOMMENDATION
            on the 2018 National Reform Programme of Germanyand delivering a Council opinion on the 2018 Stability Programme of Germany

               Recommendation for a

               COUNCIL RECOMMENDATION

               on the 2018 National Reform Programme of Germany

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

               THE COUNCIL OF THE EUROPEAN UNION,

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

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

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

               Having regard to the recommendation of the European Commission
                  3
               ,

               Having regard to the resolutions of the European Parliament
                  4
               ,

               Having regard to the conclusions of the European Council,

               Having regard to the opinion of the Employment Committee,

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

               Having regard to the opinion of the Social Protection Committee,

               Having regard to the opinion of the Economic Policy Committee,

               Whereas:

               (1)On 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 Germany as one of the Member States for which an in-depth review would be carried out. On the same day, the Commission also adopted a recommendation for a Council recommendation on the economic policy of the euro area, 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, Germany should ensure the full and timely implementation of the recommendation on the economic policy for the euro area, as reflected in recommendations (1) and (2) below.

               (3)The 2018 country report for Germany
                  5
                was published on 7 March 2018. It assessed Germany’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 Germany’s progress towards its national Europe 2020 targets. It also included an in-depth review under Article 5 of Regulation (EU) No 1176/2011, the results of which were also published on 7 March 2018
                  6
               . The Commission’s analysis leads it to conclude that Germany is experiencing macroeconomic imbalances. In particular, the persistently high current account surplus has cross-border relevance and reflects a subdued level of investment relative to saving in both the private and the public sector. The surplus, which is largely with non-EU countries, has slightly narrowed since 2016 and is expected to gradually decline due to a pick-up in domestic demand in the coming years whilst remaining at historically high levels over the forecast horizon. While there is currently a shift towards more domestic demand-driven growth, both consumption and investment remain muted as a share of GDP despite the favourable cyclical and financing conditions and the infrastructure investment needs for which there is fiscal space. While a number of measures have been taken to strengthen public investment, these efforts have not yet resulted in a sustainable upward trend in public investment as a share of GDP. Progress in addressing recommendations in other areas has also been limited.

               (4)On 30 April 2018, Germany 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)Germany is currently in the preventive arm of the Stability and Growth Pact and subject to the debt rule. In its 2018 Stability Programme, the government plans a budget surplus of between 1 and 1 ½ % of GDP over 2018-2021. The medium-term budgetary objective — a structural deficit of 0.5 % of GDP — continues to be met with a margin throughout the programme period. According to the Stability Programme, the general government debt-to-GDP ratio is expected to gradually decline to 53 % in 2021. While the Stability Programme lists and describes several planned measures of the March 2018 coalition agreement, amounting to around broadly 1½ % of GDP over the period 2018-2021, those are not yet included in the Stability Programme's projections as they are not yet adopted. The macroeconomic scenario underpinning those budgetary projections, which has not been endorsed by an independent body, is plausible.
                  9
                Based on the Commission 2018 spring forecast, the structural balance is forecast to register a surplus of around 1.2 % of GDP in 2018 and 1.0 % of GDP in 2019, above the medium-term budgetary objective. General government debt is forecast to remain on a firm downward path. Overall, the Council is of the opinion that Germany 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 achieve a sustained upward trend in public and private investment in particular on education, research and innovation.

               (7)Real public investment increased robustly in 2015-2017. This trend reflects the government’s efforts to strengthen investment. Public investment is picking up, but as a proportion of GDP the increase is still modest, and a significant backlog at municipal level, estimated at 4 % of GDP, remains. The public capital stock is still declining as a proportion of GDP, due to negative net investment at municipal level (around EUR 6 billion annually in 2010-2016). Clearing the investment backlog at municipal level would require additional annual public investment of 0.3 % of GDP over the next decade. Investment as a percentage of the capital stock in the government sector, and public investment as a percentage of public expenditure are below the euro area average. A service agency set up to support public investment at municipal level became operational in 2017, but additional efforts are needed to address the investment backlog. Together with the favourable budgetary position this indicates that there is scope to increase investment at all levels of government, notably at regional and municipal levels.

               (8)Public expenditure on education remained at 4.2 % of GDP in 2016, below the EU average of 4.7 %. Spending on education and research remained at 9.0 % of GDP in 2016, falling short of the national target of 10 %. This corresponds to an estimated investment gap of about EUR 33 billion. While education expenditure has increased in real terms, a considerable investment backlog remains. At the same time, challenges such as growing student numbers, teacher shortages and further expansion of early childhood education and care will require appropriate public financing. Additional spending on education and on research and innovation is crucial for Germany’s potential growth.

               (9)Digitalisation of the German economy is progressing slowly and the country faces considerable challenges. There is an obvious urban-rural digital divide with regard to fast internet (nextgeneration access up to 30 Mbit) coverage (only 54 % in rural areas). Germany is lagging behind on very-high-capacity broadband (> 100 Mbit) deployment. Only a small proportion of Germany’s territory (7.3 %) is covered by highperformance fibre-based access networks, as compared with an EU average of 26.8 %. Instead, upgrading existing copper cable networks (vectoring) continued to be the dominating incumbent’s preferred technological solution. Many services rely on very–high-speed connectivity and in 2017 25.3% of German enterprises found their internet connections too slow for their actual business needs. A lack of such connectivity holds back investment, especially by small and medium-sized businesses, many of which are located in rural and semi-rural areas. Performance in digital public services and in ehealth is also far below the EU average.

               (10)Business research and development investment is growing and Germany is close to achieving its Europe 2020 research and development intensity target. However, investment is increasingly concentrated in large firms and in medium/high-tech manufacturing, while the contribution of small and medium-sized enterprises is declining. A number of measures have been taken to strengthen entrepreneurial activity, especially by attracting private investments in risk capital. However, Germany’s venture capital market remains less developed than those of other international innovation leaders.

               (11)Despite some improvements in recent years, Germany’s tax system remains inefficient, in particular because it is complex and distorts decision-making, e.g. on investment, financing and labour market participation. Germany places a relatively strong emphasis on direct taxes to raise revenues and there is potential to reduce distortive direct taxation or for a shift towards less distortive taxes on property, inheritance and consumption. The levels of taxes and social contributions on income from employment were the sixth highest in the EU in 2015. The cost of capital and the effective average corporate tax rate, which differ across regions, are among the highest in the EU (28.2 % as a national aggregate, as compared with an EU average of 20.9 %). Due to the interplay of corporate income tax, local trade tax and the solidarity surcharge, the corporate tax system is complex, involves high tax administration costs and distorts the level and location of investments. In addition, the corporate income tax distorts financing decisions, with a bias towards debt financing. This bias is the seventh highest in the EU. Lowering the capital costs on equity could strengthen private investment and the relatively underdeveloped venture capital market. Furthermore, loss carryforward provisions remain relatively strict, limiting the amount to 60 % of taxable income for a given year.

               (12)Regulation in Germany is still highly restrictive, especially as regards business services, regulated professions and administrative formalities for the crossborder provision of services. Key restrictions concern inter alia legal form and shareholding. Churn rates in key business services sectors such as legal, accounting, architectural and engineering activities are below the EU average, while gross operating rates in those sectors are above average, suggesting lower competitive pressures. Because of services’ role as intermediate inputs, less restrictive regulation of services increases productivity in downstream serviceintensive industries.

               (13)Germany’s labour market performance has been very strong. Unemployment fell to a record low of 3.6 % in the fourth quarter of 2017 and employment reached 79.8 %. The level of youth unemployment (6.7 % in 2017) is among the lowest in the EU. Germany is experiencing increasing shortages of skilled labour, while certain groups’ labour market potential remains underused. The proportion of people working parttime, particularly women and those with a migrant background and caring responsibilities, is among the highest in the EU. For women, key factors include disincentives to work longer hours, coupled with a lack of sufficient childcare and allday school facilities. Specific tax rules, particularly for second earners and lowwage workers, and the lock-in effects of the mini-job earning threshold of EUR 450 generated further disincentives to work longer hours. Germany has one of the highest tax wedges on low earners, most of whom are women. The high rate of women working part-time is accompanied by one of the widest gender gaps in parttime employment in the EU (37.5 % vs EU average of 23.1 %). This contributes to a very wide gender pay gap in Germany.

               (14)Nominal wage growth remained moderate in 2017, at 2.4 %, despite record low unemployment and high job vacancy rates. This relatively subdued rate is partly due to slow productivity increases in services, low collective bargaining coverage in some sectors and a reduction in structural unemployment. The reaction to the pick-up in inflation was limited, with real wage growth declining from 1.8 % in 2016 to 0.7 % in 2017. Collective agreements from early 2018 may lead to some wage acceleration; developments in this area are worth monitoring. The proportion of lowwage earners remains high and there is scope for increases in the number of hours worked in lower wage deciles. Increased immigration did not prevent wage growth in lower wage segments. The introduction of the statutory general minimum wage in 2015, and its subsequent rise in 2017, increased wages at the bottom of the distribution. On top of wage increases, social partners are focusing on working time flexibility in the current round of wage negotiations.

               (15)Germany has a solid social protection system overall. However, the at-risk of poverty rate for the total population rose steadily from 2005 to 2015 (16.7%) before the trend was slightly reversed in 2016. Income inequality has also begun to decline in 2015, showing a modest reduction in the S80/S20 ratio owing to an improvement in the incomes of poorer households. The recent improvement of in-work poverty in 2016 was also modest and only benefitted men.

               (16)Germany can improve the attachment of older workers to the labour market, which would increase old-age income, boost potential output, help adapt to a tight labour market, and reduce the need for precautionary savings for old age. Fiscal sustainability risks are currently low, due in large part to a relatively high primary surplus. Still, Germany is expected to have one of the largest increases in pension expenditure in the EU up to 2070 according the 2018 Ageing Report. At 17.6 % in 2016, the risk of poverty in old age (i.e. above 65) was above the EU average of 14.7 %. The future deterioration of pension adequacy in the statutory first pillar is expected to increase the risk of poverty in old age, particularly for low-wage earners, people with atypical contracts and those with interruptions in their employment histories. The gender pension gap is one of the widest in the EU. At the same time, while the employment rate for workers aged 60-64 (58.4 % in 2017) was among the highest in the EU, the employment rate for workers aged 65-69 was in the middle third of Member States (16.1 %).

               (17)Socio-economic background remains a considerable determinant of educational outcomes and labour market integration. In science, it contributes to a performance difference of 3 years of schooling between the lowest and highest social quartiles according to the Programme for International Student Assessment in 2015. National data confirm the substantial correlation also for primary education. Particular challenges exist for students with a migrant background. Compared with native-born students, they are much more likely to underachieve in basic skills and leave school early or drop out of university. Also the labour market potential of people with a migrant background is not fully used. In 2017, the employment rate among non-EU nationals (aged 20-64) was more than 27 pps. lower than that for German nationals (almost 33 pps. lower in the case of female nonEU nationals). It is a concern for future labour market performance of workers that adult learning is below the EU average and remains a particular challenge for the low-skilled adult population of 7.5 million people who lack basic reading and writing skills.

               (18)In the context of the 2018 European Semester, the Commission has carried out a comprehensive analysis of Germany’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 Germany in previous years. It has taken into account not only their relevance for sustainable fiscal and socioeconomic policy in Germany but also their compliance with Union rules and guidance, given the need to strengthen the Union’s overall economic governance by providing Union-level input into future national decisions.

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

               (20)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 Germany take action in 2018 and 2019 to:

               1.While respecting the medium-term objective, use fiscal and structural policies to achieve a sustained upward trend in public and private investment, and in particular on education, research and innovation at all levels of government, notably at regional and municipal levels. Step up efforts to ensure the availability of very high-capacity broadband infrastructure nationwide. Improve the efficiency and investment-friendliness of the tax system. Strengthen competition in business services and regulated professions.

               2.Reduce disincentives to work more hours, including the high tax wedge, in particular for low-wage and second earners. Take measures to promote longer working lives. Create conditions to promote higher wage growth, while respecting the role of the social partners. Improve educational outcomes and skills levels of disadvantaged groups.

               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) 405 final.

                     (4)

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

                     (5)

                        SWD(2018) 204 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)

                        According to the Regulation on the Economic Projections of the Federal Government (Vorausschätzungsverordnung) passed by the Ministry of the Economy and Energy in agreement with the Ministry of Finance and effective from July 2018, the Joint Economic Forecast project group (Gemeinschaftsdiagnose) has been declared the independent body in charge of assessing the economic projections underlying the Draft Budgetary Plans and the Stability Programmes in the sense of the Law on the Economic Projections (Vorausschätzungsgesetz).

                     (10)

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